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CENTRAL BANK OF NIGERIA. CENTRAL BANK OF NIGERIA’S EXPERIENCE ON. “INNOVATIVE APPROACHES TO THE PROVISION OF RURAL FINANCIAL SERVICES (WITH EMPHASIS ON SMALL HOLDER PRODUCERS)” BY MR. TUNDE LEMO DEPUTY GOVERNOR, FINANCIAL SECTOR SURVEILLANCE.

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CENTRAL BANK OF NIGERIA


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CENTRAL BANK OF NIGERIA’S EXPERIENCE ON

“INNOVATIVE APPROACHES TO THE PROVISION OF RURAL FINANCIAL SERVICES

(WITH EMPHASIS ON SMALL HOLDER PRODUCERS)”

BY MR. TUNDE LEMO

DEPUTY GOVERNOR, FINANCIAL SECTOR SURVEILLANCE

AFRACA – WACRACT-WEST AFRICA II SUB-REGIONAL WORKSHOP,

JOHANNESBURG, SOUTH AFRICA

MARCH 24TH – 26TH, 2004


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1.0INTRODUCTION

  • NIGERIA:

    A chequered history of economic development: Agricultural exports, import-substitution, oil boom/doom, regulation, SAP, deregulation, Re-regulation, Non-oil Export Bias, etc.

  • 65%-70% of economically active population live in the rural/peri-urban areas; engaged in agriculture/related activities.

  • This segment of the population account for about 70% on non-oil exports and 40% of nation’s GDP.

  • A great majority of the rural producers are small holders.

  • Most lack access to formal credit for operations.


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2.0NIGERIA - SOCIO-ECONOMIC INDICATORS (YEAR 2003)

  • POPULATION (1991 CENSUS)88.5 MILLION

  • LAND AREA923,778.64 SQ. KM

  • GROSS DOMESTIC PRODUCT (1984 FACTOR COST,=N=129.83bn (current =N=5726.19bn)

  • CONTRIBUTION OF PRIMARY SECTOR TO GDP (%)54

  • INDEX OF AGRICULTURAL PRODUCTION (1984 = 100) 329.2 (2002)

  • NATIONAL SAVINGS (=N= BILLION)694.9bn

  • INFLATION RATE (end Dec - %) 13.80

  • MAXIMUM LENDING RATE (end Dec - %) 21.61

  • SAVINGS: LENDING RATE SPREAD (end Dec - %) 18.41

  • MRR (2002 – 16.5%)15%

  • TREASURY BILL RATE (1999 – 17%)14.5%

  • OFFICIAL (DAS) =N=:$ Parallel = 150.34136.12

  • PARALLEL MARKET PREMIUM (=N=:$)13.41


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3.0 DEFINITIONS

  • 3.1RURAL FINANCIAL SERVICES≡ Micro-financial offerings to rural and semi-urban clients in the form of savings, credit, micro-insurance, micro-leasing, micro-funds transfer (courier) and technical service provision relating thereto.


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  • 3.2MICRO-FINANCE CLIENTS/SMALL HOLDER PRODUCERS ≡ Beneficiaries, recipients, customers or targets of micro-financial services whose scale are much smaller than typical sizes normally reached by formal intermediaries. Their status is constrained with respect to location (rural), agricultural holdings, number of employees, capital investment, income generation, socio-political isolation and information asymmetry.


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  • 3.3FINANCIAL SERVICE INTERMEDIATION≡

    Service offering between a fund-surplus unit and a fund-deficit unit through an intermediary (individual or institutional), using facilities, instruments and conditionalities. Intermediation components include:

    • Denomination

    • Maturity

    • Risk

    • Liquidity


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  • 3.4INNOVATIVE APPROACHES ≡

    Models, channels or methods of delivery that are positively different from or improve upon existing or known ones.

