Adegbami: Poor Credit Culture Hampering Operations of Micro-finance Banks


Managing Director, Mainstreet Microfinance Bank Limited, a subsidiary of Skye Bank Plc, Mr. Adegoke Adegbami, in this interview with Raheem Akingbolu, speaks on the different challenges confronting the sector, among other issues. Excerpts:

Considering the peculiar challenges assailing the microfinance ecosystem, how do you see the future of microfinance bank in Nigeria?
I think we need to basically go back to the definition of microfinance. Microfinance means providing financial services to the small and low income earners. But when you look at the microfinance, there are some that are in the SME group, there are some that are very micro, i.e. those trading in petty markets and so on; so it depends on what you want to focus. For a microfinance bank you can’t attend to all of them. For instance, if you want to tackle the issue of poverty, are you going to get everybody on the street to come and do business with you? Some of them will come but they cannot really save their money, some of them are actually involved with one small business or the other. These are the ones we call the active ones because they are actively involved with something so these are the ones we target; the ones we believe if it’s effectively done they will bring their money to save in the bank and they will also be requiring small loans and also employ someone else. They also get their businesses better structured, better planned and maybe need to expand when it gets better with time into a limited liability company.

Another problem confronting the sector, I dare say, is the issue of capacity building which is being addressed by the day. There is the issue of funding. Microfinance needs stable funding both from private commercial and development sources. Poor credit culture in our society is also a major problem. I also think that microfinance in Nigeria is currently being strictly regulated compared with what obtains in many East African, South African and Asian countries. We know that the regulators, objective is in response to the nature of our own society. But we should get to a point were some small scale microfinance can operate just like the modern forms of our typical Alajo or Esusu system. Those people will not need twenty million naira to start their businesses, particularly in our remote villages. Their activities would be guided by other business related parts of our laws, 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 it small loan sizes and the labour intensive nature. But Nigerian environment is more challenging because of the absence of public utilities.

The greatest problems confronting most microfinance banks is the issue of huge debts 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 you need to do your assignment before you pass your money to your customers because once the money leaves your hands and it’s in their (customers) hands they have a stronger point. There is also an adage that says ‘The mouth that people use in borrowing is different from the one they use in paying’. That means you need to do your assignment before your money leaves your custody. So we talk about all issues of policies that relates to risk and the type of policy we have are policies that tell us that this is how to begin a loan and this is where to end. There are businesses we can do; there are also businesses we cannot do. The kinds of things we observe are cash flow of the person, the integrity of the person and sustainability. Once the customer has met all the conditions we then disburse the money. Some bad loans are also results of connivance between fraudulent staff and some customers. So in actual fact, we don’t let the customer go and sleep, we monitor them; that is what also determines the location of our branches. So the monitoring mechanism carried out by our Loan Recovery Officers is very alright because it’s not just about loans, you do your assignment before disbursement, you monitor and make sure the money comes back as at when due because the main asset of the Microfinance Bank are the risk assets and loans. If the policy of the loan is not well managed and you are unable to recover, it will be eroding your capital and you will be losing money and gradually you will be out of the market. The procedure we have put in place has helped us thus far.

Some banks use extra judicial means to collect debts from customers, how do you recover yours?
It depends on what you mean by unlawful or illegal means. If you owe then you must be prepared to pay. At Mainstreet Microfinance Bank, we ensure that customers sign undertaken saying if you don’t pay us we will take your items and sell, but that is the very last option because even if people don’t know us they know our Parent Bank. So it is easier to say a subsidiary of this bank did this to us. We don’t do things that are illegal or involve violence. We have our name to protect. By training we know that we don’t need to go that far. The default in effect may be an indication that we did not do the selection properly from the beginning. If you do the right thing, it’s not as bad as people think. Let me tell you, if you do micro lending the way you are supposed to do it; out of about every 100 people, I can categorically tell you that 80 people will pay you without giving you any single problem, 80 out of 100. They don’t have that kind of thing in the commercial banks. Just make sure you don’t over expose them, you don’t give them more than they need and you treat them very well. Also be sure you don’t have your staff trying to connive with them, because sometime you have staff who, can even go to influence the customer to default because they want to get something out of it. If you take all those things away, every N100 you lend to customers, 80 naira will be paid without any pressure. Of course, there is a problem that people don’t take note of. Often times, a microfinance bank wants to compete with a commercial bank. You are not dealing with the same set of people, if we are competing with them, you will go for the wrong customers. There are people that come here and we say no we are not dealing with you, you are not our customer. Because we are dealing with people who can see us as their role model, people we can talk to and guide them on how to do their business not people who think they know it all. If you select your customers very well, it is not as bad as people paint it.

The CBN is set to increase the minimum paid-up capital of Unit Microfinance banks (Mfbs) to N100 million. ‎What is your view on this?

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, those people 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 reorganisation, rightsising and downsizing following the banking consolidation.

The next thing was for those people to get jobs in the emerging microfinance space. In a typical Nigerian way, many of these people believed that microfinance means 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 regulators 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 lifestyle and their needs are different from that of an average commercial bank customer. For instance there was this belief that you can use the microfinance bank license to mobilise cheap deposit to either fund the micro credit program or other businesses. The truth is that microfinance bank cannot even become self-funding in the first two to three years. You are dealing with a net deficit section of the market and so you must get money to bring into that section of the market. Therefore, the knowledge gap was largely responsible for the failure of a number of microfinance banks. People from commercial bank background also had this problem of wanting to keep their expensive lifestyle. So they put on microfinance bank the kind of expenses that are unsustainable.

Things have changed today. The operators and regulators know better now. Even our customers now know better. They know that microfinance loan is not a share of national cake. CBN has organised and sponsored certification training for operators. For you to be in a management role a microfinance bank in Nigeria now, you 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 very seriously. Mainstreet Bank Microfinance is one of those that have done well. Here, we don’t joke with the issues of training and planning.

Now to get to the point about the new benchmark set by the apex bank for the microfinance banks, I think 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 which was established in 2009 precisely, in line with the Microfinance Policy Guidelines of the Central Bank of Nigeria-CBN. The reason why Skye Bank (then Afribank) went into Microfinance Banking was because we have a lot of people at the bottom of the economic pyramid that could not be attended to within the commercial bank or what we call money deposit bank model. Mainstreet Microfinance Bank was registered in 2008 and we started operations in 2009. Besides, we have very loyal customers, which include individual’s artisans, traders, small households and trade groups. There are 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, so you can say that Mainstreet Microfinance Bank has proved its worth in the Nigeria market. People can always align with anything done by Mainstreet Microfinance Bank; everyone wants to associate with success. So the parent bank thought it wise to set up a microfinance bank because we had a lot of loyal customers who beyond putting their savings account for safety in Skye Bank cannot do any other transaction, they cannot access loans because they don’t have the conventional collateral they cannot meet some documentation requirements of commercial bank. We thought it wise to say look we have been here for a long while, now the Central Bank came with a microfinance policy to address the financial needs of the lower end of the market, especially the small and micro customers. We then took advantage and created a platform where we could serve them. We want to empower as many people as possible because. Our mission is to serve those that are hitherto unbanked or under-banked.

We attend to the poor in the society who are into productive small businesses, those that want to pay school fees and then repay us from their small individual or family cash flow, those that want to do small agriculture businesses and those that want to do small savings. The primary aim of microfinance bank is to ensure that the poor and low income earners have access to financial services, for their transfers, access to loans, micro insurance, micro health and every other financial service. In summary, we attend to those people that are normally excluded from the formal financial system.