Understanding the Stages of Growth in the Microfinance industry (2)

We are continuing our discussion of the stages of growth of a microfinance industry, which began last week. We had, last week, identified the four stages of growth as pioneer, breakout, consolidation and maturity. For effective development of the industry, there are certain responsibilities and activities that the authorities must discharge from time to time. Such responsibilities are usually aligned to the stage of growth. In furtherance of its efforts to support the industry as necessary for growth and advancement, the Nigerian government, acting through the central bank, has taken steps to review the regulatory and supervisory guidelines for the microfinance banks. This revision, which was published adequately publicised, was done to bring the operation of the industry to conformity with current best practice and international standards. It was also intended to help regulators to rein in operators,not only to conduct themselves according to rules but also to help them cope with regulation itself, bring out their creative talents and serve their clients better.

The breakout stage often demands a lot of industry support. Due to the fact that everything is new and changing rapidly, adjustments must be made both to policy and operational procedures of players. Policy support is vital at this stage. This support may come in the form of policy review, to accommodate more friendly rules, or even financial or equivalent support. Most policies set out on very stringent notes, with rulesoften copied from other climes where such a programme had already matured, without taking account of the local industry growth stage.And that is not unexpected.

When the Pension Reform Act 2004 was passed, some of us who pioneered the industry had to cope with the hardliner stances of PENCOM. Penalties were hammered out to us at the slightest inkling of breach.  We cooperated with PENCOM and it helped the industry to gain its reputation as transparent and properly run. Am sure we all know that the massive frauds that happened in the pension system occurred only in government pension schemes and not within any of the private sector managed pension custodians and administrators. Over time, some of those very hard regulations got softened as the industry stabilized. An example is the modification of allowable investment channels, which excluded real estate when we began the industry in 2004 but now allows it even if by way of Real Estate Investment Trust (REIT).

The growth stage of the microfinance industry allows government to modify rules in the light of experience, without appearing to shift the goal post. It is also important at this growth stage to continually study and analyse the performance of the industry on a regular basis. Information on the industry is vital at this stage. This involves the commissioning of experts in the field to carry out studies and produce reports that give relevant information on the industry. Such reportsusually provide the basis of policy review, and the financial or any other and support that may be extended to the operators. We are not doing enough of this. We hardly enjoy spending on research.

The South African experience may be informative. The formal operation of microfinance in South Africa began in the 1980s. It experienced its breakout stage from the middle to the late 1990s, when so many microfinance institutions came into operation. Between 1995 and 1997 alone, the industry recorded a growth rate of 197 per cent,and loan volumes almost tripled. Typically, much of the expansionof the industry happens in this growth stage, and that is why it is so called. It is also at this stage that much of the capital inflow to the industry occurs. It was the first formal industry study commissioned to review the sector in South Africa that provided us the information on the growth of the industry.

The Nigerian microfinance sector is also experiencing this breakout phenomenon, growing reasonably fast, though at a much smaller rate than the experience of South Africa. By 1997, when the study was carried out on the South African microfinance industry, it was 15 years old (the Nigerian industry is now 13 years old). In terms of growth in the number of operators, the Nigerian industry, at 940 operators, is not growing fast enough relative to South Africa’s 3500 institutions in about the same length of time. Since it began formally in 2005, much growth has been recorded in the number of operators and capital inflow in Nigeria. However, this is too small when compared to that of South Africa, especially given our population. While a formal industry study, which is overdue in the case of Nigeria, should be the bases of any serious comparison, it may not be out of place to say that our breakout stage is progressing slowly and steadily but could do with greater speed.

Without an industry study we can only speculate on the sector’s performance. There is however some good reason to think that there is something we are not doing right, if South Africa, with its very small population relative to Nigeria’s, could boast of 3500 formal microfinanceinstitutions at growth stage while we record less than one thousand during the same growth stage of our own industry. We have a much larger population and our citizens are poorer than those of that country. We have a larger land mass with a population noted for industry and hard work, way ahead of the former Apartheid state. Why do we have fewer microfinance institutions? Perhaps our model of the industry, which we have said in this column is wrong, is actually overdue for review.

The value of large number of players is to” cover the field” and ensure that the industry does not become oligopolistic after consolidation, which is the next natural stage of growth before maturity.  The field is not yet covered and the active poor are still waiting for the time they will have access to finance. We appreciate government efforts to improve collateral capacity of microloan clients through the new law on Collateral Registry – a great law I have insisted has not been adequately publicised.

Emeka Osuji