The problems associated with borrowing from microfinance banks (MFBs) by individuals and the cost of operations of the banks will soon be a thing of the past with the coming on board of credit bureaux in the Nigerian financial institutions. Since MFBs grant loan to financially active poor without collateral, it is possible for individuals who consider themselves smart to take loan from different banks with different information.
This was typical of what led to the first banking distress in the early nineties, which witnessed the collapse of some banks.
Mercifully, this ugly incident may not have a second chance in both commercial and microfinance bank industry with the credit bureaux.
Credit bureaux is a company that engages in collation of data on individual credibility rating, which is to be shared with financial institutions who might want to lend money to them as borrowers, or to organisation who also might want to employ them.
The Central Bank of Nigeria (CBN) recently granted the first Approval-in Principle (AIP) to XDS Credit Bureaux Limited, to operate as the first watchdog on the nation’s borrowers.
Some microfinance banks operators see this as a welcome development, maintaining that it will add value to the risk management of MFBs.
According to Segun Adaju, managing director and chief executive officer, GS Microfinance Bank Limited, Lagos , the licensing of credit bureaux by CBN is a welcome development that will no doubt add value to the financial services industry, particularly microfinance banks.
Adaju says it will reduce the incidence of multiple borrowings by some clients who exploit the loophole of lack of credit records to take several loans from different microfinance banks.
As microfinance banks rely more on cash-flow potentials of businesses and character of borrowers in granting credit, Adaju maintained it will go a long way in helping to ascertain the ‘character’ component of micro-loan appraisal, and should also reduce the cost of operations of MFBs invariably.
In the same manner, Victor Mfon, director of business and development, Olive Microfinance Bank Limited, Lagos , commends the CBN for a practical demonstration of its commitment to checkmating professional borrowers in the country, adding that it will go a long way in improving the quality of risk asset.
“We commend Central Bank for approving Credit Bureaux for the financial service industry. It is very timely at this stage of our development to have the credit bureaux.
Sharing of more information will actually lead to faster credit decision taking by subscribers. It will also help in improving the quality of risk asset. And loan defaulters will be easily picked up,” he points out. The only challenge he sees with the bureaux is the cost of providing the service to the microfinance banks.
Responding to the impact of credit bureaux on microfinance banks, Lanre Bamkole, managing director, Lifegate Microfinance Bank Limited, Lagos, notes that the role of a Credit Bureau is of particular importance to the microfinance banks as keen competition has led to borrowers, maintaining relationships with several microfinance banks and there is the tendency to borrow cumulatively beyond their capacity.
The microfinance banking industry is relatively young with scanty data available to aid credit history assessment of borrowers.
Data provision from Credit Bureaux he stressed would enable microfinance banks improve their credit risks assessment, guard against overexposure to clients and consequently improve portfolio quality. There would be attendant reduction in loan monitoring and related operational costs. This he adds would also mean that money available for lending and hitherto utilised via overexposure can be redirected to other credible borrowers.
“However, the extent to which the Credit Bureaux would be useful to microfinance banks would be limited by the data collation methods employed by the Credit Bureaux and extent to which the lenders share information on loans. The data coverage extent is important as its usefulness lies in its covering the typical clientele of the microfinance banks.”
The microfinance policy framework states that due to the peculiar characteristics of microfinance practice, a credit reference bureau, which shall provide information on microfinance clients and aid decision making, is desirable. In this regard, the policy continued in the present Credit Risk Management System in the CBN shall be expanded to serve the needs of the microfinance sector.