OUTREACH AND SUSTAINABILITY OF MICROFINANCE INSTITUTIONS IN ABIA STATE, NIGERIA

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1 ABSTRACT OUTREACH AND SUSTAINABILITY OF MICROFINANCE INSTITUTIONS IN ABIA STATE, NIGERIA Obike 1*, K. C., Osondu 2, C. K, and Eze 2, C. N. 1 Department of Agricultural Economics Michael Okpara University of Agriculture, Umudike, Umuahia, Abia State, Nigeria. 2 Department of Agricultural Economics and Extension, Abia State University, Uturu, Umuahia Abia State, Nigeria. Correspondence kingobike@yahoo.com, The study evaluated the outreach and sustainability of microfinance services on cassava farmers in Abia State, Nigeria. The study adopted two stage random sampling method in selecting Microfinance Institutions (MFIs) for this survey. Six MFIs were randomly chosen (2 from each agricultural zone) in the State. Data Analysis involved the use of frequency means and percentages, and computation of outreach performance and sustainability dependence indices. The result reveals less than 50.0% agricultural zones for each of the MFI, and less than 30.0% participation by women in MFI activities. The MFIs showed an average annual growth rate of about 18.0% with interest rate range of % per annum. The year 2010 was the year with the highest loan disbursement for cassava farming across the MFIs in the State with two MFIs in Aba agricultural zone (ECO and EAS) showing the lowest subsidy dependence index (SDI). The Outreach of MFIs is low suggesting that more government incentives should be introduced to encourage higher cassava production through MFIs sponsored microcredit. Government agricultural policy should take advantage of the opportunity to spread microfinance for effective support for agricultural production. Keywords: Microfinance, institution; Subsidy, Outreach, Cassava Farmers INTRODUCTION The inability of formal finance institutions to provide financial services to the urban and rural poor and unsustainability of government sponsored development financial schemes contributed to the growth of private sector driven formal Microfinance Institutions (MFIs) in Nigeria (Anyanwu, 2004). Before the emergence of formal microfinance institutions, informal microfinance activities had flourished all over the country. Informal microfinance is provided by groups for mutual benefits of their members. These groups provide savings and credit services to their members. These informal microfinance arrangements operated under different names: esusu among the Yorubas of western Nigeria, etutu among the Igbos in the east and Adashi in the north for the Hausas (CBN, 2000). The key features of these informal schemes are savings and credit components, informality of operations and higher interest rates relative to the formal banking sector. The informal associations that operate traditional microfinance in various forms are found in all the rural communities in Nigeria (Mejeha and Echebiri, 2006). However, size of activities covered under the schemes has not been determined. The non - traditional, formalized microfinance institutions (MFIs) are operating side by side with the informal associations. The finance services provided by the MFIs in Nigeria include savings, credit and insurance facilities (Orikara, 2007). Presently, the MFIs are regulated by the Central Bank of Nigeria (CBN). The CBN indicated there were 160 registered MFIs in Nigeria as at 2001, located in 28 out of 36 states in the country (CBN, 2005). They operated largely in the rural areas and their activities expanded phenomenally in 1980s (Orji, 1989) in terms of size, branch expansion, staffing, volume and value of both credit and savings. Apart from the emerging trend that microfinance has become a commercial enterprise with some return on capital, the driving force is the desire to extend financial services and improve the living condition of the poor. Mejeha and Echebiri (2006) carried out a study on outreach of financial services delivery by rural bank branches serving Agriculture and rural bank branches serving agricultural and rural sector of Abia State. The study reveals that rural based bank branches provide financial services to the rural populace of the state, and that the target clients of the banks were farmers and the entire populace. According to Adeyemi (2008) outreach and sustainability of microfinance is a means of how well an MFI allocates inputs (such as assets, staff and subsidies) to produce the maximum output (such as number of loans, financial self sufficiency and poverty outreach). The efficiency of an MFI can be assessed only in relation to its own class of MFIs, namely units that operate in similar markets and under comparable institutional governance. A framework introduced by Yaron (1992), for assessing the performance of rural financial intermediaries ensures the unearthing of all subsidies associated with microfinance operation. The framework proposes two primary criteria including outreach and self-sustainability. Outreach is a general term for hybrid index which takes into account the extent of market penetration and the quality of financial service provision. Self-sustainability measures microfinance subsidies received against the interest earned and captured by the composite subsidy NJAFE VOL. 12 No. 3,

