Successful Microfinance Practices in Nigeria: My Experience1

Godwin Ehigiamusoe2

Preamble

In the past seven years, microfinance has enjoyed unprecedented visibility and also

experienced growth in Nigeria. Nigeria is expectedly becoming a focus of international

microfinance community.

Stakeholders particularly, the regulatory authorities and practitioners have equally contended

with a number of challenges which range from limiting factors in the operating environment,

to dearth of re-financing facility. However, there appears to be a strong commitment of all

stakeholders in the sector to make microfinance work for our people. It is on this score, I

express my delight at being invited to reflect on the Nigerian microfinance practices in

general and my experience in particular.

Microfinance

Microfinance has been defined in various ways by authors and practitioners. For Ledgerwood

(1999), microfinance is the provision of financial services to low-income clients including the

self-employedi. Robinson (2001) conceives of microfinance as small-scale financial services ,

both credit and savings that are provided to people who farm or fish; provide services; work

for wages or commission; gain income from renting out small amount of land, vehicles,

animals or machinery and tools; and to other individuals and local groups in developing

countries in both rural and urban areas. 1 Paper presented at the 6th Annual Microfinance Conference and Entrepreneurship Awards, Organized by the Central Bank of Nigeria, February 7 &8, 20122 Mr. Godwin Ehigiamusoe is the Managing Director, LAPO Microfinance Bank Limited , Benin City

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LAPO MfB Limited

Clients base : 518,345 Value of loan in 2011:

N31.8billion Loan Performing Loan/PAR >

30days : 1.58%

Because of its historical tie to poverty alleviation, microfinance is seen as poverty lending.

Micro financing is therefore, connotes more than the disbursement and collection of loan

repayments and savings; it also refers to a set of elastic organizational structures and

procedures by which appropriate financial services are delivered to low-income people and

owners of micro enterprises on a sustainable basis(Ehigiamusoe 2005)ii.

Low-income people and their micro-enterprises are peculiar in many ways and meeting their

varied financial needs requires flexible structures and procedures. Microfinance is vital

component of efforts at ensuring adequate financial inclusion.

The features of microfinance can be summarised as follows:

I. Finance for all. Microfinance focuses on persons and businesses that are

excluded from mainstream financial system. These are members of poor

household, rural dwellers, women and recently the youth. Clients of microfinance

are usually classified as ‘the poor’ or lately, as ‘low-income people’ by those who

consider the term poor as not edifying. They usually operate at the fringe of the

economy, that is, the informal sector or shadow sector. Microfinance banks seek

to empower low-income people and mainstream they into the national economy

ii. Disregard for collateral security. Exclusion of low-income people from

institutional financial services on the basis of collateral requirement is often cited as the

reason for the rise of modern microfinance. Classical microfinance does not place emphasis

on collateral as condition for access to credit. The rationale for disregard for collateral

security is simple: Low-income people do not have assets to present as collateral for loans.

They do not command ownership over assets such as titled land, stocks and other forms of

assets often demanded by conventional financial institutions. Microfinance as a lending

approach believes in the people (what they are) rather than solely in collateral (what they

have).

Microfinance institutions ensure good repayment performance through:

- Creative engagement of clients/borrowers;

-training;

-flexible Loan repayment schedule, participatory loan applications appraisal and joint

liability;

-Effective loan utilization monitoring;

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-Savings requirement

iii. Flexibility in service delivery

The peculiar nature of clients of microfinance and their businesses require flexibility in

delivery approaches. Loan disbursement and repayment as well as savings mobilization are

designed to reflect the cash-flow patterns of low-income people and their businesses.

Services are taken to the clients rather than wait for them in their branch offices. If the

clients are farmers who are working on their famers in the morning, repayment collections

could be made in the evenings well after conventional working hours!

iv. Microfinance is not charity

In spite of its association with charity, micro-lending is not charity. Borrowers are obliged to

take full responsibility for proper utilization of borrowed funds and make complete

repayment with interest and associated fees. The cost of failure of a microfinance institution

and bank far outweigh the cost of access to loan on a sustainable basis.

Challenges

The provision of financial services to low-income people applying flexible approaches comes

with its challenges. Some of these challenges are even more acute in the Nigerian operating

environment. These challenges include:

Possibility of mission drift:

The most profound of the changes microfinance has gone through is the current trend of

commercialization. Microfinance has transformed into a thriving global industry with various

profit takers in the chain of capital-flow to the poor. Transactional language is dominated by

profit rather than impact.  Private equity and commercial debts have replaced grants while

legal and regulatory frameworks provide required platform for for-profit institutions in the

sector. Interestingly, commercialization of microfinance was intended to deepen the industry

and expand access to a range of financial services to a large number of the under-served.  It

was reasoned that only funds from commercial sources could bridge the huge gap between

supply and demand for financial services by the poor. Commercialization comes with the

temptation to unscrupulous pursue to profit and the detriment of making meaningful impact

on low-income households.

