• Monday, April 22, 2024
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BusinessDay

Explainer: Why microfinance banks are endangered species

The CBN governor wields enormous power without accountability

The Central Bank of Nigeria (CBN) recently revoked the operating licences of 132 Microfinance Banks (MFBs), three finance companies and four Primary Mortgage Banks (PMBs).

In September 2010, the CBN revoked the operating licences of 224 MFBs, making a total of 356 of microfinance banks revoked in 13 years by the banking sector regulator.

What is a Microfinance Bank (MFB)

Microfinance Bank (MFB) is any company licensed by the CBN to carry on the business of providing financial services such as savings and deposits, loans, domestic funds transfer and non-financial services to microfinance clients.

Why MFBs were revoked

The revocation of the licences was due to failing to comply with the obligations imposed on them by the industry regulator in accordance with the provisions of Banks and Other Financial Institutions Act (BOFIA) 2020, Act No. 5, Godwin Emefiele, governor of the CBN said.

Kazeem Olarenwaju, international consultant, said the revocation of MBFs could be as a result of several factors.

Some of the factors include mismanagement, illiquidity, capital erosion, continuous contravention of the CBN rules, and not rendering returns for six months.

“It shows the sanitisation of the industry. The regulators are looking into the industry by making the public know those MFBs that are up to date and healthy,” Onoja Usman, managing director/CEO, Lovonus Microfinance Bank Limited.

“We have uniform reporting with the commercial banks. Most of our operations synchronise with the commercial bank, especially the monthly rendition of returns,” he said.

Permissible activities for MFBs

The CBN’s regulatory framework for MFBs allows an MFB to engage in the provision of the following services to its clients: acceptance of various types of deposits, including savings, time, target and demand deposits from individuals, groups and associations, provision of credit to its customers, provision of housing micro loans, provision of ancillary services such as capacity building on record keeping and small business management and safe custody.

Other activities include issuance of debentures to interested parties to raise funds from members of the public with the prior approval of the CBN, collection of money or proceeds of banking instruments on behalf of its customers, including clearing of cheques through correspondent banks, and among others act as agent for the provision of mobile banking, micro insurance and any other services as may be determined by the CBN from time to time, within the geographic coverage of its licence.

Who can establish a Microfinance Bank?

A microfinance bank can be established by individuals, groups of individuals, community development associations, private corporate entities or foreign investors.

Who are the target clients of Microfinance Banks?

Microfinance Bank’s target client includes the following group of persons: the economically active poor, low-income households, the unbanked and underserved people, particularly vulnerable groups such as women, youths and the physically challenged, informal sector operators, micro-entrepreneurs and subsistence farmers.

How many categories of MFB licences are available?

A breakdown of the recapitalisation requirement is as follows: tier 2 (rural) licence microfinance banks are expected to pay N50 million as minimum capital requirement, tier 1 MFBs (urban) are to pay N200 million as minimum capital requirement, N1billion for state licence MFBs and N5billion for national licence MFBs.

What is the need for returns rendition by MFBs?

Returns rendition by MFBs is a regulatory requirement (Section 5.3 of revised regulatory and supervisory guidelines for MFBs in Nigeria) required by section 58(2)b of BOFIA, 1991 (as amended) S.33 of the CBN Act 2007 (as amended): Power to require or share information S 331 (1) & (2) of CAMA as amended: keeping of proper accounting records.

What are the implications of not rendering returns, deadlines and responsibility?

Section 5.2 of Microfinance Bank Framework demands that all monthly returns must reach the Directors of Financial Policy and Regulation Department (FPRD) of the CBN and Special Insured Institutions Department (SIID) of the Nigeria Deposit Insurance Corporation (NDIC) not later than 14 days after the end of each month. The managing director/chief executive officer and the chief accountant (or equivalent) of the MFB shall sign and attest to the authenticity of the contents of the returns.