Why MFBs’ interest rates are high
Font size:
Currently, the average interest rate charged by micro finance banks hovers between 60 to 70 per cent per annum whereas commercial banks charge between 20 - 23 per cent.
Temitope Ola, Managing Director and Chief Executive Officer of Mic Microfinance bank told BusinessDay in a interview in Lagos , that with competition for market share which would has been engendered as a result of more players coming into the industry, the era of high interest rate would soon be over.
"As at this moment, microfinance banks charge between 60 - 70 per cent interest rate on loans. This is because the operations of microfinance banks are capital intensive in nature. For instance, it is the same process that commercial banks go through before it gives N10million loan to a customer is the same process that a microfinance bank will go through before it gives N15,000 loan to a customer. The only difference is the amount of credit that is involved. I strongly believe that things are the way they are because microfinance institutions are just evolving in Nigeria . By the time .they reach the critical in the society, interest rates will definitely come down .
As more MFBs are being licenced by the CBN, the competition for market share by players in terms of product and service offerings will help to bring down interest rate. Even on our own, we have stated working out modalities to bring down interest rate by changing from flat rate to reducing balance" Ola noted.
But Kunle Akeju, Managing Director / CEO of Gapbridge Microfinance Bank, in an interview with BusinessDay, attributed the high interest rate currently charged by MFBs to unavailability of cheap funds. "The only thing that can drive down interest rate is availability of cheap funds. If we are able to get cheaper sources of funds, like states and local governments providing financial support such as grants to MFB's , I believe that interest rates will drastically reduce." Akeju said
As part of deliberate efforts aimed at tackling the high interest rate associated with microfinance loans in Nigeria , the Central Bank of Nigeria (CBN) , is planning to introduce a Micro Credit Fund (MCF), to serve as a cushioning effect. The proposed MCF, which would take off with the N20billion unutilised balance of the Small and Medium Enterprises Equity Investment Scheme(SMEEIS) fund, would enable state governments, MFBs and non-governmental organisations' micro finance institutions obtain credits at a subsidised rate of 8 per cent per anum.
Under the scheme, states are expected to access the funds from the MCF for onward lending as micro credit to the nation's active poor at lower interest rates that currently applicable.The MCF would repace SMEEIS, which was initially designed to ensure direct flow of bank funds to Small and Medium Enterprises(SMEs).
According to the operational guidelines of MCF, which was released a forthnight ago by the CBN "this programme shall be applicable for three years .2008,2009 and 2010. The tenor of the loan accessed by each state shall be as agreed with the bank but shall not exceed one year in the first instance, with the possibility of a rollover yearly, thereafter"
Commercial banks in Nigeria are expected to continue to set aside 5 per cent of their profit before tax to support lending to SMEs while subsequent contributions would from henceforth be channelled into MCF, which is expected to grow to N100billion between now and 2010.
However, the recent scaling down of SMEEIS fund from 10 to 5 per cent by the Bankers' Committee has been roundly condemned by the Nigerian Association and Medium Enterprises (NASME).
Ike Abugu, NASME's National President, "the decision of the Bankers' Committee to scale down their contribution to the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) is premature. Like every other scheme, SMEEIS had its own peculiar problems. However, the Central Bank and the Bankers Committee would have allowed the scheme to mature by allowing those that are involved to make their mistakes and learn from the mistakes instead of scaling it down from 10 per cent to 5 per cent".
"If the CBN and the Bankers' Committee are scrapping SMEEIS, the they should replace it with another finance mechanism that would address the long term funding needs of Small and Medium Scale entrepreneurs by giving them loan at a single digit interest rate . The idea behind establishing SMEEIS is for banks to take more interest in developing SMEs .But they don't have the patience and expertise for long term equity financing because they are in a hurry to recoup the their investment. That is why they have decided to scale down their contribution. This decision will worsen the plight of SMEs because Micro finance banks cannot bridge the funding gap that would created by the absence of SMEEIS" .