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High operating cost:

Implementing flexible institutional procedures to reach micro and small enterprises could be

expensive and limits returns on investment.

A major cost factor is the frequent interaction with clients which is the hallmark of

microfinance practice. Credit officers are required to maintain regular and frequent contact

with service users usually outside branch offices. To reach a large number of clients, in rural

Africa, credit officers will have to traverse several communities.

Another cost dimension is the numerous transactions involved in microfinance operations.

It is usually more cost effective to deliver bigger units of services. For example, the

transaction cost of a credit facility of N100, 000,000:00 to four borrowers is cheaper than

lending the same amount to 5,000 persons at N20, 000:00 each. In the latter, numerous loan

applications and accounts are processed and monitored respectively. The unit cost of savings

mobilization is equally high. To address the challenge of high cost of transactions,

microfinance institutions adopt operational strategies including group methodology and

standardization of procedures

Repayment problem:

Loan delinquency is major threat to institutional sustainability; it is the deadly virus, which

afflicts MFIs. Delinquency demoralizes staff and deprives beneficiaries of valuable services.

Delinquency is a symptom of poor leadership.

Inadequate experienced credit staff:

Micro financing is more than dispensing loans. To be viable, MFIs require experienced and

skilled personnel. As young and growing industry, there is a dearth of experienced staff in

planning, product development and effective engagement with clients. Most credit staff of

MFIs in Nigeria is on their first jobs. Inadequate experienced staff limits expansion and

institutional performance.

Inadequate Re-financing facilities:

In nascent microfinance industry, clients are usually not able to make deposits which are

enough to fund loan portfolio. The poor can save, but their capacity to save large sums is

limited. There is always a gap between loan deposits and the loan portfolio. Microfinance

banks therefore seek fund to bridge the gap.

Internal Control challenge:

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Large number of transactions and flexible operational approach combine to pose serious

internal control challenge. Operational procedures could be breached at disbursement and

collection points. High cash transaction, which is a feature of micro financing, is a source of

temptation for fraudulent practices.

Risks and microfinance The nature of operations of microfinance institutions makes them

susceptible to risks. The challenge of risk management in microfinance is about how

operators can reach low-income people with financial services in a flexible and convenient

way (for clients) and at the same ensure adequate protection for institutional assets such as

cash and loan portfolio. Conventional risk management approaches, may lead to exclusion of

low-income, especially rural dwellers.

Risk generating factors in microfinance

A number of features of microfinance make microfinance vulnerable to risks.

i. Nature of service users and their businesses

The unique nature of microfinance clients and funded businesses from the point of view of

conventional financial intermediation constitutes considerable risk. They are considered ‘bad

risk’ and, therefore ‘unbankable’.

(a) Weak management capacity of small business owners

Most users of microfinance services lack necessary skills in record keeping, planning and

other basic management techniques. Most micro-businesses are, therefore, established

without feasibility studies. These deficiencies could result in business failure which puts loan

assets of lending institutions at risk.

(b) Vulnerability of supported enterprises

Clients and their micro-businesses are vulnerable to a range of shocks and challenges in their

operating environment. For instance, an incidence of fire out-break in the market place could

wipe out the entire economic base of a microfinance client. Urban renewal programme,

which consists of demolition of shackles and shops on the right of way, could constitute a

threat to owners of micro-businesses and lending institutions. Policy shift could have

devastating impact on their businesses.

(c) Concentration in similar enterprises

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Low-income people tend to engage in businesses with limited differentiation. In urban

centres, they invest borrowed funds in trading and related businesses. In farming

communities, all small scale farmers engage in subsistence farming. In most cases, they even

engage in cultivation of the same crops. In Southern Nigeria, it could be cultivation of

cassava. Loan amounts from the lending institution to various borrowers are concentrated in

few similar farming activities. Any unfavourable development as poor harvest of the crop,

substantial proportion of portfolio of the lending institution is at danger of default.

ii. Nature of service delivery approaches

The distinctive feature of microfinance is its flexible service delivery approaches. Delivery

structures are usually flexible while operational procedures are informal. These are designed

to be responsive to the needs and characteristics of the poor and their businesses. However,

flexibility of delivery approaches presents some risks. For example, cash disbursement and

field based operations expose micro-lending institutions to risks which require innovative

approaches to measure and mitigate.

iii. Less Emphasis on collateral of requirement

The standard practice in microfinance is collateral substitution. This is one of the key

features, which set microfinance apart, from formal lending transaction. The rationale for

collateral substitution is that, most clients of microfinance do not own assets, usually

demanded by formal lending institutions as security for loans. Microfinance practitioners rely

on ‘social collateral’ group solidarity and cross guarantee to ensure good repayment

performance.

