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Ratings: Grassroot Microfinance Bank Limited Maiduguri Road Kano, Kano State, Nigeria

Section A - Introduction

May 2012

Science and Innovation Park Brunel Way London 01322 312078 www.maratings.org

Background

Grassroot Microfinance Bank Limited Started as a state licensed microfinance bank in 2009, in line with the new CBN microfinance policy guideline. The bank’s registered office is situated at No. 820, Taurani Market Junction, Taurani Kano. The bank’s shares are held by individuals and NGO. It is under the governance Seven number of directors who constitute the board. In the recent past, the bank has attracted many interest from local and international partners including Kano State Government to help reach the active poor with financial services because of its strong brand and active participation in the sector. Grassroot microfinance bank is currently reaching its economically active poor clients with various loan and savings products. As at December 2012 the Grassroot MFB Limited has about 8,500 active borrowers comprising of 905 groups and individuals and 9,000 saving account customers, making it the most visible microfinance bank in Kano. The total loan portfolio was about N42m with 60% of its clients in the micro and small category with very small loan sizes, which buttresses its preference for depth or outreach as a strategy.

Rating Highlight

The financial performance of Grassroot has been improving over the last seven months following restructuring and after shading off the negative experiences of its start-up years. However its first 24 months experience has not made it easy to attract additional funding that is patient and cheap, and also scarce in the Nigerian financial market and from the international wholesale lenders. The wholesale lending interest rate in Nigeria, majorly from large Deposit Money Banks and a Few International Development Partners is between 20-25% per annum. This makes on-lending very expensive for many microfinance institutions in Nigeria. Grassroot MFB uses an MIS system called Cute Banker for processing and reporting its loan portfolio and financial statement with minimum capacity to meet the requirement of the local and regulatory market. It is however planning to acquire a more robust and flexible software that would enhance its new strategy for growth and furthering its delivery of effective financial services through the six degrees of outreach. The software is used by other microfinance banks in Nigeria and is customised to handle CBN reporting requirements, credit bureau queries and has an e-payment platform module. This makes it possible for the bank to do all its credit analysis of clients and also help it track all loans, including portfolio ageing analysis and performances with some manual complimentary processing though. Grassroot has maintained a strong and reliable brand in the state where it operates. Since it commenced operation in 2009, it has continued to grow in size and quality in spite of the temporary setback it encountered in its commencement years. But it has lately made frantic effort to improve its PAR by injecting new management staff, writing off its toxic loans and concluded plan to inject fresh capital. Its PAR has improved from about 68% to 22% in 2012 and plans to keep it at less than 5% in the next three years. Grassroot MFB has also concluded plan to grow from a state to a national microfinance bank in

Rating  Grade:  C    

Date  of  Rating:  February  2013    MA  Rating  Contact  

MFI  Contact  

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the next five years. It has continued to record more than 300% improvement in the quality of its loan portfolio in the last twelve months by selecting its clients and writing off its bad loans, even though it depleted the value of its shareholders fund. Further requirement to maintain its strong brand in the market and the demand to expand its market and conduct more business at the bottom of the pyramid has put tremendous pressure on its funding need. It has also set processes in place to attract more funding internally and externally. Three major challenges for Grassroot MFB is to: (1) seek adequate and reliable funding to finance continued portfolio growth and demands from its ever increasing client

base; (2) maintain a growing and healthy loan portfolio (3) build staff capacity to be more efficient in service delivery and to control cost as an organisation. Outlook

The positive outlook for the bank is that i t has a very strong brand, which attracts loyal customers and very quali f ied board and management staff. I t is also the most visible and capital ised MFB in a state with more than f i f teen mil l ion population with over six mil l ion economically active poor who are potential cl ients of the market for microfinance delivery.

