An eye market risk in microfinance

When government identified microfinancing as an effective tool for driving its policy of financial empowerment of the poor and the low income population, it took appropriate steps to change the subsector, which was at the time more of a non-profit business. The objective was to enhance access of this category of people to finance. The Central Bank and the Nigerian Deposit Insurance Corporation immediately deployed what could be considered exemplary proactive strategies to actualize the objective. In addition to the licensing of new institutions, the central bank provided an enabling environment for existing community banks to convert to microfinance banks. It was a welcome relief to the mostly moribund community banks. Although the conversion was compulsory, the regulators did all that was necessary to minimize the difficulties of such conversion and subsequent transition.

The idea behind the effort of government to establish a vibrant microfinance industry was to fight the evident problem of mass poverty, which incidentally was still at its embryonic stages, compared to the current situation. There was an urgent need to develop financial products to advance the cause of financial inclusion, which we knew was very low in Nigeria. Other challenges that made the policy inevitable include the weakness of existing institutions in meeting market demand for microfinance, a huge unserved and underserved market ready for attention, the potential for employment generation in the informal sector, the need for creating avenues for small-time savers to build their savings, and the growing interest of the international community in microfinancing.

While this exercise of converting community banks to microfinance banks was successful, many of the microfinance institutions that were created out of the process lacked the technical and financial capacity to maximally benefit from their new and enhanced status. This weakness has been one of the many challenges facing the industry as a large number of players are still very weak, including those that joined the industry fresh as microfinance banks. Not only are they persisting in their financial weakness, they are also getting more technically weak. This has reflected in huge non-performing loans and the outright failure of many.

Since the introduction of the new regime of policy in microfinance in 2005, government has through the twin agencies of CBN and NDIC, continued to seek avenues to improve both technical and financial capacity in the sector. Many training sessions were organized for both staff and management, including directors, to rev up the capacity of the operators. This helped to break in the new comers and stabilize those converting from community banks.

The policy document launched in 2005, the international year of microcredit, has also been reviewed and updated in a bid to actualize government’s vision of an active, vibrant and economically relevant microfinance industry. Essentially, there has been considerable hand-holding, mentoring and formal training of operators in the sector and the industry has begun to achieve success. The evidence of this success can be seen in the performance of some players that have advanced their game to become relevant actors, not only at home but in the international scene of microfinancing. This has reflected in many of them signing viable partnership agreements with reputable financial institutions abroad.

The Nigerian environment has however changed substantially since the introduction of the comprehensive policy on microfinance. There is now a high level of market risk that has to be managed by operators. Market risk is the risk of potential loss to an institution due to unfavourable developments in the market environment. That kind of risk is currently on the loose in Nigeria. The situation is such that the achievements already recorded in the sector may now be threatened by the current economic and political situation in the country. The present crises in Nigeria have amplified the market risk facing financial institutions general but more particularly, microfinance institutions.

There are now too many unpredictable items in the menu of the risk managers in the country. This is more so relevant to managers of financial institutions. When we relate this to the fact that the capacity of the existing microfinance institutions to manage risk is very low then we see the challenge. I believe, for starters, there is need for closer attention to be paid to the operators in the industry by the regulators. And such attention should not be construed to mean that regulators should look out for scapegoats or soft targets to punish. It should rather be an opportunity for regulators to show their art of comprehensive regulatory effectiveness. Such effectiveness entails ability to help those that have life and still capable of surviving to have life, as it were, more abundantly. Regulatory prowess does not consist of the ability to punish but in the need to assist a young industry to successfully pass through a rough economic patch.

For the operators, one starting point to deal with market risk is to take a fresh look at both on and off balance sheet items that are more susceptible to adverse developments in the market. These include exchange rate, interest rate and even agricultural commodity prices. These variables have been substantially impacted by recent changes in the market place. So we are actually facing much more than market risk. Price risk is also important. The prices on which many transactions are based have been substantially impacted by the pervasive changes in the foreign exchange market and subsequent price regimes.

There is no better time to know the client and stay very close to them. Credit review should now be more frequent as the variables are changing more frequently. It is no longer a good strategy for operators to distance themselves from their clients. It is time to feel the pulse of the client more regularly and this is possible only when the operator is handy. Market risk management entails very close marking of the client. Follow the client and you follow your money. Lose track of the client and you invite a loan book crisis.

 

Emeka Osuji