Successful Microfinance Practices in Nigeria: My Experience[1]

Godwin Ehigiamusoe[2]

Preamble

In the past seven years, microfinance has enjoyed unprecedented visibility and also experienced growth in Nigeria. Nigeria is expectedly becoming a focus of international microfinance community.

Stakeholders particularly, the regulatory authorities and practitioners have equally contended with a number of challenges which range from limiting factors in the operating environment, to dearth of re-financing facility. However, there appears to be a strong commitment of all stakeholders in the sector to make microfinance work for our people. It is on this score, I express my delight at being invited to reflect on the Nigerian microfinance practices in general and my experience in particular.

Microfinance

Microfinance has been defined in various ways by authors and practitioners. For Ledgerwood(1999), microfinance is the provision of financial services to low-income clients including the self-employed[i]. Robinson (2001) conceives of microfinance as small-scale financial services , both credit and savings that are provided to people who farm or fish; provide services; work for wages or commission; gain income from renting out small amount of land, vehicles, animals or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areas.

Because of its historical tie to poverty alleviation, microfinance is seen as poverty lending. Micro financing is therefore, connotes more than the disbursement and collection of loan repayments and savings; it also refers to a set of elastic organizational structures and procedures by which appropriate financial services are delivered to low-income people and owners of micro enterprises on a sustainable basis(Ehigiamusoe 2005)[ii].

Low-income people and their micro-enterprises are peculiar in many ways and meeting their varied financial needs requires flexible structures and procedures. Microfinance is vital component of efforts at ensuring adequate financial inclusion.

The features of microfinance can be summarised as follows:

  1. Finance for all. Microfinance focuses on persons and businesses that are excluded from mainstream financial system. These are members of poor household, rural dwellers, women and recently the youth. Clients of microfinance are usually classified as ‘the poor’ or lately, as ‘low-income people’ by those who consider the term poor as not edifying. They usually operate at the fringe of the economy, that is, the informal sector or shadow sector. Microfinance banks seek to empower low-income people and mainstream they into the national economy

ii. Disregard for collateral security. Exclusion of low-income people from institutional financial services on the basis of collateral requirement is often cited as the reason for the rise of modern microfinance. Classical microfinance does not place emphasis on collateral as condition for access to credit. The rationale for disregard for collateral security is simple: Low-income people do not have assets to present as collateral for loans. They do not command ownership over assets such as titled land, stocks and other forms of assets often demanded by conventional financial institutions. Microfinance as a lending approach believes in the people (what they are) rather than solely in collateral (what they have).

Microfinance institutions ensure good repayment performance through:

- Creative engagement of clients/borrowers;

-training;

-flexible Loan repayment schedule, participatory loan applications appraisal and joint liability;

-Effective loan utilization monitoring;

-Savings requirement

iii. Flexibility in service delivery

The peculiar nature of clients of microfinance and their businesses require flexibility in delivery approaches. Loan disbursement and repayment as well as savings mobilization are designed to reflect the cash-flow patterns of low-income people and their businesses. Services are taken to the clients rather than wait for them in their branch offices. If the clients are farmers who are working on their famers in the morning, repayment collections could be made in the evenings well after conventional working hours!

iv. Microfinance is not charity

In spite of its association with charity, micro-lending is not charity. Borrowers are obliged to take full responsibility for proper utilization of borrowed funds and make complete repayment with interest and associated fees. The cost of failure of a microfinance institution and bank far outweigh the cost of access to loan on a sustainable basis.

Challenges

The provision of financial services to low-income people applying flexible approaches comes with its challenges. Some of these challenges are even more acute in the Nigerian operating environment. These challenges include:

Possibility of mission drift:

The most profound of the changes microfinance has gone through is the current trend of commercialization. Microfinance has transformed into a thriving global industry with various profit takers in the chain of capital-flow to the poor. Transactional language is dominated by profit rather than impact.Private equity and commercial debts have replaced grants while legal and regulatory frameworks provide required platform for for-profit institutions in the sector. Interestingly, commercialization of microfinance was intended to deepen the industry and expand access to a range of financial services to a large number of the under-served. It was reasoned that only funds from commercial sources could bridge the huge gap between supply and demand for financial services by the poor. Commercialization comes with the temptation to unscrupulous pursue to profit and the detriment of making meaningful impact on low-income households.

High operating cost:

Implementing flexible institutional procedures to reach micro and small enterprises could be expensive and limits returns on investment.

A major cost factor is the frequent interaction with clients which is the hallmark of microfinance practice. Credit officers are required to maintain regular and frequent contact with service users usually outside branch offices. To reach a large number of clients, in rural Africa, credit officers will have to traverse several communities.

