Economic growth: The microfinance banks option
But given the enormity of her developmental challenges, many including the international business community, believe the financial services industry has the elixir for resolving the economic dilemma confronting the nation.
Such sentiments perhaps underline the tumultuous applause that greeted the Central Bank of Nigeria’s financial sector reforms, which heralded the micro finance-banking sub-sector in 2005.
Indeed at no other time has the business community displayed so much confidence on the nation’s economic reform initiatives, than was shown during the banking consolidation programme supervised by the CBN itself.
At the official launch of the microfinance policy and framework on December 15, 2005, the Central Bank of Nigeria Governor, Chukwuma Soludo, noted that Nigeria may not achieve a robust economic growth without putting in place well focused programmes to reduce poverty through empowering the people.
That, he argued, would be realized faster if citizens’ access to factors of production is enhanced, especially if credit is expanded and simplified. Soludo said the microfinance initiative was about providing financial services to the poor, who are traditionally not served by the conventional financial institutions.
While admitting that the formal financial system provides services to about 35 per cent of the economically active population, the CBN boss wondered what the fate of the remaining 65per cent, which according to him, are excluded from access to financial services would be in an economy dominated by small and medium scale enterprises.
It then follows that the 65 per cent could often be serviced by the informal financial sector, through non governmental organizations (NGOs), including microfinance institutions, moneylenders, friends, relatives and credit unions, among others.
He then argued that harmonizing the regulation of the activities of some of those institutions could help to promote monetary stability and ensure a sound financial system for Nigeria and the business community.
In essence, the nation’s microfinance policy was introduced in exercise of the powers conferred on the Central Bank of Nigeria by the provisions of Section 28, sub-section (1) (b) of the CBN Act 24 of 1991 [as amended] and in pursuance of the provisions of Sections 56-60(a) of the Bank and Other Financial Institutions Act [BOFIA] 25 of 1991 [as amended].
That policy recognizes existing informal institutions and brings them within the supervisory purview of the CBN, thereby creating a platform for the regulation and supervision of microfinance banks (MFBs) through Regulatory Guidelines.
It was also in its desire to harmonize the regulation and enhance the functionality of the business that the Central Bank directed all community banks to convert to microfinance banks.
As at the last count, the list of registered microfinance banks, including those that converted is in excess of 700, although the CBN expects the figure to double or triple at the end of the registration exercise. This is largely so because the apex bank knows the degree of developmental challenges that the managers of the nation’s economy have had to contend with in their desire to join the league of 20 most developed economies come 2020.
In the meantime, there seems to be a consensus among experts including the international community that the answer to Nigeria’s poverty and economic decadence could be effectively tackled by empowering the small and medium-scale industries.
Managers of the Nigerian economy are often attracted by the exploits, which other emerging economies of South East Asia and Latin American states recorded through the empowerment of SMEs
The Asian experiment has become an attractive option for Nigerians, considering that a mere assessment of her industrialization bid from independence raises many questions and more nauseating experiences listing the number of industries that have had to close shop, owing to lack of capital and the enabling environment for businesses to grow. From textile industries, food processing, agricultural, light manufactures and automobile industries, the story is worrisome.
But the truth is that the dearth of investment has not helped the Nigerian businessman and its economy, which could also have been the reason the CBN is insisting that the grassroots economy needs some financial relief.
Since 2005 when the apex bank began experimenting with the idea of setting up microfinance banks, as part of its 13-point agenda to lift the Nigerian banking industry and economy to rank among the 20 leading economies in the world, many have come to the conclusion that the road map for sustainable economic development was gradually being laid.
However, by their operation, the microfinance banks are to complement the activities of conventional banks by attending to institutions and individuals, which the big banks cannot conveniently reach.
Grounds for optimism
As an emerging economy, it is believed that more than 70 percent of Nigeria’s 57 million working population is engaged in the small and medium-scale enterprises. Unfortunately, businesses in the sector have had to be run in some crudest manner owing to lack of access to cheap financial windows.
