1

2
CENTRAL BANK OF NIGERIAS
EXPERIENCE ON
INNOVATIVE APPROACHES TO THE PROVISION OF
RURAL FINANCIAL SERVICES
(WITH EMPHASIS ON SMALL HOLDER PRODUCERS)
BY MR. TUNDE LEMO
DEPUTY GOVERNOR, FINANCIAL SECTOR
SURVEILLANCE
AFRACA WACRACT-WEST AFRICA II
SUB-REGIONAL WORKSHOP,
JOHANNESBURG, SOUTH AFRICA
MARCH 24
TH
26
TH
, 2004
3
1.0 INTRODUCTION
NIGERIA:
A chequered history of economic development:
Agricultural exports, import-substitution, oil
boom/doom, regulation, SAP, deregulation, Re-
regulation, Non-oil Export Bias, etc.
65%-70% of economically active population live in the
rural/peri-urban areas; engaged in agriculture/related
activities.
This segment of the population account for about 70%
on non-oil exports and 40% of nations GDP.
A great majority of the rural producers are small
holders.
Most lack access to formal credit for operations.
4
2.0 NIGERIA - SOCIO-ECONOMIC
INDICATORS (YEAR 2003)
POPULATION (1991 CENSUS) 88.5 MILLION
LAND AREA 923,778.64 SQ. KM
GROSS DOMESTIC PRODUCT (1984 FACTOR COST, =N=129.83bn
(current =N=5726.19bn)
CONTRIBUTION OF PRIMARY SECTOR TO GDP (%) 54
INDEX OF AGRICULTURAL PRODUCTION (1984 = 100) 329.2 (2002)
NATIONAL SAVINGS (=N= BILLION) 694.9bn
INFLATION RATE (end Dec - %) 13.80
MAXIMUM LENDING RATE (end Dec - %) 21.61
SAVINGS: LENDING RATE SPREAD (end Dec - %) 18.41
MRR (2002 16.5%) 15%
TREASURY BILL RATE (1999 17%) 14.5%
OFFICIAL (DAS) =N=:$ Parallel = 150.34 136.12
PARALLEL MARKET PREMIUM (=N=:$) 13.41
5
3.0 DEFINITIONS
3.1 RURAL FINANCIAL SERVICES
Micro-financial offerings to rural and
semi-urban clients in the form of savings,
credit, micro-insurance, micro-leasing,
micro-funds transfer (courier) and
technical service provision relating
thereto.
6
3.2 MICRO-FINANCE CLIENTS/SMALL
HOLDER PRODUCERS Beneficiaries,
recipients, customers or targets of micro-
financial services whose scale are much
smaller than typical sizes normally reached
by formal intermediaries. Their status is
constrained with respect to location (rural),
agricultural holdings, number of employees,
capital investment, income generation,
socio-political isolation and information
asymmetry.
7
3.3 FINANCIAL SERVICE INTERMEDIATION

Service offering between a fund-surplus unit and a
fund-deficit unit through an intermediary
(individual or institutional), using facilities,
instruments and conditionalities. Intermediation
components include:
Denomination
Maturity
Risk
Liquidity
8
3.4 INNOVATIVE APPROACHES
Models, channels or methods of delivery
that are positively different from or
improve upon existing or known ones.

Technological
Product
Marketing
Institutional/Schemes/Models
Emphasis/Orientation/Realism
9
INNOVATIVE APPROACHES TO FINANCIAL
SERVICES DELIVERY SHOULD IMPACT ON:
Access to Service
Price of Service
Volume of Service
Stakes: Define, Protect
Collaterals/Lenders Comfort
Sustainability and Outreach
Intermediation Costs
Delinquency Rates
Client Retention/Drop-out Rates
Competition/Efficiency
10
4. CHARACTERISTICS OF SMALL-
HOLDER SECTOR IN NIGERIA
Large number; Small, Spatial distribution, Generally
Poor
Small-Sized/fragmented Holdings; Small-Scale in all
senses
Ease of Entry and Exit from the Sector
Illiterate or Semi-illiterate entrepreneurs but business-
wise
Poverty-drag, Marginalisation/Isolation, Weak Urban
Linkages
Co-exists with Affluent, Exploitative Urban Sector
(Dualism)
.. contd next page

11
..4 Characteristics .. (Contd)
Operations Subsistent, Small, Seasonal, Erratic
Output/Fluctuating Incomes
Vulnerable to Middlemen Exploitation and Urban-
Induced Shocks
Extended Family and Social Dependency Pressures
Constrained Access to Non-Personal Capital and
Formal Credit
Aid/Subsidy Dependent; Target of Poverty Alleviation
and Rural Welfare or Donor Schemes
Able to Save, Active in Schemes of informal Osusu-
type ROSCAS/Microfinance; Voluntary Savings -
Emergencies, Social Obligation, Education, Rites.

