By Babajide Komolafe
The community banking system was a good concept. The underlining philosophy as reflected in the objectives was noble, ideal and in fact very needed. The system was established for three principal objectives which are; Promote rural development through the provision of finance and banking services, enhance rapid development of productive activities especially rural areas, improve the economic status of small scale producers both in the rural and urban areas.
Furthermore, the community banking system was a child of circumstance, and this is aptly reflected in the address of the then President Ibrahim Babangiga at the commissioning of the first community bank. “Part of our experience in rural development has clearly shown that efforts at expanding the economic base of the rural area almost always flounder because of scarcity of, and restrictive access to loanable funds. In addressing this problem, previous administrations had relied exclusively on development banking and rural branching. It was however observed that the sophisticated mode of operation of the conventional banks, their legalistic insistence on collaterals, and their very limited geographical coverage rendered them inadequate or incapable of dealing with the unsophisticated rural dweller and the less privilege in the lower strata of our society. It was the unsatisfactory outcome of these banking systems that prompted the administration to conceive other more appropriate systems of credit delivery”. In other words if the conventional banks had carried along the less privilege and the grassroots’ communities, the community banking system would not have been needed or established.
The imperative of the community banking system is further reflected in the acceptability it enjoyed from the public. No sooner than it was introduced or announced in 1990, the Community Bank Implementation Committee (CBIC), which later metamorphosed into National Board for Community Banks (NBCB) received 200 applications for Community Bank license, and by 31st July 1991 the number of applications rose rapidly to 1,055.
Hence it was no surprise the rate at which community banks sprang over the countries. As at 31st March 1996, 1355 licensed community banks (CBs) were operating in 31 states in both rural and urban areas. Of these, 850 or 63 per cent were rural based while the remaining 505 or 37 per cent were located in the urban areas. The implication was that the community bank idea was acceptable to the investors. The people believed in the concept and the reason is not far fetched. Community Banks as the name implies were designed to be community owned and no individual was allowed to own more than five per cent of total shareholding. According to the prospectus for establishing a community bank, “The community bank shall be owned jointly by the following three categories of proprietors: Community Development Association, which are regarded as the primary promoters of the banks, trade Associations e.g. farmers group, cooperative societies, indigenes of, and individuals within the community, except that no single indigene or individual shall hold more that five per cent of the shares of a community bank”.
It is this unique ownership structure that endeared the community banking system to the populace and made the banks spread rapidly across the country. And the banks performed, at least to the best allowed by their capital base and most importantly before the banking distress of the 1990s.
For example, total deposits mobilized by these banks fluctuated between N2.2 billion and N3.5 billion between 1993 and 1997 and then increased steadily from N3.9 billion in 1998 to N8.07 billion in March 2001. Total loans, since the banks were introduced, maintained an upward trend, increasing by 373 per cent from N149.8 million in 1992 to N708.2 million in 1993 and by 89 per cent in 1994 to N1.33 billion. As at March 2001 total loans granted by CBs stood at N3.8 billion. It is pertinent to note that more than 40 per cent of these loans were granted to agricultural production activities. Similarly, savings deposits constituted more than 50 per cent of their deposits.
The implications of these data are numerous. One, community banks were living up to the expectations and objectives for their creation. Prior to their establishment, no banking institution ever achieved 50 per cent of deposit in savings or had 40 per cent of loans in the agricultural sector. Yet that was what the authorities craved for and that is what is needed to promote economic activities and development in the country especially at the grassroot level. The conventional banks as noted by the address of former President Babagida quoted above, were never able to penetrate the rural and grassroot communities, and rarely gave loans to farmers especially at the rural levels. Even as at December 2006 savings constituted 17 per cent of the deposits of the conventional banks.
Secondly, the above data provide insights into the impact of CBs on the rural communities. That they were able to mobilize such amount of savings indicate their ability to promote banking habits and savings culture in their community banks.
So, not only was the community banking system a good idea but it was also an idea that was accepted and worked until distress crept into the banking sector and along the line disrupted the operations and steady growth of CBs. The ravaging effect of the distress on the system was so severe that by 1998, 315 CBs were declared insolvent and illiquid and subsequently had their operating licenses withdrawn by the NBCB. This reduced the number of CBs from 1,368 in 1995 to 1053. And two years later the license of another 119 CBs were revoked thus reducing the numbers of CBs to 934.
