Successful Microfinance Practices in Nigeria: My Experience1
Godwin Ehigiamusoe2
LAPO MfB Limited


Clients base : 518,345
Value of loan in 2011:
N31.8billion
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Loan Performing Loan/PAR
> 30days : 1.58%
Preamble
In the past seven years, microfinance has enjoyed unprecedented visibility and also
experienced growth in Nigeria. Nigeria is expectedly becoming a focus of international
microfinance community.
Stakeholders particularly, the regulatory authorities and practitioners have equally contended
with a number of challenges which range from limiting factors in the operating environment,
to dearth of re-financing facility. However, there appears to be a strong commitment of all
stakeholders in the sector to make microfinance work for our people. It is on this score, I
express my delight at being invited to reflect on the Nigerian microfinance practices in
general and my experience in particular.
Microfinance
Microfinance has been defined in various ways by authors and practitioners. For Ledgerwood
(1999), microfinance is the provision of financial services to low-income clients including the
self-employedi. Robinson (2001) conceives of microfinance as small-scale financial services ,
both credit and savings that are provided to people who farm or fish; provide services; work
for wages or commission; gain income from renting out small amount of land, vehicles,
1
Paper presented at the 6th Annual Microfinance Conference and Entrepreneurship Awards, Organized by the
Central Bank of Nigeria, February 7 &8, 2012
2
Mr. Godwin Ehigiamusoe is the Managing Director, LAPO Microfinance Bank Limited , Benin City
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animals or machinery and tools; and to other individuals and local groups in developing
countries in both rural and urban areas.
Because of its historical tie to poverty alleviation, microfinance is seen as poverty lending.
Micro financing
is therefore, connotes more than the disbursement and collection of loan
repayments and savings;
it also refers to a set of elastic organizational structures and
procedures by which appropriate financial services are delivered to low-income people and
owners of micro enterprises on a sustainable basis(Ehigiamusoe 2005)ii.
Low-income people and their micro-enterprises are peculiar in many ways and meeting their
varied financial needs requires flexible structures and procedures. Microfinance is vital
component of efforts at ensuring adequate financial inclusion.
The features of microfinance can be summarised as follows:
I.
Finance for all. Microfinance focuses on persons and businesses that are
excluded from mainstream financial system. These are members of poor
household, rural dwellers, women and recently the youth. Clients of microfinance
are usually classified as ‘the poor’ or lately, as ‘low-income people’ by those who
consider the term poor as not edifying. They usually operate at the fringe of the
economy, that is, the informal sector or shadow sector. Microfinance banks seek
to empower low-income people and mainstream they into the national economy
ii.
Disregard for collateral security. Exclusion of low-income people from
institutional financial services on the basis of collateral requirement is often cited as the
reason for the rise of modern microfinance. Classical microfinance does not place emphasis
on collateral as condition for access to credit. The rationale for disregard for collateral
security is simple: Low-income people do not have assets to present as collateral for loans.
They do not command ownership over assets such as titled land, stocks and other forms of
assets often demanded by conventional financial institutions. Microfinance as a lending
approach believes in the people (what they are) rather than solely in collateral (what they
have).
Microfinance institutions ensure good repayment performance through:
- Creative engagement of clients/borrowers;
-training;
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-flexible Loan repayment schedule, participatory loan applications appraisal and joint
liability;
-Effective loan utilization monitoring;
-Savings requirement
iii. Flexibility in service delivery
The peculiar nature of clients of microfinance and their businesses require flexibility in
delivery approaches. Loan disbursement and repayment as well as savings mobilization are
designed to reflect the cash-flow patterns of low-income people and their businesses.
Services are taken to the clients rather than wait for them in their branch offices. If the
clients are farmers who are working on their famers in the morning, repayment collections
could be made in the evenings well after conventional working hours!
iv. Microfinance is not charity
In spite of its association with charity, micro-lending is not charity. Borrowers are obliged to
take full responsibility for proper utilization of borrowed funds and make complete
repayment with interest and associated fees. The cost of failure of a microfinance institution
and bank far outweigh the cost of access to loan on a sustainable basis.
Challenges
The provision of financial services to low-income people applying flexible approaches comes
with its challenges. Some of these challenges are even more acute in the Nigerian operating
environment. These challenges include:
Possibility of mission drift:
The most profound of the changes microfinance has gone through is the current trend of
commercialization. Microfinance has transformed into a thriving global industry with various
profit takers in the chain of capital-flow to the poor. Transactional language is dominated by
profit rather than impact. Private equity and commercial debts have replaced grants while
legal and regulatory frameworks provide required platform for for-profit institutions in the
sector. Interestingly, commercialization of microfinance was intended to deepen the industry
and expand access to a range of financial services to a large number of the under-served. It
was reasoned that only funds from commercial sources could bridge the huge gap between
supply and demand for financial services by the poor. Commercialization comes with the
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temptation to unscrupulous pursue to profit and the detriment of making meaningful impact
on low-income households.
