Of sight and sound in microfinance

Last week, we drew attention to the importance of knowledge; not the knowledge of economics and finance, but the knowledge of the environment within which a microfinance institution operates. The point we tried to advance is that a business cannot be built in a void. Government policies shape the conduct of men and organizations. Public policy shapes the environment and the environment in turn shapes the people. You can glean the character of a government from the way its people behave. When you come into a country and see everybody in a hurry, just watch out. You may have arrived in a country where dog eats dog and due process is alien.

Why do you think Nigerians are forever on the run? They know that people don’t take turns here and there is no protection for those who wait for their turn. That is why a man walks from the VIP lounge straight to the door of the air plane and goes in while others wait. And before you know it the plane is full and that is it.

Since the poor are usually the hardest hit by tough government policies, MFIs must begin from the outset to familiarize themselves with the forces that shape their operating environment. That is what the country contextual argument is about. We want to further that point of view by linking it to the importance of communication with the client.

The complex web of growing bad, doubtful and delinquent loans plaguing the subsector has its roots in poor credit culture. When some people hear the term poor credit culture they think of poor knowledge of credit analysis or the quantitative work that surrounds the creation of risk assets. Far from it: poor credit culture is a lot more than inability to write good credit. There are certain things a lending institution, especially those dealing with the high risk, low unit variety envisaged in microfinance, must never do – mixing charity with business or forgetting the difference between handouts from NAPEP and microcredit from a microfinance institution. Or worse still, putting its cash in the hands of anyone it does not know very well. This point is so important that even banks, with all their might, dwell so much on the mantra of KYC- Know Your Customers.

Knowing your customer or client is actually borne out of common sense. Even con men act differently when they meet people they know. Complete strangers may not enjoy such benefit. People are said to always put their money where their mouths are. For an MFI this should be interpreted to mean putting your money only in the hands of those you know. So how come microfinance institutions often disobey this rule? The answer is very simple. In Nigeria, the culture of being in a hurry and rushing to gain advantage has taken root. Well, this is part of society’s response to the perennial shortage of most basic things. We rush for everything imaginable. That may work everywhere else but unfortunately not in microfinancing.

The first duty of lending officers is to engage with the community within which the institution is planted. This will expose them to the culture of the people. The cultural background of clients is very important. It is sometimes the most important driving force in their credit behaviour. There are people who see loans or any money from other people, especially financial institutions, as something that must never be repaid; but as their share of the national cake. If this kind of culture is prevalent, then walking into such people and booking credit without deep interaction is like a stroll in a minefield.

Having properly engaged with the community, the loan officer now has the opportunity not only to understand their cultural beliefs, but also to see if his business model fits into their culture. Some cultures may inhibit his business and run contrary to his business model. The problem is that many microfinance institutions have no business model. They do much of their lending on the spur of the moment and at whim. That is a terrible thing to do. When you deal with people whose fortunes could change at the blink of an eye, then you must know the meaning of staying close to clients.

Microfinance is actually more demanding of intimate interaction with clients than regular banking. Here, the clients hardly have proper fixed addresses. Moreover, their names do not pop out when you go to Google and, in fact, they can relocate very easily, if push comes to shove. How to deal with some of these challenges has been the focus of much research. The lending methodologies that became standard for microfinancing came about in the course of looking for how to depersonalize the individual client in the transaction.

However, practitioners will agree that those methodologies have their own limitations and somehow we find that it is difficult to truly depersonalize the credit as to overlook the borrower completely. So the individual borrower, though a member of a proper group that can be trusted, still has to be reachable to take some level of responsibility for his repayment. The evolving trend today is that group lending that tended to hide the individual client or put him in the background is no longer the vogue.

The evolution of commercial microfinancing even makes it more imperative to bring the individual to the fore. And the individual client is becoming more assertive and would prefer to take responsibility for his loans. So, whether we are using group or individual lending methodology, we cannot over-emphasize the need for proper understanding of the clients we serve in microfinancing.

There is no better way to pick up vital information on the environment and people than staying close, talking to and listening to them. It is from this kind of interaction that we learn the truth about the client’s business, products, cash flow, seasonality facts about the business, past or present borrowing history etc. For an environment in which credit bureaux have not fully evolved, operators need nobody to advise them on the value of a little extra work that better secures their loans.

Patience is one virtue that has taken flight from this part of the world. The race for growth and pursuit of market share has led to a lot of impatience among operators, even in areas where patience ought to be the hallmark. Microfinance practitioners should do a personal test in this regard. Just ask yourself how well you know the clients to whom you have given your money. Are you close to the cooperatives whose members have your money? In the absence of their leaders, can you reach the members of the group to whom you lend?

Successful poverty lending requires that you engage the client and literally suck him in and then exchange financial resources of savings or loans.You must sight the client, hear the sound of his voice and then do business with him. In other words, microfinance is a matter of sight and sound. Those two must be in place before you can fruitfully lend.

 

Emeka Osuji