Across the globe, the Banking Sector plays a vital role in the growth and development of any nation. Since independence to date, there had been various policies and reforms geared towards strengthening the economic backbone; from indigenization to Consolidation in recent past, and Bail-outs, Recapitalization and Institutionalization of Banking Ethics, and the Acquisition of Toxic Assets from banks’ books to avert possible collapse in present times.
This feature is a consolidation of a previous publication, Micro Financing in Nigeria: A Dire Need for “Sanusitization”, eliciting the attention of the Apex bank and the public towards some needed drive in checking the excesses of this Banking Sub-Sector of the Economy. Even though the CBN’s Hurricane audit that exposed top banks last year should have served as an eye cleaner to the Micro Finance Institutions (MFIs), continued sharp practices in the MFIs have resulted in loosing depositors’ funds to non credible customers who have no available means of repaying the loans; leading to MFI’s inability to pay depositors on demand.
One determinant of the success of MFIs is the level of financial regulation and supervision a government puts in place. This can be both prudential and non-prudential regulation and supervision. While prudential regulation directly sanctions and assumes the responsibility for the soundness of the system, non-prudential regulation only offers guidelines and standards. Prudential regulation brings in benefits by avoiding banking crises, protecting depositors and encouraging financial sector competition and efficiency. The degree of financial regulation and supervision depends on the country context. Nigeria’s regulations have been characterized by numerous weaknesses and flaws. For instance, there are a number of controversial issues regarding regulatory incentives for MFIs such as exemption from Value Added Tax (VAT) on lending, or tax on interest income or revenue.
Giving the roles and responsibilities as provided in the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria, the government must ensure a stable macro-economic environment and providing basic infrastructures like electricity, and setting aside an amount not less than 1% of the annual budgets of state governments for on-lending activities of MFBs in favour of their residents. Although it is hard to make generalisations about Africa’s microfinance sector because of its regional and institutional diversity, Nigeria’s MFIs operate in ‘difficult’ financial terrain with a weak rule of law, open and latent conflicts and corruption affecting everyday live. Knowing that regulation of microfinance has become a hot topic internationally in recent years, it is advocated that the Central Bank of Nigeria (CBN) follows a right path as did by the Central Bank of Sri Lanka (CBSL) in drafting a Microfinance Institutions Act which should be passed into law.
At present, regulation and supervision of the microfinance sector in Nigeria occurs within a complicated structure. Much of the provisions of the regulatory guidelines and frameworks are not strictly adhered to in recent times. For instance, there is the requirement to curtail the outstanding principal amount of all loans, Portfolio-At-Risk (PAR), at 2.5% by MFBs, rendition of returns and the publication of audited financial statements. In some MFBs, the PAR stands at 9%, while in some detrimental cases, 15%. Some lists of borrowers in the MFBs were felonious from the commercial banks. Very little of the reasonable hundreds of MFBs in the country publish their audited financial statements for public consumption; publication of financial statements had assisted the public in identifying “big” banks with negative net assets after the CBN’s audit of commercial banks. The non-compliance to the regulatory guidelines does not only serve as a violation of rules, but also puts the depositors into the claws of their unethical practices and poor corporate governance.
Although Corporate Governance is a system of checks and balances whereby a board is established to manage the managers, Governance is sometimes conceived as a virtuous circle that links the shareholder to the board, to the management, to the staff, to the customer, and to the community at large. Above all, governance should be a product of character, one the Cs of credit that banks fail to reckon with. However, governance in the Nigerian MFBs is one which confuses control with ownership. Good governance engenders trusts that allow a financial institution to attract depositors and investors. Governance provides assurance to government officials and, in the case of financial institutions, to bank superintendents. One way to create trust in the governance process is to eliminate conflicts of interest. Board members should not receive any personal and clear objectives. It is important that board members do not have political agendas that could influence the direction of the organization.
The need for a reform of this financial intermediary cannot be restricted to the creation of law, prudential guidelines and Acts alone. There must be proactive steps and measures at dealing with the “Charles Ponzis” of our MFIs. As the reform continues, the review of governance and micro-finance raises more questions than it answers. Indeed, there are no easy answers, particularly in an infant industry that has yet to establish governance guidelines. Further, it would be required to develop a recruiting kit to assist a board in identifying its role and the skills necessary for an MFI board; training board members about the hybrid objectives of micro-finance; preparing guidelines about the appropriate role of board members to avoid conflicts of interest; and conducting research to suggest ways of aligning incentives and compensation for senior management and board members with the social objective of the institution.
Salim Salihu Muhammed