Scaling up: A fragmented market of microfinance lenders looks to consolidate

While the banking sector is certainly sizeable in Nigeria, access to finance at the small end of the scale has only started to be addressed in a more structured way over the past decade. Although the number of microfinancial institutions (MFIs) has grown in recent years, with commercial banks joining donors, non-governmental organisations (NGOs) and the government in funding such schemes, progress has been constrained by issues of trust, reach and affordability.

However, with the Central Bank of Nigeria (CBN) strengthening system regulations and oversight, the sector is set for a medium-term future of growth given the significant pent-up demand for credit. Indeed, the CBN estimates that some 60% of Nigerians still have access to only informal source of finance, while 71% of loans come from family networks.

EARLY DEVELOPMENT: Microfinance has grown rapidly in Africa’s most populous country over the last decade. While a formal microfinance policy was only established in 2005, communal lenders had emerged long before. A 2001 CBN study found 160 institutions in existence, with N99.4m ($636,160) in savings and N649.6m ($4.2m) in credit. Relatively unsupervised, this market provided limited financial intermediation at a very local level. Many of these community schemes, which were structured as rotating savings and credit associations, known as susu in West Africa, have survived the advent of MFIs. Indeed, in a study published in April 2012, the World Bank found that some 44% of adults were using such savings clubs.

In 2005 the CBN issued its National Microfinance Policy, providing for two types of MFIs: lenders with capital of N20m ($128,000) and confined to one state, and those with over N100m ($640,000), allowed to expand to any state. The aim was to shift existing community banks to regulated MFIs as well as to open the door for new MFIs, with the Nigeria Deposit Insurance Corporation (NDIC) providing deposit insurance and the CBN acting as regulator. The CBN allowed lenders to provide credit up to N500,000 ($3200) for individuals, requiring at least a personal guarantee as collateral. The policy set out several ambitious goals for the sector: to increase the contribution of microcredit to 5% of GDP by 2020, to include more than two-thirds of state and local governments in financing microcredit by 2015, to reduce gender disparity in access, and to improve linkages between MFIs and commercial banks, donors and government.

RAPID GROWTH: The number of MFIs multiplied in the years from 2006, with banks, NGOs, cooperatives, community institutions, trade associations, development banks and the government investing in MFI ventures. The number of licensed MFIs grew to over 900 by 2010, stretching the CBN’s capacity for regulatory oversight. Banks like Ecobank and First Bank of Nigeria launched their own ventures in 2007, while foreign MFIs also flocked to the market. By 2011, Ecobank’s affiliate Accion Microfinance Bank – a joint venture with Accion Investments, the International Finance Corporation, and other institutional investors like Citibank and Zenith Bank – had grown into one of the largest MFIs on the market. During the first five years of operation, Accion disbursed loans valued at N12bn ($76.8m), and as of early 2012 it held N1.5bn ($9.6m) in active loans to 12,000 clients and N450m ($2.9m) in savings from 70,000 active accounts.

Other MFIs like Fortis Microfinance Bank have also grown large enough to benefit from economies of scale, with N10.5bn ($67.2m) in loans disbursed since its establishment in 2007 and some 14 branches. MFIs are also looking at alternative distribution channels as well, with Fortis becoming the first MFI to gain a mobile banking licence in 2011. But while a number of MFIs have achieved the necessary scale to sustain growth, the rapid rise in the number of institutions has strained the regulator’s capacity.

UNEVEN SPREAD: With 816 MFIs and more than 6600 branches in operation at the start of 2012, Nigeria boasts Africa’s largest microfinance market. The sector has grown from an equivalent of 0.2% of GDP in 2006 to 3% of GDP in 2011, according to the NDIC. The 596 MFIs that reported figures to the NDIC in March 2011, representing some 60% of the total market, accounted for N326.9bn ($2.1bn) in deposits and N252bn ($1.6bn) in loans. Because the small size of most accounts means that the cost of acquiring deposits is high, MFIs rely mainly on capital and credit lines for funding. “Given that the average size of deposits is N5000 ($32), it is much more cost effective for microfinance banks to focus on capital rather than deposits as a source of working capital,” MG Hassan, the CEO of NPF Microfinance Bank, told OBG.

