Centrality of corporate governance in microfinance

We have long since identified bad loans as one of the major problems facing microfinance institutions in Nigeria today. The sector is actually plagued by high and rising volumes of delinquent loans. Late last year we learnt from the Association of Microfinance Banks that the bad loan of the industry was something in the region of N80b – talk about hearing from the horse’s mouth. And if that be the case, then the actual volume of bad loans must definitely be much more.

The first question that came to my mind on reading this was: who owns this huge amount of money put out there by the MFBs and now at the risk of loss? I also wondered how the regulators reacted to the news, on hearing that announcement, which was probably not a revelation to them. Furthermore, I wondered if the regulators were doing anything differently to rein in players who are intent not only on ruining themselves but also shutting this new window of hope on the prison walls encasing the poor.

I have no doubt that the regulators were aware of the dire state of the industry, through their various inspection activities, and that the pronouncement by the operators’ association was nothing so informative. Perhaps due to their experiences and thick skin developed from years of dealing with similar situations in the financial sector, they are not as frightened as many others who read the story. However, the need for resolute action to keep the industry from harm is always present. It is better to cut off the cancerous finger than to lose the whole body.

Subsequent to that news, I did offer some opinion with regard to the urgency of addressing the problem of bad loans in the sector. I was not completely surprised at the extent of the bad loans accumulated because bad loans always arise in any lending environment. They have been the most pressing problem of commercial banks in the country and elsewhere. It is only natural therefore that our micro commercial banks (that’s what they are – a mimicry of commercial banks, and not microfinance banks) will face the same challenge. The concern is heightened by the extremely short time over which such a large volume of bad loans was acquired. It became so bad in the banking sector that a whole corporation, AMCON, had to be born to take over and deal with toxic loans. And even for AMCON, the danger of being swallowed or drowned by the share weight of toxic assets is still very much by the corned. It has not quite gone away.

I have been concerned also with the leadership of some of the operating institutions, and this has nothing to do with their academic or professional pedigrees. Some of them are probably over-qualified, which also brings its own problems. My concern has to do more with the fact that most operators have the wrong business model, and without a proper business model the sector will not achieve sustainability. It is the business model that defines the clientele. Without it we find that loans may be booked for anyone, from anywhere and for any purpose. A proper business model will clearly delineate the risk horizon and sharpen the criteria for risk acceptance in line with the corporate objectives, technical and financial capacity of players as well as key regulatory and policy imperatives. That brings me to the issue of corporate governance of our MFIs.

The issue of corporate governance has been receiving adequate attention from both the experts in the field and the non-experts. We have been told practically all we need to hear about the need for an effective board, and research is still ongoing in the field. However, we do not seem to deeply internalize the wisdom coming out from the experts. For instance, we have been told that a board must be independent to be effective. The capacity for independence of a board may be gauged from a number of criteria, including the extent of ownership and control an individual board member has in the establishment.

Today, most MFBs have their majority shareholder directly or indirectly sitting atop and directing the affairs of the board. Besides, ownership is not quite separate from management, and conflict of interest is no longer an important offence, if at all it is seen as one, as it rightly ought to be. Due to the corrupting influence of power, especially when it tends to the absolute, we find situations in which the judge and jury reside in one person. In such circumstances, we may find that the time would come when those approving loan facilities are practically the same ones for whom the loans are granted.People may not have set out to orchestrate this situation but they may have become unable to stop it, being frail humans.

This is in no way a suggestion that investors should not protect their investments. Far from it; this is rather a suggestion that investors allow a time-tested process of safeguarding investors’ interest to work for them. A properly functioning system of procedures, checks and balances will guarantee better protection for all stakeholders than individuals trying to do it by themselves. That path can only lead to the development of a strongmen rather than a strong institution.

The board is central to the success of any lending operation. Loan officers should not be put in a position that tests their courage by making them confront their benefactors – the founders of their institution on the board. Every board must be balanced in such a way as to have people who can tell the chairman or chief executive the truth. This is more so in our environment where every job offer is like a favour, even to the most qualified of employees. The fear of unemployment has robbed men of the needed courage to stop recalcitrant corporate leaders. We know that it is not often that people talk back at their benefactors, so even the strongest Loan Recovery Unit becomes a mere record-keeping unit, documenting maturities and collecting accruals that may never be paid, when boards lose steam. And one can bet that after sometime, the credit documents themselves will also be at risk like the loans they document.

The solution to the rising spate of delinquency should be soughtfarther afield from poor credit skills and loan management incapacity. The board of every lending institution must not be a rendezvous for friends and family of the principal owners. It must not be a theatre for a one-man act performed by the core investor. A balanced board, complete with appropriate dose of independence, is the way forward.

Emeka Osuji