Joda: Raising Microfinance Banks’ Capital Inevitable

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The Managing Director/ Chief Executive Officer, Accion Microfinance Bank, Mr. Taiwo Joda, in this in this interview speaks about issues around the timeline for recapitalisation of microfinance banks, the impact Covid-19 on the sub-sector and other pertinent issues. Nume Ekeghe presents the excerpts:

What has been the impact of the COVID-19 on microfinance banks in Nigeria?
The impact has been very severe but it has also created opportunities. The majority of the people that we serve are the vulnerable. When COVID-19 started, the first thing was that several markets were shut in Lagos and the first set of people that were affected were the vulnerable people whom we serve. So, the shutdown of businesses affected them and because it affected our customers, it affected our business too as these people were unable to repay their loans.

We have customers who buy things from China and other countries across Asia to sell in Nigeria and because of the pandemic and closure of borders, there was disruption in the value chain and they didn’t have products to sell. So, it was really a big challenge for them and by extension that affected their loan repayment. Some of them defaulted, not because they wanted to default, but because they didn’t have money to pay. Additionally, some even had major issues that bothered on mental stress and health issues. The effect of the pandemic left us with a lot of portfolio that were at risk and we had a lot of loans that went bad. We had a lot of customers who were doing well before, but their performance has nosedived and we had to do something differently to allow them to continue in business.

You said a lot of customers were affected by the pandemic which in turn saw increase in loan default, what can be done to cushion this effect?
In July the Central Bank of Nigeria (CBN) came up with a directive that MFBs can extend moratorium on customers’ loans. They also said customers can be allowed to do a few other things like a loan holiday for them to be able to get back into business. There were however qualifying conditions and that you must have been a MFB that ticked some boxes like having regular returns to CBN, before you can qualify. And also because of the nature of MFBs’ businesses, the tenure given for such moratorium was restrictive.

So, for example, the communiqué stated that you cannot extend beyond January or February next year and if schools have been shut down since March and some of them were planning to go back to business in the month of October, if we consider when their finances would stabilise, it could extend to next year January or February when schools reopen. So, if you cannot give moratorium beyond that period that segment of the business is going to be badly affected. The economic reports we have seen says that the bad loan in the Q3 of 2020 saw customers default across banks and it may take us another year or 18 months to really come out of this effect. So, while some might assume that once there was an easing of lockdown then the problem is over, however, the problem is far from being over. And so, the time slot given to banks, especially MFBs for the moratorium is a big issue and I think something still needs to be done beyond what the CBN has done.

Are you in talks with CBN for an extension?
Yes, we have actually gone beyond talks on the extension of moratorium to discuss some other palliatives that we think the regulators can extend to businesses that have been badly affected. A good thing they have done is the N50 billion that was given to the Nigeria Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL), but we felt more can be done. There is need to operate through other MFBs because there are existing customers of these MFBs that also need to be helped and they have loans with the MFBs they are doing business with. So, if you give them fresh money from NIRSAL, there is a high probability that they will not use it to service their loan and it is going to increase their debt burden and it then becomes more challenging for them to pay both the NIRSAL loan and the existing loans they have.

What we expect is that the N50 billion intervention, rather than give it to them afresh, it should be used to refinance their existing loans by a portion so that the burden of interest rate on the existing loan is reduced to single digit.
The CBN can look at the size of the loan book of an MFB and give the fund to refinance the loans and extend the tenure of existing loans. So, if the tenure is one year, it can be extended to two years, reduce the interest rate and give them the equivalent amount as a buffer, so that the credit risk is still with the banks but the deposit like an intervention fund is also there to cushion the effect.

The reason MFBs give out loans at a very high cost is simply because they are not able to attract the funds they can on-lend at a cheaper rate. So, the CBN can give them for specific purpose to intervene in that market, to reduce the interest amount, increase the tenure and let existing genuine businesses that have taken loan be able to survive. That will be one way to look at it.
The second will then be to increase the amount of loan for them so that for those who are having business challenges it will be able to jumpstart their businesses again. If they go that route, we are going to see a faster and better recovery than the one we are seeing.

Are fintechs perceived as competition to MFBs or are MFBs leveraging on them to grow their businesses?
I think a lot of MFBs are beginning to use fintechs and really it is the way to go. There is a joke we normally make in the industry, we say, who helped you with your digital or financial technology strategy? Is it the pandemic or the board of directors? So even where you are seeing a laid-back attitude for some MFBs, the lockdown, the chances that there may be a second wave of lockdown or the chances that even if there is no lockdown because of the pandemic, you can have one because of protests, you would realise that customers still need to be serviced at the convenience of their homes. And because a lot of other people are coming into the MFB space serving customers with technology also imposes some responsibility on you to serve your customers the way they want to be served. And so, it is inevitable that financial technology or digitalisation should catch up with industry.

The challenge has always been the cost outlay and how to be able to do that successfully especially when you consider that there are some MFBs that are very small. And so, I believe what should be done is to look for and embrace collaborations. I think it is inevitable and I also believe that microfinance institutions should look at collaborating, partnership and embrace working with fintechs. It is not competition. Actually, fintech organisations needs the banks as much as the banks needs them. That is because If you talk of a typical fintech today, or even the ones who give loans online whom we are in direct competition with or those who make payment services, the first thing they ask a customer is for your account details. In other words, you must have had a relationship with a bank and if you haven’t, they can’t deal with you. So, the more the merrier for both parties because as long as you bring in a lot more customers, who have accounts with them, they are not going to steal your customers, they just want to make money by servicing those customers. And you also make money by driving efficiency and you save cost by working with them while serving your customers.

