Implementation Support, Regulation & Supervision for MFBs

1. 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

2. OUTLINE • Introduction-Concepts & Complementary policies • Microfinance Policy Framework • 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

3. Introduction • 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

4. Introduction(contd.) • Infractions and Deviation must Not be tolerated and • Full disclosure must be encouraged to enable market discipline have effect

5. Microfinance Policy Framework • 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.

6. Microfinance Policy Framework (contd.) • 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.

7. Introduction (contd.) • 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.

8. 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 MFBs.

9. Microfinance Policy Framework - Implementation Structure • 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

10. Microfinance Policy Framework - 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.

11. Microfinance Policy Framework - Access to Finance (contd) • 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

12. Microfinance Policy Framework - Capacity Building • 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.

13. 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.

14. Microfinance Policy Framework - Corporate Governance • 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.

15. Microfinance Policy Framework - Prudential Requirements • 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)

16. Microfinance Policy Framework - Prudential Requirements (contd) • 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)

17. Microfinance Policy Framework - Operators Soft Requirements- • 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

18. Microfinance Policy Framework - Operators Soft Requirements (contd) • 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

19. Microfinance Policy Framework - Supervisory Framework • National Microfinance Policy Consultative Committee • Credit Bureau • Promote private sector-driven Credit Bureau to mitigate the credit risk of MFBs • Rating • Promotion of credible Rating Agencies of international standard to carry out institutional assessment • Risk-based Supervision • Adopt RBS for MFBs • Self–regulation • Establish and nurture a self-regulating MFB umbrella association

20. Microfinance Policy Framework - Supervisory Framework (contd) • 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 • Director-related loans • Frauds

21. Microfinance Policy Framework - Supervisory Framework (Models) • 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

22. Microfinance Policy Framework - Supervisory Framework (contd) • Delegated model –Subsidiary Supervision • Central Bank handling the licensing & regulation • Other Institution providing supervision and reporting to the Central Bank Advantages are : • Resources requirement are budgeted by National Budget centrally provided • The supervision would be sole and flexible • Specialization may be built overtime Disadvantage –The lost of image necessary to enforce sound regulation • Capacity building and institutional development get attention • It is fragmented and may be expensive

23. Microfinance Policy Framework - Supervisory Framework (contd) • Outsourcing Supervision • Central Bank handling the licensing & regulation • Other Institutions and Agencies providing supervision and reporting to the Central Bank Advantages are : • Resources requirement are budgeted by Budgeted by Central Bank • The supervision would be sole and flexible • The agent can used for other assignments Disadvantage –The lost of image necessary to enforce sound regulation • Capacity building and institutional development get attention • It is fragmented and may be expensive • Compromise of standards • Expensive in the long run

24. Conclusion & Way forward • 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

25. Conclusion • 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

26. Thank You