A 2010 study by Enhancing Financial Innovation and Access (EFIA), a donor-funded NGO, found that 3.2m Nigerians (roughly 3.8% of the adult population) held an account with an MFI, while 1.8m (2.1% of adults) used it as their main bank account. However, the aggregate picture blurs significant variation by gender and geography. For example, according to the EFIA, 57.9% of clients were male and 42.1% female, a troubling gap. In October 2011 a CBN study of the distribution of MFIs found that while Lagos hosted over 180 licensed MFIs, the northern city of Kano had only seven. This contrast between north and south is also evident outside urban centres: the north-eastern state of Borno, with 4.15m people, had only 4 MFIs, while Delta State, with a population of 4.1m, had 39.

REGULATORY PUSH: Another challenge has come from the tendency of larger MFIs to compete in areas reserved for commercial banks – such as extending larger loans and requiring collateral for loans – rather than focusing on their core mission of poverty alleviation. The fragmented structure of the industry has also kept average capitalisation levels low and lending rates high for most customers.

Aware of these issues, the CBN took action in 2010, conducting an examination of all MFIs’ balance sheets and finding serious problems. The regulator immediately revoked 224 licences, restoring over half (121) shortly thereafter on a provisional basis and leaving 103 revoked. During this review, the regulator catalogued a number of serious violations, including the “total erosion of their capital base and dissipation of depositors’ funds resulting from very high levels of nonperforming loans and/or insider abuse which culminated in negative shareholders’ funds”.

REFORM MOVEMENT: Beyond crackdowns on the worst offenders, a more general reform of the sector has been a top priority for both the CBN and NDIC. A comprehensive review of the 2005 policy led to a new focus on capacity building and stricter supervision, as reflected in the revised Microfinance Policy, Regulatory and Supervisory Framework, issued in April 2011. The categories of MFIs were refined, restricting those with capital of N20m ($128,000) to a single branch and those with funds of N1bn ($6.4m) to one state. For MFIs that wish to have branches in more than one state, they must maintain a minimum capitalisation of N2bn ($12.8m). Given 18 months to comply (by December 2012), MFIs will likely look for merger or acquisition options, or new partners to recapitalise. The alternative would be to scale down activities in line with current capitalisation levels.

Some MFIs have turned to the stock market to raise funds. For example, Fortis Microfinance Bank launched an initial public offering (IPO) on the stock exchange in June 2012, making it the second MFI to do so after NPF Microfinance Bank. The Nigerian Stock Exchange (NSE) has been calling for more such IPOs in a bid to improve transparency and risk management capacities. Yet a public listing would bring its own challenges in balancing the MFI’s mission. “Listing on the NSE entails more focus on profitability, but it is crucial of course for microfinance banks to maintain a balanced approach that pays proper attention to social concerns as well,” Hassan of NPF Microfinance Bank told OBG.

SUPPORTING EXPANSION: The national MFI strategy also entails the creation of a Micro, Small and Medium Enterprises Development Fund, which should be finalised later in 2012. Every state and local government will be expected to contribute some 1% of their budget to the fund. Aimed at covering some of the associated infrastructure costs of MFIs operating in more rural areas (such as sourcing power), the fund is intended to help MFIs build the scale of the business and reduce average interest rates offered. A certification programme being run by the CBN will also build capacity in the sector, while the establishment of a National Association of Microfinance Banks of Nigeria has created a strong partner for the CBN.

One of the most crucial means of financial intermediation in a nation where the majority of people live below the global poverty level, microfinance should benefit from stricter regulatory requirements and a drive towards consolidation. Refocused on the most marginalised segments of society, such lending will likely bring significant economic multiplier effects. Meanwhile, larger, more professionally run MFIs that focus on niche markets are likely to benefit from a flight to quality on the part of both clients and investors, creating more economies of scale for microlenders.