5 March 2018

Nigeria: 'Bank Staff, Customers Connive to Create Bad Loans'

Photo: Leadership
Naira
interview

Lagos — Mr. Adegoke Adegbami is the Managing Director/Chief Executive Officer of Mainstreet Microfinance Bank Limited, a subsidiary of Skye Bank Plc. In this interview with Daily Trust, Mr. Adegbami speaks on challenges confronting microfinance banks, how some bankers connive with customers to create bad loans and money flow, among other related issues.

One of the greatest problems confronting most microfinance banks is the issue of huge debt portfolio arising from default. What has been your experience in the area of loan recovery?

There is an adage that says there are no bad followers but bad leaders. So we need to do our assignment before money is passed to the customers because once the money leaves our hand and it is in their (customers') hand, they are in a position of advantage.

In our everyday discussion with customers, we talk about all issues of policy that relate to risk, issues on how to begin a loan and where to end it. There are businesses we can do, as there are also businesses we cannot do. We observe the cash flow of our customers, as well as their integrity and sustainability. Once a customer has met all our conditions, we disburse money to him.

Some bad loans are a result of connivance between fraudulent staff and customers. So we don't let debtor customers go to bed; we constantly monitor them. That is part of what also determines the location of our branches. The monitoring mechanism of our Loan Recovery Officers (LROs) is very strict.

If the policy behind a loan is not well managed and we are unable to recover it, it will erode our capital and our money will be lost gradually till we are pushed out of the market. The procedure we have put in place has helped us thus far.

Some banks use thugs and other illegal means to collect debts from customers. How do you recover yours?

Whosoever owes must be prepared to pay. At our microfinance bank, we ensure that customers sign undertaking agreeing that if they don't pay us, we will seize their property and sell. But that is the last option because even if people haven't known us quite well, they know our parent bank. We don't do things that are illegal or violent. We have our name to protect. The default in effect may be an indication that we did not do the selection properly from the beginning. If micro lending is done the right way, out of about every 100 people, 80 people will pay without any problem.

Also, we ensure that our staff members don't connive with customers because sometimes it is the staff that will influence the customer to default because they want to get something out of it. If all those things are taken away, out of every N100 lent to customers, N80 will be paid without any pressure.

Of course there is a problem that people don't take note of. Oftentimes, a microfinance bank wants to compete with a commercial bank forgetting that they are not competing for the same customers. There are people who come here and we tell them "no" because we are dealing with people who we can talk to and guide on how to do their businesses, not people who think they know it all.

Given the problem of the peculiar challenges assailing the microfinance business, how do you see the future of microfinance banks in Nigeria?

Microfinance means providing financial services to small and low income earners. There are some microfinance institutions that are in the SMEs group, while there are some that are very micro due to their transactions in petty markets. For a microfinance bank to function optimally, it can't attend to all SMEs and micro trades.

In tackling the issue of poverty, some people with no business will suffice, while some others, who are actually involved with one small business or the other, will also present themselves. Those with small businesses are our target because they are the ones actively involved in business. With time, the active ones will eventually take their money to the bank to save and will eventually require small loans, grow their businesses and employ others. After some time, their businesses become better structured and may need to be expanded into limited liability companies.

Another problem confronting the sector is the issue of capacity building, as well as funding. Microfinance needs stable funding - from private, commercial and development sources. Poor credit culture has been a major problem.

Microfinance in Nigeria is being regulated compared with what obtains in many East African, South African and Asian countries. We know that the regulator's objective is in response to the nature of the society. In the nearest future, we should get to a point where some small-scale microfinance companies can operate like the modern forms of our traditional alajo or esusu system, where daily saving is encouraged. Those people will not need N20m to start their businesses, particularly in remote villages. Their activities will be guided by other business-related parts of the law pending when they will grow to the level of strict regulation. At that point, they will be compelled to list for regulation.

Also, lack of public infrastructure makes the business of microfinance to be very expensive. Microfinance is naturally expensive because of its small loan sizes and labour-intensive nature, but it is more challenging in the Nigerian environment because of the absence of public utilities.

Why is it taking so long for microfinance banks in Nigeria to get their bearing right?

The 2008 global economic meltdown drew a lot of issues and challenges. There was the challenge of people losing their jobs and then looking for something to do. Microfinance provided an opportunity where they could get some money, and those that lost their jobs, for example, could start some small scale businesses. Each of them can also provide jobs for two or three other people. There were also people that lost their jobs in the commercial banks and saw microfinance as the natural alternative.

Shortly before the meltdown, there was the banking consolidation in Nigeria. Consolidation reduced the number of commercial banks in Nigeria from 82 to about 25. Many people in the money deposit banking space lost their jobs in 2006 and 2007 due to re-organisation, rightsising and downsising following the banking consolidation. The next thing was for those people to get jobs in the emerging microfinance space. In the typical Nigerian way, many of these people believed that a microfinance bank meant the smaller version of commercial bank. They believed the commercial banking knowledge they had was enough to run microfinance business; they were wrong.

At the regulator's level, many of the examiners were using their commercial bank orientation to examine microfinance banks. The microfinance market operates on a different ideology and methodology. It is very dangerous to use the strict commercial bank knowledge and methodology to run a microfinance bank. The market is different. The people we are dealing with - their lifestyles and needs - are different from that of an average commercial bank customer. For instance, there was this belief that the microfinance bank licence could be used to mobilise cheap deposits to either fund a micro-credit programme or other businesses. The truth is that a microfinance bank cannot even become self-funding in the first two to three years. We are dealing with a net deficit section of the market and so we must get money to bring into that section. Therefore, the knowledge gap was largely responsible for the failure of a number of microfinance banks.

People from a commercial bank background also had this problem of wanting to sustain their expensive lifestyles, so they put on in microfinance banking the kind of expenses that were unsustainable.

Things have changed today. The operators and regulators know better now. Even our customers now know better. They know that a microfinance bank loan is not a share of the national cake. The CBN has organised and sponsored certification training for operators. Anyone aspiring to be in a management position in a microfinance bank in Nigeria now must be certified.

There are also training programmes for the non-executive directors of microfinance banks. We must also remember that a number of microfinance banks have done well over time, particularly those that took the issue of capacity building seriously.

The CBN is set to increase the minimum paid-up capital of unit microfinance banks to N100m. ‎What is your view on this?

The policy, ordinarily, is good but what I may not say is whether it is timely. And that's the opinion of many other industry operators. It's a good policy on paper, but in terms of its finesse and practicality, I may not agree with it.

What is the vision behind the establishment of Mainstreet Microfinance Bank?

Mainstreet Microfinance Bank is a subsidiary of Skye Bank. It was established in 2009 in line with the Microfinance Policy Guidelines of the Central Bank of Nigeria. The reason Skye Bank (then Afribank) went into microfinance banking was because we had a lot of people at the bottom of the economic pyramid that could not be attended to within the commercial bank system, or what we call the money deposit bank model.

Our customers now include artisans, traders, small households and trade groups. Then there are the corporate ones, those involved in the organised unions and associations and SMEs. We have the small-time savers as well. All these customers have patronised us over a period of time.

Would you say the policies and programmes of the present administration encourage business?

Well, this government got many things wrong at the beginning on the economy. We also have so much blame game. Government must have deliberate policies to encourage business, as well as ensure strong circulation of money. There is the need to control resources and block leakages, but we must know that money is not useful until it is spent and allowed to circulate within the economy. The rate, the speed or the velocity at which it circulates is also very important.

There is no benefit going to lock all the money up in the Central Bank vault. International investors are now picking up interest in the Nigerian market again. We encourage the government to do more because we have lost so much ground.

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