Another cost dimension is the numerous transactions involved in microfinance operations. It is usually more cost effective to deliver bigger units of services. For example, the transaction cost of a credit facility of N100, 000,000:00 to four borrowers is cheaper than lending the same amount to 5,000 persons at N20, 000:00 each. In the latter, numerous loan applications and accounts are processed and monitored respectively. The unit cost of savings mobilization is equally high. To address the challenge of high cost of transactions, microfinance institutions adopt operational strategies including group methodology and standardization of procedures

Repayment problem:

Loan delinquency is major threat to institutional sustainability; it is the deadly virus, which afflicts MFIs. Delinquency demoralizes staff and deprives beneficiaries of valuable services. Delinquency is a symptom of poor leadership.

Inadequate experienced credit staff:

Micro financing is more than dispensing loans. To be viable, MFIs require experienced and skilled personnel. As young and growing industry, there is a dearth of experienced staff in planning, product development and effective engagement with clients. Most credit staff of MFIs in Nigeria is on their first jobs. Inadequate experienced staff limits expansion and institutional performance.

Inadequate Re-financing facilities:

In nascent microfinance industry, clients are usually not able to make deposits which are enough to fund loan portfolio. The poor can save, but their capacity to save large sums is limited. There is always a gap between loan deposits and the loan portfolio. Microfinance banks therefore seek fund to bridge the gap.

Internal Control challenge:

Large number of transactions and flexible operational approach combine to pose serious internal control challenge. Operational procedures could be breached at disbursement and collection points. High cash transaction, which is a feature of micro financing, is a source of temptation for fraudulent practices.

Risks and microfinance The nature of operations of microfinance institutions makes them susceptible to risks. The challenge of risk management in microfinance is about how operators can reach low-income people with financial services in a flexible and convenient way (for clients) and at the same ensure adequate protection for institutional assets such as cash and loan portfolio. Conventional risk management approaches, may lead to exclusion of low-income, especially rural dwellers.

Risk generating factors in microfinance

A number of features of microfinance make microfinance vulnerable to risks.

i. Nature of service users and their businesses

The unique nature of microfinance clients and funded businesses from the point of view of conventional financial intermediation constitutes considerable risk. They are considered ‘bad risk’ and, therefore ‘unbankable’.

(a)Weak management capacity of small business owners

Most users of microfinance services lack necessary skills in record keeping, planning and other basic management techniques. Most micro-businesses are, therefore, established without feasibility studies. These deficiencies could result in business failure which puts loan assets of lending institutions at risk.

(b)Vulnerability of supported enterprises

Clients and their micro-businesses are vulnerable to a range of shocks and challenges in their operating environment. For instance, an incidence of fire out-break in the market place could wipe out the entire economic base of a microfinance client. Urban renewal programme, which consists of demolition of shackles and shops on the right of way, could constitute a threat to owners of micro-businesses and lending institutions. Policy shift could have devastating impact on their businesses.

(c) Concentration in similar enterprises

Low-income people tend to engage in businesses with limited differentiation. In urban centres, they invest borrowed funds in trading and related businesses. In farming communities, all small scale farmers engage in subsistence farming. In most cases, they even engage in cultivation of the same crops. In Southern Nigeria, it could be cultivation of cassava. Loan amounts from the lending institution to various borrowers are concentrated in few similar farming activities. Any unfavourable development as poor harvest of the crop, substantial proportion of portfolio of the lending institution is at danger of default.

ii. Nature of service delivery approaches

The distinctive feature of microfinance is its flexible service delivery approaches. Delivery structures are usually flexible while operational procedures are informal. These are designed to be responsive to the needs and characteristics of the poor and their businesses. However, flexibility of delivery approaches presents some risks. For example, cash disbursement and field based operations expose micro-lending institutions to risks which require innovative approaches to measure and mitigate.

iii.Less Emphasis on collateral of requirement

The standard practice in microfinance is collateral substitution. This is one of the key features, which set microfinance apart, from formal lending transaction. The rationale for collateral substitution is that, most clients of microfinance do not own assets, usually demanded by formal lending institutions as security for loans. Microfinance practitioners rely on ‘social collateral’ group solidarity and cross guarantee to ensure good repayment performance.

Good as ‘social collateral’ approaches are, enormous investment in training is required for effective application. Improper application of social collateral approach could put a large proportion of loan assets of microfinance banks or institutions at risk.

3. Response strategies: The LAPO Experience

LAPO’s current performances did not come about over-night. We contended with the above challenges like other microfinance banks in Nigeria. Some of our strategies and interventions could be summarised as follows:

  1. Clarity and consistency of mission and vision. Without any fanciful mission statement, right from the beginning, we seek “to assist our clients to break out of the grip of poverty”. At the beginning, we formulated a set of five (5) operating assumptions which guide and influenced LAPO’s structures and procedures.

They are:

  1. The poor are too disadvantaged to meaningfully benefit from programmes and services provided by formal institutions and commercial banks.

The poor for instance do not have command over assets as titled land, stocks accepted by banks as security for loans. They are therefore excluded on account of their poverty. LAPO therefore targets low-income persons and owners of micro-enterprises poor who are excluded from services of formal institutions.