More importantly, thousands of budding entrepreneurs have had to die with their dreams because there is no ready access to raising funding for such ideas.
Most of such entrepreneurs lack the collateral securities required by the conventional banks to access funding for business expansion and related expenditure.
However, many have argued that with the establishment of the microfinance banks, a major hurdle to the nation’s economic development has been addressed, since one of the hallmarks of credit administration in the emerging dispensation is that Nigerian entrepreneurs could get loans without much hassles, in contrast to their experiences with conventional banks.
According to the CBN, the concept of microfinance banking was predicated on helping the poor entrepreneur to realize his dreams, thereby contributing to the economic growth and development of the nation.
For the nation’s apex banking institution, which also supervises the sub sector to ensure efficiency, it has since made it clear that it was no longer going to be business as usual for the promoters of microfinance banks. The new microfinance banks were established to provide funding and financial advisory services to small-scale manufacturers, suppliers and others engaged in other forms of economic activities, whose businesses are often stunted as a result of inadequate funding.
Unlike the era of community banks when many institutions existed to serve the political interest of the promoters, the situation might be different for the microfinance banks, which have been brought under the supervisory purview of the CBN and the NDIC.
With the number of applications swelling by the day, observers have argued that the segmentation and efficiency that the microfinance business will unleash on the nation’s financial services sector would go a long way to helping Nigeria achieve its industrial and economic objectives faster than expected, provided the regulatory environment remains right and focused.
To demonstrate that they are serious with the project, the authorities have already arranged a deposit insurance for the microfinance banks customers with the Nigerian Deposit Insurance Corporation, in the event of failure. Like customers of conventional banks, depositors in microfinance banks would be entitled to N100,000 payment in case the institution collapses.
Although the concept of microfinance banking is just taking root in Nigeria, it has a rich history in America, Europe and South East Asia, where it has helped to revolutionize their various economies to enviable standards.
In all those economies, the overriding philosophy was basically to meet the grassroots economy, which the conventional banks were unable to address.
At the same time, these microfinance banks were also expected to act as agents of savings mobilization in the grassroots economy, where even the Central Bank has acknowledged, lies abundant pool of idle funds.
Mrs. Funke Osibudu, Chairman of Citiserve Microfinance Bank, said the supervision and monitoring of the sub sector, would be better than it was during the era of community banks. She noted that it would no longer be business as usual because the objectives of the business must be met.
She told Daily Sun recently, that prospects for the industry was very huge, particularly as the business is currently being directed by more serious players in the financial sector.
However, she noted that there was a need for the regulators to ensure that the licensing process is meant only for serious players, who have quality management and who have the intention to help the business to grow.
She advised that the CBN should watch out for those promoters who have no genuine intention to add value to the economy through quality product and services to the customers.
With regard to competition in the microfinance industry, Osibudu said there was nothing wrong with competition, but it was meant to make the customer to truly become king, adding that there was need for competition to exist, so that the customer would have choices to make from the lot that are in the business, and get the best from the market place.
She remarked: “ I see that happening because as banks go beyond the capital raising and settling down to business, you need to use that capital in a quality way, and that is by having customers. Getting customers is one way we will soon begin to see new initiatives as the times go on.”
In terms of technology, Osibudu said that just as everybody is now carrying cell phones, customers of the microfinance banks would also have the opportunity of using some of the electronic cards in the course of their transactions
According to Mr. Kehinde Michael Alaba, Managing Director and Chief Executive of LMFB Microfinance Bank, at the Lagos State University, Ojo, Lagos, microfinance banks are essential for economic improvement of the nation.
He pointed out that economies of countries like India, Pakistan, Philippines and other developing nations where the concept of MFB has been implemented have remained vibrant over the years.
In the case of Nigeria, Mr. Alaba argued, the business would thrive in the economy given its robust nature and the abundant natural and human resources, stressing that their introduction would generate more activities in the economy, while opening windows for more businesses.