.. contd next page

12
..4 Characteristics .. (Contd)
Geographic Isolation: rural areas - poor infrastructure,
power, social amenities and communication networks
Victim of Information and Knowledge Asymmetry
Victim of Poor Producer Prices; Urban-Oriented
InflationInput Prices, Interest Rate, House Rents,
Exchange Rate
Weak Managerial Capacity but Desirous of Growth-
Enhancing Innovations
Prefers low credit interest rate, but able to pay market
rates if credit is appropriate (non-political, timely,
adequate and closely monitored).
Theatre of Vibrant Informal Entrepreneurship and
Skills Incubation.
13
5.0 CHRONOLOGY OF FINANCIAL SERVICE
ENHANCEMENT/DELIVERY SCHEMES FOR
SMALL HOLDERS IN NIGERIA
5.1 DIRECT SCHEMES
1962 Commercial Bill Financing Scheme
1972 Nigerian Agricultural and Cooperative Bank
(now Nigerian Agricultural Cooperative and
Rural Development Bank NACRDB)
1978 to date Agricultural Credit Guarantee Scheme
Fund (ACGSF)
1980 to 1986 Concessionary interest rate for
agricultural credit facilities
1985 to date Appropriate Grace period for agricultural
loans

.. contd next page

14
..5 Chronology of .. (Contd)
1987 Export Financing and Rediscounting
Facility (NEXIM)
1987 to date Nigerian Agricultural Insurance
Company (NAIC)
1989 to 1999 Peoples Bank (PB)
1990 to date Community Banks (CBs)
1994 1999 Family Economic Advancement
Programme (FEAP)
1999 to date National Poverty Eradication
Programme (NAPEP)


15
5.2 ANCILLARY SCHEMES
1970 TO 1975 Accelerated, National Food
Production Programme
1977 1986 Rural Banking Programme
1977 1986 National Commodity Boards
1986 Directorate of Food, Roads and
Rural Infrastructure (DFRRI)
1986 National Agricultural Land
Development Authority (NALDA)
1977; 1996 Specified Percentage of banks
total deposits mobilised to be
invested in rural areas; sectoral
allocation of credit to agriculture
as priority sector
16
6.0 INNOVATIVE APPROACHES TO FINANCIAL
SERVICES/INTERVENTIONS DELIVERY
6.1 INSTITUTIONAL
RATIONALISATION/RESTRUCTURING

6.1.1. NIGERIAN AGRICULTURAL, COOPERATIVE
AND RURAL DEVELOPMENT BANK
Re-Engineered from Rationalisation of NACB, PB and
FEAP
Expanded Mandate Covers other Rural Development
Activities. 200 branches: 158 rural/semi-rural
Enhanced Capital Base (from =N=500m - =N=50b)
Freedom to mobilise Deposits from Savers/Customers
Transparency in Board Composition/Proceedings
Freedom to Recruit Quality Professionals
2002: =N=2.13b loans to 26,942 clients
.. contd next page

17
6.1.1.1 NACRDB CONSTRAINTS
REGULATED LENDING INTEREST RATE
VERSUS DEREGULATED COST OF FUNDS
LIMITED SAVINGS MOBILISATION
COMPETITIVE FUNDS MARKET
CARRY-OVER BOGUS STAFF COMPLEMENT
NACB, PB, FEAP
CONFLICT: SUPPLY-LED WELFARE (POVERTY
REDUCTION) Vs DEMAND-BASED
INTERMEDIATION (PROFITABLE LENDING)
BACKLOG (NACB) OF BAD LOANS/DECLINING
DONOR LOANS/SUPPORT.
SOCIO-POLITICAL CLAIMANTS. CONNECTED
LENDING
18
6.1.2 CBN (AGRICULTURAL)
DEVELOPMENT FINANCE DEPARTMENT
MODIFICATION OF NOMENCLATURE
EXPANSION OF MANDATE PURVIEW INCLUDING
NON-AGRICULTURAL AND RURAL ACTIVITIES
ENHANCEMENT OF GUARANTEE FUND BASE (FROM
=N=100M (1977) TO =N=3B)
RE-CONSTITUTION OF SUSPENDED BOARD

