Many microfinance institutions in Nigeria are struggling to find the best way to serve the financially underserved population. And so are the regulators. The sleepless nights that gave birth to the Microfinance Policy of 2005 have not quite abated. Some of the reasons for the struggle are traceable to the way the operators have conducted their business. Actually no normal mother goes to sleep when the baby, for any reason, is awake and uncomfortable. That is why the struggle of the microfinance banks (MFBs) will ultimately become a struggle for the regulators who are never happy to see an operator fail to deliver on its mandate.
A review of the current state of affairs in the microfinance sector suggests, fairly eloquently, that there is need for a refocusing of these institutions to return them to the golden principles that made microfinancing the great success it is in countries like Bangladesh, Colombia and Kenya. In the next few weeks I would discuss aspects of the operation of microfinancing in Nigeria that must change if we are to achieve the objectives of the policy as well as make that economic segment profitable to investors.
Access to financial services is an accepted channel for promoting financial inclusion, which itself is strategy for poverty reduction. Available statistics show that over 50 percent of Nigerians are still financially excluded. This means that they do not use any financial product, be it bank account ownership or any of the new mobile money products. This implies that most of our people do not use any financial products to deal with their daily affairs, in an age where these services have made life easier.
The situation is even worse in the rural areas where, according to EFInA, a research-based organization, over 80 percent of the population of Nigeria is unbanked. This is not unexpected for an economy that is predominantly agricultural. Access to financial services would naturally demand greater commitment and focus on the part of service providers in such an environment.
Although we now have about 1,000 microfinance banks operating in different parts of the country, the impact they will make on this mass of unbanked population depends on their understanding of their role and their capacity to perform it, their commitment to the principles of their trade and the resources available to them.
There are, evidently, some fundamental challenges bedevilling the operation of most MFBs that will prevent them from realizing even their own internal objectives, to say nothing of the objectives of the policy framework, if not rectified. During the next few weeks, I propose to discuss these challenges and bring them up for public scrutiny, with a view to helping MFBs call attention on what is really needful in their quest for success.
The first of these challenges, which I discuss today, is the nature of Nigerian microfinance banks as presently structured. According to the definition given to it by experts, microfinancing is the provision of financial services to the active poor. Indeed, since poverty is a relative term, we need to emphasise that the term poor in this context refers to the very poor among the active poor. Perhaps, we may safely state that the focus is on that category of the poor who are willing and able to work, and indeed engaged in some economic activity but are too weak to defend themselves economically.
Financial services here include microcredit, microinsurance and microsavings opportunity to the economically active poor. I believe our MFBs, going by their focus and general demeanour, have altered this definition, either deliberately or by error. This is very evident by their spatial distribution, which shows a large concentration in urban areas, where undoubtedly poverty exists but certainly not comparable to what exists in the rural areas. By definition, the economically active poor in a predominantly agricultural economy like ours should be found in the rural areas. That being the case, we ought to have more microfinance banks in the suburbs and local communities rather than in our major cities. We often try to hold brief for the MFBs by rationalizing their preponderance in the cities but we know deep down that it is a problem.
The result is that even the services provided have also been redefined or substantially modified. Today, MFB services are mirror images of commercial banking services, even if in microcosmic stature. Thus, an innocent observer may not see any difference between them and the commercial banks except that they are smaller in size and capital base. There is nothing wrong in wearing the toga of a king if that is what your community has called you. However, you must realize that the community has a reason for calling you king when they already have a king. You cannot go on replicating the conduct of the king whose failure gave rise to your emergence. MFBs must therefore not seek to replicate the banking services that have failed to give succour to the active poor.
Unfortunately, what we see is that most MFBs are doing commercial banking focusing on traders, importers, exporters, suppliers and even consultants. These people may well be poor, since, as we said earlier, poverty is relative; they are not really the poor contemplated in microfinancing. The result is that in doing so we leave the poor unattended. Naturally, these not-so-poor customers are able to pay high interest rates because relative to what the banks charge and the protocols involved, the MFBs are still better option.
This is one of the reasons that have combined with lack of long-term funds to wreak interest rate havoc on the sector. As a result, the interest rate regime in the MFB sector has become very high. As Professor Yunus, founder of Grameen Bank, once said, what we have in many places including Nigeria is micro commercial banks and not microfinance banks. This mimicry of commercial banking has combined with other factors to impose high operating costs on the MFBs. For example, operating in the urban centres implies high cost of office space, high wage bills and diminished capacity to create loans. This capacity diminution arises because much of the capital has gone to service overheads, impairing lending capacity.
Furthermore, with their capital diminished by high operating costs, many MFBs have to rely on the mobilization of deposit liabilities, an activity for which they are not particularly famous, or the newly activated Microfinance Development Fund on which the jury is still out regarding access to and utilization of it. The end result is a shallow loan book and low returns from their core business of risk asset creation. Acting as a micro commercial bank also has implications for the kind of fixed assets an MFB acquires – cars, furniture and other gadgets that attract the urban workers. Cumulatively, these factors tend to negate the genuine efforts of MFBs but instead keep most of them on the fringes of their industry.
The way forward is for MFBs to return to the basic principles of their calling – focusing on services to the poor, and indeed, the very poor but active enterprising people particularly in the rural areas.
There is no suggestion here that the rich commercial entities, including importers and suppliers who seem to preoccupy many MFB, do not need banking services. They certainly do, but they have other kinds of banks meant for them. It should not be in the menu of MFBs to focus on this group as it would diminish their capacity to deliver on their primary mandate.
Emeka Osuji
