MARATI NGS.

ORG
Rat i ngs: Grassroot Mi crof i nance Bank Li mi t ed
Mai duguri Road Kano, Kano St at e, Ni geri a

Sect i on A - I nt roduct i on

May 2012

ScienceandInnovationPark
BrunelWay
London
01322312078
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 banks
registered office is situated at No. 820,
TauraniMarketJunction,TauraniKano.The
banks 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
withfinancialservicesbecauseofitsstrong
brand and active participation in the sector.
Grassroot microfinance bank is currently
reachingitseconomicallyactivepoorclients
with various loan and savings products. As
at December 2012 the Grassroot MFB
Li mi ted has about 8,500 acti ve
borrowers compri si ng of 905 groups
and i ndi vi dual s and 9,000 savi ng
account customers, maki ng i t the
most vi si bl e mi crofi nance bank i n
Kano. The total l oan portfol i o was
about N42m wi th 60% of i ts cl i ents i n
the mi cro and smal l category wi th
very smal l l oan si zes, whi ch buttresses
its preference for depth or outreach as a
strategy.

Rat i ng Hi ghl i ght

ThefinancialperformanceofGrassroothas
beenimprovingoverthelastsevenmonths
followingrestructuringandaftershadingoff
the negative experiences of its start-up
years. However its first 24 months
experience has not made it easy to attract
additionalfundingthatispatientandcheap,
and also scarce in the Nigerian financial
marketandfromtheinternationalwholesale
lenders.Thewholesalelendinginterestrate
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
institutionsinNigeria.GrassrootMFBuses
an MIS system called Cute Banker for
processing and reporting its loan portfolio
and financial statement with minimum
capacitytomeettherequirementofthelocal
and regulatory market. It is however
planning to acquire a more robust and
flexiblesoftwarethatwouldenhanceitsnew
strategyforgrowthandfurtheringitsdelivery
ofeffectivefinancialservicesthroughthesix
degrees of outreach. The software is used
by other microfinance banks in Nigeria and
is customised to handle CBN reporting
requirements,creditbureauqueriesandhas
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
complimentaryprocessingthough.

Grassroot has maintained a strong and

reliablebrandinthestatewhereitoperates.
Since it commenced operation in 2009, it
hascontinuedtogrowinsizeandqualityin
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
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2
the next five years. It has continued to
recordmorethan300%improvementinthe
quality of its loan portfolio in the last twelve
months by selecting its clients and writing
offitsbadloans,eventhoughitdepletedthe
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
pressureonitsfundingneed.Ithasalsoset
processes in place to attract more funding
internallyandexternally.

ThreemajorchallengesforGrassrootMFB
isto:(1)seekadequateandreliablefunding
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
controlcostasanorganisation.
Out l ook
The positive outlook for t he bank i s t hat
i t has a very st rong brand, whi ch
at t ract s l oyal cust omers and very
qual i f i ed board and management
st af f . I t i s al so t he most vi si bl e and
capi t al i sed MFB i n a st at e wi t h more
t han f i f t een mi l l i on popul at i on wi t h
over si x mi l l i on economi cal l y act i ve
poor who are pot ent i al cl i ent s of t he
market f or mi crof i nance del i very.

SECTI ON B Organi sat i on and Management

Economi c Envi ronment

GDP: $414.5billion(2012est.)
Popul at i on: 170 mi l l i on (Jul y 2012)
Count ry GDP $450. 5 bi l l i on (2012 est . )
Count ry compari son t o t he worl d: 31
GDP per capi t a: 7.1%(2012est.)
Annual growt h: 6.9%(2012est.)
I nf l at i on: 12.3%(2012)
Exchange Rat e: 160(2013July)
Maj or I ndust ri es: OilandGas,Mining,agriculturalproducts,processing,andtourism.
Maj or t radi ng part ners: 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.PresidentGoodluckJonathanhasestablishedaneconomicteamthatincludesexperienced
and reputable members and has announced plans to increase transparency, diversify economic

3

growth,andimprovefiscalmanagement.Lackofinfrastructureandslowimplementationofreforms
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
investmentpriorities,whetheritisinternationalfinancialarrangements,Nigeriahasmovedforward
extraordinarily. And one of the objectives internationally the president set forth is that if Nigeria
carriedforwarditseconomicreformprogramsuccessfully,thattheinternationalcommunitywould
agreetodebtreliefforNigeria.Itisfirstsaidthatwhentheeconomicprogramwascrafted,thatthe
reforms would be on a broad front. First, focusing on issues of macroeconomic stabilization and
tryingtospurincreasedGDPgrowthofthetypethatwouldgreatemploymentandcreatewealth,
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
expenditurestoinstillfiscalprudence.