SECTION B – Organisation and Management

Economic Environment

GDP: $414.5 billion (2012 est.) Population: 170 mil l ion (July 2012) Country GDP $450.5 bil l ion (2012 est.) Country comparison to the world: 31 GDP per capita: 7.1% (2012 est.) Annual growth: 6.9% (2012 est.) Inflation: 12.3% (2012 ) Exchange Rate: 160 (2013 July) Major Industries: Oil and Gas, Mining, agricultural products, processing, and tourism. Major trading partners: Asia, Europe, America,

Since 2008 the Government of Nigeria has begun to show the political will to implement the market-oriented reforms urged by the IMF, such as modernizing the banking system, removing subsidies, and resolving regional disputes over the distribution of earnings from the oil industry. GDP rose strongly in 2007-11 because of growth in non-oil sectors and robust global crude oil prices. President Goodluck Jonathan has established an economic team that includes experienced and reputable members and has announced plans to increase transparency, diversify economic

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growth, and improve fiscal management. Lack of infrastructure and slow implementation of reforms are key impediments to growth. The government is working toward developing stronger public-private partnerships for roads, agriculture, and power. Nigeria's financial sector was hurt by the global financial and economic crises, but the Central Bank governor has taken measures to restructure and strengthen the sector to include imposing mandatory higher minimum capital requirements. All these efforts have continued to engender economic stability and growth in the system. But in every direction, whether it's transparency, whether it is in budget management, whether it is in investment priorities, whether it is international financial arrangements, Nigeria has moved forward extraordinarily. And one of the objectives internationally the president set forth is that if Nigeria carried forward its economic reform program successfully, that the international community would agree to debt relief for Nigeria. It is first said that when the economic program was crafted, that the reforms would be on a broad front. First, focusing on issues of macroeconomic stabilization and trying to spur increased GDP growth of the type that would great employment and create wealth, and make sure that poor people have a leg up and have better advantages than they've had previously. The government is determined to work on anti-corruption, and target specific on concrete areas where it feels that corruption is the worst, and will try to deliver results on those areas. Another area the government of Nigeria is ensuring transformation is in the areas public expenditures to instill fiscal prudence. Microfinance Sector The significance of microfinance in driving important aspects of the Nigerian Vision 20-2020 and other national policy programs like the Millennium Development Goals (MDGs) cannot be over-emphasized. The Vision 20-2020 seeks to position Nigeria in the league of world’s top 20 economies by the year 2020. The alleviation of poverty remains pivotal if this dream is to be achieved. Microfinance is therefore considered a veritable tool for mitigating the problems of poverty particularly amongst the rural poor, for stimulating economic growth, supporting human development and empowering women. Important changes in the activities of Nigerian microfinance service providers commenced around the middle of the first decade of the current millennium. Since the introduction of widespread reforms in the form of a policy framework for supporting and enhancing the provision of diversified microfinance services in Nigeria (CBN, 2005), the operations of microfinance service providers have grown phenomenally. The implementation of the reforms led to the transformation of community banks to microfinance banks. There are now more than 800 microfinance banks registered in the country, along with several NGOs and commercial banks that provide microfinance services. In Nigeria, microfinance banks are expected to serve at least six statutory functions. These include: · Providing diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, that would enable them to undertake and develop long-term, sustainable entrepreneurial activities; · Mobilizing savings for intermediation; · Creating employment opportunities and increasing the productivity of the active poor in the country, thereby increasing their individual household income and uplifting their standard of living; Enhancing organized, systematic and focused participation of the poor in the socio-economic development and resource allocation process; · Providing veritable avenues for the administration of the micro credit programs of government and high net worth individuals on a non-recourse case basis; and · Rendering payment services, such as salaries, gratuities, and pensions for various tiers of government.