On the conditions for obtaining loans from MFB, Alaba said banks are designed to serve both corporate and individual customers. He said the MFBs may not be too keen in extending financial support to unregistered companies, pointing out that before such support is given to any group or organization, it must be advised to register with the Corporate Affairs Commission.
He said that apart from assisting to establish a mutually rewarding relationship with the customer, others include giving them free financial advisory services.
Businesses that fall into this category include school proprietorship, trading, and craftsmanship, most of which operate with unregistered names.
He stated that in order to monitor their activities, specific customer relations officers of the microfinance banks are often assigned to assist them consolidate their books and also to collect daily sales.
Over time, such customers would be entitled to loans, which are also strictly monitored to ensure there are no abuses.
The LMFB boss insists that the beauty of dealing with such customers is that there is a daily transaction and interface between the bank and its customers to the point that the institution would be watching the customers grow in the business, while providing the necessary financial support.
Customers that operate under a cooperative are supported with funds, which can be lent to members, thereby reducing the risk of non-repayment.
However, while in conventional banking circles, an individual client can be given several millions of naira in loans, microfinance banks, because of their unique target market and modus operandi, would prefer to give customers loans ranging from N20, 000.00 to N100, 000.00 as the need arises.
Another main feature of the microfinance banking business is that lending is tied to cash flow position, rather than collateral.
According to Mr. Alaba, microfinance banks are established to lend against the background of cash flow and ability to pay back in time and not the quality or size of collateral provided by customers
The question of cash flow for microfinance banks is symbolic, because operators are expected to use it to encourage customers to imbibe savings culture, which is lacking in most grassroots economies in Nigeria.
In one of the most controversial elements of conventional banking, intermediation activities is that of interest rate. Rightly, some analysts in the Nigerian banking sector have likened borrowing from commercial banks to suicide mission on account of high interest rate charged on loans to entrepreneurs.
For the Nigerian entrepreneur who is operating under a harsh and unpredictable fiscal environment, it would tantamount to a suicide mission to borrow at 35-45 percent interest rate and still be competitive at a time credit to the real sector in South East Asian countries and Europe is less than 5 per cent.
The question of interest rate is so crucial to the Nigerian businessman who had had to provide from his working capital most of the infrastructure that are usually taken for granted in other economies.
But, according to operators of the microfinance banks, customers are charged an interest of between 21 to 22 percent per annum, which translates to a monthly average of 2 percent.
Many see this level of interest as being consistent with the philosophy of thousands of small-scale entrepreneurs who have been looking forward to some form of financial lifeline to expand and build their businesses over the years without success.
Mostly, loans are given for six months tenor, with possibility of renewal at the expiration of the time.
But could that be safe for any one to proclaim a new dawn for the micro businesses spread across the country or are there still some threats to the survival of the sub sector?
Giving his impression on what the microfinance institutions hold in store for the nation, Alhaji Ashimiyu Onifade, a furniture maker and customer to a microfinance bank, said that the era of microfinance banks would mark a new beginning for Nigeria’s economy.
He said he decided to pitch his tent with one of the MFBs because of its personalized services to customers. He argued that unlike some of the conventional banks, the microfinance banks are more accessible and have, within the short time, operated shown that they are there to provide the financial services needs of the grassroots economic actors.
Alhaji Onifade said he would continue to support the Central Bank of Nigeria (CBN’s) effort in empowering the lowest tier of the economy through microfinance banking, considering that they have come to fulfill a need for a sector that was neglected for many years, stressing it was his wish that the project succeeds, so that people operating at the grass roots economy would have easier access to funds to help them do their business and create wealth and employment.
On his part, Pastor Timothy Ayeni, a microfinance bank customer, who spoke with Daily Sun, said that some of the institutions are doing very well at the moment, considering that they had just started the business a few months ago. Although, he stated that he had not made any application for loan or financial assistance from his bank, he was looking forward to doing so in the nearest future when they would have stabilized.
According to him, what is important now is that the microfinance bank is helping him save money on a regular basis from his little income, a situation that was not possible in the past through any of the 25 banks.
