Nigeria Microfinance: Will CBN do good by stopping MFBs from accepting Deposits?

There are speculations in the microfinance sector that Central Bank of Nigeria may stop microfinance banks from accepting deposits. VANGUARD recently reported the opinions in its article titled "Anxiety heightens over impending MFB policy review" dated 03 May 2010.

Let us first review few important provisions of Microfinance Policy Framework of CBN and also discuss the spirit behind it before we can conclude or debate over whether CBN will be doing right by stopping MFBs from accepting deposits.

The Regulatory and Supervisory Framework released and published by Central Bank of Nigeria (CBN) during late 2005 defines Microfinance as:

A Micro Finance Bank [MFB], unless otherwise stated, shall be construed to mean any company licensed to carry on the business of providing micro-finance services such as savings, loans, domestic fund transfers and other financial services that economically active poor, micro-enterprises and small and medium enterprises need to conduct or expand their businesses as defined by these guidelines.

This simple yet far fetching definition offers us many insights.

Savings as a microfinance service
Many international agencies define microfinance as provision of savings, credit, and other financial services. CBN adopted the same definition. Not only did it adopt the definition but also gave "Savings" a very prominent place in the definition - infact the very first place under "micro-finance services".

The Spirit behind Savings as a Prominent Microfinance Service
Much as you and me require a bank account to save our earnings for future use, poor also deserve a place to store them. And much as you and me require our savings to earn some risk-free return rather than sitting idle, poor also want their money to work twice as hard as themselves.

Therefore, there should be no iota of doubt to question the need for savings for the poor. They deserve savings, a better savings and probably a variety of savings products to give them the power of choice.

Central Bank of Nigeria considered this as an important element in microfinance.

Finance in African history always began with the word savings. ROSCA (Rotating Saving and Credit Association) and ASCA (Accumulated Savings and Credit Associations) are household practices in Africa. Among Microfinance circles in the world, African Microfinance Institutions are known to be "savings-led" microfinance institutions.

With a history to support the practice of savings and an enabling legal framework that was backing so far, why would CBN now think of stopping MFBs from accepting deposits?

Abuse of the Microfinance Policy
Hundreds of Microfinance Banks have queued up in Nigeria to compete with the commercial/universal banks. There is nothing wrong in doing so as long as the poor gets benefited.

However poor was not getting benefited. More so, there were so many instances of MFBs cheating the clients by disappearing with people's hard-earned money collected in the name of "savings" or "deposits".

Cheating was just a part of it. More worse was mismanagement of funds. Corporate buildings, luxurious cars and fancy salaries to top executives by microfinance banks, contributed a lot to this mismanagement. While Capital Adequacy Ratios and Liquidity Ratios were defined very well in the microfinance policy - there were several MFBs which were not following them in toto.

In some cases, the resources which were received in form of deposits were invested by MFBs in speculative businesses like share trading or were financed to buy shares by high-end clients.

Why did it happen and what is the remedy?
One obvious reason that people quote is that MFBs are unethical. Well, ethics in finance is highly a relative term when regulations are weak. Infact, ethics in finance is directly proportional to the effectiveness of policy implementation. Central Bank of Nigeria has failed in the past to rectify these issues primarily because of weak implementation despite having a strong policy.

It may be good if CBN implements the policy with high levels of monitoring implemented across the sector. Monthly reports, frequent portfolio audits, supervisory visits, surprise checks are some of the solutions ahead.

Will CBN do good by stopping MFBs from accepting Deposits?
Stopping MFBs from accepting Deposits may definitely affect clients who require the service. There is no doubt a lot of demand. But if the quality of services being offered by MFBs is so bad, then doesnt it make sense to stop MFBs from accepting deposits? Or is there a mid-way solution of CBN tightening the nuts and bolts of implementing supervision.