Mi crof i nance Sect or

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 worlds 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
developmentandempoweringwomen.ImportantchangesintheactivitiesofNigerianmicrofinance
service providers commenced around the middle of the first decade of the current millennium.
Sincetheintroductionofwidespreadreformsintheformofapolicyframeworkforsupportingand
enhancingtheprovisionofdiversifiedmicrofinanceservicesinNigeria(CBN,2005),theoperations
of microfinance service providers have grown phenomenally. The implementation of the reforms
ledtothetransformationofcommunitybankstomicrofinancebanks.Therearenowmorethan800
microfinancebanksregisteredinthecountry,alongwithseveralNGOsandcommercialbanksthat
providemicrofinanceservices.

In Nigeria, microfinance banks are expected to serve at least six statutory functions. These
include:
!Providingdiversified,affordableanddependablefinancialservicestotheactivepoor,inatimely
andcompetitivemanner,thatwouldenablethemtoundertakeanddeveloplong-term,sustainable
entrepreneurialactivities;
!Mobilizingsavingsforintermediation;
! Creating employment opportunities and increasing the productivity of the active poor in the
country,therebyincreasingtheirindividualhouseholdincomeandupliftingtheirstandardofliving;
Enhancing organized, systematic and focused participation of the poor in the socio-economic
developmentandresourceallocationprocess;
! Providing veritable avenues for the administration of the micro credit programs of government
andhighnetworthindividualsonanon-recoursecasebasis;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.EachofthesegoalscanbematchedtoaseemingdeterminationoftheCBNtoattainequity
inservicedelivery.
Inarevisedmicrofinancepolicy,theCBNlistsfourtargetsforthesector:
!Toincreaseaccesstofinancialservicesoftheeconomicallyactivepoorby10percentannually;
! 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
from0.2percentin2005toatleast5percentin2020;
!ToensuretheparticipationofallStatesandtheFCTaswellasatleasttwo-thirdsofalltheLocal
GovernmentAreas(LGAs)inmicrofinanceactivitiesby2015;and
!Toeliminategenderdisparitybyensuringthatwomensaccesstofinancialservicesincreaseby
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)livingbelowthepovertylevelestimatedatUS$1.25daybytheUnitedNationspovertyline
definition.GNIpercapitaisapproximatelyUS$11402withlifeexpectancyat52.2.Thetotaladult
population (18 years and above) is 90.7 million and about 70 percent of adults live in rural areas
with51%maleand49%female.Accesstofinanceisespeciallydifficultfortheruralpopulationas
the rural financial market is weak and unable to meet the financial services needs of the rural
economy

AccordingtotheEFINAAccesstoFinancialServicesSurvey2012,46.3%(about39.2million)of
adultNigeriansarefinanciallyexcludedhavingnoaccesstoformalorinformalfinancialservices.
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,otherloanproducts,(eg.overdrafts,finance),IslamicfinancingInvestmentsandinterest
free loans. The banking profile of the Nigeria adult population reveals that only 30% of the adult
populationcurrentlyhavebankaccounts,whichisequivalentto25.4millionpeople;67.2%ofthe
adult population have never been banked, which is equivalent to 56.9 million people and 2.4
millionadultswerepreviouslybanked.

Currently,78.8percentofruraladultsareunbanked.Theoverallnationalpercentageofunbanked
ishigheramongwomenandruralresidents.Similarly,63.5%ofadultmalesareunbanked;76.8%
ofadultfemalesareunbanked;23.6%oftheadultpopulationearnN6,000orlesspermonththis
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 EFINAs 2008 survey using banking services compared to only
15%(4.3million)offarmworkers.

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
andslowdowngrowthanddevelopment.

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

5

development institutions, deposit money banks, development banks, insurance companies,
governmentinterventionprogrammes.
Most recently telecommunications service providers initiated partnership with microfinance
institutions(MFIs)toprovidemobilebankingfortheunbankedsegmentofthepopulation.