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The Central Bank of Nigeria (CBN) is charged with supervision and regulation of microfinance banks. Each of these goals can be matched to a seeming determination of the CBN to attain equity in service delivery. In a revised microfinance policy, the CBN lists four targets for the sector: · To increase access to financial services of the economically active poor by 10 per cent annually; · To increase the share of microcredit as percentage of total credit to the economy from 0.9 per cent in 2005 to at least 20 per cent in 2020; and the share of microcredit as percentage of GDP from 0.2 per cent in 2005 to at least 5 per cent in 2020; · To ensure the participation of all States and the FCT as well as at least two-thirds of all the Local Government Areas (LGAs) in microfinance activities by 2015; and · To eliminate gender disparity by ensuring that women’s access to financial services increase by 15 per cent annually, that is 5 per cent above the stipulated minimum of 10 per cent across the board. Nigeria with a total population of about 170 million people has approximately 70 percent (119 million) living below the poverty level estimated at US$1.25 day by the United Nations poverty line definition. GNI per capita is approximately US$11402 with life expectancy at 52.2. The total adult population (18 years and above) is 90.7 million and about 70 percent of adults live in rural areas with 51% male and 49% female. Access to finance is especially difficult for the rural population as the rural financial market is weak and unable to meet the financial services needs of the rural economy According to the EFINA Access to Financial Services Survey 2012, 46.3% (about 39.2 million) of adult Nigerians are financially excluded having no access to formal or informal financial services. 53.7% (45.5 million) of the adults have some form of access to formal or informal financial services. Financial products available to the banked segment include savings and current accounts, insurance, ATM cards, debit and credit cards, fixed deposit accounts, value cards, mortgage, other loan products, (eg. overdrafts, finance), Islamic financing Investments and interest free loans. The banking profile of the Nigeria adult population reveals that only 30% of the adult population currently have bank accounts, which is equivalent to 25.4 million people; 67.2% of the adult population have never been banked, which is equivalent to 56.9 million people and 2.4 million adults were previously banked. Currently, 78.8 percent of rural adults are unbanked. The overall national percentage of unbanked is higher among women and rural residents. Similarly, 63.5% of adult males are unbanked; 76.8% of adult females are unbanked; 23.6% of the adult population earn N6, 000 or less per month – this is the equivalent of approximately USD2 per day for 20 working days per month. The salaried population has been more widely targeted by financial service providers with an estimated 71% (9.6 million) of salaried adults in EFINA’s 2008 survey using banking services compared to only 15% (4.3 million) of farm workers. The CBN Microfinance Policy Framework 2011 demonstrated that the aggregate microcredit facilities in Nigeria accounted for about 0.2 per cent of Gross Domestic Product (GDP) in 2005, and less than one per cent of total credit to the economy. This revealed the existence of a huge gap in the provision of financial services to a large number of the active poor and low income groups. The effect of not addressing this situation appropriately would further accentuate poverty and slow down growth and development. The microfinance sector has continued to grow, attracting several players and service providers, offering diverse services. The service providers include microfinance banks, non-government organizations (NGOs) also known as NGO-MFIs, cooperatives societies, community-based

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development institutions, deposit money banks, development banks, insurance companies, government intervention programmes. Most recently telecommunications service providers initiated partnership with microfinance institutions (MFIs) to provide mobile banking for the unbanked segment of the population. With respect to scale of operations, only a negligible percent of the services supplied by the deposit money banks and the finance companies involve microfinance. However given their large size and resources, their increased supply or support for microfinance is desirable. Nigerian microfinance operations are often still not either financially or operationally sustainable and face great numbers of challenges among which are the following: · Poor corporate governance

· Incompetent management

· Weak internal controls

· Lack of well-defined operations

· Inadequate regulatory/supervisory structures.

· Weak capital base

· Unsustainable nature of intervention programmes.

