NEWS WIRE: Microfinance: The way forward for poverty eradication

Source: BusinessDay Online, Harrington Harmon

Article available here.

Following its success in a number of developing countries, the Nigerian financial sector appears to have developed a penchant for embracing the new trend of micro finance banks.

Not surprisingly, the Central Bank of Nigeria has targeted 400 community banks to be converted to micro finance banks by December 31, 2007. Already, ten community banks have fully complied with the CBN’s regulations and requirements to receive licenses and 125 have received provisional approval from the apex institution to become micro finance banks.

Additionally, managers of Accion Microfinance Bank, recently launched in Lagos, have said that they are eyeing a N12 billion loan portfolio aside establishing 40 branches with a clientele base of 100,000.

With more than 60 percent of the country’s population living on less than $1.00 a day, it is not surprising that more than 65 percent of the country’s banking population does not have access to finance. Bank outlet/client ratio, according to the CBN, remains a dismal 1:57,000 and only one million out of 52 million, or less than two percent of the figure of micro and small entrepreneurs have access to small microfinance services. Credit as a proportion of GDP is still 0.2 percent, while micro credit as a proportion of total credit remains only 0.9 percent. The situation is especially dire considering the fact that Nigeria is bountifully endowed with human and natural resources. Hence, it is reasonable to say that a large percentage of the population that has entrepreneurial skills do not have access to the finance that could easily untangle them from the grip of poverty.

This is where the microfinance institutions prove to be more instrumental in fighting poverty than the commercial and other banks, providing access to needed fundsfor the poor to invest in the first place and low interest rates. In the light of this scenario, microfinance institutions come with a good package to empower poor people to get out of poverty. There is no gainsaying that, microfinance institutions are the best bet for access to much needed funds to invest with. For example, whereas other banking institutions in the country charge interest rates of as much as 18 to 22 percent, micro finance institutions usually charge one digit figures as interest rates, usually in the range of five to eight percent.

As appealing as such a rate is for the poor, some authorities of finance have argued that there are not very many merits to microfinance institutions. From whichever angle one looks at it, microfinance institutions might not be the optimal conduit through which poverty can be eradicated. They have their own costs; they must pay their staff, bills, and operate for a profit, albeit minimal. And it is from the spread they make from lending to the poor that they succeed. That is why some experts have posited that the optimal solution for poor people is the local “esusu” or “susu” system that had been practiced on the continent for centuries. Similar practices are done in other cultures. For example, experts say that the ASAP’s Kufusa Mari project in East Africa is a good example of how such joint effort projects yield fantastic results both during the project and long after the project has ended. The women involved in ASAP’s pilot project chose to name their project, “Kufusa Mari,” which means “save for the future,” because the programme is focused on the benefits of working together to save money to fill future needs.

The programme brings together small groups of rural villagers, most of whom are women. They pool their resources and provide loans to each other, which are then paid back with interest. ASAP’s role is training and monitoring, not to provide outside funding. After gaining skills in leadership, resource mobilization, loan appraisal and bookkeeping, members create their own clubs, making all decisions themselves including who is in the club, how often to meet, how much to save, what the interest rate should be, and what to do if a member does not follow the rules which they agreed to follow when the club was formed.

The Village Savings and Lending methodology encourages individuals to form groups and select members themselves. Once the groups are formed they start saving! They all agree on an amount they can afford and when they can contribute. Any money saved by the group can then be borrowed by the members of that group. The members that borrow money pay it back after an agreed time period with interest. Savings add up as members continue to contribute and pay interest on their loans.

At first, the club only has enough money in their fund for one person to borrow at a time. During the loan cycle, that person may turn that money several times, enabling her to repay the loan with interest, and to continue operating the income generating activity she has chosen. The most common income generating activity is market gardening, which involves buying and reselling produce.

The programme becomes self-sustaining as the participants move from the ASAP training toward graduation. Graduation is when all members are able to borrow from the fund at one time, and the monitoring required by the ASAP field officer is minimal. Each group takes ownership not only of the money they earn, but also of the skills they develop in the process. Through this community-based method, the participants gain confidence and learn skills to become self-reliant. In the case of rural women living in Africa, where polygamy is common, having personal money also gives her decision making power in the home – a voice for the first time.

Clearly, the reason for the success story of the project is the spirit of team work that exists in the association. Each person feels that he is working for himself while working as a group. In that situation, the failure of the association translates to the failure of the entire group. Therefore, every member feels impelled to put in his best for the success of the association. As the name implies, “saving for the future”, they put in their all because they have a deep feeling that they are saving for the future. Also, the peer group influence makes members impelled to do all they can to guard their integrity jealously. But that typically succeeds in rural settings where everyone knows everyone.

As urbanisation is ever increasing among developing countries, micro finance banks are fast filling the void which “esusus” fill in the cities. It makes a pleasant development because microfinance institutions have features that are similar to the esusus of the village settings. Considering the economic class of the people that are serviced by micro finance institutions, they do not require collaterals, and their rates of interest are markedly lower than conventional bankers. Moreover, most microfinance institutions require that their clients be part of a cooperative organisation, for the same purpose that the borrower in the village setting would want to do his best to pay back his debt, maintaining his integrity.

On the part of the microfinance institutions, apart from lending and savings services, they should provide ancillary services to their customers regarding financial advising, evaluating their business model to make sure that what they are doing is in tandem with their objectives as a microfinance bank.

The success of the scheme holds a bright future for Nigeria and Nigerians as the country struggles to meet the Millennium Development Goals. The need to sublimate the country’s huge developmental prospect has never been as pressing as now. And empowering the poor, which constitutes the bulk of the population is the best way forward.

The success story of Brazil’s microfinance scheme and those of other countries are good inspiration for Nigeria. The scheme’s success in Brazil has made it the third largest producer of shoes in the world.

Happily, the scheme in Nigeria has started showing good signs of success. It is such signs that have moved some mega commercial banks to seek opportunities of tapping into the favourable operating environment created by the regulating authorities to buy into those banks. Already, in just their first year of operation, some micro finance banks have increased their client base to well over ten thousand. This is good news for the industry because the more money available to lend to the poor and low income earners, the better the opportunities there are to rescue people from the pangs of poverty, and the better opportunities of meeting the Millennium Development Goals.

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