It has been said time and again that Nigeria’s soaring unemployment, poverty and inflation rates can be tamed by leveraging the informal economy, but numerous challenges continue to hold down the sector. Godwin Ehigiamusoe, former CEO of LAPO Microfinance Bank, speaks with Chuks Oluigbo on how the vast potential of Nigeria’s informal economy can be realised. For Ehigiamusoe, improving credit access for the informal sector and reducing financial inclusion gender gap are key, as well as building the capacity of informal sector players to adopt data and digital tools. Excerpts:
The informal sector suffered huge losses as a result of COVID-19. Current government interventions, however commendable, may not be enough to mitigate these losses. What do you consider as additional steps for the government to safeguard these businesses as the world opens up and economies recover?
Preempting the dire socio-economic consequences that would arise as a result of the pandemic, the Federal Government provided a N2.3 trillion stimulus package, a notable effort towards addressing the financial constraints of MSMEs in the country. However, institutionalization of the various commendable interventions is necessary to effectively address the multiple challenges on the path of informal economy’s recovery.
Prior to the pandemic, MSMEs already faced several hurdles that hindered their growth and participation in the economy; access to finance, regulatory bottlenecks, infrastructure deficits, etc. As many as 98 percent of MSMEs in Nigeria have low asset values, implementing the zero-balance account opening directive will help onboard them into the formal financial system and increase access to finance and credit through loans. Currently, only 10 percent of MSMEs are able to access the full loan they applied for.
This is attributable to various factors such as high interest rates, insufficient collateral and the perception of risks associated with MSMEs. These issues exist due to the absence of an institutionalized informal sector identity and credit history systems, making it expensive to provide credit to players. It is, therefore, necessary for the government to take the lead by providing innovative solutions and incentives to encourage private financial institutions to review the way in which MSME risk is evaluated and to identify the potential policies and services that would help to grow these businesses.
Bringing all of these together, all stakeholders shall collectively seek sustainable solutions to protect the informal sector. The challenges highlighted need to be addressed quickly to ensure that our vulnerable informal sector does not continue to suffer during and after major shocks like the COVID-19 pandemic by creating an enabling and friendly environment.
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One significant revelation from the pandemic is the strength and importance of leveraging data and digital tools across the informal sector’s entire value chain. What is the role of the private sector in this development?
Many businesses experienced a revenue shortfall due to decreased demand for their products and services. MSMEs were particularly affected; most of them were unable to move their services online and could not afford to repay loans or fulfil other contractual obligations such as paying salaries.
Public-private partnerships have been highlighted by international organizations like the United Nations as a crucial pathway to development. The private sector should work in collaboration with the government towards augmenting the modest success of regulatory efforts. We saw this play out in Malawi where the government, in partnership with GiveDirectly, set up NOVISSI, a digital platform to raise funds to support vulnerable groups in the country. In Kenya, the government through an e-voucher programme provided a means for smallholder farmers to access subsidised farm supplies to ensure that they could continue to do business even in the face of scarce resources. Also, private sector-led initiatives that work directly with vulnerable groups operating in the informal sector have access to useful data that will aid issues tracking and disbursement of loans.
Private sector synergy with the Federal Government and corresponding investments can ensure that available data is well documented, readily available and accessible and used to design solutions for effective targeting. If more private sector players invested and found ways to leverage digital and data-driven solutions for the informal economy, it would complement existing government initiatives and create space for deeper and broader engagement with businesses while also improving their operations in harsh conditions.
Capacity building is another major challenge facing the sector, most especially in terms of upskilling micro and small businesses in the nitty-gritty of digital transformation. How can the private sector partner more with the public sector to fill this gap?
No doubt digital transformation, technology can make a difference in increasing the output of any business, especially as the world continues to adopt digital. This knowledge is acutely lacking within our informal economy. However, there is a potential for many to access more opportunities if they can deploy digital solutions.
Here, there is an ample opportunity for intervention by the private sector actors. Concerted efforts are required to provide needed capacity building initiatives that equip players in the informal economy with the right levels of skills that can be deployed for their micro and small businesses. The digital solutions and the capacity building initiatives may even be as simple as building on existing low-level digital solutions or leveraging existing structures to identify more innovative ways to deploy them.
Leveraging the informal economy has been established as a viable solution to Nigeria’s rising unemployment, poverty and inflation rates, but it seems to be underutilized. What specific things must be instituted or changed to ensure that the sector can utilize the potential? What country can we hold up as a case study in this regard?
Realising the vast potential of the informal economy, especially as a vehicle for employment, is predicated on improving access to credit and an intentional reduction of the financial inclusion gender gap. In most economies, MSMEs are the backbone of the economy. Ours is not an exception, with a significant contribution of 49.78 percent to the GDP. They certainly can do more.
However, innovative interventions are required to address the inhibiting policies and barriers to access to a range of financial services, particularly credit and microinsurance. Nigeria can look to Kenya for inspiration in this regard. ‘Jazaduka’ (fill up your store) is an innovative solution in Kenya that addresses the lack of access to capital as a significant barrier to growth for MSMEs.
Acknowledging that MSMEs cannot produce financial reports to enable financial institutions to assess their repayment capacity and default risk, Unilever in partnership with Mastercard and Kenya Commercial Bank (KCB) launched ‘Jazaduka’. Jazaduka is a digital working capital platform that empowers micro-entrepreneurs with working capital through offering credit in a cashless system that will enable the retailer to buy what they can sell.
