With more than half of the adult population unable to access retail banking services, the introduction of microfinance banking by the Central Bank of Nigeria (CBN) was welcomed by Nigeria’s development partners and the general populace.
However, this laudable concept was soon caught in the thorns of an inefficient Nigerian economic system and hijacked by money bags, having failed to capture its target market – ‘the poor’.
Tunde Lemo, the then deputy governor of the Central Bank, confirmed last year that some of these microfinance banks are simply ostentatious, with some of them having holidays abroad as part of their executive remuneration.
“With a package like this, how do such banks hope to reach out to those not using any bank and alleviate poverty, which are the main reasons for setting them up?,” Mr. Lemo had queried.
Within 3 years of operation, 90% of Nigeria’s Microfinance banks folded up. The Central Bank insists that every microfinance bank should have a minimum reserve of N20 million (about $130,000), while the National Deposit Insurance Corporation (NDIC) insures each depositor for a maximum of N100, 000 ($670), regardless of the amount of money invested.
Experts have identified the problems of microfinance banks in Nigeria to be similar to those of commercial banks. Some of these include severe under capitalization, extremely high levels of non-performing loans, insider lending, lack of transparency, inexperience and supervision, meager capital base, loss of customers’ confidence, and most significantly is the high overhead cost.
They have also expressed fears that the sector might collapse soon if the operators did not change their strategy.
It is in recognition of the unique challenge that Microfinance banking has faced in Nigeria that this article decided to investigate the functioning of a traditional model rooted in the Nigerian system.
In Nigeria’s multicultural society, deeply embedded within its shadow private sector, there exists a micro credit scheme little known to people outside the shores of Nigeria.
This informal banking and micro credit scheme has thrived and is even practiced beyond the national boarders of Nigeria (as far as Ghana).
An attempt will also be made to dissect the anatomy for the education of the uninformed that are yet to be acquainted with the knowledge and the workings of such a scheme.
It is also intended to investigate the possibilities of extending such a scheme beyond its current rudimentary setup in order to enhance its efficiency as a more viable strategy at enhancing the economic upliftment of the next billion still stuck at the bottom of the economic and social pyramid.
In our multi ethnic environment, it is know by different monikers among the various ethnic groups that make up the population of Nigeria, among the Yoruba, it is called “Ajo”, and among the Ibo (even in Ghana) it goes by the name “Susu” .
These two names serve as the most common names by which it is known, however, in the English language, it is simply known as “Thrift collection”. Let us for simplicity use the word Ajo to identify the scheme.
The anatomy of Ajo:
Ajo is a simple thrift collection based informal financial service, wherein the thrift collector/operator goes about to collect small deposits of funds from the clients on a daily basis. Ajo collectors are one of the oldest financial groups in Africa. Even though the origin of Ajo is quite murky at this time.
Based largely in Nigeria, they provide (for a small fee) an informal means for low income Nigerians to securely save and access their own money, and gain limited access to credit, a form of microfinance. Money looked after for an individual by an Ajo collector is held in accounts in formal banking sector.
The deposits collected from the client is determined from the beginning of each new monthly cycle by the client and sustained at the predetermined rate till the end of that particular cycle, it is at the discretion of the client to decide how much he/she can deposit on a daily basis.
The contribution is fixed around a 31 day calendar per month and at the completion of each monthly cycle, the depositor retrieves the funds minus a service charge equivalent to one day deposit which is usually for the first day deposited.
For a client who chooses to make a daily contribution of $1, at the end of 31 days, he is entitled to get back $30 from the Ajo operator, $1 fee is retained for the services of the operator.
A unique feature of the scheme is the loan apparatus which is technically interest free and has a nearly non-existent default repayment rate when compared with the very high loan defaults associated with the contemporary microfinance banking system we have in operation today in Nigeria.
Features of Ajo:
· The fundamental foundation for the Ajo business is built upon Trust and Relationship
· It is not recognised or regulated by government, there is virtually no form of institutional oversight body supervising thrift collection operators, it practically operates in the shadows of Nigeria’s financial services regulatory institutions (The Central Bank of Nigeria, Nigeria Deposit Insurance Corporation etc. are not in the know of the activities of these local financial services.