2 dependence index (Yaron, 2000). Some primary indicators of outreach performance are changes in the value of total savings deposits, the proportion of the target rural population served and the value and the number of loans extended plus the rates of participation by women (Gurgard et al., 1994 and Yaron, 1994). These are several barriers to drawbacks to outreach mode of assessing performance. In his work Chirinko (1993), stated that in addition to poor macroeconomic environment, MFIs have suffered from low level of development of their national financial system. He asserted that to various degrees, their financial system have been impaired by fiscal imbalance; volatile inflation, financial repression and weak legal and regulatory framework. The MFIs are particularly underdeveloped resulting in low level of competition among service providers (Guargard et al., 1994). Meanwhile, Sacay and Randhawa (1995) identified alternative way to review the sustainability of rural banking programmes (MFIs). They observed that the criterion is to estimate whether the borrowers have achieved higher income flows over time. This according to them implies that the programmes beneficiaries increased their incomes so that they were able to pay their loans and possibly accumulated capital. Effective outreach is also inhibited by factors which are specific to agriculture and to rural economies based on agriculture. Many elements of the rural sector are poorly developed. Markets for products, land uses and labour are inefficient and strongly localized (Adeyemi, 2008). Hence the specific objectives of the study are to: identify and determine the operational characteristics of the formal Microfinance Institutions (MFIs) in Abia State, Nigeria; determine the extent of MFIs reliance (dependence) on subsidies for their survival in the study area; and analyze the administrative competence and hence ability of the MFIs to sustain their services in the study area. MATERIALS AND METHOD This study was carried out in Abia State, Nigeria. Abia is a State located in the south eastern part of Nigeria. The State was chosen for the study based on the fact that cassava is widely cultivated and cassava farmers are majorly clients of available MFIs (ABSADP, 2005). The climate is essentially tropical humid with average annual rainfall of 2292 mm distributed evenly throughout its wet season, which covers a period of seven months (April to October) (NRCRI, 2008). Abia state is located between longitudes 7 23 and 8 02 E and latitudes 5 47 and 6 12 N of the Greenwich Meridian. It is bounded by Enugu State on the North, Rivers State on the South, Akwa Ibom and Cross River States on the East and Imo State on the west. Abia State was created on 22 nd August 1991 out of the then Imo State and has its capital at Umuahia. The State covers a total land area of km 2, with a total population of 2,833,999 persons made up of 1,434,193 or 55% males and 1,399,806 or 45% females (NPC, 2006). The State has 17 Local Government Areas (LGAs) clustered in 3 agricultural zones namely Aba, Ohafia and Umuahia zones. The study adopted two stage random sampling method in selecting the MFIs for the survey. Firstly, random sampling method was adopted in selecting two (2) Local Government Areas (LGAs) from each of the three (3) agricultural zones. This gave a total of six (6) Local Government Areas in all. The list of all Microfinance Institutions was obtained from each Local Government Area office. The composite list formed a sampling frame used in selecting two MFIs from each zone by simple random sampling process. The MFIs chosen were Ohafia MFI (OHA) and Uzuakoli MFI (UZU) from Ohafia zone, Ovuoma MFI (OVM) and LAPO MFI (LAP) from Umuahia zone and Ecosal MFI (ECO) and Easy Gate MFI (EAS) from Aba zone. Data for this survey was obtained with a pre-tested and structured questionnaire administered on respondents. The questionnaire addressed market interest rate, lending interest rate, annual loan portfolio, number of female clients, amount of savings deposit, loan transaction costs, and subsidy received The analysis used microcredit sustainable interest rate in performance evaluation. Thus since no definition of a well performing MFI has been able to rally support unanimously, we adopted an approach based on both performance criteria introduced by Yaron (1992, 1997) and those proposed by CGAP (1996). These authors suggested two key criteria for evaluating performance of MFIs namely, outreach and sustainability. It is important to mention that a great majority of studies are based on these criteria as observed in the following works on sustainability and outreach of microfinance by (Gurrand and Yaron 1996; Larriviere and Martin 