MICROCAPITAL STORY: Microfinance Interbank Money Market Commences in Nigeria

The Microfinance Money Market Association of Nigeria (MMMAN) was inaugurated in Lagos in March 2009. MicroCapital previously reported on the announcement of the proposed interbank money market in September 2008. The MMMAN was developed by the Financial Derivatives Company (FDC), an asset management company, and the Kakawa Discount House to allow microfinance banks (MFBs) to borrow and invest excess liquidity amongst one another. Financial Vanguard reports that five MFBs, the Integrated MFB, Mic MFB, Accion MFB, Susu MFB and Gapbridge MFB, have officially joined MMMAN. These MFBs have also been trading amongst one another since October to pilot the system. Mr. Jaiyeola Laoye, Managing Director and CEO of Kakawa, said at the inauguration, “The market is for short and medium term liquidity and would help [the MFBs] carry out their functions more effectively.” Also speaking at the inauguration, FDC’s Managing Director Bismarck Rewane, added “Most times, banks get closed down when they are faced with liquidity problems than when they encounter solvency challenges.” The MMMAN is designed to bring stability to the microfinance industry by providing further sources of liquidity to MFBs and to mobilize liquid funds between MFBs at competitive rates.

Vanguard reports Mr. Laoye voicing his expectation that through the MMMAN, MFBs would be able to lend and borrow amongst one another at better rates than those offered by conventional banks. Rural MFBs were accustomed to depositing funds in conventional banks at an annual interest rate of 15 percent. Mr. Laoye estimates that urban MFBs would be able to offer an annual interest rate of 22 to 25 percent if there was an interbank trading system directly between MFBs. Although this certainly appears to be an incentive, only five MFBs have joined the MMMAN, two of which report to the MIX. The Accion MFB had a gross loan portfolio of USD 760,000 and 1,076 active borrowers. The Integrated MFB had a gross loan portfolio of USD 24,465,673 and 8,641 active borrowers. In total, 12 microfinance institutions (MFIs) in Nigeria report to the MIX and have a cumulative gross loan portfolio of USD 75.1 million. Mr. Laoye reported that the cumulative total of the balance sheets of all 700 MFBs in Nigeria is USD 609.1 million and estimates that the size of the money market could grow to USD 121.8 million. However, so few MFBs have joined so far that the MMMAN has refrained from choosing members of the administration.

The structure of the MMMAN is modeled on the Money Market Association of Nigeria (MMAN), an association of the treasurers of licensed banks and discount houses that is not involved with MMMAN. At the moment, members of MMAN include 25 banks, the 5 discount houses of Nigeria, 7 non-bank financial institutions, and 2 corporations. Financial Vanguard reports that MFBs are not eligible for membership in MMAN because they do not have access to Central Bank of Nigeria’s (CBN) clearing house. Among MMAN’s achievements is the introduction of the Nigerian Inter-bank Offered Rate (NIBOR) in 1998. Thereafter, MMAN introduced a reference rate for foreign exchange transactions termed the Nigerian Inter-bank Foreign Exchange Rate (NIFEX). MMAN also operates an electronic trading platform called the Money Market Terminal. Currently, MMMAN does not have a common lending rate or an electronic platform. Mr. Laoye remarks,”We expect conversations within the banks through phones or other platforms they agree upon.”

Kakawa will continue to play a major role in the MMMAN. When a transaction between two MFBs is approved by both parties, they must submit agreement letters for confirmation by Kakawa. All members of the MMMAN will maintain a trading account with Kakawa. In every case, Kakawa would debit the loan amount from the account of the lending MFB and credit the amount to the account of the borrowing MFB. The MFBs will be permitted to appeal to Kakawa for urgent financial demands. Kakawa is one of five discount houses through which excess liquidity can circulate between Nigerian banks and the CBN. Kakawa also markets treasury bills to foreign investors through the Treasury Bill Backed Investment (TBBI), created in 1997. In a 2008 balance sheet, Kakawa reported that gross earnings increased 73.37 percent from USD 36.5 million in 2007 to USD 65 million in 2008. Net earnings had increased USD 3.9 million, or 23.5 percent. Assets grew from USD 473.8 million to USD 651.8 million. Gross loans and advances stood at USD 6.8 million in 2008. Although the FDC jointly launched the MMMAN with Kakawa, it does not have an apparent role in moderating individual transactions. The FDC reports current assets of USD 5.75 million. Clients include British Airways, Shell, Siemens, and the Nigerian Liquefied Natural Gas Company.

All financial institutions in Nigeria are supervised by the CBN, which reports total assets of USD 52.6 million and total equity and liabilities of USD 52.6 million. The CBN has launched aggressive initiatives to improve microfinance in the country in the past. A previous MicroCapital story discusses a 2005 report on Nigerian micofinance in which the CBN mandated the conversion of all community banks to MFBs with a minimum capital of USD 161,000 by the end of 2007 with the penalty of closure. Research showed that USD 400,000 was the minimum capital required by a bank for successful operation, but the CBN recognized that most MFBs could not raise this amount of capital in the specified time frame. In the same report, the CBN outlined several goals, including increasing the share of microcredit as percentage of total credit to the economy from 0.9 percent in 2005 to at least 20 percent in 2020 and increasing the share of micro credit as percentage of GDP from 0.2 percent in 2005 to at least 5 percent in 2020. The CBN also listed a goal to increase linkages among universal banks, development banks, specialized finance institutions and microfinance banks by 10 percent annually. Although the MMMAN may facilitate this goal, the CBN was not directly involved in its formation.

Additional Resources:
“New Hope, Fresh Challenges for Micro Finance Banks”, by Babajide Komolafe, published by Financial Vanguard, April 2009
“Microfinance banks: More liquidity stability in view”, by Oluwaseyi Bangudu, Published by Next, April 2009
Central Bank of Nigeria (CBN)
Financial Derivatives Company Limited (FDC)
Kakawa Discount House Limited
Money Market Association of Nigeria
“Microfinance Policy, Regulatory, and Supervisory Framework for Nigeria”, Published by CBN, December 2005
MIX Market: Nigeria

By Goda Thangada, Research Assistant

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