The microfinance industry in Nigeria has come a long way. From the days when the service was the preserve of non-governmental organizations, motivated to a large extent by social considerations, to the present day when microfinancing is essentially a commercial activity. The sector has evolved very significantly. Thanks to the formalization of the regulatory aspects of their operations following the 2005 launch of the Microfinance Policy in the country. Considerable investment has also gone into the sector not only to expand financial capacity and deepen the pockets of the key players, but also to bridge the skill gap in the industry. The CBN and the NDIC have done a lot of work in this area with a lot of hand-holding and support for the industry.
In December 2008, the Central Bank of Nigeria (CBN) in cooperation with the Nigerian Deposit Insurance Corporation (NDIC) introduced the Microfinance Certification Programme. The programme aims to help operators improve their knowledge of the business and to create a core of technical people that the industry may draw upon as it develops. The certification programme, which is extensive and organized in diets or segments, has contributed significantly to skill acquisition and operator confidence in the industry. By the end of 2013, over 6,000 operators had been trained and over 1,600 certified. Today we can boast of a better quality manpower pool in the industry that is a far cry from what obtained in 2005 when microfinance became an official instrument of poverty reduction in Nigeria.
This evolution of the Nigerian microfinance industry has had its own share of the ups and downs of the Nigerian economy. Over these years, many microfinance institutions have been licensed. Many of them have grown rapidly in terms of asset volumes and even outreach. However, a large number has also suffered losses and capital diminution to the extent that they were shut down and liquidated by the regulators for failing to live up to their responsibilities. There were, for instance, 880 microfinance banks in Nigeria in December, 2011 but by the end of 2014, the number had come down to 832 – a downsizing of some sort across the industry.
The Nigerian microfinance industry is now essentially a commercially-oriented industry, and that has its own challenges to the objectives of the industry. By its very nature, microfinance industry develops along a kind of natural continuum, with stages of growth. First, the industry begins with the need to develop operational behaviours or conducts that are business-like. This is necessary because microfinance did not begin as a purely commercial undertaking. It was basically non-commercial and driven by not-for-profit organizations, with passion to help the les-privileged but economically active individuals.
Non-commercial microfinance has a lot of charity-driven behaviour in its operation and even administration. Because non-commercial microfinance is driven by grassroots interaction, its products are developed with the full knowledge of clients’ economic and cultural features in mind, including family history, background, environment and geographical traits. Such products actually speak directly to the needs of the clients rather than being foisted on them by merely speculating on what the consumer needs. Such products are also not only very diverse to cover significant needs of the clients, but equally flexible. Above all, while they have considerable elements of cost recovery in them, they are not essentially driven by cost recovery.
Having adopted efficient operational methods, the microfinance operator would then focus on operational and financial self-sufficiency. At this stage, the microfinance institution is concerned mainly with cost recovery and efficiency. The expansion of outreach becomes essential at this stage. Commercial microfinance institutions are funded from market-based or commercial sources. These sources do not provide subsidized funds, even though they may be apex and wholesale lending organizations. Other sources of non-subsidized funds in this category include commercial banks, equity from the promoters and mobilized savings.
Commercial microfinance institutions are for-profit organizations. They have all the trappings of a commercial enterprise and must prepare and submit themselves to the full forces of regulation within approve industry forbearance. A great key to achieving significant outreach is by building a strong financial institution. A strong financial institution is not run as a charity. It strives to cover its costs. This implies striving to recover fully its operational costs. Interest payments on its funds must therefore be properly covered while efficiency must be a significant objective. Nigerian microfinancing is essentially operating at this stage. The necessary foundation has been laid and products and services are focusing on client needs. Cost recovery is also now paramount to operators because they all have boards of directors to which they must give account of their stewardship. And this is where the challenge comes – making respectable returns to shareholders and reaching the largest possible clientele at the same time.
There is some kind of conflict between outreach and sustainability. Outreach requires taking steps to reach more people over time. This calls for increased investment of resources. Profitability is critical to sustainability and even outreach. It enables an institution to leverage commercial sources of finance to improve outreach. It is important however to balance outreach and sustainability. This is sometimes a very difficult task. Outreach has become even more important in Nigerian microfinance because of the expansion and transplantation of misfortune from one part of the country to the other. The terrorist attacks in the North-East have continued to increase the population of the poor. As more and more people join the Internally Displaced Persons camps, the demand on microfinance institutions to do more continues to rise. In a similar vein, militancy is returning in the Niger Delta and commercial activities generally suffer when insecurity is high. Kidnapping has worsened the already high rate of unemployment as potential investors stay away even from their own communities to whom they would have loved to do a lot.
Operators must begin to tackle the conflict that often exists between outreach and sustainability. Now that more people are joining the camp of the economically active poor through the impact of insecurity on the nation, and microfinance in our country is fully and squarely commercial, it is time to watch over outreach so we do not lose what we have worked for.
Emeka Osuji
