‘Recapitalization alone can’t improve fortunes of Nigerian microfinance banks’

It would take more than recapitalization or financing to improve the fortunes of microfinance institutions in the country, according to Muideen Adejare Isiaka, a research economist at the Bells University Ota.

Isiaku who spoke to business a.m. on the sidelines of the August edition of the monthly financial and investment dialogue powered by business a.m. and GTI Capital, said the reason for failure of MFIs is more than lack of capital or problems of illiquidity.

“There is a more fundamental problem if businesses that are set up to run on its own and have been given the resources to do so keep failing, noting that the problem has to do more with a pervading culture of loan default by obligors as well as poor strategies of collections by the MFIs.

While operators and financial analysts would quickly point to low capital base, insider abuse, poor management, illiquidity, lack of skill sets and policy summersaults as problems hobbling the operations of these institutions, Isiaka believes that poor financial education, financial indiscipline and little or no credit culture of Nigerian businesses are the reasons why MFIs have failed to thrive.

“It is important to note that the MFIs are the custodian of several developmental funds from the CBN and foundations like that of Dangote. It is better to look at the problem and see how we can make it work, rather than to say bail them out, give them sponsors/funds, or ask them to raise more capital,” he said.

Lending insights on possible solutions to the pending problems in the sector, Isiaku explained that MFIs must play through the beliefs and values of people to enable quality patronage easy compliance to terms of loans.

A tactic applied in the north, may not work in the south just because they are of different social, cultural and even religious beliefs, every tribe in Nigeria is unique, so we may not get a solution that will work everywhere,” Isiaku further explained on advances and collection.

He said, “if proper research can be done to unravel the unique peculiarities of each area and geopolitical zones, we may begin to get headway in capturing the burgeoning populace who continue to lack access to finance and the will to pay back loans granted to them for economic and social development.”

Speaking further, the economist called for collaboration between telcos and MFIs.

“If these Telco’s work with MFIs in such a way that they can use the text messaging feature on their ordinary mobile phones to do a transfer and other basic financial transaction, it could be one way to go,” adding that with that, transfer of loans or making payments will be simple and cost of transactions on both ends will reduce.

“If the person needs to take a bike to get to a bank to pay loans, the cost is being increased even at that such person will not leave their business because they will be thinking of how much they could have earned if they leave to come and pay parts of a loan.

“The banks must relate with them and get the model that will work; other innovations from the fin techs can be refined in a way that could work well with the MFIs as well,” said Isiaku.

Corroborating the idea of changing the business model of microfinance institutions in the country, Modestus Onuoha a senior executive partner/CEO of Bota Fintech Ltd said the idea of MFIs clamouring for funds to run their businesses goes beyond just giving out loans to small business so that profit can be made.

Asides the profit that could be made, financiers are majorly about the impact their monies can create and that is why Nigerian’s hardly get a part of these developmental financing other African countries are getting, Onuoha explained.

“For you to access that fund, there are developmental concepts that must be met. Frankly, they want to know how many people you are able to empower with the funds. They want to know the socio-economic impact the funds will have. These are more important to them, and if it can’t be substantiated such funds will not be released.”

On the aspect of dealing with the poor culture of loan repayment in the country, Onuoha was of the opinion that loan structuring has to change, adding that it must be tailored specifically to the business that is in need of such funds.

“The objective of doing business must not be lost on the bank,” Onuoha said. He dispelled the idea of giving out loans through trade associations because it has been practised and in most cases has not worked.

He, however, advised that individuals are better off as obligors of a loan rather than an association because it aids easier recovery of debt, and mitigates credit risk, especially if something adverse happens to the association.

Peter Owunna, the CEO XsInce Micro Finance Bank and Xslince Investment and Trust Limited who was the guest speaker at the financial and investment dialogue noted that of the over one thousand microfinance institutions (MFIs) licensed by the Central Bank of Nigeria (CBN) less than twenty percent of them are functioning optimally.

Speaking on the topic “Integrating microfinance institutions into the Nigerian capital market”, he said microfinance institutions should be encouraged to list on the Nigerian capital market so as to access the huge capital available in the market.

Highlighting the benefits of listing, the finance expert said, “Listing of MFIs can provide much-needed funding from pension fund administrators, mutual funds and a host of other private equity investors.”

He said private equity investors who often have a timeline for certain funds find it difficult to invest in microfinance institutions today because there are no exit opportunities, adding that if the shares of the MFIs are listed, it will be much easier for investors to offload their investment at the end of the life of a particular fund.

With the current primary and secondary categorization in the nation’s capital market, Owunna further explained that it would give room for the microfinance banks to come into the market through the second tier, which is a subdivision of the primary market.

The second tier market was created for SME’s to access capital in the market and has less stringent listing requirements to be met.

Lamenting that only three out of the 1000 licensed microfinance institutions are currently listed on the NSE, the Xslnce CEO wondered if the sector could bring the desired financial inclusion growth being championed by the financial regulators.

Other benefits of MFIs listing on the NSE include enhanced transparency and integrity, access to growth enabling capital as well as broader ideas and skill sets among operators.

Indeed, MFIs play a significant role in financial inclusion since they deal directly with the informal sector and grass root businesses, which are in most cases financially excluded.

CBN data indicate that the number of citizens with Bank Verification Number (BVN) is barely 22 million as against the country’s current population estimated to be well over 200 million.

With little or no access to finance, a rapid development of the rural sector pose a major challenge for overall economic development, hence a dire need for innovative ideas through collaborations among MFIs and Fintechs as well as rapid deployment of information technology is necessary.