The Micro Finance challenge: New Policy, Fresh Hope?

Examining The New Micro Finance Policy and Its Promise

Each time micro and small/medium businesses are asked to rank their major constraints, funding ends up capturing the top spot, seconded, these days, by the power supply nightmare. Business people argue that while they understand the prime place of ideas, management skills and market dynamics in the matrix for success, the severity of the funding problem tends to give it top mention. The micro and small/medium sized businesses have great far-reaching difficulty accessing the financial system, dominated by universal banks, whose priority has, for years, excluded the small businesses. The public sector agencies whose mandate covers this sector have also been unable to deliver, for reasons of poor funding and unfocused management. With capital formation so difficult for the individual (in view of low disposable income), investment funding has been difficult, hence the seeming frustration among MSMEs.

The big question today is: will the micro enterprises sector be seeing an end to that trauma, with the new micro finance policy? It's too early to say. What is clear is that the Federal government, through the instrumentality of the CBN management, has shown a recognition of the enormity of this problem and the need to tackle it. The new micro finance policy, is designed to create a framework for a coordinated attack on the micro business funding challenge. Will it work? Always a tough call in the Nigerian environment, where heaps of policy designs that never got beyond paperwork are there to caution against undue optimism. A lot will depend on how actively the stakeholders pursue the success of this fundamentally critical poverty-eradication and wealth-creation instrument.

The policy framework of the scheme prescribes:

1. A private sector-driven approach: eliminates the weaknesses of government-run agencies which often lose focus and end up as propaganda tools;



2. To be delivered through the vehicle of micro finance banks (MFBs): intended to be reasonably capitalised, technically well-managed and oriented towards lending;



3. CBN regulatory and supervisory framework to ensure sound operation and effectiveness.

The CBN will license two categories of micro finance banks, with the following features:

1. Two categories of MFBs to be licensed by the CBN: unit and state



2. A unit MFB is licensed to operate in a Local Government Area (LGA) initially, as a single unit of operation. Required paid-up sharecapital/shareholders' funds is N20million. Organic growth is permitted by opening new branches, first to cover the LGA adequately and subsequently to spread to other LGAs in the State. However, for each new location, the MFB must show availability of free funds, unimpaired by losses, of at least N20million.



3. A State MFB is licensed to cover the state and can open branches in different LGAs of the state. Required minimum paid-up share capital/shareholders' funds unimpaired by losses is N1billion. A state MFB can also grow to be a national MFB by spreading to other states. It must have established presence in at least 2/3 of the LGAs in a state before extending to another. A minimum of N1billion share capital/shareholders' funds unimpaired by losses will be provided to justify presence in a new state.



4. A unit MFB that organically grows to the status of a state MFB attains similar status as MFBs originally licensed as state MFBs.



5. A universal bank can set up a subsidiary to operate as an MFB. The prescribed conditions for licensing MFBs and state MFBs must be met.



6. A universal bank currently engaged in micro financing activity which chooses not to operate a subsidiary company, is allowed to run a specific department or unit for micro finance. Such unit will be subject to the same regulations and supervision as MFBs.



7. All existing Community Banks have 24 months from the approval date of the new policy to meet the conditions for MFB license and convert to MFBs (either state or unit). If they fail, they will cease to operate at the expiration of the dateline.



8. Existing NGO-MFIs can incorporate a subsidiary to register as MFB while still operating as NGO or may choose to convert fully to an MFB.



9. Also, registered NGO-MFIs that wish to remain NGOs are allowed to carry on that way but will forward periodic returns to the CBN.



10. Existing credit-only membership-based micro finance groups (for example, esusu schemes), are permitted to continue with their schemes but are not to mobilise deposits from the general public.



11. Individuals, groups of individuals, community associations, private corporate entities, NGOs, foreign investors are permitted to seek licence to operate MFB's.



12. Beyond the sharecapital injected by the owners, MFBs are expected to actively mobilise savings from the communities they serve and elsewhere for use in their financial intermediation role. They can also raise funds from the public by issuing redeemable debentures.



13. Governments' funding support will come through the 1% of each state's annual budget expected to be set aside for on-lending by MFBs. In effect, such funds will be channeled through MFBs.



14. A strong regulatory, supervisory and operational framework is being instituted to facilitate success:
    
    
    • Licensing of MFBs is the responsibility of the CBN.
    
    
    
    • CBN to supervise MFBs
    
    
    
    • various organs are being set up to support the nurturing process: for example, National Micro finance Consultative Committee, Association of Micro Finance Institutions, credit reference bureau, Micro Finance Development Fund
    
    
    
    • Extension of NDIC deposit insurance scheme to cover MFB deposits.
    
    
    
    • Micro finance loan, under the policy, is pegged at a ceiling of N500,000.

What future for micro finance?
Under the new policy, it's tempting to get into the euphoria of celebrating the end of the funding problems of micro enterprises. However, it's too early to jubilate. Its important too to recognise that:

• There is an implementation period, which means that current effort will take some time to crystallise;



• More funds may be available but the issue of collateral may remain a hurdle. Also micro enterprises that are not primed to attract support will still fail to get help. The quest for skilled management, structured operations, proper bookkeeping, etc should be high on the agenda of any MSME that looks forward to attracting financial support.



• Implementation has never been our forte and a cautious posture towards the success of the policy will not be misplaced.



• A lot of dedicated work is required to translate policy into action and the involvement of universal banks and other stakeholders will be critical.

In all, the policy sets out a viable framework for energising the all-important micro finance sector. For once, we possibly have a real chance to empower many active, goal-driven Nigerians with meaningful wealth-creation ideas, to go ahead and pursue their dreams.