1998; Gibbon and Meelan 1999). Outreach was defined as ability of MFI to provide high quality financial services to a large number of clients. The indicators of outreach performance are changes in the number or percentages of female clients, the amount of saving deposit, the value of outstanding loan portfolio, the average amount of savings deposit, the average value of loans etc. Sustainability is a situation where an MFI covers up all transaction cost (loan losses, financial costs, administrative cost etc.) with a return to equity (net of any subsidy received), and consequently function without subsidies. It is measured by indicators such as the sustainability interest rate, the quality of loan portfolio, administrative efficiency, staff productivity and the degree of dependence to subsidies (Yaron, 1997). In this study, MFIs sustainable interest rate was estimated with the aid of the model suggested by Consultative Group to Assist the Poor (CGAP, 1996). NJAFE VOL. 12 No. 3,

3 R = AE LL CF K II 1 LL R = the annualized effective interest rate charged (N). AE = Administrative Cost (N) LL= loan losses (N) CF = Financial Costs (N) K = the desired capitalization rate (%) II = Investment income (N) Dependence on subsidies is measured by subsidy dependence index (SDI) developed by Yaron (1992, 1997). The SDI is defined by Yaron (1997) as the ratio which measures the percentage increase in the average on-lending interest rate required to compensate an MFI for the elimination of subsidies in a given year while keeping the return on equity equal to the approximated non-concessional borrowing cost. SDI is calculated on basis of the following formula S A m c E m P) K IDS LP i LP i S = Total Subsidy A= Subsidy on concessional borrowing rate m= Market interest rate c= Concessional interest rate E= Annual average equity P= Profit (Losses) K= Miscellaneous grants and benefits LP= Annual Average Loan Portfolio i= Lending interest rate RESULTS AND DISCUSSION MFI characteristics by agricultural zone A brief overview of the main characteristics of these MFI is shown in Table 1. Most of the MFI in the study area were established less than 15 years ago. Outreach performance requires MFI to reach a large public and to have a significant and increasing volume of activities (savings, credit, insurance etc.) and membership. Table 1 revealed less than 50.0% agricultural zones coverage for each bank and does not fulfill the requirement of large public. An MFI is expected to target the poor population and rural clients, micro entrepreneurs groups and associations. It was observed that the MFIs in the area targeted rural population and even the poorest. Women are under - represented in the MFIs as none of the MFIs had up to 30.0% of women clients survey in their transactions. The average savings and credit for cassava farmers shows a reasonable operational efficiency on the part of deposit and savings made by the MFI clients. MFI cassava farmer clients for in Abia State, Nigeria The distribution of MFI according to the number of cassava clients for a period of is presented in Table 2. It shows that the MFIs were characterized by growth in the number of cassava clients (an average annual growth rate of about 18%). This growth of MFIs clients was adjudged poor and this suggest a low outreach in the area. Membership growth per administrative units was highest in Abia North and least in Abia South. Across the State this was low depicting low depth of the outreach. Financial products of MFI available to cassava farmers Table 3 shows the distribution of MFI according to financial product available to cassava farmers in the area of study. The result revealed that MFIs in the study area offer very limited range of saving and credit products. The saving products comprise mainly of short- term savings (The small amounts the farmers save to meet up with emergencies and unexpected expenditures) attracting interest return within range of 0-3.0% per annum, and short term loans (money the farmers borrowed for specific expenses, particularly medium or long term farm investment). The average duration for short term savings is one month and many of the MFIs in the study area did not pay interest on such short term savings. However, for short term loans, the interest charges by MFIs ranges from 10 18% per annum. More so, the average loan duration in the MFIs is between 6 24 months. It is important to note that these MFIs used the traditional loan guarantee scheme like physical assets, price durable goods etc. as collaterals. The group credits were based on group based liability which varied amongst based on the uniqueness of each MFI and its philosophy to agriculture and cassava farming. On the average, Table 3 showed that 81.17% of short term savings were made by cassava farmers. NJAFE VOL. 12 No. 3,

