One of the discoveries in microfinancing that have kept it going is the fact that it is possible to make good loans without taking any financial collateral or physical security from the borrower. Well, maybe not exactly without collateral, but let’s say by replacing collaterals with something less demanding but equally effective and protective of the lender. That replacement is in the form of what is called social collateral. By social collateral is meant the goodwill, ties and relationships that people develop within the groups to which they belong. For example, in our various communities, members know one another so well that they could tell, with considerable certainty, those that can be trusted in matters of finance and those that cannot.
Due to the experiences they gathered from close interactions, over the years, members of any community, rural or urban, often bond together in groups with common identity, like birds of identical plumage, and can vouch for one another. These ties bind members of these communities together and often influence or even regulate their group and to some extent their private behaviour. They are the reasons why microfinance banks can actually book good quality loans and recover them successfully with social collateral as the only protection against default.
Social collateral manifests mainly in the form of joint guarantees given by group members for the loans given to individuals among them. It is actually the driving force behind the celebrated Group Lending methodology of microfinance as popularized by such leading institutions including the very successful Grmeen Bank of Bangladesh. This lending methodology has become very widespread, riding on the wave of the social ties existing among members of social groups. It has also become a major basis of most microfinance activities even in Nigeria. It is an example of how private and group interests can comingle to produce a balanced outcome that meets the needs of both group and individuals.
Many microfinance institutions in Nigeria are currently reaping the benefits of the extensive social networks in Nigeria’s culture of community living, strong family ties and extended family system. However, whether they are willing and able to fully exploit this benefit of our culture is yet to be determined. Nigerians live in communities, which may take the form of natural ancestral homes, church groups, social clubs and such. The saying “no man is an island” is particularly very true of Nigerians. We cluster to prosper and this could be the engine of growth of effective microfinancing in the country, if properly harnessed.
The question that arises, however, is whether microfinance institutions in Nigeria are exploiting fully the benefits of this nature of ours. My humble opinion is that they are not. Social ties exist among members of communities both in the urban and the rural areas. However, there is ample research evidence that the social ties existing among rural dweller are stronger and tighter than those of urban dwellers. So the real core of social collateral resides in the rural areas. Unfortunately, due to many rigidities including but not limited to lack of social amenities, the distribution of microfinance institutions in Nigeria is skewed in favour of the urban centres. Most of them are located in the cities mostly because the founders are urban dwellers who are used to the comfort of city life and the effect of urbanization on workforce availability in rural areas. This locational reality may further be explained by a number of other reasons including nearness to larger clusters of potential customers, the lure of city life with better infrastructure (relatively speaking) and higher purchasing power. This means that the bulk of Nigeria’s microfinance institutions, being urban based, are not available to tap fully the benefits of the social collateral existing among our rural dwellers.
Could this be one of the reasons why the present crop of microfinance institutions do not seem to be meeting the needs of the active poor in the way it was intended by the crafter of the National Policy on Microfinance? My answer is in the affirmative. It is no longer a discovery that the business models of most of the microfinance institutions in Nigeria are not sustainable and therefore unlikely to take them to the promised land of high outreach and financial sustainability. With the bulk of the operators in the urban centres, for reasons which in fairness are mostly beyond their control, the benefits of the stronger social collateral in the rural communities are likely to elude them. As a consequence, therefore, they are likely to serve clients that are not exactly the intended active poor who mostly reside in the rural communities. And this has implications not only for the effective implementation of the National Policy on Microfinance but also the quality of risk assets likely to be generated by operators. The weaker social ties in the urban areas are likely to produce weaker social collaterals and hence higher loan delinquency for the operators. At the end of the day, there will be a big gap between policy objective and the direction of implementation with adverse consequences for poverty reduction.
Evidently, microfinance institutions in Nigeria require a lot of public support. The debilitating infrastructure deficit makes it difficult for them to reach out to the rural poor as much as they should. Unfortunately, this limits their marketing and business opportunities, and enhances the risk of loan loss. The objectives of the well-received National Policy on Microfinance would be better served if the operators are encouraged to focus more on the rural active poor who constitute the bulk of our poverty-stricken population than trying to replicate the behaviour of regular banking institutions. If this is not the case, we would find ourselves in a situation in which microfinance institutions merely duplicate or replicate orthodox banking services, which will never meet the expectations of members of the informal sector that constitute the bulk of the economically active poor.
Emeka Osuji
Dr Osuji, a former director at FSDH Discount House (now FSDH Merchant Bank) and a former lecturer in Economics Dept, Unilag, is currently Senior Fellow, School of Business Admin., Pan Atlantic University, Lagos. He is author of Microfinance and Economic Activity: Breaking the Poverty Chain.
eosuji@pau.edu.ng
