MFBs urged to invest in digital channels

Microfinance Banks (MFBs) in Nigeria have been urged to accelerate investment in digital channels for loan disbursement and collection to mitigate the impact of COVID-19 in the industry.

A new report by Agusto & Co on COVID-19 and microfinance bank said the pandemic hurt the microfinance industry in Nigeria.

According to the report, many microfinance banks in the country, like in most other developing countries with relatively low penetration of e-channels, witnessed a doubling of obligations during the first wave of the pandemic and lockdown restrictions in early 2020.

The report noted that despite up to ₦N5 billion spent by the major national and state microfinance banks in Nigeria on the implementation of new technology, mobile and USSD banking services, the industry remains heavily reliant on brick-and-mortar operation for the acquisition of customers and disbursement of loans.

Given the low technological literacy in the country, collections from micro, small and medium-scale enterprises (MSMEs) were ground to a halt during the six-week lockdown.

Besides, the economic environment also did not lend itself to loan disbursements given the sharp decline in business activities. Many microfinance banks were caught off guard by the pandemic with few having the infrastructure in place to lend digitally.

According to the report, the growth in the industry’s loan book was depressed with the portfolio remaining flat as operators adopted a more cautious approach given the heightened credit risk of MSMEs in key sectors such as education, supply of non-essential goods and services, transportation and hospitality.

“The efficacy of such channels in Nigeria may, however, be limited by the low digital literacy of the unbanked, under-banked and low-income target market of the microfinance industry,” it said.

Therefore, the rating agency stressed the need for operators in the industry to develop web portals for loan applications and is actively exploring the use of payment services such as Remita, Paystack and ultimately mobile money for collections.

“The future of digital channels in microfinance space critically for collections and consequently disbursements) will be strongly dependent on the adoption of digital payments by low-income earners and MSMEs in everyday purchase and sales transactions.

“Agusto & Co. expects to see improvements in the Microfinance Industry in 2021 as the global and domestic economies rebound and operators adjust to the new realities with a five per cent growth in the loan book and a 400-basis point drop in the non-performing loan ratio from an average of 12.6 per cent for major operators,” it stated.