Bello: Microfinance Banks Need Stronger Regulation for Better Performance

 Managing Director/CEO, Bosak Microfinance Bank Limited, Kola Bello, spoke on the bank’s operations, in this interview with Goddy Egene. Excerpts:

As an operator what can be done in terms of regulations and general policies to help improve the microfinance sector?
Let me first talk about regulation, the Central Bank of Nigeria (CBN) has really improved but they need to further improve their capacity as I have come across so many things not addressed by regulations that can help improve the sub-sector. Talking specifically about Lagos State Government, I will like to commend the current administration because this is the first time I have seen a programme like the Lagos State Employment Trust Fund where the state is collaborating with financial institutions to provide capital to those who don’t have access to raising capital for their businesses.

The rate charged is even better than what you get in some western economies, so for me the Lagos State Government is doing a lot in the microfinance sub-sector. I just want to advise that they should not only be interested in funding clients, but they should also work with the microfinance institutions to grow their capacity, offer grants for specific purpose to microfinance banks they are partnering with because if they are well equipped, they will deliver on the mandate of Lagos State.

Tell us about Bosak Microfinance Bank?
Bosak Microfinance Bank Limited commenced operation in 2010 and the bank has been an impactful organisation in micro lending activities especially in Lagos State where it has a licence from the CBN to operate. The unique thing about the organisation is that we continually seek to understand the needs of our client’s and appropriate products to meet these needs. I say this because we are in a market where everyone does almost the same thing; but we have taken it to the next level to understand what the active poor person needs and then design products to meet these needs.

And talking about our products, we have products that are designed to meet the credit need of clients and product that helps their desire to save surplus liquidity. Let me talk about the credit products first – we have our group loan because majorly our loans are group based and that is meant to address the working capital needs of traders. Beyond the group loan, individuals in the group get to benefit from one form of loan or the other, for instance, they can borrow to expand their productive asset and they can buy assets. For example, some people do not understand basic financial management, all they know is that there is money and they can use their working capital to acquire assets and then they end up needing working capital again. So, what we do is that we don’t allow them to do that, we give them the opportunity to borrow from their groups to purchase fixed assets that they require in addition to their working capital.

We also noticed that within the groups, some have higher loan needs and what we do is that we also give them the opportunity to borrow individually within the group – something sizeable that their cash flow can support. Beyond that, we also have a product in the pipeline which will address the need for them to pay their children’s school fees because the poor usually dip their hands into their working capital to pay school fees of their children except for those whose husband’s pay the fees. Hence, the need for this new product to aid them pay from loans and repay in instalment. So, that is essentially what we do as we also have other products we hope to unveil soon to address other areas of need. We know that the poor in Nigeria save through other means such as daily collectors that isn’t safe as the money can be lost due to death of the collector or relocation.

We have introduced a savings product that will help these individuals save weekly as opposed to daily. In addition, we go there to get the money to be saved just as the daily collectors known as “alajoojojumo” also do. We also have another product that will help the poor get access to health facilities. We have what is called “Bosak Health Insurance Savings”. What that means is that as you pay back after borrowing, you have the opportunity to pay for health insurance premium for as low as N6,000 per annum which is N500 per month. So the structure is that as you repay your loan, you only add N125 to your weekly loan repayment instalment. The interesting thing is that you don’t need to pay the N6,000 before getting healthcare because it is “pay as you go”.

So how has the journey been since you started?
I will say that it is not as easy as it sounds. It is a journey that evolved overtime. A lot of people including our directors were scared that we would go into extinction. We realised that what works for the poor is something that is specialised, so we studied it and designed products to solve these needs. We also realised we didn’t have the capacity to serve the elite as we focused on those at the bottom of the pyramid which is the game changer for us.

How is Bosak Microfinance gearing up to the changes about to be introduced by CBN in relation to capital base for the sub-sector?
As the sectors of the economy grow and emerge, it is important to strengthen the position of operators. It is a good thing that CBN is looking to increase the capital base of microfinance banks which will result in stronger banks and better ability to absorb risks etc. One thing I will like to mention is that a strong capital base is not an assurance that the business will do well.

This has to be supported by tighter regulations, corporate governance rules, capacity and know-how of directors of microfinance banks needs to improve as some do not know what they are doing in some cases. My point is, the increase in capital base will help the banks but that alone is not sufficient. Bosak is aware of this initiative of CBN and we are also raising capital internally and rather than distribute profit, we save and at the same time attract investors to invest in the bank’s equity and we are getting positive response. We are quite confident that when the CBN comes up with this regulation, we would be ready.

How will Bosak tackle the issue of non-performing loans which affects a lot of microfinance banks?
Non-performing loan is the biggest risk every financial institution is exposed to because for most microfinance institutions, you will see that 80 per cent of their assets is in loans and if they don’t have healthy loan portfolios, the bank is as good as gone. If you recall, I said we serve those at the bottom of the pyramid, especially women who make up about 90 per cent of this category and they pay back their loans. This is because the product serves their needs. The interesting thing is that when the client sees us as partners, they will be encouraged to repay so they can get even more loans. There are also other incentives which time wouldn’t permit me to mention.

Aside non-performing loans, what other challenges do microfinance banks face?
Microfinance is alien to Nigerians. I say this because in some countries, it has been working for more than 50 years. But if you recall, the regulatory framework was formulated in 2005 which is about 12 or 13 years ago. Capacity is a major issue, so the impact on the microfinance institution is to invest majorly in capacity building and trainings to expose the people to international best practice. The second issue is infrastructure. A microfinance bank with over 30 branches nationwide will need to generate power in each of these locations, so infrastructure is essential. Compare a microfinance bank here and elsewhere where things work, you will see that your cost is higher. These two are among the many challenges being faced.

What distinguishes Bosak from its competitors and where do you see the bank in the next five years?
There are so many microfinance banks, but our competitors are few. Most of them do not serve the same market, some are competing with commercial banks but don’t have the capacity to do so. What distinguishes us from our competitors is that our products are tailored to meet the needs of our clients. We also ensure that we are partners with our clients, so we work towards improving our quality of service every day. On our projections, the bank has a road map that states that it should be a national bank in the next five years. We are a major player in Lagos state, but we are looking at being a national player. I usually tell people that it doesn’t matter where you are now or where your competitors are; it is all about your vision