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Rethinking microfinance strategies
By Thompson Ayodele and Olusegun Sotola
Wednesday, 30 Jun 2010
Across the world, microfinancing has proved to be an
effective tool for poverty
alleviation and a better approach to development. It is
based on the recognition that
the war against poverty cannot be won without the
poor themselves in the frontline. This is a
critical factor of growth,
particularly in poor societies where business activities
are largely informal and
access to credit is restricted.
One of the objectives of microfinance banking is to
increase access to credit
among local entrepreneurs who do not have the
collaterals to obtain loans in
commercial banks. However, the microfinance bank in
Nigeria has not performed its
expected roles. Women who ought to be its core
constituents are largely underserved. Customers’
confidence has waned with many
vowing never to have anything to do again with
microfinance bank.
With over sixty per cent of business activities being
informal, less than five per
cent patronise microfinance bank. Aside from
concentrating in large cities,
not less than 250 of the over 900-licensed microfinance
banks in Nigeria have shut up shops.
Worried by the incessant closure of microfinance banks
and the
accompanying economic burden on their customers, the
Central Bank of
Nigeria recently embarked on a comprehensive examination
of all
microfinance institutions. Of over 68 microfinance banks
in Lagos, only
six of them were given a clean bill. Given the visible
poor performance and the
dearth of success stories, the result of the CBN’s
examination merely confirms
the extent of the rot in the sector.
Most of the micro-lending operators usually cite unpaid
loans as the cause of failure
to break even. Laying the blame on unpaid loans might
lead one to conclude that the
poor are not credit worthy. This is misleading. Evenin
the poorest countries, the poor save.
A highly successful microfinance bank in Bangladesh is
built on the
philosophy that the poor always pay back. The founder of
Grameen Bank, Muhammad Yunnus,
in his book, “Banker to the Poor,” maintains that poor
people throughout the world are credit worthy and
one only needs to look at
credit and poverty from their perspectives.
Local moneylenders and thrift societies are patronised
and organized by the poor,
particularly women. They hardly shut up shops over loans
repayment. They obviously owe their continued
existence to proper
understanding of micro lending business, their
customers’ needs and the risks
involved in trying to behave like a conventional bank.
Micro-lending that tends to behave like a real bank will
be unsustainable.
While conventional banks build all sorts of risk
mitigating checks into
their loan packages, thereby increasing interest rates
and what is
repayable, trust, peer check and customers’ interest
should be the
cornerstone on which microfinance banks should build
their services.
Many have argued that microfinance bank failure is
traceable to poor corporate
governance. They are correct to a large extent. The key
problem lies with the
conception and operation of microfinance banks.
Ordinarily, a microfinance
bank is not a bank in the real sense, though it renders
financial services. Micro-lending is never
elitist. It is essentially
pro-poor and as such adopts flexible methodology. The
perceived problems of
microfinance banks are offshoot of business designs that
are not mindful of these
important elements.
Unfortunately, many microfinance banks are conceived and
operated like mini commercial
banks. They adopt every vestige of a regular bank. For
this reason, they operate from magnificent
edifice in locations where
residents obviously do not need microfinancing. This
unnecessarily drives up their
overheads and consequently disconnects them from the
people they ought to have
served.
One critical issue plaguing microfinance banks is their
inability to
invest their funds in other sectors. The CBN should put
in place a policy guideline,
whereby a certain percentage of their deposits are
re-invested.
The advantage of this is that such investment will
increase the liquidity base as
well as be a special fund that could be fallen back on
in crisis time.
However, because of the propensity to get quick returns,
microfinance bank managers and
directors might be tempted to invest in sectors they
have little or no expertise,
thereby risking depositors’ fund. In this regard,
there is a need for a framework, whereby the
decision to invest is taken
alongside with the apex bank.
There are reports that microfinance bank capital base
might be jerked up from N20
million to either N100 million or N200 million. While
this is desirable, it will be
counter productive in the long run. Aside from
defeating the spirit of micro-lending, many of
them in the countryside will
die a natural death as a substantial number of them
won’t be able to raise N100
million. The CBN should look at the microfinance banks
outside big cities like Lagos,
Abuja and Port Harcourt. The main challenge for
microfinance bank goes beyond having huge capital
base but their mode of
operations. The commercial banks were bailed out not
because of inadequate
capital base but due to insider abuse, poor corporate
governance and the CBN
compromised its regulatory and over-sight functions.
The war against poverty could not be won when credit
remains inaccessible to over
60 per cent of the population. It is therefore important
that an appropriate regulatory
framework is put in place to get microfinance banks
to really be a partner in the war against poverty
and development.
Already, the CBN is organising training for management
staff of
microfinance banks. One is of the view that content
should emphasize the essence
of micro credit and products must be directed at the
poor.
Though the financial needs of the poor vary, the truth
is that the same law
everywhere governs poverty. An effective micro- lending
bank will need to devise
products that will meet these changing needs and make
repayment to be in the
borrowers’ interest. It is unreasonable for micro
lenders to set interest rate
as high as haggling allows, which is the hallmark of
many micro- finance banks. The genuinely poor are
never in a position to get a
good bargain. It behoves the Deputy Governor, Financial
Services of the CBN, Kingsley
Moghalu, and his team to clearly emphasize these
nuggets: lend money to the poor on terms that are
suitable to them, teach them a
few sound financial principles and they will help
themselves.
A well-trained and well-informed manpower who
understands the concept of
micro financing is an essential factor of success. Staff
of microfinance banks should
be trained to be teachers, advisers and mentors. This
way, they will be more helpful
to borrowers. The most important thing in micro
lending is that operators should not be merely
concerned with the edifice,
computers and state-of-the-art cars. On the contrary,
the guiding philosophy should
be centred on helping somebody to escape the poverty
trap.
Only then can we claim to be waging war against poverty.
- Ayodele and Sotola are with the Initiative for Public
Policy Analysis, a public
policy think-tank based in Lagos.
Thompson Ayodele
Director
Initiative for Public Policy Analysis
P.O.Box 6434
Shomolu,Lagos
Nigeria
Email:thompson@ippanigeria.org
Backup: thompson.ayodele@gmail.com
Website: www.ippanigeria.org
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