A micro lender’s note for surviving the downturn

Poverty reduction remains one of the overriding policy goals of most governments, especially in developing countries. There is unity of purpose on this goal and hardly do we find any developing country that is not involved, one way or the other, with programmes aimed at poverty reduction. What may vary is the approach to the realisation of this goal. The 1960s was considered a Development Decade, particularly for Africa, and the conventional economic wisdom was that development would trickle down to the masses, once activated within the big corporations. In other words, government support to large corporations, investors and entrepreneurs, through tax breaks, capital gains and other incentives will stimulate economic growth that will eventually benefit the poor. This was the core thesis of the once famous Trickle-down theory of economic development.

Unfortunately, the 1960s turned out to be one of the worst decades, at the time, for Africa as far as development was concerned. This was because Africa actually experienced growth quite alright during the so-called Development Decade but the growth did not benefit its people – sounds familiar. The trickle-down development approach failed and was discarded because it had no positive impact on the people. Some modern African economies are still reliving the 1960s experiences as they continue to grow without development. Recent impressive growth figures posted by Nigeria happened at a time when the rate of unemployment and poverty among the people were at their very highest.

The current approach is to tackle poverty at its roots. This is part of the mission of microfinancing. This mission is being delivered through the instrumentality of microcredit and the provision of non-credit services that attack poverty at its base – the rural areas in particular. Apart from microfinancing, there are other pro-poor activities and initiatives that are promoted with government support to push the poverty reduction objective. There are also several financial provisions open to SMEs to access as incentives for them to boost productivity, and expand output and employment. Unfortunately, much of the benefits of these initiatives do not accrue to the real targets, the poor.

One of the most potent ways to tackle poverty is to boost growth of the rural economy and thereby increase household incomes. This requires the deployment of programmes that improve the efficiency of markets. Complete markets are essential for poverty reduction. However, the economic landscape of developing countries is replete with incomplete markets – markets that lack some key attributes, such as sufficiency of supply. Markets for quasi-public goods are typically incomplete. Unlike markets for say, defence (once supplied all can benefit, including free-riders), individuals can be excluded from participation in a quasi-public good. Such markets may form but not complete. Meanwhile, complete and efficient markets (markets that are Pareto optimal – resources are allocated in such a way that no improvement can be made for any group without a loss to others), are very important in poverty reduction.

The current microfinance programme in Nigeria appears to be urban-biased, looking at the spatial distribution of operators. Many rural areas have no financial institutions and therefore have neither credit nor savings opportunity for the poor. While that challenge was yet to abate, the country enters into a long period of recession and security crisis that have wiped out, practically, almost all the gains recorded by the microfinance sector. Today, the programme itself is at risks, as many institutions struggle with mounting delinquencies occasioned partly by inefficient operations and an operating environment that gets more hostile by the day. Here are some tips for operators who wish to stay afloat, as we travel this bad patch on our economic roadway.

First, services offered must fit the needs and preferences of the poor entrepreneurs served. Don’t tempt the client. This principle presupposes that the MFB is focused on the correct object of intervention – the economically active poor, and not anyone who needs access to other peoples’ money. If that is settled, then the services must also reflect need and nature of the enterprises serve. Loans may be as short as 90 days or up to 365days. Focusing on the clients enables the MFB to understand what they are doing and be able to grant repeat loans, which may be critical in the progress of clients and their bonding with the lender. Here, flexibility of use of the funds should be allowed as clients may have a mixture of needs. Loan size must be kept small and targeted on identified expenditure, to avoid loan diversion for consumption smoothing. As recession bites and costs rise, MFBs are in a better position and are encouraged to take the business to the clients than wait for them to come. MFBs Increase their friendliness in terms of location of services.

The second principle of successful lending in a recession is to reduce unit cost by streamlining operations. All service frills must go and time spent per loan must be cut to minimum. This requires that processes be standardised. It is time to revisit some of those Keep It Simply Small (KISS) elements of microfinance – inexpensive facilities, one page forms, objective and verifiable approval criteria, use of free local government offices for meetings and use of staff from clients’ communities to serve them, etc.

Third, develop and enhance repayment incentives such as mutual guarantees by borrowers, which have proved invaluable to Grameen Bank and ACCION International and their affiliates, hinging and guaranteeing of repeat loans on repayment history and good conduct, and so on. Preferential pricing is also an incentive for performance that should be promoted.

Fourth, track your costs religiously and recover them. Operators need to know that the small loan sizes needed to meet the needs of the poor may cost more to process than large loans. The implication is likely to be higher than bank interest rates but surely below informal credit market rates. The active poor are not asking for free lunch. Recover all your costs; that way you stay afloat to serve the poor.

Emeka Osuji