    • Technological

    • Product

    • Marketing

    • Institutional/Schemes/Models

    • Emphasis/Orientation/Realism


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  • INNOVATIVE APPROACHES TO FINANCIAL SERVICES DELIVERY SHOULD IMPACT ON:

    • Access to Service

    • Price of Service

    • Volume of Service

    • Stakes: Define, Protect

    • Collaterals/Lenders’ Comfort

    • Sustainability and Outreach

    • Intermediation Costs

    • Delinquency Rates

    • Client Retention/Drop-out Rates

    • Competition/Efficiency


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4. CHARACTERISTICS OF SMALL-HOLDER SECTOR IN NIGERIA

  • Large number; Small, Spatial distribution, Generally Poor

  • Small-Sized/fragmented Holdings; Small-Scale in all senses

  • Ease of Entry and Exit from the Sector

  • Illiterate or Semi-illiterate entrepreneurs but business-wise

  • Poverty-drag, Marginalisation/Isolation, Weak Urban Linkages

  • Co-exists with Affluent, Exploitative Urban Sector (Dualism)

    • ….. cont’d next page


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…..4 Characteristics .. (Cont’d)

  • Operations – Subsistent, Small, Seasonal, Erratic Output/Fluctuating Incomes

  • Vulnerable to Middlemen Exploitation and Urban-Induced Shocks

  • Extended Family and Social Dependency Pressures

  • Constrained Access to Non-Personal Capital and Formal Credit

  • Aid/Subsidy Dependent; Target of Poverty Alleviation and Rural Welfare or Donor Schemes

  • Able to Save, Active in Schemes of informal “Osusu”-type ROSCAS/Microfinance; Voluntary Savings - Emergencies, Social Obligation, Education, Rites.

    ….. cont’d next page


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…..4 Characteristics .. (Cont’d)

  • Geographic Isolation: rural areas - poor infrastructure, power, social amenities and communication networks

  • Victim of Information and Knowledge Asymmetry

  • Victim of Poor Producer Prices; Urban-Oriented Inflation–Input Prices, Interest Rate, House Rents, Exchange Rate

  • Weak Managerial Capacity but Desirous of Growth-Enhancing Innovations

  • Prefers low credit interest rate, but able to pay market rates if credit is appropriate (non-political, timely, adequate and closely monitored).

  • Theatre of Vibrant Informal Entrepreneurship and Skills Incubation.


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5.0 CHRONOLOGY OF FINANCIAL SERVICE ENHANCEMENT/DELIVERY SCHEMES FOR SMALL HOLDERS IN NIGERIA

5.1DIRECT SCHEMES

  • 1962 –Commercial Bill Financing Scheme

  • 1972 – Nigerian Agricultural and Cooperative Bank

    (now Nigerian Agricultural Cooperative and

    Rural Development Bank – NACRDB)

  • 1978 to date – Agricultural Credit Guarantee Scheme

    Fund (ACGSF)

  • 1980 to 1986 – Concessionary interest rate for

    agricultural credit facilities

  • 1985 to date – Appropriate Grace period for agricultural

    loans

    • ….. cont’d next page


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…..5 Chronology of .. (Cont’d)

  • 1987 –Export Financing and Rediscounting

    Facility (NEXIM)

  • 1987 to date –Nigerian Agricultural Insurance

    Company (NAIC)

  • 1989 to 1999 –Peoples’ Bank (PB)

  • 1990 to date –Community Banks (CBs)

  • 1994 – 1999Family Economic Advancement

    Programme (FEAP)

  • 1999 to date –National Poverty Eradication

    Programme (NAPEP)


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5.2ANCILLARY SCHEMES

  • 1970 TO 1975 – Accelerated, National Food Production Programme

  • 1977 – 1986Rural Banking Programme

  • 1977 – 1986National Commodity Boards

  • 1986 Directorate of Food, Roads and

    Rural Infrastructure (DFRRI)

  • 1986 National Agricultural Land

    Development Authority (NALDA)

  • 1977; 1996 –Specified Percentage of banks

    total deposits mobilised to be

    invested in rural areas; sectoral

    allocation of credit to agriculture as priority sector


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6.0 INNOVATIVE APPROACHES TO FINANCIAL SERVICES/INTERVENTIONS DELIVERY

  • 6.1INSTITUTIONAL RATIONALISATION/RESTRUCTURING

  • 6.1.1. NIGERIAN AGRICULTURAL, COOPERATIVE AND RURAL DEVELOPMENT BANK

    • Re-Engineered from Rationalisation of NACB, PB and FEAP

    • Expanded Mandate – Covers other Rural Development Activities. 200 branches: 158 rural/semi-rural

    • Enhanced Capital Base (from =N=500m - =N=50b)

    • Freedom to mobilise Deposits from Savers/Customers

    • Transparency in Board Composition/Proceedings

    • Freedom to Recruit Quality Professionals

    • 2002: =N=2.13b loans to 26,942 clients

      • ….. cont’d next page


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6.1.1.1NACRDB CONSTRAINTS

  • REGULATED LENDING INTEREST RATE VERSUS DEREGULATED COST OF FUNDS

  • LIMITED SAVINGS MOBILISATION

  • COMPETITIVE FUNDS MARKET

  • CARRY-OVER BOGUS STAFF COMPLEMENT – NACB, PB, FEAP

  • CONFLICT: SUPPLY-LED WELFARE (POVERTY REDUCTION) Vs DEMAND-BASED INTERMEDIATION (PROFITABLE LENDING)

  • BACKLOG (NACB) OF BAD LOANS/DECLINING DONOR LOANS/SUPPORT.

