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Cablegate: Nigeria: Microfinance Sector-Growth Area

VZCZCXRO1539
PP RUEHMA RUEHPA
DE RUEHUJA #0864/01 1330858
ZNR UUUUU ZZH
P 120858Z MAY 08
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 2823
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 9205
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 02 ABUJA 000864

SIPDIS

DEPARTMENT FOR EB/IFD/OIA
DEPARTMENT PASS TO USTR (AGAMA)

E.O. 12958
TAGS: ECON EINV EAID ECIN NI
SUBJECT: NIGERIA: MICROFINANCE SECTOR-GROWTH AREA

REF: A. ABUJA 1828

1. Summary. The microfinance sector in Nigeria is large and has the
potential for further growth. GON officials view establishing
Private Public Partnership (PPP) as a mechanism to increase lending
that will eventually alleviate poverty. For the GON to be
successful the public sector should focus on maintaining
macroeconomic stability; involving the private sector in poverty
reduction strategies; imbedding microfinance mechanisms into the
financial system; tweaking the regulatory framework for increased
access; and investing in supervisory capacity building. USAID has
worked with several Nigeria banks to assist microfinance lending.
Partial credit guarantee has been provided to three commercial banks
to provide $16 million credit access to Micro Small and Medium
Enterprises (MSMEs) in the agricultural sector. Challenges remain
in the banks' capacity development, financial management and in
their dealing with MSMEs. End Summary.

2. The Governor of the Central Bank of Nigeria (CBN), Professor
Chukwuma Charles Soludo, outlined improvements in the financial
sector at the recent conference on microfinance in Abuja(Reftel A):

-- Bank consolidation produced 24 relatively strong banks.
-- Commercial banks have expanded to over 4300 branches.
-- 7 million depositors added (from 14.8 to 22 million depositors
over the last 3 years).
-- Deposit sizes increased from 2 trillion naira ($17 billion) in
2004 to N5 trillion ($42 billion) in 2007.
-- Increased jobs in the sector.
-- 600 out of 761 community banks have successfully converted to
microfinance banks (MFBs) before December 31, 2007.
--Since December 2005, 117 new applications for MFBs licenses were
processed, 40 approved, and 67 approval-in-principle granted.

Public Private Partnership Potential
------------------------------------

3. Soludo also reported that the microfinance market is large, with
an estimated 60 to 90 million micro entrepreneurs, and trails only
the markets in China and India. The CBN is working with other
institutions to develop a certification program for microfinance
operators to develop Public Private Partnerships (PPP) and urged the
private financial institutions to get involved. The program will
build capacity within management at MFBs and develop operational
skills. Soludo announced the development of Entrepreneurship
Development Centers (EDC) in the six national geo-political zones
and the opening of three in Kano (North West), Ota (South West) and
Onitsha (South East).

4. Soludo stressed that a provision in the microfinance policy calls
for state and local governments to set aside one percent of their
annual budget to support microfinance lending in their communities,
yet state and local governments have not met this target. Soludo
promised to continue addressing key challenges in the microfinance
sector, such as low outreach, lack of support for institutions, poor
technical skills, and a lack of sustainable funding to deliver
effective services.

5. Ismail Radwan, World Bank (WB) Senior Economist for Africa,
commented, at the recent conference on microfinance in Abuja, that
private not the public sector should lead the way in microfinancing.
Radwan explained that for now, the Nigerian public sector still
directs lending by subsidizing credit, placing an interest ceiling,
receiving low repayments, and not reaching poorer applicants. The
World Bank's Nigerian portfolio is $8 million and according to their
calculations only 20% of Nigerian households have access to the
financial markets.

Microcredit Fund
-----------------

6. As a continuation of government policies in the microfinance
sector, President Yar'Adua launched the N50 billion ($427 million)
microcredit fund (MCF) to help Micro Small and Medium Enterprises
(MSMEs) in February 2008. The MCF will be administered by the CBN
and will provide funds to state governments for lending to MSMEs.

Questions and Obstacles Remain
------------------------------

7. Commenting on the MCF, many MSMEs entrepreneurs were skeptical
how the fund will help alleviate poverty. Questions left unanswered
are how MSMEs apply for credit, is the MCF a one-time idea, and
which sectors will receive funds and how much.

8. The CBN Governor is aware of these questions and maintains that
the GON should provide a stable economic environment by maintaining

ABUJA 00000864 002 OF 002


low inflation rates, strengthening bank regulation and supervision,
and addressing critical infrastructure needs. Soludo noted that one
critical obstacle to lending money to Nigerians is the absence of an
effective national identification system. Banks are reluctant to
lend because they cannot reliably check identities.

USAID Ties With Local Banks
---------------------------

9. USAID through the $5.09 million Promoting Improved Sustainable
MSME Financial Services (PRISMS), from January 2004 through
September 2006, supported microfinance sector in Nigeria. The
project collaborated with several banks, the central bank's two
divisions working on microfinance policy and other collaborating
donors at improving the enabling environment. Four wholesale loans
were brokered for $1.69 million, direct lending to MSMEs increased
by $3.87 million, and about 28,000 microentreprenuers accessed funds
of which 98% are women. Partial credit guarantee has been provided
to three commercial banks to provide $16 million credit access to
MSMEs especially in the agricultural commodity value chain.

10. Despite relatively stable, broad economic reforms and the
restructuring of the Nigerian financial sector, access to finance by
MSMEs is still faced with major challenges. The lack of stable
management structures within major banks makes it difficult to
negotiate and implement wholesale and direct MSME lending
strategies. The commercial banks are not accustomed to assessing
risk based on the transaction and the borrowers' credit standing.
Rather they rely on traditional collateral-based lending that MSMEs
do not have. This means that external guarantees are required to
build a bridge between Microfinance Institutions (MFIs) and bank
loans. The MFI sector does not have an adequate governance
structure. It lacks capacity to develop business proposals. It
lacks financial management within the MSME sector and the banks have
no capacity to serve MSMEs.

11. Comment: The microfinance lending has potential for growth and
development in Nigeria. Infrastructure and access to funds remain
major obstacles for the full development of the microfinance sector
in Nigeria. Soludo is a supporter of microfinance institutions and
is aware of obstacles faced by MFBs and MSMEs and is trying to help.
For the GON to be successful the public sector should focus on
maintaining macroeconomic stability; involving the private sector in
poverty reduction strategies; imbedding microfinance mechanisms into
the financial system; tweaking the regulatory framework for
increased access; and investing in supervisory capacity building.
If the GON follows this path there likely will be more opportunities
for MSMEs to access funds which should increase employment and
lessen poverty. End Comment.

PIASCIK

1

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