MFIs, SMEs and challenges of financing

Data by Microfinance Barometer shows that 139.9 million borrowers benefited from the services of microfinance institutions (MFIs) in 2018 compared to 98 million borrowers reported 10 years earlier (2009). That is equivalent to about a 43 per cent jump in the global coverage of MFIs in a decade.

Of the figures, 80 per cent were women while 65 per cent are rural dwellers. Activities of MFIs have increased tremendously, and their operational structures transformed over time. What has remained constant, however, are the proportions of borrowers. The blend between women and rural dwellers has remained consistently stable in the researcher’s yearly surveys in the past 12 years it took up the challenge of tracking the progress of global microcredit, a key variable of financial inclusion.

Women and rural folks are the representation of Nigeria’s unemployment and poverty rates, which the author of Banker to the Poor, Muhammad Yunus, said the system exists to address. “Money begets money. If you don’t have that, you wait around to be hired by somebody at the mercy of others. If you have that money in your hand, you desperately try to make the best use of it and move ahead. And that’s generating income for yourself,” Yunus, who is regarded as the founder of modern microfinance, said to his global audience.

“Soon, we saw that money going to women, brought much more benefit to the family than money going to the men. So we changed our policy and gave a high priority to women. As a result, now 96 per cent of our four million borrowers in Grameen Bank are women,” the social investment expert says in one of his teachings.

Whereas unemployment rate permeates the entire population, the female gender and rural dwellers are the worst hit. For instance, the Q4 2020 labour data the National Bureau of Statistics (NBS) released last shows that the unemployment among female is 35.2 per cent while that of the male is 31.8 per cent The trend is the same for underemployment where 24.2 per cent is reported for female as against males’ 21.8 per cent.

Also, the unemployment rate among rural dwellers is estimated at 34.5 per cent while urban dwellers reported a jobless rate 31.3 per cent. Further analysis also shows that the unemployment rate is higher among younger people who are typically economically deprived and unable to provide collateral required for commercial lending.

The latest data says that 37 per cent of the youths (24 to 35 years) are jobless.

Needless to say that youth and female unemployment is not a Nigeria but a global threat. According to the International Labor Organisation (ILO), the global youth unemployment rate stood at 13.6 per cent as of last year. The rate of unemployment among women and rural dwellers in different parts of the world also stokes social unease. Particularly, the world sees growing unemployment among females and other special groups as a falling knife – a reason microcredit adoption has emerged in recent years is not considered mere funding.

All over the world, micro-lending has taken on the image of social investment as well as responsible financing schemes and issues relating to the development of the genre of business financing classified as development issues in the mold of health, education and environment policies.

As the world embraced the special funding option, Nigeria, some years ago, also rolled up a policy for the national development of MFIs and licencing process, leading to the approval of hundreds of operators. The operational style of the operators, who did not see any difference between commercial and microcredit lending, sounded the death knell of what was supposed to mark the revolution of Nigeria’s Micro, Small and Medium-scale Enterprises (MSMEs).

The founder of LAPO Macrofinance Bank Limited, Dr. Godwin Ehigiamusoe, who many described as Nigeria’s Yunus, did warn that systemic crisis was inevitable except the operators retraced their steps and stopped competing with commercial banks.

At the weekend, Taiwo Oyedele, a partner at PwC Nigeria, recalled that misrepresentation and misunderstanding of the needs of the small businesses by the operators and regulators is fundamental to the inability of the MFIs to rise to the challenge.

“The major challenge of the MFIs was access to finance. The major reason SMEs cannot access loans of commercial banks was that they cannot provide collateral. But the MFIs were asking them all manner of things they could not provide. You cannot treat SMEs like multinationals, asking them to provide financials, cash flow and projects, they will go away. The truth is that when you give SMEs loans, some will pay while others will not such that you make up from those who pay,” Oyedele observed.

The financial analyst stressed that the entire structure and protocols of accessing loans from the banks were a major disincentive. He observed that the country rushed to proffer a solution to the funding gap in SMEs without doing proper diagnosis, adding that it is necessary to find a system that suits the peculiarities.

In the intervening years, several microfinance banks have fizzled out. Last December, the Nigeria Deposit Insurance Bank (NDIC) released a list of 42 operators whose licences, it said, the Central Bank of Nigeria (CBN) revoked effective November 12, 2020. On its websites are dozens of other microfinance banks closed at some point for non-compliance with CBN’s statutory requirements, which Oyedele said could been burdensome and amount to over-regulation.

Notwithstanding the failure, the country still has about 916 MFIs, according to information sourced from the CBN, in operation. But what is the credit value of the potpourri microfinance lenders to the economy? There are no data on the total credit of the industry but stakeholders believe its performance is a far cry of the need of SMEs.

As if that is not enough, the few vibrant ones are still located in the metropolis where they compete with ‘omni’ purpose commercial banks, which are hesitant in funding rural businesses. As of Lagos State’s share of the entire banking, credit amounted to N15.13 trillion or 77.7 per cent of the total credit while Yobe State recorded the least with N19.38 billion (0.09 per cent). These figures underline the urban-centric nature of Nigeria’s banking business, and the effect of this is complicated by unavailable microcredit schemes.

Nigeria’s micro and small businesses are estimated at over 40 million. Oyedele said a policy that would boost the capacity of the businesses, enabling them to employ an average of one employee each would reduce the country’s unemployment rate to a record low and address the insecurity.

Technology has demystified the search for financial inclusion, which informed the creation of the micro banking model. With technology, firms operating in Lagos are meeting the needs of entrepreneurs in different parts of the country. With their digital algorithm, a phone number is enough to determine the creditworthiness of loan applicants whose physical presence is not required to grant and disburse loans. Do the new lenders, who are seen as the financial vampires that are sucking dry the brick-and-mortar banks. But are the new ‘banks’ the solution sought in the failing MFIs?

Indeed, the digital lenders have democratised access to funding – reduced the ancient labyrinth of documentation, cure the headache over unavailable collateral and ease lending. But in terms of cost, their services are unsustainable as MFIs.

Last year as COVID-19 impact pushed up non-performing loans (NPL), a few of the fintech began to recoil, become increasingly less liberal and started mounting roadblocks on the hitherto access it promised. Again, the traditional unbanked were the first casualties of the retooled business processes as leading brands chose to do business with only Lagos, Abuja and Port Harcourt residents while pushing rural dwellers further away from credit.