By Simeon Mpamugoh
LAPO Microfinance Bank (MfB) is a pro-poor financial institution committed to the empowerment of low-income Nigerians through creation of access to responsive financial services on a sustainable basis. The institution was founded as “Lift Above Poverty Organization” (LAPO), a non-profit entity. In this e-interview with the founder and former Managing Director of the bank, Dr. Godwin Ehigiamusoe, who established the bank while working as a rural co-operative officer revealed that microfinance arose from the exclusion of micro enterprises and their owners from mainstream financial systems in most nations. He added that four decades into the practice, there are evidences and testimonies of its impact on access to finance and poverty reduction. He speaks more on this and sundry issues in the microfinance banking sector. Excerpts
LAPO Microfinance Bank and its subsidiaries
LAPO Microfinance Bank is a premium regulated national bank with branches across the country. We are in 495 locations in Nigeria, and in 34 states. In 2010, LAPO MfB obtained the approval of the Central Bank of Nigeria (CBN) to operate as a state microfinance bank and in 2012, it was granted a national microfinance status. The bank currently delivers a range of financial services to micro-enterprises and their owners. It has pioneered a number of innovative products; these include affordable housing lending and clean energy lending. Lift Above Poverty Organisation (LAPO) has evolved a number of mutually institutions with focus on addressing the challenges associated with poverty. For instance, the LAPO Microfinance Bank addresses access to finance; GOXI Microfinance Insurance Company the first licensed microinsurance company in the country assists the low-income people and their micro and small enterprises to manage risks and the Benin Medical Care provide premium medical and diagnostic services.
LAPO’s current status
To a large extent yes, LAPO was founded in the late 1980, in Ogwashi-Uku in the present, Delta State. As a pro-poor not-for-profit entity, it was essentially in response to the fall out of the effects of the implementation of the Structural Adjustment Programme (SAP) in 1986. The key elements SAP included devaluation of the naira; gradual removal of subsidies and rationalization of workforce in the public sector. The cumulative effects of this led to a spike in the level of poverty. It has grown from N100 loan each to three members in my church in Ogwashi-Uku to what it is today. We have encountered a series of challenges as would be expected and we overcame many. Between 2001 and 2003 we successfully implemented a scaling -up plan and have won several recognitions. For instance, in 2006, we won the Grameen Foundation Award for Excellence in Microfinance. Its subsidiary, LAPO Microfinance Bank has consistently won Businessday’s Best Microfinance Bank since the award’s inception. The fulfilment for those who have been involved in Lift Above Poverty Organization (LAPO) comes from its influence and support of LAPO for the microfinance sector in Nigeria and indeed Africa; its health and social empowerment programmes and current promotion of micro-insurance.
Most of the NGOs operating as microfinance banks don’t have CBN license. Is it not time CBN apply some sanctions on them?
This is emerging as the greatest threat to the microfinance sector in Nigeria. Non Government Organizations cannot be prevented from involvement in micro-credit, but in most nations, (NGOs) are not allowed to open their doors to receive public deposits. They can do lending with owned funds. A situation where anyone without being regulated simply puts up a sign- post under whatever name and collects deposits from people is abnormal. Sooner or later, it is expected that regulators will address the practice.
How operators of microfinance banks have reduced poverty
True! Another name for microfinance is poverty lending. Microfinance arose from the fact that micro enterprises and their owners were excluded from mainstream financial systems in most nations. Four decades into the practice, there are evidence and testimonies of impact on access to finance and poverty reduction. For the first time, the poor are having access to institutional credit. Impacts of household nutrition and access to health care have also been reported. However, the impact of access to credit should be assessed within the context of other factors such as availability of enabling environment and core social services such as healthcare and education.
Inadequate skilled human capital has been said to be a major challenge to the development of the microfinance sector in Nigeria. How valid is this assertion?
True, the toughest earliest challenge was that of human capital deficit. Microfinance is not micro-banking; it essentially requires some specific skills. There was no pool of experienced microfinance practitioners for fledgling microfinance banks and institutions to draw from. In response, the Central Bank of Nigeria and the Nigerian Deposit Insurance Corporation of Nigeria and operators have over the years made concerted efforts to address this challenge and the results are showing. For LAPO there was huge investment in training and learning . It set up an LAPO Institute. Today, that institute, that is, LAPO Institute for Microfinance and Enterprise Development has been approved by the Federal Ministry of Education as a monotechnic. In collaboration with the National Board for Technical Education, Kaduna, LAPO developed the first microfinance curriculum for National Diploma. Poor social and physical infrastructures also affect microfinance banks like actors in other sectors of the economy.
