Nigeria: How Cost of Funds Affects Interest Rates in Microfinance Banks

Mar 2009
Lagos, Nigeria, March, 23 2009 - High interest rate has been a major contention in MFBs, Lanre Bamkole, managing director, Lifegate Microfinance Bank Limited, in this interview with HOPE MOSES-ASHIKE discloses that more funds can bring down interest rates and loan tenure extension.

Interest rate

Our interest rates are currently five to six  percent per month, depending on the particular product. It may be slightly lower or higher. Invariably, there are some challenges we have in microfinance sector. Funding is a major issue. So, the more funds you have, the more you can extend the tenure of the loan you give, as well as reduce the interest rate. What we need to understand is that microfinance is a very cost intensive marketing aspect because we go to customers to collect proceeds, unlike the conventional banks. That brings added cost to us. And what it will cost you to chase a loan of N1 will be the same it would cost you to chase a loan of N1 million.

Government has an important role to play and I am happy that various governments, particularly, the state governments are beginning to put aside certain funds for microfinance because we are reaching the grassroots in a conventional manner, not in adhoc or undocumented manner.

Global financial crises

We are impacted by what occurs around the world, but depending on the nature of your business. It may be significant or less.

In our own case, we are not looking at funding from abroad. You can see that people are looking for where they can get a return on their investment. Nigeria has actually been identified as one of those countries with thriving microfinance banks. We actually see that in the last quarter of last year and now, how people are diverting their funds to places like Nigeria as investment, which could actually translate into opportunity for the microfinance sector. But of course, you need to know the cost of those loans because they are denominated in foreign currency.

So the basic concern will be a stable exchange rate for planning. To that extent, it will definitely have effect on us because we have the naira deteriorating sharply. So we should be prepared to brace up and look at more innovative ways of reaching our people in a way they want.

We won’t say that commercial banks are not lending, what happens is that, they put on the breaks.

Achieving objectives of MFBs

We are working towards achieving the objectives and I think we are beginning to see results. Out of over 800 microfinance banks, 150 are in Lagos. There is a concentration in Lagos and other key markets. It is not to say that the states that do not have the presence of microfinance banks will not have. What happens is that CBN has liberalised the terrain, open it to entrepreneurs, so entrepreneurs will go out of their way to set up microfinance banks where they want it to be. So, it is only natural that first of all, you will see an apparent striving in the major commercial centers. You can see that as the microfinance banks grow their capacity, they are branching out to states, which are actually like green terrain for them. So long as the beneficiaries are poor and active, microfinance will strive, it is just a matter of time before it trickles down. And the rate of trickling will depend on the approach.

Fears that MFBs may crash

We should look at where we are coming from. We are coming from the history of community bank where there was some mismanagement and financial impropriety and before the microfinance banks were set up by the government in conjunction with the ministry of finance and the CBN, there was an articulation of framework for the operations of microfinance banks, so there is actually a guideline on microfinance banks and I must say there is tremendous level of supervision being done by the CBN. And there is also the capacity building programmes organized by various parties in order to educate the staff of microfinance banks so that they are better positioned to meet the challenges. I will not entertain those fears, if at all we will have that, it will be of a negligible nature and not of a major concern, because largely, this is a regulated industry and there are strict guidelines.  


I can tell you an average customer of a microfinance bank wants to walk in and demand for loan immediately. First of all, we want to marry expectations with the reality, educate people because there are certain guidelines before you can give out a credit. It is not necessarily that you don’t have money but you want to make sure it is credible.

Also, some of the economically active poor do not keep records. So, that becomes a challenge for them to be able to give you a history of themselves. On our part, we need to educate some of them on minor bookkeeping to brush them up and address issues of hanky-panky by their employees.

Part of the challenges is that, in some instances, you may see that they are here today, tomorrow, they are gone, so you need to go an extra mile to know your customer. Compliance and knowing your customer is an important part of microfinance business. Mobilization of funds is also a key. Savings culture needs to be enhanced. But the savings culture is a very lower rate than the borrowing culture, so we need to balance the two.

That is why I say government needs to come in to fund and put a partial subsidy on the sector, as a preferential sector key to our economic growth such that the rates can come down even more affordable to these people and reach a greater populace, who since they are economically active, will be able to engage more people at work and we have less people roaming the streets as idle hands.

Survival strategy

Well, sustainability is important for us. As a microfinance bank, we are here to empower the economically active poor, make a difference in their lives, turn their dreams into reality and ultimately provide economic growth. We also have at the back of our mind that there is profitability aim as well.

Our strategy of course, is to make sure we have the correct human capital, the correct products and we have the correct marketing team and we are constantly monitoring our position and we are striving to excel.

Source : Business Day

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