  • SOCIO-POLITICAL CLAIMANTS. CONNECTED LENDING


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6.1.2 CBN – (AGRICULTURAL) DEVELOPMENT FINANCE DEPARTMENT

  • MODIFICATION OF NOMENCLATURE

  • EXPANSION OF MANDATE PURVIEW – INCLUDING NON-AGRICULTURAL AND RURAL ACTIVITIES

  • ENHANCEMENT OF GUARANTEE FUND BASE (FROM =N=100M (1977) TO =N=3B)

  • RE-CONSTITUTION OF SUSPENDED BOARD

    • ….. cont’d next page


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…… 6.1.2 .. Dev. Fin Dept .. (Cont’d)

  • AMENDMENT BILL TO EXCISE OBSELETE/LIMITING LEGISLATION

    • CAPITAL BASE

    • LIMITS OF GUARANTEE

    • EXPEDITE CLAIM SETTLEMENT PROCESS

  • RETENTION AND REINFORCEMENT OF

    TRADITIONAL GUARANTEE

  • REVIEW OF GUARANTEE APPEAL AND

    STAKEHOLDERS ASSESSMENT/FEEDBACK

  • PROACTIVE BOARD SURVEILLANCE. IMPACT ASSESSMENT


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    6.1.2.1 SELF-HELP GROUP (LINKAGE) BANKING

    • PACKAGED LENDING TO UNCOLLATERIZED GROUPS

    • GROUPS – COMMUNITY/MEMBER-BASED

    • GROUPS SAVE REGULARLY WITH PARTNER BANKS

    • CREDIT IS SAVINGS-LINKED: 2-4 TIMES AMOUNT SAVED BY GROUP

    • LENDER HAS LIEN ON SAVINGS: FIRST RECOURSE IN DEFAULT

    • PROVISION FOR REPEAT/ENHANCED BORROWING (INCENTIVE)

    • PERFORMANCE IS BOOSTED BY PEER PRESSURE (JOINT AND SEVERAL GUARANTEE/LIABILITY OF MEMBERS)

    • IMPROVES SAVINGS/BORROWING HABITS/RURAL INVESTMENT

    • DEEPENS RURAL FINANCIAL SERVICES INTERMEDIATION

    • CIRCUMVENTS TANGIBLE COLLATERALS CONSTRAINTS

    • YIELDS ADDITIONALITY


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    6.1.2.1bPERFORMANCE OF ACGSF IN LOAN TO SMALL HOLDER SECTOR (=N=5,000 - =N=100,000)1978 - 2002


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    6.1.2. 2a – TRUST FUND (GUARANTEE) MODEL

    • PROMINENT STAKEHOLDERS IN A STATE, LOCAL GOVERNMENT, HOST COMMUNITY ARE SENSITIZED/MOBILIZED TO COMMIT FUNDS IN TRUST TO BACK ENVISAGED CREDIT DELIVERY TO SMALL-HOLDER PRODUCERS.

    • TRUST FUND DONOR/DEPOSITOR COULD BE STATE GOVERNMENT, LOCAL GOVERNMENT, MULTINATIONALS (OIL COMPANIES, PROCESSORS, MANUFACTURERS OR RETAIL CHAIN OR PROMINENT INDIVIDUAL

    • DISCUSSIONS ARE HELD BY CBN AND STAKEHOLDERS ON SCOPE, PACE, PATTERN, TARGET CLIENTELLE AND MODUS OPERANDI

    • STAKEHOLDERS: PARTNER BANK; TRUST DONOR. ADP; NAIC; CBN; BENEFICIARIES

      • ….. cont’d next page


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    ….. 6.1.2. 2a – TRUST FUND .. (Cont’d)

    • PARTNER (INTERMEDIARY) BANKS ARE IDENTIFIED AND ENLISTED FOR THE TRUST FUND PROGRAM

    • AGREEMENTS ARE REACHED ON VARIOUS ISSUES: INITIAL VOLUME OF TRUST FUND, LOAN, NO. OF BENEFICIARY GROUPS, MARKET INTEREST, TENOR AND OTHER TERMS.