With respect to scale of operations, only a negligible percent of the services supplied by the
depositmoneybanksandthefinancecompaniesinvolvemicrofinance.Howevergiventheirlarge
sizeandresources,theirincreasedsupplyorsupportformicrofinanceisdesirable.
Nigerian microfinance operations are often still not either financially or operationally sustainable
andfacegreatnumbersofchallengesamongwhicharethefollowing:
!Poorcorporategovernance
!Incompetentmanagement
!Weakinternalcontrols
!Lackofwell-definedoperations
!Inadequateregulatory/supervisorystructures.
!Weakcapitalbase
!Unsustainablenatureofinterventionprogrammes.
!Weakinstitutionalcapacity
!Poorbankingcultureandlowliteracylevelofthepopulation
!Highleveloffraudandloandefault
!Absenceofreliableclient/citizenidentificationsystem
!Dearthofrequisiteinfrastructuralfacilities
!Securitychallenges

Rural financial institutions, agriculture finance providers and other informal sources of finance
despiteexperiencingtheabovechallenges,havegreaterconstraintsinthefollowingareas:
vHightransactionandadministrativecosts
vHighlevelsofrealandperceivedrisks
vLimitedopportunitiesandwindowsforcapacitybuilding
vPoorinformationandsocialinfrastructure
vSeasonalityofclient(farming)operations
vGeographicaldispersionandremoteness
vExcessivewelfareorpoliticalorientationandlimitedcommercialfocus

Legal St at us
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
companysince2009.Itstarteditsbusinesswithadequatecapitalizationforastatemicrofinance
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
MicrofinanceBanks.

6

Itsfinancialstatementshavebeenauditedandcertifiedforthepastthreeyearsbyaprofessional
accountingfirmcalledAhmedZakariandCo,anaccountingfirmthathasafairlygoodexperience
inmicrofinance.

Ownershi p
Majorityofshareswasownedbyanindividualbuthassetinmotiontoinjectmoresharesandalso
further dilute ownership. Further to that 75% of shares its shares are held and owned by its
directorswhiletheremaining25%isheldbyanNGOandindividuals.

Donati ons
Sinceitsinceptionasabusinessentity,thebankhasneverreceivedanydonationfromany
source. This is typical with most microfinance institutions in Nigeria, as a result of poor
visibility.Howeverithasbeenabletomobilisecheapdepositfromitsclientsandfrombeinga
strategicpartnerfortheKanoStategovernmentpovertyalleviationprogram

Fundi ng composi ti on
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
refinancingfacilityoralineofcrediteventhoughataveryexpensiverate.

Management t eam
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
someformofcontinuityandbonding.Anothertwo,InternalControlandGeneralManager,areless
thanoneyearwiththeorganisation.ThebankhaslostanMDandsomeotherstaffwithinitsfirst
twoandahalfyearsasaresultofthereorganisationandrepositioning.Inothertostrengthenthe
performanceofthebank,theMDandGMhavepassedmicrofinancecertificationLevels1and11;
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
managementstaffearnthecertification,whichhasbothprofessionalandregulatoryrequirements.

Organi zati on
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
situatedinfourlocalgovernmentswithintheKanomunicipality,outofthe33localgovernmentsin
the state. The Head office takes strategic decision and planning, preparation of final accounts,

7

funding, recruitments, and external relationship with regulatory bodies and also disseminates the
institutions product and services. The branches and cash centers also sell the banks products
andservicestothecustomersaswellasrunassustainablebusinessunit.Cashiscollectedfrom
thefieldinformofsavings,depositsorloanrepaymentsthroughthecashcentersandbranches.
Howevermajorloandecisionsandbusinessmodeldecisionsarecentralattheheadoffice.

Here, potential clients apply for funds by writing an application letter and filling in an application
form.Theformisusedforcollectingdataforappraisalandinternalmanagementinformation.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
bothindividualandgroupclientswouldhaverelatedwiththebankforatleastthreemonthsbefore
theyqualifyforthefirstcycleofloan.Thesuccessfulclientsgetanofferletterandareexpectedto
fileinanacceptanceoftheofferbeforetheiraccountsarecreditedwiththeapprovedamount.The
traditional security required is either individual or group guarantees, and in rare occasions would
takecollateralorcollateralsubstitute.

