There are three possible groups to which we could categorize microfinance institutions currently at work in Nigeria. In the first category, we may place those institutions that came into the market fully prepared and determined to follow, and actually follow, the wisdom of the founding fathers of the industry. They therefore developed and standardized their operations in line with the established tenets of the trade. Members of this group have spent time and resources to deepen their understanding of the industry; its characteristics and peculiarities. In their menu of services are a plethora of services adapted to the domestic environment. They are also well-capitalized and efficiently run, in accordance with both domestic regulations and accepted international norms. Their business models are clear and easy to appreciate.
Although some of them already had international flavour, due partly to their origins or make-up, they have domesticated that attribute to the advantage of their clients as well as their investors. They have high potential for greater outreach and sustainability – two key indices of successful microfinancing – and have demonstrated these by their spatial and service characteristics. Many of them have actually arrived on the steady growth super highway. They have become comfortable with the regulatory regime, having tailored their operations, ab initio, to cohere with the extant regulatory environment. Indeed, they are now significant contributors, not only to the financial good health of the industry but also to that of other stakeholders, including, to a modest extent and through the payment of requisite premium, to the good health of the regulatory authorities.
By way of reward, members of this group have sound loan books with delinquency ratios in line with international standards, and they have a strong client base. They have also, to a large extent, and following the adoption of appropriate business models and technology, contained fraud and improved the performance of their clients. This group has derivatively attracted international attention and foreign financial commitment to the local industry by way of partnerships and even direct investment. Thus, they have become recognized as valuable channels of accessing the active poor in one of the most densely populated poor countries in the world. This category of players is bold, daring and properly arrow-headed. They are the delight of regulators and, given long-term consistency, are likely to produce members that would favourably compete in the arena of world-class microfinance institutions.
A major attribute of this group is that they book small loans as required in microfinancing. This, not only gives them the necessary spread of risk but also allows them to control the sole of the business – the mass of the active poor. They adopt lending methodologies that replicate or modify, rather than contradict, the story already told by the founding fathers of the industry, such as Grameen Bank in Bangladesh. In addition they keep the business small and simple, in terms of loans and processes.
The second category is made up of those institutions that decided to follow their hearts and instincts, rather than the time-tested tenets of microfinancing. This group also has strong members, who are equally well-capitalised and strong enough to substantially impact the universe of the active poor in Nigeria. However, they have business models that are hard to classify or even identify. This tends to shift their gaze from side to side and give the impression of unclear leadership and business focus. As a result, they lack a clearly defined target market. Their risk acceptance criteria are indeterminate, tending to be driven by opportunistic reactions rather than established market focus.
There is something very virtuous about market focus, just as there is with proper business model. A microfinance institution must have a clear target market, which does not necessarily have to be the active poor. In the Dominican Republic for instance, the Association for the Development of Microenterprises (ADEMI) developed an effective non-traditional lending methodology to service low-income clients. Its target clients are microenterprises to which it gives loans in accordance with certain standards, focusing on job creation.
Similarly in Kenya, the Kenya Rural Enterprise Programme (K-REP) developed a modified specie of the Group Lending methodology of Grameen Bank. Its Chikola programme has been offering loans to individual enterprises through existing Rotating Savings and Credit Associations (ROSCAS). Microfinance institutions must be learning institutions with good institutional memory, even with their small sizes. This is the only way they could understand their environment, adapt and adopt the existing lending methodologies, services and products to meet the needs of their markets.
As a result of some of these deficiencies, this category of players in the microfinance sector is hardly breaking any new grounds, both in terms of location and product design, as well as service delivery. They are always content to swim in the Red Ocean of attrition rather than seek out the many Blue Oceans around the country. The above features have evidently rubbed off negatively on their ability to service their clients on a timely and consistent basis. It has also depressed their profitability. Even though a large number of them have the same capacity and potentials with those in the first category, members of this group are hamstrung by wrong frameworks and methodological incongruences.
Expectedly, and by way of reward or punishment, their market effectiveness has been stolen by lack of direction, poor business models and an apparent limited understanding of the market niche for which they came into being. Furthermore, their long-term profitability and survival are suspect. While learning is an attribute of all living and evolving entities, this group of players will particularly profit from retooled leadership structures, an enhancement of technical skills, as well as the virtues of market discipline.
The regulator may therefore do well to drive, and if necessary, compel a programme of skill updating. Such activity could be on a cost-sharing basis, since the health of the industry is of interest to all stakeholders, including regulators. Apart from loss of premium, payment of insurance claims and the introduction of market instability that follow death in the corporate financial battlefield, contagion is also a shared risk that should be properly managed.
The third category is the motely crowd of institutions that have long since literally alighted from the vehicle of microfinancing that brought them to the market. They have joined the crowd in the market, doing whatever is legitimate, even if outside regulatory permissibility, to make ends meet. They have become part of the general market infrastructure. Indeed, they are now hardly distinguishable from the moneylenders and itinerant (esusu) bankers that dot the side-lines of most markets, collecting savings from clients for a fee. Most of them have challenges meeting, on a consistent basis, the regulatory standards of healthy capital requirements.
This is not a structure that will bring the shared prosperity to our citizens who have been structured to the suburbs of economic prosperity. Nothing fails when its laws are obeyed, microfinancing inclusive. It is fun when we Keep it Simply Small (if you like, when we KISS it). The beauty of microfinancing is its focus on the small things – clients are small, loans are small,risk is small and diffused by the diverse nature of the clientele. Microfinance operators must therefore step back to the wisdom of the masters of the trade by keeping it simply simple.
Emeka Osuji
