Using the faint glow of light from a flickering candle to sew a dress at night is something Nneka Moses never dreamed she would do. As the founder of Busy Stitches, a tailoring outfit in Surulere, Lagos, Ms. Moses borrowed some money from a microfinance bank to help boost her business. The money, she said, was used to buy two sewing machines and other sewing materials at her shop. She also employed two tailors and one apprentice. Things moved on well for a while until it was time to repay her debts. Upon her failure to do so, some of her assets, including her generator were carted away by the bank.
“Borrowing money from a microfinance bank was a wrong business decision. I know that now. People warned me not to borrow money from them but I didn’t listen. Now I regret ever borrowing from a microfinance bank.”
A larger majority of small business owners surveyed for this story, attested that the microfinance banks have failed in their duties of offering affordable and convenient business loans. Their terms and period of repayment, they say, are very inflexible and short, giving them little or no breathing space to put the borrowed money into good use and earn a profit.
Peter Kalejaiye, a youth corp member said he borrowed money from a microfinance bank in Ogun state to start a business, but had to stop and turn over all the money he borrowed without making any profit because the bank wasn’t giving him any breathing space. His experience is similar to that of Mrs. Omuvu, a trader at Ipodo market, Ikeja, Lagos state, who got a loan from a microfinance bank.
“One girl just came to meet me here and said she was from a microfinance bank. She promised to give me loan if I bring two guarantors. At the bank, they gave me N80, 000 and said they would collect it within a month. I thought they were joking until they started disturbing my guarantors with threats and phone calls. In the end, I had to borrow to pay them back,” Mr. Kalejaiye said.
Goods versus infrastructure
The purpose of injecting more money into a business according to Michael Otobo, an entrepreneurship teacher, is to expand the business’ profit. This applies more to small businesses, Mr. Otobo says, because the money should be used to buy goods or items which can be sold for profit.
“Unfortunately, most small business owners borrow money and use it on infrastructure which does not immediately yield profits. I don’t advice any of my students to borrow money from microfinance banks because they want to start collecting their money immediately, before you’ve made any profit, and they have high interest rates.” Gbenga Filani, a financial manager with Rehoboth Financial Services, says that small business owners should not borrow money from just any one who offers them a loan but should put in clear perspective, the purpose of the business loan, before accepting it.
However, Charles Okorie, the marketing manager of Imprest Microfinance Bank, Bariga, Lagos says that microfinance banks cater for any kind of financial needs of small businesses.
“If you want to buy an asset such as a machine, a fridge, or so, we buy the asset for you and collect the money back over a period of six months. If you need capital to buy more goods to boost sales, we can give you a loan and collect the money back within three months.” Responding to the complaints of business owners regarding high interest rates and short repayment periods, Mr. Okorie says that the interest rates are regulated and approved.
“Our interest rates are approved by the Central Bank. Also, we don’t have so much capital to work with and cannot leave our money with our customers for a very long time, which is why we have to collect the money back within a few months so we can cater for other customers and make profits ourselves.”
Microfinance banks are dying
But despite the fact that most small businesses require capital which these microfinance banks are supposed to provide, they seem to be getting slowly extinct as they keep closing down while the remaining ones maintain skeletal business services.
Olamipo Ismail, a former staff of Seed Capital Microfinance Bank, Yaba, Lagos says that she left the bank’s employment because she couldn’t continue extracting money from their customers who had no means of repayment on justifiable grounds.
“There was a particular elderly woman the bank lent money to, who used to plead with me every time I go to her shop. She loaned N100, 000 and was to refund N130, 000 within two months. After the first two installments, it got difficult for her to pay because she had just invested the money. Eventually, I got tired of disturbing innocent people and resigned,” Ms. Ismail said.
Microfinance banks in Nigeria will continue to remain in business in the next few years only if they make their policies more consumer friendly, says Aduke John, a small business owner. “You can already see that they are going down from their high staff turnover rate,” Ms. John said.
Her view is reiterated by a man who was seen coming out of a microfinance bank in Ikeja. “Imagine, they want me to bring three guarantors and operate an account for two months just because I want to borrow N100, 000. When they don’t see any customer, they will close up.”