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Non-performing loans in MFBs due to bad approach

16 August 2013, 09:30

Abuja - A microfinance expert has said that most micro finance banks (MFBs) in the country has huge bad debt because they operate as commercial banks.

Jero Omare-Ogah, the Chief Operating Officer, Fortis MFB, said this on Thursday in Abuja at the bank’s monthly ‘Save and Win promo’.

He said that operating an MFB as a commercial bank was a bad strategy.

“Most of the people who run MFBs in Nigeria have managed commercial banking previously, so they tend to apply the same method of commercial banking to micro financing, and that doesn’t work.”

“In microfinance, the way you monitor loans is quite different from that of commercial banking and when you apply that, it becomes quite an issue.”

“One thing we have observed with portfolios at risk is that installment payments are key because when one customer misses one installment, it is seen that the entire portfolio is at risk.”

“So, what we in Fortis practise as a bank is portfolio at risk methodology,” he said.

Omare-Ogah said that since every installment of a customer in paying back loans was important, Fortis MFB had put mechanisms in place to ensure that no installment went unpaid.

He said that it entailed informing the customers before due date of payment, following up on them regularly, and ‘if for any reason they missed payment, we go the very next day to find out what the issues are.’

“It’s not enough to give people funds and go to sleep. You must carry out a lot of checks, like is the amount they are asking for sufficient to do what they are asking for, is it too much?”

“This is important because if you don’t carry out these checks they could begin to divert the funds given to them.”
“So, the best strategy is to get involved in their lives.”

“You must ask them what the challenges are, and when payments will come. You must really follow up.”

Omare-Ogah said that another way to checkmate bad loans was through choosing the right social class to lend to.

“Microfinance banks should lend to the active poor. There is the belief that the active poor do not pay back loans, but in the real sense they always pay.”

“It is the bigger men that usually have issues.”

“So, if you leave your target market and focus on those that are not your target market like the big companies and big firms, you begin to have issues,” he said.

Omare-Ogah said also that in spite of all these, CBN was trying to reduce the non-performing loans through training of MFBs on enterprise risk managements and through frequent checks on their books.

A N100, 000 cash award, motor cycle, and electronics such as plasma television sets, micro wave ovens, printers and washing machines were given to customers at the function.

The News Agency of Nigeria, (NAN) recalls that the CBN had put the total non-performing loans held by microfinance banks as at the end of December 2012 at 61.9 percent of their total loan portfolio.

This development was worrisome since the regulatory benchmark for the industry, according to the CBN was five per cent.

-    NAN

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