General Fundamentals of Microfinance Banking April 2012 The questions were standard, relevant and straightforward and covered the syllabus. Question 1, which was compulsory, had 25% pass rate, including 5% passes with distinction. It accounted for the high failure rate in the paper as the question carries 30 marks. The overall performance was below average. Despite the fact that the questions were simple and unambiguous, many candidates seemed not to understand the requirements for them. It is important that candidates should read and understand questions well before putting down the answers. Candidates are advised to prepare themselves for the examinations in future to get better performance. Also, it is critical for candidates to go through the examiners reports to avoid some notable pitfalls which are avoidable. Question by Question Analysis Question 1 In line with the Regulatory and Supervisory Framework for Microfinance Banks (MFBs) in Nigeria, supply the full meaning of the following acronyms. a) OFID b) CRR c) AIP d) PAR e) ROSCAs f) MSME g) SMEEIS h) NMFCC 1 In line with the Regulatory and Supervisory Framework for Microfinance Banks (MFBs) in Nigeria, list the four (4) characteristics that qualify a person to be a microfinance client. i) j).. k).. l). One of the requirements for the licensing of an MFB is the provision of a detailed feasibility report. List eight (8) of the relevant information to be contained in the feasibility report as required by the Regulatory and Supervisory Framework for Microfinance Banks (MFBs) in Nigeria. m) n).. o).. p).. q).. r). s). t). The question was compulsory and required short answers. It is standard and relevant to the subject matter. The pass rate was 25%. The poor performance was least expected as basic terminologies were required. Out of the 984 candidates that attempted the question, 49 passed with distinction, and 199 had ordinary passes. a) Other Financial Institutions Department (OFID) b) Cash Reserve Requirements (CRR) c) Approval in Principle (AIP) d) Portfolio At Risk (PAR) e) Rotating Savings and Credit Associations (ROSCAs) f) Micro, Small and Medium Enterprises (MSME) 2
g) Small and Medium Enterprises Equity Investment Scheme (SMEEIS) h) National Microfinance Consultative Committee (NMFCC) i) A monthly income of not more than twice the monthly Per Capita Income of Nigeria or minimum wage, whichever is higher. j) Have a total productive asset of not more than five hundred thousand naira (N500,000=00) only. k) Is not a regular employee of any organisation. l) Age between 18 and 60 years. Any eight (8) of the following: i) The objectives and aims of the proposed MFB; ii) The justification for the establishment of the MFB; iii) The services that the MFB intends to provide; iv) The branch expansion programme (if any) within the first five years; v) The proposed training programme for staff and management succession plan; vi) A five year financial projection for the operation of the MFB, indicating its expected growth and profitability; vii) Details of the assumptions upon which the financial projections have been made; viii) The organisational structure of the MFB, setting out in detail, the functions and responsibilities of the top management team; ix) The composition of the Board of Directors and the Curriculum Vitae (CV) of each member, including other directorships held (if any); x) Appropriate management information systems, internal controls and procedures, including manuals of operation. xi) The conclusions based on the assumptions made in the feasibility report. Question 2 Write short notes on the following: a) Past Due Microfinance Loans. b) Penalties for false/ inaccurate or late rendition of returns. 3 c) Conditions for declaration of dividends by MFBs d) Revaluation of Fixed Assets by MFBs. e) Micro enterprise. Out of 815 candidates that attempted the question, 322 passed while 55 candidates had distinction. The pass rate was 40%. The question is clear and relevant to practitioners of microfinance. Candidates are advised to take note of the items listed seriously as they affect day-to-day running of MFBs. a) Past Due Microfinance Loans. This is any loan that has missed one day repayment in accordance with the agreed repayment term in the loan contract. Such loan, whether restructured or refinanced, shall attract appropriate provision for loan loss. The past due microfinance loan shall remain in the account of the MFB until it is fully repaid or arrangements are formalised for its reactivation/ renewal/restructuring or collection case has been filed in court. b) Penalties for false/inaccurate or late rendition of returns or other information. i) A penalty of a fine of N20, 000.00 for each day during which such failure occurs. ii) This can be a ground for the revocation of an MFB s licence if it persists. iii) The CBN may appoint qualified accountants to prepare proper books for the MFB with the cost borne by the MFB. c) Revaluation of Fixed Assets by MFBs A prior approval of the CBN must be obtained by any MFB before the recognition of the valuation surplus on fixed assets in its books. The valuation must of necessity take into account the following. 4
