Microlenders, recession and proper business models
The Vision 2010 Committee in its final report estimated that about 70 per cent of the economic activities in Nigeria were carried out in the informal sector. It went further to describe the informal sector to comprise the rest of the indigenous economy outside the public sector and the organised private sector. That was in 2010. Six years is a lot of time anywhere, especially in a developing economy, for anything to change. Indeed, many things have changed in the Nigeria of 2016.
First, we have descended from the top spot of being Africa’s largest economy. Just like that; in a flash like some upstart, we came down. Second, we may have lost to Angola, our number one spot in the hierarchy of African oil producers (no thanks to militants and the Federal Government, both of whom are wrong in what they are doing about the crisis). Third, we are ravaged by a recession caused by the fall in oil prices and our oil output, exacerbated by incoherent economic policies that plant us deeper in the quicksand of recession.
As a result, the informal sector, which is said to be an underground economy not subject to regulation, is now probably well over 80 per cent of the Nigerian economy.The implication is that we have two economies, the larger of which is a blind spot to policy and rules. Our policies touch it only tangentially. We actually legislate on the fringes of the real economy far from the problem and people for which and whom we make policies. Any wonder why the little government is doing is not visible?
Operating in the informal sector comes with a lot of challenges, even in the best of times. This is a sector that is driven by a winner-takes-all philosophy. The lack of enforceable rules and the penchant for dishonouring agreements ensures that contracts are made simply to be broken. Survival is for the fittest and justice is hard to define as it takes the form that meets the wants of the strong. Add the foregoing to a massive recession in an economy irredeemably anti-production, the picture becomes clearer. The rank of the poor is burgeoning.
This is why it is now inevitable for microfinance banks to clearly identify the business model and in particular, the lending methodology they are implementing. Without a clear business model, microlenders find it difficult to proactively defend their operations against economic wind and weather. This is so because different microfinance models demand different actions from operators as the economy changes. It follows therefore that inability to distinguish between and among various operational models may hamper the effectiveness of a microlending institution.
Most operators are aware of the lending methodologies in the microfinance industry. Indeed, some have been applying these strategies either individually or in combinations, sometimes and probably very often, without a clear understanding of the rules that guide their application. Some of the key lending methodologies include the Private or Individual lending approach, the Grameen Bank Solidarity lending approach, the Village Banking style of the Foundation for International Community Assistance (FINCA), the Commercial Bank approach and the Self-reliant Village Banks in the form of savings and loans associations, which manifest as Rotating Savings and Credit Schemes (ROSCAS) or the Accumulating Savings and Credit Schemes (ASCAS), among others.
A few questions may be necessary to help us open a new vista in our discussion of business models implemented by microfinance institutions. The questions may include the following: Which of these lending technologies or combination thereof are we using in our individual firms? What are their fundamental features? What are the benchmark ground rules that must be laid down for their effective implementation? What does each methodology imply in terms of clientele and product? An effective credit delivery service neither begins with the booking of a loan nor does it end with it. It begins with the design of the credit service and ends with the return of the funds,probably with prospects for return services.
The present situation in Nigeria is very demanding, both of patience and knowledge. Many local people think the recession will end within a few months. Miracles still happen and there is absolutely nothing wrong with optimism, which is one of the levers that pull an economy out of a recession, if played up effectively. However, optimism without knowledge is not quite different from a combined attack of deafness and blindness. It is therefore important that everyone, especially those whose financial assets have changed hands and now resting in the coffers of others, to understand the need strategic adjustments to protect both the client and the loan. This is why microlenders must understand the business model they are running as they have implications for crisis management.
Microfinance is more than making small loans to small economically active people. It includes keeping an eye on both the loan and the borrower, with a view to helping the later to stay above the water of debt. Microlenders should know the import of loan overdose. It is unwise to pile unnecessary loans on clients, irrespective of their repayment history. It may drive them deeper into debt and eventually to delinquency. The danger of clients getting deeper into debt and defaulting on their loans is a clear and present. There is hardly any legitimate business that is currently thriving in Nigeria. The degradation of the Naira may imply manufacturing opportunities but it may be deceitful to say that manufacturers in Nigeria are ready to immediately fill the gap. The sector has been in recession long before the present debacle because we refused to patronise our own.
Why are Range Rover, BMW andToyota Land Cruiser the official government cars in a poor country where Innoson and Peugeot are making cars? I think the most powerful president in the world, Muhammadu Buhari, should deal with this wasteful lifestyle, and he does not need additional or EMERGENCY powers to do so. When a man’s income falls he cuts his costs. This is Anti-Recession Lecture 101. All the bloated costs remain and budget padding fraud is still being alleged. It appears the president forwhose rectitude Nigerians voted is gradually being demystified by policy missteps that haveprevented him from taking the quick wins to short-circuit the recession.
As the economy contracts and small enterprises whither in large numbers, microlenders must know that any loans to their poor clients at this time must be critically appraised not just to prevent losses to the lender but more importantly, to save the poor client from sinking deeper into the mire of debt.
Emeka Osuji