.. contd next page

19
6.1.2 .. Dev. Fin Dept .. (Contd)
AMENDMENT BILL TO EXCISE OBSELETE/LIMITING
LEGISLATION
CAPITAL BASE
LIMITS OF GUARANTEE
EXPEDITE CLAIM SETTLEMENT PROCESS

RETENTION AND REINFORCEMENT OF
TRADITIONAL GUARANTEE
REVIEW OF GUARANTEE APPEAL AND
STAKEHOLDERS ASSESSMENT/FEEDBACK
PROACTIVE BOARD SURVEILLANCE. IMPACT
ASSESSMENT
20
6.1.2.1 SELF-HELP GROUP (LINKAGE)
BANKING
PACKAGED LENDING TO UNCOLLATERIZED GROUPS
GROUPS COMMUNITY/MEMBER-BASED
GROUPS SAVE REGULARLY WITH PARTNER BANKS
CREDIT IS SAVINGS-LINKED: 2-4 TIMES AMOUNT SAVED BY
GROUP
LENDER HAS LIEN ON SAVINGS: FIRST RECOURSE IN DEFAULT
PROVISION FOR REPEAT/ENHANCED BORROWING (INCENTIVE)
PERFORMANCE IS BOOSTED BY PEER PRESSURE (JOINT AND
SEVERAL GUARANTEE/LIABILITY OF MEMBERS)
IMPROVES SAVINGS/BORROWING HABITS/RURAL INVESTMENT
DEEPENS RURAL FINANCIAL SERVICES INTERMEDIATION
CIRCUMVENTS TANGIBLE COLLATERALS CONSTRAINTS
YIELDS ADDITIONALITY
21
6.1.2.1b PERFORMANCE OF ACGSF IN LOAN TO
SMALL HOLDER SECTOR (=N=5,000 - =N=100,000)
1978 - 2002

(=N=)

NUMBER
% OF
TOTAL

VALUE
% OF
TOTAL
5,000 & BELOW 225,333 66.7 747,766 17.20
5,001 20,000 68,913 20.4 892,209 20.50
20,001 50,000 29,619 8.8 1,094175 25.10
50,001 100,000 10,532 3.1 837,105 19.2
TOTAL SMALL HOLDER 334,397 99.0 3,571,255 82.0
TOTAL ACGSF 338,084 100 4,354,653.1 100
22
6.1.2. 2a TRUST FUND (GUARANTEE)
MODEL
PROMINENT STAKEHOLDERS IN A STATE, LOCAL
GOVERNMENT, HOST COMMUNITY ARE
SENSITIZED/MOBILIZED TO COMMIT FUNDS IN TRUST TO
BACK ENVISAGED CREDIT DELIVERY TO SMALL-HOLDER
PRODUCERS.
TRUST FUND DONOR/DEPOSITOR COULD BE STATE
GOVERNMENT, LOCAL GOVERNMENT, MULTINATIONALS
(OIL COMPANIES, PROCESSORS, MANUFACTURERS OR
RETAIL CHAIN OR PROMINENT INDIVIDUAL
DISCUSSIONS ARE HELD BY CBN AND STAKEHOLDERS ON
SCOPE, PACE, PATTERN, TARGET CLIENTELLE AND MODUS
OPERANDI
STAKEHOLDERS: PARTNER BANK; TRUST DONOR. ADP;
NAIC; CBN; BENEFICIARIES

.. contd next page

23
.. 6.1.2. 2a TRUST FUND .. (Contd)
PARTNER (INTERMEDIARY) BANKS ARE
IDENTIFIED AND ENLISTED FOR THE TRUST
FUND PROGRAM
AGREEMENTS ARE REACHED ON VARIOUS
ISSUES: INITIAL VOLUME OF TRUST FUND, LOAN,
NO. OF BENEFICIARY GROUPS, MARKET
INTEREST, TENOR AND OTHER TERMS.
A MEMORANDUM OF UNDERSTANDING (MOU) IS
SIGNED
TRUST FUND BENEFICIARY GROUP MUST SAVE
25% OF THE AMOUNT TO BE BORROWED
ALSO 25% OF THE AMOUNT TO BE BORROWED BY
SCREENED SMALL HOLDER GROUPS DEEMED TO
BE GUARANTEED BY THE TRUST FUND
.. contd next page

