Unclear microfinance vision promotes poverty

Data from the National Bureau of Statistics (NBS) on the level of poverty in Nigeria are anything but encouraging. Although they have never been rosy before, they are now deteriorating so fast, despite the efforts being made to halt the drift. All things considered, including the negative impact of the current economic recession, the situation is still beyond expectation. More people are falling into the poverty trap every day, and the ranks of the immiserated grow rapidly. This should worry everyone, especially in view of the efforts and commitment of government, evidenced by several empowerment packages, to reduce poverty. In some quarters, the effectiveness of our strategies for poverty reduction, especially microfinancing, is already being doubted. Many people are no longer so sure that microfinancing, which constitutes a major plank of our current empowerment strategy, is still a potent weapon for poverty reduction. Others argue that the rate of inflow to the pool of the unemployed is far higher than the rate of outflow because of the recession. Perhaps, the time has come for us to look again at our poverty reduction strategies, including microfinancing, to see if these fears are founded or misplaced.

In attempting to evaluate the situation of rising poverty in the face of major poverty reduction initiatives, it is important to interrogate the approaches of our microfinance institutions to be sure they are reaching the poor. Unless microfinancing gets to the active poor, it might end up servicing the wrong elements. In doing this, we need to resolve some issues, essentially concerning the focus of our microfinance operators. The first issue is to establish whether they are targeting the poor or just lending money to people. The next is to figure out what strategy they are using to reach the poor? Put differently, are the over 978 microfinance banks in Nigeria actually financing the poor or are they just financing anyone that meets their standards? What is their strategy for reaching the poor? If they are doing the right thing, how come there is no dent on poverty in the country? In my almost two decades of enthusiasm in microfinance, I have learnt a few things about how operators reach the poor, and thereby attack poverty, and how they can chase shadows instead of poverty. I would like to share some tips here.

There must be a clear Business Model

Elsewhere in this column we had questioned the business model of some microfinance banks operating here, and dared to say that they had the wrong model. Granted that some world-class operators are blazing the trail in many areas, many others are at best groping. We opined that failure to adopt clear and appropriate operational models would do in our effort to tackle poverty through microfinancing. The foregoing questions bring us back to the issue of appropriate model for effective outreach in microfinancing. Many operators tried to join issues with me on this matter (for which am grateful for the intellectual value) by insisting their model was right, blaming unstable operating environment. True, we cannot deny the environmental factor. However, the disarray in many operator’s models is reflecting in their bottom line and hence health. And many could not explain the nature and character of the model they operate. As a tip, let me say that the model of a microfinance institution is usually evident from the statistics of its clients.

Focus must be on the poor

As the saying goes, those who fail to learn from history are doomed to repeat it. We should learn from those who have done what we are trying to do. There are not so many wheels to be reinvented. We need to ask how the successful pioneers of microfinancing did it. The first article of faith for a microfinance institution determined to fight poverty is to make poverty its number one enemy. One cannot hunt frogs in the pond and go home with rabbits. They don’t live in water. In 1976, Grameen (meaning village or rural) Project, initiated by an academic, with the sponsorship of his country’s central bank, granted loans of $30 to forty-two poor people in the village of Jobra in Chittagong – the eventual home town of Grameen Bank – in Bangladesh. This is how that bank began – very simple. By 1983, having convinced every one of its unique niche, it was granted the status of an independent bank. To achieve its goal of poverty reduction, the institution focused exclusively on the poor, and committed the bulk of their resources to them. Poverty may be hard to fight if the banks created to fight it have focus as wide as those of universal banks or even wider – lending indiscriminately to both rich and poor, and probably more to the rich; going for big ticket loans and avoiding the drudgery that defines microfinancing. In short, they lost focus.

Target the womenfolk

A large proportion of the world’s poor is made up of women. This implies that focusing on the poor is focusing on women. That was how Grameen Bank modelled its operations. After its first 22 years of activity, Grameen Bank had reached 2.4 million of the poorest people in Bangladesh, out of which about 2.2 million were women. Even to date, about 94 per cent of its clients are still women, compared to the borrowers of deposit money banks that reflect an equivalent proportion of men in their customer lists. The whole idea is to challenge the myths surrounding banking and poverty, such as the myth that the poor are not to be trusted, and that uncollateralized loans to them are lost on commitment. Those who want to fight poverty must have substantial, if not exclusive, focus on the poor. We understand the character of commercial microfinance. Perhaps, there is something lacking in it that should be sorted out for it to deliver on poverty reduction. Even with the recession, if microfinancing actually targets and reaches the poor, their numbers will react differently. A bit of research would be useful here. Do the poor really feature in the target market definition of commercial microfinance banks? How many women clients are on their loan books? How many are operating among the poor – the villages?

Clear and poverty-centred eligibility criteria

An effective credit delivery system that targets poverty reduction must include some measures of poverty in its eligibility criteria for loan disbursement. Under the early Grameen system, landlessness was (and probably remains) an eligibility criterion for selecting poor people to be funded. Therefore, to reach the poor, service delivery criteria must be such that the features of the poor are prominent in their design. When microfinance institutions make loans to “the highest bidder”, irrespective of socio-economic status, then it becomes simple commercial banking in microcosm. Perhaps, this is why the microfinance banks in Nigeria have been christened “microcommercial Banking” by critics, for its mimicry of deposit money banking.

Lending methodology should conduce to poverty

Successful microfinance programmes do more than lending to the poor. They encompass other activities like helping to organize the poor and teaching them the benefits of group activity compared to individualism. This is the investment part of the business of lending to the poor. Once they get organized, not necessarily by the operator (for reasons every operator should know) but probably through operator’s support, they stick together and form a reliable client base. How well are we doing in this cooperative aspect, in terms of helping to organize the poor to make them bankable? As long as the earth remains, seed time and harvest time shall not cease.

By Emeka Osuji

Dr Emeka Osuji  School of Management and Social Sciences Pan Atlantic University