Over the past several months we have been sharing our thoughts on many issues in the MSME sector, with a view to helping in setting the agenda for growth and prosperity in that sector in particular and our economy in general. A review of sundry developments in the microfinance sector, however, points to some cause for concern. There is a growing burden of loan delinquency and bad loans among microfinance banks that could harm the sector if not quickly resolved.
Reports from the regulatory authorities indicate that non-performing loans of MFBs rose from N15.8bn in 2013 to N213bn in 2014 – an addition of about N6bn in one year. This is a substantial figure. To bring this to perspective, the reports show that the ratio of non-performing loans to total loans stands at over 17 percent. This is also discomforting, more so when we realize that this figure is an improvement on the 2013 non-performing loans ratio, which was about 19 percent. So although it looks like we had a reduction in 2014, it is not significant.
The questions that come to mind immediately are many. We may need to ask: who are the debtors of the microfinance banks that owed and were unable to pay over N21bn in 2014? Is it the active poor, who should constitute the bulk of their clients, or are these loans made to other categories of business people? Are the MFBs focusing on the economically active poor members of society or are they loaning to just anyone who needs money? Is the maximum principal amount of a microloan still N500,000? These questions relate to the target clients of MFBs, the nature of a microenterprise and a microloan, which are clearly defined in their guidelines.
We continue to commend the regulators for making the industry so robust as to attract additional 50 new operators in 2014. They must be doing something right to engender this level of confidence. Their confidence-boosting policies are working. However, I hope that the solid backing of the regulators through the provision of deposit insurance, which is now a strong selling point for MFBs, has not become a reason for financial rascality among them.
Many MFBs, especially the “big boys”, are doing the right things but a lot more are not. I believe the operators who often act like commercial banks are pushing their bank identity too far. I have in the past called for caution in this direction. Observers of the industry may recall how hard these operators fought to have the word “bank” included in their names. There is nothing wrong in the use of the word bank as part of the appellation of MFBs; after all they are bankers to the active poor. However, some of us may recall the events in the early days of mortgage banking in Nigeria. The same battle was waged by operators in that sector for the inclusion of the term “bank” in their names. It was granted but what became of them thereafter was self-imposed unequal competition with the deposit money banks. The rest is part of our history.
The competition between MFBs and commercial banks is now so serious and should be viewed seriously. We did not set out to replicate the commercial banking sector. Some operators in the microfinance sector are even unhappy that the regulators do not refer to them as Deposit Money Banks. It is that bad and ridiculous. Someone needs to call them to return to orderliness.
Something similar happened during the days of licensed finance companies in Nigeria. It sowed the seed of destruction of that great component of Babangida’s financial sector reform. There may be arguments against those reforms, especially as Nigerians were in a hurry to return to democracy and would not see anything good in military-led reforms, yet Babangida’s economic reforms were a result of very deep and innovative thinking in the financial sector that led to massive positive changes in the sector.
Although the Structural Adjustment Programme (SAP) may have been mismanaged, its kernel remains a sound economic blueprint that should revolutionize any economy at the same stage. It may be recalled that Babangida’s reform led to the introduction of the Value-Added Tax – probably Nigeria’s most stable hope for financial survival as oil revenue fades. It also created new financial institutions and instruments that laid the foundation for the growth in the capital and the money markets, including microfinancing pioneered by the People’s Bank, as well as the proper management of Nigeria’s debt by the Debt Management Office, which started from the Debt Conversion Office at the CBN.
What happened during the early days of finance companies is that licensed finance companies began to see themselves as banks, though in a slightly different way from what the MFBs are doing now. While they did not bother to have the word “bank” in their names, they went ahead to behave like commercial banks, taking on huge financial transactions meant only for highly capitalized banks. For example, many of them went into dredging and sand-filling of what now became the affluent Lekki neighbourhood. Some went into airline business.
Unfortunately, when the trouble between Gen. Abacha and Aare MKO Abiola climaxed in a near outbreak of war, funds stopped flowing to the finance companies. As people converted their deposits (which finance companies had mobilized through obscene interest payments) to dollars and sent them abroad in preparation for trouble in Nigeria, the finance companies were left high and dry. So many of them did not see the end of the huge projects in which they had sunk billions of naira.
More important, the finance companies, in their new feeling of importance and mimicry of commercial banks, introduced what they called “Interhouse Placements” – a copycat of Interbank Placement that the banks do with one another. This “product” allowed finance companies to place funds with one another, mostly unsecured. Unscrupulous operators cashed in on this loophole to cart away billions of naira from their unsuspecting counterparts. When the bubble burst, the finance companies collapsed. Many of those rouge operators never came back to Nigeria till date and some innocent people got killed by depositors. It is an experience that nobody should wish we have again!
History may not be our favourite pastime but we need institutional and, indeed, national memory if we are to avoid the errors of the past. There is an Igbo proverb that says something to the effect that when the bird that cries and somebody dies begins to cry, then everyone should be careful. We must not repeat our mistakes, especially those of our recent history.
As if the ominous sign portrayed by rising loan delinquency is not scary enough, the Association of Microfinance Banks, through its president, is flexing its muscles about a purported synergy with NICON Insurance. According to him, they will now demand insurance cover from borrowers before granting loans. What an affront to the whole concept of microfinancing! What an unwarranted self-elevation! What is microfinance? What is the role of insurance in microfinance? I will volunteer some answers subsequently.
Emeka Osuji
