‘Why micro finance banks remain immune to pangs of fallen Naira’

Godwin Ehigiamusoe

Godwin Ehigiamusoe

With over two million clients and branches in 28 states in the country, LAPO Microfinance Bank, which disbursed over N113 billion in 2015, is well placed to speak on the state of microfinance banking in the country. In a report on microfinance banking, an indigenous rating agency – Agusto& Co – confirmed that LAPO accounts for 24 per cent of the Nigerian microfinance sector. And in recognition of its assessed good performance in agricultural financing under the Agricultural credit guarantee scheme in Kaduna state, the Central Bank of Nigeria awarded the institution the best microfinance bank recently. The award was in recognition of the bank’s contribution to the development of agriculture in that state. In November last year, the African Development Bank Group (AfDB) signed a loan agreement with LAPO for N2.364 billion (approximately US $12 million) to enhance the bank’s credit granting to SMEs. The loan, according to the Managing Director of LAPO, Godwin Ehigiamusoe, would boost the realization of LAPO MfB’s goal of serving five million clients by 2017. In view of these remarkable achievements in an environment where many microfinance institutions are comatose due to hostile operating climate, Ehigiamusoe spoke with GODFREY OKPUGIE on the state of microfinance banking and his experience so far in the industry.

Microfinance banks were established to cater mainly for the micro, small and medium scale enterprises in Nigeria. Can you say that the banks have fulfilled this objective?
The Nigerian microfinance policy and regulatory framework was launched in 2005 essentially to increase the volume of institutional credit to micro, small and medium enterprises. The sector might not have fully met the exceptions of the public and needs of its target. However, it is important to note that appreciable progress has been made. Recently the leadership of the industry association paid an advocacy visit to Ex-President Obasanjo during whose tenure the microfinance policy was formulated. Statistics made available during the visit were quite revealing. Over N151 billion and N131 billion was granted as loan assets and deposits respectively. More than four million Nigerians, mostly persons from low-income households and owners of micro and small enterprises are currently accessing a range of financial services from microfinance banks. These are measures of progress. We may not have gotten there but much progress has been made and prospects for a brighter future for the sector are obvious.

Some customers of microfinance banks have complained about the high-interest rates payable on loans advanced by MFBs, alleging that the flat monthly interest of four per cent that some MFBs charge amounts to 48 per cent per annum, which is more than the rates charged by banks. What is your position on this?
It is often said that microfinance is pretty expensive because delivering microfinance is expensive. High cost of access to microfinance is due two major factors. First, is the fact that it is quite expensive to deliver little financial services. The cost for a commercial bank to deliver one billion naira to two major borrowers at N500 million each will certainly be lower than for a microfinance bank, which delivers that same amount at N50,000 each many clients. While the commercial bank will deal with only two borrowers, the microfinance bank will need to appraise 20,000 loan applications and will have to monitor the same units of loans in the hands of 20,000 persons. The second reason is that low-income people and micro enterprise do not have the capacity to make adequate deposits from which loans could be made. Microfinance, therefore, have to borrow funds from commercial sources to provide loans to their customers. These commercial sources are not cheap because they are not subsidised. Deposits are not only reliable source of fund but are equally cheaper than loans from commercial sources. Where funds are available to microfinance banks at cheap rates, they equally provide cheaper loans. An example is the funds from the Central Bank of Nigeria’s Micro, Small and Medium Enterprise Development Fund, which are delivered to the customers at very cheap interest rates

Your bank – LAPO, is among the very few MFBs in the country that have been able to swim through the murky and turbulent water of microfinance banking in Nigeria. To what can you attribute your success?
Our success could be attributed to a number of factors. First, is the fact over the years we have been able to developed competences in effectively engagement low-income people. We have developed flexible structures to deliver responsive services and doing so on a sustainable basis. We relate with our customers very cordially. We regard them as people with emotions and needs other than the need for loans. Second, we have been able to strike the delicate balance of carrying out our business, not only by paying attention but also to achieving social impact while also focusing on superior financial performance. Micro financing, therefore, is to us a mixture of charity and profit making.