    • A MEMORANDUM OF UNDERSTANDING (MOU) IS SIGNED

    • TRUST FUND BENEFICIARY GROUP MUST SAVE 25% OF THE AMOUNT TO BE BORROWED

    • ALSO 25% OF THE AMOUNT TO BE BORROWED BY SCREENED SMALL HOLDER GROUPS DEEMED TO BE GUARANTEED BY THE TRUST FUND

      • ….. cont’d next page


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    ….. 6.1.2. 2a – TRUST FUND .. (Cont’d)

    • PARTNER BANK STILL RETAINS RECOURSE TO TRADITIONAL ACGSF GUARANTEE

    • REPEAT BORROWING IS PERMITTED; PROGRESSIVE GROUP MEMBERS CAN OPT FOR STAND-ALONE ARRANGEMENTS

    • PARTNER BANK CHARGES MARKET INTEREST RATE; PERFORMING GROUPS ARE ENTITLED TO INTEREST DRAWBACK (40%)

    • TRUST FUND ENJOYS PREVAILING SAVINGS INTEREST WHICH ACCRUES TO BOOST THE FUND

    • CBN AND TRUST FUND DONOR MONITOR PROGRESS/REVIEW


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    STAKEHOLDER RESPONSIBILITIES

    • CBN: 75% Guarantee, Terminal Default. Monitoring. Advocacy. Mentoring. Advice. IDP

    • PARTNER BANK:Credit. Monitoring. Advice. IDP

    • TRUST DONOR:Additional Cash Security. Monitoring

    • ADP:Inputs. Technology. Client Identification

    • NAIC:Agric Insurance

    • FARMER:Output. Prompt Repayment. Peer Pressure. Feedback


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    6.1.2. 2b LENDERS’ RISK PROSPECTS WITH ACGSF, SELF-HELP (LINKAGE) BANKING AND TRUST FUND MODEL - EXAMPLE


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    6.1.2. 2c CASE I – SHELL PETROLEUM DEVELOPMENT (SPDC) LTD. – MICRO-CREDIT SCHEME FOR AGRICULTURAL DEVELOPMENT (MICSAD)

    • MICSAD – TFM FUNDED BY SPDC, COMMENCED 1ST DISBURSEMENT IN MAY 2000

    • HOST COMMUNITY: OIL COMMUNITIES OF RIVERS STATE OF NIGERIA

    • PERFORMANCE AS AT JUNE 2003:

      • PROPOSED TRUST FUND (PILOT)=N=14.5 M

      • ACTUAL LIMIT APPROVED =N=12.53 M

      • ACTUAL TRUST FUND DEPOSIT=N=4.3 M

      • NO. OF GROUPS PROJECTED FOR PILOT58

      • ACTUAL NO. OF GROUPS BORROWING31

      • TOTAL SAVINGS MOBILISED=N=3.7 M

      • VALUE OF BANKS LOANS DISBURSED

        BY PARTNER BANK=N=11.53

        • SWOT Analysis….. cont’d next page


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    ….. 6.1.2. 2c … Case I SPDC … (cont’d)

    • STRENGTH:Sustained Commitment of Parties,

      Capacity of Trust Donor

    • WEAKNESS:Intra-Group Squabbles; Default,

      Reparation Syndrome

    • OPPORTUNITIES: To enlist other Oil/Service

      Companies, State and Local

      Governments

    • THREAT:Could be overtaken by Other

      Untargeted Gestures;

      Restive Youth Activities


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    6.1.2. 2d – CASE II – NIGERIAN AGIP OIL COMPANY (NAOC) LTD: GREEN CARD - TFM

    • GREEN CARD TFM FUNDED BY NAOC

    • MOU SIGNED IN 2001; ACTUAL OPERATION – 2003

    • HOST COMMUNITY: OIL COMMUNITIES OF RIVERS STATE OF NIGERIA

    • PERFORMANCE AS AT JUNE 2003:

      • Proposed Trust Fund=N=20.0m

      • Actual NAOC Trust Deposit=N=5m

      • Total Savings Mobilised=N=2.9m

      • Value of Partner Bank Loans Disbursed=N=10m

      • Number of Loans Involved=N=400 (40 groups)

        • SWOT Analysis….. cont’d next page


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    ….. 6.1.2. 2d … Case II NAOC … (cont’d)

    • STRENGTH:Renewed Commitment of Trust Donor

    • WEAKNESS:Delayed Kick-off; Interest of some

      groups waned

    • OPPORTUNITIES:To enlist other Oil Companies

      and Multinationals – UAC,

      NESTLE, MICHELIN, LEVER BROTHERS, etc.

