Naira
Microfinance has been touted as the saviour of the poor and with success in some parts of south Asia is being exported to various poverty-stricken parts of the globe with modifications done by most countries to fit their system. Nigeria too has jumped on the microfinance bandwagon but has so far not been able achieve the expected targets. In order to understand the problem with microfinance in Nigeria it is useful to first of all understand why microfinance works in south asia.
I should point out the primary problems with lending to the poor which microfinance attempts to solve. Firstly the costs associated with lending to the poor are usually higher than lending to regular businesses. This is because of the small amounts of loans involved. Transaction costs and follow-up costs are a lot larger because they apply for almost every single small loan as opposed to transaction costs for larger regular loans. Secondly there is a degree of risk involved in lending in general. Collateral is usually used to protect the lender from defaults for regular loans but poor people usually do not have collateral. Microfinance deals with the problem of higher transaction costs by charging higher than market interest rates. Nothing irregular about that. However the key ingredient for succesful microfinance in asia however is how they deal with the risk.
One thing that is unique to south Asia is the caste system or in more general terms the kinship network. A system which is still practiced in most of their rural communities. Basically each individual belongs to a caste which is also associated with various jobs. The farmers, the manure collectors, the sweepers and so on. Loans are indirectly guaranteed by the caste with threat of withholding future loans to the caste if any of its members defaults. This creates a situation whereby each individual borrower has a big incentive to pay back loans or risk being outcasted which in most cases also results in being out of work. The lender also has the indirect guarantee that even in the event of a default by the borrower the caste would rather pay up on his or her behalf than risk being quarantined from future loans. This caste system therefore creates some kind of trust between the lender and borrower which reduces the risk of default even without collateral.
Indeed microfinance institutions are not the first to take advantage of this feature of asian society. Colonial money lenders also worked in a similar way to modern microfinance banks by charging higher interest rates and leveraging the caste system to reduce the risk associated with lending although they were not as loved as modern microfinance banks.
Back in Nigeria however the microfinance banks do tackle the higher transaction costs by charging higher than market interest rates however the second problem is still unsolved. There is no system, either natural or artificial that deals with the risk associated with lending without collateral. The caste system in south asia is not present in Nigeria. Indeed the closest thing I can think of is the Esusu and even that does not provide enough incentives for individual borrowers to ensure they pay back loans or for the group to bail them out.
In trying to figure out how to make Microfinance work in Nigeria dealing with the issue of risk and incentives not to default are critical. A direct copy of microfinance programs from asia will not necessarily work here
Regulated micro-finance banks don’t have the incentive to lift the poor out of poverty, because once their customers become rich, they will no longer be qualified to use micro-finance banks. I think micro-investing will be a better idea. Invest in tiny businesses owned by poor people. That gives you a stake in their success.