i) The basis of the underlying fixed assets valuation is stated and the valuation made by qualified professional valuers whose identity and qualifications are stated. ii) The difference between the market and the historic values of the eligible fixed assets being revalued is to be discounted by 55%. iii) The revaluation of fixed assets is applicable to own premises only. iv) The revaluation of fixed assets (owned premises only) is permissible within a minimum period of 5 years after the date of the purchase of the asset or the last valuation. d) Micro-Enterprise: - A micro enterprise is a business that requires microcredit /loans to operate. - The operations and management are often built around the sole owner or micro-entrepreneur. - The micro-entrepreneur usually works alone or provides employment for a few people, mainly the immediate family members and others over time. - It does not often require formal registration to start, but tends to operate as sole proprietorship. - The management and accounting requirements are very simple and flexible. - The scope of economic activities of micro enterprise typically includes primary production and crafts, valueadded processing and distributive trades. - Micro-entrepreneurs work informally, without business licences or formal records of their activities or earnings generally. Question 3 a) Enumerate eight conditions for the revocation of the licence of MFBs by the Central Bank of Nigeria. b) List and briefly explain the core values of the Chartered Institute of Bankers of Nigeria (CIBN). 5 This was not a popular question as it was one of the least attempted. Out of the 338 candidates that attempted it, only 93 passed, which represented a 28% pass rate. The poor performance may be attributed to lack of adequate preparation and not paying attention to the functions of the institutions involved as regards microfinance banks in Nigeria. a) The grounds for the revocation of the licence of an MFB would be one or several of the following; i) Submission of false information/data during and/or after the processing of the application for licence; ii) The use of proxies or disguised names to obtain a iii) licence for an MFB; Engaging in functions/activities outside the permissible scope of its licence as specified by the CBN; iv) Persistent failure to comply with request for information/data in the form required/specified by CBN; v) Engaging in activities prejudicial to the Nigerian economy; vi) Failure to redeem matured obligations to customers; vii) Unauthorised shop closure; viii) Failure to comply with any directive issued by the CBN; ix) Any other act(s) which, in the opinion of the CBN constitute(s) a violation or a serious default. b) The core values of the CIBN are: - i) Ethics; ii) Professionalism; iii) Excellence; iv) Integrity / Honesty; v) Commitment; and vi) Transparency. 6
Ethics: These are mainly the established rules or principles of appropriate behaviour. More specifically, ethics has been defined as the principles of morality and entails doing what is good and right, even when that will bring pains. Ethics encompasses virtues such as fairness, honesty, compassion, loyalty, integrity, etc. Professionalism: This refers to competence, technical skill or specialist knowledge that arise from extensive period of training. It often entails subscription to a code of ethics which stresses qualities such as integrity, objectivity, competence, confidentiality, independence, etc. Excellence: This implies striving for quality to the highest level possible, superiority in value and flawless execution. Integrity/Honesty: Integrity encompasses elements such as firm adherence to a code of moral or professional values (incorruptibility) on unimpaired condition (soundness) and a state of being whole, unified undivided/completeness. Commitment: This is at two levels i.e. the organisational and the individual. At the organisational level, commitment implies not only undertaking to faithfully and vigorously pursue the mission, vision and values of the organisation, but also to live up to that promise. At the level of the individual, commitment means strong identification with the organisation s mission, vision and goals. Thus, the individual feels a sense of oneness with the organisation. Transparency: This refers to openness and availability of information to stakeholders and clarity of an organisation s policies and decisions. Transparency complements and reinforces credibility and accountability. Question 4 a) What are the conditions precedent to the commencement of operations by an MFB? b) What are the sources of funds for the operations of an MFB? 7 This is another popular question attempted by 835 candidates; 69 out of the 271 passes recorded had distinction. The performance was below average at 32% pass rate. The question was standard but should have been made clearer. The poor performance was due to lack of understanding of the question. Candidates needed better training guide enable them