    • THREAT:Militant Youth Agitation for general

      reparations may scuttle Scheme


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    6.1.2.3 INTEREST DRAW-BACK PROGRAMME (IDP)

    • A FRAMEWORK OF INTEREST RATE REBATE

    • TWO (2) BILLION NAIRA SEED FUND ESTABLISHED FOR THIS PURPOSE

    • INTRODUCED IN YEAR 2003 FARMING YEAR

    • JOINTLY FUNDED BY FED. GOVT. AND CBN (60:40)

    • RESPONSE TO CONCERNS ABOUT HIGH MARKET INTEREST RATE FOR SMALL PRODUCERS Vs A DEREGULATED FINANCIAL SERVICE ENVIRONMENT (PARADOX)

      • ….. cont’d next page


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    … 6.1.2.3 – IDP (cont’d) …

    • AGRIC/RURAL BORROWERS PAY THE PREVAILING MARKET RATE OF INTEREST

    • ON SUCCESSFUL COMPLETION OF REPAYMENT ON SCHEDULE BORROWER IS ENTITLED TO 40% REBATE OF INTEREST PAID VIA THE LENDING BANK

    • AVOIDS UP-FRONT INTEREST SUBSIDY AND ASSOCIATED HAZARDS

    • APPLICABLE ONLY TO LOANS GRANTED UNDER ACGSF

      • …SWOT Analysis ….. cont’d next page


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    6.1.2.3 IDP SWOT:

    • STRENGTH

      • SUSTAINABILITY OF REBATE FUND

      • COMPATIBLE WITH MARKET-DRIVEN COST OF CREDIT

      • ONLY ACTUAL OPERATORS BENEFIT

  • WEAKNESS

    • MAY NOT BE SUFFICIENT INCENTIVE WHERE WILFUL DEFAULT IS PRE-MEDITATED

  • OPPORTUNITIES

    • COULD BE EXPANDED TO COVER NON-FARM , MICRO-FINANCED ACTIVITIES

  • THREAT

    • APPEAL IS CONDITIONAL ON OTHER COOPERANT INCENTIVES E.G. ADEQUATE CREDIT, PROFITABLE OPERATIONS

    • RESIDUAL SUBSIDY-DEPENDENT PERCEPTIONS


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    6.2.0 – PARTICIPATION OF COMMUNITY BANKS (CBs)

    • SINCE 1990, CBs OPERATED WITH PROVISIONAL LICENCES AS UNIT BANKS

    • FULL OPERATIONAL LICENCE GRANTED TO 283 CBs IN 2003

    • CBN MANAGEMENT APPROVAL TO PARTICIPATE IN ACGSF ACTIVITIES, EFFECTIVE JANUARY, 2004

    • SENSITIZATION WORKSHOP AND TECHNICAL TRAINING ORGANISED FOR MDs AND DESK OFFICERS BY CBN (OFID, DFD), ON-GOING

    • FREEDOM TO ENGAGE IN FULL RANGE OF RURAL DEVELOPMENT AND BANKING ACTIVITIES EXCEPT FOREIGN EXCHANGE AND INTERNATIONAL MONEY TRANSFER TRANSACTIONS

    • CBs TO ENJOY CBN GUARANTEE COVER/CLIENTS TO BENEFIT FROM IDP

      • …SWOT Analysis ….. cont’d next page


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    CBs SWOT:

    • STRENGTH:

      • RURAL-BASED, DEEP KNOWLEDGE OF RURAL CLIENTS’ NEEDS, BEHAVIOUR, NORMS AND MORES/PEER PRESSURE. CLIENTS MEMBERS OF SAME OR NEIGHBOURING COMMUNITIES – HIGH STAKES. COULD MAINSTREAM/NETWORK WITH STRONG DMBs IN URBAN AREAS

  • WEAKNESS:

    • WEAKER COMPETITOR AGAINST RURAL BRANCHES OF DMBs

    • COULD BE DOGGED BY WEAK MANAGEMENT & LOCAL POLITICS. EXECUTIVE SQUABBLES.

