Microfinancing: Why not much is happening in this sector

• Low Government Patronage
• Lack Of Citizens’ Confidence

In 2017, there were 960 microfinance banks in the country, but it is doubtful if the industry’s branch network or business office would average two in major cities.By the structure of the sub-sector’s operations, which is dominated by lower level classification, it is difficult to see a microfinance in all the semi-urban centres. This is the first challenge to microfinance banking.

The potential of microfinance in poverty reduction, economic growth and development, coupled with the emergence of fast growing Microfinance Institutions (MFIs), has effectively put the issue of microfinance on the political agenda of most developing countries.Consequently, supervisory authorities have taken active measures to ensure an efficient and effective microfinance delivery, through the development of an appropriate regulatory and supervisory framework, based on the peculiar features and associated risks.

However, the challenge that supervisors face is how to accommodate, or reasonably encourage microfinance within a framework of generally accepted norms and prudential standards. In general, the guidelines that adequately address the features and risks of microfinance would effectively support the orderly development and sustainability of these institutions to enable them to achieve the microfinance objectives of financial inclusion and poverty alleviation.

The implementation of the microfinance policy in the country over the years, and the experience gained, underscore the need for periodic reviews of the existing regulatory and supervisory guidelines, mostly as more are now incorporated in monetary policy decisions through unconventional methods.

Enabling Laws Setting Up Microfinance Banks
BY the regulatory framework, a microfinance bank, unless otherwise stated, shall be construed to mean any company licensed by the Central Bank of Nigeria (CBN) to carry on the business of providing financial services such as savings and deposits, loans, domestic fund transfers, other financial and non-financial services to microfinance clients.

The bank’s target client shall include economically active low-income earners, low income households, the un-banked and under-served people, in particular, vulnerable groups such as women, physically challenged, youths, micro-entrepreneurs, informal sector operators, subsistence farmers in urban and rural areas.In fact, a microfinance loan is granted to the operators of micro-enterprises, such as peasant farmers, artisans, fishermen, youths, women, senior citizens and non-salaried workers in the formal and informal sectors.The loans are usually unsecured, but typically granted on the basis of the applicant’s character and the combined cash flow of the business and household. The tenor of microfinance loans is usually within 180 days, while those longer than six months would be treated as special cases.

In the case of agriculture, or projects with longer gestation period, however, a maximum tenure of 12 months is permissible and in housing microfinance, a longer tenor 24) months is permissible.In line with best practice, the maximum principal amount shall not exceed N500, 000, or one per cent of the shareholders fund unimpaired by losses and/or as may be reviewed from time to time, by the CBN.

Microfinance loans may also require joint and several guarantees of one or more persons. The repayment may be on a daily, weekly, bi-monthly, monthly basis or in accordance with amortisation schedule in the loan contract.As a support to its intrinsic grassroots orientation, one of the operational permissibles stated that a microfinance bank is allowed to buy, sell and supply industrial and agricultural inputs, livestock, machinery and industrial raw materials to low-income persons on credit, and to act as agent for any association for the sale of such goods or livestock.

Licensing requirements for this form of banking were split into three thus: unit microfinance bank; state microfinance bank, and national microfinance bank.A unit microfinance bank is authorised to operate in just one location. It shall be required to have a minimum paid-up capital of N20m and is prohibited from having branches and/or cash centres.

The state microfinance bank is authorised to operate in one state or the Federal Capital Territory (FCT). It shall be required to have a minimum paid-up capital of N100m and is allowed to open branches within the same state or the FCT, but subject to prior written approval of the Central Bank of Nigeria (CBN) for each new branch or cash centre.The national microfinance bank is authorised to operate in more than one state, including the FCT. It shall be required to have a minimum paid-up capital of N2b, and is allowed to open branches in all states of the federation and the FCT, subject to prior written approval of the CBN for each new branch or cash centre.

