Late last week, a young female friend walked into my office. It was early morning. Not unusual in itself, this visit. But her face, that day, was a study in unalloyed joylessness. An ordinarily winsome character, the contrast, that morning between her countenance and the sombre hue of her hijab was all the more startling. In Yoruba, she managed to convey a sense of impending disaster. She works with a micro-finance bank, and only the day before, “management” had informed “staff” of new deposit targets. The new “metrics” require front office personnel to bring in N5m before end-April, while back office staff (my young friend falls into this category) should bring in N1.5m over the same period. Sadly, I forgot to ask what the penalty for missing these targets are; although the chances of the penalties being anything but severe are rather slim.
My first take was that a lot is wrong with this arrangement. To begin with, the average balance on accounts with this micro-finance bank is less than N20,000. This, incidentally, is as it ought to be. Micro-finance is technically about providing formal-type financial services solutions to sub-prime segments of the financial services market. In the local case, it is also about mainstreaming the informal sector – persuading the market woman, the hawker of “Agege bread” (the one who offers you an insert of margarine as option), etc. to open “small form” bank accounts. This segment of the market spends and earns income in small bits. The currency of its financial transactions is M1 (currency in circulation, and very near money; no cheques, no cards, no online payments, no quasi-money). Moreover, because of each economic entity’s narrow base, and the smaller iterative nature of transactions, the speed with which money circulates here is faster than in the formal sector.
When you think of it against the preceding background, an annual average balance of N20,000 per micro-finance account is large. It, however, also means that each front-office staff in my friend’s workplace will have to persuade 250 new and/or existing customers to add an average of this to their balance over the next two months. Same logic for back office staff, except that the number of customers they have to talk to is smaller. While this goal is not impossible to attain, the share difficulty involved in pushing the case for higher deposit numbers through 250 market women and bread sellers is an incentive to cut corners.
I share the section of my office with a richer (and financially wiser) colleague, who, incidentally, is also a mutual friend of my deposit-hungry visitor. He offered to give her N1m at 11.5% (a part of his portfolio is held with a discount house, where he earned 12% until Friday; treasury bill yields are trending down, so he expects a review of this rate). She left with a promise to get back to him on the acceptability of this rate. Because micro-finance bank customers fall into the sub-prime lending category, the industry’s loans are priced at a huge premium to the traditional fare. We expect, therefore that the response to the 11.5% rate on the offered N1m will be positive when she shows up today.
This leads to a very simple worry. A well-meant incentive may be inducing perverse behaviour. Marginal bank deposits feeding through to premium priced sub-prime lending is not necessarily bad. Reversal of this process (in developed economies) may have been the trigger for the last global financial and economic crisis. However, that was only because the extant regulatory and supervisory frameworks over-estimated the usefulness of the exotic risk management instruments touted then by the financial services sector. In the current case, by far the biggest worry is that the absence of a transparent relationship between the formal financial services sector and its micro-finance sub-segment may frustrate the effective discharge of the regulatory and supervisory function. This threat is the more so when a bank and a micro-finance institution are part of a financial holding company.
Ultimately, a diligent supervisor may well see to it that the firewalls inside the holding company never come down (or are otherwise breached). Still, inefficiencies in our system mean that such perverse (unintended) consequences will be its hallmark for a while yet.