Microfinance

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MICROFINANCE: EXPERIENCES AND LESSONS

FROM OTHER COUNTRIES AND LAGOS STATE

By

Dr Malami Muhammad Maishanu Department of Business Administration Usmanu Danfodiyo University, Sokoto

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INTRODUCTIONINTRODUCTION Each time micro and small/medium

businesses are asked to rank their major constraints, funding ends up capturing the top spot, seconded, these days in Nigeria, by the power supply nightmare.

While it is true that the prime place of ideas, management skills and market dynamics in the matrix for success is high, the severity of the funding problem tends to give it top mention.

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INTRODUCTIONINTRODUCTION The micro and small/medium sized businesses have

great far-reaching difficulty accessing the financial system, dominated by universal banks, whose priority has, for years, excluded the small businesses.

The public sector agencies whose mandate covers this sector have also been unable to deliver, for reasons of poor funding and unfocused management.

With capital formation so difficult for the individual (in view of low disposable income), investment funding has been difficult, hence the seeming frustration among this class of business.

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INTRODUCTIONINTRODUCTION Micro financing, a system of small loans for

new entrepreneurs, has recently gained popularity as a method of spurring innovation in the sub-Saharan economy.

It is a strategy for empowering potential and existing but poor entrepreneurs to be self-employed, productive and purposeful in life.

It is the anchor for economic growth and could revolutionize transformation to a developed country status if given the right disposition.

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INTRODUCTIONINTRODUCTION This paper examines the

experiences of selected countries and Lagos state of Nigeria in order to identify lessons that different levels of government or other private institutions can learn in the desire to develop this country economically.

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INTRODUCTIONINTRODUCTION Section one is introduction; Section two examines the framework for

micro finance; Section three presents the practice of

microfinance in selected developing countries;

Section four looks at the existing micro-financing strategy in Nigeria;

Section five focuses on the Lagos state experience; and

Section six concludes the paper.

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FRAMEWORK FOR MICRO FINANCE

Micro-finance and Micro-credit

Micro finance includes the whole gamut of financial services like thrift, credit, insurance, leasing of equipment, remittance etc. required by the poor.

Micro credit is the credit of meager amount of money which plays an important role in enhancing human life by properly utilizing it to achieve income generation, reduction of poverty, creation of employment etc.

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The most common microfinance product is a microcredit loan — usually. These tiny loans are enough for hardworking micro-entrepreneurs to start or expand small businesses such as weaving baskets, raising chickens, or buying wholesale products to sell in a market.

Income from these businesses provides better food, housing, health care and education for entire families, and most important, additional income provides hope for a better future.

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The micro credit programmes influence savings in a number of ways.

First of all, it inculcates a habit of regular savings and thrift, and the saving is made compulsory.

Secondly, the compulsory savings mobilised would be invested in productive activities, which in turn increases employment, income and output.

Thirdly, this increase in income increases the purchasing power and effective demand among the community and thereby the standard of living and the economic development of the nation would improve.

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Microfinance can greatly assist on a sustained way the generation of jobs and income, creation of viable enterprises, empowerment of poor entrepreneurs and upliftment of the standard of living of those who avail themselves of the services.

It therefore holds the key to unlocking the potential of the small and micro enterprises sector to contribute to economic development and alleviate poverty.

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Development of Microfinance

Formal microfinance emerged in the 1970s as social innovators began to offer financial services to the working poor — those who were previously considered “un-bankable” because of their lack of collateral.

Once given the opportunity, not only did the beneficiaries expand their businesses and increase their incomes, but their high repayment rates demonstrated that the poor are capable of transforming their own lives given the chance.

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This formal model of lending disproved all conventional thinking and therefore microfinance was born. Since then, microfinance has become one of the most sustainable and effective tools in the fight against global poverty.

The microfinance revolution actually began when Bangladeshi economics professor Muhammad Yunus first handed over a few dollars to an impoverished basket weaver in 1974.

Since then, the movement towards microfinance—the granting of very small loans to the poorest people in the world to enable them run small businesses that will lift them out of poverty—has won passionate supporters across the globe.