Good as ‘social collateral’ approaches are, enormous investment in training is

required for effective application. Improper application of social collateral approach could

put a large proportion of loan assets of microfinance banks or institutions at risk.

3. Response strategies: The LAPO Experience

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LAPO’s current performances did not come about over-night. We contended with the above

challenges like other microfinance banks in Nigeria. Some of our strategies and interventions

could be summarised as follows:

1. Clarity and consistency of mission and vision. Without any fanciful mission

statement, right from the beginning, we seek “to assist our clients to break out of

the grip of poverty”. At the beginning, we formulated a set of five (5) operating

assumptions which guide and influenced LAPO’s structures and procedures.

They are:

i. The poor are too disadvantaged to meaningfully benefit from programmes

and services provided by formal institutions and commercial banks.

The poor for instance do not have command over assets as titled land, stocks

accepted by banks as security for loans. They are therefore excluded on account of

their poverty. LAPO therefore targets low-income persons and owners of micro-

enterprises poor who are excluded from services of formal institutions.

ii. An improvement in the condition of the poor would take place if financial

services were provided on affordable basis. For the poor to benefit maximally

there must be implementation structures procedures and terms which are

responsive to the peculiar nature of their businesses. Beyond pricing, credit

delivery strategies should take into account, the debt capacity, and low level of

business training and vulnerability of their businesses. Through innovative and

flexible procedures, LAPO is able to meet the financial needs of low income

persons. Sizes of loans and repayment procedures are sensitive to the businesses

of its borrowers.

iii. Small groups have tremendous influence on cooperating individuals.

Grouping is major source of strength and support for persons with limited means.

It provides opportunities for exchange of ideas and tips on business success and

social and economic empowerment. Groups provide valuable assistance and in

some cases help cooperating individuals act in compliance with operating rules

and procedures. In micro-credit delivery, group methodology promotes credit

discipline amongst other advantages. Group methodology is a major feature of

LAPO financial services delivery structure. Borrowers are organized into self-

selecting credit groups.

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iv. Poverty is aggravated by such factors as diseases, ignorance and social

exclusion. The poor contend with challenges other than lack of capital. These

include poor health, ignorance and social exclusion. These factors act to

strengthen the grip of poverty. Meaningful poverty eradication intervention should

take this into consideration. LAPO conceives of poverty as an octopus with

several tentacles of causes and manifestations. Beyond the provision of financial

services, LAPO pays attention to social empowerment through effective

collaboration with other sister organizations within the LAPO SYSTEM.

v. Women and children are relatively more disadvantaged and worst hit by

poverty. The reality of development is that there is no society in the world, where

women are treated as good as men. In poor nations of Africa, women are deprived

access to income generating assets and life transforming opportunities as credit,

education and popular participation. Their ability to realize their potentials are

constrained by customs and traditions in patriarchal societies. Comparatively, they

are excluded from institutional credit than men3. LAPO gives priority to women.

Women constitute over 90% of LAPO current client base.

Over time we have built some fancy into our mission statement, but we still remain

faithful to enabling our clients break out of the grip of poverty

2. Staffing and people management

We realize very early that we would not be able to access a pool of experienced staff

and sought to compensate with the following:

i. We look for attitude: in the early years, we did not bother so much about the

level and nature of academic qualification. We sought for people willing to work

hard particularly, with low-income people. Today we do not recruit people from

elitist homes; rather we select people from low-income households.

ii. Emphasis on learning. Since we recruit the ‘young and green’ we invest in

education and training. We encourage our staff to develop themselves. The

result is that we have a body of professionals who qualified while working in

LAPO. For example, we have ten (10) chartered accountants; all except one

3 In the study on access to the Federal Government of Nigeria Agricultural Guarantee Scheme, in Cross River State , women account for only 4% of beneficiaries ( Eyoma :1994)

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passed their professional examinations while in LAPO. We have a full-fledged

Academy for microfinance.

iii. Our staff members are ‘people’ rather than as ‘resources’: Our staff policies

and practices see staff as ‘people’ with needs, aspirations, self worth and voice.

We have People Management Unit (PMU) and not Human Resources (HR).

Here are some examples of our policies and practices:

a) We started the implementation of the national pension scheme, immediately

it was launched even then as a Non-profit organization.

b) Eight (8) years ago we formulated and began the implementation of

HIV/AIDS Work Place Policy which was reviewed in 2010

c) We engaged a US Based organization to conduct Employee Engagement

Survey in 2011. The result shows that LAPO scored higher above the global

average in staff engagement index

d) We have appropriate bonus /incentive systems

e) Our annual staff turn-over in the past 6 years has been below 6%

3. Client relationship and engagement

Our relationship with clients in based on:

i. Participation. We have :

(a) Each branch of LAPO has a ‘Branch Council’ which is a body of all

leaders of credit groups supervised by the branch. The leader of the council is

elected by the members while our Branch Manager is the Secretary. The

council meets quarterly to review operations of the branch.

