NEWS WIRE: Nigeria: High Microfinance Interest Rates Cause Loan Defaults

Source: The Guardian (Nigeria).

LAGOS, September 23 – There is increasing fear that the high default rate among fund borrowers from the microfinance banks may soon ruin the nascent banking institutions, The Guardian investigation has revealed.

High interest charged by the microfinance banks has been discovered to be the reason behind the alarming default. A microfinance loan is a facility granted by a microfinance bank to an individual or a group of borrowers, whose principal source of income is derived from business activities involving the production or sale of goods and services.

The maximum principal amount stipulated by the Central Bank of Nigeria (CBN) guidelines that a microfinance bank can grant to a client is N500,000 and this may be reviewed from time to time by the apex bank.

By practice, a microfinance loan is granted to the customers of microfinance banks, such as peasant farmers, artisans, fishermen, women, senior citizens and non-salaried workers in the formal and informal sectors. The loans are usually unsecured, but typically granted on the basis of the applicant’s character and the combined cash flow of the business and household.

Microfinance loans may require joint and several guarantees of one or more persons. The repayment may be on a daily, weekly, or monthly basis in accordance with amortisation schedule in the loan contract.

Although the CBN’s guidelines provide that the tenure of microfinance loans should be 180 days (6 months), and in the case of crops with longer gestation period, a maximum tenure of twelve months may be permitted, but nowadays in Nigeria, rarely can a microfinance bank customer get such tenor of loan.

The Guardian’s investigation revealed that majority of the microfinance banks prefers to give out loans on monthly basis. And those, who may need the fund for more than a month are required to roll it over at the end of each month and pay the agreed interest upfront.

Available data indicate that there are currently about 800 microfinance banks all over the country and many of them are now groaning under the burden of unpaid loans granted to their clients.

Although efforts to get from the CBN the total amount involved in all the loans given out by the microfinance banks could not yield results, information gathered from some microfinance banks operators showed that the figure is staggering.

Mr. Odumosu Fakiyisi, managing director, Batik Fabrics, Abulegba, Lagos, told The Guardian that he has been unable to pay his loan of N800,000 (interest inclusive) owed to a microfinance bank because his business has been paralysed by lack of electricity and scarcity of fuel to operate his generator.

Saying that the interest rate on the loan has been mounting, Fakiyisi said he does not know how he would generate fund to liquidate the loan, which was advanced to him at 10 per cent per month by the microfinance bank.

Another loan defaulter, who pleaded anonymity said the N150,000 loan his microfinance bank granted him some months ago has increased to N350,000 now because of the 8 per cent interest the loans is yielding every month.

Some of the microfinance banks contacted by The Guardian in Lagos and other parts of the country confirmed the huge unpaid loans by clients. While some agreed that they charge as high as 24 per cent interest rate per month, others, however, said they charge less (between 6 and 10 per cent) but that interest is usually based on negotiations and the credit worthiness of the individuals.

For instance, Bakasi Microfinance Bank Limited, Calabar, Cross River State, confirmed through telephone interview that their interest rate ranges between 10 and 16 per cent depending on the amount needed and the customer, the bank official, who identified himself simply as Mr. Blessing said. But refused to say how much clients owed the bank.

Apeks Microfinance Bank Limited, based in Ilorin, the Kwara State Capital, said they charge 3 per cent for a small loan of N20,000 and any amount from N50,000 and above is subject to negotiation.

The bank’s Managing Director, Mr. Oludare Adewale, said that the problem confronting microfinance banks in the country is sourcing cheap funds to give to the poor at low interest rates.

He lamented the dearth of fund being faced by the institutions and enjoined the state and local governments in the country to make available to the microfinance banks in their locality the one per cent, which the microfinance banks policy require the two tiers of government to provide from their statutory allocation.

Adewale explained that if the fund was made available to the microfinance institutions, that will enable them (microfinance banks) to provide loans to the poor at very low interest rate.

