MFBs’ operations and sectoral rating


Godwin Emefiele, CBN Governor

MICROFINANCE Bank (MFB), as the name suggests, is banking at the grassroots and on a small scale- providing loans to co-operatives and individuals engaged in cottage industries, who cannot afford the high-level transactions of the normal bank. This is also at affordable rates.

Besides, experts have consistently espoused that robust economic growth cannot be accomplished without situating well focused programmes that enhances entrée of deprived and low income earners to factors of production, especially access to credit, as well as effecting rating of activities.

Of course, the above definition is not all encompassing, but the truth is that while there are challenges in realizing the objectives of microfinance banking in Nigeria, there are 882 MFBs in the record of the Nigeria Deposit Insurance Corporation (NDIC).

NDIC in its 2014 yearly report and statement of accounts noted that the sub-sector’s total assets grew by 12.26 per cent from ₦197.44 billion in 2013 to ₦221.65 billion in 2014, while total loans and advances moved from ₦85.44 billion in 2013, to ₦114.70 billion in 2014.

Also the Special Insured Institutions Fund (SIIF)- a pool of insurance premiums by MFBs, rose by 23.39 per cent from ₦57.71 billion as at December 31, 2013 to ₦71.21 billion as at December 31, 2014.

These statistics are replete with NPF Microfinance Bank Plc’s figures, which were recently reviewed by Augusto & Co. Remarkably, the exercise ended with ‘A’ rating, as well as declaring it a company with good financial condition and strong capacity to repay obligations on a timely basis and stable outlook. This is a good development and everyone will only wish other MFBs come out same or better.

MFBs’ opportunities abound as the Central Bank of Nigeria (CBN) has said that a large percentage of the population is still excluded from financial services and perhaps, years after the launch of microfinance policy, its impact could be felt on the unbanked populace. In fact, many that have financial services from the informal sector like savings clubs/pools, Esusu/Ajo, and money lenders are opportunities yet untapped to close up the excluded number still running in tens of millions in Nigeria.

The 2005 Microfinance Policy, Regulatory and Supervisory Framework for Nigeria, revised in April, 2011 by CBN, reflected response to stakeholders’ concern and recognises existing informal institutions, bringing them within the supervisory purview of the CBN and creating a platform for the regulation and supervision of MFBs.

One of the critical initiatives in this direction was the incorporation of financial inclusion as one of the cardinal objectives of the Nigerian Financial System Strategy 2020 (FSS 2020). The initiative represents a holistic and strategic roadmap and framework for developing the Nigerian financial sector into a growth catalyst that will enable Nigeria be one of the 20 largest economies in the world by 2020.

Microfinance, often defined as financial services for poor and low-income clients, offered by different types of service providers, is often used more narrowly to refer to loans and other services from providers that identify themselves as “microfinance institutions”.

These institutions tend to use methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. The methods include group lending and liability, pre-loan savings requirements, gradual increase of loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly.

From a global perspective, microfinance organizations envision a world in which low-income households have permanent access to a range of high quality and affordable financial services offered by a range of retail providers to finance income-producing activities, build assets, stabilize consumption, and protect against risks.

Given the high unemployment rate and millions still unbanked or under-banked, billions of naira are circulating outside the banking system, but the policy provided an already-made market for this new industry to surpass expectation. Some of the active poor only needed small loans to kick-start their dream businesses or expand them, thereby, employing more people as their businesses grow.

However, as earlier mentioned, the industry has passed through several ordeal and challenges, culminating in the near dormant state of the industry. They have twirled through excruciating economic challenges, as mismanagement, high loans defaults, negative public perception, lack of financial assistance from government, harsh operating environment, and crash in the share price of stocks on the Nigerian Stock Exchange (NSE) in 2009, among others, led to their predicament.

Specifically, NDIC pointed out that corporate governance challenges, weak capital base, poor asset quality, lack of microfinance banking knowledge and experience, high operating costs, scarcity of loanable funds, low literacy level and inadequate Management Information System are still bedeviling the industry.

But optimists are insistent that if CBN, NDIC and other regulatory agencies would provide both moral and financial supports for the promising industry and the Federal Government improves the harsh operating environment, the operations of MFBs would seamlessly coast to prosperity.

However, amid the unsavoury economic developments, some MFBs appear to be defying the odds and providing quality services, maintaining sound financial discipline, creating value for shareholders, as well as working in tandem with the policy enunciated by the CBN.

The NPF Microfinance Bank, incorporated in May 1993, as a private limited liability company, was granted a provisional license as a community bank by the CBN and commenced operations in August the same year. In 2006, it changed status to public limited company, given approval-in-principle as a microfinance bank in May 2007 and final license in December 2007.

The shares of the bank became listed on the Nigerian Stock
Exchange in December 2010 and settled to offload its specialised banking and other permissible financial services to poor and low-income households; and micro-enterprises with emphasis on members of the Nigeria Police community.

The services include retail banking, granting of loans, advances and allied services and with a large number of shareholders comprising over 6,000 institutional and individual investors, with ownership concentrated among the two largest shareholders- the Nigeria Police Co-operative Society Limited, which holds the largest equity stake of 64.75 per cent and the NPF Welfare Insurance Scheme with a 10.25 per cent ownership.

Its business strategy has focused on growing income through the provision of banking services to the police, their communities, microfinance clients and other members of the general public, while in line with its strategic plan, driven by the threat of increased competition from microfinance institutions and deposit money banks, the financial institution offers high-quality services, leveraging on its history with police customers.

The bank intends to increase its industry outreach by expanding to all 36 states through branch network, cash centres and meeting points, in addition to plans on diversifying its customer base, traditionally dominated by men, through the barracks strategy aimed at empowering women.

It is currently riding on the back of the Finance Solution banking application to process its transactions and the human manager application for its payroll functions thus giving little or no space for system manipulation.

In the last three years, NPF MFB’s business volumes have grown moderately, with total assets soaring at a Compound Annual Growth Rate (CAGR) of 19 per cent; total loans and advances also growing at a CAGR of 17 percent over the same period and net earnings’ growth of 15 percent from 2013 to ₦N2 billion as at December 31, 2014.

Pre-tax return on equity and pre-tax return on asset have averaged 15.6 percent and 7.1 percent respectively over the three-year period, while cost-to-income ratio averaged 68.7 percent over the same period (2014: 69.3%). The pre-tax profit increased by 21% to ₦617 million during the year ended 31 December 2014, while return on asset remained unchanged at 6.3 percent and return on equity improved to 15.4 percent.

As a niche, the bank operates a centralized risk management system, where credits originate from different branches and approvals are granted at the Head Office, with the Board Risk Management Committee established to oversee the overall risk policy and set out the limit of risk appetite.

Presently, NPF MFB’s risk management system is partially technologically driven as the bank utilises the banking application- Finance Solution, to track and monitor its loans and generates monthly reports on loans approved, reviewed and watch-list/problematic loans.

Of course, the bank engages in secured lending to mitigate credit risk and in cases where no collateral is provided, customers produce a personal guarantor with a salary account with the bank. The loan process starts with the receipt of loan application documents, while the credit appraisal officer verifies the information and documentation presented with the loan application checklist.

Agusto has affirmed that the bank’s risk management framework is adequate for its current operations. The rating of NPF Microfinance Bank, no doubt, reflects its strong capitalisation, good asset quality, profitability and adequate liquidity level. The rating also takes into consideration the Bank’s ability to sustain its current profit levels as it pursues its nationwide expansion plans and moderates costs as business volumes grow.

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