24
.. 6.1.2. 2a TRUST FUND .. (Contd)
PARTNER BANK STILL RETAINS RECOURSE TO
TRADITIONAL ACGSF GUARANTEE
REPEAT BORROWING IS PERMITTED;
PROGRESSIVE GROUP MEMBERS CAN OPT FOR
STAND-ALONE ARRANGEMENTS
PARTNER BANK CHARGES MARKET INTEREST
RATE; PERFORMING GROUPS ARE ENTITLED
TO INTEREST DRAWBACK (40%)
TRUST FUND ENJOYS PREVAILING SAVINGS
INTEREST WHICH ACCRUES TO BOOST THE
FUND
CBN AND TRUST FUND DONOR MONITOR
PROGRESS/REVIEW
25
CBN: 75% Guarantee, Terminal Default.
Monitoring. Advocacy. Mentoring.
Advice. IDP
PARTNER BANK: Credit. Monitoring. Advice. IDP
TRUST DONOR: Additional Cash Security. Monitoring
ADP: Inputs. Technology. Client
Identification
NAIC: Agric Insurance
FARMER: Output. Prompt Repayment. Peer
Pressure. Feedback
STAKEHOLDER RESPONSIBILITIES
26
6.1.2. 2b LENDERS RISK PROSPECTS WITH
ACGSF, SELF-HELP (LINKAGE) BANKING
AND TRUST FUND MODEL - EXAMPLE
ONLY ACGSF
GUARANTEE
(=N=)
PLUS SELF-
HELP STAKE
(=N=)
PLUS TRUST
FUND STAKE
(=N=)
Amount Loaned 10,000.00 10,000.00 10,000.00
Amount in Default 10,000.00 10,000.00 10,000.00
Recourse to ACGSF
(75%)
7,500.00 5,625.00 3,750.00
Recourse to Group
Savings (25%)
- 2,500.00 2,500.00
Recourse to Trust
Donor Fund (25%)
- - 2,500.00
Lenders Capital
Loss
2,500.00
(25%)
1,875.00
(18.75%)
1,250.00
(12.5%)
27
6.1.2. 2c CASE I SHELL PETROLEUM DEVELOPMENT
(SPDC) LTD. MICRO-CREDIT SCHEME FOR
AGRICULTURAL DEVELOPMENT (MICSAD)
MICSAD TFM FUNDED BY SPDC, COMMENCED 1
ST

DISBURSEMENT IN MAY 2000

HOST COMMUNITY: OIL COMMUNITIES OF RIVERS
STATE OF NIGERIA
PERFORMANCE AS AT JUNE 2003:
PROPOSED TRUST FUND (PILOT) =N=14.5 M
ACTUAL LIMIT APPROVED =N=12.53 M
ACTUAL TRUST FUND DEPOSIT =N=4.3 M
NO. OF GROUPS PROJECTED FOR PILOT 58
ACTUAL NO. OF GROUPS BORROWING 31
TOTAL SAVINGS MOBILISED =N=3.7 M
VALUE OF BANKS LOANS DISBURSED
BY PARTNER BANK =N=11.53
SWOT Analysis.. contd next page

28
.. 6.1.2. 2c Case I SPDC (contd)
STRENGTH: Sustained Commitment of Parties,
Capacity of Trust Donor
WEAKNESS: Intra-Group Squabbles; Default,
Reparation Syndrome
OPPORTUNITIES: To enlist other Oil/Service
Companies, State and Local
Governments
THREAT: Could be overtaken by Other
Untargeted Gestures;
Restive Youth Activities
29
6.1.2. 2d CASE II NIGERIAN AGIP OIL
COMPANY (NAOC) LTD: GREEN CARD - TFM
GREEN CARD TFM FUNDED BY NAOC
MOU SIGNED IN 2001; ACTUAL OPERATION
2003
HOST COMMUNITY: OIL COMMUNITIES OF
RIVERS STATE OF NIGERIA
PERFORMANCE AS AT JUNE 2003:
Proposed Trust Fund =N=20.0m
Actual NAOC Trust Deposit =N=5m
Total Savings Mobilised =N=2.9m
Value of Partner Bank Loans Disbursed =N=10m
Number of Loans Involved =N=400 (40 groups)