· Weak institutional capacity

· Poor banking culture and low literacy level of the population

· High level of fraud and loan default

· Absence of reliable client/citizen identification system

· Dearth of requisite infrastructural facilities

· Security challenges Rural financial institutions, agriculture finance providers and other informal sources of finance despite experiencing the above challenges, have greater constraints in the following areas: v High transaction and administrative costs v High levels of real and perceived risks v Limited opportunities and windows for capacity building v Poor information and social infrastructure v Seasonality of client (farming) operations v Geographical dispersion and remoteness v Excessive welfare or political orientation and limited commercial focus Legal Status Grassroot Microfinance Bank is licensed by the Central Bank of Nigeria as a state microfinance bank as well as registered with the Nigeria Corporate Affairs commission as a limited liability company since 2009. It started its business with adequate capitalization for a state microfinance bank under the new CBN policy guideline, which paved the way for its transformation into a licensed state microfinance bank. Grassroot has been operating in the microfinance sector since 2009. The bank is regulated by the Central Bank of Nigeria and also supervised by both The Central Bank and Nigeria Deposit Insurance Corporation (NDIC). It is receiving further technical support by the CBN/NDIC training and capacity building programs as well as world-renowned consultant. This is apart from self- regulation through the support of National Association of Microfinance Banks.

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Its financial statements have been audited and certified for the past three years by a professional accounting firm called Ahmed Zakari and Co, an accounting firm that has a fairly good experience in microfinance.

Ownership

Majority of shares was owned by an individual but has set in motion to inject more shares and also further dilute ownership. Further to that 75% of shares its shares are held and owned by its directors while the remaining 25% is held by an NGO and individuals.

Donations

Since its inception as a business entity, the bank has never received any donation from any source. This is typical with most microfinance institutions in Nigeria, as a result of poor visibility. However it has been able to mobilise cheap deposit from its clients and from being a strategic partner for the Kano State government poverty alleviation program Funding composition

As of December 2012, Grassroot funding structure consists of about 33% of equity, 67% of liability. G r a s s r o o t i s c u r r e n t l y b e i n g m e n t o r e d b y a t e a m o f c o n s u l t a n t s a n d b y t h e N a t i o n a l A s s o c i a t i o n o f M i c r o f i n a n c e B a n k s , w h i c h i t i s a f f i l i a t e d t o . I t a l s o h a s c o r r e s p o n d i n g b a n k i n g r e l a t i o n s h i p s w i t h s e v e r a l f i n a n c i a l i n s t i t u t i o n s , w h i c h i n c l u d e F i d e l i t y B a n k o f N i g e r i a P l c , G u a r a n t e e T r u s t B a n k , K e y s t o n e B a n k a n d E C O b a n k a m o n g s t o t h e r s . These companies sometimes could help with refinancing facility or a line of credit even though at a very expensive rate.

Management team

The bank is managed by a team of managers headed by the MD/CEO, Hajiya Farida Tahir , a passionate microfinance practitioner who is also a board member, based on the regulatory provision, and reports to the Board of Directors. She possesses the relevant academic and professional experiences, in banking and finance. The management team structure include MD/CEO, GM/Business Development, Head of Operations, Head Internal Control, Head Finance and Risk Management, which covers the core activities of a microfinance bank. MD/CEO has banking experience and over three years in microfinance. Two other heads have banking experiences without microfinance background, while the last two have microfinance experiences. Three members of management staff have worked for more than two years together, showing some form of continuity and bonding. Another two, Internal Control and General Manager, are less than one year with the organisation. The bank has lost an MD and some other staff within its first two and a half years as a result of the reorganisation and repositioning. In other to strengthen the performance of the bank, the MD and GM have passed microfinance certification Levels 1 and 11; while the head internal control has one paper to qualify, and two other heads are almost completing their certification. The bank is making frantic effort to ensure that all member of its management staff earn the certification, which has both professional and regulatory requirements. Organization Grassroot has a decentralized organizational structure through a network of four branches, cash center and departments. The bank has currently a head office and four branches, which are situated in four local governments within the Kano municipality, out of the 33 local governments in the state. The Head office takes strategic decision and planning, preparation of final accounts,