Mr. Sarafa Ogunbajo of Pyramid Microfinance Bank Limited, Jibowu, Lagos, said they charged as high as 24 per cent on loans.

But a Small and Medium Enterprise operator, Mr. George Eke, managing director, Distinct Dimensions, Lagos, asked how on earth will a businessman, who is into manufacturing pay back a loan he obtained at 10 per cent or more per month, which in effect, translates to 120 per cent per annum?

According to him, majority of the loan defaulters did not do their homework well before they took the loans. Said he, “the problems with this country are high interest rate and lack of electricity. The purpose for introducing microfinance banks was to enable the poor access funds to do business and thus escape from poverty. But how can poverty be alleviated through loans granted at usurious rates?”

Mr. Dave Idodia, a chartered accountant explained that a monthly interest on loans, no matter how small, is not good for doing business in a country such as Nigeria where there are no regular power supply and other basic infrastructure.

Picking up his calculator, he calculated that a monthly 10 per cent interest on N500,000 translates to N50,000 per month and for a whole year the borrower would pay N600,000 as interest on the N500,000.

According to him, if the same amount (N500,000) were borrowed from a commercial bank at the prevailing interest rate of 22 per cent per annum, the total interest payable on the loan for a whole year of 365 days would be N110,000. This translates to N9,167 per month as against the N50,000 charged by the microfinance banks.

He said that what this means in effect is that whereas the rich who have collateral could borrow N500,000 from the commercial banks and pay N9,167 or less as interest per month, poor artisans and other poor people, who have no access to the commercial banks, if they go to the microfinance bank to borrow the same amount (N500,000) at 10 per cent per month, would pay an interest of N50,000 per month for such a loan, all because they have no collateral to go to the commercial bank to borrow the amount.

This contradicts the purpose for introducing the microfinance banks in the country, which was meant to be an engine behind the economic drivers of micro, small and medium enterprises. With more than half of the adult population unable to access retail banking services, the introduction of microfinance banking by the CBN was welcomed by the general public.

Microfinance banks were essentially to provide credit and other financial services to people in lower income groups, with one of its major characteristics being that it offers limited products with no formal collateral.

Engineer Ndubuisi Nnodim said this laudable concept has been hijacked by money bags who have invaded the microfinance banking industry, and as they did in the era of finance house saga, they have set up microfinance banks here and there, go to the commercial banks to source loans on interest rate based on per annum and them re-channel such loans to the poor at higher monthly interest rate.

Microfinance banks watchers disclosed that the booming business of taking loan from commercial banks by moneybags and re-channeling such loans through the microfinance banks to the poor at usurious rates was partly responsible for the rapid expansion of the one-branched banks through out the country. This, investigation revealed, was also responsible for the many of banks being located in highbrow areas of Nigeria’s cities.

At a recent conference on the banks, it stated that microfinance banks have gone beyond their level into competing for corporate accounts. They were accused of wanting to have salary accounts for government parastatals, or finance petroleum marketing industries. And in their bid to meet with their self-imposed responsibilities, they provide their employees staff suits, chauffeur-driven in state of the art cars. It was also revealed that they now compete with wholly commercial banks.

The Deputy Governor of the Central Bank, Tunde Lemo told participants at the conference that managers of some of the banks are yet to imbibe the necessary culture suited for their operation.

“Some of these microfinance banks are simply ostentatious, with some of them having their executive remuneration to include a two-week holiday abroad.

With a package like this, how do such banks hope to reach out to those not using any bank and alleviating poverty which are the main reasons for setting them up?” Lemo said.

Mr. Akin Akinbobola noted that the CBN’s directive to the every microfinance bank to have a minimum reserve of N20 million, while the National Deposit Insurance Corporation (NDIC) insures each depositor for a maximum N100,000, regardless of the amount of money invested, take the microfinance industry out of the reach of the poor it was intended to serve.

The fear being harboured in some quarters is that the banks may collapse soon if the operators did not change their strategy.

By Godfrey Okpugie, The Guardian

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