The Managing Director, KCMB microfinance bank, Mr. Abayomi Ajayi, in this interview with KAYODE TOKEDE, speaks on banks’ intention in the SMEs sub-sector, impact of multiple taxes ,among others challenges in the Microfinance sector.
Can we conclude that the microfinance bank has achieved its objectives by reaching out to the grass roots, creating jobs and reaching out to those in the rural areas across the country?
No, we cannot. There is so much to be done. A 2016 EFinA report reveals that about 46.3per cent of Nigeria’s adult population of about 96.4million was financially excluded.
The report claims that 216 Local Government Areas out of a total of 774 LGAs do not have a DMB(Deposit Money Bank), an MFB(Microfinance Bank), an offsite ATM location or a financial service agent. The objectives of financial inclusion are therefore far from being achieved.
The Central Bank of Nigeria (CBN) had given Dec 31, 2017 deadline that all micro finance banks must issue BVN numbers to their customers, how are you going about it especially the cost of carrying out such directive?
Though the CBN has done a lot to make sure that customers have BVN by December 31, 2017, right up to subsidizing the cost of purchase of BVN machines by MFBs, we still have a lot of challenges. Customers who did not have BVN in the first place, did not have BVN for several reasons. Mostly they refuse to see the importance and/or relevance of BVN. Majority had been excluded from the main financial system and they have learnt to adapt to the exclusion and the transactions limited by the exclusion. What I mean essentially is that it is easier to get a customer who is already within the financial loop to have a BVN because it will be easier to let him/her feel the consequence of non-conformity. You cannot threaten a person who is not on any financial platform of eviction from the system if he does not conform. He is ‘evicted’ by default.
So essentially, it is not the financial cost of carrying out the CBN directive that is the main obstacle. CBN has done so much to subsidize, at least as much as making the machine available for a much ‘cheaper’ cost of N600,000 ( and to be candid, I personally dont believe all MFBs need to acquire a machine each). The main obstacle are the barriers to financial inclusion. Overcome that, the directive becomes easy. All in all, I feel we need more time..
Operating as one of the leading micro finance banks in Ilorin, what are the success stories and challenges compared to other states in Nigeria?
Though each state has its own challenges, each state also has its own strengths. I may not be able to compare success stories and challenges state by state, but then let me try and compare with a very urban state like Lagos and then a fairly rural state like a Northwestern state. Kwara State can be ranked as a semi urban state. I am using IGR and volume of business as criteria. Compared to Lagos, I would expect that access to capital to run an MFB would be a lot easier than in Kwara. I will thus expect that increasing business capitalization will be less of a challenge in Lagos. I am not saying there are no challenges, but that it would be less. Increasing reach and achieving financial inclusion should be easier in Lagos and bigger states.
In Kwara therefore, the challenges when compared to other bigger states (in terms of IGR) is access to funds or capital to run and expand the business. We are limited by this and it affects our reach. Moreso when we have these funds, they come at a higher cost and as such they impact on the cost of lending. We could have done more with more, obviously.
The success stories are many. Since the state is not as ‘urban’ as bigger states, we find ourselves doing real micro financing. We tend to the active poor as is expected since we have more active poor and as such we have more impact on the small businesses. Achieving financial inclusion for us is more measurable in our state.
I will like to add here that the Kwara State Government has supported SME significantly in the last few years. The government has routed quite a lot of intervention programs through MFBs, which has facilitated us not only getting customers but retaining customers. I will like to encourage states that have not done this to emulate such.
Are you not concerned about the high interest rate, cost of doing business and multiple taxes in Nigeria?
Of course, I am. High interest rate stems from high cost of doing business. Cost of funds is disproportionately high, especially with the MFBs. Most people that give funds to MFBs do so because of the higher interest rates they get compared with what they get from commercial banks. This in addition to high cost of running your generators (which is kind of getting better), and other infrastructure deficits the banks have to pay for like security, impacts on the rates you can charge on loans advanced.
The issue of taxation is a painful conundrum for me personally. I believe in taxes as long as I don’t have to still pay for what the Government has collected taxes from me to handle.
The government cannot do anything tangible without taxes and as such I believe in taxes. What I don’t believe in when you don’t see the effects of the taxes collected and when there is multiple taxation.
Banks tend to pass the costs back to the customer and hence to the society. The society, which is all of us, eventually pays for all of these.
It is of a concern because the situation seems not to be improving over all. I believe we should all be involved in driving these costs down. The government has a lot to do, but it is obviously not what they can do alone.
What are the benefits derived in banking with a microfinance bank, especially yours?
You have access to banking services at the micro level. We are designed to address the financial needs of the clients that cannot access the big banks probably because of the complexities involved. We are designed to be simple in order to aid financial inclusion. It is not entirely accurate and it belittles the impact of MFBs when all you hear is ‘How much can I access in loans from MFBs?’ Most miss it when they think an MFB is a place where you can just walk in and access funds with far less conditions than from a commercial bank. And maybe in a way, you can escape paying back since an MFB is not enabled to enforce repayments. Nothing could be further from the truth. But I digress, the benefits of an MFB is to aid financial inclusion in Nigeria. As pointed out above, the percentage of the adult population that is financially excluded is alarming. MFBs serve to attempt to bridge the gap and as such help in improving the entire economy.
