The Managing Director, Olive Microfinance Bank, Mr. Chibuzor Duru, in this interview said that the money Microfinance Banks, MfBs, give out as loans are private sector investments and not government fund as many perceive. Excerpt.
WHY is loan recovery a major challenge in the microfinance sub sector?
It depends on the methods different MfBs adopt, but to give and recover loan, I would say that it takes a lot of packaging. Once you are able to understand the customer's business, programmes and cash flow with a mitigating factor in place, there is no way the loan will go bad.
Secondly is monitoring, if you monitor by going close to your customers, recovery would be easier. When a loan goes bad, first is to serve a 14 day notice, after seven days, you can reach out to the guarantors, possibly you can do restructure or refinancing. If all these methods fail, the next thing is to engage the customer and find meaningful ways to recover the loan.
Some MfBs use orthodox method such as using thugs to recover loan but it is unacceptable because it is not backed by law. The truth is that most Nigerians see MfB loan as government funds, they do not see it as private sector investment. They believe that microfinance operators get fund from the federal government to distribute to them. I think to recover loan is dependent on banks and the method they use. Loan recovery is all about what you put into it like monitoring engagement, refinancing and more. Sale of assets must be with customers' consent.
Why is interest rate still high in the sub sector?
MfB is a sublime lending, it is not a normal lending, and it is for the active poor to support financial inclusion and population. When people borrow money from microfinance banks, payment is done on reducing balance method. For instance, if you borrow N50, 000 at 2.5 percent interest rate, as you pay back the cost of the loan comes down. It is not as high as people think. It is only when you default and you are charged a default rate that you feel the interest rate is high. Default rate starts counting when there is a default.
As you pay your loan, the interest rate payable comes down. It is something we can manage. Sometimes people divert loan from what it was originally meant for, for something else, and this can cause default.
Consumption loan is different from transaction loan, if you collect loan in the name of transaction and you use it for consumption, there would be problem because it will be difficult to service such loan hence no money is coming in compared to when you are doing transaction.
Why is MfB penetration low despite their number in the country and the population?
MfBs are growing but let's look at the infrastructure in setting up a bank. Minimum capital for setting up MfB is N20million for unit licence. Meanwhile, you are looking at software, office, staff and many more costs.
You cannot set up a microfinance bank where you don't have a market or patronage. What we need is support from government.