One of the important pre-requisites for building confidence of the depositors, even among the under-privileged, in the formal banking system, is deposit insurance. In that regard, the Nigeria Deposit Insurance Corporation (NDIC) becomes the tool through which such service can be rendered. Fortunately, the NDIC was established to perform functions such as the following, among others:
i. insuring all deposit liabilities of all licensed banks and such other deposit-taking financial institutions, such as micro-finance banks, operating in Nigeria, so as to engender confidence in the Nigerian banking system;
ii. giving assistance in the interest of depositors, in case of imminent or actual financial difficulties of banks particularly where suspension of payments is threatened; and
iii. guaranteeing payments to depositors, in case of imminent or actual suspension of payments by insured banks or financial institutions up to the maximum deposit insurance coverage.
It was based on that statutory requirement that the NDIC extended deposit insurance cover to MFBs in 2008. Even before the extension of formal deposit insurance to MFBs in 2008, the Corporation had participated actively in the supervision of the erstwhile Community Banks (CBs), many of which transformed to MFBs in order to ensure safe and sound management practices in those institutions and boost depositors’ confidence most of whom belonged to the under-privileged members of the society.
The extension of deposit insurance services to MFBs by the NDIC involves the following:
Membership
By the provision of the NDIC Act of 2006, membership of the MFBs in deposit insurance is mandatory/compulsory. This is line with the dicate of best practice in deposit insurance so as to avoid the problem of adverse selection. That requirement also helps in engendering public confidence in the MFBs.
Coverage
All deposit products of the MFBs are insured up to a maximum o N 100,000 per depositor per insured institution. With that level of coverage over 95% of depositors in MFBs are fully covered.
Funding
The NDIC established a separate Deposit Insurance Fund (DIF) known as Special Insured Institutions Fund (SIIF). The fund is generated through the annual premium contribution by the insured institutions. In order to give some kind of incentives for the MFBs, their premium rate was reduced to 50 basis points instead of the maximum of 80 basis points payable by an insured universal bank. All deposit products of the MFBs are insured up to a maximum of N 100,000 per depositor per insured institution. In order to ensure a rapid build-up of the SIIF, the sum of N5 billion was made available to it from the NDIC’s 2007 operating surplus.
A separate department known as Special Insured Institutions Department was created for off-site surveillance and on-site examination of the MFBs Through that department, the NDIC has been carrying out On-site examinations, premium assessment and off-site surveillance of licensed Microfinance Banks (MFBs) and Primary Mortgage Institutions (PMIs). It had also participated in joint and special investigations and examinations of the institutions with the CBN. During the routine examinations of these institutions, their books and records are perused with a view to identifying, analyzing and measuring the risks the institutions are exposed to and recommending mitigating measures that could reduce or eliminate such risks.
The Corporation has also been carrying out off-site surveillance of licensed MFBs and PMIs on a quarterly basis. In that respect, the prudential returns of the reporting institutions are analyzed and reports generated. The off-site surveillance framework provides the basis for early detection of problems which could facilitate timely intervention.
Capacity Building
Microfinance was a novel idea in the country and both regulators and operators did not have adequate knowledge and skills for microfinance operations. In that regard, the Corporation during the year under review, partnered with the CBN to build capacity of its staff. In 2008, some examiners were sent to The Philippines and Bangladesh (which had recorded great success in microfinance), to learn about the operations of microfinance. In addition, facilitators were invited from Social Enterprises Development Partnerships Incorporated (SEDPI) Anteneo De-Manila University of Philippines for implant courses organized by the Corporation to train the bulk of examiners in 2008. A total of forty (40) examiners benefited from the courses.
Public Awareness/Advocacy
Public awareness about the deposit insurance cover available to depositors and related procedural/legal aspect are also necessary for promoting financial inclusion by strengthening public confidence in this banking sub-sector. This is also underlined by International Deposit Insurance Association. The NDIC uses various methods for spreading awareness about Deposit Insurance in Nigeria. In the case of the MFBs, public awareness of extension of DIS to MFBs was conducted in 2008 through sensitization workshops for Board Management and External Auditors of MFBs at various centres nationwide. In addition, a sensitization workshop was held for Finance Correspondents Association of Nigeria (FICAN) to enhance public advocacy. Furthermore, advertisements on introduction of DIS for MFBs were placed in print and electronic media, while stickers (decals) were provided for MFB offices/business premises.
