Since the advent of microfinance banks in Bangladesh in the mid-1970s, several countries have followed suit. The seeming popularity of microfinance banking among developing countries is predicated on reducing poverty. NGOZI AMUCHE examines the banks’ challenges.
Microfinance is the provision of financial services to the poor who are traditionally not served by the conventional banks. These financial services include credit, savings, micro-leasing and money transfer and payment services. The features that distinguish microfinance from other forms of formal financial products are; smallness of loans advanced and savings collected, near absence of assets–based collateral and simplicity of operations.
However, this can be deduced from the foregoing that microfinance is a poverty alleviation strategy that operates by providing credit and other financial services to economically active and low-income households and their businesses.
To achieve this poverty alleviation objective, microfinance helps the poor increase their income, build a viable business, reduce vulnerability to shocks, and create employment.
Financial services such as microfinancing are badly implemented as more people are unable to access loans to develop their businesses. As a result, basic life necessities such as property insurance are rarely available, while mortgage loans are very costly due to massive market and regulatory failure.
Before the banking sector reform programme in Nigeria, there was little attention from the government as regards the implementation of microfinancing in the country. This was because there were few banks and financial institutions interested in the scheme.
A major consequence of a large informal sector is difficulty in economic management. The experience of Nigeria in this regard is not different as the monetary authorities have had to watch impotently as their monetary policy measures fall short of desired objectives.
Since microfinance means giving working capital to small organisations, like roadside mechanics, carpenters and small business operators who do not have any collateral, many banks were not interested to give them loans.
Apart from collateral, most banks were really not interested in financing micro businesses because they lack formal structure, have poor management skills and no records to show for their operations in the form of account (book-keeping).
But since the banks were fully recapitalised, many of them could access loans as banks now have enough money to work with. It has also been speculated that many microfinance operators would be able to access soft loans on longer terms as time goes on. This change of attitude has also received the attention of policy-makers. Some experts have argued that microfinance is appealing to the government because it offers hope of improving the lives of poor people.
Director, Other Financial Institution Supervision Department, of the Central Bank of Nigeria, Ahmed Abdullahi, said under-capitalisation is one of the greatest impediments to the growth of microfinance banks in the country.
“Microfinance banks are facing a lot of challenges. They are generally undercapitalised and this hampers effective risk management. At the moment, their non-performing loans are growing beyond regulatory requirements. This has implications on their capital assets and liquidity as banks. The industry, in general, is making losses and no business can survive without being profitable.”
According to him, one of the greatest challenges is the overhead of most of the microfinance banks because they are mimicking commercial banks.
“MFBs should, therefore,” he said, “re-examine their business models because they do not have the kind of opportunities that commercial banks have.”
The Managing Director of Nigeria Deposit Insurance Corporation, Umaru Ibrahim, emphasised the imperative of adopting effective risk management by MFB operators to drive growth in the sector, sustain profitability and boost access to finance especially to Micro, Small, Medium Enterprises, and MSMEs.
Ibrahim regretted that deposits mobilised by 936 MFBs as of June 30 2015 amounted to N173.3bn, adding that the NDIC will continue to ensure that MFBs in the country operate under the purview of the guidelines.
“NDIC as an insurer reimburses depositors of MFBs up to a maximum limit of N200, 000 per depositor per MFB in the event of failure of such MFB,” he said.
He noted that the new coverage level represents an increase of 100 per cent over the earlier coverage level of N100, 000, pointing out that the NDIC has developed and deployed a framework for financial assistance for MFBs so as to promptly intervene and assist the MFBs to overcome temporary liquidity challenges.
Historically, another fundamental difficulty microfinance banks in Nigeria face is the near-absence of basic infrastructure.
This compounds operational difficulties of the banks, which ordinarily are faced by high operational costs because of their nature of business. By dealing with many small clients microfinance banks’ transaction costs are usually higher than those of conventional banks.
Unfortunately, the banks are forced to incur additional costs in providing electricity and water. The absence of good roads especially in rural areas also affects their outreach. All this drives up the cost of operations.
Prof. Mohammad Yunus, the founder of Grameen Bank, said, “I believe we can create a poverty-free world because poverty is not created by poor people. It has been created by the economic and social system that we have designed for ourselves; the institution and the concept that make up the system; the policies that we pursue.”
Grameen has grown to provide collateral-free loans to five million clients in Bangladesh, 96 per cent of who are women.
Over the last three decades, Grameen Bank has loaned out over $5bn to the poorest of the poor, while maintaining repayment rate consistently above 98 per cent.
The innovative approach to poverty alleviation pioneered by Yunus in a small village in Bangladesh has inspired a global microcredit movement reaching out to millions of poor women from rural South Africa to inner-city Chicago.
“There are certain characteristics of the global recovery which we noticed in the various markets where we operate. For example, we noticed attempts by policy-makers to stimulate credit growth by lowering interest rates to zero,” he said.
“If the poor must overcome poverty, it is important, therefore, that they have the means to develop themselves. They must be able to find their own solutions as microfinance is recognised worldwide as a powerful aid in eradicating poverty,” said a financial analyst, Samuel Adebowale.
The new national microfinance policy seeks to give a defined structure to the microfinance sector which has over the years operated without modus operandi, a situation responsible for the sector’s poor showing.
Microcredit, according to sources, accounted for 0.2 per cent of the gross domestic product and its proportion of total credit is only 0.9 per cent.
For a country of about 200m people, CBN said 80 per cent of the total population being regarded as poor is ridiculous.
Evidently, the federal government appears determined to influence and stimulate the level of economic activities in the real sector of the national economy. Within the last four years, the CBN has released several guidelines for disbursement of over N900bn, directed at boosting real activities across five sectors.
The funds with varying loan tenures are Commercial Agricultural Credit Scheme, SME Credit Guarantee Scheme, SME/Manufacturing sector Refinancing /Restructuring Funds, and Power and Aviation Intervention Fund.
To address the issues of microfinance anomaly, concerted effort on the part of regulators, promoters, practitioners, and other stakeholders in the microfinance banking subsector is required.
It is expedient that the banks succeed and grow considering their poverty amelioration potentials.