    • CANNOT PLAY IN FOREIGN EXCHANGE MARKET WHICH IS THE PLUM AREA NOW.

      • …SWOT Analysis ….. cont’d next page


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    …CBs SWOT Analysis … (cont’d)..

    • OPPORTUNITIES:

      • NICHE SPECIALISATION IN RURAL INTERMEDIATION AT LOWER COST; SPECIALISED SKILLS AND TECHNOLOGY.

  • THREAT:

    • WIDESPREAD LOAN DELINQUENCY COULD THREATEN LIQUIDITY AND SOLVENCY.

    • DISTRESS CONTAGION. RUNS.


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    6.3.0 SMALL AND MEDIUM INDUSTRIES EQUITY INVESTMENT SCHEME

    • AN INITIATIVE OF DMBs COMMITTEE UNDER THE MENTORING OF THE CENTRAL BANK OF NIGERIA

    • ESTABLISHED IN JUNE 19, 2001. INNOVATION IN NIGERIA

    • BANKS SET ASIDE ANNUALLY 10% OF PROFIT BEFORE TAX (PBT) FOR EQUITY INVESTMENT IN SMEs ESPECIALLY IN THE REAL SECTOR

    • AN SME UNDER SMIEIS IS ENTERPRISE WITH A MAXIMUM ASSET BASE OF =N=200M EXCLUDING LAND/WORKING CAPITAL; EMPLOYEE STRENGTH 10-300


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    … 6.3.0 SMIEIS (cont’d) …

    • EQUITY PARTICIPATION MODE:

      • SMIEIS DESK; SUBSIDIARIES; VCMs

  • INVESTMENT AREAS INCLUDE AGRO-ALLIED, INFORMATION TECHNOLOGY/TELECOM, MANUFACTURING, EDUCATIONAL ESTABLISHMENT, SERVICES, TOURISM AND LEISURE, SOLID MINERALS, CONSTRUCTION, ETC.

  • BANKS TO EXIT INVESTMENTS NOT EARLIER THAN 3 YEARS

    … cont’d next page …


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    … 6.3.0 SMIEIS (cont’d) …

    • OBJECTIVES:

      • Provision of Equity Finance for SMEs

      • Contribution of Managerial and Technical Expertise to Businesses

      • Stimulating Economic Growth of SMEs

      • Developing Local Technology

      • Generating Employment

      • Stimulate Development of VCC Industry

      • Synergy. Multiplier. Technical Service Provision.

  • … cont’d next page …


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    …6.3.0 .. SMIEIS cont’d …

    • SET ASIDE Funds shall be utilised within 18 months in the first instance and within 12 months in subsequent years. Withdrawal Sanctioned 31st Dec. 2003 =N=1,871,313,445.24

    • SMIEIS PERFORMANCE (29th February, 2004):

      • SET ASIDE FUNDS=N=22,290,785,848.00 (OUT OF 83 BANKS)

      • INVESTMENT=N=8,662,814,243.91

        (BY 53 BANKS IN 153 PROJECTS)

  • 10% OF TOTAL SMIEIS FUND RESERVED FOR DEBT FINANCING OF MICRO-ENTERPRISES VIA INTERMEDIARY INSTITUTIONS (EQUITY)

    • …SWOT Analysis ….. cont’d next page


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    SMIEIS SWOT:

    • STRENGTH:

      • Sustainability of Funding Source; Mentoring by Central Bank, Voluntary but Committal Initiative

    • WEAKNESSES:

      • Tardy Investment Rate Due to Novelty, Dearth of Bankable Businesses In The Defined Class. Fear of Dilution of Ownership/Control. Verification Puzzles

    • OPPORTUNITIES:

      • To become joint owners of growing businesses;

      • Increase Customer Base and Loyalty

      • Stimulate General Growth of Economy


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    • THREATS:

      • Higher Convenience and Preference by both Clients and Investors For Debt-Financing

      • Parallel Programmes By Govt (Smedan)

      • Negative Perceptions. Reticence Of Banks.