Challenges of MFBs
The Microfinance bank sub-sector is faced with a number of challenges which have restricted its effectiveness in enhancing economic inclusion. Some of these challenges are enumerated as follows:
I. Skewed Distribution of MFBs
As shown in Table 11.1, the MFBs, as at December 2008, were concentrated mainly in the urban and semi-urban areas of the country. That development runs counter to the basic objective of the microfinance policy of enhancing economic inclusion in the country.
ii. High Operating Cost
Majority of the MFBs operate as if they are in competition with the universal banks. The cost of office accommodation mostly in urban centres, heavy wage bills and fringe benefits have resulted in very high operating costs thereby reducing the loanable funds available to most of the MFBs.
iii. Inadequate Executive and Regulatory/Supervisory Capacity
Microfinance is a novel idea in the country therefore majority of the staff of MFBs do not have requisite knowledge and skills in microfinance. Most of the MFBs staff had universal banking job experience and that explains why some of them focus mainly on conventional banking products with little efforts in developing products for the desired target members of the society In the same vein, there is dearth of capacity on the part of regulators and supervisors to effectively discharge their role. That has limited the effectiveness of the safety-net arrangement in ensuring safe and sound practices in the institutions, a situation which threatens the stability of the sub-sector in particular and the entire financial system in general.
iv. Lack of Exit Mechanism for CBs that Failed to Meet the Requirements for MFB licence
Some community banks that failed to meet the requirements for MFB licence are still operating as community banks even when many of them are exhibiting distress symptoms of which most unsuspecting depositors are not aware. Even for those CBs that are viable, the fact remains that the legal framework for their existence is no longer tenable. There is therefore, the need on the part of the regulators to address this problem by working out an appropriate exit mechanism for the affected CBs with minimal interruption to the operations of the MFB sub-sector in particular and the entire financial system in general. Such mechanism is currently not available.
v. Inhibited Ability to Mobilize Deposits
As a result of the high failure rate of community banks, finance houses and “wonder banks” in the recent past, members of public have been weary of patronizing MFBs. That has to a great extent created problems in deposit mobilization by the MFBs, thereby inhibiting their intermediation process. In addition, there is inadequate access to sustainable source of funding as most State Governments are yet to make good the requirement of contributing 1% of the annual budgets to microfinance credits through the instrumentality of micro-finance banks.
vi. Challenge of Management Information System
Many of the MFBs are yet to be computerized. That could be expected since the cost of computerization could be too much for MFBs to bear at inception, hence, most of them resort to manual operation with attendant adverse consequences on accurate record keeping.
vii. Poor Corporate Governance
The Boards of MFBs should be responsible for establishing strategic objectives, policies and procedures that would guide and direct the activities of the banks. These are lacking in most of the existing MFBs, as revealed by Examination Reports. Majority of the existing MFBs operate without strategic plans, policies and procedures. Also, there are issues of self-serving practices and insider abuse by the owners, board and management of some of the MFBs.
Viii Loan Recovery Challenges
Various Examination Reports of these institutions have revealed a rapid build-up of non-performing loans in the sub-sector. The subsisting legal and judicial system has equally made it difficult for the MFBs to recover loans and realize collaterals obtained to secure loans.
ix. Collateral Security Challenge
In other jurisdictions where microfinance operations have been successful, emphasis has not been laid on collaterals for micro credit. Many MFBs in Nigeria are yet to embrace that lending practice because of the poor borrowing culture in Nigeria. That challenge has been exacerbated by the slow judicial processes in adjudicating loan recovery cases.
Conclusion
Even though still evolving in Nigeria, micro-finance has been recognized as a veritable tool for economic inclusion. It has a great potential for savings mobilization, economic empowerment, poverty reduction and accelerated economic growth and development. In this chapter the experience of Nigeria in that respect has been discussed. The chapter has equally demonstrated that the provision of deposit insurance helps to enhance the effectiveness of microfinance policy via the creation of micro-finance banks by reinforcing public confidence in MFBs. In order to derive maximum benefits from the initiative, concerted efforts are still required to address some of the daunting challenges facing the MFB sub-sector. In that regard, there is urgent need for the MFBs to design customized financial products for the target members of society Also, there is the need funding of the MFBs from sources other than money and credit market. Furthermore, the need for requisite skill acquisition by managements of MFBs as well as for their regulators/ supervisors cannot be overemphasized. Finally, there is the need to heighten the pace of financial literacy for the clienteles of the financial sub-sector.
