MICROCAPITAL STORY: Nigerian Microfinance Banks Struggle to Meet their Expected Goals

The Nigerian microfinance sector is facing a setback in the wake of several issues plaguing the country’s microfinance institutions (MFIs), according to a press release on the Nigerian weekly NEXT. NEXT is a publication of Timbuktu Media, a media and information company based in Lagos, Nigeria, and founded by Dele Olojede, Africa’s first winner of the Pulitzer Prize (for International Reporting). Stating that the country’s microfinance sector has been ‘caught’ in the midst of an ‘inefficient Nigerian economic system’, the release cites several reasons why MFIs in Nigeria are not in alignment with their goal of increasing financial access to the poor.

A significant percentage of licensed MFIs in Nigeria are located and operate in well-developed cities. The location of MFIs in the urban areas impedes access of microfinance services to the rural poor. In this regard, the release quotes an analyst working with one of the MFIs in Nigeria as saying the location of these banks was the ‘first sign that hopes for [its] transformation of Nigeria’s banking landscape are misplaced’. Additionally, since most MFIs in Nigeria have failed to capture their target markets (the poor), they have begun competing with wholly commercial banks. The release quoted the analyst as saying several operators of microfinance banks wanted a ‘short cut’ to owning a commercial bank without having to undergo the ‘rigors’ of procuring necessary banking licenses, etc.

Most MFIs in Nigeria also lack in important aspects of operation, namely raising funds from depositors and also helping prospective clients discard their ‘fear’ of bank loans on account of exorbitant interest rates. According to the Deputy Governor of the Central Bank of Nigeria (CBN), Tunde Lemo, some MFIs in Nigeria are ‘yet to imbibe’ the necessary culture required for their operations. Speaking to participants at a conference on microfinance organized by the Nigerian consulting company, Tradewise Consulting and the Lagos State government, Mr Lemo brought to light the high executive remuneration of MFIs which even included packages offering a two week holiday abroad. Mr Lemo questioned how MFIs could hope to meet their main goals of reaching out to the poor and fighting poverty if they resorted to such extravagances. In this regard, the Central Bank of Nigeria had also recently threatened to withdraw licenses of such banks.

Another issue is with regard to the minimum reserve requirements for microfinance banks as directed by the CBN. The CBN directs every microfinance bank to have a minimum reserve of N20 million (approximately USD 135k), while the National Deposit Insurance Corporation (NDIC) insures each depositor for a maximum N100, 000 (approximately USD 676) regardless of the amount of money invested. According to a manager at the Nigerian MFI Olive Microfinance Bank, such requirements pose challenges for MFIs to raise the required capital for operation. While the minimum reserve requirement makes it difficult for MFIs to reach out to the very poor, the NDIC insurance policy discourages prospective investors because their funds are not sufficiently secured. The deposits made by customers tend to serve as the capital that MFIs lend to borrowers who come for loans. MFIs in Nigeria have not been too successful with convincing customers to make deposits with them and tend to face competition from commercial banks in terms of deposit facilities. Mr. Olusha was also quoted as saying that his bank was still struggling to get people to open deposit accounts with them.

Other challenges identified by operators of microfinance banks include shortage of skilled personnel in the sector. According to a senior official of the Nigerian based First Bank, the sector might ‘collapse soon’ if the MFI operators did not change their strategy. The official identifies close monitoring of borrowers to ensure repayment of loans as one of the major challenges of microfinance banks. He opined that Nigerian MFIs have to employ larger number of staff to monitor their debtors. As per the release, the country is also witness to many fraudulent practices and mismanagement in the microfinance sector.

According to a World Bank study, nearly 70 percent of Nigeria’s population still lives in poverty with more than 54 percent living below the poverty line (less than one US dollar a day). A survey conducted by FinMark and Research and Marketing Services (RMS), a South African research agency, shows that 53 percent of the adult population in Nigeria is still financially excluded with no access to either formal or informal financial services. As per a November 2008 story by MicroCapital, only 12 out of 36 Nigerian states contribute to microfinance activities in the region. Microcapital has extensively covered the Nigerian microfinance sector; for a complete list of our stories please click here.

By Bharathi Ram, Research Assistant

Additional Resources:

NEXT.com: Trouble in the Halls of Microfinance Banks

MicroCapital.org:
Nov 3, 2008: Only 12 out of 36 Nigerian States Contribute to Microfinance Activities

World Bank: Nigeria – Country Brief