In order to enhance the performance of Microfinance Banks (MFBs), the Central Bank of Nigeria (CBN) recently announced an increase in their minimum capital requirement. In a circular to MFBs entitled, “Review of minimum capital requirement for Microfinance Banks in Nigeria,” signed by the Director, Financial Policy and Regulation Department, Mr. Kevin Amugo, the CBN explained that it made the move in the bid to strengthen the MFB sub-sector for improved performance.
Under the new capital base, the minimum paid-up capital for Unit MFBs has been increased to N200 million, while state MFBs and national MFBs will require minimum paid-up capital of N1 billion and N5 billion respectively, to operate in the country.
Before now, Unit MFBs minimum capital base was N20 million, State MFBs, N100 million and national MFBs, N2 billion. Currently, there are over 700 MFBs in the country and more than 80 per cent of them are reported to be Unit MFBs. The upward review of their minimum capital base is in line with the powers conferred on the CBN under the Banks and Other Financial Institutions Act.
While the new minimum requirement takes immediate effect for new applications, existing MFBs are required to fully comply with effect from April 1, 2020. To meet these requirements, existing microfinance banks are expected to explore the possibility of mergers and acquisitions and/or direct injection of funds. However, it has been revealed that the Revised Regulatory and Supervisory Guidelines for MFBs, Code of Corporate Governance for the sub-sector and sector specific prudential guidelines for microfinance banks, would be issued in due course.
Under the new regime, microfinance banks that meet the new capital requirement and demonstrate the existence of strong corporate governance in their operations would be allowed to open account at the CBN office within their state of operation. In addition, “such institutions would be channels for micro funding activities of the CBN and the Development Bank of Nigeria (DBN).”
We welcome the decision of the apex bank to allow the exceptionally good MFBs to be part of the activities of DBN, because it will enable them play strategic roles in the socio-economic development of the country, especially in providing credit facilities to medium and small enterprises. There is no
doubt that many microfinance banks in the country are contending with the challenges of capital inadequacy, weak corporate governance, ineffective risk management practices, lack of requisite capacity and mission drift. It is hoped that these challenges will be addressed by the enhanced new capital base.
Many keen observers of microfinance banks’ operations may not be surprised at the upward review of the minimum capital requirement. We recall that last month, the CBN issued licence revocation notice to 154 MFBs, six primary mortgage banks and 22 finance companies.
According to the CBN, 62 of them had long closed shop, 74 were reported insolvent, 12 terminally distressed, while six had gone into voluntary liquidation.
It is a sad development that many MFBs performed below public expectation in their roles as lenders to small businesses that can stimulate economic growth and financial inclusiveness. With the new capital base, we hope their financial capital will be strengthened for improved performance. In the same vein, the consolidation in the sub-sector appears to be a viable option. It will be recalled that during the banks’ consolidation of former CBN Governor, Prof. Chukwuma Charles Soludo, some of the mergers and acquisitions were driven by economic pressures that exposed the capital inadequacy of most banks. In fact, that recapitalisation averted the collapse of the banking industry.
We, therefore, urge the apex regulator to follow the guidelines under the Banks and Other Financial Institutions Act to ensure that the MFBs meet the stipulated capital requirement. The health of microfinance banks should not be toyed with. It is good that they should have the required capital base to carry out their functions effectively.