Middle class microfinancing will not get us there
There has been doubt expressed around the world as to whether microfinance is a successful instrument of poverty reduction or a promoter of poverty. My view is that there is no yes or no answer to it. The answer depends on how the programme is delivered and the society to which it is delivered. And there are a number of factors that shape the impact of microfinancing, including culture and leadership. This is why we should avoid copying and pasting any programme without adaptations. For instance, the way microfinance policy which gender sensitive is delivered in an Islamic country is different from how it should be delivered in secular states. In certain parts of Bangladesh, because of how they are regarded, women take microfinance loans and their husbands are the ones to spend the money. This has implication for both the programme and its objectives.
Despite the consistent failure of leadership in Nigeria to deliver even average performance and the massive looting that took place at the treasuries (state and federal) since the days of the military, which allegedly has not abated, and for which Nigerians have severely punished the PDP, our country has achieved some economic milestones we need to build upon. These include the introduction of a National Policy on Microfinance. On the saddle then was Olusegun Obasanjo; the one whose letters you may not like but who nonetheless continues to write letters that knock huge chips off mountains, if they are not moved. No matter what one may have against Nigeria’s luckiest man, Olusegun Aremu Obasanjo, he knows how to hire sound people to get things done; whatever those things may be. He is not one of those breaking new grounds on nepotism and inequity like APC kings in Imo State who believe only their sons-in-law and kinsmen hold the key to Solomon’s wisdom.
Obasanjo showed statesmanship in the selection of his team. That team engineered Nigeria out of considerable foreign debt to the Paris Club of government creditors. In case you dispute the fact that Obasanjo is Nigeria’s luckiest man, then show me another Nigerian man who ruled Nigeria for at least three terms and only failed at an alleged fourth attempt. (But the man insists there was no such agenda and I have no reason to doubt him). Obasanjo was President after Murtala Mohammed. Whether he was called head of State or president makes no difference. Those terms, (at least in Nigeria) are one and the same thing as Babangida proved to us. We woke up one morning and saw him address himself as president.
As President, Obasanjo hired Nigerian-born Harvard-trained economist and former Managing Director of the World Bank; first female finance Minister and later Coordinating Minister for the Economy in Nigeria, Okonjo-Iweala (Diminish that profile if you can). Guided by this world-class financial technocrat, Obasanjo was able to convince the Paris Club of public creditors to forgive a large portion of Nigeria’s debts so that she could pay off the balance. That powerful deal was pulled off successfully easing our debt burden, even though some critics did not see why Nigeria should pay off debts, when according to them, everybody else was owing. Perhaps it is the same people now screaming that Buhari is endangering the country’s future by his borrowing and rapid build-up of foreign debt. Surely, debts eat up resources that could go to provide critical Social Overhead Capital, and worse when the debt is in hard currency under uncertain exchange rates and vanishing earning potentials.
In that year, 2005, when Obasanjo and Okonjo-Iweala solved the Paris Club debt riddle, Nigeria also achieved another milestone in the finance sector – launch of the national policy on microfinance. The policy was a culmination of many years of public discourse on the need to adequately canalize financial resources to the informal sector. Such discourse had been pioneered by the work of Dr Chu Okongwu, another Harvard-trained economist and former Finance and Petroleum Minister who, with President Babangida, extensively reformed the finance sector and created many institutions and instruments, including the Value Added Tax, the Peoples Bank, Licensed Finance and mortgage companies and community banks – novel initiatives that made some impact on many segments of our economy.
The microfinance initiative in Nigeria was one of the most heralded and celebrated policy ideas of recent times. A number of reasons made it popular and very welcome. It was introduced when government reckoned that white collar jobs were scarce and private enterprise was rising. The community banks and finance companies failed to deliver effective services and appeared destined to be completely discarded. In the midst of stagnant economic development and liquidity constraint among banks, credit to the informal sector had become limited. The business of the economically active poor in the informal sector was hardly a priority to the formal banking institutions. Microfinance banks were therefore like a rescue team for the micro and small enterprises in need of support.
Accordingly, many community banks metamorphosed into microfinance banks, reformed and recapitalized. The policy of spreading them across the country helped to bring financing to many local communities. However, this has not been sustained. Not only are the MFBs concentrating in the urban centres they have focused mainly on financing the same segment of society that is getting the most support from deposit money banks – the middle class.
Except for the eight big microfinance banks with national licenses, and a few of the state MFBs, the myriad of unit MFBs are merely busy running around urban centres and looking for a share of the business of the middle-class. The active poor in the rural areas remain where they were. A recent survey we carried out in parts of Lagos show that the attitude of microenterprises in Lagos towards banks has not changed much since 2005, when the policy was introduced. Most entrepreneurs still rely on family and personal savings to start their businesses and would rather go to friends than MFBs for additional capital.
There is need to review the entire microfinance programme to ensure that operators return to focus – the active poor. The current microcommercial banking model appears to favour the middle-class, which incidentally are the focus of retail commercial banking by deposit money banks. This segment is already fully served by the formal banking institutions. The result is that our microfinance industry is growing but not maturing. It is growing in number but not perfecting the art or poverty financing, which is the real factor in its maturity as a microfinance industry.
Elsewhere, in this column in the past, I had drawn analogies from a comparative review of the Nigeria microfinance industry and that of South Africa, our nearest economic rival. I noted that when the later was at the stage where we currently are – the growth stage – they had over 3500 microfinance institutions. That provided them the room to remain robust after an unavoidable consolidation that always happens. At less than one thousand, despite out huge size relative to them, how are we going to serve our active poor when consolidation happens as I believe it will before very long?
The contemplated reform may include regulatory reform. It is beginning to appear that we need a specialized institution to regulate that segment of our finance industry made up of MFBs and Primary Mortgage Institutions. Somebody needs to devote more time for them; get to know exactly what they do and are doing, and insist on their doing it well. The subsector has made considerable contribution to our development efforts. It has grown and been fairly well structured to play a leading role as agents of development. However, there is room for improvement, which will propel the sector to maximally blossom.
Emeka Osuji