I am closing my discussion on this topic today by looking at some other aspects of the challenges that are impairing the ability of some microfinance institutions to fully achieve their objectives on the one hand and those of the policy framework in general. One of these challenges is that we are operating a unique microfinance system (micro-commercial banking) with a mindset of microfinancing. Micro-commercial banks are not exactly microfinance institutions even if they conduct themselves in ways that appear similar.
Commercial banks are highly profit-oriented businesses. They are in the business for their own ends and I don’t think they will dispute this. They want high market share, high and perpetually rising profits and industry prestige. Service delivery to customers is incidental to and driven by the profit motive as well as other motivating factors. By their very nature, commercial banks are anti-small business. Not that they are so on grounds of some pathological malfunction. Not at all. It is just that for obvious reasons of cost-effectiveness and resource utilization, it is cheaper to avoid the small transactions coming from small businesses. Commercial banks are usually owned by hard-nosed investors with a lot of cash. Similarly, the leadership or management of commercial banks is in the hands of equally hard-nosed profit-seeking specialists. These people make their living buying and selling money. These are not exactly the character of microfinance institutions.
The inventors of microfinancing did not intend it to be profit-oriented. Pure microfinance institutions have a social orientation. They may return surpluses but not in the sense of a money-spinner as we have in the banks. There is no doubt that money, being the root of all things evil, the pursuit of it will surely change the orientation of anyone including even saints. Commercial profit orientation will definitely produce a different kind of microfinance institution. Our MFIs are patently profit-oriented, and this is legitimate. They are owned by businesspeople whose chief reason for entry to the business is profit, prestige or maybe bank ownership pride, and desire to help a national cause.
The history of some of the major success stories in microfinancing shows that they were actually owned mostly by their clients and they were not motivated purely by profit. They came to solve a problem – poverty. In our own case, perhaps with the exception of some of the pioneer MFIs, most of the new generation of players, especially the MFBs, are not owned by their clients. This ownership structure has great implications for the conduct of an MFI. These characteristics, which are ingrained in their DNA, went a long way in determining how they set up their operations.
MFIs promoted as non-profit institutions would naturally lack deep pockets and this will deter them from any frivolous or unnecessary spending that eats into their capital funds. It will also presuppose that in staffing, they would not be looking for regular and expensive bankers but people with the passion and flair for working with the needy and giving social service. Such people will naturally be competent in their chosen specialty areas but not necessarily in the sense of a commercial banking staff.
I had in previous discussions elaborated on the implications of a depletion of the capital funds of an MFI and the subsequent reliance on deposit mobilization to fund operations. The problems that arise from this situation have also been mentioned. Suffice it now to say that some operators of microfinance institutions have, in the course of trying to get the best bankers to lead their teams, found themselves in a situation in which they have hired the wrong people who are unable to pilot their outfits. These people are ordinarily brilliant and academically well qualified. However, they may not be suitable for the requirements of managing a microfinance institution.
As a result of this hybrid nature of our microfinancing (midway between commercial banking and microfinancing), a number of challenges will continually show up in the course of their operations. Firstly, their setup facilities will be hybrid. This reflects in infrastructure that do not exactly reflect the sobriety entailed in lending to the poor and helping them to come out of poverty. It will reflect in a staff complement whose orientation is halfway between Ivy League commercial bankers and modest hands-on microfinance bankers. It will also reflect in profit expectation that puts everybody, including the chairman, under extreme pressure to perform. Of course, they have to account to the purely commercial-minded shareholders who are in the game for the takings it promises.
This situation partly accounts for the high interest rate prevalent in the industry, though a phenomenon that is of general application to the entire finance industry and not limited to microfinance. The prevalence of high interest rates was responsible for the capping in 2010 by the Microfinance Regulatory Authority (MRA), of the lending rate for micro loans in the microfinance industry in Bangladesh. The rates were as high as 50 percent by the time the MRA took the action and reduced it to a maximum of 27 percent p.a at the time.
Microfinancing is a very complex business to run. Unfortunately, many operators are carried away by some of the frills around the business that their focus has strayed from deepening their corporate culture as MFIs and building capacity of their institutions to work with the rural poor. Microfinancing demands more than good brains and banking experience. It requires that the managers speak the language of the poor, eat their food and wear their clothes. Of course, that is the only way one can get to the truly active poor some of whom have never come close to a well-dressed man, let alone having a private discussion with one. So it is important that we ensure that those who run our MFIs have the right aptitude, in addition to the right academic and practical qualifications. We should therefore always monitor and ask how much passion our MFI managers have for the poor and their small businesses.
The point to note here is that our model of microfinancing is slightly different from what the founders of that activity gave us. This does not however detract from the quality of our policy framework nor its capacity to serve the needs of the target clients. We must, nonetheless, continue to keep our eyes on the policy objectives, among other motives we may have as operators.
The economic activities of the poor are too important to be left to the wind and weather of regular bank financing – the original cause of their marginalization. Microenterprises often represent a large portion of the workforce in the informal sector of developing countries. They are also creating a lot of jobs in the developed countries. According to a report by EIM Business & Policy Research, between 2002 and 2010, net employment in the European Union increased sharply by an average of 1.1 million jobs (or 0.9 percent) annually. Of this figure, 85 percent was employment growth in the SME sector. While this report may not be very current, it points the way to the value of small business in job creation.
Emeka Osuji
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