• Thursday, March 28, 2024
businessday logo

BusinessDay

Reinventing microfinance

microfinance

Microfinance has its rules, traditions and norms. If you follow the rules, the results pop out nicely by way of improved social welfare for the very poor. Doing otherwise takes you off the planned trajectory. At that time, the need for a change of course becomes even more urgent than the problem intended to be solved. The Nigerian microfinance industry is struggling to find the best way to serve the financially underserved population.

The sleepless nights that gave birth to the Microfinance policy of 2005 have not quite abated. Both operators and regulators are all battling to see significant achievement in the sector. One of the reasons for the struggle is the way the operators have conducted their business. Some have tended to focus on issues other than their calling: making small loans to the active poor and helping them with capacity building. A review of the state of things in the sector suggests, fairly eloquently, that there is need for a refocusing of these institutions. They need to return them to the golden principles that made microfinancing the great success it is elsewhere.

Access to financial services is an accepted channel for promoting financial inclusion, which itself is a strategy for poverty reduction. Available statistics show that over 50 percent of Nigerians are still financially excluded. This implies that most of our people do not use any financial products to deal with their daily affairs, in a technology age.

The situation is even worse in the rural areas where, according to EFInA, a research-based organisation, over 80 percent of the population of Nigeria is unbanked. This is not unexpected, for an economy that is predominantly agricultural with significant infrastructure deficit. Access to financial services would naturally demand greater commitment and focus on the part of service providers in such an environment; and even much more from the authorities. Although we now have about 1,000 microfinance banks operating in different parts of the country, the impact they will make on this mass of unbaked population depends on their understanding of their role and their capacity to perform it, their commitment to the principles of their trade and the resources available to them. However, no amount of resources will help the cause of service delivery if the foundations, evidenced by business models and lending technology is false.

There are evidently, some fundamental challenges, and indeed, failings bedevilling the operation of most MFBs, that may prevent them from realizing even their own internal objectives, to say nothing of the objectives of the policy framework, if not rectified.

The first of these challenges, is the nature of Nigerian microfinance banks as presently structured. According to the definition given to it by experts, microfinancing is the provision of financial services to the active poor. Of course, this has been elaborated to include capacity building support and advisory services. Since poverty is a relative term, we need to emphasise that the term poor in this context refers to the active poor. Perhaps, we may safely state that the focus is on that category of the poor that are willing and able to work, and indeed already engaged in some economic activity but are too weak to defend themselves against the negative wind and weather of the economy.

Financial services here include microcredit, microinsurance and micro savings opportunity offered to the economically active poor. I believe our MFBs, going by their focus and general demeanour, have altered this definition, either deliberately or by error. This is very evident by their look and feel, and spatial distribution, which shows high concentration in the urban areas, where undoubtedly poverty exists but certainly not comparable to what goes on in the rural areas. By definition the economically active poor in a predominantly agricultural economy, like ours, should be found in the rural areas. That being the case, we ought to have more microfinance banks in the suburbs and local communities than in our major cities. We often hold brief for the MFBs by rationalising their preponderance in the cities but we know deep down that it is a problem that can reduce their effectiveness to deal with the poverty scourge.

The result is that even the services provided by MFBs are being redefined or substantially modified, tending to regular banking services. They are now a mirror images of commercial banking services. Thus, an innocent observer may not see any difference between them and the commercial banks, except that they are smaller in size and capital base. There is nothing wrong in wearing the toga of a king, provided one can actually do what kings do. MFBs must therefore not seek to replicate the banking services that have failed to give succour to the active poor.

Many MFBs are doing commercial banking in the name of microfinance. They are focusing on traders, importers, exporters, suppliers and even consultants. These people may well be poor, since poverty is relative, however, they are not the poor contemplated in the National Microfinance Policy. The result is that people for whom microfinance was introduced are again being side-lined, just the way the deposit money banks did. Naturally, these not-so-poor customers are able to pay high interest rates thereby helping raise costs for other borrowers.

The result is that people for whom microfinance was introduced are again being side-lined, just the way the deposit money banks did. Naturally, these not-so-poor customers are able to pay high interest rates thereby helping raise costs for other borrowers

The result is that interest rate in the MFB sector has become very high. As Professor Yunus, founder of Grameen Bank once said, what we have in many places including Nigeria is micro commercial banks and not microfinance banks. This mimicry of commercial banking has combined with other factors to impose high operating costs on the MFBs. For example, operating in the urban centres implies high cost of office space, high wage bills and diminished capacity to create loans. This capacity diminution arises because much of the capital has gone to service overheads thereby impairing lending capacity.

Furthermore, with their capital diminished by high operating costs, many MFBs are struggling with deposit mobilisation, an activity for which they are not particularly famous. The end result is a shallow loan book and low returns from their core business of risk asset creation.

Acting as a micro commercial bank also has implications for the kind of fixed assets an MFB acquires – cars, furniture and other gadgets that attract the urban worker. These factors tend to negate the original intention of the microfinance policy introduced in 2005. This wrong trajectory has hindered growth in the sector and deprived both operators and other stakeholders of the benefits of the policy.

The way forward is for MFBs to return to the basic principles of their calling – focusing on services to the poor, and indeed, the very poor but active enterprising people, particularly in the rural areas. There is no suggestion here that the rich commercial entities, including importers and suppliers who seem to preoccupy many MFB, do not need banking services. They certainly do, but they have other kinds of banks meant for them. It should not be in the menu of MFBs to focus on this group as it would diminish their capacity to deliver on their primary mandate.

This is piece is largely excerpted from my book “Leading Essays on Microfinance” due to be presented on Friday, Nov. 8, 2019 at the NIIA, Lagos.