By 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.
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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.
1. 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.
2. 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.
3. 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.
4. 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.
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.
Abraham is the Managing Director/CEO of Rigo Microfinance Bank based in Lagos. He can be reached on firstname.lastname@example.org