Practical Experiences
FROM the capital requirements for the three categories cumulatively, it thus means that one national commercial bank is made up of about 11 of each category of microfinance bank. This also shows how little the sub-sector’s scope is, and the extent to which expectations can be placed.The Head of Research at FSDH Merchant Bank Limited, Ayodele Akinwunmi, is of the view that activities in that sector are going on well, judging by its mandate and opportunities available in the space, as microfinance banks are concentrating on the people at the bottom of the pyramid.

“One thing you must take into consideration is their operations too. There is no unit commercial banking license, but there is unit microfinance license. This means that it can only operate in one location and with a capital base of N20m.”So, they just operate where they have niche market. Just see what the Federal Government is doing now, that is giving N10, 000 or so to traders. It is typical of microfinance banking. Their main target is, of course, people like market women and not importers. That may be why they are not well pronounced,” he said.

There is a limit to pushing the capital base of microfinance banks, in efforts to raise their capacity for lending. First, they are private businesses and the owners have set targets for the markets they are looking at, what they want to achieve, and what they can control.”Every business has a strategy; some will say I don’t have the capacity to raise N2b for a national license, or I want a unit bank at N20m so that a huge amount would not be forced on them. Besides, if a company says it lacks the capacity to run a large organisation and remain efficient, it makes no meaning forcing money on it because the size of money does not necessarily determine efficiency,” he added.

By their design, mission and operations, microfinance banks are supposed to be closer to the rural mass than commercial banks, because they are to be seen in the remote areas or suburbs.This is not totally the case in the country where some, by loss or misplacement of identity or non-recognition of the guiding framework have chosen fanfare, glitz and glamour of urban activities, especially in connection with their correspondent banks, to rub shoulders with conventional banks to the point that they no longer think about the poor and micro entrepreneur.

This is not without concomitant implications- loss of business or joining the bandwagon, but still retaining their microfinance identity.
Generally microfinance banking has lost fame, popularity, potency as regards their mission statement, mortality and are un-impactful.In fact, they are the reverse of the proverbial friends in the time of needs. The masses that should be financially included through them are wallowing in ignorance, exposed to the harsh modus operandi of conventional banks and bemused with terminologies that should have been broken down by their efficient operations.

A financial analyst, Egie Akpata, said even the regulator knows that not much is happening in the microfinance industry, noting that at a point, there was a report that many of them were insolvent. “For sure, the sub-sector is not that vibrant, but just managing to hold on. Yes, they are not banks and do not have access to discount windows, so their survival strategy is peculiar.

“But I do know that they charge very high interest rate for lending and never grow big year after year, which means they have something not working right with them. Charging three to seven per cent a month should earn them much like a bank, but you can’t see such in their operations, instead, any hitch makes them collapse easily.”If they charge so much and cannot grow bigger in 10 years of operations, it means there is the tendency for massive default rate in their loan books. This is because if those loans are really performing at that spread, they would find more money to lend out. It is likely things are not easy there too and need more reforms,” he said.

Akinwunmi, who also pointed out that their activities are basically to give micro loans, which they have been doing, noted that the effects of economic challenges that are currently jolting the banking sector are also affecting them too.”A number of them have challenges. But some are doing well too,” he said, citing LAPO Microfinance Bank, which got some funds from World Bank’s investment arm to support its lending in the agriculture sector.

“Some of them are quoted on the stock exchange and doing pretty well. But there are some cases where some are not doing well,” he stressed.
Admitting that the interest rate charged by microfinance banks is a bit higher than what it is supposed to be, he pointed out that the risks they take was responsible for that as there are no stringent rules to get loans like in normal banks.

“They lend without collateral and that in itself commands costs. They also incur cost to manage the loan because some go on daily basis to collect the money. Besides, their sources of funding are mired with low perception.”They cannot compete for fund with normal banks, just as customers would not trust them more than commercial banks and that feeds into their sources of fund and interest rate charges. If investors place money at a higher cost with them, it then follows that they will lend at higher costs too,” he said.

Challenging too is the lack of, or non-direct link between the flowing development interventions by the regulator and the microfinance. Indeed, banks have over the years been in the middle of monetary policy decisions, with liquidity ratios, directly linked to banks, while MFBs are rarely mentioned.All the development interventions, ranging from agriculture for smallholders farmers to large real sector operators are directed to commercial banks.

