A few months ago, our column focused on what we consider one of the key strategic instruments of effective control of any lender’s loan book – the Portfolio Report. Our intention for beaming the searchlight on this vital report was to draw attention to the importance of effective credit risk management and monitoring in any financial institution. This becomes more important as the microfinance sector in Nigeria continues its growth, with attendant complication of otherwise simple management challenges. We believe it would be in the interest of all operators and the industry as a whole to ensure that risk assets are of the highest possible quality and risk management is sharp and smart. Equally important, loan management must give adequate weight to performance monitoring.
The Nigerian Deposit Insurance Corporation (NDIC) is one of the leading institutions that have shown clear commitment to the promotion of financial inclusion in Nigeria. The introduction of deposit insurance for operators in the microfinance sector is a real confidence booster for the operators. When combined with other innovative activities in mobile money as promoted by the Central Bank, the microfinance sector stands a good chance to further its drive to extend banking and other financial services to the unbanked segments of our society.
Recent reports emanating from the NDIC, on the performance of the financial sector, adequately put into focus the situation in the microfinance sector. It is evident from these reports that the microfinance sector has been expanding rapidly. The sector has also continued to improve its overall performance on a year-on-year basis, especially between 2013 and 2014, growing both in head count and financial capacity. There is also an indication of growing confidence in the sector as more profit-seeking investment flowed into it.
For instance, as investors see its profit potential, many of them came into the industry in 2014, increasing substantially the headcount of institutions and expectedly the capital funds available in the sector. This is an indication that the investors are aware of the opportunities offered in this area of the Nigerian economy to both local and foreign investors. It also shows that more people feel safe to put their investments in Nigeria. This is surely a good report for the regulators, NDIC and the Central Bank of Nigeria, who have worked so hard to reverse the growing trend of financial and economic exclusion in the country. I believe that being able to attract more investment to the sector is probably one of the core measures of policy success in the area. It indicates that confidence in the sector is high. Needless to say that if confidence is a critical success factor in the financial system, it is everything in the microfinance and other derivative institutions of the financial sector. Keeping it high and rising is essential for success in banking and that was the intendment of the NDIC when it extended insurance cover to MFBs.
It is significant to note that not only did more investors find the microfinance industry worthwhile, those who feel so are large in number and probably growing. The number of active MFBs operating in the country rose from 832 in 2013 to 882 in 2014. This means that 50 new institutions were welcomed to the sector. By any definition, this is a quantum leap and a good reason for cheer. It has implication for job creation and income distribution in the country. Indeed, it has far-reaching positive implications for extending the frontiers of financial and economic inclusion in Nigeria.
This development is even more encouraging when we examine the spatial distribution or geographical spread of the new institutions. From available reports, each of the geopolitical zones of the country experienced growth in the number of MFBs operating within its space, even as the South-West, for obvious reasons of Lagos and its attractions to financial services people, continues to dominate in the number of operators per zone. This development also speaks well of those driving the policy shift in the sector. It shows that each zone has some attraction on its own, for investors in the sector. I think we should commend the administrators of the policy. It is quite easy to gloss over the achievements of policymakers and administrators, probably because that is what we expect of them. I believe a nod for a good job is tonic for more.
The fact that this substantial increase in the number of new investors in the sector happened during the turbulent election year of 2014 is also significant. To a large extent, 2013 and 2014 were largely years of divestment from Nigeria or, at best, years of wait-and-see. That a lot of people put money in the sector at a time when others were buying dollars and putting them away in foreign banks is to me a measure of rock solid confidence in both the survival of the country and the potentials of the microfinance sector. With the growing confidence of depositors buoyed by the availability of deposit insurance cover provided by the NDIC for their funds, more people (depositors) are now willing not only to place funds with operators in the sector, but also to stake their own capital funds.
Information emanating from recent NDIC reports has thrown more light on the performance of microfinance institutions, and in particular, the state of their loan portfolios. It has also thankfully called attention to what we had said in our earlier pieces in this Small Business Handbook concerning the need for effective management of the loan portfolios of microfinance institutions (MFIs) in Nigeria. In one of our past pieces captioned “Microfinance portfolio report as the manager’s car key”, we tried to draw an analogy between the Portfolio Report of an MFB and the key to its manager’s car. For the manager to go home after work each day he must find the key to his car, take a look at it and be sure it’s the right key and then off he goes. He can never leave the office without the key to his car, except he plans to walk home. Picking up the key to his car is one last vital action the manager must take before leaving office at the close of day. The same thing applies to the Portfolio Report of his MFI. We recommended that it be one last piece of paper he looks through before leaving office at the close of work each day. Similarly, operators in the pension fund sector will tell you about their End of Day Report (EOD) and what it does for them.
Evidently, the loan books of our MFIs are showing considerable signs of stress and we must do what I call “Return to Orderliness in Portfolio Management”. This will impact not only our credit processes but also the management of our loan books.
Emeka Osuji
@Emyosuji
