The concept of cost has been a very important thing to humanity. Every successful business owner understands that expenses are like the swimming pool. There is not always a sharp divide between the shallow and the deep side. Amateur swimmers playing at the borders may find themselves drowning in the pool as water suddenly draws them to the deep side. Allowing unnecessary cost to mount is a risk no business should take. No wonder a whole body of knowledge called Cost Accounting has developed. The founding fathers of the Accountancy profession must have figured that if the cost of running an organisation is allowed to run away, it might take with it the heart of the business – its capital.
Capital, being fundamental to the existence of a business, is like oxygen. You have it and you have life. Without it, all kinds of complications, including COVID-19-type symptoms, such as respiratory tract infections, will begin to manifest. Delay in finding remedy for capital inadequacy may lead to death. Like the asymptomatic victims of the rampaging COVID 19 pandemic, corporate death may occur, without much notice. The symptoms of capital shortage are also dire and sometimes mimic those of the pandemic. Shortness of breath, or corporate life, if you like, is the scariest one.
In essence, like a COVID-19 patient, a business that lacks capital could die suddenly. This is why all efforts must be arrayed in favour of continually educating our entrepreneurs on the significance of capital in the life of a business, and to make sure that every business entity raises and maintains the right level of capital at all times.
The microfinance industry is a vital agent of economic development. Its members serve the poor and most vulnerable members of the society who, incidentally, constitute the life wire of their societies. The Micro, Small and Medium Enterprises (MSMEs), which they serve, account for about half of the world’s Gross Domestic Product and three quarters of its jobs. In many societies, this segment of the economy accounts for well over 60 percent of all economic activity. The financial institutions supporting this critical segment of the economy are doing a national service and must be protected through the application of public policies that impact them positively.
The challenge of booking fresh loans, to support a devastated clientele, at a time when most existing loans are tending towards bad and doubtful debts, is one of those conflicting objectives that economists have spent generations working towards, but never reaching the answer beyond the elegant concept of trade-offs.
Unfortunately, poor capitalisation is rife among MFBs, making it difficult for them to effectively deliver meaningful service to their clients. This is why the ongoing effort to douse the impact of the current pandemic on the MSME sector must be implemented with a view to also strengthening the microfinance institutions that serve them. As governments work to return spending power to households, and restore consumer demand, we must also guide MFBs, and indeed other microfinance service providers, to brace up and do what is necessary to sustain their operations, in the face of evaporating cash flows – manage their costs.
The effort to restore normalcy in the sector, I believe, should begin with directing policy action towards mitigating the effects of the capital erosion now confronting players in the sector. While financial palliative action to restore activity in the MSME sector, including the moratorium on repayment and interest rate cuts, which will help MSMEs clients, are proceeding apace, it would be necessary for MFB operators to take certain important steps of their own to promote early return to normalcy. One of such internal steps would be to directly confront the challenge of cash flow disappearance now evident everywhere.
MFB clients have suffered business failure and there is no way they would be expected to continue to service their loans effectively. The risk of default is now very highly probable. Unfortunately, while existing loans are not coming back in a hurry, there is a heightened demand for cash among the clients of MFBs. This means that operators have to find ways of supporting their clients’ cash needs, one way or the other, despite the difficulty of recovering existing loans.
The challenge of booking fresh loans, to support a devastated clientele, at a time when most existing loans are tending towards bad and doubtful debts, is one of those conflicting objectives that economists have spent generations working towards, but never reaching the answer beyond the elegant concept of trade-offs.
The effort must begin with effective cost containment, which itself starts with a clear picture of the costs in a typical MFB or enterprise. I have always said that conserving cash is the perfect corollary of income improvement. If cash is not coming in, then conserve what is available by cutting all expenses and eliminating unnecessary ones; and they are many at every point in time. That way, we achieve the same purpose of increasing available cash, simply by spending less.
In Nigeria, particularly in the public sector, when executives say they are implementing cost reduction programmes, they mostly focus on salaries and wages, which are no doubt often substantial, but only a small part of the problem. In more ridiculous cases the top shots offer cuts in their own salaries, making a mockery of the idea of cost containment. MFBs must therefore affect real cost containment, which is not the same thing as cutting costs. It is more than that. They must contain their costs at this critical moment to shore up the needed cash to continue supporting clients, even as cash gets scarcer. Therefore, clear understanding of the cost drivers is critical to cost containment.
In this regard, I would like to group the cost elements of an MFB operation into two broad segments, for ease of analysis. They are the Cost of Sales and the Cost of Selling. Financial institutions, particularly those engaged in financial intermediation, are in the business of buying and selling a commodity called money, simplicita.
Accordingly, they incur costs to buy money (cost of sales) and when the money is sold (lent out), some costs also happen. Interest expense is the cost of the money bought either as fixed or savings deposits. A smart bank must keep an eye on its interest expense and, as much as possible, dilute the impact of high cost funds on its Net Interest Margin with the soothing effect of low-cost deposits.
On the other hand, in the course of running the operations of the bank, costs are incurred in the form of wages and salaries, business promotion and even deposit insurance. These are operating costs and may be classified as the cost of selling. It is important for MFBs to clearly understand the dynamics of each cost element, and gain mastery over it. For instance, if account officers understand the importance of Net Interest Margin, then they will not require much admonition to focus on cheaper savings deposits and limit emphasis on costly corporate deposits, in their efforts to grow liabilities.
