Rethinking Microfinance: A wake up call to Nigerian Microfinance Institutions.
As discussed in my previous article, Financial Inclusion has seen more success in Uganda compared to Nigeria.
Please note this write up is not meant to condemn Nigerian Microfinance Institutions, it is rather a form of wake up call.
It is time to ask ourselves if my Microfinance in Nigeria is fulfilling its main purpose of making financial services affordable and available for the socially and economically marginalized, and consequently taking them out of poverty.
Microfinance has been used to make a huge difference in different part of the world. In India, Guatemala, Uganda, Kenya, Pakistan, The Philippines, Bangladesh and other parts of the world, microfinance has been widely used as a tool to eradicate poverty.
With my experience in the Nigerian Microfinance service Industry and the brief experience in East Africa, specifically Uganda, I have been able to identify the areas where Nigerian MFIs need to improve:
Product Design and Development:
This is the most important aspect of all; financial products design should be customer-centric and not stereotypical.
When designing a financial product, the culture, the macroeconomic condition of the country, the specific situation and needs of the target sector, and the desired impact of the product should be carefully considered. Nigerian microfinance product design seems to be stereotypical, let’s start with the loan products. Most of these products would fail impact assessment process.
Most MFIs offer the same loan to their clients, regardless of the peculiarity of these clients. These loan products might be given different names, but in the end, it is still the same design. For example, a trader, and school owner would be given the same repayment frequency, despite the general knowledge that schools’ cash flow is not monthly. Sometimes, borrowers find it hard to pay due to wrong product design, rather than lack of payment capacity or unwillingness. I was once asked by a foreign financial Inclusion expert how many loan products do we have in our MFB, she was surprised when I said only two: SME AND MICRO. Finca Uganda, for example, has 5 loan products, each product with a distinct design. Namely: Business Loan, School fees Loan, Solar Loan, Agric Loan, and Village Bank Group Loan. Most MFIs in Uganda has similar loan products. And this not business as usual, this is confirmed; see below an example of the terms and condition of a loan:
Loan amount of up to Shs.60 million
Repayment period of up to 3 years
Repayment plan tailored to your production cycle
- A grace period
- Competitive interest rates
- Available to individuals and groups borrowers of up to 5 members.
Which agricultural projects are eligible?
- Rice, Banana, Tea, Coffee, Maize, Sorghum, and wheat growing
- Produce (fruits and vegetables)
- Livestock keeping (Cattle, Goats, Piggery, Poultry, Bees)
How many MFIs in Nigeria offer this product with good terms like this? For me, I do not know any. And please, educate me if I am wrong.
Besides loans, microfinance institutions in Uganda are also innovative in designing their savings and micro-insurance products. These products have unique features to meet the needs of the target market.
For those MFIs that have an international network outside Nigeria, I keep wondering why their mode of operation is entirely different from that of Nigeria. Many factors can be responsible for this, but I think the most important is the way they are regulated in different countries.
MFIs in Nigeria are poorly regulated. Have you read the CBN regulation policy of MFBs? It is full of formality and bureaucracy. It does not in the first place, put emphasis on the financial inclusion goals of Microfinance. It is just business as usual.
In Uganda, microfinance institutions are well regulated by the Bank of Uganda, and there is an independent body (Uganda Microfinance Regulatory Agency) that assists the bank of Uganda in ensuring all microfinance institutions, both bank and non-bank are well regulated. Here, Microfinance is a serious business. In addition, the limitation CBN placed on MFIs further makes it hard for them to make a social impact. For example, unit, state, and National license model is not realistic.
