Our first piece on this topic identified high cost of operation as one of the many challenges of the microfinance sector in Nigeria. This high cost is partly attributable to the high profile which some of the MFBs create for themselves. The impact of such high profile often reflected in the erosion of their paid-up capital thereby hampering their ability to create risk assets. Today’s piece will take the issue a step further by looking at other reasons why Microfinance Institutions (MFIs) should avoid the impairment of their capital base through unwarranted high profile spending.
The natural tendency of deposit-taking institutions, including microfinance institutions, desirous of increasing their operating funds is to drive for deposits. Deposit mobilization is essential for the survival of MFIs because it not only supplies the much-needed loanable funds but also helps to create a client base that is needed to support the operation of the lender. However, deposit mobilization, including creation of opportunity for voluntary savings by MFI clients, is not an easy job.
To effectively execute savings mobilization plans, microfinance institutions must be sure they possess both the institutional structures and the operational capacity that allow them to effectively mobilize and rapidly grow savings. Moreover, the introduction of savings as a service option in the menu of an MFI imposes more responsibility on it than is often appreciated. In the first place, being a deposit taker highlights the existence of the institution to the regulators. Accordingly, the regulator takes more interest in the institution’s affairs because of the impact a failed operator may have on the wider society. It would also entail more reporting activity on the part of the operator, which will drain more resources from it.
By institutional capacity we mean and include proper governance, capable management and effective organizational structure. These also presuppose the existence of adequate and properly motivated staff. Savings mobilization is a very important function both for the economy as a whole and the MFI. Yet it is a very delicate one. Mismanaged savings, especially of members of the socioeconomic strata of citizens targeted by MFIs, may spell doom for the whole economy. This is why the extension of deposit insurance cover to MFIs by the Nigeria Deposit Insurance Corporation (NDIC) is vital to the survival of the operators and the stability and sustainability of the industry. The role of regulators like the Central Bank of Nigeria (CBN) and the NDIC becomes more critical once an MFI gains authority to accept deposits or mobilize savings.
These institutional structures have substantial impact on the clients of MFIs. For example, how the governance of an institution is perceived by clients is important in the extent of confidence they repose in the institution. This is why public ownership of an MFI sometimes seems to be a plus for it as clients tend to believe that the government will come to their rescue in case of trouble, be it liquidity or insolvency of the operator. But the trend is no longer in favour of government ownership of these kinds of institutions. The trend is now in favour of MFIs operating free of any government intervention. Of course, there are equally big disadvantages of government ownership of MFI, including poor risk management and less than top-of-the-shelf leadership.
While it is very important for MFIs to be perceived and actually seen to possess good governance, they must seek to establish themselves in the psyche of their clients as safe places for savings. It is important therefore that savings-mobilizing MFIs be close to the source of such savings to enable savers have their own assessment of the institution. There is no substitute for trust and confidence.
Focusing on savings to shore up lending capacity therefore has its own challenges. An MFI is not a financial intermediary strict senso if it is not involved in mobilizing savings. Once this status has been gained, the next challenge is the human capacity to mobilize and administer the savings. A successful savings mobilization programme requires that MFIs hire their staff from among members of the community they operate. Local staff have a way of serving as beacons for would-be savers. They tend to instil greater confidence in clients than outsiders. This is why closeness to the source of savings is important to effective savings schemes.
It may be trite to say that there is a great difference between credit and savings services provided by MFIs. However, it is sometimes good to state the obvious or repeat a cliché. In creating risk assets, MFIs have the prerogative to pick and choose which client or group of clients they give credit. Such clients must meet the Risk Acceptance Criteria of the lender. These include the nature of their businesses, location, and size of the group, how they formed the group and its leadership. The lending MFI has to design its own internal controls to ensure the safety of its funds. On the other hand, it is the clients that do the selection when it comes to deposits. They would naturally require assurances that the MFI is well governed, properly managed and meets their own risk acceptance criteria. Thus, savings are not easy to mobilize and adequate care must be taken to ensure that the capital funds of an MFI are properly utilized and not wasted on expensive nonessential items at take-off.
Essentially, what we are proposing is that microfinance institutions take savings mobilization more seriously. To do this they must first understand the extent and ramifications of the challenge of savings mobilization. This does not appear to have dawned on many, given the way they deploy their capital funds and the zeal and strategies they apply to savings mobilization.
Once the challenge of deposit mobilization has been fully internalized, MFIs would invariably become more prudent in the use and deployment of their initial capital funds. The following is the likely chain of reactions that will follow when MFIs realize that savings are hard to come by: frivolous expenditure incurred mainly for glamour sake will show for what it is – a mere waste that must be avoided; cutting nonessential costs will become a more attractive operational engagement. In like manner, choosing the right office location for the operator will become more important and with it, the desire to reduce the avoidable high office rentals they incur trying to locate in the wrong places.
Emeka Osuji