SWOT Analysis.. contd next page

30
.. 6.1.2. 2d Case II NAOC (contd)
STRENGTH: Renewed Commitment of Trust Donor
WEAKNESS: Delayed Kick-off; Interest of some
groups waned
OPPORTUNITIES:To enlist other Oil Companies
and Multinationals UAC,
NESTLE, MICHELIN, LEVER
BROTHERS, etc.
THREAT: Militant Youth Agitation for general
reparations may scuttle Scheme
31
6.1.2.3 INTEREST DRAW-BACK
PROGRAMME (IDP)
A FRAMEWORK OF INTEREST RATE REBATE
TWO (2) BILLION NAIRA SEED FUND
ESTABLISHED FOR THIS PURPOSE
INTRODUCED IN YEAR 2003 FARMING YEAR
JOINTLY FUNDED BY FED. GOVT. AND CBN
(60:40)
RESPONSE TO CONCERNS ABOUT HIGH
MARKET INTEREST RATE FOR SMALL
PRODUCERS Vs A DEREGULATED FINANCIAL
SERVICE ENVIRONMENT (PARADOX)
.. contd next page

32
6.1.2.3 IDP (contd)
AGRIC/RURAL BORROWERS PAY THE
PREVAILING MARKET RATE OF
INTEREST
ON SUCCESSFUL COMPLETION OF
REPAYMENT ON SCHEDULE BORROWER
IS ENTITLED TO 40% REBATE OF
INTEREST PAID VIA THE LENDING BANK
AVOIDS UP-FRONT INTEREST SUBSIDY
AND ASSOCIATED HAZARDS
APPLICABLE ONLY TO LOANS GRANTED
UNDER ACGSF

SWOT Analysis .. contd next page

33
6.1.2.3 IDP SWOT:
STRENGTH
SUSTAINABILITY OF REBATE FUND
COMPATIBLE WITH MARKET-DRIVEN COST OF
CREDIT
ONLY ACTUAL OPERATORS BENEFIT
WEAKNESS
MAY NOT BE SUFFICIENT INCENTIVE WHERE
WILFUL DEFAULT IS PRE-MEDITATED
OPPORTUNITIES
COULD BE EXPANDED TO COVER NON-FARM ,
MICRO-FINANCED ACTIVITIES
THREAT
APPEAL IS CONDITIONAL ON OTHER COOPERANT
INCENTIVES E.G. ADEQUATE CREDIT, PROFITABLE
OPERATIONS
RESIDUAL SUBSIDY-DEPENDENT PERCEPTIONS
34
6.2.0 PARTICIPATION OF COMMUNITY BANKS (CBs)
SINCE 1990, CBs OPERATED WITH PROVISIONAL
LICENCES AS UNIT BANKS
FULL OPERATIONAL LICENCE GRANTED TO 283 CBs
IN 2003
CBN MANAGEMENT APPROVAL TO PARTICIPATE IN
ACGSF ACTIVITIES, EFFECTIVE JANUARY, 2004
SENSITIZATION WORKSHOP AND TECHNICAL
TRAINING ORGANISED FOR MDs AND DESK
OFFICERS BY CBN (OFID, DFD), ON-GOING
FREEDOM TO ENGAGE IN FULL RANGE OF RURAL
DEVELOPMENT AND BANKING ACTIVITIES EXCEPT
FOREIGN EXCHANGE AND INTERNATIONAL MONEY
TRANSFER TRANSACTIONS
CBs TO ENJOY CBN GUARANTEE COVER/CLIENTS
TO BENEFIT FROM IDP
SWOT Analysis .. contd next page
35
CBs SWOT:
STRENGTH:
RURAL-BASED, DEEP KNOWLEDGE OF RURAL CLIENTS
NEEDS, BEHAVIOUR, NORMS AND MORES/PEER PRESSURE.
CLIENTS MEMBERS OF SAME OR NEIGHBOURING
COMMUNITIES HIGH STAKES. COULD
MAINSTREAM/NETWORK WITH STRONG DMBs IN URBAN
AREAS
WEAKNESS:
WEAKER COMPETITOR AGAINST RURAL BRANCHES OF
DMBs
COULD BE DOGGED BY WEAK MANAGEMENT & LOCAL
POLITICS. EXECUTIVE SQUABBLES.
CANNOT PLAY IN FOREIGN EXCHANGE MARKET WHICH IS
THE PLUM AREA NOW.