Muhammad Yunus

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In 2006, Yunus and the microfinance institution he founded, Grameen Bank, shared the Nobel Peace Prize.

Microfinance, which emphasizes granting small loans to the poorest of the poor without requiring collateral, rests upon the notion that the most impoverished people in developing countries typically do not otherwise have access to traditional financial services, but that they do possess modest survival skills that make them credit-worthy.

Credit programs can offer the poor access to small amounts of capital and, in turn, they use these loans for self-employment projects, to generate income and eventually become self-reliant.

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Microfinance institutions exist in many forms. These include:

Traditional/informal - Rotating Savings and Credit Associations (ROSCAs) e.g. “esusu”, “adashi”; Self-Help Groups (SHGs); moneylenders; pawnbrokers; thrift collectors; family members, friends and neighbors.

Semi-formal institutions - credit unions; savings and credit co-operatives and multipurpose co-operatives; and Non-Governmental Organisations (NGOs).

Universal banks

Community banks

Development banks etc.

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MICROFINANCE IN SELECTED DEVELOPING COUNTRIES

Experience has shown that over 40 million low-income entrepreneurs, mainly in the developing countries, have access to microfinance.

Banks and other financial institutions in Bolivia, Colombia, Costa Rica, the Dominican Republic, Ecuador, the Cameroon, South Africa, Bangladesh, India, the Philippines, and others - in addition to a number of institutions in Indonesia - have either established commercial microfinance programs or are in various stages.

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In Bangladesh, where about one third of the world’s estimated 30-40 million micro borrowers reside, the growth has come from specialised microfinance NGO’s and Grameen Bank. What began with a few small grants and loans from international donors has now provided over 100 million dollars in loans.

The most distinctive feature of the credit delivery system is the absence of middle men between the credit supplier and end user.

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The bank’s cumulative recovery rate is an astounding 98 percent. Grameen Bank has its own special legal structure, and does not fall under regulatory oversight of the central bank.

The bank also aims to raise health and environmental consciousness. Each of its members must plant at least one sapling a year as part of an afforestation programme. Grameen is perhaps the only bank in the world that encourages birth control, sanitation and a clean environment as part of its lending policy.

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In Bolivia the microfinance revolution emerged in the 1990’s. Large-scale commercial credit is provided there by BancoSol, a privately owned bank for micro entrepreneurs, and by a number of other competitors.

By 1997 BancoSol, financed by a combination of domestic and international commercial debt and investment and locally mobilized voluntary savings, provided loans profitably to more than one quarter of Bolivia’s clients.

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In India, despite the large size and depth of its financial system, the majority of the rural poor do not have access to formal finance and financial services.

For this reason, innovative microfinance initiatives pioneered by non-governmental organizations strove to create links between commercial banks, NGOs, and informal local groups to create the " Self Help Group (SHG) Bank Linkage".

The success of SHG Bank Linkage has been largely attributed to good policy and strong leadership, in conjunction with facilitating government policy and legal framework. Thus, the incidence of poverty fell from about 40 percent of the population in the mid-1970’s to about 11 percent in 1996.

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In Ghana, a country of 24 million people, microfinance is merely a modern iteration of a longstanding traditional banking system called “susu”.

Under the susu system, Ghanaians have traditionally traded money with each other in exchange for periodic repayment with interest.

This system arose because 95 to 96 percent of Ghana’s population does not have access to formal banking institutions but rather than turning to alternatives like moneylenders and credit associations,.

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Ghanaians created the self-regulated susu system to make up for the lack of access to formal banks.

Recent attempts to formalize the susu system have seen the creation of organizations like GHAMFIN, the Ghana Microfinance Institutions Network, in order to connect small business owners with potential investors.

It consists of 80 microfinance-focused banks and serves over 60,000 clients. In order to participate, clients pay a small membership fee in return for easy access to grants and loans that enable small businesses to get off the ground.

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Microfinance in Ghana has gone through a four-step evolution, transforming it from informal agreements between individuals to a practice recurring throughout the country.