With digitisation comes fraud, how are MFBs coping and what has your bank put in place to mitigate fraud?
When you talk about fraud cases in MFBs, because we are micro, the amount is micro. Accion has put in place a lot to ensure that there are stopgaps to prevent frauds from happening. But the biggest mitigant against fraud is education, because the cybercriminals also need you to provide some information. And if they are not able to get that information from you, 60 per cent of frauds would not be successful. For us, we continually educate our customers and we have put in place some critical infrastructure to help mitigate fraud. For example, initially our customers had to call a hotline if they believed their card has been stolen or if they were getting fraudulent alert for transactions they didn’t initiate. They were expected to call a hotline and that may take time and if time elapses a lot of money could be averted. So, we have now enabled an Unstructured Supplementary Service Data (USSD) solution, an avenue for our customers to block their cards directly. So, you don’t need to call the contact center or rely on third party to do so for you. Once you have your phones with you and you get the first alert and you can block it.

On recapitalisation of MFBs, how prepared or how much time would be sufficient for MFBs to meet the deadline?

Recapitalisation is inevitable and with the pandemic, the chances that a lot of microfinance banks would make losses this year and even next year is high. If they don’t make losses, they are not going to make significant profit. Now if that happens, whenever you make a loss, it eats your capital. So, at the end of December 2020, I see the capital of MFBs lower than the position it was in 2019 because of the effect of the pandemic. That also makes us vulnerable to external financial shocks and may eventually erode the confidence of investors, especially foreign direct investors (FDIs) who want to bring money in. It will also affect confidence of those who want to do business with you locally. So, we need to increase the capital. When MFBs were directed in 2019 to increase the capital base by 2021, it was before the pandemic. Although they later revised it to 2022 for us to meet the minimum capital by 2021, and then the balance by April 2022.

My take is that before we talk about timing, we should allow December 2020 to pass. We should allow MFBs submit their audited financial report for December 2020 then the regulators can gauge the available capital for each of those institutions that were probably doing well before now, but have been badly shaken or badly affected by the pandemic. Then we can have that discussion in 2021 to ascertain a responsible timeframe. We may need to push it to 2024 with milestones for every year. So rather than have it in two years, you can extend to three years. Because where we were in 2019 is not where we are now and it is not going to be where would be in December.

Again, a lot of discussion on recapitalisation and injection of fresh capital from investors have stalled because of the pandemic. Therefore, you cannot make any reasonable progress. People who would want to give money to recapitalise and those who want to discuss mergers and acquisition would be cautious and would be looking at the books of banks to know how the pandemic has affected them. Also, I am aware of a lot of talks on mergers and recapitalisation that have been put on hold until the effect of the pandemic is seen.

Presently, a lot of organsations are playing that wait and see attitude and to pitch the capitalisation story at this point is like removing yourself from the reality that is on ground.So, raising capital is inevitable, it is very important but I think the timing needs to be re-worked clearly.

There is school of thought that the MFB model we run in Nigeria is faulty and that is why the microfinance banks are not having the desired impact on the Nigerian economy, what would be your take on that?

I want to take that with a lot of caution because you need to grow solution to the kind of business you run. So, what do we even mean by microfinance model or Is it group lending technology or individual lending? I have had opportunities to visit India and Kenya where I visited numerous microfinance institutions and I saw their model and it is a model that works for them. We have to have develop our own microfinance but on what I can agree on is that a lot of MFBs want to operate microfinance as if they are operating a mini-bank. Microfinance is for microbusinesses. Microfinance is not reducing the amount the banks would give to a particular customer and still do the business the banks are doing. If you are doing microfinance, then look for the micro-customers and vulnerable sector because building this critical class would drive economic growth. So, we can have a home-grown solution, which would be hugely successful in Nigeria so that every other people and countries can also come to understand our module of microfinance banks and operate it.

There are MFBs in Nigeria that have operated successfully for over 14 years and are still waxing very strong. So, there is something they must be doing right that we can learn from.

Going forward, what can your customers expect from you and how do you plan to add more value to your customers?
The first, we did was to touch base with our customers during the pandemic period and then we gave them interest rate discounts on all their loans and we also restructured several of their loans. We also looked at those businesses badly affected and we carried out a survey which indicated that some were not sure if they could bounce back from this turmoil. So, what we did at a cost to Accion MFB, was engaged an SME doctor who worked with them and helped them in restart their businesses. We also partnered with some initiatives from Bank of Industry. But it gives us a huge opportunity to upscale our digital services and so today, we have our internet banking working which is in the test environment and is going to be rolled out. Our digital loan is ready and it is going to be rolled out at the end of the year so our customers can actually take loans from the comfort of their houses.

We have also improved on our save brighter product. Also, what we have done which is also very unique in the market is that if you have just N5,000 in your savings account, you are entitled to health insurance cover for a period. And if you don’t want the health insurance and there is an emergency where you have to go the hospital, we would give you back your money. We are doing this because we believe that a healthy nation is a nation that can proper more. And even though business activities have been low, it has just given us time to close-in our digital aspiration, roll out our product and services and we are excited about the future. The last thing we have done is that we have also engaged an e-commerce company and we are going to be onboarding all our customers on e-commerce platforms. And so apart from having physical shops, they can now sell their products online. I am excited about the prospects and new products we are rolling out for our customers and I think the customers would be the winners at the end of the day.

For Accion, with all these products you are rolling out, what is the outlook for 2021?
2021 is going to be a good year, it is going to be a year of recovery. Like our tagline which is ‘Accion your future is bright’ our future is bright. We believe so much in our customers and we are customer centric and I would say 2021 would be the year of our customers. We are going to bounce back; we are going to be stronger and our customers are going to be grateful that Accion stayed with them and partnered with them. And we would see a brighter future both for our customers and for Accion Microfinance bank.