The platform combines distribution data from Unilever and analysis by Mastercard, on how much inventory a retailer has bought from Unilever over time. The results from the analysis are used to provide a micro-credit eligibility recommendation to KCB. Consequently, MSMEs in Kenya are being enabled to move from a cash-based system to a more formalised way of doing business with new opportunities for obtaining credit.
The platform was launched in 2017 and has already reduced cash-flow challenges of over 20,000 merchants and small distributors by providing working capital, with enrolled businesses experiencing a 20 percent growth in sales on average. Also, about 62 percent of participating merchants have been able to access formal bank credit lines for the first time.
The financial inclusion gender gap is another major challenge that must be resolved if the country is to maximise the potential of the informal economy and achieve the targets set in the National Financial Inclusion Strategy (NFIS). MSMEs owned by women face additional challenges: they have less access to collateral and limited access to financial services.
There is a 14 percent gap between men and women that own bank accounts. The COVID-19 pandemic exacerbated these challenges as several studies confirm that more women have been pushed out of the formal financial system. There is no harnessing the potential of the informal economy without implementing policies and frameworks that specifically address women’s financial inclusion and access to credit.
We have seen an increase in tech capital raising which we often celebrate because of its capacity to unlock value. However, micro-enterprises do not seem to enjoy the same levels of benefits of capital investments even though they are delivering value – albeit at a lower level – and consistently. How can investors be encouraged to invest more in micro-enterprises, either through intermediaries or multilateral?
The CBN introduced a policy mandating commercial banks to lend at least 65 percent of their deposits. This is a critical step in the right direction, as it has birthed a variety of new loan schemes, including Access Bank’s Payday Loan, GTBank’s Quick Credit, etc. However, this policy intervention, while useful in deepening broader access, has limited impact for MSMEs, such as low-income women who have low education and no trust in formal financial institutions.
More interventions which target the subset of the population – for instance, women and youths – that is most marginalised and in need of financial services will be required if they are to have the desired impact on MSME growth in the informal economy. The best solutions are rooted in the local context.
Take, for example, Bankly, a Nigerian fintech for the unbanked which just made $2 million in a seed round, which proves that an important way to attract investment is through innovation. Bankly’s model digitizes the informal thrift collections system known by different names such as esusu or ajo.
By digitizing a system trusted by many unbanked people, Bankly is able to gradually create an online banking presence for customers, while solving the problems associated with these informal systems of saving or collating capital such as security, location-based access and customer data. More innovation within the private sector as well as favourable government policies are necessary to attract more investment for MSMEs.
At a media parley recently, you touched on the benefits that could accrue to people within the informal sector if health and education interventions worked with grassroots organizations to use their data in allocating micro-insurance to the informal sector to help them reduce heavy expenses on those two line items. Could you elaborate on this?
There are many benefits that could be available to people within the informal sector if the government or developmental health and education interventions worked with grassroots organizations. Data generated in the process are valuable in creating access to micro-insurance for people in the informal sector and making such interventions in a more efficient manner.
Gradually, this would move the process away from any short-term interventions and institutionalize these services in a way that allows all parties to work seamlessly to create a pathway for everyone to benefit from such opportunities and escape poverty.
Different ongoing processes in Nigeria, such as the current drive for citizen identification, the role of private businesses in the financial space to move people from unbanked to banked and help them save their money in more secure forms, as well as other financial literacy programmes, point to the gradual formalization of our informal sector.
Institutionalizing these interventions is important because it means going beyond providing business credits and developing other areas like micro-insurance for healthcare, educational support, both of which require huge expenditure from lean financial resources by households at the bottom of the pyramid. Ideally, private-public social interventions are a way to create direct supply linkages and collaborations with micro-enterprises as well as a consolidation of the concept of social business as a way to reduce poverty rates and improve economic outcomes.
Many microfinance banks and other financial service providers have adopted moratoriums and reduced/no interest rates for small businesses to curtail the effect of COVID-19. What is LAPO doing differently and how does it change things?
Normally, support in this respect consists of moratorium for loans and review of pricing. Further steps were taken to get our clients, who were most impacted, back on their feet. As we were getting out of the first wave, an extensive survey was conducted to determine the extent of the impacts on enterprises, liquidity and, of course, to determine their funding needs.
LAPO MfB’s partnership for access to insurance policies which dated back to 2013 has come handy in assisting clients to deal with the current challenges. Many wanted loans of higher sizes outside of LAPO’s loan size guidelines, we accommodated this and made necessary adjustments.
From January 2012-December 2020, LAPO Microfinance Bank has disbursed over N27 billion reaching over 34,000 farmers and agro-allied operators across Nigeria. What’s the level of impact after eight years? What more can be done?
In 2012, LAPO Microfinance Bank decided to develop loan products that specifically meet the funding needs of farmers. Prior to that, some of our clients were diverting part of their regular loans usually well suited for commerce into agriculture. Across the country, LAPO MfB is a major actor in the Agricultural Credit Guarantee Scheme. The department of the CBN in charge recognizes and acknowledges this accomplishment. Finally, LAPO MfB’s commitment to agricultural lending is based on our belief and conviction that microfinance should be made relevant to agriculture in Africa.
