MICROCAPITAL STORY: Controversy Arises Over Pay for Employees of Microfinance Institutions (MFIs) in Nigeria

Controversy has arisen over the governance and operations of microfinance institutions (MFIs) in Nigeria. A recent Daily Sun article reported that Pastor Kehinde Alaba, Managing Director and Chief Executive Officer of Lagos State University Micro Finance Bank (LMFB), believes that government restrictions hinder the ability of MFIs to provide quality financial services to the poor. Meanwhile, members of the Central Bank of Nigeria (CBN) recently made comments suggesting that MFI mangers were acting inappropriately and it may be necessary to revoke the licenses of egregious offenders.

According to Pastor Kehinde Alaba, government restrictions barring MFIs from participating in foreign exchange transactions and buying government securities limits the amount of funds the MFIs can generate by excluding MFIs from certain opportunities that may generate more capital than other available options. This lack of funds reduces the amount of available loans and the sizes of MFI employee salaries, causing the institutions to lose some of their best employees. He also argues that other states in Nigeria have not followed the Central Bank of Nigeria’s directive to devote one percent of state funds to microfinance services, further decreasing the amount of money available to MFIs.

Mr. Tunde Lemo, deputy governor of CBN, believes that microfinance institutions already have “ostentatious” benefit packages. He also indicated that the government may revoke the licenses of MFIs that “are not run the way they should be” and force them to re-apply. While the penalties of a revoked license were not immediately clear, the CBN does administer a USD 426 Microcredit Development Fund, which provides existing MFIs with capital for lending and operational expenses.

The controversy centers around the role of MFIs compared to conventional banks. Pastor Kehinde Alaba contends that preventing MFIs from operating like commercial banks limits their effectiveness. On the other hand, Mr. Tunde Lemo believes that “Microfinancing is different from conventional banking and it is evident that most of the nation’s microfinance banks are not doing microfinance banking, They still engage in the old conventional way of banking practice, which can not sustain the nation’s economy.

By Greg Casey, Research Assistant

Additional Resources:

Daily Sun: “Micro finance banks need more support from govt – MD, LASU MFB”

MicroCapital Story, August 15, 2008: “Nigeria State, Lagos, to Release N850m (USD 7.3m) to Five Microfinance Institutions”

The Nation: “SME: Lagos, five microfinance banks plan N50m intervention fund“

Punch: “Five microfinance firms to access N50bn in Lagos”

MicroCapital Story, July 22, 2008: “Why the Central Bank of Nigeria’s Small and Medium Enterprises Equity Investment Scheme (SMEEIS) was Replaced by a Fund for Microfinance”

MicroCapital Story, February 22, 2008: “Nigerian Government Creates $426m Microcredit Development Fund“