The Mission, Vision, and Purpose:
Most Microfinance Banks in Nigeria has eradication of poverty and financial inclusion in their mission and vision statement, but most times it is just formality, the real sense, they are just in the business for the profit. Most investor enters the Microfinance business for a wrong reason: Just to make money. Microfinance is not the right business for an investor whose sole interest is just making money. I know there is always a tension between profit and Impact. If the interest cannot be evenly distributed between making a profit and making lives better, then the desire to make people’s life better should be favoured. Most Microfinance investors in Nigeria are solely interested in making money. I mean, there is nothing bad in that, every investor expects a return on the investment, but this should not override the main purpose of financially including the socially and economically marginalized. Most MFIs in Nigeria are owned by people who cannot afford to start a commercial bank. Therefore, they just use the microfinance name as a cover, while they offer services that deviated entirely from what they are licensed for. For example, I know an MFI in Lekki that does exclusively local purchasing order (LPO) financing, nothing else, is that an MFI?
Furthermore, most of the major players, the biggest market shareholders, in Nigeria neither finance agriculture nor clean energy. What is financial Inclusion without Agric and clean energy finance?
I would refer to Uganda again, Most of the major players in the industry offer Agric finance and clean energy finance, in fact, the Bank of Uganda(Central Bank) religiously support MFIs to provide Agric and clean energy finance. For example, The Agricultural Credit Facility (ACF) was set up by the Government of Uganda (GoU) in partnership with Commercial Banks, Uganda Development Bank Ltd (UDBL), Micro Deposit Taking Institutions (MDIs) and Credit Institutions all referred to as Participating Financial institutions (PFIs).
The facility is intended to provide medium and long-term loans to projects engaged in agriculture and agro-processing on more favourable terms that are usually available from the PFIs. The scheme is administered by the Bank of Uganda (BoU), with provision for a maximum grace period of 3 years and the interest rate to the final borrower being a maximum of 10% per annum.
The good thing about Agric and solar energy finance is that there are cheap funds available for these products, funds from international Investors like Afdb, Imf, Ifad, undp etc. IFAD recently issued 168 million dollars to Uganda for Agric finance. Foreign Investors have a keen interest in these product themes. Centenary Bank, Uganda for example, despite having one of the biggest clean energy loan portfolios, they still have a huge unutilized clean energy fund.
The Target Clientele:
There are more than 1,000 MFBs in Nigeria and more than 1,000 unregulated Non-bank MFIs.
Despite the huge number of MFIs, the people that really need the services are not adequately reached. For example, the major players in the Industry do not have branches in remote areas. Major Players in the industry like FINCA MFB, AB MFB, LETSHEGO, ADVANS LAFAYETTE, FORTIS, MICROCRED(NOW BAOBAB), ACCION MFB, with exception to LAPO MFB, only have branches in the major cities. Most of their customers are those who are already being served by commercial banks. The only thing they cannot get from the conventional banks is credit service. They do not have branches in villages. LAPO has few branches in some villages, but not in very remote areas. Do not get me wrong, MFIs in Nigeria are making a good impact, with over 200 billion naira’s outstanding in loans, yet I only believe there are still more people to be reached, especially those in very remote areas.
It is an entirely different case in Uganda, major players in the industry like FINCA MFB, Ugafode, Hofokam, Pride Microfinance Bank, Brac MFB, Yako and Efc have branches in the Most Remote areas in Uganda. I was shocked when I saw various branches of these MFIs in very remotes areas like Kamwenge, Katerera, Lypa, Nthugamo, and Bushenyi. FINCA for example, has 27 branches distributed all over Uganda.
They are able to reach the “real” under-banked. This target market has no other choice of getting financial services from any other provider. This is real financial Inclusion
There is an urgent need to rethink microfinance in Nigeria. We need to evaluate the impact of microfinance. Are we serving the real under-banked? Are we reaching the socially and economically marginalized populace? Are most of our customers receiving financial service for the first time in their life? Would they be better off or worse off without us? How have we impacted their standard of living? What is the effect of our product and services on the economy and the environment?
If the answer to most of the above questions is NO, then we need to rethink the main purpose of the microfinance model.
Please note, this piece is my personal opinion, it is inspired by my experience in the two countries (Nigeria and Uganda).