A recent article from Next.com, [1] an online source for Nigerian news, reported that the Nigeria Deposit Insurance Corporation (NDIC), the financial industry regulator and subsidiary of the Central Bank of Nigeria (CBN), is unable to regulate and keep up with the rapidly expanding microfinance sector in the country. [2] At a workshop for finance correspondents in Kaduna, Nigeria, [2] [4] Jacob Afolabi, a deputy director at the NDIC, stated that the NDIC and the CBN are “overwhelmed by the number of microfinance banks in the country.” [2]
The NDIC and the CBN began catering towards MFIs in early 2008. However, in the past two years, the industry has continued to face an array of problems, including lack of government control, low compliance rates among operators, and lack of liquidity in the sector. [3] [5] Since 2005, when the CBN established a revised guideline for MFI operations, around 800 MFIs have been registered throughout the country. Due to the dramatic expansion in the industry, the NDIC is finding it difficult to even locate many of the institutions, which has made the tasks of monitoring and supervising extremely challenging. [2]
According to an article published in Vanguard, a Nigerian newspaper, Afolabi stated that letters are sent to the banks to ask them for up-to-date information on their activities, but many of the letters are “either ignored or return undelivered, indicating that [the MFIs] are no longer in operation.” [2] [4] He said that the NDIC is working on formulating a way to identify which MFIs are still in operation and which have closed. [2]
In addition to incomplete information on MFI operations, the NDIC also attributes its hardships in regulating the industry to low compliance among microfinance operators in the sector. [2] Afolabi claimed that less than 50 percent of MFIs are adhering with regulation standards and fail to report their activities periodically. [4] A previous MicroCapital.org story reports on how the CBN is attempting to enforce consequences on errant MFI practices. [6] (Look to bibliography for further MicroCapital.org coverage of CBN attempts to regulate improper practices).
The microfinance sector in Nigeria is also currently threatened by the lack of short-term liquidity, which has forced some MFIs to shut down. [5] Recently, the CBN has proposed to increase the capital base for MFIs to help improve performance. However, though many such as Francis Akpudi, managing director of Solace Microfinance Bank in Nigeria, commend the CBN on its efforts, they doubt its practicality in succeeding given the current strain in liquidity. [8] (Look to bibliography for further MicroCapital.org coverage of the liquidity strain and consequences of the CBN’s proposal). The CBN has even considered outsourcing the supervision of MFIs, in response to its inability to adequately supervise the industry. [7] (Look to bibliography for further MicroCapital.org coverage of the possibility of outsourced regulation of Nigerian microfinance).
Overall, the combination of inadequate regulation, the current financial turmoil, and inconsistent compliance among MFIs has resulted in consequences on both regulatory institutions (NDIC and CBN) and MFIs themselves, threatening their sustainability in the future.
By Radhika Chandrasekhar, Research Assistant
[1] Next.com http://234next.com/csp/cms/sites/Next/Home/index.csp
[2] “Regulator cannot locate microfinance banks.” October 30, 2009. Next.com. http://234next.com/csp/cms/sites/Next/Money/Business/Markets/5475535-147/story.csp
[3] “No Bail Out for Micro Finance Banks.” AllAfrica.com. http://allafrica.com/stories/200910050782.html
[4] “Most microfinance banks shut….NDIC.” Vanguard. Octover 30, 2009. http://www.vanguardngr.com/2009/10/30/most-microfinance-banks-shut-ndic/
[5] MICROCAPITAL.ORG STORY: Nigerian MFI, Integrated Micro Finance Bank Plc (IMFB), Temporarily Closes Doors Due to Lack of Liquidity. https://www.microcapital.org/microcapitalorg-story-nigerian-mfi-integrated-micro-finance-bank-plc-imfb-temporarily-closes-doors-due-to-lack-of-liquidity/
[6] MICROCAPITAL.ORG STORY: Nigerian Central Bank Warns Of Increase In Non-Performing Microfinance Loans, Poor Corporate Governance And Commits To Impose Sanctions On Errant Officials At Microfinance Banks. https://www.microcapital.org/microcapitalorg-story-nigerian-central-bank-warns-of-increase-in-non-performing-microfinance-loans-poor-corporate-governance-and-commits-to-impose-sanctions-on-errant-officials-at-microfinance-bank/
[7] MICROCAPITAL.ORG STORY: Central Bank of Nigeria (CBN) Considering Outsourcing the Supervision of Microfinance Banks (MFBs). https://www.microcapital.org/microcapitalorg-story-central-bank-of-nigeria-cbn-considering-outsourcing-the-supervision-of-microfinance-banks-mfbs/
[8] Microfinance banks threatened by calls for increase in capital base. Next.com September 30, 2009. http://234next.com/csp/cms/sites/Next/Money/Finance/5464789-147/story.csp
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