Temitope Ola, Managing Director and Chief Executive Officer of Mic Microfinance bank told BusinessDay in a interview in Lagos , that with competition for market share which would has been engendered as a result of more players coming into the industry, the era of high interest rate would soon be over.
"As at this moment, microfinance banks charge between 60 - 70 per cent interest rate on loans. This is because the operations of microfinance banks are capital intensive in nature. For instance, it is the same process that commercial banks go through before it gives N10million loan to a customer is the same process that a microfinance bank will go through before it gives N15,000 loan to a customer. The only difference is the amount of credit that is involved. I strongly believe that things are the way they are because microfinance institutions are just evolving in Nigeria . By the time .they reach the critical in the society, interest rates will definitely come down .
As more MFBs are being licenced by the CBN, the competition for market share by players in terms of product and service offerings will help to bring down interest rate. Even on our own, we have stated working out modalities to bring down interest rate by changing from flat rate to reducing balance" Ola noted.
But Kunle Akeju, Managing Director / CEO of Gapbridge Microfinance Bank, in an interview with BusinessDay, attributed the high interest rate currently charged by MFBs to unavailability of cheap funds. "The only thing that can drive down interest rate is availability of cheap funds. If we are able to get cheaper sources of funds, like states and local governments providing financial support such as grants to MFB's , I believe that interest rates will drastically reduce." Akeju said
As part of deliberate efforts aimed at tackling the high interest rate associated with microfinance loans in Nigeria , the Central Bank of Nigeria (CBN) , is planning to introduce a Micro Credit Fund (MCF), to serve as a cushioning effect. The proposed MCF, which would take off with the N20billion unutilised balance of the Small and Medium Enterprises Equity Investment Scheme(SMEEIS) fund, would enable state governments, MFBs and non-governmental organisations' micro finance institutions obtain credits at a subsidised rate of 8 per cent per anum.
Under the scheme, states are expected to access the funds from the MCF for onward lending as micro credit to the nation's active poor at lower interest rates that currently applicable.The MCF would repace SMEEIS, which was initially designed to ensure direct flow of bank funds to Small and Medium Enterprises(SMEs).
According to the operational guidelines of MCF, which was released a forthnight ago by the CBN "this programme shall be applicable for three years .2008,2009 and 2010. The tenor of the loan accessed by each state shall be as agreed with the bank but shall not exceed one year in the first instance, with the possibility of a rollover yearly, thereafter"
Commercial banks in Nigeria are expected to continue to set aside 5 per cent of their profit before tax to support lending to SMEs while subsequent contributions would from henceforth be channelled into MCF, which is expected to grow to N100billion between now and 2010.
However, the recent scaling down of SMEEIS fund from 10 to 5 per cent by the Bankers' Committee has been roundly condemned by the Nigerian Association and Medium Enterprises (NASME).
Ike Abugu, NASME's National President, "the decision of the Bankers' Committee to scale down their contribution to the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) is premature. Like every other scheme, SMEEIS had its own peculiar problems. However, the Central Bank and the Bankers Committee would have allowed the scheme to mature by allowing those that are involved to make their mistakes and learn from the mistakes instead of scaling it down from 10 per cent to 5 per cent".
"If the CBN and the Bankers' Committee are scrapping SMEEIS, the they should replace it with another finance mechanism that would address the long term funding needs of Small and Medium Scale entrepreneurs by giving them loan at a single digit interest rate . The idea behind establishing SMEEIS is for banks to take more interest in developing SMEs .But they don't have the patience and expertise for long term equity financing because they are in a hurry to recoup the their investment. That is why they have decided to scale down their contribution. This decision will worsen the plight of SMEs because Micro finance banks cannot bridge the funding gap that would created by the absence of SMEEIS" .
Add to:
del.icio.us |
Digg
del.icio.us |
Digg
Email to a friend
Print version
Plain text
Comments ( posted):
Post your comment