Third, we have great people. My colleagues are wonderful. Daily, they transverse hamlets and urban slums to deliver services. They are empowered with excellent training and capacity building programmes. In Benin City, the Edo State capital, we have a full-fledge institute for microfinance and enterprise development. Fourthly, we have been able to build a network of partnership locally and internationally. And lastly, but very important, we believe that our success has also been due to some divine interventions.

What impact will the policy of Treasury Single Account (TSA), falling value of the Naira against the dollar, high-interest rate, dwindling revenue from crude oil sales and the general illiquidity in the banking system among others, have on microfinance business?
As actors in the national economic space particularly in the financial sector, microfinance banks will definitely be affected by these developments. But certainly not in the degree many expect. TSA initiative, for instance, will not have significant impact on the sector for the simple reason that microfinance banks ordinarily do not play in what the commercial banks call public sector. Also, the declining value of the Naira would have had adverse impact on the sector if many microfinance banks were accessing foreign loans in foreign currency for on-lending to their clients. Since they do not have such loans, the issue of foreign exchange rate risk does not exist. The possible high rate of inflation that is associated with these developments could worsen the already high cost of operations.

Does the stamp duty also affect transactions in MFB?
As financial institutions, yes. I strongly feel that microfinance banks low-income clients or customers should be exempted.
In most countries, microfinance banks or institutions are not seen or treated purely as financial institutions. They engage in economic empowerment and poverty alleviation.  They are regarded as development institutions, which strive to enable low-income people become actors in the national economic space. They enhance financial inclusion and in the process, extend full economic citizenship to the poor. Microfinance banks are not only eligible for concessions by government but should actually be supported.

Now that many commercial banks are in a position not favourable to granting of wholesale loans to MFBs for onward retail lending to their clients, will such not make survival difficult for MFBs this year?
I will like to say that even before now the volume of loans from commercial banks to microfinance banks for the purpose of on-lending to customers has not been significant, or much less than we expect. In other climes, microfinance banks and commercial banks build strong linkages for the purpose of channeling funds from the mainstream financial system institutions to the so-called informal sector, using microfinance banks as agents. Since we do not have such linkage, I do not sincerely envisage serious problem or threat to the microfinance sector if the very few commercial banks providing loans to MfBs cease to do so.

What is the association of MFBs doing to make the governments (federal, state and local) begin to release the statutorily mandated one per cent or so of their revenue allocations to the MFBs in their domain to enable them grant low-interest credits to their customers?
The idea of tiers of government supporting the sector with certain proportions of their budgets was muted during the formulation of the microfinance policy. The rationale was to enhance liquidity in the sector. Somehow, it has not been implemented. Rather, some of these governments floated their microfinance or micro credit projects obviously to gain political mileage. With the exception of very few, these government-led microfinance schemes are not sustainable. The only thing the association can do is to embark on advocacy, which is what they have been doing. I am not optimistic that the government can allocate proportions of their budgets to microfinance banks.

What efforts are the MFBs making to encourage their clients to venture into businesses that will boost the production of non-oil products for export to shore up the country’s dwindling forex earning?
Diversification of financial products is one approach to achieving the objective. Traditionally, microfinance clients are actors in the informal sector with emphasis on trading. However, many microfinance banks are developing SME products, which can support manufacturing, including production for export.

Some MfBs are also expanding their portfolio to agriculture.
Could you oblige us information on default percentage of your debts and causative factors? And what are your suggestions to the regulatory authorities on what to put in place to assist MFBs to deal with loan defaulters?
LAPO Microfinance has always maintained excellent loan asset. On the average, our non-performing loan ratio one day is far less than five per cent. This is largely due to our tested operating procedures. Perhaps the regulatory authorities could try the AMCON-like initiative in the microfinance sector to deal with toxic loan assets

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