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Rethinking microfinance strategies
The Guardian, United Kingdom Wednesday, June 30, 2010

Thompson Ayodele
It is proven that microfinancing aids development and help alleviate poverty. It primarily heps local entrepreneurs who lack collateral. The poor are not necessarily unworthy of Credit.The founder of Grameen Bank, Muhammad Yunnus, tells us so in his book, “Banker to the Poor", writes Thompson Ayodele and Olusegun Sotola in The Guardian.

Across the world, microfinancing has proved to be an effective tool for
poverty alleviation and a better approach to development. It is based on
the recognition that the war against poverty cannot be won without the
poor themselves in the frontline. This is a critical factor of growth,
particularly in poor societies where business activities are largely
informal and access to credit is restricted.

One of the objectives of microfinance banking is to increase access to
credit among local entrepreneurs who do not have the collaterals to obtain
loans in commercial banks. However, the microfinance bank in Nigeria has
not performed its expected roles. Women who ought to be its core
constituents are largely underserved. Customers’ confidence has waned with
many vowing never to have anything to do again with microfinance bank.
With over sixty per cent of business activities being informal, less than
five per cent patronise microfinance bank. Aside from concentrating in
large cities, not less than 250 of the over 900-licensed microfinance
banks in Nigeria have shut up shops.

Worried by the incessant closure of microfinance banks and the
accompanying economic burden on their customers, the Central Bank of
Nigeria recently embarked on a comprehensive examination of all
microfinance institutions. Of over 68 microfinance banks in Lagos, only
six of them were given a clean bill. Given the visible poor performance
and the dearth of success stories, the result of the CBN’s examination
merely confirms the extent of the rot in the sector.

Most of the micro-lending operators usually cite unpaid loans as the cause
of failure to break even. Laying the blame on unpaid loans might lead one
to conclude that the poor are not credit worthy. This is misleading. Even
in the poorest countries, the poor save.

A highly successful microfinance bank in Bangladesh is built on the
philosophy that the poor always pay back. The founder of Grameen Bank,
Muhammad Yunnus, in his book, “Banker to the Poor,” maintains that poor
people throughout the world are credit worthy and one only needs to look
at credit and poverty from their perspectives.

Local moneylenders and thrift societies are patronised and organized by
the poor, particularly women. They hardly shut up shops over loans
repayment. They obviously owe their continued existence to proper
understanding of micro lending business, their customers’ needs and the
risks involved in trying to behave like a conventional bank.

Micro-lending that tends to behave like a real bank will be unsustainable.

While conventional banks build all sorts of risk mitigating checks into
their loan packages, thereby increasing interest rates and what is
repayable, trust, peer check and customers’ interest should be the
cornerstone on which microfinance banks should build their services.

Many have argued that microfinance bank failure is traceable to poor
corporate governance. They are correct to a large extent. The key problem
lies with the conception and operation of microfinance banks. Ordinarily,
a microfinance bank is not a bank in the real sense, though it renders
financial services. Micro-lending is never elitist. It is essentially
pro-poor and as such adopts flexible methodology. The perceived problems
of microfinance banks are offshoot of business designs that are not
mindful of these important elements.

Unfortunately, many microfinance banks are conceived and operated like
mini commercial banks. They adopt every vestige of a regular bank. For
this reason, they operate from magnificent edifice in locations where
residents obviously do not need microfinancing. This unnecessarily drives
up their overheads and consequently disconnects them from the people they
ought to have served.

One critical issue plaguing microfinance banks is their inability to
invest their funds in other sectors. The CBN should put in place a policy
guideline, whereby a certain percentage of their deposits are re-invested.
The advantage of this is that such investment will increase the liquidity
base as well as be a special fund that could be fallen back on in crisis

However, because of the propensity to get quick returns, microfinance bank
managers and directors might be tempted to invest in sectors they have
little or no expertise, thereby risking depositors’ fund. In this regard,
there is a need for a framework, whereby the decision to invest is taken
alongside with the apex bank.

There are reports that microfinance bank capital base might be jerked up
from N20 million to either N100 million or N200 million. While this is
desirable, it will be counter productive in the long run. Aside from
defeating the spirit of micro-lending, many of them in the countryside
will die a natural death as a substantial number of them won’t be able to
raise N100 million. The CBN should look at the microfinance banks outside
big cities like Lagos, Abuja and Port Harcourt. The main challenge for
microfinance bank goes beyond having huge capital base but their mode of
operations. The commercial banks were bailed out not because of inadequate
capital base but due to insider abuse, poor corporate governance and the
CBN compromised its regulatory and over-sight functions.

The war against poverty could not be won when credit remains inaccessible
to over 60 per cent of the population. It is therefore important that an
appropriate regulatory framework is put in place to get microfinance banks
to really be a partner in the war against poverty and development.
Already, the CBN is organising training for management staff of
microfinance banks. One is of the view that content should emphasize the
essence of micro credit and products must be directed at the poor.

Though the financial needs of the poor vary, the truth is that the same
law everywhere governs poverty. An effective micro- lending bank will need
to devise products that will meet these changing needs and make repayment
to be in the borrowers’ interest. It is unreasonable for micro lenders to
set interest rate as high as haggling allows, which is the hallmark of
many micro- finance banks. The genuinely poor are never in a position to
get a good bargain. It behoves the Deputy Governor, Financial Services of
the CBN, Kingsley Moghalu, and his team to clearly emphasize these
nuggets: lend money to the poor on terms that are suitable to them, teach
them a few sound financial principles and they will help themselves.

A well-trained and well-informed manpower who understands the concept of
micro financing is an essential factor of success. Staff of microfinance
banks should be trained to be teachers, advisers and mentors. This way,
they will be more helpful to borrowers. The most important thing in micro
lending is that operators should not be merely concerned with the edifice,
computers and state-of-the-art cars. On the contrary, the guiding
philosophy should be centred on helping somebody to escape the poverty

Only then can we claim to be waging war against poverty.

This article was published in the The Guardian on Wednesday, June 30, 2010. Please read the original article here.
Author : Mr Ayodele is a Project 21 associate and, the Executive Director of Initiative for Public Policy Analysis, based in Lagos, Nigeria.
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