Dealing with inefficiency in microfinance (2)

One of the things that make Economics the hot discipline it is and, indeed, the Crown Prince of the Social Sciences is that Economics uses simple concepts and models to explain and simplify otherwise complex phenomena. The concepts of Scarcity, Choice and Opportunity Cost, which are now multidisciplinary in use, are, perhaps, among the best introductory avenues of stepping into the analytical world of Economic Science.

They are also among the most appropriate routes to an understanding of the problem of inefficiency, which, simply put, is the suboptimal use of economic resources or inability to maximize the use of resources. Such resources may of course be in the form of time, money, manpower and other factors of production. There is always a better way to do something, either in terms of time spent in doing it or in terms of the quantity of output that is delivered with a given amount of resources.

In looking at the challenge of inefficiency in microfinance, we begin with an understanding of the fact that resources are limited. When economists say that resources are scarce, they are not concerned with the quantum of the resource per se. It is not about the size of the resource or the volume of it we have. They are rather concerned with the uses to which the resource may be put, because there are many contending uses to which any particular resource may be put. Our challenge or duty, as managers of microfinance institutions, which by the way are not famous for their abundance of resources, is therefore to find that use to which we must put our limited resources that maximizes the benefit we derive from them.

When we understand (1) that resources are limited, (2) that they have alternative uses, and (3) that we have to use them efficiently or maximize the benefits from their use, then we learn to make good choices. So a choice must be made between alternative uses to which we can put our resource. This choice is an imposition created by scarcity. MFIs must realize that once they deploy some part of their capital, for instance, to purchase, say, pool cars, clearly that portion of their capital cannot be used elsewhere. It will not be available for any other use, say, to make loans. This is the typical nature of all resources that have alternative uses. They have what is called Opportunity Cost. The real cost of the pool car purchased is the loan that is not booked for clients – the forgone alternative use of the capital. When resources are not used in such a way as to give the maximum benefit to the organization, then we operate in the region of inefficiency.

In my view, there is no better time to focus on inefficiency in microfinancing in Nigeria than now. First, the economy is very weak in many respects, and one hopes there is no controversy about that. The Central Bank governor’s recent comment on the economy is apt and should not be misunderstood by anyone including the markets. Second, we are currently dealing with budgetary challenges occasioned by a disastrous revenue performance, which is still on-going, political uncertainty due to the not-yet-fully-depleted power of Boko Haram, growing corruption due to an equally growing greed of politicians, a preponderance of insolvent and unaccountable governments and public institutions and, above all, a financial sector whose future strength and stability, given its substantial dependence on government funds, is suspicious. This is therefore the best time to think efficiency and act frugally. And there are many more reasons to do so.

First, the people of this world, especially the rich, are becoming more selfish and anti-poor by the day. In his recent book “The Crash of 2016”, Thom Hartman, who is a New York Times Bestselling Author, criticised the growing tendency of the powers that-be in Washington to manipulate the economy forcing it to serve only the needs of the rich. He noted that while the poorest 20 percent of Americans faced income declines of as much as 7 percent, that of the top 1 percent increased by about 275 percent since Reagan’s election. Furthermore, Hartmann wonders why Wal-Mart Stores, the world’s largest private employer of labour, persists in paying its workers the minimum wage, even after raking in $16.4bn in profits in 2011.

Second, according to Hartmann, the political and corporate moguls have perfected the art of using public funds to bail themselves out, whenever they get into troubles usually orchestrated by them and their allies. On the contrary, many small entrepreneurs, according to him, face corporate death and actually die without any bailout from Washington. My attention was captured by this point because we are currently going through an era of bailouts in Nigeria.

We recently handed out billions of naira to state governments, who ran their states aground and had the courage to tell Nigerians on national television that they could not pay salaries. By throwing the unconditional bailout funds at these less-than-averagely-proficient managers, we have just approved business as usual. If incompetent managers are allowed to run companies aground and shareholders refinance lost capital this way, then capitalism will soon come to an end.

Some have wondered why so small a number of civil servants would wreak so much havoc on the economy through salaries that are often dominated by ghost workers and we bail them out unconditionally. In a similar fashion, big banks are bailed out because they are “too big to fail”. One hopes that corporate entities like the MFBs are not in any illusion that such benefit may be extended to them if they allow inefficiency to ruin them. Ironically, it is these MFBs and their kind that employ the bulk of our people. So this is not the time to operate in oblivion of their operating environment.

MFBs must deal with inefficiency. The negative comments on microfinancing are a reflection of the declining performance of operators. The cost of inefficiency is being transferred to clients and the implication is beginning to show in a continuously rising cost of operation and pressure on clients. This pressure is coming in the form of high cost of funds and other services of microfinancing institutions and this is the source of the attacks on the industry we mentioned in an earlier piece.

A disturbing part of the attacks is that some of the critics actually used Nigeria as an example of places where the industry is not functioning properly or where credit facilities are too expensive that the poor are unable to use them beneficially. I believe there is need to take every criticism very well and positively but seriously. It is therefore important that operators in Nigeria review their strategies to see if they meet the selection criteria for a poverty reduction activity. I doubt if many do.

I think there is merit in the critical opinion ringing out against the cost of microfinance services, especially microloans, in many countries, including Nigeria. I also believe that such high cost of loans derives from inefficiency in resource use on one hand and inappropriate business strategies on the other. This situation can only be properly addressed when operators adopt the right business models. It is likely that many have veered off line in terms of strategic focus. We need to look again at many things including the clientele, type, size and variety of loans and the business model in general. In particular, operators need to sharpen their focus on cost drivers. There seems to be a need for proper identification of the cost items that are the ringleaders in the high cost of operation in MFBs.

Emeka Osuji