SWOT Analysis .. contd next page

36
CBs SWOT Analysis (contd)..
OPPORTUNITIES:
NICHE SPECIALISATION IN RURAL
INTERMEDIATION AT LOWER COST;
SPECIALISED SKILLS AND
TECHNOLOGY.
THREAT:
WIDESPREAD LOAN DELINQUENCY
COULD THREATEN LIQUIDITY AND
SOLVENCY.
DISTRESS CONTAGION. RUNS.

37
6.3.0 SMALL AND MEDIUM INDUSTRIES EQUITY
INVESTMENT SCHEME
AN INITIATIVE OF DMBs COMMITTEE UNDER THE
MENTORING OF THE CENTRAL BANK OF NIGERIA
ESTABLISHED IN JUNE 19, 2001. INNOVATION IN
NIGERIA
BANKS SET ASIDE ANNUALLY 10% OF PROFIT
BEFORE TAX (PBT) FOR EQUITY INVESTMENT IN
SMEs ESPECIALLY IN THE REAL SECTOR
AN SME UNDER SMIEIS IS ENTERPRISE WITH A
MAXIMUM ASSET BASE OF =N=200M EXCLUDING
LAND/WORKING CAPITAL; EMPLOYEE STRENGTH
10-300
38
6.3.0 SMIEIS (contd)
EQUITY PARTICIPATION MODE:
SMIEIS DESK; SUBSIDIARIES; VCMs
INVESTMENT AREAS INCLUDE AGRO-ALLIED,
INFORMATION TECHNOLOGY/TELECOM,
MANUFACTURING, EDUCATIONAL
ESTABLISHMENT, SERVICES, TOURISM AND
LEISURE, SOLID MINERALS, CONSTRUCTION,
ETC.
BANKS TO EXIT INVESTMENTS NOT EARLIER
THAN 3 YEARS
contd next page
39
6.3.0 SMIEIS (contd)
OBJECTIVES:
Provision of Equity Finance for SMEs
Contribution of Managerial and
Technical Expertise to Businesses
Stimulating Economic Growth of SMEs
Developing Local Technology
Generating Employment
Stimulate Development of VCC Industry
Synergy. Multiplier. Technical Service
Provision.
contd next page
40
6.3.0 .. SMIEIS contd
SET ASIDE Funds shall be utilised within 18
months in the first instance and within 12 months
in subsequent years. Withdrawal Sanctioned 31
st

Dec. 2003 =N=1,871,313,445.24
SMIEIS PERFORMANCE (29
th
February, 2004):
SET ASIDE FUNDS =N=22,290,785,848.00
(OUT OF 83 BANKS)
INVESTMENT =N=8,662,814,243.91
(BY 53 BANKS IN 153 PROJECTS)
10% OF TOTAL SMIEIS FUND RESERVED
FOR DEBT FINANCING OF MICRO-
ENTERPRISES VIA INTERMEDIARY
INSTITUTIONS (EQUITY)

SWOT Analysis .. contd next page
41
SMIEIS SWOT:
STRENGTH:
Sustainability of Funding Source; Mentoring by
Central Bank, Voluntary but Committal Initiative
WEAKNESSES:
Tardy Investment Rate Due to Novelty, Dearth of
Bankable Businesses In The Defined Class. Fear
of Dilution of Ownership/Control. Verification
Puzzles
OPPORTUNITIES:
To become joint owners of growing businesses;
Increase Customer Base and Loyalty
Stimulate General Growth of Economy
42
THREATS:
Higher Convenience and Preference by
both Clients and Investors For Debt-
Financing

Parallel Programmes By Govt (Smedan)

Negative Perceptions. Reticence Of Banks.