He said he was also looking forward to more improvements as the institutions mature.
But according to Mr. Adebayo Babatunde Kareem, a businessman, competition is going to drive some of the banks under very soon. He observed that any microfinance bank that fails to invest in information technology or improve on customer relations activities may be shown the way out.
Mr. Kareem said bank customers at all levels would want to enjoy efficient service delivery and may not want to spend the whole day waiting in the banking hall to do a simple transaction, advising that the operators of the sector should ensure they invest more in activities that will improve on the customer service. He said that banking services in both the rural and city setting ought to be very fast, because everybody now value time.
Fears about MFBs
There is, however, growing anxiety and concern among Nigerians that the frenzy of microfinance banking may soon die down, as it did during the era of finance companies and primary mortgage institutions.
At least, not many Nigerians would forget in a hurry how billions of naira went down the drains, when finance houses were hit by a major crisis in the 1990s.
Part of the reasons that precipitated the collapse of the finance companies in that dispensation included the flagrant mismatch of resources by those managing them. Most managers, for instance, were said to have used short-term deposits to finance capital projects for state and federal government agencies to the extent that many could not withstand the shock of the blast. There are still indications that the present managers of microfinance banks may still fall into the same trap which ensnared the finance companies
Another major worry, according to some observers, is the dominance of individual or sole proprietors in the equity of most MFBs. Since the shareholdings are concentrated in a few hands, there would be no guarantee that credit allocation would be as fair as envisaged by the CBN
It has been discovered that despite CBN’s assurances that it would tighten up supervision, many believe that the influential shareholders could still be calling the shots in determining the flow of credit in the various banks and this may not be beneficial to the micro businesses for which the institutions were set up.
These abuses could arise from breach of corporate governance codes, by some influential elements hence the call for laws to dilute the ownership structure in order to dilute personal interest in favour of group of shareholders. This, according to some analysts, was partly responsible for the poor performance of many community banks in the country before now.
There are also fears that inexperienced human capital at the disposal of the microfinance institutions may create room for fraudulent activities, with the resulting weakening of internal control machinery which the banks may not be able to handle.
Now, some of the established MFBs are known to have consistently lost some of their quality staff to the big banks who are evidently competing for funds and customers with the village or grassroots banks.
This becomes more worrisome considering that the MFBs do not have the kind of resources that the big institutions have to hire or train staff to meet their needs.
As would be expected, majority of the staff of the MFB would in line with their new assignment require special training to cope with the demands of a new and specialized market, as well as customers, majority of who have had no formal conventional banking and saving habit prior to the new relationship with the microfinance banks.
What can be done to sustain the MFB sub-sector?
Micro finance banks by their nature are small operators in the financial service industry.
As a result, they are expected to be cautious with their expenditure, bearing in mind the number of clients they are targeting to serve in the economy
But several months after take off; operators are concerned that the operating environment has remained very harsh, as power, road, transportation and other costs relating to their business and clients have remained an issue. It is against this background that many are calling on the government to improve on the key economic infrastructure, so that the institutions can operate more profitably.
Prominent among the issues militating against their operation is that the operators are still generating their own power, even though they are expected to operate in line with CBN’s guidelines with respect to sources of revenue and charges.
They are asking that the CBN should also relax some restrictions on their areas of operation, noting that their exclusion from access to public funds, foreign exchange transactions was denying them an opportunity to improve on their revenue base which is, needed, to boost funding of the grassroots economy.
They argued that the restriction imposed on them by their regulators would not allow them to move forward and reach and break new grounds in an economy that is so richly endowed.
They are calling on the various governments to emulate Lagos State, which has already earmarked about N5billion for lending to about five microfinance banks to help them strengthen their operation and boost the economy.
In addition to strengthening its supervisory and oversight functions over the banks, many have suggested that given the volume of work expected of them, the Central Bank or the Federal Government could devote some revenue from the federation account to support the operators of the scheme as was done to the agricultural sector through the agricultural credit guarantee scheme.