High operating cost:
Implementing flexible institutional procedures to reach micro and small enterprises could be
expensive and limits returns on investment.
A major cost factor is the frequent interaction with clients which is the hallmark of
microfinance practice. Credit officers are required to maintain regular and frequent contact
with service users usually outside branch offices. To reach a large number of clients, in rural
Africa, credit officers will have to traverse several communities.
Another cost dimension is the numerous transactions involved in microfinance operations.
It is usually more cost effective to deliver bigger units of services. For example, the
transaction cost of a credit facility of N100, 000,000:00 to four borrowers is cheaper than
lending the same amount to 5,000 persons at N20, 000:00 each. In the latter, numerous loan
applications and accounts are processed and monitored respectively. The unit cost of savings
mobilization is equally high. To address the challenge of high cost of transactions,
microfinance institutions adopt operational strategies including group methodology and
standardization of procedures
Repayment problem:
Loan delinquency is major threat to institutional sustainability; it is the deadly virus, which
afflicts MFIs. Delinquency demoralizes staff and deprives beneficiaries of valuable services.
Delinquency is a symptom of poor leadership.
Inadequate experienced credit staff:
Micro financing is more than dispensing loans. To be viable, MFIs require experienced and
skilled personnel. As young and growing industry, there is a dearth of experienced staff in
planning, product development and effective engagement with clients. Most credit staff of
MFIs in Nigeria is on their first jobs. Inadequate experienced staff limits expansion and
institutional performance.
Inadequate Re-financing facilities:
In nascent microfinance industry, clients are usually not able to make deposits which are
enough to fund loan portfolio. The poor can save, but their capacity to save large sums is
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limited. There is always a gap between loan deposits and the loan portfolio. Microfinance
banks therefore seek fund to bridge the gap.
Internal Control challenge:
Large number of transactions and flexible operational approach combine to pose serious
internal control challenge. Operational procedures could be breached at disbursement and
collection points. High cash transaction, which is a feature of micro financing, is a source of
temptation for fraudulent practices.
Risks and microfinance The nature of operations of microfinance institutions makes them
susceptible to risks. The challenge of risk management in microfinance is about how
operators can reach low-income people with financial services in a flexible and convenient
way (for clients) and at the same ensure adequate protection for institutional assets such as
cash and loan portfolio. Conventional risk management approaches, may lead to exclusion of
low-income, especially rural dwellers.
Risk generating factors in microfinance
A number of features of microfinance make microfinance vulnerable to risks.
i.
Nature of service users and their businesses
The unique nature of microfinance clients and funded businesses from the point of view of
conventional financial intermediation constitutes considerable risk. They are considered ‘bad
risk’ and, therefore ‘unbankable’.
(a) Weak management capacity of small business owners
Most users of microfinance services lack necessary skills in record keeping, planning and
other basic management techniques. Most micro-businesses are, therefore, established
without feasibility studies. These deficiencies could result in business failure which puts loan
assets of lending institutions at risk.
(b) Vulnerability of supported enterprises
Clients and their micro-businesses are vulnerable to a range of shocks and challenges in their
operating environment. For instance, an incidence of fire out-break in the market place could
wipe out the entire economic base of a microfinance client. Urban renewal programme,
which consists of demolition of shackles and shops on the right of way, could constitute a
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threat to owners of micro-businesses and lending institutions.
Policy shift could have
devastating impact on their businesses.
(c) Concentration in similar enterprises
Low-income people tend to engage in businesses with limited differentiation. In urban
centres, they invest borrowed funds in trading and related businesses. In farming
communities, all small scale farmers engage in subsistence farming. In most cases, they even
engage in cultivation of the same crops. In Southern Nigeria, it could be cultivation of
cassava. Loan amounts from the lending institution to various borrowers are concentrated in
few similar farming activities. Any unfavourable development as poor harvest of the crop,
substantial proportion of portfolio of the lending institution is at danger of default.
ii. Nature of service delivery approaches
The distinctive feature of microfinance is its flexible service delivery approaches. Delivery
structures are usually flexible while operational procedures are informal. These are designed
to be responsive to the needs and characteristics of the poor and their businesses. However,
flexibility of delivery approaches presents some risks. For example, cash disbursement and
field based operations expose micro-lending institutions to risks which require innovative
approaches to measure and mitigate.
iii.
Less Emphasis on collateral of requirement
The standard practice in microfinance is collateral substitution. This is one of the key
features, which set microfinance apart, from formal lending transaction. The rationale for
collateral substitution is that, most clients of microfinance do not own assets, usually
demanded by formal lending institutions as security for loans. Microfinance practitioners rely
on ‘social collateral’ group solidarity and cross guarantee to ensure good repayment
performance.
