Why most microfinance banks fail, by operator
AN operator of a microfinance bank, said that most microfinance banks collapsed because they operated a “mini commercial bank model”.
The Managing Director of Asha Microfinance Bank, Ikeja, Lagos, Aminul Bhuiya, said that even now, no microfinance bank would succeed under such a model.
According to Bhuiya, the Central Bank of Nigeria (CBN) has appropriately laid down rules for the sector, but most operators deviated from the rules.
“For example, if we follow real microfinance practice as laid down by Asha microfinance banking model in Bangdalesh, the sector will thrive.
“Our clients should be an ordinary people on the streets who need little money to do business. The loan should be for the active poor. I mean for people into small business of selling pepper, tomatoes and other petty trades.
“According to the CBN rules, loans to an individual should not go beyond N500,000 and Asha model ensures that those who borrow money are monitored. We must ensure that the loan is used strictly for the purpose for which it is borrowed and attempt to divert such loan requires the lender’s advice,” he said.
He urged operators to stop giving huge loans to individuals, because such loans could affect their shareholders’ funds and lead to bad debt.
Bhuiya pointed out that over 860 out of about 890 microfinance banks in the country were struggling to survive because majority of them operate on a high scale.
Bhuiya, who is from Bangdelesh, said that such microfinance bank was bound to fail in the long run.
On the N220 billion intervention fund for the sector by the Federal Government, he noted that it would be difficult for majority of microfinance banks to access the fund because of their mode of operations.
To access the fund, a microfinance bank must submit its latest CBN/National Deposit Insurance Corporation examination report and two-year audited and management reports.
It must also have an acceptable risk management framework, sound corporate governance culture, adherence to ethical value, degree of separation of ownership from control and evidence of a membership of an association, up-to-date payment of yearly subscriptions and timely rendition of monthly returns to the CBN, among others.
But Bhuiya said that from the conditions stated above, it was wrong to castigate the Federal Government and the CBN that the conditions attached for accessing the fund were stringent.
“It is not absolutely true because most microfinance banks have derailed from the original mandate laid down by the CBN in 2005. The derailment is what is affecting their books.
“No stringent rules in accessing the loan if the rules dictated by regulators are followed. But most of them will prefer not to access the loan than exposing their weakness.
“Some even prefer to close down because they failed absolutely in managing their shareholders’ fund. So how would CBN give assistance to such banks?” he asked.
Already, no fewer than six microfinance banks have accessed the intervention fund.
The microfinance expert said: “President Goodluck Jonathan in August, 2014, launched the N220 billion Micro, Small and Medium Enterprises Development Fund to support entrepreneurs.
“The President, also in September, 2014, inaugurated the National Council on Micro, Small and Medium Enterprises (MSMEs), to create an economy that works for all.
“But the medium through which the funds are to be channeled are not healthy. These obstacles are some of the reasons why many microfinance banks have gone down and many are still on the verge of collapsing,” he said.
He urged operators to re-adjust their operating system to that which was recommended by CBN and assist the government in attaining its set objectives of reducing poverty by 2020.