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Implementation Support,
Regulation & Supervision for
MFBs
A Paper Presented at the National Start –Up/Sensitization
Workshop of IFAD –Assisted Rural Finance Institutions
Building Programme (RUFIN)
@NICON LUXURY, Abuja on Feb 2nd, 2010.
By
Adedeji .J . Adesemoye
Assist. Director, Other Financial Institutions Supervision Dept.
Central Bank of Nigeria
Other Financial Institutions Department (OFID)
OUTLINE
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Introduction-Concepts & Complementary policies
Microfinance Policy Framework
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Policy objectives
Implementation Structure –CBN, Operators, Market & others
Capacity building/Certification process
Corporate Governance &Risk Mgt
Compliance with prudential requirements
Supervisory Framework (Central & Delegated, Outsourcing
Models)
Sanitizing the distressed MFBs
Expected Implementation supports going forward.
Conclusion & Way forwards
Other Financial Institutions Department (OFID)
Introduction
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Understanding the MF policy, target& strategies
Understanding of complementary policies such as Consumer
Credit Policy &Regulatory framework for Nigeria, Cooperatives
policy
Enabling acts of the S.28 of CBN 24 of 1991 as amended, 2007
& S. 56 -60 of BOFIA 25 of 1991 and 2004 provide the legal
backing
MF Regulations – Are set of rules of business of business of
microfinance to promote orderly development of industry in
sustainable way. This codified as guidelines
MF Supervision framework – To ensure compliance with the
rules through regular monitoring and where necessary enforce
sanctions & penalties
Other Financial Institutions Department (OFID)
Introduction(contd.)
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Infractions and Deviation must Not be tolerated and
Full disclosure must be encouraged to enable market discipline
have effect
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
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The important role of Microfinance (MF) in promoting
rapid economic growth and rural transformation in
emerging economies cannot be over - emphasized.
Global empirical evidence clearly shows that access
to MF has been an important factor in the growth
and development in many countries (developed or
developing).
The National Economic Empowerment and
Development Strategy (NEEDS) recognizes the
importance of access to financial services by micro
and small enterprises as a critical element in
promoting private enterprise and empowering the
most vulnerable groups.
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
(contd.)
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MF has been acknowledged as one of the prime
strategies for achieving the Milliennium Development
Goals (MDGs), particularly targets that relate to
poverty eradication, gender equality and the
empowerment of the disadvantaged groups.
Access to sustainable financial services enables
microentrepreneurs to increase income, build assets,
gradually create wealth and reduce their vulnerability.
Enables households to improve their nutrition,
children’s education, health and general living
standards; and to foster the social empowerment of
women.
Other Financial Institutions Department (OFID)
Introduction (contd.)
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Recognizing the latent capacity of MF in economic
transformation and encouraged by the emergence of
highly successful and fast growing Microfinance
institutions (MFIs) around the world, the Microfinance
Policy, Regulatory and Supervisory Framework for
Nigeria (MF Policy) was enunciated by the CBN and
launched by Mr. President on 15th December, 2005.
The rest of this paper is devoted to discussing the
policy objectives, the key policy issues as well as the
challenges in implementing the MF Policy.
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Objectives
The principal objective of the MF Policy is to create
MFBs that are financially reliable, self sustaining and
integral to the communities in which they operate,
with the potential to attract more resources and
expand services to their customers, thereby:
 Providing access to financial services for the
unserved and vulnerable groups;
 Promoting synergy and mainstreaming of the
informal subsector into the national financial system;
 Enhancing service delivery by MFBs to MSMEs;
 Contributing to rural transformation;
 Promoting linkage programmes between DFIs and
Other Financial Institutions Department (OFID)
MFBs.
Microfinance Policy Framework
- Implementation Structure
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Categories of MFBs
 Unit MFBs (N20 million capital base)
 State MFBs (N1 billion capital base)
Organic growth path for MFBs
Ownership
 Individuals/groups of individuals; Associations; Co-operatives
 Private companies
 No government ownership - MFBs should be private-sector
driven
 Ownership diversification is encouraged
Participation of existing institutions
 Universal Banks – as an activity or product by establishing
subsidiaries or Departments/units for the purpose
 Community Banks - required to convert on or before 31 Dec.
2007
 NGO-MFIs – can transform
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
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Access to Finance
Provide access to financial services through:
 Licensing adequate number of (de novo) MFBs.
 Ensuring that as many CBs as possible are
converted before the stipulated deadline (Dec.
2007), without compromising set standards. This
will reduce number of rural–based poor customers
that will become deprived of financial services.
 Ensuring a good geographical spread of MFBs
without compromising set standards (political
considerations).
 Ensuring licensed MFBs are integral to the
communities in which they operate.
 Ensuring that the licensed MFBs are truly oriented
and practice microfinance.
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Access to Finance (contd)
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Promote soundness of the financial system by licensing MFBs
that are:
 Financially reliable and stable and have strong capital base
 Self–sustaining institutions
 Have strong MF orientation
 Practise good corporate governance
 Exhibit professionalism
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Capacity Building
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Facilitate continous capacity building and
development of the fledging MF sub-sector –
regulators, operators, service providers and the
investing public.
Up-scale skills, technology and infrastructure to be
able to compete with in-coming global players.
New skills are required by regulators in MF principles
and practice; Risk-based Supervision.
New skills are required by operators in MF global best
practice; credit administration; corporate governance;
internal controls; risk management; etc.
Higher level of professionalism in line with global
standards will be key.
