Managing Director, DavoDani Microfinance Bank Limited, Mr. John Ologe, in this interview with Financial Vanguard spoke on the challenges of the subsector including inadequate capital base, loan default and non compliance of state governments to the provisions of the Microfinance Policy framework that stipulates that they allocate one percent of their revenue allocation to deposits in MfBs operating within their states. Excerpt:
By Providence Emmanuel
WHAT are your expectations for the subsector in 2018?
I expect a lot of activities this year. I am saying so because it is a year that we are preparing for elections. I know that the government would be releasing money for capital projects and that would filter into the microfinance sub-sector that would drive activity. Secondly, as we see the oil price rising, I expect that more revenue would come to the government which would impact positively on the economy and by extension the sub-sector. I expect a brighter future for the sector this year.
Also, from the regulatory perspective like the Central Bank, I expect some changes in terms of recapitalization for the different levels of microfinance banks. I expect that they should increase the capital base for Unit, State and National MfBs. Of course I expect that they should bring in another layer which would be called the regional MfB with a different capital base.
Don’t you think that recapitalisation would erode confidence on the industry?
I have never seen it in that light. The challenges we have in the subsector is that we don’t have sufficient funding to trade and so if recapitalization takes place, it is evident that shareholders will inject more money into the subsector. What will emerge from that is a stronger subsector because you are putting in more money.
It would increase customers’ confidence. One of the issues we have in the microfinance subsector is that a lot of them are not operating optimally and one of the challenges is capital. So when the CBN increases the capital base, of course, that is injection of additional fund into the subsector, and it would lead to increased confidence.
Will this prompt mergers and acquisition?
That is a possibility. When the CBN came up with the recapitalization of the commercial banks a few years back, there was this fear that so many of them would not be able to meet N25 billion. That led to merger and acquisition and what came out of that was a stronger banking system.
But in the interim, when they were talking about the idea, people thought it would not be possible. But they were radical with the idea and what emerged from it was a better banking structure. That also needs to happen in the MfB sub-sector.
Do you agree that the CBN and NDIC have a poor attitude towards Unit MfBs?
I think I would agree to some extent. I agree to the extent that they are overwhelmed by the number of MfBs in operation. But they do not really understand some of the challenges around the sub-sector. They have not been able to identify the challenges, may be because of the number of the MfBs. The number of MfBs operating in the country is over 900, so to an extent I would agree.
I don’t think they have the manpower to really digest the issues in the sub-sector. They need to do more by identifying the issues. They set up AMCON for the commercial banks but they have no bail-out options for the MfBs and I think they should begin to think of things like that.
There is money market for commercial banks, where they can trade instruments among themselves, there are discount windows that exist in the CBN that commercial banks can draw on. In the MfB you don’t have such opportunity. I think the CBN really need to look at the issues in the MfB too and come up with a better way to do things.
Why is loan default still a major challenge in the MfB subsector?
At various fora where we discuss the issue of loan default, we have made reference to the fact that in some of these countries where microfinance is better practiced, they have special courts that are set up to speedily try loan defaulters. But in the Nigeria legal system, we don’t have such opportunity and so if you go to court for a loan default, you may be there for the next five years. So people come to us and collect money and still boast that nothing can be done to them.
That is a problem for us. In Ghana, there is collateral register policy where you are able to use some movable assets to collaterize your loan request to the bank and therefore the issue of crane-lending that is permissive in the Nigeria MfB subsector, is not there in Ghana and some of these other countries where MfB operation is successful. Collateral register provide some extent of back up for the exposure that we have, but in Nigeria we don’t have that policy effectively in place yet. So people just borrow on what we call crane-lending, so when they default, the MfB don’t have anything to fall back on and that is why some of our attitude towards the subsector is changing.
The micro people are the greatest defaulters and when they default, you have nothing to fall back on. If you shift to SMEs more, you have some fairly structured business. There are some things you can hold back on. If you look at the foreign MfBs in the country, you will see that they are thriving with the SMEs more than with the micro. The core micro people are going to suffer at the end of the day because the focus is shifting more towards the SMEs.
What are the solutions to some of the identified issues in the sub sector?
There is a need for adequate funding for the subsector. I don’t know how the government wants to do that but recall that there is the microfinance policy framework of one percent State allocation to be devoted to the subsector to support the funding, but many States are not complying and of course I am not surprised since they cannot even pay their staff salaries and wages. With the exception of Lagos State Government who have done so much for the subsector, the other states I haven’t seen what they have done.
I think the government should ensure that some kinds of funds are made available for practitioners that would help them to drive up their infrastructures for easy operation. If you look at the funds coming from development agency like Development Bank of Nigeria, DBN, you will find that they started with the National MfB to make funds available but recently, I gathered that the whole thing is also difficult. They expect a MfB to collaterize N500 million.