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Home | Economic Watch | Business intelligence | Uneven, harsh interest rates and still difficult to access

Uneven, harsh interest rates and still difficult to access

25 February, 2008 10:49:00 ZAKARI MOHAMMED

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A survey on the prevailing costs of borrowing from the new MFBs reveal different ‘still uncompromising’ interest rates are still being applied

Clearly, the emergence of a more robust and defined Micro Finance banking sector, akin to the current consolidated conventional banking sector, sent some hopeful signals to the less privileged category of fund borrowers in the country. But it appears that some would need long ladders to get to the ‘low hanging fruit’, which is the ‘cheap money’ required to get off the ground.
A survey carried out by Business Day on prevailing costs of borrowing from the new MFBs revealed that different ‘still uncompromising’ interest rates are being applied by different MFBs in different parts of the country.
Findings of the survey showed that in Lagos state, for instance, the average interest rates in the micro finance banking sub sector hovers at 6 percent for 30 days normal lending while overnight takes average of 9 percent. In some parts of South-South region (particularly in Rivers State, cost of borrowing is as high as between 8 and 10 percents.
At the Federal capital Territory, Abuja, ironically, some micro finance banks offer interest rates at between 25 percent and 30 percent, per annum, that is about 2.08 to 3.05 per month. This is comfortable for small scale business entrepreneurs and so because they are operating close to the regulators office.
In some other states, the rates hovers around 5.5 percent. In some northern states, the interest rates is equally low. What this implies is that there is no close or uniform range of interest rates charges by the new MFBs in the country.
If you take for instance, an average of 6 percent as the prevailing industry interest rate across the country, the implication is that, the MFBs would be charging small borrowers 72 percent of total amount of loans contracted in a year. This invariably means that the new MFBs cost of funds, if compressed in a year is far higher than those charged by the conventional banks in the country as shown in the graph.
Again, micro economic watchers wonder what business the low borrowers would engage in that would fetch them enough returns that will be needed to cover for the cost of borrowing and at the same time make some meaningful profits. This scenario, according to analysts is unfortunate and discouraging to potential borrowers from the micro finance industry. This development becomes worrisome given the public outcry which have been trailing the lending rates charged by the conventional banking and for which reason the MFBs scheme was were conceptualized by the apex bank.
Comparatively, conventional bank lending for overdraft lending, the average prime rate is 17.600 percent; and normal lending was 17.516 percent. In the same trend, loan lending attracts average prime interest rate of 17.615 percent while normal lending hovered at 17. 620 percent.
On month by month comparative analysis, the result shows that the conventional banks lend at average of 1.46 percent. In view of the emerging discriminatory rates charged by different MFBs across the country, analysts wonders how the Government and the CBN feels comfortable of meeting the desired objectives of the MFBs scheme towards achieving the vision 2020.
Another aspect of the operation of the new MFBs is in the amount granted out as loan. Despite the fact that the CBN imposed a ceiling of N500, 000 as maximum loanable amount for the MFBs, the survey found out that no individual customer can secure up to N150, 000 in any micro finance bank in most states in the country. An interview with Okechukwu Agwu, a textile dealer at Ogbete market in Enugu corroborated this belief. The interviewee claimed he applied for a loan of N1.5m from one of the newly formed Micro Finance Banks in Enugu, he said he was told he could not get more than N100, 000. Besides, he was told he must register with a cooperative society before he could be granted any credit.
On the issue of collateral, many MFBs customers disagreed with the general belief that there must be one. According to those interviewed, “MFBs do not require substantive collateral. If that were to be the case, they claimed, then why are they called microfinance banks? Why were they created to serve the interests of those who cannot access loans from the commercial banks because of inability to meet the stringent conditions attached?” Meanwhile, no financial institution lends money without assurance or something to fall back to in the event of a default. The only difference between microfinance bank and larger commercial banks is that the procedures required to obtain a loan from the (MFBs) is slimmer while the stock (inventory) is always regarded as the collateral.
Perhaps the MFBs are out to make up for their exclusion from some strategic areas. Launching the micro finance and regulatory policy for Nigeria on the 15th December 2005, the CBN has barred microfinance banks from accepting public sector (government) deposits, engaging in foreign exchange transactions, international corporate finance and international electronic funds transfer. They are also prohibited from engaging in international commercial papers, cheque clearing activities, dealing in land for speculative purposes and entering into leasing and renting, from venturing into sale/purchase of any kind with its directors, officers, employees or persons who either individually or in concert with their family members and beneficiaries, own five per cent or more of the equity of the MFB, without the prior approval in writing of the CBN.
Meanwhile, before the new MFBs consolidate their positions of higher monthly interest rates as being championed by some of them at the moment, the CBN should have a quick intervention now so as to prevent another “Shylock - debtor’ situation that could jeopardize the chances of reducing poverty in the country substantially by the year 2020
For the records, there are now 407 Micro Finance banks in the country as against the 750 that existed merely in ‘name’. It could be recalled that the federal government launched the micro finance and regulatory policy for Nigeria on the 15th December 2005. The new policy created two categories of micro finance banks - MFBs licenced to operate as a unit bank and MFBs, licenced to operate within the four walls of a given state. Community banks were therefore given 24 months to recapitalize and convert to MFBs in line with the conversion requirements of the CBNMicrofinance is defined as the provision of financial services and products to those whose low economic standing excludes them from conventional financial institutions or programs. These can include microcredit, small scale venture capital, savings, and some forms of insurance. Access to each of these services is provided on a micro-scale allowing those with severely limited financial means to participate.

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