Dr. Kazeem Olanrewaju is the Managing Director/Chief Executive Officer (MD/CEO) of Baobab Microfinance Bank Limited. In this interview, he gives an overview of the microfinance sub-sector in Nigeria in the past one decade, the impact of the Central Bank of Nigeria (CBN) loan directive to commercial banks on Microfinance Banks (MFBs), among other issues.
Can you give us an overview of the microfinance sub-sector in Nigeria in the last decade?
It was a concept that started in 2005 with specific objectives. Today generally in the industry, I will say some of the objectives have been achieved, some have not, but overall, there has been impact from the microfinance sub-sector given the number of customers today and the risk assets that have been created by them all.
Same goes for deposit. We’ve discovered that financial inclusion is also enhanced by many MFBs that we have today. Talking about the ease of access to finance, this is one of the areas the MFBs have played a lot of roles. People who will never have dreamt of getting any support from the bank, today, they can. The roadside vulcanisers and food vendors all can get one form of financial service from the bank or the other. About 15 years ago, this was not possible.
Coming home to Baobab MFB, we were one of the earlier callers in Kaduna in 2009. It was a ground, I’m sure, not so many of the MFBs would like to start from. We know that we have more than one-third of the MFBs in Nigeria all concentrated in Lagos. In fact, from data, we have over 200 MFBs out of over 800 in Lagos.
So, we started in Kaduna, and the impact today is enormous as one can see by way of the customers we have there, the support we granted and the number of people that we have employed. Today, we have over six branches in Kaduna alone. This is also worthy of note. We may not be there yet, but we are on our way to achieving the reasons why this sub-sector is in existence.
Particularly in Baobab, we take the three important cardinal points very seriously: social mission, environmental mission (under which we have about 21 items that we will never lend or do business with because we believe they have negative impact on the society and the environment) and lastly the financial mission, to make sure that we are sustainable.
CBN recently gave a directive to commercial banks to give loans, how do you see this policy affecting MFBs?
For instance, in Baobab, our deposit is about N4bn, our loan book is about N10bn, which means we lend more than the deposit we have taken. We all lend money we borrow from other people. What we have in the commercial banks is the opposite; they take a lot of deposits and their activities in the area of lending or creating credit is not as much as the deposit. So, what the CBN is doing is to correct that imbalance. If you can take money from the public as deposit, then you should be able to lend to the public. So, this is what the concept is about. Now that commercial banks are scrambling everywhere to get people and different sectors to take loans, and because of the competition in that space, the pricing of loans is coming down; which is good for the economy. Maybe, the effect may be negative, but overall for the whole economy, I think it is good. It is also worthy of note that some of the local banks too are looking for MFBs that are viable so that they can on-lend the funds commercial banks can give. So, it also creates opportunity for the MFBs to get some funding from the commercial banks. As such, it has both positive and negative impacts, but overall, if the policy is pursued and achieved, it will help the economy, especially the productive sector which is starved of funds.
Of course, some of them are coming into the MFBs space to compete for our clients because some of the commercial banks lend as little as N100,000 and even N20,000. No doubt, there is competition in the area of them coming down to the space where the MFBs are playing; but I think it is very good for competition which will bring about innovations and help everybody to work better. In the short-run, it looks like competition and may be negative, but in the long-run, it’s going to help the economy. If you have an economy that is growing and vibrant, the effect over all on the business in the country is positive.
What is your take on the recent VAT rate increase to 7.5 per cent by the Federal Government?
VAT hike will impact lives and businesses negatively in the short-run, while in the long-run, the proceeds can be used to address infrastructure. But in a corrupt system, the leakage will limit the positive impact.
I, therefore, suggest that time for notice should be long enough, and I hope that will happen. The other way is to extend the tax net to cover everything or every consumption without increasing the rate.
What sector would you say has benefitted most from your bank in the last 10 years?
