Race for recapitalisation increases pressure on microfinance banks

•To raise N5bn, N1bn, N50m in categories

Jolted by the sudden impact of the Novel Coronavirus, the Microfinance industry virtually went to bed because most of them had no Business Continuity Plans (BCP) in place, thereby slowing every progress made at capital raising and increasing pressure on operators as countdown to deadline begins.

Financial institutions usually do not rely on insurance alone; they create a system of prevention and recovery in advance to avoid threats and disruptions that will result in loss of customers, revenue and lead to higher cost.

Nigerian Tribune investigations revealed that while Commercial banks in the country leveraged on their strong infrastructure to continue operations with most staff working remotely during the lockdown, majority of the Microfinance Banks (MFBs) which were already going through a lot of operational stress, closed shops.

The CBN on May 27, 2020 approved regulatory forbearance for the restructure of loans of Other Financial Institutions (OFIs).

On March 16, 2020, the CBN had granted similar regulatory forbearance to Deposit Money Banks (DMBS).

This means a further one-year moratorium for CBN’S intervention facilities offered through participating OFIS effective from March 1, 2020 and  reduction of interest rates on CBN’S intervention facilities through OFIS from nine per cent to five per cent per annum effective from 1 March 2020.

But an industry source who preferred anonymity said due to the shut down in economic activities, small businesses and individuals could not pay back loans and the amount involved were too small to give room for any meaningful loan restructuring.

According to him, “If a man that depends on daily income to feed did not go out for business for close to three months, how will he talk about paying back loan with empty stomach, no matter how low the interest rate is?”

In recognition of the difficulties faced by the subsector, the Central Bank of Nigeria (CBN) extended the deadlines issued to them to comply with its revised minimum capital requirements.

This was contained in a circular issued to all microfinance banks on April 29, 2020, and signed by the CBN’s Director, Financial Policy and Regulation Department, Kevin Amugo.

In the circular, the apex bank said, “The Central Bank of Nigeria in consideration of the impact of the coronavirus (COVID-19) pandemic on economic activities has revised the deadlines for compliance with the minimum capital requirements for Microfinance Banks (MFBS) in Nigeria.”

According to the apex banking sector regulator, MFBs operating in rural, unbanked and underbanked areas (Tier 2) shall meet the N35 million capital threshold by April 2021 and N50 million by April 2022.

State MFBs shall increase their capital to N500 million by April 2021 and N1 billion by April 2022, while National MFBs are expected to meet the minimum capital of N3.5 billion by April 2021 and N5 billion by April 2022.

As they put on their thinking cap on how to raise funds, operators are equally mindful of the revised supervisory and regulatory guidelines which stipulate that any bank that operates outside its approved business would be fined the sum of N500,000 and such will forfeit its estimated profit.

Also, before any Microfinance Bank restructures or performs any reorganisation, it must receive the CBN’s approval or risk N500,000 fine among others.

However, despite the challenges they face due to poor corporate governance, people’s fears of losing their money (risk perception), inability of clients to meet collateral requirements among others, stakeholders are confident that over 50 per cent of the MFBs will scale through the recapitalisation hurdle.

Mr. Bonaventure Okhaimo chief Operating Officer at Development Bank of Nigeria (DBN) and Mr Oluwaseun Olatidoye from the Coverage and Corporate Banking department of FBNQuest Merchant Bank believes that the MFBs will meet their recapitalisation deadline if they diversify their funding sources and allow other investors to come in.

Making a presentation on “Overcoming the Liquidity Challenge: Debt Funding and Capital Raising for MFIs,” through a Webinar organised by Accion Microfinance Bank, Okhaimo expressed concern that some institutional depositors are willing to forgo better interests because of the issue of perceived risks attached to MFBs.

According to him, time has come for MfBs to revamp their processes and work on their systems to change the perceptions that microfinance institutions are of high risk.

“The most important factor for debt companies to consider in granting loans to companies is Character which can be found in historical performance and corporate governance. Demonstrate to the market that you have got improved processes” he said.

Okhaimo also highlighted the major challenges Micro Finance Institutions (MFIs) face in accessing debt funding to include: poor corporate governance; poor financial performance and inability to meet up with Prudential Requirements; lax regulatory compliance, risk Management Practices and Standards as well as weak IT infrastructure and Absence of Business Continuity Plans.

Speaking further he said the DBN is ready to assist, based on its three mandates in promoting access to finance for MSMEs: Lending, Risk sharing and Technical Assistance through capacity building at management and staff level.

Mr Oluwaseun Olatidoye who represented Mr. Afolabi Olorede Head, Coverage and Corporate Banking, FBNQuest Merchant Bank identified the critical success factors for MFIs in accessing funding, one of which he said is getting investment grade rating especially from local rating agencies.

Olatidoye believed some MFIs do not understand the critical need of getting an investment-grade rating which starts from ‘BBB’, or creating awareness to the capital market community on their products.

“You don’t necessarily have to run your business or meet the capital requirements alone” he advised, adding that MFIs should have improved investor engagement through conscious efforts.

Assessing developments in the capital market, he noted that in the last one year over N600bn has been raised, but decried the fact that only one percent of MFIs constituted that price.

He called for significant improvement from MFIs in their activities, especially branding and also harped on the need for them to access the capital market, through periodic roadshows.

Mr Adegoke Adegbami, the Managing Director (MD)/CEO of Mainstreet Microfinance Bank, was of the view that MFIs need to position and brand itself properly. According to him “Part of the problems confronting MFIs is that they have not been scaling. Scaling is good for MfIs as an industry to be able to attract human, material and financial resources.”

The importance of the microfinance subsector was highlighted on Friday by Kevin Amugo during a Webinar organised by CRC Credit Bureau. According to the CBN director, the other financial institutions subsector where the MfIs fall into is the major funders of individuals and the Small and Medium scale Enterprises which contributes immensely to economic growth and development.

The last time such recapitalisation occurred for Microfinance Banks was in 2018 when the minimum capital base for national microfinance banks was N2 billion; N100 million for state microfinance banks, while the unit microfinance banks had a minimum capital requirement of N20 million.

According to the CBN, the changes were made to improve the performance of the Microfinance Bank in the financial industry.

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