43
6.4.0 NATIONAL MICRO FINANCE POLICY
6.4.1 BACKGROUND/RATIONALE
GOVT RECOGNISES THE SUBSTANTIAL SIZE OF
THE INFORMAL SECTOR OF THE ECONOMY (55-
65%)
SECTOR IMMUNE TO FORMAL REGULATORY/
SUPERVISORY POLICY IMPULSES
SECTOR IS THE ACTIVITY ZONE OF BRISK MICRO-
FINANCIAL SERVICE ACTIVITIES
BEING UNREGULATED, THE SECTOR IS
VULNERABLE: NEGATIVE CONTAGION.
EXPLOITATION. UNHEDGED DISTRESS. FINANCIAL
CRIMES
Contd next page
44
.. 6.4.1 .. National Microfinance (contd)

ADVOCACY OF EXTENSIVE RURAL BRANCH
NETWORK BY FORMAL BANKS NEGATED:
LEGAL FRAMEWORK. REGULATION.
TRANSPARENCY. RECORDS AND CONTRACTS.
UNHEDGED RISKS (WONDER BANKS SAGA)
GREY AREA FOR CURB MARKETS PARALLEL
FOREIGN EXCHANGE, MONEY
LENDERS/CHANGERS/DOUBLERS
INTERPHASE LICENCED CBs, MORTGAGE AND
FINANCE COMPANIES - HIGH RISK.

Contd next page

45
6.4.1 National Microfinance (contd)

CLEAR REGULATORY GAP; HEALTHY COMPETITION,
DEPOSITOR PROTECTION, SAFETY NETS,
SUPERVISION/COMPLIANCE CONTRACTS
ENFORCEMENT DISPUTE RESOLUTION FINANCIAL
MAINSTREAMING. MINIMISING MARKET
FRAGMENTATION AND ARBITRAGE
CLEAR CASE FOR REGULATION: LICENSE. GROUND
RULES. SUPERVISION. CAPITAL ADEQUACY
CONTRACTS. MARKET DEEPENDING. INTERMEDIATION
MAINSTREAMING.

46
6.4.2 DRAFT MICROFINANCE POLICY
JUSTIFICATION

FORMAL BANKS DO NOT COVER
MICROFINANCE SERVICES ADEQUATELY
MICRO-ENTERPRENEURS EXHIBIT
EFFECTIVE DEMAND FOR CREDIT AND ARE
ABLE TO PAY FOR IT
MICRO-ENTREPRENEURS HAVE
DEMONSTRABLE CAPACITY TO SAVE
COMPOSITE DEMANDS: SAVINGS, CREDIT,
MONEY TRANSFERS, MICRO-LEASING.
MICRO-INSURANCE.
Vision . Contd next page
47
. 6.4.2 draft microfinance policy(contd)
VISION/MISSION
TO PROMOTE ECONOMIC DEVELOPMENT BY
EMPOWERMENT OF MF SECTOR, THROUGH
IMPROVED ACCESS TO COMMERCIAL CAPITAL
AND SYSTEMIC MAINSTREAMING.
TO USE MICROFINANCE AS TOOL FOR
IMPROVING LOW-INCOME GROUPS/REDUCING
POVERTY
APPROPRIATE ENVIRONMENT FOR GROWING
VIABLE MICRO-FINANCE INSTITUTIONS
PROMOTE ADAPTION/ADOPTION OF
INTERNATIONAL BEST PRACTICES
POLICY FRAMEWORK WITH NATIONAL
ORIENTATION/COVERAGE


Ingredients contd next page
48
. 6.4.2 draft microfinance policy(contd)
INGREDIENTS
ENABLING ENVIRONMENT MICRO-ECONOMIC
POLICIES, FINANCIAL SECTOR POLICY,
LAND/INSTITUTIONAL ISSUES
PROVISION OF DEMAND-BASED FINANCIAL
SERVICES
INSTITUTIONAL POLICIES: FORMAL INSTITUTIONS,
RATING AGENCIES, CREDIT BUREAU, FOREIGN
AID/DONOR ASSISTANCE
RATIONALISATION/COORDINATION
GENDER EQUITY
OUTREACH AND SUSTAINABILITY
SUSTAINABLE INTERMEDIATION
GOVERNANCE, REGISTRATION, MFI UP-SCALING/
TRANSFORMATION. PROCESSES.