If MFBs actually participate they do so under the shadow of conventional banks. There should have been a renewal, or entirely new scheme to bring them to limelight for a fact, microfinance sector is inactive.The Chairman of the National Association of Microfinance Banks (NAMB), Federal Capital Territory Chapter, Dr. Dan Ogun, had told The Guardian that situations where microfinance banks ought to be part of the various government’s intervention programmes and financial intermediation with the grassroots have always come, but somehow they are kept off.

This is because part of the recovery strategies in difficult times like this, are to let money be available to the people to do legitimate businesses and access to credits to build their own businesses.In other words, microfinance banks being the grassroots’ banks ought to be in the forefront of the government’s intervention towards economic recovery as the country needs a lot of funds for onward lending to small businesses, and microfinance banks are surely and certainly, the instrument that the government ought to rely on.

According to Ogun, “Every month, we render our accounts. So, the Central Bank of Nigeria (CBN) knows that we are very stable, reliable and strong, and that we have a crop of young people running the banks now, who can bring that kind of results that the government is looking forward to.

“Patronising microfinance banks by the government is not an option, but a necessity, if we have to get to the grassroots and get the economy to flourish again. When a microfinance bank runs into a bumpy situation, it is a combination of many factors.”One of such is the fact that the citizenry are yet to develop very strong confidence in microfinance banks. They look at them as places to only patronise when there is dire need of loans; a place to come and take money, while reeling out excuses when it comes to repayment. No business thrives that way,” he said.

Meeting Clients, Institutional Needs Through Technological Compliance
THE 2017 Global Symposium on Microfinance, tagged: “Revolutionising Microfinance: Insight, Innovation, Inclusion,” in Malaysia, which attracted financial services providers (FSPs), technology companies, and microfinance institutions was to develop a shared vision of how emerging digital innovations can be harnessed to meet the needs and expectations of individuals and small and micro-enterprises, and to provide a broad range of affordable financial products.

Organised by the World Bank’s Global Knowledge and Research Hub, in collaboration with Bank Negara Malaysia, it was an opportunity to reflect on the achievements of microfinance over the last four decades, and develop a better understanding of how MFIs can be a part of the evolving financial services ecosystem, where technology is transforming both the way clients can access financial services, and how institutions can meet their needs.

Whether operators of the nation’s microfinance banks were able to mobilise resources to attend this event is not known, but it is a known fact that majority of them are battling with technological issues, especially in the light of the huge amount involved in getting these services vis-à-vis their sizes.

“Rapid advances in technology, mobile phone penetration, new players and massive investments in financial technology (FinTech) are transforming the financial services industry. This presents tremendous opportunities for MFIs to raise efficiency, lower transaction costs for institutions and clients and expand outreach to new markets,” the organisers said.Despite the efforts that microfinance banking has made in reaching the unbanked in the country, no fewer than 40 million more people need to come on board before the twilight of 2020 in order to reach an 80 per cent inclusion. Consequently, much contribution is expected from the sub-sector.

Bridging this financial access gap will require going beyond the business as usual to incorporate new and diverse technologies, and transcend the need for traditional brick-and-mortar service delivery, which has been the mainstay of microfinance in the past three decades.
The huge numbers of MFIs that remain in traditional mode of operations have been the bane of the sector, and so they need to adapt to rapidly changing financial services ecosystem or remain behind.

Information Asymmetry
MICROFINANCE banks, like other financial institutions are shrewdly exploiting and benefiting from assessed information asymmetry, and by virtue of their low operational profile, they have been quiet, as if they do not exist. The usual “oath of confidentiality” mantra, where the operators and professional groups chose not to reveal certain important information and appear unreachable, in part accounts for this. Even when they do not speak about their challenges when the sub-sector has one of the highest interest rates on loan and sometimes, allegations of gimmicks in the form of extra charges, late payment of fees and escalating non-performing loans are all part of the things that the banks leave out of discussions most of the time.

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