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UNDERSTANDING MICROFINANCE BANKING

In the last 4 episodes, I have written on Microfinance is not Charity, Microfinance, as the Panacea for real development, Insomnia for both the Poor and the Rich and how Microfinance may be the right prescription and concluded last week on how to prevent old age poverty through micro pension It has just dawned on me, that I write on all these topical issues on micro financing when indeed most of my readers do not even understand what microfinance banking is. It was after delivering a lecture to a mens group yesterday(15 TH March 2008) that I decided that before going on the other topics I have carefully lined up, I must first of all try to educate my readers on what microfinance banking is so that they would have the background to understanding the issues that follow. WHAT IS MICROFINANCE ? Microfinance was defined by Gert Van Maneen, a Microfinance expert as banking the unbankable, bringing credit, savings and other essential financial services within the reach of hundreds or millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. A microfinance bank can therefore be defined as the bank for the poor. It means investing in the income generating activities of the poor. Microfinance is meant for those who cannot be efficiently served by regular commercial, universal or merchant banks because their activities and volumes are too low to warrant the high cost of services by these big institutions. But it must be stressed here again that Microfinance is not charity, hence as a borrower, it is expected that repayments must be made. Very importantly, it must be understood that Microfinance is meant to lift the poor from his/her current level of poverty to a level of productivity and self sufficiency. It is therefore for the income generating and economic activities of a person not for paying school fees, hospital bills, burial or marriage ceremonies CAN MICROFINANCE TRULY BE A BANK? The best way to approach this for easy understanding of my diverse readers is to first lead them to understanding what banking is. What Is Banking Banking is the business of taking money from people who have (surplus spenders) for safekeeping and giving money to those who require them (deficit spenders) in what is termed, in the financial world as financial intermediation. Financial Intermediation

In financial intermediation, surplus spenders make deposits in banks and earn interest incomes on certain deposits. Banks lend the moneys to deficit spenders and earn interest on the loans as depicted in the diagram below. There is no direct interaction between the deficit and surplus spenders. Therefore, funds owners have no influence over how the bankers use their money. The important thing to them is that they are paid back when they make demands on the banks to pay

Surplus spenders deficit spenders

BANKS

INTEREST Disintermediation

INTEREST

Here, the bank brings the deficit and surplus spenders together. The deals are closed and the bank earns an income called fees. While Core Banking i.e Financial Intermediation started from the medieval age passing through produce storage to gold smiting etc, and finally obtaining its legal backing from the Bill of Exchange Act 1882, which is still the International Banking Act today, disintermediation is a recent development. It is the contemporary banking practice engendered from a greater need of banking customers and technogical developments that have turned the world truly into a global village. In disintermediation, the bank simply brings the surplus spenders and the deficit spenders together and may or may not drop off depending on the agreements. If the agreement is that the banks job ends in bringing the two together, instrument mainly used is a Commercial Paper (CP). But where the bank is expected to add its names to the transaction, then mainly a Bankers Acceptance (BA) is used. But in both, banks earn just fees although higher fees are earned on BAs than on CPs

Surplus spenders deficit spenders

BANKS

FEES
Banking originated purely from deposit taking and later metamorphosed into lending or what is called credit. However, an individual or a group or body corporate that has not been licensed as a bank by the Central Bank of Nigeria, cannot be called a bank no mater to what level such a person or institution carries on banking functions of financial intermediation or disintermediation as depicted picturesquely above. Indeed, except a body corporate has obtained banking license, it is precluded by the Central Bank of Nigerian Act and the Banks and Other Financial Institutions Act 1991 (as Amended) from using the word Bank as part of its names Consequently only microfinance institutions that have obtained the CBN license may use the word Microfinance Bank as part of their names. Those persons or institutions known as microfinance institutions but who do not have the CBN license are not banks even though they carry on micro credit activities. These include NGOs, Finance houses, Cooperatives etc. Only licensed banks are allowed by the CBN to take deposits from the general public. All other persons and institutions may borrow money from persons and any such loans to such institutions is outside of CBN regulatory purview and lacks Nigerian Deposit Insurance (NDIC) protection. In summary therefore, all licensed microfinance banks in Nigeria today are banks to all intent and purposes because they undertake the basic functions of banks and are licensed as such by the Apex Regulatory Institution in Nigeria, the CBN. UNDERSTANDING NIGERIAN MICROFINANCE BANKING The first step is that we must understand that Microfinance banking in Nigeria is Guided by the microfinance regulatory policy and guideline of 2005. No micro banker may therefore operate outside the dictates of this policy. In Nigeria, Microfinance banks render services to the poor and Small and Medium Scale Entrepreneurs (SMEs). While the poor is defined as a person living with less than two dollars ( about N230) a day (and those living with less than a dollar a day are said to be living below the poverty line), the SMEs are defined as persons doing business with less than N1.5 billion. Recent studies indicate that poor people in Nigeria number some 126 million or 90 % of the population while those living below the poverty line are about 40 million people. Depositors of Nigerian microfinance banks are insured by the NDIC to the tune of N100,000 (one hundred thousand Naira only) as against N200,000 (two hundred thousand only) for the mega banks Two categories of Microfinance banks exist in Nigeria namely, Unit Microfinance bank which are those that are established with Minimum capital of N20million and are not allowed to open branches outside of their local government Area. A state wide Microfinance bank may establish branches any where in the state for which it is licensed to operate but not outside of the state

