The large informal sector that characterises many developing economies is the breeding ground for the most resilient entrepreneurs in these economies. Their enterprises, mostly micro and unregistered, rely on microfinance for credit and much more. The dawn of commercial microfinance made life even more promising for them by making multiple sources of finance available. Unfortunately, the current political-social and economic challenges in the country have reduced the potency of microfinance as a source of succour to these energetic group of people. It is important therefore to continually review the developments in this very important sector, for the strategic role it plays in the economy. Accordingly, we bring up some issues, which the current security crisis in Nigeria presents to microfinancing.
The microfinance industry in Nigeria, like many other sectors, is in deep crisis. When members of a community fall sick, they look up to the doctor who provides them with proper treatment. But what happens to a community of sick people when the doctor is sick? Microfinance cannot help those in trouble if it is also in trouble. That seems to be the case today. The crisis in the country has engulfed the microfinance industry and now hampers its work. But the crisis in the industry is not caused by any of the many things the operators do badly or leave undone. It is not about their business model, which many insist is incongruent with their raison d’etre. We know they could do better in capitalization and also improve their decreasing shareholders’ funds; they have poor quality assets due to the dearth of experienced lending staff; and have continued to generate and carry overhead costs that are unsustainable, among others.
Although these short-comings are corrosive and contagious, and have the capacity to severely damage the industry, if not carefully managed, they are not the key problems threatening the sector right now. Operators and their regulators have been able to handle some of the challenges effectively, one way or the other. Besides, operators are learning to do the right things as regulation improves. The most potent challenge facing the sector now is the pervasive insecurity in the country, which threaten to turn the doctor to a very sick patient.
An even worse challenge is that we have not agreed on the source, nature and motivation for the worst state of insecurity the country has ever witnessed. Some believe the herdsmen are a transformed Boko Haram now seeking and gaining more territories outside Sambisa Forest. Others say they are cattle farmers looking for grass in other peoples’ farms. Only those with security information can tell us. But this crisis is a bigger threat to Nigeria than the civil war. The worst that could have come out of the civil war is that we could have broken into two countries. But this pervasive insecurity promises not only to break up the country but also make the pieces ungovernable. This is actually the minimum we can expect if this land-grabbing and mass killing is allowed to continue.
Some of the challenges that confront microfinance in times of crisis are already present with us. An example is the possibility of resource misallocation. The dwindling client base arising from insecurity may heighten competition, which already exists in the industry. Prior to the introduction of the Microfinance Policy in 2005, there were few informal credit sources, mostly in the mould of the money lenders. Some of them used to be the only source of funds in their areas. However, the entry of many operators has removed their monopoly and introduced serious competition. Clients may now be forced to take multiple credits from different sources. With multiple loans, clients have slimmer chances of getting out of debt, leading to Debt Overload, which negates the whole idea of microfinance.
Clients may also use loans meant for business investment to finance consumption. This may promote irresponsible conducts like Consumerism, among clients, and damage their repayment performance. Availability of multiple lines of credit may also promote Loan Juggling (robbing Peter to pay Paul behaviour), which may undercut the requirement of good payment record, as a basis of repeat loans – another danger to the industry.
Besides, insecurity is destroying the foundation of microfinance by highlighting the need for collateral. Microfinance came that the poor may have credit and have it abundantly without collateral. But the uncertainty of finding the client at his location on the next visit makes a case for insistence on collateral. Granted that the poor are often more trustworthy than the rich, when it comes to debt repayment, that is true only if they are stable in what they do and secure in their domains. If their homes are burnt and they become refugees, lenders would be damned to lend without security, which clients do not have. The crisis is magnifying our fault lines and with it destroying some of the best fabrics of our society- trust. Even the poor, the bearers of trust, may no longer be trusted. Besides, everyone wants to be politically correct, and so half-truths are flying about. When people think a discussion might lead them to the heavy gorges that our then little cracks have become, they just change direction. And for writers like us, these are trying times. This is why the debate on how to feed animals has superseded the more strategic issue of a national food scarcity that is already on the threshold of our country or how to get 12 million out-of-school children back to school – a complete disaster for our dear country in this 21st century.
But we cannot deprive our country of insights that may help it find its way out of the present morass. My observation and research, indicate that the market for microfinance in Nigeria is rapidly shrinking, while poverty and destitution are rising with equal rapidity. This might appear ironical but it is true. Microfinance was adopted in 2005 as an instrument to push the federal agenda against poverty. It worked for a while and pushed poverty towards the fringes. As the industry burgeoned and increased access to finance for many hitherto unserved communities, poverty retreated. Unfortunately, the reverse is now the case. Poverty has taken a bullish stance and microfinance appears to be on a retreat as insecurity rages. And the reasons for this role reversal are not entirely farfetched. They are found in the festering security challenge we face. It has turned hitherto prosperous communities to wastelands. This is a sure way to make microfinance, not only risky and unprofitable but a futile exercise in poverty reduction.
Internally displaced people cannot be economically active. They are refugees. Refugees contribute nothing to a nation. Similarly, fear stricken farmers who no longer go to farms cannot be economically active. They are refugees in disguise. Both categories of people do not need microfinance services. If their numbers are large and multiplying everywhere the herdsmen operate, then our microfinance programme is heading for the cemetery.