FORMAL RURAL FINANCE INSTITUTIONS AND THE STATE OF MICROFINANCE BANKS A PAPER PRESENTED BY THE DIRECTOR OF DEVELOPMENT FINANCE DEPARTMENT OF THE CENTRAL BANK OF NIGERIA AT THE FORMAL LAUNCHING AND START –UP /SENSITIZATION ON THE RURAL FINANCE INSTITUTION BUILDING PROGRAMME

OUTLINE OF PRESENTATION Introduction Conceptual Issues In Rural Finance Rural Financing in Nigeria: Historical perspective Challenges of Rural Financing in Nigeria Evolution of Microfinance Banks Current State of Microfinance Banks Future Plans for the Microfinance Banks Place of RUFIN In CBN strategies to Improve the Microfinance Sub-sector Conclusion

1.INTRODUCTION The rural area is home to 53 per cent of Nigeria’s population Rural areas have always been centres of poverty and deprivation, About 2 percent of rural households have access to institutional finance. Shortage of finance has continued to limit the ability of rural people to make profitable economic investments Financial markets have failed to function properly because of : –unavailability of sound risk mitigation techniques, –problems of asymmetric information –high transaction costs to lenders and borrowers. Addressing the rural finance problems would enable rural people to make investments and contribute to national growth and development.

2.CONCEPTUAL ISSUES IN RURAL FINANCE Rural Finance (RF) is widely viewed as a process whereby rural deposits are mobilized and channeled into productive rural enterprises. Provision of micro loans and savings to the micro entrepreneurs in the rural areas Two broad categories of rural sector credit are: –institutional sources such as cooperative societies, state agricultural credit corporations, the Nigerian Agricultural Cooperative and Rural Development Bank (NACRB) and Commercial banks –and non-institutional sources such as friends and relatives, merchant middle-men and professional money lenders.

CONCEPTUAL ISSUES IN RURAL FINANCE CTND Rural areas have been inadequately served because of : – dispersed nature of rural settlements, – poor physical infrastructure and support facilities, –small size of financial needs, –Low levels of literacy, –absence of record keeping, formal credit histories, –heterogeneity of production and marketing processes –climatic, production and price risks, and –seasonal flows of income.

3.RURAL FINANCING IN NIGERIA: HISTORICAL PERSPECTIVE Traditionally money lenders, cooperatives held sway Rural Banking Policy in the early seventies Nigerian Agricultural Cooperative and Rural Development Bank Community Banking in the late eighties and nineties Performance not appreciable

4.CHALLENGES OF RURAL FINANCING IN NIGERIA Inadequate institutional arrangement for supporting rural financing Uncompetitive nature of rural economic activities relative to urban ones Poor infrastructural facilities Unstable government policies Unstable inflation rates High interest rates

CHALLENGES OF RURAL FINANCING IN NIGERIA CNTD Low capitalization of financial services providers; Poor governance and accountability; High loan default and misapplication of loans on the part of clients; Lack of empowerment of the poor, particularly women and youths in the rural areas; Lack of technical capacity of rural finance institutions for effective services delivery; Existence of narrow range of services; and

5.EVOLUTION OF MICROFINANCE BANKS Poor state of erstwhile community banks Low performance of other alternative institutions Launching of the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria in December, Two categories of Microfinance Banks: –State bank: ^1 billion capitalization –Unit bank: ^20 million capitalization Over 900 banks already licensed comprising: –News institutions –Converted community banks

6.CURRENT STATE OF THE MFBS Improper understanding on practical microfinance banking Lack of adequate skills and capacities at operators and institutional levels Huge investment in fixed assets Low capitalization Inability to actively mobilize savings/deposits Poor loans recovery

CURRENT STATE OF THE MFBS Problems related to products development and marketing Waning public confidence Uneven distribution of the banks across the country

7.FUTURE PLANS FOR THE MFBs Awareness creation on practical microfinance banking Capacity building for microfinance institutions: –Certification programme –Unstructured training programme –Attachment, mentoring and monitoring programme Promotion of apex associations Development of capacity for microfinance rating Promotion of credit bureaux that encapsulate micro lending activities Promotion of wholesale lending sources for MFBs Release of operational template for MFBs

8.PLACE OF RUFIN IN THE CBN STRATEGIES TO IMPROVE THE MICROFINANCE SUB-SECTOR. CBN entered into an MOU with the Federal Ministry of Agriculture and Rural Development on the implementation of RUFIN Project The Bank’s roles are as follows: –Implement the capacity building programmes for NGO MFIs Microfinance Banks Central Bank Staff Ensure the establishment of a Microfinance Development Fund to undertake guarantees, refinancing and wholesale funding activities in favor of microfinance institutions in Nigeria Ensure that the implementation of RUFIN is in tandem with the financial sector policies of the nation. Coordinate the activities of RUFIN to ensure complementarities with other donor related institutions

9.CONCLUSION Rural Finance is very crucial to broad based development in Nigeria Institutions providing the services have evolved over the years depending on prevailing circumstances in the financial sector Most recent intervention on the CBN is the establishment of a framework for the licensing and operation of microfinance banks The licensed microfinance banks have performed below expectation owing to several challenges The implementation of RUFIN will go a long way to address these challenges particularly the capacity building of the MFIs and MFBs. It is believed that this will bring the banks to the institutional capacity to deliver effective financial services in favour of Nigeria’s rural populace.

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