Newly appointed Managing Director of Accion Microfinance Bank, MfB, Mr. Taiwo Joda in this interview explains the factors that influence the high interest rate charged by microfinance banks (MfBs). He however expressed optimism that the trend would abate as more intervention funds are made available to MfBs. Excerpts:
By Providence Emmanuel
WHAT would you be doing to enhance access to the CBN’s N220billion Micro Small and Medium Enterprises Development Fund, MSMEDF?
As a microfinance bank, we have had our fair share. We have partnered with the CBN and a few other government agencies in the area of intervention funds. But that is not to say a lot more can’t be done and that is also to say that a lot more MfBs can be included in the process. We are engaging again with the CBN, I was with the CBN and we had fruitful deliberations on how we can move the industry forward.
One of the major issues has always been the ability of the MfBs to come up with security for the loans that the government had given. It is interesting because the MfBs are also expected to give loans to the customers that do not have security. Most of the customers we give loan to are customers that do not have security and they don’t have to give.
That is why it is a financial inclusion programme. They cannot meet those standards that the commercial banks would need, so they come to MfB. We are looking for where we can shake hands and one of the things that are coming out is the MCR. We are also exploiting ways where the BoI, CBN and other regulatory arm of the government can accept the MCR that the MfBs are accepting.
If they can accept it, it is also security, so we can transfer our rights in the movable collateral secretariat to those government agencies and the CBN. May be with that we would be able to deepen the financial inclusion drive but no doubt there are a lot that would be done if there are additional funds.
What would you be doing differently on the issue of high interest rate?
Let us start this way. The cost of serving a customer with a microfinance bank is quite high. So when you say high interest rate, it must be put in context; high interest rate of what? Do you know that the amount of resources you put into serving a customer that wants N20,000 is the amount of resources some other banks would put in to serving a customer that wants N100 million.
Most of the customers that we serve are also not in the mainstream of banking. There is a lot of physical intervention, so the administrative cost of MfB is very high. It is quite labour intensive. Accion for instance, has over a thousand staff. If you look at that on one angle, you will see that because of the high cost, the cost of doing business is very high.
That tends to mirror the kind of charges our customer. Secondly, the funds are not coming as they should because of several things that the government wants and so what is left is that, we need to be able to borrow money from other financial institutions. There is this perception that if you are MfB, then your risk must be higher and there is a trade-off between risk and return.
A typical person who will put his money in a bank at ten percent want to put it in a MfB at 20 percent. As a financial inter-mediator, you want to bring from the surplus and give it to the deficit to do business and it comes at a high cost. However, what is also very important is that because of the tenure and the other arrangements that soften the ground, customers are then repaying the loan. Customers are glad that they are able to access that fund to do their business, rather than not having funds at all.
Is this enough reason for high interest rate?
When you say an interest rate is high, at times, what you are trying to say is that the customer is not making as much profit from the money as they would have love to make. But my argument is that, it is better to move from zero to one than to remain in zero. As the industry gets better and as we begin to attract more credibility in the industry and as more intervention funds come from the government, we would be able to do things.
There are some of our products in Accion that is cheaper than what commercial banks are doing. The people leaving with disability, their facility with the bank is single digit interest rate. For those who have schools who take loan from us, our interest rate to them is cheaper than what commercial banks are charging them.