In the 1950s, the Ghanaian government started offering subsidized credit to citizens when it realized that people were unable to overcome poverty without start-up funding for business ideas.

The emergence of non-government organizations in the 1970s started a new period of credit for entrepreneurs.

The third step towards today’s microfinance system emerged in the 1990s, when institutions, like banks, started developing branches devoted to microfinance operations.

Finally, in the mid-1990s, organizations like GHAMFIN emerged to integrate microfinance into the mainstream Ghanaian economy.

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Ghana has been able to extend the microfinance system to encompass industries outside of the business sector. For example, the practice of micro financing for real estate has allowed many individuals in low-income groups to improve their standard of living.

By continuing to apply microfinance to other sectors of the economy, Ghana will foster a sense of individual entrepreneurship that encourages people to work hard to build better livelihoods for themselves and their families.

Ghana has created a system that can be applied to benefit other developing nations.

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Summary of Lessons Learnt

Microfinance can be a tool to raise health and environmental consciousness. Grameen bank requires each of its members to plant at least one sapling a year as part of an afforestation programme;

That microfinance banks success has been largely attributed to good policy and strong leadership, in conjunction with facilitating government policy and legal framework. In the absence of these, success is not guaranteed;

Micro finance system can be extended to encompass industries outside of the business sector and in real sector as practiced in Ghana.

MICRO FINANCING STRATEGY IN NIGERIA

Federal government, through the instrumentality of the CBN management, has shown recognition of the enormity of the problem of poverty and the need to tackle it through empowering the poor entrepreneurs.

Central Bank of Nigeria (CBN) is one those first few regulatory bodies in the world who have drafted and implemented national-level microfinance policies in their respective countries.

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The policy framework of the scheme prescribes:

A private sector-driven approach: eliminates the weaknesses of government-run agencies which often lose focus and end up as propaganda tools;

To be delivered through the vehicle of micro finance banks (MFBs): intended to be reasonably capitalised, technically well-managed and oriented towards lending;

CBN regulatory and supervisory framework to ensure sound operation and effectiveness.

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The CBN will license two categories of micro finance banks (unit and state), with the following features: A unit MFB is licensed to operate in a Local Government Area (LGA)

initially, as a single unit of operation.

Required paid-up share capital/shareholders' funds is N20 million.

Organic growth is permitted by opening new branches, first to cover the LGA adequately and subsequently to spread to other LGAs in the State.

However, for each new location, the MFB must show availability of free funds, unimpaired by losses, of at least N20 million.

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A State MFB is licensed to cover the state and can open branches in different LGAs of the state.

Required minimum paid-up share capital/shareholders' funds unimpaired by losses is N1billion.

A state MFB can also grow to be a national MFB by spreading to other states. It must have established presence in at least 2/3 of the LGAs in a state before extending to another.

A minimum of N1 billion share capital/shareholders' funds unimpaired by losses will be provided to justify presence in a new state.

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A unit MFB that organically grows to the status of a state MFB attains similar status as MFBs originally licensed as state MFBs.

A universal bank can set up a subsidiary to operate as an MFB. The prescribed conditions for licensing MFBs and state MFBs must be met.

A universal bank currently engaged in micro financing activity which chooses not to operate a subsidiary company, is allowed to run a specific department or unit for micro finance. Such unit will be subject to the same regulations and supervision as MFBs.

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All existing Community Banks have 24 months from the approval date of the new policy to meet the conditions for MFB license and convert to MFBs (either state or unit). If they fail, they will cease to operate at the expiration of the dateline.

Existing NGO-MFIs can incorporate a subsidiary to register as MFB while still operating as NGO or may choose to convert fully to an MFB.

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Also, registered NGO-MFIs that wish to remain NGOs are allowed to carry on that way but will forward periodic returns to the CBN.

Existing credit-only membership-based micro finance groups (for example, esusu schemes), are permitted to continue with their schemes but are not to mobilise deposits from the general public.