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funding, recruitments, and external relationship with regulatory bodies and also disseminates the institution’s product and services. The branches and cash centers also sell the banks products and services to the customers as well as run as sustainable business unit. Cash is collected from the field in form of savings, deposits or loan repayments through the cash centers and branches. However major loan decisions and business model decisions are central at the head office. Here, potential clients apply for funds by writing an application letter and filling in an application form. The form is used for collecting data for appraisal and internal management information. The relationship officer who sends it to the MD via the Head Business Development receives both forms of application. There are basically two levels and layers of credit approvals, at the management and board credit committee. The management committee approves a maximum of N300, 000 while the board credit committee approves any amount above that, but within the regulatory obligor limit. The process takes about three days in normal circumstances, because both individual and group clients would have related with the bank for at least three months before they qualify for the first cycle of loan. The successful clients get an offer letter and are expected to file in an acceptance of the offer before their accounts are credited with the approved amount. The traditional security required is either individual or group guarantees, and in rare occasions would take collateral or collateral substitute. Grassroot uses the Cute Banker software for its financial reporting and portfolio management and reports. The system is robust enough to meet it’s reporting requirements and it normally receives support and upgrade from the vendor. However it plans to upscale by migrating to software as a result of its expanded clientele and outreach program.

Market penetration

Grassroot operates five offices in Kano, North Eastern region of Nigeria; one main branch which doubles as a head office, and four other branches/cash centers. there were 8 MFB in Kano before the 37 launched in January (only Grassroot has a state license) by the state government so as to ensure each local government has a microfinance bank. However the government chose partners among even the old MFBs, though only 10 of the new ones are functioning as at the time of this report. Out of the old ones (8) only one has been rated and the second one now being Grassroot. There are three major actors, Grassroot, WNDI, Northbridge. Grassroot has 8,000 (905 groups) borrowers and 9,000 savings account, which makes it the most visible and most strategic within it environment. Kano socio economic statistics shows that the entire microfinance banks have not been able to reach more than 10% of their market potential. The bank needs to match its performance with the strength of its brand.

Products and services

Grassroot has simplified but very inclusive products drawn between deposit mobilization and loans: Loans: its loan products are focused among micro clients, SMEs and a few large clients. The micro loans are targeted towards groups and petty traders; SME loans are given to individual and corporate SMEs while the large loans are usually to companies that have relationship with security for such facilities. There are product papers as well as a credit manual, which guides the bank, which is being strengthened. The bank has advertised more than 5 loan and credit product each. Its product paper covers only three products though, which are robust enough to capture the activities of its target market. It uses both group and individual methodology with 60% of operations carried out in the field. This has engendered mass patronage within the short period of operations. It is

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enhancing customer satisfaction and gauging it by the huge patronage, even though the poor relationship management in the first 18 months of operation dampened image. This has been corrected in the on-going change management and restructuring. The bank has sector related experiences drawn from its almost three years’ experience and location in the heart of MSME market in Kano.

Decision-making

The owners and the board are vastly experience and supportive of the operations of the bank and desirous of its growth and impact in the society. The ownership structure is in tandem with regulatory requirements and diversified enough to bring about versatility. Shareholders possess both technical and financial capacity to support the bank, but had challenges with being available for meeting or performance of corporate governance oversight in the past. There has been congruency of goals between ownership and governance no any form no marked cases of conflict of interest. A board manual and governance policy guide has been developed to guide board operations and describe duties of the board. Board is well composed and brings diversification and versatility.. The relationship between the Board of Directors and the Management is guided by principle of fair play and mutual respect as well as separation of duty. Also board is quick to adopt changes that would move the bank forward, impact the communities as well as ensure sustainability of service delivery. The BOD is also kept informed with monthly and quarterly performance reports allowing a follow up of the implementation of strategic as well as operational decisions. The BOD therefore closely monitors the market risks and opportunities. The overall performance of the institution is also thoroughly examined by the BOD members, which is constantly been fed by the internal auditor and the various board committees of the bank. These committees are credit, audit, and management.

