On the proposed National Microfinance Bank – 2

• Continued from yesterday

A major way to resolve the lopsided regional distribution of microfinance banks is to re-enact what the apex bank attempted to achieve back in 1977 with its rural commercial banking scheme: formulate policy sweeteners, such as waiving the requirement for feasibility report as a prerequisite for setting up shops in disadvantaged territories, writing off of the capital cost of erecting office blocks and staff quarters and other heavy ticket items like computer systems and marketing vehicles within 3-5 years.

It may come as surprise to many, but the truth is that the microfinance subsector is already over-regulated and what is simply lacking is adequate supervision! ‘Wonder banks’ and similar Ponzi schemes operate freely without any checks and whenever they fail, the heat falls on the regulated microfinance subsector.

Rather than consider more laws to hamstring the subsector, the apex bank should depopulate the list of non-permissible activities. For example, as grassroots financial institutions with the strongest presence in non-urban centres, the CBN should permit microfinance banks to engage in foreign exchange remittances to ease the turnaround time and cost of rural dwellers accessing funds sent from their relations in the Diaspora. Dealing in forex transactions would enable microfinance banks play a more effective role in Small and Medium Enterprises (SME) non-oil exports financing e.g. opening of small-ticket letters of credit. Those that can afford it should also be encouraged to establish branches in cities with a large concentration of Nigerians in the USA, Canada, Great Britain, Malaysia and Brazil to lubricate Diaspora remittances as is the practice in Haiti, Indonesia and Bolivia, among others.

The National Microfinance Policy Framework issued by the CBN states that the government should play an enabling role rather than being a direct participant in microfinance. This is in sync with one of the principles espoused by the Consultative Group to Assist the Poor (CGAP), a global partnership of more than 30 leading development organisations that works to advance the lives of poor people through financial inclusion.

The CBN document rightly acknowledges that the government has no business being in business and advocates private-sector ownership. The proposed plan by the apex bank completely goes against the grain of the crystallizing global trend towards a demand for democratization of access to financial intermediation funds within low-income countries and emerging markets and away from centralized Government intervention/participation.

Rather directly participate in microfinance business, the apex bank ought rightly to foster a conducive policy environment that supports product and service innovation while affording customer protection. Truth be told, even the provision of various intervention funds by the apex bank ought to be viewed as a temporary palliative measure.

The only way to wean microfinance banks out of their ultra-expensive funding mix is by developing an enabling IT infrastructure that would drive a successful mobilisation of savings from the public, including from large numbers of poor people. This is aimed at providing them with a cheap and reliable source of funds. And when their average cost of funds starts plummeting at the same time they are getting critical scale, microfinance lending rates would crash and cease to be ‘usurious’ – the nearest analogy would be the GSM industry.

Contrary to the widely held myth that poor people live from hand to mouth and therefore cannot save, empirical studies prove that they indeed do save. A particular CGAP study that focused on loans and savings accounts in more than 3,000 financial institutions focusing on customers with an income profile below that of a typical commercial bank customer found that “on an aggregate basis, savings accounts in the (former) outnumber loans by amount four to one.”

So, it can be seen that savings is even more important to this class of people than micro-credits! But since building up a sizeable savings portfolio takes time and a huge financial investment, the initiative would have to be initially led by the CBN, with operators’ buy-in. Another way the apex bank can play a critical role in promoting microfinance activities is by assisting to build sustainable business models that deliver affordable financial services to the poor in terms of outreach and cost-coverage.

What the CBN hardly gives any thought to, given its constant haranguing of the microfinance subsector, is the impression being created in the public space that microfinance banks are not adequately regulated. This only goes to further erode whatever is left of public trust and confidence and makes savings mobilization in the regulated microfinance subsector an impossible Sisyphean task. One of the things close observers of the microfinance have noted is that while the economically active poor and low-income households rush to save with commercial banks they tend to trust more, they rush back to microfinance banks to seek business and wealth-creation loans because they are rejected by the former. But the question to ask is where and how the microfinance banks are then expected to procure cheap funds to avoid charging ‘usurious’ interest rates.

Collaborative projects between the apex bank and commercial banks are not a new development. In fact, the highway to the mountain of CBN/Bankers’ Committee collaboration is strewn and littered with the carcasses of good intentions and bad results when you consider what became of such ‘joint projects’ as the Rural Banking Scheme (1977), People’s Bank of Nigeria (1990), Small and Medium Industries Equity Investment Scheme (2001) and Small and Medium Enterprises Equity Investment Scheme (2005). What then is the basis for expecting that the envisaged national microfinance bank would not follow the same pattern and end up being a colossal waste of financial resources and efforts with a very high opportunity cost?

If foreign investors are willing and able to lend funds to microfinance institutions solely based on a due diligence exercise, one wonders why the CBN is so keen on over-collateralising its intervention funds. Is it that the apex bank is unwilling and unprepared to take risks on the Nigerian economy? It hardly makes any sense for outsiders tend to continue to weep louder and more passionately than the bereaved. It is long overdue for the CBN to relax most of the stringent conditions preventing microfinance banks from accessing its intervention funds and stop making the victim the villain!

The CBN-led/owned National Microfinance Bank would have a crowding-out effect on existing microfinance banks. Apart from the attendant job and income losses, it would also create a financial monopoly which in turn breeds inefficiencies. Empirical evidence exists to support the view that where the cost of such inefficiencies cannot be passed on to the customers, because of interest rate or lending margin caps, failure is always inevitable.

Given the non-profit customer advocacy activities they are supposed to engage in, such as financial literacy, financial inclusion and civil enlightenment programmes, microfinance banks should be eligible for a tax-holiday incentive scheme that has a tenor not less than three years.

My last comment is aimed at the executive committee of the National Association of Microfinance Banks (NAMB). The bureaus de change (BDCs) have consistently constituted a pain in the neck to CBN attempts to efficiently manage the parity of the naira. The association has been banned several times from participating in the foreign exchange market, only to be unbanned shortly after on each occasion!

This is obviously due to the enormous influence members of the group wield on the levers of power. The time has come for NAMB to similarly become a big influencer and advocate of public policy by riding on the wings of its vast clientele base – those at the base of the pyramid who actually take the time and pain to vote – that no government or agency can treat in a cavalier manner.

• Concluded

• Okoye is an Abuja-based microfinance management consultant.