By Abou Dieng
From 2018, Nigeria has gained the unenviable first position worldwide as the country with the largest number of extreme poor, surpassing India’s 73 million people according to projections from Brookings Institution. Local data compilation from National Bureau of Statistics revealed in the beginning of this decade a much higher number of extreme poverty to well over 100 million. Over time, all the reports converge though to the same conclusion that rural, agrarian areas are disproportionately affected with isolated institutions in terms of education and financial services.
International NGOs, local financial institutions and the domestic government in federal and state level have started executing several poverty policy programmes. Education initiatives to improve school participation and performance were quickly combined with financial solutions against the poverty. Small-scale micro-lending schemes were launched for the local population with limited access to formal funding channels, where the regular use of bank loans and transactions is not a prevalent norm at all.
The Microfinance Policy, Regulatory and Supervisory Framework of 2005 was introduced as a means of formalizing microfinance institutions towards financial accessibility and sustainability. However, the final effectiveness of this improved approachability closer to unbanked population remains ambiguous.
Fragmentation and minimized impact of microfinance
Microfinance banks were developed considerably in number, with 1064 licensed banks in Nigeria as of the end of June 2018. Overall, 10 million previously unbanked depositors have now access to financial services, while they have current pool of four million borrowers. However, their combined asset base according to the Central Bank of Nigeria is still minimal, just around 1% of total assets of all the banks (e.g. referred as deposit money banks). A great majority (nearly 900) of these licensed institutions are local-based, unit players in communities. A “critical mass” of larger banks has been established, but their significant performance variability is detrimental for their internal lack of transparency and reliability.
Despite the initial misconception that microfinance is primarily served by non-conventional big banks, the largest, national banks remain main drivers of this force. Even though a holistic approach is needed to reach geographically dispersed, decentralized micro and small-scale enterprises, there is an industrial concentration in few players. Eight largest national microfinance banks possess almost half (44%) of the total assets and 38% of total deposits.
The boom of formalized microfinance services of the previous years has been moderately stabilized in an effort for stricter financial control and monitoring from authorities, particularly for smaller regional players.
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Reformation of credit facilities and supervision
These so-called soft credit facilities were given sporadically to smaller farmers and rural dwellers, but their impact historically remained marginal. Until today, major microfinance banks are blamed to squeeze deliberately large proportions out of the credit line availability, activities justified in association to higher risk exposure.
This type of banking seems to be constrained by its own scope of activities under a constant fear of the prospects of future repayments by people from the bottom of the income pyramid. On the other hand, vulnerable local institutions with low, inadequate levels of capital can be potentially transformed as instruments for illicit activities, such as money laundering or financing illegal, criminal activities.
Based on that, stricter supervisory enforcement of licensing agreements is fundamental for the consolidation of this sector, since the proliferation of local, unit microfinance banks seems to create financially unsustainable strategies and excessive volatility in an already unstable environment full of diverse threats.
As a result, higher capital requirements are necessary for a transition period that aims to promote a clear vision and transparency via the final consolidation of the numerous, very small institutions into larger entities with major resources and growth by harnessing economies of scale.
Local engagement and expansion of opportunities
Micro-credit programs by NGOs or government authorities should be structured in such a way that all the economic agents involved are provided with incentives and opportunities to behave in a manner conducive to the final success.
Nevertheless, the current concept of microfinance is defined itself in a very limited way in Nigeria with minor scope of attention and inadequate business opportunities. Apart from basic financial services (loans, deposits, savings), a broader spectrum of activities can be offered by integrating education, healthcare and social services (e.g. insurance) into a common framework.
As usually observed, corporations in Nigeria tend to treat each market as a generic whole, falsely unifying different customer segments. That’s why there is one single model to follow in each region and community to create a sustainable market for microfinancing with a societal purpose to alleviate poverty.
Collaboration of not-for-profit institutions with major financial institutions could be a major, initial step to bridge microfinancing projects from different perspectives, in terms of both social inclusion and entrepreneurial investments. All the actors should coordinate their actions together as early as possible.
Individuals, like Nikos Toumaras with many similar initiatives in Nigeria and mainly in Angola and the wider Central-Southern Africa region, may be an added value, crucial factors for final local engagement and social support. The vast expansion of microfinance in Asian countries and particularly in the Indian subcontinent with similarly high rates of extreme poverty could give some positive examples for future local development in Sub-Saharan Africa. On the other hand, cases of unsuccessful penetration, such as in South Africa, with quick and chaotic microcredit plans at the expense of the most vulnerable part of population are useful lessons to avoid similar mistakes in this process.
Organizations and individuals from the non-financial sector that can facilitate this connection should be at the forefront of this revolution.
- Dr. Dieng is a Nigeria-based research economist and investment banking analyst.
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