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 
 
 
 
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