The CBN and the NDIC need to be aware that their help is still urgently needed in the microfinance sector – a sector to which they have already committed so much of their time, talent and treasure, as it were, over the past decade. Those guys need some help to find their way out of the confusion that seems to grow around them.
Over the past weeks, I highlighted some developments in the microfinance sector that indicate the need for both commendation and further policy action. We find that the sector has had mixed experience, some of which are negative for the industry. There were also many positive accomplishments. While the sustained confidence in the industry is good reward for the hard work of stakeholders, the growing significance of bad loans demands urgent attention.
The cancer of bad loans is creeping in and it is doing so with considerable speed. More important, many who should help arrest this cancer are either unaware of its enormity or are busy making a show of it.
In its 2014 Annual Report and Statement of Accounts, the NDIC revealed that over 17 percent of MFB loans granted by MFBs were not performing. Relate this to industry best practice standard for delinquency ratio of 5 percent and the achievement of less than that by practitioners around the world. In naira terms, the report says that over N21bn of the loans granted by MFBs is classified as non-performing. A non-performing loan, for the avoidance of doubt, is a loan that has fallen into default, in accordance with the terms of classification usually specified by the regulatory authority under its Prudential Guidelines. In short, the debtor has missed payment of some instalment or has stopped paying altogether.
Well, that figure was for 2014. We are now at the close of 2015 and MFB loans going bad are getting larger. According to the president of the National Association of Microfinance Banks in Nigeria (NAMB), “The microfinance sub-sector has recorded no less than N80bn as bad debt over the last few years.” While it is not clear whether this is the current volume of bad debts still on the books or includes what has been written off over the “last few years”, something unhealthy is going on.
The microfinance sector in Nigeria is young. Our cumulative effective experience in operating MFBs is below 20 years. We are still learning. However, we need to present the right attitude and ability to understand the challenges we face if we are to successfully grow the sector. It does not appear to me that all critical stakeholders have a proper grasp of their roles in developing the sector. We can’t cut our noses to spite our faces. Even though what we have are micro commercial banks that probably have no need for donor funds, most donors would be scared by the announcement of this size of bad loans.
The NAMB’s statement was accompanied by what it probably considers a solution to the problem of bad loans – a new condition precedent to lending, which will ensure that every borrower takes out an insurance policy against default. This policy, according to the NAMB president, would be provided by NICON Insurance. Every borrower would be required to provide an insurance cover so that when he defaults the MFB would be indemnified by NICON. This plan obviously will profit from improved advice if it won’t become laughable.
Insurance is undoubtedly a pooling of risk. It provides opportunity for sharing risks and reduces the burden of loss. However, it is difficult to see how insuring against loan default in the microfinance sector will promote the cause of the sector. This proposed “synergy” with NICON strikes directly at the soul of microfinance – the provision of microloans and other financial services, including micro insurance, to the active poor. Again, even though we know about Key Man Insurance, I don’t know when commercial banks that deal with multi-million loans started insuring every borrower.
It does appear that some role misunderstanding has crept in here. The association in my view needs to take another look at the role of MFBs and their target clients. Although MFBs are allowed to lend as much as 5 percent of their shareholders’ funds unimpaired by losses to one obligor, they are still required to maintain a loan portfolio in which microloans are at least 80 percent. By regulation, the maximum principal of a microloan shall not exceed N500,000.
The question is, will the insurance cover be provided to individual borrowers or to cooperatives or groups of borrowers? Is it an insurance of the client or his business? If the bulk of the clients of an MFB are the very poor unbanked and mostly illiterate members of society, will it be feasible to burden them with the technicalities needed to effect an insurance policy?
When you are dealing with people who are afraid to enter banking premises, then you have a pipedream asking them to get insurance cover in order to get a loan. Perhaps we need to look at the clientele of the MFBs again. There has always been the suspicion that they are not dealing with the target clients of the policy – the poor members of society. That suspicion may have graduated to reality.
Again the way the idea is presented seems to create the impression that the best way to deal with loan delinquency is to shift the burden to an insurance company. This presupposes that the operators do not have good credit and risk management capabilities. They will simply grant a loan once an insurance policy is flashed at them. Insurance cover cannot take the place of effective credit appraisal. It will not make up for loans granted without due regard to cash flow, properly matched with repayment periods.
MFBs should go back to the drawing board to discover the place of insurance in microfinancing. It is to provide succour to clients who many suffer any number of disasters such as flooding and other acts of God. Microfinancing is still the art of successfully lending and recovering loans to the active poor without recourse to collateral. An insurance policy prior to loan approval is an indirect demand for collateral – a major reason while commercial banks have failed to be of significant assistance, relatively, to the active poor.
The NAMB president went ahead to ask the Buhari administration to give microfinance banks the opportunity given to commercial banks – whatever that means. This mimicry of the commercial banks is what has led the operators to become a collection of micro commercial banks and not microfinance banks. Rather than think of creative ways of expanding a financing technology that other people have developed, tested and applied successfully, we are busy looking for the glamour in what is otherwise a social, service-oriented and people-centred finance business.
MFBs must be told to return to orderliness. There is no need to overemphasize the dearth of skill in this area of financing. What kind of training are we giving to operators? And let me ask for the umpteenth time, what business model are the operators implementing? The regulators have a few issues to thrash out in the sector.
There are various categories of MFBs in the country. Are the current guidelines like a one-size-fits-all regulatory framework for them or do they recognize the difference among operators? There may be need for policy review and programmes of mandated training, if possible part-funded by the regulators, to help the young sector.
So much has been achieved in this sector from the days when we created the People’s Bank to canalize financial resources to the poor. We have achieved respectable milestones. However, a lot still needs to be done. We shall be avoiding the payment of huge deposit insurance claims that may arise from improper focus and poor lending behaviour if we assist the operators now to up their game.
Emeka Osuji
