The Need for Wholesale Funding Inclusive Financial Institutions to Strengthen their Lending Operations in Africa: The Nigerian Microfinance Banking Sector Case
In March 2020, and in the wake of the COVID-19 pandemic, the Central Bank of Nigeria (the “CBN”) announced the need to recapitalise the microfinance banking sector. The CBN in consideration of the impact of the COVID-19 pandemic on economic activities extended its deadline to April 2021 for microfinance banks (“MFBs”) to comply with the outlined minimum capital requirements. In March 2019, the CBN had reviewed the minimum capital requirements for MFBs, with a view to ensuring continued operations of these banks in rural, unbanked and underbanked areas of the economy. National MFBs were expected to meet the minimum capital of NGN 3.5 Bn (USD 8.5 M) and NGN 5 Bn (USD 12.0 M) by April 2022.
The effects of the COVID-19 pandemic which ravaged world economies affected the Nigerian economy to a larger extent imposing great hardship on humans, businesses and the economy, with the worst hit being the low-income households and Small to Medium Enterprises (“SMEs”) which MFBs serve directly. The National President of the National Association of Microfinance Banks (“NAMB”) Yusuf Gyallesu is quoted calling upon the CBN to shift ground by extending the tenor of the deadline or reduce the minimum capital requirement amount because of the effects of the COVID-19 pandemic and the challenges MFBs are facing to raise such required capital. According to an internal survey conducted by the NAMB, only 30% of MFBs will be able to meet the new deadline. The NAMB, founded in 2010, is a registered body of all licenced MFBs in Nigeria with the aim of assisting the regulatory bodies to enforce the rules, regulations and policies of the government in the microfinance sector. Nigeria has 900+ MFBs in the country with state, regional, and national licences.
MFBs are left with no option other than to place greater reliance on external borrowing because of the economic hardships they have endured thus far. Over the years, very few larger National MFBs have managed to source funding through the issuance of public equity or equity investments from abroad. National MFBs have a stronger reputation than State and Unit MFBs and have been able to mobilise deposits more readily. MFBs require wholesale funding to address the opportunities available in the economy as it recovers from the Covid-19 related distress. This is key for economic growth and creation of jobs in the country.
It is not only in Nigeria, but most financial institutions in Africa rely heavily on shareholder funding and customer deposits to finance their operations and the availability of wholesale funding is too narrow.