Individuals, groups of individuals, community associations, private corporate entities, NGOs, foreign investors are permitted to seek licence to operate MFB's.

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Beyond the share capital injected by the owners, MFBs are expected to actively mobilise savings from the communities they serve and elsewhere for use in their financial intermediation role. They can also raise funds from the public by issuing redeemable debentures.

Governments' funding support will come through the 1% of each state's annual budget expected to be set aside for on-lending by MFBs. In effect, such funds will be channelled through MFBs.

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A strong regulatory, supervisory and operational framework is being instituted to facilitate success: Licensing of MFBs is the responsibility of the CBN; CBN to supervise MFBs; various organs are being set up to support the nurturing process: for example,

National Micro finance Consultative Committee, Association of Micro Finance Institutions, credit reference bureau, Micro Finance Development Fund; Extension of NDIC deposit insurance scheme to cover MFB

deposits; and Micro finance loan, under the policy, is pegged at a ceiling of

N500,000.

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MICROFINANCE BILL – THE LAGOS STATE EXPERIENCE

The current governor of the Lagos State Government recently, announced a new microfinance bill which “will make it compulsory for all local governments in the state to contribute not less than one percent of their allocations to the operations of the microfinance banks in the state,” The bill was passed in 2008 as Lagos State Microfinance Institution Law 2008.

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http://www.vanguardngr.com/index.php?option=com_content&task=view&id=6883&Itemid=0


In order to effectively administer the Micro Finance Fund for the growth of entrepreneurial activities and alleviation of poverty in the State, the Lagos State Micro Finance Institution (LASMI), as empowered by the State Government, is partnering with eight (8) microfinance banks to help spread the benefit of the Lagos State Microfinance Scheme through-out nooks and cranes of the state (the three (3) Senatorial Districts) to facilitate its disbursement of financial assistance to prospective and eligible beneficiaries.

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A Fund known as the Lagos State Micro-Finance Fund is established by the Lagos State Micro-Finance Institution (LASMI) to provide additional operational funds to interested Microfinance Banks who shall in turn grant loans directly to entrepreneurs in line with guidelines that are put in place from time to time by the Institution (LASMI) towards achieving the poverty alleviation programme of the Lagos State Government.

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LASMI offers various services contained in “Functions of LASMI” as enshrined in the Law establishing the Institution. These include:

Provision of basic financial assistance to entrepreneurs who may normally be in a position to benefit from the services of the orthodox banking system due to their inability to provide collateral or security through Micro Finance Banks which are involved in legitimate microfinance activities in both urban and rural areas;

Monitoring of the records of the Lagos State Micro Finance Fund to ensure disbursement in a way to achieve the aim of Government;

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Collaboration with local and foreign development finance agencies to co-fund the Lagos State Micro-Finance Fund;

Attraction of people-oriented development projects and, implementation and coordination of micro-finance programmes;

Provision of corporate governance and management of the Lagos State Micro Finance Fund;

Ensuring measurable improvements to the quality of life of micro-finance entrepreneurs in the state by conducting impact assessment surveys;

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Receiving of periodic reports from Micro-Finance banks in order to ascertain their performance on the fund disbursed to them through LASMI;

Ensuring that value-added support services necessary to impact positively on the business of the poor and micro entrepreneurs are developed through qualitative education and confidence building programmes;

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Development and implementation of a graduate entrepreneurship scheme that would create employers of labour rather than graduate job seekers in the State.

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CONCLUSIONS The case of Grameen bank is a good

example and developing countries like Nigeria must borrow a leaf if the objective of making financial services accessible to a large segment of the potentially productive Nigerian population which otherwise would have little or no access to financial services would be realised.

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CONCLUSIONS The role of microfinance in economic

development particularly in poverty alleviation is clearly evident from the discussion. Microfinance system is a global phenomenon with varying degrees of success in different parts of the world.

One discerning fact is that governments must be clear about its interest in the system and must support it through good policies, infrastructure and good leadership. No doubt microfinance can be a functional tool if properly handled and structured.

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END OF LECTURE

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