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Okoye: Lack of specialised attention responsible for high mortality rate of microfinance banks

By Helen Oji
21 October 2018   |   3:20 am
Of course, there is low managerial capacity, which is evident in the ongoing national discourse about high deficiency of required skills. In the private sector, there have been complaints of huge turnout of graduates that lack requisite skills ...

Tiko Okoye

• Reducing Financially Excluded Persons To 20% By 2020 ImpossibleManaging Director/Chief Executive Officer of Fortis

Microfinance Bank Plc, Tiko Okoye, in this interview with HELEN OJI, spoke on factors inhibiting the growth of microfinance institutions, and what should be done to cause a turnaround.

There are more than 1, 000 microfinance banks in the country, but they seem to be inactive. Why is the sub-sector not vibrant?
Of course, there is low managerial capacity, which is evident in the ongoing national discourse about high deficiency of required skills. In the private sector, there have been complaints of huge turnout of graduates that lack requisite skills and weak human resources management (lax recruitment and hiring process).

Still, there exists huge knowledge gaps within the board and top management levels of microfinance banks, just as there is poor asset quality resulting from bad business; inadequate capital (shareholders’ funds); high transaction costs; lack of public trust and confidence; poor banking habits and culture on the part of existing and potential clients, but made worse by high level of financial illiteracy.

There is still huge evidence of very poor infrastructure, which amplifies operating costs for microfinance institutions (MFIs), and the observed seasonality of rural incomes from peasant and subsistent farmers.

Added to this are flip-flop government policies; lack of proper understanding of microfinance business; poor government and systemic support; ideological confusion or mission drift, where many operators approach microfinancing as if it is a mini-commercial bank, and heavy investment in fixed assets associated with operations. Situations like these would create more difficulty for the institutions to thrive.

For example, high interest rates would make the operations of MFIs difficult to thrive, which is what we are experiencing now. Aside from the low managerial capacity earlier mentioned, there is also a case of improper bookkeeping; low understanding of markets, marketing process and the right customers. There is also the challenge of keeping the business and personal transactions completely apart, as the sub-sector is more of individuals, than public. Then, the case of funding to support elaborate deals seems to be central and unresolved over the years.

Are interventionist organisations like the Bank of Industry, Development Bank of Nigeria among others filling, or taking over the role of microfinance banks?
Recall the highly popular advert jingle: “If e no be Panadol, e no fit be like Panadol,” or something to that effect. MFIs are specialised grassroots institutions that are best fitted to play the role they are playing in furtherance of financial inclusion, principally as they dare to be established in areas where more formal banking institutions would dread to walk.

But it appears nobody seems to be bothered about the vacuum created by the failure rate or observed gaps?
A vacuum does not exist in the real sense because it is a sub-sector characterised by easy entry and easy exit. There are about 1, 000 microfinance banks today, not to mention a myriad of unregulated non-governmental organisations-microfinance institutions (NGO-MFIs). But the quantity is not reflected directly in the quality of their contribution to the GDP and aggregate loan portfolio of the banking sector. The capital requirement for a Unit MFB is only N20m. Perhaps, it is these “realities” that delude the government and regulatory authorities into thinking that MFIs are dispensable. When compared to the royal treatment accorded deposit money banks by the Central Bank of Nigeria, one cannot but understand why these grassroots institutions seem to be “orphans.”

This is also reflected in the poor public perception and trust. But this is a very wrong perception given the key roles MFIs play by way of enhancing financial literacy and driving financial inclusion by making financial services accessible to millions of people who would normally not have had access to such services.

What’s the non-performing loans portfolio like in MFIs?
This largely depends on whether MFI’s operations are skewed more to SMEs or micro-credits. Generally, and as a rule of thumb, as the economy goes, so does the loan default rate and size of non-performing assets. During periods of economic recession or economic downturn, non-performing loan figures for banks generally increase as businesses face harsh times.

A MFI that is skewed towards SMEs would tend to have a loan default rate higher than the banking industry average while a MFI that is skewed towards microcredits tends to have a much lower default rate as a result of the group lending methodology that emphasises peer pressure and cross-guarantee.