(b)Till recently, an elected client was a member of our board

There are series of client for a

ii. Support. LAPO realizes that our clients need much more than finance,

because they contend with challenges other than lack of money. LAPO

provides:

(a) Scholarship award for secondary education for children of clients, as the

greatest concern for a poor woman is the future and education of her children. She

usually believes that she is poor because she did not have formal education. In 2006

LAPO won the Grameen Foundation award for ‘Excellence in Microfinance ‘ and the

cash prize of $10,000 used as seed fund for the scholarship Fund. 530 children are

currently on the scheme. We need your contributions.

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(b) Health and Gender training. Health awareness and gender

sensitization activities are organized for our clients by our sister organization-

LAPO NGO. 51,001 women were trained in 2011.

(c) Micro-insurance services. LAPO in collaboration with GoldLink Inc

Company Plc provides insurance cover for life and fire in the market place

for our clients. 418,187 women are currently covered. We are working on

health insurance scheme.

(d) Credit staff members are trained to be Client Support Officer (CSO). This

indeed is the official designation of our Credit Officers. They are trained to

provide necessary support for clients in areas beyond finance such as

education and career counselling for their children.

iii. Respect and satisfaction. LAPO has endorsed and began the implementation

of the Seven Client Protection Principles.

Periodic client satisfaction surveys are also conducted

4. Funding

Funding is possibly the most acute t challenge facing microfinance banks in a young

microfinance industry as ours. LAPO’s position and steps taken to address this

challenge could be summarized as follows:

i. We realized quite early that ONLY huge funds from commercial

sources could support meaningful and sustainable growth.

ii. We believed that ONLY good and sustainable microfinance institution

could attract commercial funds

LAPO therefore took the following steps:

(a) In 1999, we articulated the vision of what should done to access commercial fund

in Project REfEX (REach for EXcellence)

(b) In 2002, conducted institutional review/assessment by MicroRate Inc, a US-Based

specialized rating agency for microfinance institutions.

(c) In 2003, we began the implementation of the recommendation of the review

exercise,

(d) In early 2005, we started to obtain commercial fund.

LAPO currently take commercial loans from 11 local and international financial institutions.

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5. Sustainability challenge

The high cost of transaction in microfinance throws up the challenge of financial

sustainability.

LAPO addresses this challenge from three perspectives. First, is through cost-effective

approach. Periodically, we review our cost profile and implement cost reduction strategies.

For example branch set up cost is minimal. Second, we push for benefits of scale and optimal

engagement of staff through periodic performance assessment. Third, we periodically review

our rates and fees to reflect movement especially in the cost of funds.

6. Lateral learning and collaboration

From the start, we realized that there is much to learn from other institutions and initiatives.

We learned much from the indigenous thrift and loan schemes, the co-operatives and other

local and international microfinance institutions.

7. Social performance strategies

We believe that access to finance is only one item in the bouquet of empowerment

services the poor require. From the beginning LAPO adopted the finance Plus

approach. We believe that social empowerment is vital. LAPO MfB in conjunction

with its sister NGO provides a range of social empowerment services to our clients.

These include health awareness activities, gender sensitization and popular

participation training,

8. Delinquency management

At the beginning, LAPO struggled with loan delinquency and we have overcome it in

the past ten years. What did we do?

We began by changing our attitude of blaming the delinquent borrowers to blaming

ourselves. We realized that there are really no ‘bad borrowers without bad lenders’

We thereafter decentralized our loan administration process with the powers to lend

and collect repayment in the hands of our Branch Managers (BMs) and Client Support

Officers (also called Credit/Loan Officers by most lending institutions).

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We invested in training. We review the contents of our pre service orientation (PSO)

programme.

We hold these field staff responsible for good repayment performance. There is not

particular incentive for good repayment performance, as it is believed across LAPO,

that collecting complete repayment of the loan you gave out is not a spectacular

achievement!

Concluding remarks

I will ascribe whatever achievements LAPO as recorded to more of attitude and

support that to any particular skills.

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i Joanna Ledgerwood also adds that many MFIs provide social intermediation services such as group formation, development of self-confidence and training in financial literacy and management capabilities among members of a group. Microfinance Handbook; an Institutional and Financial Perspective The World Bank, Washington DC, 1999, p. 1ii Godwin Ehigiamusoe emphasized this point in a paper ‘Tested Institutional Practices for sustainable microfinance’. Presented at the International Conference on Microfinance organized by The Central Bank of Nigeria, December 2005

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