Two factors were responsible for the devastating effect of the distress syndrome on the CBs. First, the community banking system was still new then. Though, it was working and living up to the objectives of its establishment, it was nevertheless still in its infancy stage and yet to develop the root and strength to withstand such adverse conditions.
The second factor was the attachment of CBs to the conventional banks. Since CBs did not have access the clearing house of the CBN, they had to have correspondent banks, which are the conventional banks. This means CBs opened accounts with the conventional banks where they also keep their money. Also the cheques issued by CBs carry the name and logo of the correspondent banks, and the cheques can only be cashed either at the issuing CB or at the correspondent conventional banks. It was an arrangement that was inimical to the finances of CBs as the correspondent banks also charge them for COT. But the real implication of this arrangement emerged during the distress era, when the deposits of CBs were trapped in some of the distressed correspondent banks. At the end over N1b belonging to CBs were trapped in these banks and this actually occasioned the iliquidity and insolvency of the liquidated CBs.
Other reasons that may be listed by the regulatory authorities as responsible for the distress of CBs are secondary. It was the attachment to the conventional banks through the correspondent banking arrangement that exposed CBs to the distress syndrome.
Of course the situation was aggravated by the fact that CBs were not included in the deposit insurance scheme of the Nigerian Deposit Insurance Corporation (NDIC). Consequently, public confidence in the CBs declined sharply until it was almost eroded by the time the CBN took over the oversight function of the system.
Surfice to say within the period that the system was been bartered by the distress syndrome, the NBCB experienced internal problems among which are lack of a governing board and a crippling strike action by staff between 2001 and 2002.
Unfortunately, the CBN in an attempt to help the community banking system increased the capital base of each CB to N5 million but it went further to violate the core principle behind the existence of CBs when it removed the five per cent shareholding ceiling for individuals. The CBN had good intentions but this directive was an indirect death sentence on the community banking system. Though about 800 CBs were still in existence in 2007, most of them if not all were no longer community banks in the real sense of the underlining philosophy. Why?
By the time the apex bank raised the minimum capital base of CBs to N5 million, the CDAs , which are the majority owners of CBs had lost so much confidence in the system due to the effect of the distress and the indifference of the authorities to their plight hence were not willing to put in more money to allow the CBs meet the capital base. Consequently, the CBN concluded that if the communities, the supposed owners would not put in more money to shore up the capital of the CBs, people who have the money and are willing to invest should be allowed to do so. But this mean the banks would no longer be community banks but privately owned banks operating on a micro level. This means that to the apex bank the community banking idea was no longer acceptable or a viable idea hence its decision to remove the ceiling on individual shareholding in CBs and by so doing killed the community banking system. The system was as originally designed was already dead by the time the micro finance policy was announced in 2006. The policy, which ushered in the establishment of microfinance banks in place of CBs, thus provided a convenient burial arrangement for the community banking system introduced in 1990.
December 31st 2007 brought an effective end to the era of community banks. It ushered in the era of microfinance banks. According to the CBN, about 600 CBs were able to meet the condition for transforming to a microfinance banks namely the N20 million capital base. What a huge carry over? Thus, the microfinance banking sector as presently constituted is mostly a case of old wine in new wineskin. This is not however surprising.
The micro finance policy is not fundamentally different from the community banking system. The difference is the methodology. Both target the micro, rural or grassroot economic activities. Both recommend the establishment of special banking institutions to specifically provide banking services to this target level of the economy. While the community banking system requires that the communities own the institution, the micro finance policy does not. So fundamentally the two are not different from each other.
That is the reason for the fear in some quarters that the microfinance can end up the way the CBs ended up. While the operators and authorities have tried to dismiss this fear. The fact remains that the greatest weakness of the community banking system era is being carried over into the new era. This weakness as indicated above is the attachment of CBs to the conventional banks. Like CBs, micro finance banks cannot directly access the clearing house hence they must have correspondent relationship with the Universal Banks. Hence their deposit and financial resources would be kept with these banks. Consequently, just like CBs, microfinance banks are made vulnerable to any adverse development in the Universal banks. Whilst, unlike CBs, the deposit of microfinance banks are insured by the NDIC, recent experience with resolution of distress banks suggests that it is better to untie micro finance banks from the aprons of Universal banks. Prevention is better than cure.