perform above average in future. a) The following documents shall be submitted to the CBN. i) A copy of the shareholders register in which the equity interest of each shareholder is properly reflected; ii) A copy of the share certificates issued to each shareholder; iii) A certified true copy of Form CO2; iv) A certified true copy of Form CO7; v) A certified true copy of the Memorandum and Articles of vi) Association; The opening statement of affairs audited by an approved firm of accountants practising in Nigeria; vii) A certified true copy of the Certificate of Incorporation of the company; viii) A copy of acceptance of offer letters by management staff approved by the CBN; ix) A Letter of undertaking to comply with all the rules and regulations guiding the operations of MFBs. The MFB shall inform the CBN of the location and address of its Head Office in Nigeria and shall confirm that all the infrastructure for take-off are in place. The MFB shall be informed in writing by the CBN that it may commence business after physical inspection of its premises. The MFB shall inform the CBN in writing of the date of commencement of business after the physical inspection of its premises. 8
(b) The sources of funds are: i) Shareholders funds Paid-up share capital and reserves. ii) Deposits/Savings of customers; iii) Debenture/qualifying medium-to-long-term loans; iv) Grants/Donations from individuals, organisations, national government and international sources; v) Fees and commissions; vi) Interest income. x) Copies of letters to shareholders conveying allotment of shares; xi) Any other information that may be required or stipulated by the CBN. Question 6 What are the prohibited activities for a microfinance bank? Question 5 What are the requirements for increase in share capital by an MFB? The question was standard and clear. Only 378 out of the 984 candidates attempted the question, with a dismal pass rate of 15% (57). There was neglect of a part of the question by most candidates, hence the poor performance. It was also clear that the question was not understood fully by the candidates. Solution The requirements are: i) Board resolution authorising the increase; ii) Evidence of payment of stamp duty; iii) Corporate Affairs Commission (CAC) registration of the increase; iv) Form CO2 showing the additional capital; v) Share Certificate issued to shareholders; vi) Photocopy of share register showing the entries of allotment; vii) Evidence of payment for the new allotment of shares by the shareholders; viii) Statements of accounts from banks reflecting the cheques lodged and cleared; ix) Vouchers showing evidence of internal transfer or payment for the right issues allotted; 9 This question was standard and straightforward, hence 903 out of 984 candidates attempted it. The pass rate, however, was 47% (424). About 25% (106) of the candidates had distinction. The prohibited activities are: i) Acceptance of public sector (government) deposits except for the permissible activities; ii) Foreign Exchange Transactions; iii) International Commercial Papers; iv) International Corporate Finance; v) International Electronic Funds Transfer; vi) Cheque Clearing Activities; vii) Dealing in land for speculative purposes; viii) Real estate-except for its use as office accommodation; ix) Allowing any facility for speculative purposes; x) Entering into leasing, renting and sales / purchase of any kind with its directors, officers, employees or persons who either individually or in concert with their family members and beneficiaries own five (5) per cent or more equity of the MFB. Question 7 a) State the justification for the introduction of the microfinance policy in Nigeria. 10
b) Based on the objectives of the microfinance policy in Nigeria, list the targets of the policy. The question was simple, standard and straightforward. A total of 377 candidates (62%) of the overall candidates (609) attempted the question with a pass rate of 49%. This question produced the highest distinction of 145 candidates (45%) out of the 185 candidates that passed. Solution a) i) Weak institutional capacity; ii) Weak Capital Base; iii) The existence of huge unserved market; iv) Economic empowerment of the poor, employment generation; v) The need for increased savings opportunity. b) The targets of the above objectives are: i) To cover the majority of poor but economically active population by 2020 thereby creating millions of jobs and reducing poverty. ii) To increase the share of micro credit as percentage of total credit to the economy from 0.9 per cent in 2005 to at least 20 per cent in 2020 and the share of microcredit as a percentage of RSP from 0.2 per cent in 2005 to at least 5 per cent in 2020. iii) To promote the participation of at least two thirds of state and local government in micro credit financing by 2015; iv) To eliminate gender disparity by improving women s access to financial services by 5% annually; v) To increase the number of linkages among universal banks, development banks, specialised finance institutions and microfinance banks by 10% annually. 11