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    6.4.0NATIONAL MICRO FINANCE POLICY

    6.4.1 BACKGROUND/RATIONALE

    • GOVT RECOGNISES THE SUBSTANTIAL SIZE OF THE INFORMAL SECTOR OF THE ECONOMY (55-65%)

    • SECTOR IMMUNE TO FORMAL REGULATORY/ SUPERVISORY POLICY IMPULSES

    • SECTOR IS THE ACTIVITY ZONE OF BRISK MICRO-FINANCIAL SERVICE ACTIVITIES

    • BEING UNREGULATED, THE SECTOR IS VULNERABLE: NEGATIVE CONTAGION. EXPLOITATION. UNHEDGED DISTRESS. FINANCIAL CRIMES

    • … Cont’d next page …


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    • ….. 6.4.1 .. National Microfinance …(cont’d)

    • ADVOCACY OF EXTENSIVE RURAL BRANCH NETWORK BY FORMAL BANKS NEGATED: LEGAL FRAMEWORK. REGULATION. TRANSPARENCY. RECORDS AND CONTRACTS. UNHEDGED RISKS (WONDER BANKS SAGA)

    • GREY AREA FOR CURB MARKETS – PARALLEL FOREIGN EXCHANGE, MONEY LENDERS/CHANGERS/DOUBLERS

    • INTERPHASE LICENCED CBs, MORTGAGE AND FINANCE COMPANIES - HIGH RISK.

    • … Cont’d next page …


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    • 6.4.1 … National Microfinance (cont’d)

    • CLEAR REGULATORY GAP; HEALTHY COMPETITION, DEPOSITOR PROTECTION, SAFETY NETS, SUPERVISION/COMPLIANCE CONTRACTS ENFORCEMENT DISPUTE RESOLUTION FINANCIAL MAINSTREAMING. MINIMISING MARKET FRAGMENTATION AND ARBITRAGE

    • CLEAR CASE FOR REGULATION: LICENSE. GROUND RULES. SUPERVISION. CAPITAL ADEQUACY CONTRACTS. MARKET DEEPENDING. INTERMEDIATION MAINSTREAMING.


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    6.4.2DRAFT MICROFINANCE POLICY

    • JUSTIFICATION

      • FORMAL BANKS DO NOT COVER MICROFINANCE SERVICES ADEQUATELY

      • MICRO-ENTERPRENEURS EXHIBIT EFFECTIVE DEMAND FOR CREDIT AND ARE ABLE TO PAY FOR IT

      • MICRO-ENTREPRENEURS HAVE DEMONSTRABLE CAPACITY TO SAVE

      • COMPOSITE DEMANDS: SAVINGS, CREDIT, MONEY TRANSFERS, MICRO-LEASING. MICRO-INSURANCE.

        …Vision …. Cont’d next page …


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    …. 6.4.2draft microfinance policy…(cont’d)

    • VISION/MISSION

      • TO PROMOTE ECONOMIC DEVELOPMENT BY EMPOWERMENT OF MF SECTOR, THROUGH IMPROVED ACCESS TO COMMERCIAL CAPITAL AND SYSTEMIC MAINSTREAMING.

      • TO USE MICROFINANCE AS TOOL FOR IMPROVING LOW-INCOME GROUPS/REDUCING POVERTY

      • APPROPRIATE ENVIRONMENT FOR GROWING VIABLE MICRO-FINANCE INSTITUTIONS

      • PROMOTE ADAPTION/ADOPTION OF INTERNATIONAL BEST PRACTICES

      • POLICY FRAMEWORK WITH NATIONAL ORIENTATION/COVERAGE

      • … Ingredients … cont’d next page …


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    …. 6.4.2draft microfinance policy…(cont’d)

    • INGREDIENTS

      • ENABLING ENVIRONMENT – MICRO-ECONOMIC POLICIES, FINANCIAL SECTOR POLICY, LAND/INSTITUTIONAL ISSUES

      • PROVISION OF DEMAND-BASED FINANCIAL SERVICES

      • INSTITUTIONAL POLICIES: FORMAL INSTITUTIONS, RATING AGENCIES, CREDIT BUREAU, FOREIGN AID/DONOR ASSISTANCE RATIONALISATION/COORDINATION

      • GENDER EQUITY

      • OUTREACH AND SUSTAINABILITY

      • SUSTAINABLE INTERMEDIATION

      • GOVERNANCE, REGISTRATION, MFI UP-SCALING/

        TRANSFORMATION. PROCESSES.

      • … Regulation & Supervisory Framework … cont’d next page


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    …. 6.4.2draft microfinance policy…(cont’d)

    • REGULATION AND SUPERVISORY FRAMEWORK (TIERED INSTITUTIONS)

      • TIER ONE:MEMBERS-ONLY DEPOSITS. LENDING. NO PUBLIC DEPOSITS.