Strategic Planning

The bank has just gone through a major reorganisation and has been properly reposition to serve a huge underserved market. It has further held a major strategic session to define both qualitative and quantitative objectives that would see her grow from a state to a national microfinance bank within the next five years. It is currently strengthening preparing to upscale its licence from a state to a national ability to operate branches in all the local government of the state and in all states of the country. This is also in line with the recent CBN policy for new banking license regime in Nigeria. It has developed and reviewed its business plan to meet these challenges. Its current business plan has anticipated its new growth plan and the implication of the strategy. It plans to raise additional capital within and outside the country for this task. Management team The bank has a reconstituted and raised a vibrant management team. It has also restructured to ensure that it raises its performance by building in performance management systems that are measured daily and appraised quarterly using the stick and carrot model. This has begun to show great results as losses keep reducing.

Human resource management

The bank needs to transfer its HR role to a manager who should concentrate on HR and admin issues. Currently the MD and her secretary handle the HR role. But as the bank grows and expands, there will be a need for a HR manager who has the requisite knowledge to address

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strategic issues faced by the bank. The bank needs to focus on selecting the right employee, developing them, compensating, managing performance and setting standard training systems. The bank has an HR policy along with all the other needed polices that will aid it in running the organization. The bank pays a competitive salary based on the industry standard but needs to institute a performance based incentive scheme. There are currently training and capacity building programs organized by the CBN which it shall take advantage of to build its staff capacity. It has been involved in these trainings but needs to set up a staff skills gap appraisal system, along with a clearly spelled out training needs assessment. The staff turnover of the bank was high prior to reorganization but improved due to the conducive working environment procedures throughout the institution.

Information Technology Grassroot has adequate IT infrastructure and systems with computerized processes that separates management information systems in place for both accounting and loan/savings tracking. It uses the Cute Banker, a locally developed by a software company, with more than 50 microfinance bank subscribers. The bank has a service level agreement with the vendor, which allows it to benefit from free upgrade of features and modules to suit any industry requirement. It however needs to strengthen the reporting format and the accuracy of the report. The application has robust features and management information system which allows for daily call over for control purposes, enables reporting to suit the format the regulator requires, has modules for credit bureau queries and e-payment platform. It also generate loan portfolio reports and ageing analysis. The bank however needs to build more capacity of its staff to improve proficiency in the use of the software. There are both internal and external back up to ensure the safety of data. However the software needs to be upgraded to enable management generate ratios that can be used for quick decision-making.

Internal controls

The bank has a fairly good risk management framework in place, with all policies and procedures developed and put in use. It however needs to improve its enterprise wide risk management approach to suit the requirement of the regulator by developing an ERM framework document. All its business and administrative procedure are well defined but needs to appropriately disseminate to centres and locations within its structure where they can be effectively utilised. There are no fraud cases in its current operations because the bank has zero tolerance for fraud. The bank has continued to strengthen its internal control. The oversight function is multi-dimensional thereby improving control. Two national regulatory bodies, NDIC and CBN, as well as its board supervise Grassroot and the board committee as required by law setting microfinance operations in Nigeria. It has in the most recent times been graded “sound” in it the routine examinations by the regulators. The bank has reorganised its internal control in a restructuring that took place between from the 3rd to 4rth quarter of last year. A new IC head has been recruited; who has sector-related experience, as well as most of the policy manual. The bank is strengthening control through the production of a Strategic business plan, enterprise wide risk management manual and corporate governance manual. The bank has an internal audit manual, which needs to be properly adopted and put to use.

Internal audit

The bank currently has one internal auditor who performs the audit work, using the internal control guidelines. It plans to recruit more audit staff as it expands operations. The internal audit currently reports to management and board monthly. He performs his daily routine and ensuring check and

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balances, and draws the attention of the party concern to ensure compliance to lay down policy and procedures before generating report. This design allows a quick view of main issues and expedites follow up. However the auditor needs to improve his client visit to ensure that there are no abuses in field operations in the areas of cash pick up in the form of saving and loan repayment. The auditor’s reports cover both loan portfolio positions and general operations off the bank. However the amount off work required ensuring effective supervision and risk management need to be improved by increasing the number of personnel.