GrassrootusestheCuteBankersoftwareforitsfinancialreportingandportfoliomanagementand
reports.Thesystemisrobustenoughtomeetitsreportingrequirementsanditnormallyreceives
supportandupgradefromthevendor.Howeveritplanstoupscalebymigratingtosoftwareasa
resultofitsexpandedclienteleandoutreachprogram.

Market penet rati on

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
functioningasatthetimeofthisreport.Outoftheoldones(8)onlyonehasbeenratedandthe
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
statisticsshowsthattheentiremicrofinancebankshavenotbeenabletoreachmorethan10%
of their market potential. The bank needs to match its performance with the strength of its
brand.

Products and servi ces

Grassroot has simplified but very inclusive products drawn between deposit mobilization and
loans:
Loans:itsloanproductsarefocusedamongmicroclients,SMEsandafewlargeclients.Themicro
loans are targeted towards groups and petty traders; SME loans are given to individual and
corporateSMEswhilethelargeloansareusuallytocompaniesthathaverelationshipwithsecurity
forsuchfacilities.
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
targetmarket.Itusesbothgroupandindividualmethodologywith60%ofoperationscarriedoutin
the field. This has engendered mass patronage within the short period of operations. It is

8

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
marketinKano.

Deci si on-maki ng
Theownersandtheboardarevastlyexperienceandsupportiveoftheoperationsofthebankand
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
bothtechnicalandfinancialcapacitytosupportthebank,buthadchallengeswithbeingavailable
for meeting or performance of corporate governance oversight in the past. There has been
congruencyofgoalsbetweenownershipandgovernancenoanyformnomarkedcasesofconflict
of interest. A board manual and governance policy guide has been developed to guide board
operationsanddescribedutiesoftheboard.Boardiswellcomposedandbringsdiversificationand
versatility..

TherelationshipbetweentheBoardofDirectorsandtheManagementisguidedbyprincipleoffair
play and mutual respect as well as separation of duty. Also board is quick to adopt changes that
wouldmovethebankforward,impactthecommunitiesaswellasensuresustainabilityofservice
delivery.TheBODisalsokeptinformedwithmonthlyandquarterlyperformancereportsallowinga
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.

Strategi c Pl anni ng
The bank has just gone through a major reorganisation and has been properly reposition to
serveahugeunderservedmarket.Ithasfurtherheldamajorstrategicsessiontodefineboth
qualitative and quantitative objectives that would see her grow from a state to a national
microfinancebankwithinthenextfiveyears.Itiscurrentlystrengtheningpreparingtoupscale
itslicencefromastatetoanationalabilitytooperatebranchesinallthelocalgovernmentof
thestateandinallstatesofthecountry.ThisisalsoinlinewiththerecentCBNpolicyfornew
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
implicationofthestrategy.Itplanstoraiseadditionalcapitalwithinandoutsidethecountryfor
thistask.

Management t eam
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
measureddailyandappraisedquarterlyusingthestickandcarrotmodel.Thishasbeguntoshow
greatresultsaslosseskeepreducing.

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

9

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
instituteaperformancebasedincentivescheme.Therearecurrentlytrainingandcapacitybuilding
programs organized by the CBN which it shall take advantage of to build its staff capacity. It has
beeninvolvedinthesetrainingsbutneedstosetupastaffskillsgapappraisalsystem,alongwith
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.

I nf ormat i on Technol ogy

Grassroothas adequate IT infrastructure and systems withcomputerizedprocessesthat
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,
withmorethan50microfinancebanksubscribers.Thebankhasaservicelevelagreementwith
the vendor, which allows it to benefit from free upgrade of features and modules to suit any
industryrequirement.Ithoweverneedstostrengthenthereportingformatandtheaccuracyofthe
report.Theapplicationhasrobustfeaturesandmanagementinformationsystemwhichallows
for daily call over for control purposes, enables reporting to suit the format the regulator
requires,hasmodulesforcreditbureauqueriesande-paymentplatform.Italsogenerateloan
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
managementgenerateratiosthatcanbeusedforquickdecision-making.
I nternal control s
Thebankhasafairlygoodriskmanagementframeworkinplace,withallpoliciesandprocedures
developed and put in use. It however needs to improve its enterprise wide risk management
approachtosuittherequirementoftheregulatorbydevelopinganERMframeworkdocument.All
itsbusinessandadministrativeprocedurearewelldefinedbutneedstoappropriatelydisseminate
to centres and locations within its structure where they can be effectively utilised. There are no
fraudcasesinitscurrentoperationsbecausethebankhaszerotoleranceforfraud.Thebankhas
continued to strengthen its internal control. The oversight function is multi-dimensional thereby
improvingcontrol.Twonationalregulatorybodies,NDICandCBN,aswellasitsboardsupervise
GrassrootandtheboardcommitteeasrequiredbylawsettingmicrofinanceoperationsinNigeria.
It has in the most recent times been graded sound in it the routine examinations by the
regulators.