      • TIER TWO: NON-BANK OR NON-CLEARING BANK. DEPOSIT TAKING/CREDIT INSTITUTION ALREADY LICENSED

      • TIER THREE: DEPOSIT TAKING/CREDIT UNIVERSAL BANKS

      • … Roles/responsibility under the policy … cont’d next page …


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    …. 6.4.2draft microfinance policy…(cont’d)

    • ROLES/RESPONSIBILITY UNDER THE POLICY

      • GOVERNMENT

      • CENTRAL BANK

      • COMMERCIAL BANKS

      • PROVIDERS OF MF SERVICES

      • NGOs

      • DONOR COMMUNITY

    • ROAD MAP:

      • AUTHORISATION TO DRAFT POLICY– CBN – OK

      • INTER-DEPARTMENTAL MPPDC REVIEW – CBN – OK

      • NATIONAL WORKING COMMITTEE REVIEW – 25TH/26TH

        FEB, 2004

      • INTERNATIONAL VALIDATION SUMMIT – 18/19 MAR, 2004

      • INTER-DEPARTMENTAL COMMITTEE: FINALIZATION


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    7.0 CONSTRAINTS AND CONCLUSIONS

    7.1CONSTRAINTS AND LIMITATIONS TO PROVISION OF INNOVATIVE FINANCIAL SERVICES TO SMALL HOLDER PRODUCERS IN NIGERIA

    • Reticence of banks to lend to small-holder operators despite the innovative approaches: Inherent/Residual Risks

    • Dearth of basic infrastructure to facilitate outreach

    • Natural Disasters/Crop Failures

    • Diversion of Funds

    • … cont’d next page ...


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    • 7.1constraints and limitations

    • Inadequate manpower for specialised funding in rural/micro-clients

    • Policy deficiencies/Credibility Gap

    • Inability of borrowers to offer acceptable collateral. Limits of Clean Lending/Group Guarantee

    • Low pricing of small-holder producers’ output due to lack of value addition.

    • Market glut

    • Fragmented holdings resulting in limited application of modern technology.


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    7.2CONCLUSION

    • Provision of rural financial services to small-holder producers is inherently costly due to diseconomies of scale in reaching a large number of spatially dispersed targets in a narrow range of specialized land-based activities. Moreover, the terrain is often beset with infrastructural, communication and other deficiencies, further raising the cost of doing business. The targets appear mired in a vicious cycle of incapacity.


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    7.2 Conclusion …cont’d…

    • Extant schemes in Nigeria therefore tended to appraise small-holder producers as mere targets of poverty alleviation and other welfare programs having regard to their limited capacity to save or pay economic prices for financial services. Subsidized credit, inputs and concessionary interest rate therefore dominated those supply-led initiatives. This orientation bred its own moral hazards as the targets received these programs as humanitarian aids or their share of the “national cake” with dismal consequences for repayment and programme sustainability.


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    7.2 Conclusion … cont’d …

    • The realism of diversity in product mix and commercial sustainability of micro-financial service delivery has since dawned on the government, donors, banks and small-holder targets, especially since financial sector deregulation following structural economic reforms in the late 1980s and the ensuing wider lender discretion. 


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    7.2 Conclusion … cont’d …

    • Enabling the rural economy realize its potential for growth and synergy with the vibrant modern (oil-led) sector calls for ingenious and innovative approaches to service delivery. The interventions in Nigeria must not only be compatible with a deregulated environment, but should also be accessible and affordable to the rural small-scale producers. They should also be seen to be adequate and sustainable within a framework of minimum legislation, regulation, supervision and efficient competition.


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    7.2 Conclusion … cont’d …

    • The trust fund model, the interest drawback programme, the Small and Medium Industries Equity Investment Scheme and the Micro-finance Policy and Regulatory initiative are only pre-cursors of this new orientation. Both the nascent SMIEIS and the micro-finance project, for example, have already generated salutary excitement in the SME sector especially in the development of venture capital and technical service industries. There are also pending requests for collaborative programmes from international MFIs and agencies including the ACCION/IFC partnership, Chenomics and Opportunity International, etc.


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    7.2 Conclusion … cont’d…

    • In this context therefore, there is ample room for assimilation of best practices, flexibility, creativity and a range of institutional options refurbished by lessons of cross-sectional experience. The Central Bank of Nigeria, partnering with these other organizations, agencies and governments is dynamically poised and willing to be a committed contributor to these ends.

    • Thank you for your kind attention.


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    • THE END

    THANK YOU


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