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Capacity Building (contd)
Certification Programme
 Establish an efficient and credible certification
programme for regulators and operators
commenced 2009 and service providers
subsequently.
 Establish high standards for the certificate,
benchmarked on international best practices
and curricula.
 Enforce compliance with the directive to
undergo certification within three years.
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Corporate Governance
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Ensure Board members are suitable in line with the
prescribed qualification and experience in the MF
Policy and are “fit and proper” persons.
Ensure Board can add value, provide strategic
direction and effective oversight.
Management must be suitably qualified, experienced,
competent, committed and certified microfinance
practitioners. Must also demonstrate high level of
integrity and professionalism.
MFB is operating in line with commercial principles,
best MF practices and high accounting, auditing and
MIS standards.
Enforce the Code of Good Corporate Governance.
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Prudential Requirements
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Compulsory investment in NTBs (5% of deposits)
Liquidity ratio (20%); Capital adequacy ratio
(10%); Adjsuted capital/net credits (1:10)
Maintenance of capital funds (transfers to
reserves)
Restrictions on declaration of dividends, where
necessary conditions have not been met.
Single obligor limits: Individuals (1%); Group
(5% of SHF); Aggregate insider-related lending
(max 5% of Paid-up capital)
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Prudential Requirements (contd)
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Equity investment holding ratio (7.5%
of SHF)
Provision for classified assets
Contingent items: BAs and CPs
Limit of investment in fixed assets (20%
of SHF)
Revaluation of fixed assets
Unsecured lending limits (N50,000)
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Operators Soft Requirements
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Person, knowledge & Skill requirement of the business- it is not
all commoners business. It is NOT commercial banking
Appropriate low cost field based model would enhance
sustainability
Institutions building support in the form –Manuals, operational
policies, procedures etc
Collaboration with Development Partners to leverage on existing
knowledge and supports
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Operators Soft Requirements (contd)
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Governance &strategy development
Credit process
Banking and Treasury operations
Investment &Finance
Savings& deposit mobilization
Risk Management
Human Resources Management
ICT& MIS simple technological platform
Accounting System and Records
Internal Audit and Control
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Supervisory Framework
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National Microfinance Policy Consultative
Committee
Credit Bureau
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Rating
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Promotion of credible Rating Agencies of international
standard to carry out institutional assessment
Risk-based Supervision
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Promote private sector-driven Credit Bureau to mitigate the
credit risk of MFBs
Adopt RBS for MFBs
Self–regulation
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Establish and nurture a self-regulating MFB umbrella
association
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Supervisory Framework (contd)
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Deposit Insurance
Establishment of the Microfinance Development Fund
 Provision of wholesale funding
 Promote the development of the industry
Policy implementation
 Fairness and firmness in implementing the MF Policy
 Minimizing regulatory arbitrage through periodic reviews of
the policy and guidelines
Compliance with Anti-Money Laundering Act 2004 and
Know Your Customer (KYC) circulars
Insider abuse
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Director-related loans
Frauds
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Supervisory Framework (Models)
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Nigerian model –Central Supervision
Central Bank handling the licensing & regulation
Central Bank providing supervision and integrating the structure
into National Financial System
Advantages are :
Resources requirement are centrally provided
The image necessary to enforce sound regulation
Capacity building and institutional development get attention
It is the most effective and global practice
Utilization of branch outlet for outstation gathering
Disadvantage –Expensive resource and attention of central
regulator
Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Supervisory Framework (contd)
Delegated model –Subsidiary Supervision
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Central Bank handling the licensing & regulation
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Other Institution providing supervision and reporting to the Central
Bank
Advantages are :
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Resources requirement are budgeted by National Budget centrally
provided
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The supervision would be sole and flexible
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Specialization may be built overtime
Disadvantage –The lost of image necessary to enforce sound regulation
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Capacity building and institutional development get attention
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It is fragmented and may be expensive
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Other Financial Institutions Department (OFID)
Microfinance Policy Framework
- Supervisory Framework (contd)
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Outsourcing Supervision
Central Bank handling the licensing & regulation
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Other Institutions and Agencies providing supervision and reporting to the
Central Bank
Advantages are :
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Resources requirement are budgeted by Budgeted by Central Bank
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The supervision would be sole and flexible
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The agent can used for other assignments
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Disadvantage –The lost of image necessary to enforce sound regulation
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Capacity building and institutional development get attention
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It is fragmented and may be expensive
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Compromise of standards
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Expensive in the long run
Other Financial Institutions Department (OFID)
Conclusion & Way forward
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Uniform ICT platform for the operations, accounting & report
submission to the CBN
Capacity building targeted at Governance, Risk Management &
information and Data Management
Sustainable low cost model adapted to rural financing structure
& for rapid extension of access to finance in rural communities
Promotion of Rural financial literacy programme as integral part
of National Financial literacy programme
Collaboration with Credit bureau & National Identity
Management
Integrating Rural Finance into National payment system
Other Financial Institutions Department (OFID)
Conclusion
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The potential of collaborative effort should be
carefully harnessed and supported in order to achieve
the intended objectives.
The synergy between several on going interventions
focused at the rural sector should integrated as part
of National Rural Finance Development strategy
The role of advocacy and financial literacy
programme would in financial education and
consumer protection
All these would lead to support effort at establishing
sound MFBs at rural sector & in fulfillment of the
objective of Microfinance policy
Other Financial Institutions Department (OFID)
Thank You
Other Financial Institutions Department (OFID)