Statutorily, a microfinance bank is not allowed to lend more than N500, 000 to a single individual or business. Microfinance banks credit classification is more stringent than the Mega banks. For instance, while a mega bank may only classify an account loss if it stays unpaid for interest and capital for up to 365 days, microfinance banks must classify such loans loss if it remains unpaid for 90 days. Consequently, micro bank operators opt for very short term liquid loans Microfinance banks do all banking business except that they are not allowed to do foreign exchange businesses. They therefore serve their forex customers by making use of their correspondence banks services. Because a microfinance bank is not allowed in the meantime to access the clearing house operations, its cheque books bear the names of their correspondence banks. Those people who were around before the banking liberalization era of mid 90s in Nigerian would recall that merchant banks cheque books used to have two banks names such as NAL MERCHANT BANK/ UBA PLC. This is because, NAL, as a merchant bank then was not allowed to undertake clearing house operations, hence their cheques were cleared though their correspondence banks. It is exactly the same thing for Microfinance bank today.

FUNCTION OF NIGERIAN MICROFINANCE BANKS Microfinance banks in Nigeria undertake all banking and financial services provision that Mega banks do but on small scales to small and medium scale entrepreneurs. They basically render services to the poor for poverty alleviation and also deal in business developments and improvements of SMEs. They therefore use traditional banking products instruments to serve their customer The basic instruments used by microfinance banks include: traditional and enhanced savings accounts, current accounts, fixed deposits, investment accounts; Credit or lending products such as overdrafts, leases, term loans of various terms but mainly short tenured, trading loans, salary advances, LPO financing etc; Support services including financial advisory services, feasibility reporting particularly for start-up SMEs, Financial training; Micro insurance services; Money transfers both locally and internationally in conjunction with their correspondence banks, micro pensions, capacity building etc. Hardly would a good microfinance bank lend without some form of support service being rendered to its client FORMS OF LENDING BY MICROFINANCE BANKS Microfinance banks lending is different from those of Mega banks in a number of ways because of the peculiarity of its clientele. Micro banking, in addition to Individual lending (which is greatly disfavored) particularly undertake group/cooperative lending. Group lending ensures that each member of the group act as moral suasion and encouragement for each other and ensures that a defaulting member is helped by other members of the group for sustainability of the relationship. Additionally, an indisposed member of the group does not suffer business loss as typically, groups are stratified into various business types such as Okada Riders Association, Keke Riders Association, Butchers Association, Hairdressers Association in various locations. MFBs also undertake referred or sponsored lending. In sponsored lending, the sponsor who would otherwise lend to the poor or an SME domiciles the money with an MFB and instructs on the particular persons the loans should go to. The sponsor may also determine the terms and conditions of the loans provided the bank is paid management fees as they are expected to appraise and manage the