Good as ‘social collateral’ approaches are, enormous investment in training is
required for effective application. Improper application of social collateral approach could
put a large proportion of loan assets of microfinance banks or institutions at risk.
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3. Response strategies: The LAPO Experience
LAPO’s current performances did not come about over-night. We contended with the above
challenges like other microfinance banks in Nigeria. Some of our strategies and interventions
could be summarised as follows:
1. Clarity and consistency of mission and vision. Without any fanciful mission
statement, right from the beginning, we seek “to assist our clients to break out of
the grip of poverty”. At the beginning, we formulated a set of five (5) operating
assumptions which guide and influenced LAPO’s structures and procedures.
They are:
i.
The poor are too disadvantaged to meaningfully benefit from programmes
and services provided by formal institutions and commercial banks.
The poor for instance do not have command over assets as titled land, stocks
accepted by banks as security for loans. They are therefore excluded on account of
their poverty. LAPO therefore targets low-income persons and owners of microenterprises poor who are excluded from services of formal institutions.
ii.
An improvement in the condition of the poor would take place if financial
services were provided on affordable basis. For the poor to benefit maximally
there must be implementation structures procedures and terms which are
responsive to the peculiar nature of their businesses. Beyond pricing, credit
delivery strategies should take into account, the debt capacity, and low level of
business training and vulnerability of their businesses. Through innovative and
flexible procedures, LAPO is able to meet the financial needs of low income
persons. Sizes of loans and repayment procedures are sensitive to the businesses
of its borrowers.
iii.
Small groups have tremendous influence on cooperating individuals.
Grouping is major source of strength and support for persons with limited means.
It provides opportunities for exchange of ideas and tips on business success and
social and economic empowerment. Groups provide valuable assistance and in
some cases help cooperating individuals act in compliance with operating rules
and procedures. In micro-credit delivery, group methodology promotes credit
discipline amongst other advantages. Group methodology is a major feature of
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LAPO financial services delivery structure. Borrowers are organized into selfselecting credit groups.
iv.
Poverty is aggravated by such factors as diseases, ignorance and social
exclusion. The poor contend with challenges other than lack of capital. These
include poor health, ignorance and social exclusion. These factors act to
strengthen the grip of poverty. Meaningful poverty eradication intervention should
take this into consideration. LAPO conceives of poverty as an octopus with
several tentacles of causes and manifestations. Beyond the provision of financial
services, LAPO pays attention to social empowerment through effective
collaboration with other sister organizations within the LAPO SYSTEM.
v.
Women and children are relatively more disadvantaged and worst hit by
poverty. The reality of development is that there is no society in the world, where
women are treated as good as men. In poor nations of Africa, women are deprived
access to income generating assets and life transforming opportunities as credit,
education and popular participation. Their ability to realize their potentials are
constrained by customs and traditions in patriarchal societies. Comparatively, they
are excluded from institutional credit than men3. LAPO gives priority to women.
Women constitute over 90% of LAPO current client base.
Over time we have built some fancy into our mission statement, but we still remain
faithful to enabling our clients break out of the grip of poverty
2. Staffing and people management
We realize very early that we would not be able to access a pool of experienced staff
and sought to compensate with the following:
i.
We look for attitude: in the early years, we did not bother so much about the
level and nature of academic qualification. We sought for people willing to work
hard particularly, with low-income people. Today we do not recruit people from
elitist homes; rather we select people from low-income households.
ii.
Emphasis on learning. Since we recruit the ‘young and green’ we invest in
education and training. We encourage our staff to develop themselves. The
result is that we have a body of professionals who qualified while working in
3
In the study on access to the Federal Government of Nigeria Agricultural Guarantee Scheme, in Cross River
State , women account for only 4% of beneficiaries ( Eyoma :1994)
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LAPO. For example, we have ten (10) chartered accountants; all except one
passed their professional examinations while in LAPO. We have a full-fledged
Academy for microfinance.
iii.
Our staff members are ‘people’ rather than as ‘resources’: Our staff policies
and practices see staff as ‘people’ with needs, aspirations, self worth and voice.
We have People Management Unit (PMU) and not Human Resources (HR).
Here are some examples of our policies and practices:
a) We started the implementation of the national pension scheme, immediately
it was launched even then as a Non-profit organization.
b) Eight (8) years ago we formulated and began the implementation of
HIV/AIDS Work Place Policy which was reviewed in 2010
c) We engaged a US Based organization to conduct Employee Engagement
Survey in 2011. The result shows that LAPO scored higher above the global
average in staff engagement index
d) We have appropriate bonus /incentive systems
e) Our annual staff turn-over in the past 6 years has been below 6%
3. Client relationship and engagement
Our relationship with clients in based on:
i.
