September 12, 2011

Seven fundamental flaws with microfinance banking in Nigeria

By Babajide Komolafe
It was obvious from the beginning. Only just that the regulators and operators were not humble enough to accept it, that the framework for microfinance banking in Nigeria is faulty and cannot achieve its objectives. This reality was made the more and undeniably obvious last week by the revealing and moving presentation of Professor Mohammad Yunus, the founder of the first microfinance bank called Grameen Bank.

From his keynote address delivered at the first  FirstBank Impact conference series, Yunus, a Nobel peace prize winner, indirectly told the gathering of regulators, top bankers, microfinance operators,  national assembly members and government officials that what we have in Nigeria is not microfinance banking but micro commercial banks.

Though he was not asked to  make an assessment of microfinance banking in Nigeria, the panel discussion before his speech might have prompted him to explain the fundamental principles behind the founding of Grameen Bank.

The panel discussion featured Mr. Fabanwo, Director, Other Financial Institutions Department (CBN), which is the supervising department for microfinance banks (MFBs), Professor Ibidapo Obe, former vice chancellor, University of Lagos, Mrs Bunmi Lawson, Managing Director, Accion MFB and Managing Director FirstBank Microfinance Bank,Mrs. Pauline Wandoo Nsa.

During the question and answer session, Oba Rilwan Akiolu, the Oba of Lagos, asked two questions. The first was directed at Nsa, CEO of First Bank MFB. He asked, “What is your interest rate? Rather than give a simple answer, Nsa began to educate the gathering about the high running cost of MFBs.

“Let me first provide a background. Runing a microfinance bank is expensive”, and she went on and on without answering the  question. Rather she said, “Our our rates are not that high. Some MFBs charge up to 10 per cent.  But ours is still reasonable”. But the Oba and the audience however insisted,  “Tell us your own rates or the range”.

Eventually she said, “Our rates range from three to four percent”. The rates she quoted are however monthly rates. This implies that some MFBs in Nigeria charge up to 100 per cent per annum, while First Bank MFB charges between 36 and 48 per cent.

The second question was directed at Fabanwo, the CBN Director that supervises MFBs. He was asked why CBN can’t create a fund that can be assessed by the MFBs so that they can lend cheaply. Responding,  Fabanwo first defended the high running cost of MFBs and then said there is actually a fund for such purpose but it is in the pipeline. He said it would come after the CBN had sanitised the sector and ensure that the operators understand what microfinance banking is all about.

Yunus presentation however show that it is not only microfinance banking  operators in Nigeria that does not understand and practice microfinance banking, the OFID director and the entire CBN also lack understanding of what they are regulating. It is a case of the blind regulating the blind and both are pretending to see.

According to Yunus, there are at least seven fundamental flaws with microfinance banking in Nigeria.

The first is that it is not for the poor, the poorest poor. Rather it is for traders, suppliers and importers and this explains the cut throat interest rates Nigerian MFBs charge. Yunus said, “We should remember where microfinance came from; it is banking for the poor. I am not saying that banking cannot be done for the rich.

There is banking for the rich but the complaints we hear is that banking is too restricted to the rich. That is why we decided to start by reaching out to the poor and the poorest. This is the most important part of it and this is the beginning of the whole idea and movement called microfinance. So the conventional banks go to the rich we went to the poor”

Secondly, because it for commerce, microfinance banks in Nigeria are predominately in the cities and urban areaa, a sharp contrast to the rural based nature of the first microfinance bank. “Conventional banks go to the cities, particularly the big banks, they have the largest branches, we went to the villages, and the most remote villages. The remoter you are the more exited we are.

That was what Grameen Bank was all about. Grameen means rural and when we were enacting the law that set it up we incorporated a clause that says this bank would never work in an urban center, never. It  still today has never worked in any urban area, 35 years after inception, not even in the municipalities. In fact anything covered by the municipality is a no-fly zone”, Yunus said.

Thirdly, Nigerian microfinance banks insist on collateral and they don’t lend to start a new business. This according to Yunus is not microfinance.

He said, “We dismiss the idea of collateral. Conventional banks want collateral, we said, “Forget it”.  The more collateral one can provide the more exited conventional banks are but in our case, the less collateral people have, the more exited we are. If you have nothing, we get more excited about you.

We say yes we have gotten our customer.  “Conventional banks ask the borrower, how much do you know about this business”. The more he or she can convince the conventional banks he or she is an expert in the business the more excited the conventional banks, we reversed that, when a client says I don’t know anything about this business, we get excited about him, that is the person we want.”

Fourthly, microfinance banking according to its founder is women oriented and focussed. In Nigeria that is not the case. It is who ever can pay the interest rate. “Conventional banks go to the men, we went to women”, Yunus said.

Fifthly, Nigerian microfinance banks are owned and are regulation required to be owned by the rich hence the minimum capital base of N20 million. But according to the founder it should not be so, it should be owned by the poor who are also its customers. “Conventional banks are owned by rich men, Grameen Bank is owned by the poor women”, Ynus said.

The sixth flaw is that microfinance banks are allowed to charge any interest rate. But in the Gremeem Bank concept, the interest rate is capped at 10 per cent margin between the cost of funds and interest rate. Yunus said the highest interest rate which is for income yielding activities is 20 per cent simple interest and for housing loan it is 8.0 per cent simple interest.

For its education loan, given to children of the poor, the interest rate is 5.0 per cent simple interest and they don’t start paying until they graduate from school and start working.

To achieve this interest rate, Yunus said Grameen Bank bounded itself never to allow its cost of operations to exceed the ten per cent interest margin. And this is done by doing most of the banking at the door step of their customers. “We believe that people should not go to banks, rather banks should go to people. So we make sure we visit all our customers at least once in a week. Hence there is no need for expansive offices and this helps reduces our running cost”.

In Nigeria, it is the opposite. Microfinance banks have expansive, tastily furnished offices that can easily pass for the head office of a conventional bank.

However, the greatest flaw with microfinance banking in Nigeria is that it is profit oriented. The promoters saw it as a cheap access to owning a bank and making money. Hence they set target for staff and management. Grameen Bank on the contrary, according to Yunus was founded to solve a problem-poverty. “Microfinance is a social business; it is not for profit but to help people out of poverty. This is because poverty is the fault of the society, the individual is just a victim of poverty”, he said.

Yunus said it indirectly, but Professor Ibidapo had earlier said it bluntly that the current microfinance banking framework in Nigeria cannot work, it can’t achieve the cardinal objective of poverty eradication.

Thus far it has only produced micro-commercial banks, and no matter the amendments and adjustments, it would not produce anything different or near Grameen Bank.

The solution is to scrap the framework and design a new one. This of course requires a lot of humility on the part of the leadership of the Central Bank of Nigeria.