loans as though they were direct lending. At Elim Microfinance Bank Limited for instance, there is a product called Kit and Kin which is a typical sponsored loan product with great benefit to the sponsors COLLATERAL DE-EMPHASISED IN MICROFINANCE BANKS Most poor people that borrow from microfinance banks have absolutely no collateral to back their loans. This is why they are not served by Mega banks as these banks always insist on collateral for their loans because doing anything to the contrary is a violation of the BOFIA 1991. But in Microfinance banking, collateral is de-emphasized since most borrowers from microfinance banks have absolutely no collaterals to offer. As Oikocredit International would say, and as believed and practiced by most microfinance banks in Nigeria, the poors greatest asset and collateral in his/ her pride and integrity. The poor person is so excited with the possibility of raising loan from a bank that s/he would work extra hard to repay the loans and stay in the good books of the bank. S/he has no moneys to retain the services of a lawyer and take the bank to court as would the High net worth individuals and big corporates. Hence, s/he values greatly the partnership and trust the bank has in giving the loan that his/her integrity is greatly gingered. Consequently, MFBs and MFIs rely mainly on the integrity of borrowers and cash flows for loan repayments. This is why in Microfinance banking, emphasis is placed on three rather than five Cs of lending as explained under the article Microfinance is No Charity. For successful lending without collateral however, micro banks lend mainly in groups. It is a lot easier for group members to be successful with their loan applications than individuals or single businesses. An MFB would almost always require collateral from individual borrowers but would lend clean to groups. MICROFIANCE BANKS ARE NO WONDER BANKSL BANKS Some of the challenges we meet in the market include the preponderance of wonder banks We hear of microfinance banks that offer depositors rates as high as 10 or 15% on their deposit per month but disappear from the scene before such deposits mature. I personally blame this attitude on greed of the depositors. Every depositor who is offered mouth watering deposit rates must first consider what businesses the deposit taker or borrower must do with the funds to ensure the interest and principal are paid at maturity. Of recent, I leant of a body that took deposit of N5million from a client, on a 10% flat per month but all interest and principal payable after one year. This means a 120% rate per annum and the depositor would be paid some N11million after one year. The proviso however is that termination before one year entitles the borrower (deposit taker to a charge of 50%) . This depositor had gone 7 months when ill health in the family necessitated termination of the investment which cannot be used as collateral to borrow elsewhere anyway. The depositor got only N2.5million after leaving her money with the institution for 7 months. Sad, is all I can say, sadness engineered by greed. Any one who wants money multiplication must face up to such rip-offs. But this is not the typical activity of Microfinance banks. A DEPOSITOR IN MICROFINANCE BANK WOULD TAKE HIS/HER MONEY OUT ANY DAY WITH ACCRUED INTEREST THEREON IF IT IS A SAVINGS OR DEPOSIT ACCOUNT. NO INTEREST WOULD GENERALLY BE PAID ON CURRENT ACCOUNT. IF A DEPOSITOR TERMINATES A

FIXED DEPOSIT BEFORE MATURITY, ONLY PENALTY ON ACCRUED INTEREST IS ALLOWED. ANY CUSTOMER THEREFORE WHO IS OFFRERED ANYTHING DIFFERENT SHOULD KNOW THAT SUCH AN INSTITUTION MAY BE A WONDER BANK, DEFINITELY NOT A MICROFINANCE BANK . Also, depositors who are offered far more than market deposit rates by microfinance banks must check out the institutions and exercise cautions in dealing with them. Microfinance deposit rates are similar with those of mega banks with perhaps 1 or two percent or a few basis points higher. WHAT MAKES MICROFINANCE BANKS UNIQUE Below are some of the issues that make microfinance banking unique and special: They touch the lives of the poor and are engines of real and sustainable development in any nation-the grass root development They operate very flexible businesses that break the barriers the poor and the inadequately equipped face in their businesses. This is why they do not go into detailed documentation and they lend without collateral. Speed of processing and disbursing loans is also generally much faster than Universal banks MFB are partners in progress with their customers. This is why they train, keep books, advice, market with and collect moneys right from the small shops of their customers MFBs are training Organisations for their customers. The customers acquire tremendous knowledge, formerly or informally from their micro credit providers because these people are mainly not knowledgeable about so much financially even with regards with the business they do. Daily business relationship is a key relationship issue with micro clients. This is why micro bankers visit their clients every day whether they are borrowing or daily contributors to collect money. Clients feel disappointed if they do not see their micro bankers any day Gradual growth with customers. A microfinance bank would not suffocate its clients with too much loans than s/he can cope with. Hence the banker builds gradually with the customers and watch them grow from nothing to millions of Naira business. The micro banker would also not give loans for projects that he knows the customer would make loss even if the bank profits from it. This is because The MFB, AT ALL TIMES BALANCES THE BUSINESS AND SOCIAL ASPECTS OF RELATIONSHIP WITH THE CUSTOMER IFEOMA C ANA is the MD/CEO ELIM MICROFIANCE BANK LIMITED She is also the President Women In Banking, Finance and Investments In Nigeria(WIBAFIN)

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