Nigeria: New Hope, Fresh Challenges For Micro Finance Banks

Apr 2009
Lagos, Nigeria, April, 13 2009 - The commencement of the Micro Finance interbank money market has raised hope for the sector as well as up the stakes for the ever increasing competition for funds in the banking industry.

Financial Vanguard last year exclusively reported that some Microfinance Banks in the country have commenced moves to set up an interbank money market for the subsector.

An interbank money market is a market where banks borrow and lend among each other. The market provides opportunity for to invest their excess funds, and also borrow to cover temporary shortfall in their liquidity position. Apart from the 24 banks other players in the Nigeria interbank money market includes the five discount houses.

However, other financial institutions like microfinance banks and primary mortgage institutions (PMIs) cannot participate in the market because they don't have direct access to the clearing house of the Central Bank of Nigeria. The hence the decision of microfinance banks to create their own interbank money market.

The microfinance interbank money market took off formally two weeks ago following the inauguration of the Microfinance Money Market Association of Nigeria (MMMAN) in Lagos.

Speaking at the inauguration, Managing Director of Kakawa Discount Houses Limited, Mr. Jaiyeola Laoye, stated that the inter-bank market has the potentials of deepening the microfinance sub-sector while also reducing the cost of funding.

The MFB inter-bank market initiative, which was facilitated by Kakawa Discount Houses in conjunction with Financial Derivatives Company, Laoye said, was meant to reduce the cost of funding in the sub-sector. "This idea was driven from the fact that, microfinance institution with a single funding base faces greater exposure and vulnerability to the effects of exogenous shocks and market volatility.

"The impact of this is a low interest margin as a result of the huge difference between their low deposit rates earned from commercial banks and high interest rates paid on credit lines," he noted.

Laoye pointed out that from a supplier perspective; the credit lines of the MFBs were negotiated from a position of weakness, but that with an inter-bank market, having multiple suppliers and buyers of funds would make the price discovery mechanism more efficient.

"This will in the end deepen the microfinance sub-sector of the Nigerian financial services industry and mitigate to a large extent the risk of systemic failure," he added.

He stressed that with an estimated size of the combined balance sheets of MFBs put at N90bn and with an assumed critical mass of 20 per cent, it was envisaged that the market could grow significantly to about N18 billion."

Investigation reveals that since inception, microfinance banks (MFBs) especially those outside Lagos and Abuja, have become source of cheap funds for banks. The chief executive officer of one the MFBs told Financial Vanguard that most off these MFBs in the rural areas are partly co-owned by cooperatives of big companies and parastatals, which deposit huge funds with them from time to time. Though the MFBs place these fund as deposit with banks, they interest offered by the banks are not competitive. Most time the highest they get is 15 per cent per annum. But on the other hand, there are MFBs located in places like Lagos where demand for credit by entrepreneurs is very high and such the interest paid can be up to four per cent per month (which is 48 per cent per annum).

These urban MFBs will be willing to pay up to 22 to 25 per cent per annum, but because there is no interbank dealing among MFBs, they are forced to rely on conventional banks for lines of credit and at exorbitant rate.

"With the MFB inter bank money market, we don't have to deposit money with banks or borrow from them again. The MFBs with surplus now have avenue to lend to their colleagues and at very attractive rate," the CEO said.

Microfinance interbank market was spearheaded by Financial Derivatives Limited, in collaboration with Kakawa Discount House Limited, which act as the settlement agency for the market. Investigation reveals that MFBs participating in the market would open a settlement account with Kakawa. Since MFBs are mandated to keep a portion of their assets in liquid assets like treasury bills, the settlement account might comprise of such assets which would be managed for them by Kakawa, and also serve as security for borrowing from other MFBs. So, when two MFBs agree to trade with each, Kakawa would debit the account of the lending MFB and credit that of the borrowing MFB. This would be reversed when the loan is been repaid.

Investigation revealed that though all the MFBs in the country were invited for the preliminary discussions last year only five of them responded namely Intergrated MFB, Mic MFB, Accion MFB, Susu MFB and Gapbridge MFB. It was further gathered that prior to the inauguration the five MFB had been trading among themselves since October to test the system.

The CEO of one of the five banks told Vanguard that as a MFB, knowing there is an alternative to the conventional banks is a big relief to our operations. Very soon the universal banks will know that they can't take MFBs for granted again.

Though the microfinance interbank is designed to provide avenue for MFBs to trade among themselves, it would however heighten competition for funds among MFBs and conventional banks, as it would encourage MFBs to go all out to mobilise funds with attractive interest rate. The implication according to the Head of Operation in one of the microfinance banks is that we would be able to generate more income and be less vulnerable to distress in the banks.

Experts were of the opinion that the MFB interbank, the MFBs will not collapse like their predecessors-community banks. One of the factors that led to the collapse of the community banks is the fact that most of them lost their money to distressed banks in the 1990s. This was because in addition to the correspondent relationship they had with the conventional banks through whom they have access to the clearing house of the CBN, the community banks also invested their surplus funds with the banks either in term deposits or in the various products offered by the banks, thereby depending on them for liquidity management.

Financial Vanguard investigation reveals a lot of MFBs have shown interest to participate in the interbank market. Also it was gathered that though the MMMAN will be operated by treasurers of MFBs, the appointment of executives for the association is been delayed till a sizeable number of MFBs have registered as members.


Though the microfinance interbank is designed to provide avenue for MFBs to trade among themselves, it would however heighten competition for funds among MFBs and conventional banks, as it would encourage MFBs to go all out to mobilise funds with attractive interest rate


Source :

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