Our business is divided into three: micro, micro-plus and SMEs. In terms of number of persons that have benefitted most, it’s the micro; so, in our books today, we have about 70 per cent. For instance, we have extended loans to over 100,000 since inception, so if you take 70 per cent, it means over 70,000 of our customers do micro, that is, people who are doing less than N500,000 have benefitted from our loan. But when it comes to volume, that is, the amount of loan that has been granted, the SMEs got more loans than the micro. So, today, for the SMEs, it is about 60 per cent, which means, for every N100 loan we are giving, N60 is going to SME business owners while the remaining N40 goes to the micro, but in terms of number, micro takes the day; meaning that only 30 per cent of our customers are SMEs, but those 30 per cent get very high loans. Our loans range from N20,000 to N50m.
How is Baobab’s housing loan faring?
We started the housing loan in 2017. I can tell you that it’s one of the best products we have today as almost everyone who took this loan has repaid. We did the pilot in about three branches, but now, we have extended it to all our branches, and the demand is quite huge.
In terms of loan book, we have done close to half a billion naira on housing. It’s divided into four categories: buying of land, building of house, renovation of house and equipping of house. The four areas are covered under the housing scheme, and it is working very well. The maximum we give today is N5m and the minimum is N100,000 because our intention is to concentrate on micro-housing, and it is called incremental loan, meaning that you start from one level to another. For instance, you can take the loan to buy the land, repay to a certain extent, you take another loan to build and then you repay to a certain extent, then you equip. So the pressure is not like giving a big loan and the person running into trouble.
To what extent has the agricultural sector benefited from your products?
Direct investment in agricultural production is limited, except that we have some poultries and few farmers who are accessing our loans. We recently sent our staff to Tunisia to understudy what they are doing there because we have an affiliate that is doing very well there. The whole idea is that when they come back, we should be able to push agric lending up to 10 to 20 per cent of our loan book; meaning that we should be doing close to N3bn for agriculture. Today, we are doing less than N1bn and most of them are into agric processing and a few are into production like poultry and animal husbandry. With the new ideas, we will have a specialist in that area and so we can lend to agric production for crops and animals as the case may be.
How do you cope with loan defaulters and how will the recent CBN policy on loan defaulters help the system?
Definitely, when CBN makes that kind of policy, it sends a signal to the system that the days of defaulting banks and running from one bank to the other will soon be over. It is a very clear message to the market. Just like the CBN is asking banks to increase their lending to the economy, it is also saying to the players to plan very well to pay back loans accessed. On a general note, it is a good signal to the economy, and I think the CBN should be commended for that. The implementation is another thing, but I think the first has been done by raising the consciousness in the economy; to tell people that they need to repay when they take loan.
Coming home to Baobab, from our historical data on default rate, for every N100 we give out, the default rate is less than N3. Although the intention is to be able to achieve 100 per cent repayment, we are doing over 90 per cent. So the combination of the regulators and some players in the economy like what is happening in Lagos State, where we have small debt recovery process, where you file a case on anything less than N5m and you get judgement within 90 days while you can enforce the judgement and get your repayment. This has helped to drive down the rate of default. No doubt, we are battling with some customers whose intention from inception had been to defraud the bank, but majority of our customers pay back their loans as at when due. We have some customers that have done more than 10 cycles of loan with us and they have been repaying.
I also need to emphasise that it depends on how the institution takes the issue of loan and credit management. Our staff are trained, the conditions are very straight forward, the evaluation is rigorous, even though it takes us less than five days to do our disbursement, but as a customer, you are taken through all that you need to do to make sure that you run a successful business and repay your principal and interest. So, the training we give to our staff on evaluation has also helped in minimising the default we have in the system. I must also tell you that we have a lot of rejections. For instance, for any customer that we can see any iota of dishonesty with the documents or statements given to us, we don’t do business with such person. When we came to Lagos, the rejection rate was about 32 per cent, meaning that for every 100 customers walking into our premises asking for loan, 68 per cent of them get.