Micro finance banks need more
support from govt – MD, LASU MFB
By KELECHI MGBOJI
Thursday, August 21, 2008

The restriction of micro finance banks from accessing public sector deposits and engaging in sophisticated banking services such as foreign exchange (Forex) business has not only reduced the operational space for the banks, but also put them in a tight corner, where it becomes very difficult to actualize optimal potentials.

To be able to generate enough funds to cater for the credit finance needs of the millions of grassroots customers whom the micro finance institutions are meant to service, the regulators should take a second look at some of the regulatory policies and relax those ones which are not in the best interest of the objectives on which the banks were founded.

Micro finance banks are restricted as a matter of policy from access to public sector deposits. Access is permitted for only micro-credit programmes on a non recourse basis and for payment purposes. What this means is that the banks cannot be depository to public funds such as rates, utility bills, treasury bills and all other accruing to government. Besides, they are barred from Forex business transactions, at least for the Unit MFBs.

But the Managing Director and Chief Executive Officer, Lagos State University Micro Finance Bank (LMFB), Pastor Kehinde Alaba said that such restrictions are rather counter productive. His argument was that from whom much is expected, more ought to be given. He reasoned that for the MFBs to cater adequately for the hundreds of thousands of small and medium scale entrepreneurs at the target grassroots, the banks should be allowed enough operational space to generate enough funds for on-lending and at the same time afford the financial muscle to maintain the skilled work force needed to drive the burgeoning sub-sector of the economy.

The Chartered Accountant who also holds a masters’ degree in Business Administration identified constant poaching of the MFBs’ work force by the mega banks, high operational costs arising from general infrastructural decay, ownership structure, and non compliance with Central Bank of Nigeria (CBN) directive to States and Local Governments to devote 1 per cent of annual budget as micro credit funding as some of the major draw backs the lower financial institutions have had to grapple with since inception in 2005.

He disclosed that apart from Lagos, other States and Local Governments are yet to implement the CBN directive, a development which he attributed to the non existence of a legal frame work backing the directive. He said, “CBN directive is only a pronouncement and has no force of Law. For it to be taking seriously, it requires a statutory frame work that could compel two tiers of government to comply. Until this is done, the MFBs would continue to suffer set back in this aspect.”

My fears for micro finance banks
They are quite numerous. First, the ownership structure where there is no dilution of ownership structure, where only one individual is the major player, there could be an abuse of corporate governance that might lead to distress just as weak internal control may lead to laxity. But to forestall possible conflicts, there should be a set of rules acting as checks and balances to the board, the management and the staff. An individual must not exercise too much power over the entire corporate organization. The expectations of the stakeholders from board and from the management must be specified. We are happy in LMFB because the University is the major stakeholder, and they are thorough about checks and balances, and internal control.

Another problem that poses a great challenge to the MFBs is constant poaching of our work force by the commercial banks. Majority of those that constitute the workforce of the MFBs are seasoned bankers who were laid off as result of the recapitalisation of the banks. But now, due to steady expansion, the commercial banks are re-absorbing some of us back into the system.

The MFBs will constantly lose their good hands to the mega banks since we cannot match them in terms of the irresistible remuneration offer. This inability of the MFBs to sustain their staff may pose a great danger to the smooth operations of the system. And to sustain them, we need to match the commercial banks pay for pay. We need to be allowed to go into more business areas. Government need to encourage us by increasing our portfolio of operations. In fact, we still need more support from government.

But in spite of these challenges posed by operational environment coupled with ownership structure, the bank chief dispelled fears over the possibility of distress as was the case with defunct community banks. His words “The structures are in place. The deposits are insured by the Nigerian Deposits Insurance Corporation (NDIC). This guarantees the security of the deposits and the operations of the banks. But in the event of failure, customers can recover their deposits without much stress.”

Why MFB is banking for the poor
The philosophy behind the establishment of micro finance banks is the need to provide credit facilities needed by low-income earners and the economically active poor. The government realized that a large proportion of the active but poor and low-income groups are not taken care of by the formal financial sector. They also realized that existing micro-finance institutions could not fill the yawning gap occasioned by this inadequacy.

Weak institutional capacity crippled most community banks scattered all over the country. There was poor corporate governance, incompetent management, flawed internal control system and the lack of well-defined operations, and these militated against effective operations of defunct community banks and development institutions. Restrictive supervisory requirements further clipped their wings.

It is against this background that the MFBs were created for effective mobilization of funds for the grassroots. The grassroots are there for domestic savings and they are very important for economic improvement of the nation. We cannot eradicate poverty in this country unless the grassroots are effectively and productively mobilized. The mega banks cannot do this. Only the micro-finance banks can. And to this extent, the MFB is banking for the poor. I am confident that activities of micro finance banks will go along way towards economic improvement of the nation.

Take for instance, India, Pakistan and other developing nations where the MFBs are operating, their economies are vibrant. They are also active. So, I believe that the sector will equally do well in Nigeria. They few we have seen are already doing well, they will put more economic activities in the system and harness other sources of economic improvement of the nation which are otherwise untapped.

Conditions for obtaining loans from LMFB
Basically, we categorize the Small and Medium Scale Enterprises as either individual or corporate bodies. As individuals, some bear the names that suggest the business is owned by a family and most times they are not registered with the Corporate Affairs Commission (CAC). For instance, such names as Femi & Sons, Chidi & brothers are individual businesses which in most cases are not registered. First, we make sure that those names are registered with CAC. We offer them professional advice on how to go about it and then get them open account with us either daily savings or current account with as much as they can afford. Next, we establish a relationship and identify their locations. For those with small business, we regularize their records. Subsequently, we ask them to give us a name with which to register their businesses with CAC with a token fee. We make them understand that they have been operating illegally.

In this category of customers, we have majority of them as private school owners and traders who bear names for bearing sake. Subsequently, we attach to them one of our customer relations officers who go there to assist them to keep their records straight or collect their daily savings. With time, we give them loans when the need arises depending on the amount they want to get their business going.

The beauty of it all is that their savings are daily. They give instructions to us to pay in their money and credit their loan account. So, you find out that the risk is reduced, but the accessibility of the fund is always there. Besides, those of them that are operating as co-operative, we give them money through the co-operative for lending to their members. But if the co-operative chooses that their members should open an account with us, it is all well but the co-operative will stand as a guarantor for the member or the group.

Why we insist on business registration with CAC
We insist because in the law, any transactions with an unregistered business enterprise, company or organization is void. So, our legal department regularizes all the matters pertaining to registration of the customer. We go a step further to know them down to their residence, their businesses and the guarantors. We call it “Know Your Customer” (KYC) and his business. One funny thing is that in the course of all this, we discover that some of them with limited liability tag are not even registered. That is why it is important to apply the KYC which helps us recognize a legal frame work in our dealing with the customer. It also helps to know that we are dealing with genuine people and fraudsters. We know them to their roots, associations, business premises, etc.

Loan beneficiaries
So far, we have close to 2,000 beneficiaries and our clientele base is in the neighbourhood of 5,000. There are about 50 SMEs we are supporting. Some are into fish pond business. Others are into agro allied business. Majority are traders. There are also those of them who are school proprietors. Those who have problem setting up their businesses, we help them do so. Some traders who need funds, we support them.