· The only form of regulation or supervision available in the domain of the thrift collector operators is usually of the informal trade unions (which serve to regulate the activities of members who volunteer to be a part of the unions, the activities of these unions are usually unorthodox, anti-competitive and pose unpleasant barriers to free market entry by new entrants)
· Majority of their clientele base is of the low income class drawn from the base of the pyramid.
· The fixed daily contribution which is required to be maintained at that rate till the end of the monthly cycle is determined at the discretion of the client.
· To start a thrift collection business, an intending Ajo operator usually requires minimal funding (start up capital required is usually of the logistics and administrative type) to enter into this line of business – high dose of passion and commitment usually serves as more strategic incentive to convince prospective clients into patronage than financial power.
· The business requires minimal overhead/operational cost for day to day business activities, because they avoid many of the excessive costs already being incurred by the modern microfinance banks, which has become their major albatross.
· The Ajo collection business in its purest form is not financed or operated using bank credit facilities.
· There is higher confidence and trust among Nigerians at the BoP in the Ajo collector operator than they have in the modern microfinance banks (from ethnographic surveys and focus groups interviews conducted)
· It serves as a reliable and constants source of micro credit for people at the BoP
· An Ajo operator usually operates on a micro-clientele base of usually around 50 to 100 clients per operator, this small scale enables them to effectively relate and supervise on an intimate base with clients rather than what is obtained in microfinance banking sectors (one on one relationship between operator and client)
· Most operators have been in business for considerable amount of time ranging from 5 years to over 25 years (from focus group interviews organized), in some cases, there has even been generational change as was with the case of one respondent who actually inherited the business from the mother after she passed away.
· Low staffing, at most, most Ajo operators employ 2 to 3 additional staffs who usually are family members, they are remunerated by cash, vocational training and are allowed to work conveniently for about 2 to 3 hours daily, this enables them keep other jobs, attend their vocational training etc. this helps keep staff cost low.
Nature of loans:
o Loans are usually for longer term clients for whom the operator has become reasonably familiar with
o The time frame for qualification for the loans usually is 1 to 3 years depending on several intrinsic factors.
o The loans offered are non collateral based.
o Non-repayment/default for loans is rare and in some cases loans might be rescheduled but they are never underwritten or declared as bad loans,
o The amounts loaned varies with each client, it does not exceed the monthly contribution capacity of individual clients, e.g. for a $30 per month client, he/she is entitled to $30 loan to be repaid in one month or rescheduled to the next month in a worst case scenario, whereas for a $300 per month client, he/she is also entitled to $300 per month on unified repayment terms basis for all clients. In essence, the loans made out to clients do not exceed the monthly contribution capacity of the client in question.
o The loan is usually advanced as an upfront for a new month, and then the client is required to commence with a daily repayment cycle for which the client is expected to complete repayment of the loan by the end of the month.
o The loan is technically interest free, since the Ajo operator only takes the 1 day service fee attached to the daily contribution, no extra charge is attached to loans offered to clients.
Challenges:
· Improper book keeping and accounting structure poses a major challenge
· Skepticism about eventual government interference, which is often attached to the fact that governance in this part of the world is more often than not a rent seeking enterprise and the fear that possible imposition of taxes might actually force operators to review their business models which might eventually lead to higher costs to the clients.
· The informal unions usually impose anti competitive rules, they also restrict domain of operation for Ajo operators, and they create artificial barriers to market entry for prospective entrants.
· The death of an operator in some cases may literally translate to the end of the business, this is however synonymous with most single ownership businesses run on a subsistent scale.
· The possibility of operators actually eloping with the funds of the clients, although rarely reported among clients interviewed also creates trust issues; this was what primarily led to the formation of the trade unions to check the activities of Ajo operators.
The next part of this paper intends to compare the Ajo scheme to the modern microfinance banking (MFB) as it was introduced in Nigeria.
The Ajo scheme has operator in the shadows of the formal banking system for long. It has recorded significant success, at low operation cost and has displayed higher efficiency in getting much needed micro-credit to those who badly require it.
It has also shown much resilience as there has been a minimal default rate among borrowers.
We intend to compare Ajo to MFB in Nigeria and drawn upon the strength and weakness thereof to propose a new model for micro credit service offering the unbanked and the underserved at the BoP in Nigeria.
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