  1. An improvement in the condition of the poor would take place if financial services were provided on affordable basis. For the poor to benefit maximally there must be implementation structures procedures and terms which are responsive to the peculiar nature of their businesses. Beyond pricing, credit delivery strategies should take into account, the debt capacity, and low level of business training and vulnerability of their businesses. Through innovative and flexible procedures, LAPO is able to meet the financial needs of low income persons. Sizes of loans and repayment procedures are sensitive to the businesses of its borrowers.
  2. Small groups have tremendous influence on cooperating individuals. Grouping is major source of strength and support for persons with limited means. It provides opportunities for exchange of ideas and tips on business success and social and economic empowerment. Groups provide valuable assistance and in some cases help cooperating individuals act in compliance with operating rules and procedures. In micro-credit delivery, group methodology promotes credit discipline amongst other advantages. Group methodology is a major feature of LAPO financial services delivery structure. Borrowers are organized into self-selecting credit groups.
  3. Poverty is aggravated by such factors as diseases, ignorance and social exclusion. The poor contend with challenges other than lack of capital. These include poor health, ignorance and social exclusion. These factors act to strengthen the grip of poverty. Meaningful poverty eradication intervention should take this into consideration. LAPO conceives of poverty as an octopus with several tentacles of causes and manifestations. Beyond the provision of financial services, LAPO pays attention to social empowerment through effective collaboration with other sister organizations within the LAPO SYSTEM.
  4. Women and children are relatively more disadvantaged and worst hit by poverty. The reality of development is that there is no society in the world, where women are treated as good as men. In poor nations of Africa, women are deprived access to income generating assets and life transforming opportunities as credit, education and popular participation. Their ability to realize their potentials are constrained by customs and traditions in patriarchal societies. Comparatively, they are excluded from institutional credit than men[3]. LAPO gives priority to women. Women constitute over 90% of LAPO current client base.

Over time we have built some fancy into our mission statement, but we still remain

faithful to enabling our clients break out of the grip of poverty

  1. Staffing and people management

We realize very early that we would not be able to access a pool of experienced staff and sought to compensate with the following:

  1. We look for attitude: in the early years, we did not bother so much about the level and nature of academic qualification. We sought for people willing to work hard particularly, with low-income people. Today we do not recruit people from elitist homes; rather we select people from low-income households.
  2. Emphasis on learning. Since we recruit the ‘young and green’we invest in education and training. We encourage our staff to develop themselves. The result is that we have a body of professionals who qualified while working in LAPO. For example, we have ten (10) chartered accountants; all except one passed their professional examinations while in LAPO. We have a full-fledged Academy for microfinance.
  3. Our staff members are ‘people’ rather than as ‘resources’: Our staff policies and practices see staff as ‘people’ with needs, aspirations, self worth and voice. We have People Management Unit (PMU) and not Human Resources (HR). Here are some examples of our policies and practices:

a)We started the implementation of the national pension scheme, immediately it was launched even then as a Non-profit organization.

b)Eight (8) years ago we formulated and began the implementation of HIV/AIDS Work Place Policy which was reviewed in 2010

c)We engaged a US Based organization to conduct Employee Engagement Survey in 2011. The result shows that LAPO scored higher above the global average in staff engagement index

d)We have appropriate bonus /incentive systems

e)Our annual staff turn-over in the past 6 years has been below 6%

  1. Client relationship and engagement

Our relationship with clients in based on:

  1. Participation. We have :

(a) Each branch of LAPO has a ‘Branch Council’ which is a body of all leaders of credit groups supervised by the branch. The leader of the council is elected by the members while our Branch Manager is the Secretary. The council meets quarterly to review operations of the branch.

(b)Till recently, an elected client was a member of our board

There are series of client for a

  1. Support. LAPO realizes that our clients need much more than finance, because they contend with challenges other than lack of money. LAPO provides:

(a) Scholarship award for secondary education for children of clients, as the greatest concern for a poor woman is the future and education of her children. She usually believes that she is poor because she did not have formal education. In 2006 LAPO won the Grameen Foundation award for ‘Excellence in Microfinance ‘ and the cash prize of $10,000 used as seed fund for the scholarship Fund. 530 children are currently on the scheme. We need your contributions.

(b) Health and Gender training. Health awareness and gender sensitization activities are organized for our clients by our sister organization-LAPO NGO. 51,001 women were trained in 2011.

(c)Micro-insurance services. LAPO in collaboration with GoldLink Inc Company Plc provides insurance cover for life and fire in the market place for our clients. 418,187 women are currently covered. We are working on health insurance scheme.

(d)Credit staff members are trained to be Client Support Officer (CSO).This indeed is the official designation of our Credit Officers. They are trained to provide necessary support for clients in areas beyond finance such as education and career counselling for their children.