By Adolphus Abraham
My previous editions on this column has addressed the notion that potential investors usually have when it comes to investing in the microfinance space and that is the misconception that they can use the MfB license to mop up free or cheap funds to fund other businesses where they have interest. As a potential investor, it is good for you to know that the business of microfinancing is heavily regulated by the CBN and if you are one with propensity to always deviate from set rules and regulations, then you might want to review your decision.
A microfinance bank is allowed to grant loan to individuals and groups including owners, directors and staff but there is a cap. This is called single obligor limit. To underscore the seriousness, the CBN will require the MfB to pay a fine of one million naira only (irrespective of the license status) for exceeding this cap. A further one hundred thousand naira fine is placed on the Managing director and or the directors/managers who were privy to the transaction. The single obligor limit is a serious issue in banking generally.
Meaning of Single obligor
This is the maximum amount a bank is allowed to lend a single borrower or an individual in relation to the total shareholders’ fund of the bank. Meanwhile, the shareholders fund simply refers to how much money would be available for the owners of a business to share if the company were to liquidate. It is the amount of equity in a business which belongs to the shareholders. Take for instance a MfB whose shareholders fund is one hundred million.
So for the benefit of compliance, let us review the provision.
Individual borrower: These are customers who have borrowed in their names without the use of corporate or other form of group names. The bank is not allowed to grant more than 1% of their shareholders’ fund and in this case the maximum an individual can get is one million naira only.
Group borrower: This happens when individual come together for reasons that promotes economies of scale to access a loan. It may be corporate or Trade groups. The maximum loan this corporate entity is allowed to access is 5% of the shareholders’ fund and in this case, five million naira.
Director/Shareholders borrower: Directors are the individuals saddled with the responsibility of running the business and in my past edition I treated the fiduciary relationship between the bank and these individuals. Regulation does not prohibit lending to directors and owners but it is important that all transaction must be done at arm’s length. This type of borrowing is referred to as insider related borrowings and the aggregate of it must not exceed 5%. In this case it means that all loans extended to those related to the bank shall not exceed five million naira in this case at any given time.
Staff borrowing: There are no restrictions around the extension of loans to staff but what is important is that it should be in line with the staff condition of service.
Let me quickly conclude that the CBN reserves the right to change this provision from time to time.
See you nest week.
• Adolphus Areban Abraham is the Managing Director/CEO of Rigo Microfinance Bank based in Lagos. He can be reached on firstname.lastname@example.org