Nigeria: Liquidity Crisis Grounds Micro-Finance Interbank Money Market
Nigeria, January, 17 2010 -
Less than one year after take off, the microfinance interbank money market has collapsed following default by participating microfinance banks.
The microfinance interbank money market initiated by Financial Derivatives Company Limited took off formally April last year off with five microfinance banks, namely Accion Microfinance Bank, Integrated Microfinance Bank, MIC Microfinance Bank, Gapbrige Microfinance Bank and Susu Microfinance Bank.
It was however gathered that the trading banks declined to two. A source close to Kakawa Discount House, which is the clearing house for market, told Financial Vanguard that the along the market began to experience defaults by trading members due to the problem of liquidity crisis.
This, it was gathered prompted Kakawa Discount House to stop further transactions and close the microfinance interbank market. Though the Chief Executive of one of the participating MFBs told Vanguard that "The microfinance interbank money market is still active but based on the present climate placements have reduced among members", Kakawa Discount sources confirmed that the company has stopped it.
"There were only two MFBs that were trading but there was default and the company just stopped. They realised that given the liquidity crisis in the subsector, it would be unwise to continue with the initiative and hence stopped it", a source said.
In fact prior to the launch of the interbank market, the five pioneer MFBs traded actively among themselves, with volumes exceeding N100 million but attempts to expand membership was hampered by widespread liquidity in the subsector which begin to manifest in the second quarter of 2009.
The biggest blow to the microfinance interbank money market was the closure of Integrated Microfinance Bank September last year. The bank was a dominant participating member of market and it is believed that its closure triggered crisis of confidence among other participating MFBs.
Surprisingly, the microfinance interbank money market was initiated to provide avenue for MFBs to provide liquidity support to each other and hence forestall the incidence of liquidity crisis. Unfortunately, the initiative had been grounded by what it was aimed to prevent.
Speaking at the launch last year, the Managing Director of the Financial Derivatives Company, Mr. Bismarck Rewane, said the market was informed by the fact that microfinance institutions with a single funding base face greater exposure and vulnerability to the effects of exogenous shocks and market volatility.
"The impact of this is a low net interest margin as a result of the huge difference between their low deposit rates earned from their commercial banks and the high interest rate they pay on their credit lines" he added.
On the benefits of the market to the operators, he said it would provide opportunity for increased mobility of funds among microfinance banking operators thereby reducing their cost of funds while improving their net interest margin.
"This will at the end deepen the microfinance sub-sector of the Nigerian financial services industry and also mitigate to a large extent the risk of a systemic failure, he added