Access to Finance - How can Nigeria do it better?
Where we find ourselves
A popular question in international development is ‘how best can development interventions support the financial inclusion for Africa’s poor?’
During it’s time, the DFID-funded Growth and Employment in States, Meat and Leather programme (GEMS 1) in Nigeria piloted a ring-fenced financing model for women’s co-operatives in close collaboration with Grassroots Microfinance Bank (GMFB). Financing from GMFB was designed to enable farmers to fatten and ‘feed finish’ goats to meet the requirements of off-takers who would commit to buy the goats. As a result, it was hoped that the women would become part of the supply chain for goats.
The arguments we’ve heard
Greg Dobbel and colleagues (Access to Financial Services: Necessary but not Sufficient for Financial Inclusion) argue convincingly that for financial inclusion it is critical to have both trust in financial institutions and quality, affordable financial products such as digital financial services and simplified account opening. They note that in Kenya’s western province, intended beneficiaries with readily accessible financial products choose to shy away from using these financial products, citing the high costs of withdrawals, poor services and fears of embezzlement. This all too clearly shows that financial access alone is not enough if offered without ensuring trust of financial institutions and quality, affordable financial products.
James Eberlein and Sarah Bel (Financial Literacy: What for?) provide a strong argument that financial literacy is a necessary pre-requisite to achieving financial inclusion of the world’s poor. They make the point that… “Innovations such as electronic payments are tipping the economic scales in favour of those who have, for too long, been excluded from the system. But unless consumers are equipped to make sound decisions about use of financial services (i.e financially literate), no amount of innovation (i.e financial inclusion efforts) will bridge the gap”. Simply put, people need a basic understanding of the value and usage of financial products if they’re to fully appreciate and enjoy the various means by which this is made easily accessible.
The GEMS 1 experience
In my experience facilitating access to finance with GEMS 1 in Nigeria, one approach to this challenge could be working with business management organisations (BMOs) which are defined as co-operatives’ umbrella bodies. Well organised BMOs can quickly support financial literacy, help build trust with financial institutions and work with the institutions to design financial products. The unity of purpose and social cohesion within such BMOs can make it easier to teach and share common values of good financial practices such as honouring loan repayment schedules on time and making use of financially inclusive platforms. Sufficiently large BMOs present the opportunity to achieve financial literacy and trust of financial institutions on a large scale.
Unfortunately, BMOs are usually very difficult to work with. Most BMOs tend to be very ambitious in the duties they adopt and are mostly ill equipped to deliver these effectively. GEMS 1 identifies these BMOs against a set criteria and partners with them to build their capacity through targeted technical assistance and strengthening activities. In Sarina, GEMS 1 and GMFB are working with groups of multi-purpose co-operatives of up to 200 women whose main economic activity is pen-feeding/feed-finishing of goats for sale at a local livestock market. GEMS 1 and GMFB collaborate to strengthen the organisation and functioning of the co-operatives during periodic visits to discuss and monitor loan repayment, savings, group dynamics and feeding-finishing techniques. This method of engagement is welcomed by the co-operatives and is resulting in an exchange of learning to refine GEMS 1’s approach and GMFB’s loan product packaging for future cycles.
There are impressive success stories of co-operative organisation in India (Largest Milk Brand in India is a co-operative) that show the remarkable achievements small cooperatives can achieve within formal supply chains by organising themselves as a collective of united and capable market players. Amul Dairy, the largest milk brand in India, is one such co-operative story where small cooperatives formed and organised themselves under one brand to provide direct supply to the government’s Bombay Milk Scheme. This ended Polson Dairy’s monopoly on milk collection. Amul dairy now sources milk from at least 10,000 co-operatives under its brand predominantly run by women. Amul Diary also makes use of computerised payment systemsWhat we’ve learnedAs revealed in my discussions with the Association of Non-bank Microfinance Institutions of Nigeria (ANMFIN), just when Africa’s growth requires a forward thinking private sector, banks in Nigeria, completely detached from the real world, require a whopping 120% collateral for micro-credit loans from entrepreneurs.
This clearly shows a lack of foresight by the banks and demonstrates how inappropriate some standard products are for micro, small and medium enterprises. During the intervention in Sarina, it was discovered that the total account management, loan interest, hidden penalties and overdraft costs during the first cycle of this intervention were on average 25% of the total costs for buying the required four goats for each woman. A NGN100, 000.00 loan facility attracted a 1.5% management fee of NGN1, 500.00, a 1.5% processing fee of NGN1, 500.00, a loan interest fee of NGN4, 300.00, a loan penalty fee of NGN1, 870.00 and an overdraft fee of NGN1, 870.00.
This is considering that the remaining operational costs (transportation, feed concentrate, vaccination and paravet costs) would account for an additional 25% thereby significantly reducing the likely profit to be made from the eventual sale of the goats. In this case Nigeria’s loan officers appeared not to understand the workings of the sectors they claim to focus on and therefore did not know how to think innovatively about lending to them. Surely to demand 120% collateral from a livestock farmer in Northern Nigeria will assure that your service is rejected? People will not put up their entire livelihood to secure a loan – they tend to run from such arrangements! Put simply, if you do not know how your customers’ business field works, you are unable to design and implement appropriate financing products.
GEMS 1 found GMFBs desire to tightly control the Sarina account operations to be at times disruptive and potentially detrimental to the feed finishing activity. During both rounds of the of goats for the feed finishing exercise the bank insisted on having their staff present to participate in the buying of the goats in the livestock market. The GMFB staff arrived at the market wearing bright lime green golf shirts written Grassroots Microfinance Bank and carrying at least NGN150, 000.00 in a brown paper bag to be shared out amongst five buyers. This immediately sent a signal across the market in Sarina that these were newcomers with a lot of money to spend as shown by the high prices paid for the goats during purchasing.
So where do we come in?
As development practitioners, we have a responsibility to work with the financial sector to bridge the gap between capital source and capital need. Nigeria’s destiny will never be to lead Africa’s microfinance revolution through its insatiable population numbers if we do not play our part. Development programmes need to work exhaustively with banks and microfinance institutions to fully understand the various sectors in which they work, how they function, the challenges they face, and more importantly explore the advantages presented when you issue a BMO managed group loan against an activity you fully understand. Equally, if any development assistance is to be effective, Nigerian banks need to show the required commitment to deliver realistic and innovative financial products. If development programmes can achieve this, they can claim to be doing the best of what is required to achieve financial inclusion and financial literacy in Nigeria. Without such efforts, development programmes are merely sitting and watching as Nigeria fumbles with its potential.