Microfinance banks living up to mandate?

Set up by the federal government to provide the kind of services that Deposit Money Banks (DMBs) could not provide, Microfinance banks in the country have failed to provide to provide the much needed support services to small businesses, BENJAMIN UMUTEME writes.

When the federal government paved the way for the Central Bank of Nigeria (CBN) to give the go ahead for the establishment of microfinance banks (MFBs), it was for the purpose of been able to capture those in the rural areas.

Based on its model, MFBs are supposed to facilitate the promotion of agricultural products and help create employment opportunities, including the provision of credit facilities to individuals as well as businesses.

With a larger part of Nigeria’s population in the rural area, MFBs objectives is to bridge the gap that has been left by DMBs by bringing financial services to people who otherwise wouldn’t have them.

Most times, it’s difficult to get a loan, no matter how small, from the conventional bank. The irony is that even a small loan might be enough to help someone work their way out of poverty by allowing them to purchase goods, supplies or a needed piece of equipment that can be used to create an entrepreneurial income that is where the microfinance bank come in handy.

However, in the absence of a microfinance bank or other microfinance providers, or government programs that fill a similar niche, freelance moneylenders, in other words, high-interest loan sharks, are often the only resource available, leaving borrowers worse off than before.

How it started

In December 2005, the CBN under the leadership of Professor Chukwuma Soludo introduced a Microfinance Policy Framework to enhance the access of micro-entrepreneurs and low income households to financial services required to expand and modernise their operations in order to contribute to rapid economic growth.

The rationale was that no inclusive growth can be achieved without improving access of this segment of the economic strata to factors of production, especially financial services

It was expected that it will help a large population of the working population leave the poverty level by the year 2020.

Focusing on the poor

The credit system in the microfinance banks exclusively focuses on the poorest of the poor, organises borrowers into small homogenous groups, and gives loans to meet diverse development needs of the poor without emphasis on tangible collaterals.

The aim of microfinance is not only to extend credits to beneficiaries but to promote entrepreneurship and boost rural financial markets that will provide sustainable access to financial services by creating a relationship between those with financial resources and those who need them.

The MFBs also facilitate economic development by providing ancillary capacity building to micro-enterprises in areas such as record keeping and small business management; collection of money or proceeds of banking instruments on behalf of their customers through correspondent banks; provision of payment services such as salary, gratuity and pension for the staff of micro-enterprises and various tiers of government; provision of loan disbursement services for the delivery of credit programme of government agencies, groups and individuals for poverty alleviation on non-recourse basis; provision of ancillary banking services to their customers such as domestic remittance of funds and safe custody among others.

All these areas have a direct positive link with entrepreneurial capabilities of the rural people.

Bringing succour to small businesses

A trader in Jikwoyi, Mrs. Angela Okafor, told Blueprint Weekend that her once dying business received life with the help of a microfinance bank.

According to her, she was frustrated to the point of closing down the business until somebody introduced her to an MFB.

“For two years I struggled to sustain my provision shop after my husband lost his job. And because we now had to be using it also to I could not fill the shop as expected. The issue dragged on and because of that I lost a lot of customers.

“After trying to get small loans to shore up the business failed I resigned myself to managing the situation. And in January, I had concluded with my husband that if I couldn’t get loan to restock the shop it would be better to close it down because it was almost as if nothing was inside.

As God will have it one day my neighbour directed me to LAPO MFB and after discussing with them, they came to inspect the shop and gave me the amount agreed upon. That was how my business came back to life. I thank God because if not for them I would have closed the shop.”

Mrs. Okafor is not the only one who has good things to say about the role of MFBs, even another petty trader, mama Ifeanyi and a pensioner, Mrs. Aisha Musa say MFBs have come handy when it appears as if they are stranded.

According to mama Ifeanyi, who has a provision shop in Phase 3 in Jikwoyi, “with the loan from the microfinance bank, I have been able to fill my shop. Now, I will not tell anybody that come to my shop that I don’t have anything.”

On repayment, she told our correspondent that it has never been a problem as sales has increase and it has helped in the weekly payment of the interest.

“I am able to pay the N3,000 weekly because whatever people come to my shop to buy they get.”

But has it been all smooth sailing for Nigerians?

For Mr. John Yahaya, going to MFBs to take a loan is like committing suicide. Narrating his experience to Blueprint, he said that after agreeing to give him the loan, the MFB introduced some outrageous condition s that he would never be able meet.

He wondered how any normal business man would be able to repay any loan with 30 per cent interest.

“I had a financial challenge that required immediate solution. So I approached a microfinance bank for a loan. Initially, they were been nice but after agreeing to give me the money they added that I would bring my TV set, and my laptop as collateral just for N50,000. I quietly left the place blaming myself for going to meet them,” he said.

Weak capital base hindering MFBs effectiveness- Uwaleke

In a WhatsApp message, Head, Banking and Finance Department, Nasarawa State University, Professor Uche Uwaleke, asserted that weak capital base of MFB continues to hinder their ability to engage professionals in their operations as well as put proper risk management framework in place.

The reality, according to Prof. Uwaleke is that many Microfinance banks with a minimum capital base of N20 million were financially sick.

“Little wonder many of them are closing shop and their licenses being withdrawn by the CBN,” he said.

The president of Capital Market Academics noted that the directive by the CBN for MFBs to recapitalise is a welcome development as it will boosts their effectiveness and enable them achieve their mandate.

According to him, the development will also enhance their corporate governance.

He said: “The whole idea behind microfinance banks is to have institutions that are in a position to grant micro credit to micro and small enterprises. That does not mean that such institutions should be small in size.

Bottom Line

In the final analysis, while microfinance isn’t a magic wand that will make poverty disappear, there’s a lot to be said in its favor. Despite the concerns of its critics, there has been no evidence of that MFBs cause systemic harms to those that patronize it. At the end of the day, that may just be enough.