What do you think the capital base for microfinance banks ought to be for you to be comfortable in doing your business?
Answer: Incidentally I think the capital base for MFBs should be reasonably high so that the reach of MFBs can be enhanced. There is so much to be done and MFBs need capital to achieve desired targets as it concerns financial inclusion.
I think that the federal government can assist by setting aside a percentage of its budget, (or the federal government can encourage individual states to do this), for capitalization even if in form of redeemable debenture so they can measure performance and possibly recall the debenture in the event of a non-performance. Recalled debenture can be rotated amongst other MFBs. They can also increase in the event of obvious performance.
To answer the question directly, whilst I am reluctant to give a figure, I believe the higher the capital base requirement, the better. I have heard of CBN’s intention to increase capital base from the minimum paid up capital of N20million, N100million and N2billion for Unit, State and National MFBs and I think it is a welcome initiative. But it should be staggered over a period of time.
Why are some businesses skeptical of taking loans from financial institutions? Is the high interest rate and why are the tenures of the loans always short?
Businesses need to be wary of taking loans so that loans taken will be properly channeled/utilized. Businesses cannot really survive without loans at some point or the other in the lifetime of the businesses. However, loans should be properly utilized. The need for the loans must be carefully considered so that losses will be minimized and the loans repaid.
People talk of high cost of loans, but I tell you that sometimes the cost of not accessing loans is higher than the cost of actually taking the loans. If properly utilized, you end up with a bigger business capacity and more profits. If you are doing your business right, then the need for loans will soon arise. You however need to be careful so that what you are taking the loan for is self-financing in real terms and not just something you just wishing will pull through. Otherwise no matter how ‘cheap’ the loan is, it will still be too costly.
The tenure of loans in MFBs is mainly determined by the nature of deposits we have access to which is usually short-tenured. To that end, most MFBs try to match loan tenure with tenures of deposits so that the owners of deposits will not be stranded when they call for their deposits. This is to avoid creating a negative impression that the bank is unable to meet obligations which can lead to a run on the bank.
Can we conclude that the commercial banks activities in SME sub-sector is overcrowding that of Microfinance banks?
Yes, we can conclude that, alright. But that is not surprising. Commercial banks don’t have the focus required of them. You can see that the main function of financial intermediation which is taking from the rich(depositor) and giving to the poor (the active borrowing poor) is inverted for them. They rather take from the poor and give to the rich. And they don’t even know how to give to the rich. The Etisalat fiasco is a prime example. You would think heads should have rolled for supposedly experienced people to have given that much monies against a ‘Negative Pledge’which turned out to be unenforceable. But that is the story for another day.
Commercial banks crowd SME sub-sector, as well as MSME sub-sector, not to assist SME but to TAKE money from SME and add to their ever increasing and fundamentally useless (at least to the larger society) deposits. And I have facts backing this up.
For example, the Minister of Finance, Kemi Adeosun alluded to the fact that the Development Bank of Nigeria was set up because ‘MSMEs contribute 48.47per cent to the Gross Domestic Product(GDP) of Nigeria, they have access to only five per cent of lending from Deposit Money Banks(DMBs)’ This after the FG has done all they could (not enough in my humble estimation) to make DMBs lend to the Nigerian market and still has come short.
DMBs are very good at taking advantage of the system. You can see that when CBN opened the MSMEDF window which initially was meant only for MFBs, DMBs eventually latched on and using the bigger is better/safer argument, were able to access MORE of the funds from CBN. My question is, do we have a report on impact assessment with respect to the funds? Did DMBs use this intervention to fund the Nigerian market or to fund their balance sheets so they can continue to claim they are bigger off the backs of the Nigerian economy?
I am always appalled when I hear top-notch bankers say that Nigeria is a difficult economy to lend to. And you remain a banker in the same economy? I always want to remind them that most big businesses in Nigeria today access single digit loans from banks outside the country. Of course, the irony is lost on same DMBs which now receive same funds on behalf of these businesses. They fail to realize that foreign banks are appraising their own markets better than them and are willing to lend on their turf.
DMBs will rather take advantage of the system, like putting all their monies in Treasury Bills, which the FG strangely priced at 18per cent and then they will still brag about it. It is just unbelievable. If I had my way, I will compel them to lend. Otherwise, you should get out of the system. It is like a soldier saying he will not fight because a war is ongoing. Was that not why he trained to be a soldier.
I can go on for the whole day on this, so let me stop. But yes, DMBs, unfortunately, are crowding the SME sub-sector, not with the intention to help, but with the intention to tame the system by sucking out funds so as to just increase their deposit base. To no tangible purpose as it concerns the Nigerian economy, I must add.