Sustaining micro financing during wars (2)

In the first part of this piece, we argued that a strong repayment culture, which should be promoted by operators, is a key requirement for sustainable poverty lending activity. Accordingly, we suggested that microfinance banks should consider it important to establish a strong culture of loan repayment among their clients. This culture works to reduce delinquency which heightens in times of crisis, such as war or the current pandemic, when depleted cash flows and disruption in operations are endemic. It would also help to ensure that such disruptions do not automatically translate to delinquency or deliberate refusal to pay loans. Members and clients who are groomed in the discipline of repayment, a culture that doesn’t come easy but takes conscious effort, are critical not only for the stability of the industry during a crisis but also for its long-term.

Long after micro financing had been recognized as a potent poverty reduction strategy in Nigeria, several challenges continue to assail the sector. These challenges, which include paucity of loanable funds, arise largely from the credentials of the operators, which are often unattractive to lenders and other fund holders. This is not helped by their poor capitalization and savings mobilization strategies. Consequently, they are unable to access significant deposits from the public. These issues are being addressed, especially at the policy level, but the funding gap among their clients, especially among the Micro, Small and Medium Enterprises (MSMEs), remains very large. The whole idea of the Microfinance Policy introduced in 2005 is to canalize financial resources to (MSMEs), which are considered to be significant drivers of national economic activity.

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There is a need for a lot of house-keeping – improvement in the character and strength of MFBs, so as to attract funding.

Microfinance banks are expected to help the MSME sector overcome its disabilities that make it unattractive to bank financing. No matter the number of SME desks the deposit money banks set up, and no matter their good intentions, they are pathologically ill-fitted for MSME financing. The Microfinance policy has a main objective of improving access to funds by these very important MSMEs. However, this objective is being frustrated by several factors, including the shallow pockets of microfinance banks and the mostly woolly business models used by many.

The role of the Central Bank in overcoming these challenges cannot be denied. This current central bank, in particular, has been overly bullish in this regard, to the extent that some have criticized it for taking over the role of commercial and development banks. However, those in support of it have referred critics to its developmental functions as justification for what it is doing to fund the economy. The Bank has tackled, very decisively, the challenge of on-lending funds in the MSME sector, by providing an assortment of funding facilities for different segments of the economy that rely on the microfinance sector for funds. The Bank currently has about thirty-seven intervention funds aimed at stimulating different sectors of the economy, and a recent report said that about 500,000 beneficiaries have received about N460 billion as at May this year. A N50 billion loan facility was set up in March 2020, to counter the impact of COVID 19 among households and MSMEs, even though a drop in the ocean has been positively reviewed and substantially drawn down.

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Yet, these funds are still like a flash in the pan, being insignificant for the size of our economy, and the challenge of repayment being experienced by the disbursing agencies. In reality, a sustainable flow of funds to the MSMEs should include but not be limited to intervention funds of the Central Bank. Perhaps, this realization may have informed the recent call on the CBN, by the Association of Microfinance Banks, to create a linkage between MFBs and Deposit Money Banks (DMBs), in order to promote the steady flow of loanable funds to the MFBs. However, the Central Bank has already done much in that regard by creating on-lending facilities. The operators need to do more to facilitate that nexus between them and the DMBs.

It is probably necessary to state that there is a limit to which operators can continue to rely on external support to fund their lending operations. There is a need for a lot of house-keeping – improvement in the character and strength of MFBs, so as to attract funding. The current recapitalization will substantially attend to the challenge. Already there are many MFBs that have continued to grow their portfolio of grants and loans even from abroad. This, and strong deposit mobilizations and savings strategies are the way forward. At a time like this, when war drums are beating and actual displacement of microfinance clients is taking place, there is a need for avenues for replacing funds that are likely to be lost.