Understanding the stages of growth in the microfinance industry (1)

The past few years have been somewhat turbulent for some players in the Nigerian microfinance industry. Although no new corporate deaths have been recorded of late, it may be wrong to assume that all is well or that the many problems of the industry, especially the teething ones, have been successfully resolved. Sometimes, it is better to allow sleeping dogs to lie or give time for certain problems to either self-resolve or just be resolved, one way or the other. In reality, the industry is still going through those problems that afflict it at its different stages of growth. As we have indicated in this column in the past, regulators sometimes suffer from what I call regulatory timidity (not regulatory capture).

By regulatory timidity I mean a situation whereby the regulator shies away from needed regulatory action, for certain self-imposed reasons. Unlike in regulatory capture, the reasons for inaction in regulatory timidity are not necessarily corrupt. One such reason may be to avoid anything that could inflict greater harm on the system than that posed by the mischief or defect for which regulatory action is withheld – destabilizing the system or causing “more harm”. The state of an industry is critical to the ability of regulators to exercise their powers at full capacity or otherwise. Knowledge of the stage of development of a regulated sector is very important to effective regulation. The question we may ask is: at what stage of growth is the Nigerian microfinance industry? This is a very critical question because it is of great intelligence value for operators, regulators and indeed all stakeholders, to understand the facts surrounding an industry in which they are interested, for many obvious and some not-so-obvious reasons.

Some theoretical postulations on the growth process of a typical microfinance industry may be apposite. The stages of growth and development of a microfinance industry are usually classified into four segments, for ease of analysis. These are the pioneer stage, the breakout stage, the consolidation stage and the maturity stage. The requirements for the survival of an industry at each of the different stages of development may differ significantly. And so are the nutrients and corrective action in case of challenges.

The Nigerian microfinance industry started officially in 2005 (the International Year of Microcredit as declared by the United Nations) with the release by the Central Bank, of the Microfinance Policy Framework for Nigeria. This is not to say that the practice of microfinance was unknown to Nigeria before 2005. Far from it, the practice of microfinance or its precursor, microcredit, has been here for a much longer time. It manifested in the activities of moneylenders, regulated under the Moneylenders Act, and other different forms of rural or informal credit market operations. The high end of it existed in the form of Non-governmental Organizations (NGOs), governed by cooperative rules and regulations. As far back as 1982, Country Women Association of Nigeria (COWAN) was formed and by 1988, another prominent microfinance NGO that is still leading the pack today, Leap Above Poverty Organization (LAPO), was out there delivering international standard microfinance services. They were among the pioneers.

The pioneers were motivated by the need to help in canalizing financial resources, basically in the form of microcredit, to microenterprises that constitute over 90 per cent of Nigerian business entities. In 2005, when the official policy was launched, Nigeria had a population of about 137 million people, a GDP of about $40 billion and was Africa’s second largest economy, after South Africa. However, 70% of those Nigerians lived below the poverty line. Evidently therefore, there was a lot to do in the area of the fight against poverty, and microfinance was a fitting instrumentality.

It is usual for pioneer stage (also called mobilization stage) rural credit providers, especially moneylenders, and other microcredit institutions, to function mostly illegally, charging usurious interest rates. Credibility is low at this stage. Of course, the formal introduction of a national policy on microfinance would change all that and legitimize the illegal operators; and encourage the inflow of capital funds to the sector. It was in this regard that some of the pioneer institutions transferred their already public positive attributes to become industry leaders. LAPO microfinance is still the number one player in this field creating wealth and blazing the trail. Policy objective at this pioneer stage should centre on the promotion of stability and confidence. Regulation should be strict and transparent or at least evoke the image of transparency, while intervention is swift, all in a bid to win popular confidence of stakeholders.

The breakout or growth stage of the industry is characterised by expansion in the number of participants. This is usually driven by the level of success achieved by the pioneers. Being a monopolistically competitive market, the fairly easily achievable conditions for entry (licensing) enable profit-seekers to come and compete for the presumed profit available in the sector. Nigeria now has over one thousand microfinance banks and several providers organised as NGOs. This is a clear indicator that the industry in Nigeria is attractive to investors who are willingly staking their capital. At this stage also, policy activity focuses of refinement and improvement of regulation and the digitalization of the regulatory and supervisory oversight capabilities of the appropriate authorities.

Emeka Osuji