Market position

Grassroot currently seeks to reach the economically active poor who live in Kano and beyond, North West Nigeria with it products and services. There were 8 MFB in Kano before the 37 launched in January 2013 by the state government (only Grassroot has a state license) by the state government so as to ensure each local government has a microfinance bank presence. However the government chose partners among even the old MFBs, though only 10 of the new ones are functioning as at the time of this report. Out of the old ones (8) only one has been rated and the second one now being Grassroot. There are three major actors, Grassroot, WNDI, Northbridge. Grassroot has 8,000(905 groups) borrowers and 9,000 savings account, which makes it the most visible and most strategic within it environment. Kano socio economic statistics shows that the entire microfinance banks have not been able to reach more than 10% of their market potential. It current has about 40% of the reached and less than 1% of the unreached market. Commercial banks in Nigeria are not active in reaching out to the active poor, even though a few are involved microfinance activities and deposit mobilisation among the active poor. Microfinance banks in Nigeria have a limited reach due to lack of capacity and capital. However the bank has continued to grow in its outreach in deposit, outreach location and number of borrowing clients. It needs to however increase its gross loan portfolio. There are several other microfinance banks in Kano but not organised enough to effectively compete with Grassroot, with their total reach of combine is less than 1% the six million estimated potential markets. This makes its business potential very high with large clientele. The bank has a reputation in the market and a strong brand in the environment where it operates. It needs to increase market penetration through credit products so as it will not have reputational risk for not being able to meet the loan demand.

Loan portfol io management

It has a credit manual that defines its loan policy and processes, along with its loan strategy and procedures. The policy clearly spells out the target market and the product that it intends to use to reach its market. There is also a standard guide for the target market of standard microfinance banks in Nigeria. Microfinance banks are expected to target micro credit with 60% of their gross loan portfolio. It has not adjusted its credit to be able to reach this target effectively. Its current loan profile shows that 50% of its loans go to the SME sector, 30% to micro credit and the remaining 20% to the larger category of clients. It has a clear procedure and eligibility for these main categories of client, which is clearly defined as follows:

• Field officers, known as client relationship officers, are responsible for recruiting clients from the filled, helping them to grow their business and if they need loan, guiding them to write application and filling of the printed loan forms. The application letter shows the clients request, while the forms allows the bank to collect personnel and business information to be used in loan appraisal. The loan assessments made by credit officers are further scrutinised by a senior loan officer and the management credit committee or board credit committee as the case may;

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• The internal audit helps in spurring loan monitoring and recovery. The IT software has alert systems where relationship officers are constantly being reminded of maturing loans so they can follow up. Even though the relationship officers are acquainted with their group members and clients sometimes there are still difficulties in locating them due to high mobility of the population and the cosmopolitan nature of the people makes permanent residence and group guarantee a challenge.

The bank has continued to make deliberate attempt to comply with the CBN rule of ensuring that more of it loans go to micro credit customers, than SMEs and large clients. It also has started the process of increasing business with rural agricultural producers and women groups.