Thebankhasreorganiseditsinternalcontrolinarestructuringthattookplacebetweenfromthe3
rd

to4rthquarteroflastyear.AnewICheadhasbeenrecruited;whohassector-relatedexperience,
aswellasmostofthepolicymanual.Thebankisstrengtheningcontrolthroughtheproductionofa
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.

I nternal audi t
Thebankcurrentlyhasoneinternalauditorwhoperformstheauditwork,usingtheinternalcontrol
guidelines.Itplanstorecruitmoreauditstaffasitexpandsoperations.Theinternalauditcurrently
reportstomanagementandboardmonthly.Heperformshisdailyroutineandensuringcheckand

10

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
expeditesfollowup.Howevertheauditorneedstoimprovehisclientvisittoensurethatthereare
no abuses in field operations in the areas of cash pick up in the form of saving and loan
repayment.Theauditorsreportscoverbothloanportfoliopositionsandgeneraloperationsoffthe
bank.Howevertheamountoffworkrequiredensuringeffectivesupervisionandriskmanagement
needtobeimprovedbyincreasingthenumberofpersonnel.

Market posi ti on
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
onesarefunctioningasatthetimeofthisreport.Outoftheoldones(8)onlyonehasbeenrated
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
makesitthemostvisibleandmoststrategicwithinitenvironment.Kanosocioeconomicstatistics
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.
CommercialbanksinNigeriaarenotactiveinreachingouttotheactivepoor,eventhoughafew
areinvolvedmicrofinanceactivitiesanddepositmobilisationamongtheactivepoor.Microfinance
banksinNigeriahavealimitedreachduetolackofcapacityandcapital.Howeverthebankhas
continuedtogrowinitsoutreachindeposit,outreachlocationandnumberofborrowingclients.It
needstohoweverincreaseitsgrossloanportfolio.

There are several other microfinance banks in Kano but not organised enough to effectively
competewithGrassroot,withtheirtotalreachofcombineislessthan1%thesixmillionestimated
potentialmarkets.Thismakesitsbusinesspotentialveryhighwithlargeclientele.Thebankhasa
reputation in the market and a strong brand in the environment where it operates. It needs to
increasemarketpenetrationthroughcreditproductssoasitwillnothavereputationalriskfornot
beingabletomeettheloandemand.

Loan portf ol i o management

It has a credit manual that defines its loan policy and processes, along with its loan strategy and
procedures.Thepolicyclearlyspellsoutthetargetmarketandtheproductthatitintendstouseto
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
loanportfolio.Ithasnotadjusteditscredittobeabletoreachthistargeteffectively.Itscurrentloan
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
categoriesofclient,whichisclearlydefinedasfollows:
Fieldofficers,knownasclientrelationshipofficers,areresponsibleforrecruitingclientsfrom
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,whiletheformsallowsthebanktocollectpersonnelandbusinessinformationtobe
usedinloanappraisal.Theloanassessmentsmadebycreditofficersarefurtherscrutinised
byaseniorloanofficerandthemanagementcreditcommitteeorboardcreditcommitteeas
thecasemay;

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Theinternalaudithelpsinspurringloanmonitoringandrecovery.TheITsoftwarehasalert
systemswhererelationshipofficersareconstantlybeingremindedofmaturingloanssothey
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
residenceandgroupguaranteeachallenge.

ThebankhascontinuedtomakedeliberateattempttocomplywiththeCBNruleofensuringthat
moreofitloansgotomicrocreditcustomers,thanSMEsandlargeclients.Italsohasstartedthe
processofincreasingbusinesswithruralagriculturalproducersandwomengroups.

