Socio-economic crisis and repayment incentives in Microfinance
Let me use the first paragraph of this piece to commiserate with all Nigerians and, in particular, the damaged parents of the remaining Chibok girls still in captivity years on, and now the 110 unfortunate Dapchi girl carted away like cattle by terrorists. May God help you and give you the grace to keep staying alive. I hope this message does not offend anyone. I used to be quite brave until recently. My courage suffered when some media outfits recently began to announce disclaimers after their popular shows. I have not seendisclaimers after such programmeso boldly announced, as if to leave no one in doubt.The announcers fear is so palpable and shouldleave us worried. Is the media afraid of something? But my heart goes out to those young women, and their families who have undoubtedly been irreparably damaged.
Nigeria is not the only country facing an uncertain future in the world today. There is a lot of political-social unrest literally everywhere one looks. But Nigeria is undoubtedly a central figure in the world arena of socio-political crisis. Ours is so bad because terrorists emerge regularly fromwithin us to take our innocent underage daughters for sex slaves, commodities and wares to be sold.Everyone, except perhaps us in Nigeria, knows the implication of the carting away of young girls by terrorists. It is the easiest way to destroy Nigeria psychologically. Perhaps, we need to stop for one moment to think of our own 12 year old daughters in the hands of drug infested armed men, then we feel the psychological war going on. I wish I could beg my fellow countrymen not to let this happen again.
I am literally paralyzed at the idea that several lorries will emerge, probably from Chad or Cameroun, since Sambisa is said to be take and cleared, drive through Nigerian towns and villages and stop for several hours collecting the most precious things we own, our children, into trucks and not one policeman or soldier or parent or relation or passer-by was there to put up any resistance or make a phone call. To say that nobody in the security system got wind of this is a national disaster.
With more internally displaced people than many countries at war, we cannot possibly be a country at peace. Microfinance in Nigeria today therefore must wear the toga of war and operators must pull out the wartime tool kit and act as though they are in a war situation. Whatever they know that makes the industry survive in war times must be on the menu of operation now, if they are to survive.
The violence in Nigeria has created more demand for services that alleviate pain and suffering, including microfinance. Sadly we are not good in such services. Ironical also they have worsened the risks of such fields of endeavour, including lending to the poor. One of the ways by which the risk of microfinancing is enhanced by the crises is by reducing the capacity of clients to meet their financial obligations to lenders.It changes their repayment behaviour and creates tension in the lending institutions, on the one hand, and between them and their clients on the other. If microfinance is to survive we need to get more proactive with our lending strategies.
Why should clients fail to meet their repayment obligations in times of crisis? Or more appropriately, should they actually repay their loans in the face of the massive crises they face in times like these.I will make some propositions. Without any doubt, repayment is usually a major problem during crisis. However, microfinance institutions that know their onions do a lot more than regular collection activity to ensure that payments are coming in, even if drastically reduced, when crisis happens.One of the key things they do is to provide their clients with a set of incentives that motivate them to pay. Four major incentives to repayment may be advanced to clients that have personal loans, for instance.
As part of the standard practice of the industry, all loans have some sort of guarantee or security behind them. This is very important because it acts as a chain that tethers the client to his loan. Microfinance institutions are advised to create such a tether from the outset of the transaction, not only as a matter of procedure but as an incentive for repayment.The chattels used to secure a loan are usually things of value to the client. He stands to lose them if he fails to pay back his loans. Such chattels will be valuable incentives if the loan is properly structured taking account of such critical issues as the price of the asset by valuation and the market value under forced sale conditions. Lenders usually protect themselves by allowing a reasonable room for manoeuvre between the loan amount and the forced sale value of assets. Know that the latter is more than the former will increase the client’s incentive to repay.
It is important that microlenders continue to place emphasis on repeat and consecutive loans being made only to clients that meet their repayment objectives. It is important also for clients to be aware from the outset that they will lose access to future loans if their repayment performance is below standard. Recently, Nigeria passed the Credit Reporting Act, 2017 as part of efforts to improve the credit environment for lenders and borrowers. The Act and it concomitant on credit reporting, have already positively impacted the rating of Nigeria by the World Bank on the Ease of Doing Business. According to a recently released report of the World Bank titled: “Ease of Doing Business 2018: Reforming to Create Jobs”, Nigeria moved up 24 points on that scale. There is no doubt that the positive record was influenced by that and therecently passed Credit Reporting and the Collateral Registry Act, 2017. As a best practice standard, microlenders do not grant successive loans to defaulters. The Credit Reporting Law reinforces the Credit Bureau efforts of the banking industry, whereby all credit defaults are recorded against the loan obligor. This serves to warn future lenders of the character of the borrower and helps to reduce the incidence of non-performing loans.
If used effectively, the Credit Reporting and Credit Bureau system should be very important infrastructure in the financial architecture of the country. Credit is the life wire of every business and everyone wants to be in a position to find and access credit whenever they need it. Bad credit reports are dangerous to the health of any business, even if they are not borrowing actively yet. It may be the death knell that ends their existence when the need for funds arises. In precise terms, business entities must safeguard their reputation, especially as regards creditworthiness. It is a major integrity question that anyone, human or legal, should be found wanting in this regard. The loss of ability to access credit whenever necessary is a major failure factor. The fear of Credit Bureau should actually be the beginning of financial management wisdom.
Repayment history and performance must be built into the conditions of every loan, as standard, from day one. This way, loan conditions may be tailored to favour clients with good track record. Lenders must know that there are many ways they can help their clients reduce costs other than by direct interest rate reduction. Loan conditions can be made more flexible and repayment terms friendlier. Granting automatic loans could help clients avoid money lenders who charge exorbitantly high rates.
Emeka Osuji