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Micro Finance: Between profits and social impact
The December 2005 policy statement establishing microfinance banks in Nigeria was laudable and well-intentioned, and still is. There are now over 800 microfinance banks (MFBs) in Nigeria today. The microfinance industry is fast becoming the 'next frontier' for the financial services industry. Universal banks are creating microfinance units on their existing platforms while independent operators in urban centres are erecting glass edifices in high-end locations to establish presence. In fact, there is an ongoing initiative by a group of financial operators (including some big MFBs) to establish an 'inter-bank' market for the microfinance industry.

We caution that practitioners and regulators need to be reminded that the microfinance industry is not the typical business enterprise - it is a double-pronged platform that must, of necessity, equally emphasize profitability and social impact. Otherwise, the end result is going to be further alienation and resource-deprivation of the poor that could lead to revulsion against the industry.

The industry should view microfinance not as a product line but a platform that leverages their relationships with the poor to develop and distribute an array of products and services - financial and non-financial! It is important that MFBs discover ways to integrate their financial offerings with non-financial services for the poor like education, telecommunication, healthcare, shelter and infrastructure, otherwise, profitability will only be short term and social impact will be negligible.

The microfinance industry presently charges high interest rates of between 5 percent and 10 percent per month which can partly be justified because servicing small loans is inherently a costly business. This is further exacerbated where loans are being made in rural and remote locations. However, the industry must recognise the real cost exacted by high interest rates - unacceptably high dropout rates. MFBs are well advised to develop high-volume low-margin business models like that practiced by arguably the premier microfinance organisation in the world - Grameen Bank. It is not enough to copy best practices from Grameen Bank, it is equally important to adopt its passionate disposition towards alleviating the pains of the poor.

The sophisticated office structures sprouting up across urban centres around the country with the accompanying fleet of executive cars, bank level personnel costs (for the bank-owned MFBs) should be a source of worry for the industry as well as investors and regulators. Forward looking MFBs should look towards allowing their customers purchase shares in them, and set aside a reasonable proportion of their profits for Corporate Social Responsibility Projects like the provision of scholarships and the provision of amenities.

Few, if any, MFBs have developed any metrics to measure their poverty alleviation impact on their customers and this, to say the least, is short sighted. Establishment of effective metrics and standards for assessing social impact will impact positively on the profitability of MFBs by assuring a financially healthy customer base and also help focus innovation efforts on lagging segments of their customer base. The greater the positive social impact, the greater the financial activities of the customers, resulting in even greater profitability and social impact in an ever expanding loop of increasing social and financial returns to both MFBs and the poor.

Investors (especially the international variety) need to know whether an MFB is actively and effectively working to alleviate poverty and private microfinance rating agencies as prescribed by the CBN are a step in the right direction. Such agencies must rate MFBs on the twin criteria of social impact and financial performance and only those organisations with such dual basis third-party certification should be allowed to access subsidised capital, whether in form of the Microfinance Development Fund or as grants or other inflows from international anti-poverty resource providers. Such certification will ensure that the industry does a great job of pursuing and delivering much needed social returns.

On a purely commercial basis, the long term sustainability of the Microfinance business model requires substantial political and regulatory support. This support can only be gained, retained and expanded if MFBs don't fleece their customers, limit staff benefits and corporate largesse and redistribute some of their profits to the poor clients who generate them. Only then are they more likely to win political and regulatory support.

Whilst Microfinance will not by itself put "poverty in a museum," a forward looking mind set, innovative strategies and a fair and realistic operational mechanism will go a long way to attaining the critical poverty-alleviation goal of microfinance.
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