Adolphus Areban Abraham
As we enter a new decade, it is imperative for
us to take a projective
view of microfinance. Potential investors, whose interest this column
seeks to focus should be able to decide if their investment will extinguish
should they decide to enter the industry today or
within the decade. They should be able to decide their exit strategy in terms of tenor, capital
withdrawal and an acceptable returns benchmark. The issue that should bother an
investor as we enter this decade should be the future of Microfinance in Nigeria. Will the investment still be relevant? would the industry have
suffered extinction? This article that also happens to mark the 100th edition
of Business a.m. promises to help the investor review the factors that will
shape the Microfinance industry in Nigeria this decade in order to help him tread cautiously.
Preamble
The Microfinance industry is barely two decades
old starting from the incursion made in the early 90s by the now generally
acclaimed father of Microfinance, the founder of Gramen Bank in Bangladesh, Muhammad Yunus. He received a Nobel price in 1986 for his effort in developing the
industry.
Prior to this time, the industry was bi-product oriented
delivering microcredit (covering savings and loans only) and basically unregulated
as operators were structured as NGOs. The need to promote financial inclusion
became rife as over two thirds of global adults did not have bank accounts and
lacked basic financial services of savings, loans, insurance, pensions, transfers, mortgages etc. It was the bid to close this gap that gave rise to the concept of
Financial Inclusion which refers to a situation where the hitherto excluded individuals
and businesses have access to useful and affordable financial products and
services that are delivered in a responsible and sustainable manner. In
Nigeria, about 100million (40% of Nigerian adult as at 2017) adults are financially excluded and through the instrumentality of the CBN
and other stakeholders the fight is being gradually won.
Despite the milestone, there are a great number
of people who believe that the concept of Microfinance and financial inclusion
is a mirage. Many argue that despite the huge investment and attention the success
recorded has not shown value as both do not correlate. so, if this is the case, why do we still have to invest in the industry?
Benefits
of Microfinance
The benefits of microfinance are wound round easy access
to credit,provision for families,
catering for the often overlooked, better loan repayment model, possibility of
future investment, creation of jobs, access to good health and education, easy
savings platform, reduces the stress of borrowing and repayment, set out to improve the
standard of living amongst impoverished communities etc. If the benefits are these
robust, why then would pundits complain of value.
Challenges
facing Microfinance
Among the challenges facing MfBs in Nigeria include but not limited to
periodic changes in policies, dearth of relevant
skills, poor physical and technological infrastructure, lack of sufficient
social capital, Inflation wiping away value of customers savings,
high cost of lending, corruption,
poor corporate governance and frauds and forgeries, inability to make profit
that guarantees their sustainability due to that limited operation, high
transaction cost, wrong business models, quality of customers etc. If these
challenges have prevailed in the last few
decades, what then does the future holds?
Factors
that will shape the Microfinance Industry in the next decade.
1. Financial Technology: This is the use of new technology to improve and automate financial service delivery. With the use of
specialized software and algorithms on computers and smart phones, it aims to
help individuals and business owners better manage their financial
operations, processes, and experience.
The CBN has recently issued operating license to entities whose core operating
infrastructure is technology driven rather than the brick and mortar currently
being relied on by existing operators. Recent technology has proved to not only
create access to financial services even on your palm anywhere and anytime, it
has also proved to radically reduce cost of transaction for very poor and
remote customers.
2. Demographics: This explains a
situation where a business uses the factors of age, race, sex
employment, education, income, marriage rates, birth and death rates etc to
make informed decision concerning their product and services. In Nigeria, the
factors that will affect the industry most are immigration, labour markets, urbanization and access to information.
As the younger generation of today forms the adult of the future, the current
drift abroad by young people due to changing immigration policies of some
countries would be a deciding factor. The changing orientation of our teenagers
who have now found the labour market unattractive, the high rate of rural urban
migration making the cities more populated at the expense of the rural areas
and the availability of information on the go, making people more informed and
sensitive to product and pricing, the microfinance industry will surely receive
its fair share of these imbalance.
3.
Regulations: This refers to policies, standards and codes
guiding the operation of microfinance as issued by the CBN. The quality and how
the market respond to it will impact the industry from both side of the coin. Policies
like Know Your Customer, AML/CFT, digital transaction, transaction fees etc are
rife.
4.
Government activism: this describes a situation where government strive to create friendly
policy environment for microfinance operators and at the same time, raising
competing institutions. With the existence of over 888 MfBs in Nigeria,
government institutions that should provide funds for on lending are currently
directly involved in lending to individuals and businesses. With larger balance
sheet of government backed institutions, the competition with Mfbs becomes
unfavourably skewed.
5.
International Funding and incursion: This tends to look at how much inflow are
received from outside the country into the microfinance industry. It is common
place to notice that profits and cashflow generated from international businesses
especially technology companies are being deployed to developing countries to
solve problems of poverty and financial inclusion for which Nigeria is not an
exception. The presence of notable technology or tech driven companies are
already causing major disruptions in the industry.
Microfinance
outlook for the decade
The microfinance industry will be very busy this decade as there would be a lot of changes as we enter year 2020. Major landmarks would be made. I have tried to pen a few of those changes below.
- Brick and Mortar will disappear; Technology will rule the industry. The act of building branches all over location of interest would become unfashionable. This will allow MfBs to reach a wider clientele at a lower transaction cost.
- Emergence of Mega Retail Banks: Microfinancing business will return higher yield on investment and capital ahead of traditional commercial banks. Commercial banks will see compelling reasons to focus on this area as it would contribute significantly to their bottom line and would therefore want to split their license. This would lead to the emergence of Mega Retail banking license instead of Commercial Banking. Commercial banks will disappear and give room to a holding structure that would hold various license as they find profitable.
- The Poor will always be poor: As a Christian, I believe the bible when it says in Mathew 26:11 that the poor will always be among us(paraphrased). You can manage and attempt to alleviate poverty but you cannot eradicate it. The war against poverty will continue with gainers and losers.
- Colonisation of the Nigerian
Financial system: There are currently 9 National microfinance licenses, out of which 7 has international
affiliations. More investors have shown interest and this will continue for
sometime. Foreign investors are interested in the
population of Nigeria. It is exciting to have your potential target in excess
of hundreds of millions. By the time we
realise the impact of the great influx giving rise to financial colonies, we will fight hard to free
our economy but not without paying the price.
5. Higher profitability due to the reducing marginal cost of serving customers as they scale. The current pricing regime allows for sufficient interest rate to enable operators cover their cost, the use of technology will reduce transaction cost. Supported by a teeming population, there will be higher returns to attract more investors and the cycle continues.
Conclusion
While I assert that the poor will always be around us, microfinance will on a sustainable basis remain a significant interest with sufficiently orchestrated venture. A greater number of social investors will emerge to saturate the industry and skill set draught will almost contentiously, be prevalent.
Adolphus Areban Abraham is the Managing Director/CEO of Rigo Microfinance Bank based in Lagos. He can be reached on jiyere@yahoo.com
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