Credit risk

The bank’s PAR has continued to improve within the last 7 months after a write-off decision as part of its reorganisation. It had a total non-performing loans of more than 70% but has improve to less than 30% as at December 2012, with further frantic efforts to maintain a healthy portfolio. Grassroot is guided by the CBN provisioning and write-off policy, which it has adhered to. All bad loans are adequately provided for according to the CBN provisioning policy, where even loans of 1-30 days past due are provided for. Provisioning increases based on the age of the loans, and the bank has fully complied with. As of December 2012 it had all the standard benchmarks. It has set up systems and procedures that would enable her maintain healthy and quality loan. Funding and l iquidity The funding structure of the MFB is typical of a bank, especially a microfinance bank in Nigeria. I t t a k e s d e p o s i t f r o m t h e p u b l i c a n d a l s o g i v e s o u t l o a n s , c a r r i e s o u t p a y m e n t a n d t r a n s f e r s e r v i c e s o n b e h a l f o f i t s c l i e n t s . Therefore its funding liability comprises of deposits, owners’ equity and would include retain earnings when it makes profit. The bank sometimes augments this with fund it gets from partnering with the state government to deliver microcredit program, even though this might be volatile The bank is very lowly leveraged and could raise more debts to finance its activity but the management has not succeeded to raise more commercially-oriented debts, especially from the international market where they could have lower interest rate to be more competitive. Asset & Liabil i ty Management

• No maturity risk: All loans are short term with an average length of 3 to 6 months and funding is on medium term (1year);

• No interest rate risk: Grassroot will borrow on a fixed rate, so it does not face any interest rate risk.

• The solvency risk is very low as the portfolio quality is high and can sell collaterals to pay its debts.

• No mismatch of assets, as it watches this carefully and follows the prudential guidelines for asset and liability management.

Funding strategy

The weakness of Grassroot is like the weaknesses of the entire sector as a whole, which is the limitation of Nigeria’s microfinance banks, the inability to attract low interest commercial financing from both local and the international market. Grassroot still relies too much on its equity, and very volatile depositors fund to finance its growth. The management need to diversify its financing. The strength of their BOD along with improved operational performance could have been better

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leveraged to access commercial financing from the international market. While the bank has the willingness to increase its portfolio, improve its profitability and be sustainable, it has not been successful in its bid raise funds to achieve such objectives. Most of the external funds raised since its creation was from depositors term deposit at about 15% pa.

Liquidity management

It manages liquidity by ensuring it follows strictly the CBN’s guidelines for liquidity ratios. It also mobilises deposits and keeps repayment short and regular daily, weekly and monthly-to avoid Due to the lack of funds for investment, liquidity is closely controlled. The weekly repayments keep relatively comfortable cash balance at banks. The bank does not however have a standard template and cash flow forecast to be able to anticipate liquidity positions say five months ahead. It however slows down on loan approval and also invest any excess idle funds in treasury bills and placement with other banks. But it currently has sufficient resources to meet current, quick and liquidity ratios without any challenge. It even needs to invest more funds in loans than in the money market. However it needs to increase its Treasury bill figures.

Prof itabil i ty analysis

The first 24 months of the bank were marked by poor loans due to lack of capacity and wrong methodology which made it accumulated huge loses. It has since learnt the ropes and has reposition to become more profitable from its current financial statement spanning the last seven months. It has constantly reduce its loses form a negative position making operational profits and eventually tending towards financial profits. Identifying and controlling cost and carefully investing in healthy risk assets, as well as monitoring to ensure repayments have contributed to the attainment of this feat. Most of the assets on its balance sheet are funded with very volatile deposit, which it mobilized, and also the fixed assets acquired with shareholders’ funds. With fresh mobilization of patient capital it can improve its asset exposure to risk assets and will attain higher profitability by:

• Raising more patient capital it can invest in additional gross loan portfolio • It also needs to be determined and develop the managerial will write-off the toxic assets

from its books • Strengthen portfolio management, which will help to reduce PAR and write offs. • Recruit and develop the right employee

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Ratings

Excellent - A

• Excels in the evaluation and is a model for the sector • Long-term vision • No risks in the short and medium term for operations • Long-term risks are well monitored.

Good - B

• Procedures are well developed • Effective • Long-term perspective • Inherent Risks

Average - C

• Procedures Functional • Medium term risks

Below Average - D

• Problems in specific areas • Risks of Default • Liquidity problems • Financing structure inadequate

Structural problems - E

• Immediate risk of default • Risks of Default • Level of performance poor • Structural imbalance