Nigeria microfinance banks and their toxic credit that kills small businesses

SMALL and medium scale businesses have been identified as the major drivers of an economy. This is truer of developing or emerging economies like that of Nigeria.

Most workers in the country are employed in the thousands of small and medium scale enterprises sprouting in the country on a daily basis. The ratio of the so-called professionals who are employed in multinational organisations and blue chip companies in the oil and gas, telecommunications, Information Communication Technology, banking and financial services as well as real estate sector are only a fraction of the number of people who are not only willing able to work but also trained and qualified for skilled or semi-skilled jobs.

In effect, Nigeria is an expanding economy or rather has a huge potential for expansion considering the enormous level of untapped human resources side by side with a market reputed to be the largest on the African continent.

However, year of unabated economic mismanagement and political misrule has left the Nigerian economy either comatose or drifting at best. A few micro and macro-economic policies have been thrown in here and there, but the trickledown effect on the mass of people in the country has been very negligible.

To a large extent Nigerians have had to rely on themselves rather than on a responsive and responsible government for the provision of infrastructure as well as capital that makes life liveable.

From historical point of view, it seems nothing that has worked well elsewhere ever gets to work in Nigeria. Not only that they don’t just seem to work. They have the effect of impacting the Nigerian populace adversely.

Without trying to go into the litany of such failed attempts to implement foreign ideas and programmes in Nigeria, I will go straight to identifying one of such well-intentioned programmes that have done more harm than good since it was adopted, namely the microfinance system of funding small and medium scale businesses in Nigeria.

The microfinance bank was introduced into the Nigerian financial services sector to cater to the funding gap which used to be the bane of small businesses and their owners who, in most cases, do not have the wherewithal to access loans from large commercial or merchant banks. Micro credits without the heavy burden of collateral requirement seemed to be the answer.

And indeed, it was answer in the case of the Graeme Bank experience in Indonesia where entire villages of working women and men were lifted out of poverty through microcredits at very negligible interest rate over a long period of time and no collateral.

Microfinance banks in Nigeria are, however, an entirely different matter. In my own experience, these banks mushrooming all over the country only exist to serve their owners and shareholders alike at the sorry expense of unsuspecting or hapless customers who patronise them. First of all, you have to cross hurdles to qualify for their loan facilities.

You do not only relinquish your automobile as collateral, they put a lien on all your household items including electrical appliances such as TVs, sound systems, computers, refrigerators, freezers, cookers, furniture and so much more depending on your current asset acquisition.

In case of default you lose not only your business but everything you have ever worked for in a single moment. And the ruthless way they go about it is better imagined than experienced.

Then you talk about interest rates that at first looks very attractive; they tell you it’s 4 per cent or 5 per cent on every monthly instalment. But on closer examination, you find that cumulatively the so-called little interest comes up to between 33 per cent – 36 per cent at the end of the day.

By even the prohibitive Nigerian commercial bank standard of 22 per cent 25 per cent, you will agree that no small business will ever survive. Even much bigger businesses groan under the commercial bank interest rates that look like child’s play by comparison.

You are simply locked in a vicious cycle. After struggling to pay off your loan tenure you have to obtain a fresh one because then you are practically out of stock and cash strapped again.

Basically you are working for the owners of the microfinance banks and their shareholders. The next stifling point of concern is that the loan tenure cycle is very short. Most of the loans run between six months to nine months.

Your business never gets a breathing space to plan for expansion, growth or development because all that you keep thinking about is how to meet up with next month’s loan repayment tranche.

This suffocating condition ensures the early death of the new small business. In fact, the truth of the matter is that any business that has collected a microfinance bank loan and that seems to be thriving is not actually running on such microcredit.

The reality is that the owner has already established his business and is doing fine, but only needs a quick back credit or for liquidity reasons. That kind of business can ordinarily survive on its own without the intervention of the microfinance bank.

In essence, the microfinance bank is only reaping where it has not sown. At least, one may give some credit to the microfinance institutions that still show some semblance of lending money to the real sector.

For good or for bad, they make a little contribution. The really baron robbers among them are the ones who have a policy and culture of not lending money out to their customers.

There is one I know because I have a relative who works for that particular microfinance bank that is only interested in receiving daily daily “savings” from unsuspecting members of the public including traders, artisans and small business owners.

But when it is time for them to apply for loans, the bank puts up barriers nearly impossible to surmount. For instance, Mr. A needs a small loan and he will be required to look for nine other people who have been saving with the bank and who do business in the same area to jointly apply for loans.