Regulation & Supervisory Framework contd next page
49
. 6.4.2 draft microfinance policy(contd)
REGULATION AND SUPERVISORY
FRAMEWORK (TIERED INSTITUTIONS)
TIER ONE: MEMBERS-ONLY DEPOSITS.
LENDING. NO PUBLIC DEPOSITS.
TIER TWO: NON-BANK OR NON-CLEARING
BANK. DEPOSIT TAKING/CREDIT
INSTITUTION ALREADY LICENSED
TIER THREE: DEPOSIT TAKING/CREDIT
UNIVERSAL BANKS

Roles/responsibility under the policy contd next page
50
. 6.4.2 draft microfinance policy(contd)
ROLES/RESPONSIBILITY UNDER THE POLICY
GOVERNMENT
CENTRAL BANK
COMMERCIAL BANKS
PROVIDERS OF MF SERVICES
NGOs
DONOR COMMUNITY

ROAD MAP:
AUTHORISATION TO DRAFT POLICY CBN OK
INTER-DEPARTMENTAL MPPDC REVIEW CBN OK
NATIONAL WORKING COMMITTEE REVIEW 25
TH
/26
TH

FEB, 2004
INTERNATIONAL VALIDATION SUMMIT 18/19 MAR, 2004
INTER-DEPARTMENTAL COMMITTEE: FINALIZATION
51
7.0 CONSTRAINTS AND CONCLUSIONS
7.1 CONSTRAINTS AND LIMITATIONS TO
PROVISION OF INNOVATIVE FINANCIAL
SERVICES TO SMALL HOLDER
PRODUCERS IN NIGERIA
Reticence of banks to lend to small-holder
operators despite the innovative approaches:
Inherent/Residual Risks
Dearth of basic infrastructure to facilitate outreach
Natural Disasters/Crop Failures
Diversion of Funds

contd next page ...
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7.1 constraints and limitations
Inadequate manpower for specialised funding in
rural/micro-clients
Policy deficiencies/Credibility Gap
Inability of borrowers to offer acceptable
collateral. Limits of Clean Lending/Group
Guarantee
Low pricing of small-holder producers output due
to lack of value addition.
Market glut
Fragmented holdings resulting in limited
application of modern technology.

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7.2 CONCLUSION
Provision of rural financial services to small-
holder producers is inherently costly due to
diseconomies of scale in reaching a large
number of spatially dispersed targets in a
narrow range of specialized land-based
activities. Moreover, the terrain is often beset
with infrastructural, communication and other
deficiencies, further raising the cost of doing
business. The targets appear mired in a vicious
cycle of incapacity.

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7.2 Conclusion contd
Extant schemes in Nigeria therefore tended to
appraise small-holder producers as mere
targets of poverty alleviation and other welfare
programs having regard to their limited
capacity to save or pay economic prices for
financial services. Subsidized credit, inputs and
concessionary interest rate therefore dominated
those supply-led initiatives. This orientation
bred its own moral hazards as the targets
received these programs as humanitarian aids
or their share of the national cake with
dismal consequences for repayment and
programme sustainability.
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7.2 Conclusion contd
The realism of diversity in product mix
and commercial sustainability of micro-
financial service delivery has since
dawned on the government, donors,
banks and small-holder targets,
especially since financial sector
deregulation following structural
economic reforms in the late 1980s and
the ensuing wider lender discretion.
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7.2 Conclusion contd
Enabling the rural economy realize its potential
for growth and synergy with the vibrant
modern (oil-led) sector calls for ingenious and
innovative approaches to service delivery. The
interventions in Nigeria must not only be
compatible with a deregulated environment,
but should also be accessible and affordable to
the rural small-scale producers. They should
also be seen to be adequate and sustainable
within a framework of minimum legislation,
regulation, supervision and efficient
competition.
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7.2 Conclusion contd
The trust fund model, the interest drawback
programme, the Small and Medium Industries
Equity Investment Scheme and the Micro-
finance Policy and Regulatory initiative are
only pre-cursors of this new orientation. Both
the nascent SMIEIS and the micro-finance
project, for example, have already generated
salutary excitement in the SME sector
especially in the development of venture capital
and technical service industries. There are also
pending requests for collaborative programmes
from international MFIs and agencies
including the ACCION/IFC partnership,
Chenomics and Opportunity International, etc.
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7.2 Conclusion contd
In this context therefore, there is ample room
for assimilation of best practices, flexibility,
creativity and a range of institutional options
refurbished by lessons of cross-sectional
experience. The Central Bank of Nigeria,
partnering with these other organizations,
agencies and governments is dynamically
poised and willing to be a committed
contributor to these ends.

Thank you for your kind attention.
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THANK YOU
THE END