How corruption, poor corporate governance and weak capitalisation inhibited operations of many MfBs
I believe it has been more of poor governance and weak capital base than corruption. These are common afflictions of many institutions and microfinance banks especially at the beginning were not immune to. The failure of early microfinance banks was attributed more, to poor governance; weak capitalization and ineffective management rather than to any other factor. The good news is that the sector is coming up strong given the interventions of the Central Bank of Nigeria in areas of minimum capitalisation requirement and certification programme.
Achieving even distribution of microfinance banks across Nigeria. It is true to a large extent. However, the current efforts to deepen financial inclusion will within a very short time ensure even presence of services providers. We currently have a crowd of lenders especially on-line lenders. Their reach will be limitless. The increasing number of microfinance banks with national status will ensure services across the country. LAPO Microfinance Bank for instance, has branches in the country with the only exception of Bornu and Yobe. Also some microfinance banks are looking towards the rural economy
Comparing MfBs’s interest rate with conventional banks
The issue of interest rate in microfinance is usually emotive. It is expected that interest rates by microfinance banks should be low and even lower than what the commercial banks offer. The reality however is the contrary. Let me explain why. First, it is expensive to deliver little bits of loans. A commercial bank could deliver a loan of N2 billion to one customer. It has one loan application to appraise and one account to monitor. If LAPO Microfinance is to deliver the same loan amount at an average of N100, 000 per borrower, it will have to deal with 20,000 borrowers. That is, 20,000 applications to appraise, 20,000 accounts to monitors, etc. This has an implication for cost. Also, since micro enterprises and their owners demand for more loans than deposits they can make, microfinance banks do not have enough deposits to meet the huge credit demand. It will have to borrow from commercial banks to on-lend to borrowers. These loans are borrowed from banks without concessionary interest rates.
In determining the rates to be charged by a microfinance bank, this high cost of operations and high cost of funds from commercial banks have to be taken into account. There is therefore no magic to ensure interest rates charged by microfinance banks to be lower than what the commercial banks charge. It is impossible. Two major interventions to ensure low-interest rates to the poor and microenterprises are: 1, the existence of second-tier institutions which lends to microfinance banks on concessionary rates, Microfinance Banks can therefore lend to their borrowers at lower interest rates. 2 linkage between commercial banks that have huge deposits (funds) without flexible structures and processes to reach micro-enterprises, and microfinance banks with tested flexible processes. Commercial banks channel funds to the poor and microenterprises through microfinance banks at low cost.
Assessing Nigeria’s MfB sector from inception
At inception, there were huge challenges arising from skill gap, low capital and poor governance. With the concerted efforts of all stakeholders- the regulators and operators, the sector has made huge progress. That LAPO Microfinance Bank issued a bond in 2019 and was oversubscribed is a testimony of maturity and strength of the sector. The future is even brighter given Nigeria’s huge number of exceptionally enterprising people.
The funding into the sector is on the increase. The CBN’s Micro, Small and Medium Enterprise Development Fund; lending interventions by Bank of Industry (BoI) and Development Bank of Nigeria (DBN) are examples of efforts to provide the much needed liquidity for the sector. Recently the operators in the sector through their association have capitalised a refinancing company to meet the liquidity needs of microfinance banks.
Managing credit culture discipline in MFB
The difference between a successful lending institution and an underperforming is portfolio management supported by excellent credit discipline. Unfortunately, most borrowers, even those at the bottom end of society do not take their obligation of loan repayment seriously. This has led to the collapse of many microfinance banks. The services of credit registry institutions are gradually assisting microfinance banks to prevent and manage default
Many believe that the objectives of MfBs have not been achieved.
I believe otherwise, perhaps because I am involved. Let us first consider access to finance for the poor. Before the rise of microfinance, ordinary people never had access to institutional credit; no bank accounts whether savings or current. They borrowed from money lenders and relatives. Now, progress has been made in expanding access to credit. LAPO since inception, first as a non-profit entity has delivered over a trillion naira. The common error is often made in assessment of impact of poverty-focused sectors such as the microfinance sector. The error is the tendency to apply the conventional evaluation tools which overlook peculiar factors. For instance, some traditional evaluation tools may ignore significant improvement in household nutrition of borrowers. Sending additional children .