Maximising the benefits of micro credit

Tunde Lemo,
Deputy Governor, CBN

PRACTICALLY, over two third of the Nigerian population rank in the poor category and experts have confirmed it. Last Wednesday, at a seminar for group of shoe makers, an association of predominantly micro entrepreneurs, Jonathan Tobin, a senior manager in the Development Finance Office of the Central Bank of Nigeria (CBN), Ibadan branch, puts the figure around 80 per cent. But he also stressed the pertinent position of micro credit in reversing the trend of poverty.

If, as he stated, micro credit brought down the rate massively from 78 per cent to 40 per cent within five years of microfinance in Bangladesh, the same feat is possible here.

That is a prospect, but how to move from here to attain the goal is more important. In this respect, a disturbing scenario presents itself for stakeholders to deliberate. Well, a larger percentage of the actively poor people (whom the microfinance policy targets in the first place) are not aware of that the microfinance products are meant to transform their status for good.

“They (the actively poor) are not maximising the opportunities in micro credit,” stated Tajudeen Aderogba, Managing Director, Olomoyoyo Microfinance Bank. The reason, according to Aderogba, is not far fetched. “There is enormous fear from their end.

There is no enough information at their disposal as to the workings of the microfinance banks or the microfinance policy in its entirety.

“Most of these people still view microfinance banks as the erstwhile community banks, of course, with their bad records. The reality, however, is that micro credit, even with its inherent opportunities, will not be relevant for discussion in our environment if the target beneficiaries are still in the dark.

When an average micro entrepreneur even decides to maximise this potential, he is still confronted with how to go about it. Tobin mentioned seven steps which would help in having easy access to micro credit from microfinance banks. The first thing to do, as he put it, is for the intending beneficiary to open an account with a microfinance bank.

This is another area in which people have demonstrated massive ignorance. Aderogba said some of them were not interested in opening accounts. Probably due to misinformation, they just walk into these banks with the hope of attracting credit without even, the necessary formalities.

Maybe they are not aware. The maintenance of account, savings or current, with a microfinance bank gives the bank the time to know its customer. We all know that the greatest collateral for securing credit in the microfinance bank setting is the integrity.

The account provides the link to the customer in the first place. When accounts are opened, it is also necessary to operate them. Savings into the account will demonstrate commitment on the part of the account holder and withdrawals states his belief in it. So, Tobin listed the operations of the account as the second step.

Then, the account holder will need to prove credibility and integrity for him to be trusted by the bank. Tobin even viewed the ability and integrity of the borrower to repay credit as the best form of bank security.

And, indeed, it is. The CBN guidelines on the operations of microfinance institutions emphasise the client of the microfinance bank as one with little or nothing to pledge as collateral. His integrity, the policy says, is enough in that line and that is why group lending is encouraged. The integrity of the group suffices as collateral for a member of the group.

The fourth step is that the intending beneficiary seeks loan only when it is necessary.

That will make him to maximally utilise such facility. It is important to note that expected clients of microfinance banks are not unexpected to be predominantly ignorant on methods of writing a business development plan which would help to state the process and the exact amount required to lift a business, Aderogba stated that the banks have been taking that serious. He said “that is what makes us unique. We have to assist our clients, even to the extent of fashioning out the particular amount they require at specific periods.”

Most entrepreneurs think only of the benefits to be derived through the facility, but the bank puts several other factors in serious considerations. For instance, Tobin highlighted that capital (the owners equity or stake), capacity (liability to generate income to repay), character (human attributes, reliability, honesty etc.), condition (economic justification of the project), collateral (what to be pledged for the credit), and connection (other businesses or financial deals of the) will come into play when the bank weights the pros and coins of giving out the loans. “If a clients demands for N10,000, and after considerations of multiple factors, we saw that he actually requires half of that and we will give him that appropriately,” he said. Tobin harped on the economic justification and legality of the intended business through an interesting practical experience. “There was a case of a farmer who applied for loan to develop his farm. He turned out to be a farmer of indian hemp, after having secured the loan,” he narrated.

For the fifth step, the beneficiary must be ready to utilise the loan for the purpose intended. Tobin observed, and rightly too, that micro businessmen and women, tend to divert the loan granted them for others uses.

Sadly, some loan beneficiaries have been reported to have absconded so as to escape the monitoring eyes of the banks which granted them the credit in the first place.

Microfinance is built on trust, confidence which parties put in each other. Aderogba revealed, “even some of these people still see micro credit as gift,” That is not a cheering news.

To round it off, the intending beneficiary has the task of being honest and transparent in his financial dealings with the bank and build a credit history by repaying the loans on scheduled.

Not taking lightly other points such as the timing of the loan and the length of its repayment schedule, the purpose for which the loan is sought, the credit history of the intending beneficiary, the customers ability to service the debt, his credit worthiness, and the current or future demand for the output, one question remains germane to providing solutions to the necessity of micro credit. And that is information access to the active poor on the gains waiting to be tapped through micro credit.

As for the CBN, stakeholders would laud a more vigorous information dissemination to the micro entrepreneurs through the apex banking authority. Bill boards that advertised and practically announced the arrival and benefits of the new currency rates still litter the various strategic places throughout the country. In fact, the radio and television jingles almost virtually became a slogan for the illiterate market men and women and the villagers. Such landmark initiative will no doubt, transform many lives of the active poor if given consideration by the CBN as a method to develop the microfinance industry, and at what cost?

For the microfinance banks, they cannot shy away from taking over where the CBN has stopped. Their various products designed to meet the needs of specific customers are appreciated and more importantly, the extensive marketing approach put in place to reach customers is plausible, but the issue of interest rate needs to be seriously considered.

Although Aderogba argued that interest rate had never constituted such a serious hinderance to easy access to credit, it is realistic to consider the expression of Tobin that “Interest charge should be both social and allow financial sustainability, maintain the dual focus of profitability and outreach to poor clients, should not be comparable or above those of commercial banks and reflects the real cost of doing business.”