Poverty generators and the challenge of microfinance in Nigeria (1)

A popular truism of medical science is that the effective treatment of an ailment begins with a successful diagnosis. As though to amplify the idea, an Igbo adage puts it more graphically (and I warn that some people might not like their choice of words), that those who wish to stop anyone from vomiting must begin by locating and fighting whatever it is that pushes from under the chest of the victim. As the saying goes, from the mouth of two witnesses, the truth is established. These advisories, as they may be described, are now of general application, and have been well adopted in many fields other than medicine.
The point of these advisories is that we need strong intuitions to delivery national programmes and policy support for such institutions must not be lacking.

As late Chief Moshood Abiola, the undeclared winner of the June 12, 1993 Presidential Election in Nigeria cancelled by the then military President, General Ibrahim Babangida, used to say, one cannot clap with one hand. One needs two hands to clap effectively. The corollary to it is that we cannot clear only one side of a pathway and say that the path has been properly cleared. With regard to microfinance and poverty, we cannot successfully tackle poverty if we do not bother about the factors pushing people into poverty – what I may call poverty generators.

It is now more than a decade since the federal government of Nigeria introduced microfinance as an official strategy for poverty reduction. That was in 2005. How time flies. This strategy has led to the development of a whole new world and channel of financing the Nigerian economy by permitting the growth of microfinance banks – a group of financial institutions that are intended to be smart, quick and patient to handle the challenges of financing the economically active poor. Over these past years, the microfinance industry has grown steadily, though not as rapidly when compared to the experience of other climes. We now have over 1000 licensed microfinance banks spread all over the country, making loans, supporting capacity building and helping the poor in business.

The industry has however had its fair share of the vicissitudes of economic downturn and other complications that the Nigerian economy has been passing through. As a result, there has been a lot of casualties among the operators, many of whom have exited the market. As at December 2016, the Nigerian Deposit Insurance Corporation (NDIC) reports that it had withdrawn the licenses of 127 microfinance banks that became insolvent and unable to continue in operation. That is a large number by any standard and probably symptomatic of some fundamental flaws in the system. With regard to Primary Mortgage Institutions (Mortgage Banks), which are also part of the war chest of arsenals lined up by government to fight poverty, several operators had also been shown the way out. In all, there were 46 of them that were closed down by the same review period; all in a bid to strengthen the industry for effective delivery of services.

Evidently, the times have been quite hard for these operators, as reflected in the mortality figures just presented. And the hard times were not limited to the microfinance and mortgage banking sectors. The deposit money banks have also paid dearly for their citizenship of the Nigerian financial system, at a time of global economic and financial turbulence, as recently witnessed. But for the ability of the NDIC to manage the crisis, much more damage would have been done to the wider economy. Early resolution of problem banks, and timely payment of premiums and dividends, has come handy to mitigate the hardship of customers.

It has been pretty hard to pinpoint any particular reason for the poor performance of many of the operators in the microfinance industry. However, the NDIC has fingered certain indivisibilities that keep plaguing the sector. Among them are the issues of inappropriate business model, of which we have written very extensively in this column, and equally inappropriate corporate culture as reflected in operators’ excessive overhead. There is also the issue of poor capitalization. Many operators are not financially prepared to play the roles they are taking on. Low capital funds, which have been further diminished by recent bouts of devaluation, have not stood the players in good stead. Add to these, the challenge of poor governance reflected by the weak board oversight evident in the industry. Probably most import, the matter of rising volumes of non-performing loans, and insider abuses. These drawbacks have been aided by poor internal controls and record keeping to do in some operators.

Furthermore and particularly for the PMBs, the inability of some institutions to honour withdrawal request from depositors and shortage of long term funds, weak leadership and substandard loan books and deliberate financial misreporting have promoted the growth of non-performing loans and advances· As a result of these challenges, many operators have downgraded the business of risk assets creation to deposit placement. There is now a preponderance of funds invested by way of placements with and among other banks rather than credit to clents and customers.
There are many things that hasten the journey of our people into poverty. They create more poverty stricken people. They are poverty generators. Any pursuit of poverty alleviation without confronting these elements will hit a brick wall. We shall, in the coming weeks, look at some agents of poverty in Nigeria and name them as such. That way we are better able to fight poverty from its source.

Emeka Osuji