Participation. We have :
(a) Each branch of LAPO has a ‘Branch Council’ which is a body of all
leaders of credit groups supervised by the branch. The leader of the council is
elected by the members while our Branch Manager is the Secretary. The
council meets quarterly to review operations of the branch.
(b)Till recently, an elected client was a member of our board
There are series of client for a
ii.
Support. LAPO realizes that our clients need much more than finance,
because they contend with challenges other than lack of money. LAPO
provides:
(a) Scholarship award for secondary education for children of clients, as the
greatest concern for a poor woman is the future and education of her children. She
usually believes that she is poor because she did not have formal education. In 2006
LAPO won the Grameen Foundation award for ‘Excellence in Microfinance ‘ and the
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cash prize of $10,000 used as seed fund for the scholarship Fund. 530 children are
currently on the scheme. We need your contributions.
(b)
Health and Gender training.
Health awareness and gender
sensitization activities are organized for our clients by our sister organizationLAPO NGO. 51,001 women were trained in 2011.
(c) Micro-insurance services. LAPO in collaboration with GoldLink Inc
Company Plc provides insurance cover for life and fire in the market place
for our clients. 418,187 women are currently covered. We are working on
health insurance scheme.
(d) Credit staff members are trained to be Client Support Officer (CSO). This
indeed is the official designation of our Credit Officers. They are trained to
provide necessary support for clients in areas beyond finance such as
education and career counselling for their children.
iii.
Respect and satisfaction. LAPO has endorsed and began the implementation
of the Seven Client Protection Principles.
Periodic client satisfaction surveys are also conducted
4. Funding
Funding is possibly the most acute t challenge facing microfinance banks in a young
microfinance industry as ours. LAPO’s position and steps taken to address this
challenge could be summarized as follows:
i. We realized quite early that ONLY huge funds from commercial
sources could support meaningful and sustainable growth.
ii. We believed that ONLY good and sustainable microfinance institution
could attract commercial funds
LAPO therefore took the following steps:
(a) In 1999, we articulated the vision of what should done to access commercial fund
in Project REfEX (REach for EXcellence)
(b) In 2002, conducted institutional review/assessment by MicroRate Inc, a US-Based
specialized rating agency for microfinance institutions.
(c) In 2003, we began the implementation of the recommendation of the review
exercise,
(d) In early 2005, we started to obtain commercial fund.
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LAPO currently take commercial loans from 11 local and international financial institutions.
5. Sustainability challenge
The high cost of transaction in microfinance throws up the challenge of financial
sustainability.
LAPO addresses this challenge from three perspectives. First, is through cost-effective
approach. Periodically, we review our cost profile and implement cost reduction strategies.
For example branch set up cost is minimal. Second, we push for benefits of scale and optimal
engagement of staff through periodic performance assessment. Third, we periodically review
our rates and fees to reflect movement especially in the cost of funds.
6. Lateral learning and collaboration
From the start, we realized that there is much to learn from other institutions and initiatives.
We learned much from the indigenous thrift and loan schemes, the co-operatives and other
local and international microfinance institutions.
7. Social performance strategies
We believe that access to finance is only one item in the bouquet of empowerment
services the poor require. From the beginning LAPO adopted the finance Plus
approach. We believe that social empowerment is vital. LAPO MfB in conjunction
with its sister NGO provides a range of social empowerment services to our clients.
These include health awareness activities, gender sensitization and popular
participation training,
8. Delinquency management
At the beginning, LAPO struggled with loan delinquency and we have overcome it in
the past ten years. What did we do?
We began by changing our attitude of blaming the delinquent borrowers to blaming
ourselves. We realized that there are really no ‘bad borrowers without bad lenders’
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We thereafter decentralized our loan administration process with the powers to lend
and collect repayment in the hands of our Branch Managers (BMs) and Client Support
Officers (also called Credit/Loan Officers by most lending institutions).
We invested in training. We review the contents of our pre service orientation (PSO)
programme.
We hold these field staff responsible for good repayment performance. There is not
particular incentive for good repayment performance, as it is believed across LAPO,
that collecting complete repayment of the loan you gave out is not a spectacular
achievement!
Concluding remarks
I will ascribe whatever achievements LAPO as recorded to more of attitude and
support that to any particular skills.
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i
Joanna Ledgerwood also adds that many MFIs provide social intermediation services such as group formation,
development of self-confidence and training in financial literacy and management capabilities among members
of a group. Microfinance Handbook; an Institutional and Financial Perspective The World Bank, Washington
DC, 1999, p. 1
ii
Godwin Ehigiamusoe emphasized this point in a paper ‘Tested Institutional Practices for sustainable
microfinance’. Presented at the International Conference on Microfinance organized by The Central Bank of
Nigeria, December 2005
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