Credi t ri sk
ThebanksPARhascontinuedtoimprovewithinthelast7monthsafterawrite-offdecisionaspart
ofitsreorganisation.Ithadatotalnon-performingloansofmorethan70%buthasimprovetoless
than30%asatDecember2012,withfurtherfranticeffortstomaintainahealthyportfolio.
GrassrootisguidedbytheCBNprovisioningandwrite-offpolicy,whichithasadheredto.Allbad
loans are adequately provided for according to the CBN provisioning policy, where even loans of
1-30dayspastdueareprovidedfor.Provisioningincreasesbasedontheageoftheloans,andthe
bankhasfullycompliedwith.AsofDecember2012ithadallthestandardbenchmarks.Ithasset
upsystemsandproceduresthatwouldenablehermaintainhealthyandqualityloan.

Fundi ngandl i qui di t y

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,
ownersequityandwouldincluderetainearningswhenitmakesprofit.Thebanksometimes
augments this with fund it gets from partnering with the state government to deliver
microcreditprogram,eventhoughthismightbevolatileThebankisverylowlyleveragedand
couldraisemoredebtstofinanceitsactivitybutthemanagementhasnotsucceededtoraisemore
commercially-orienteddebts,especiallyfromtheinternationalmarketwheretheycouldhavelower
interestratetobemorecompetitive.

Asset & Li abi l i t y Management

No maturity risk: All loans are short term with an average length of 3 to 6 months and
fundingisonmediumterm(1year);
No interest rate risk: Grassroot will borrow on a fixed rate, so it does not face any interest
raterisk.
Thesolvencyriskisverylowastheportfolioqualityishighandcansellcollateralstopayits
debts.
Nomismatchofassets,asitwatchesthiscarefullyandfollowstheprudentialguidelinesfor
assetandliabilitymanagement.

Fundi ng strategy
The weakness of Grassroot is like the weaknesses of the entire sector as a whole, which is the
limitationofNigeriasmicrofinancebanks,theinabilitytoattractlowinterestcommercialfinancing
frombothlocalandtheinternationalmarket.Grassrootstillreliestoomuchonitsequity,andvery
volatiledepositorsfundtofinanceitsgrowth.Themanagementneedtodiversifyitsfinancing.The
strength of their BOD along with improved operational performance could have been better

12

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
successfulinitsbidraisefundstoachievesuchobjectives.Mostoftheexternalfundsraisedsince
itscreationwasfromdepositorstermdepositatabout15%pa.

Li qui di ty management
It manages liquidity by ensuring it follows strictly the CBNs guidelines for liquidity ratios. It also
mobilisesdepositsandkeepsrepaymentshortandregulardaily,weeklyandmonthly-toavoidDue
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
templateandcashflowforecasttobeabletoanticipateliquiditypositionssayfivemonthsahead.It
howeverslowsdownonloanapprovalandalsoinvestanyexcessidlefundsintreasurybillsand
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
moneymarket.HoweveritneedstoincreaseitsTreasurybillfigures.

Prof i tabi l i ty anal ysi s

Thefirst24monthsofthebankweremarkedbypoorloansduetolackofcapacityandwrong
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
contributedtotheattainmentofthisfeat.Mostoftheassetsonitsbalancesheetarefundedwith
very volatile deposit, which it mobilized, and also the fixed assets acquired with shareholders
funds.Withfreshmobilizationofpatientcapitalitcanimproveitsassetexposuretoriskassetsand
willattainhigherprofitabilityby:

Raisingmorepatientcapitalitcaninvestinadditionalgrossloanportfolio
It also needs to be determined and develop the managerial will write-off the toxic assets
fromitsbooks
Strengthenportfoliomanagement,whichwillhelptoreducePARandwriteoffs.
Recruitanddeveloptherightemployee

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Rat i ngs

Excel l ent - A
Excelsintheevaluationandisamodelforthesector
Long-termvision
Norisksintheshortandmediumtermforoperations
Long-termrisksarewellmonitored.
Good- B
Proceduresarewelldeveloped
Effective
Long-termperspective
InherentRisks
Average- C
ProceduresFunctional
Mediumtermrisks
Bel ow Average-D
Problemsinspecificareas
RisksofDefault
Liquidityproblems
Financingstructureinadequate
St ruct ural probl ems-E
Immediateriskofdefault
RisksofDefault
Levelofperformancepoor
Structuralimbalance