I was in a gathering during the week where we were to discuss the future of microfinance banks from an investor point of view and during the welcome address from the convener and chairman of the occasion, the first statement he made was a rhetorical question on why the industry has continued to underperform. There are myriad of factors but the relevant one for the purpose of this discussion relates to the individual goal of the investor. Several questions that will beg for answers revolve around the investor’s motive.
In previous episodes we have discussed the double bottom approach where microfinance banks are expected to exist for profit and sustainability while caring for the poor and financially excluded. So, while attempting to make profit, the path to profitability is guided by products offering, pricing, promotion and place. Many investors went into the business of micro financing on the basis of certain parameters and when these parameters shifted or became non available and non-existent they realized they had made a mistake. Some investors went into MfBs with the assumption that they can use it as a platform to mop up deposit to fund their other projects at cheaper cost. They soon realized that the fact that your name carries the word “Bank” does not give the public enough confidence to walk through your door and deposit funds as it is the case with commercial banks.
To improve customer’s confidence and compete with the commercial banks, many tried to upgrade their business environment with huge investment far in excess of the potential level of business associated with microfinance. Their decision caused the industry a lot in terms of investor and regulatory perception. As an investor, we can change that narrative with the information contained in this episode. The CBN is very clear on the nature of business MfBs can do and those they cannot do as we can see below.
Government Relationship: MfBs are not allowed to have direct banking relationship with the 3 tiers of government or their MDAs (Ministries Departments and Agencies). They cannot open account for them and accept deposits either in terms of savings or fixed. However they can deal with government officials as individual but will ensure that all provisions of KYC (Know Your Customer) and PEP (Politically Exposed Persons) are adhered to. They can also deal with beneficiaries of government activities that has to do with individuals. I will explain this better in the coming episode.
Foreign exchange transactions: FX transactions comes with its attendant risk and challenges. Engaging in any form is a No No for MfBs. Should you want to keep your license, or if the reason for your interest in the license is to harness the potentials of your affiliations with business of FX nature, you would have to seek an appropriate license because as an MfB you would not be allowed to issue international commercial papers, engage in international corporate finance and electronic transfer.
Clearing House: A clearing house in banking terms refers to a platform form that allows you exchange banking instrument of other institutions for value. MfBs are not allowed to play this role of mopping up third party cheques and other instrument with the intention to clear them through their correspondence bank.
Real Estate: This is pretty straight forward. Apart from the real estate that serves as the office accommodation, owning real estate for speculative purpose is not allowed. Some investors may want to use their license to mop up savings and buy several plots of land or pay for off plan development with the proceeds in other to dispose them when the value appreciates. This is not allowed.
Speculative Loans: A customer may imagine that he/she can make money by buying palm oil at a cheaper cost when it is in season and then store it till it is out of season before he/she sells at a huge profit margin. As good as the idea sounds, MfBs are not allowed to grant this type of loan or any other loan of a speculative nature.
Relationship with Directors and Shareholders: Transactions with directors, officers, employees or persons who either individually or in concert with their family members and beneficiaries own five per cent (5%) or more of the equity of the MFB should be at arm’s length. The approval of the CBN must be sought before such is consummated. The practice of Leasing, renting, and sale/purchase of any kind is common and should be appropriately handled. Other Businesses: These include business that may or may not require remote licensing. Though they may have been licensed by other bodies as many would argue, they are top rated in the prohibition list. MfBs shall not grant loans to companies whose business objective is gambling, drug trafficking and sale or distribution of fire arms.