Are there possibility of takeover by development banks and interventionist financial institutions?
Takeovers by deposit money banks is very unlikely since they are very risk-averse. By foreign investors? It is very likely, since organisations have many years of practical experience in different continents and appreciate the importance and benefits derivable. Those already highly exposed to MFIs are prime candidates for loan-to-equity swap arrangements.

For mergers and acquisitions, it would have been the best option, but for the notorious attitude of Nigerian entrepreneurs to go it alone. If it is going to happen, then it must be induced by the CBN as happened with the 2006 banking consolidation exercise.

Interest rate on loans by microfinance seems to be at par with that of commercial banks. Is this proper?
This is a very grave error because both majorly source intervention funds from different sources. While the cost of capital is generally much lower for commercial banks, it is generally much higher for MFIs. This scenario would only exist where the MFI is heavily skewed towards SMEs and competition with banks and the accompanying pricing pressure would force such MFI to charge very close to what regular banks are charging. But such MFI may not survive in the nearest future because its operations would not be financially sustainable. MFIs that operate mainly on the basis of Group Lending Methodology have a greater flexibility in their interest rate regimes.

What strategies have you been adopting in navigating the harsh operating environment?
Develop institutional culture of zero tolerance for loan default; have an excellent management succession plan, and focus on effective savings mobilisation programmes to reduce cost of funds. For us, we engage in constant process review aimed at enhancing operating efficiency and customer satisfaction; put effective staff motivation plans in place like competitive wages; working environment; staff training and good use of emotional intelligence, among other things.

We also work towards ensuring structures that fit the strategy we are adopting; engage in collaborative projects with deposit money banks for win-win outcomes; diligently crystalise a long-term strategic plan (maybe, three to five years); place more emphasis on microcredit and related products (micro-insurance, micro-housing, micro-pensions, funds remittances, than SMEs), and ensure equity injection and increased retained earnings to shore up capital base.

Is micro-financing still relevant today?
Of course, yes. It is even more relevant today than ever, particularly when Nigeria reportedly just overtook India as the country with the largest number of people living below poverty line. Apart from an increasing poverty rate, the percentage of people that are financially excluded is still unacceptably high at 60 per cent.

The aims and objectives of the National Microfinance Policy include the reduction of the percentage of financially excluded persons to 20 per cent by 2020; increase access to financial services by the active poor by 10 per cent yearly; increase the share of microcredits as a percentage of total credits in the economy from 0.9 per cent in 2005 to at least 20 per cent in 2020; and increase share of microcredits as a percentage of the GDP from 0.2 per cent in 2005 to at least 20 per cent in 2020. Note that 2020 is only a couple of years away, yet achieving these targets remains a Herculean task. They would be impossible to achieve without microfinance banks playing a significant role.

What measures can be adopted to strengthen the sub-sector?
Five-year tax holiday to compensate for high transaction costs and non-profit yielding social mission projects is an important step. The provision of easily affordable intermediation funds by government and its key agencies like the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation. Just consider that the regulatory authorities recently provided a bailout fund of nearly N800b for the emergence of Polaris Bank. This is equivalent to formation capital for as many as 40,000 Unit MFBs or 400 National MFBs yet, they would hardly lift a finger for a MFB facing similar liquidity crisis.

There is also need to significantly relax the collateral requirements for sourcing intervention funds. These MFIs emphasise social collateral, so from where would they procure the hefty collateral amounts requested? These are grassroots banks nearest to those they serve in the rural areas. It is therefore, imperative that they be allowed to a limited participation in the foreign exchange transactions given the huge funds sent yearly from Nigerians in the Diaspora to their relatives in rural areas.

It is also exigent to establish “Toxic Assets Bank” for the sub-sector similar to the Asset Management Corporation of Nigeria for DMBs to relieve MFIs of the albatross of non-performing loans. It is also time for the implementation of the National Microfinance Policy that suggests that the Federal Government, states and local governments should contribute one per cent of their yearly budgets to MFIs of their choice to fund micro entrepreneurial activities in rural areas.

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