4 Table 1: Distribution of MFIs by their characteristics in Abia State, Nigeria Profile OHA UZU OVM LAP ECO EAS Date of Creation Geographical coverage (%) Target Population Rural Rural Rural Urban Rural Urban Rural Rural Number of Branches % of Women Average Savings( ) Average Credit( ) 80, ,721 45, , ,320 Table 2: Distribution of MFIs according to the number of cassava farmer clients for in Abia State, Nigeria Pooled Mean Year OHA UZU OVM LAP ECO EAS Total Annual Growth (%) Table 3: Distribution of MFI according to financial product available for cassava farmers in Abia State, Nigeria Financial Product OHA UZU OVM LAP ECO EAS Average short term savings (%) Savings interest rate (%) Short term loans (%) Lending interest rate (%) Average loan Duration Value of cassava loans ( millions) for Table 4 shows the distribution of MFI according to the volume of loans given to cassava farmers ( millions). The MFI loan portfolio for cassava farmers grew in value between 2005 and This should have a positive effect on efficiency of cassava production. In 2010 the MFI in Abia North Agricultural zone had the highest loan disbursements for cassava production in the State. Relatively, the year 2010 had the highest loan disbursement across MFIs in the State. This means that 2010 was the year that showed the greatest potential for productivity and efficiency, since financial resource is key to productivity and efficiency (Okoye et al., 2007). Average MFIs loan interest rate (%) for cassava farmers in Abia State Table 5 shows the distribution of MFI according to the interest rate for farmers. The result shows that MFIs lending interest rates ranged from 10.0 and 18.0% per annum, while the sustainable interest rate ranged from % and these were obviously lower than the formal markets rates. The reason for this could be that these MFIs in the State apparently operate in rural area and semi urban areas, where risk and transaction cost are very high. It is important to note that interest charges on loans which are lower than interest charges by commercial banks are not commercially viable. The MFIs need to double or even triple their lending charges to be able to cover their overhead cost. The difference between sustainable lending interest rate to their present actual lending interest rate is particularly high. These differences not withstanding a number of empirical studies have shown that what matters most to the poor is gaining access to financial services. Most poor people are willing to pay for institutional services at full costs, having being used to borrowing from informal lenders despite their high interest rates (Tapsoba, 1982, Ellsasser, 1992, Nguyen et al., 1998). Indicators in Table 1 to 4 have severally and collectively shown that outreach of MFIs are low in the study area and this is consistent with the findings of Ezeh, (2004) in Abia State. NJAFE VOL. 12 No. 3,

5 Table 4: Distribution of MFIs according to cassava loan disbursement ( million) in Abia State, Nigeria Year OHA UZU OVM LAP ECO EAS Total ,564, ,000-1,500,000 1,740,000 1,200,000 7,754, ,687,000 2,380,000-3,200,000 1,340,000 2,500,000 14,107, ,529,000 3,740,000 2,700,000 3,430,000 1,750,000 2,800,000 16,949, ,394,000 4,490,000 1,800,000 4,120,000 2,100,000 3,100,000 19,004, ,100,000 3,080,000 2,330,000 2,220,000 2,100,300 3,200,000 14,030, ,011,500 3,700,000 3,200,000 3,000,000 2,870,000 3,500,000 20,281,500 US$ = Table 5: Distribution of MFIs by interest rates on cassava farmers in Abia State, Nigeria Interest Rate (%) OHA UZU OVM LAP ECO EAS Lending Interest Rate(b) Sustainable Interest Rate(a) (a) (b) MFIs loan recovery from cassava farmer - borrowers in Abia State, Nigeria Table 6 shows that all the MFIs studied recovered a high percentage of their loans. The year 2006 showed the best loan recovery by the MFIs in the State. These high loan recoveries are due to groups lending and benefits of group liability. This strategy is good with small borrowers who generally lack the suitable traditional asset required as collaterals on individual basis. This result agrees with the observation made by Ezeh, (2004) that lending to groups is a sure means of higher loan recoveries Table 6: Distribution of MFI according to their loan recovery (%) from cassava farmers in Abia State Average Year OHA UZU OVM LAP ECO EAS (%) MFIs Subsidy Dependence Index- SDI - (2010) in Abia State, Nigeria The analysis of the subsidy dependence index for all the six selected MFIs is presented in Table 7. The result shows a high dependence of MFIs in the State on subsidies. In 2010 the two MFI in Abia north (OHA and UZU) had to raise their lending interest to 41.2% and 22.7% respectively in order to sustain their existence. As compensation for full elimination of subsidies, the two MFIs in Abia Central (OVM and LAP) had to triple their interest charges on loans. Similarly, for Abia south MFI (ECO and EAS) had to increase respectively their lending interest charges to 13.7% and 23.9% to be self-sustainable. These results are consistent with the findings shown in Table 5. It was imperative for them to raise the lending interest rates to recover all transaction cost and rely less on subsidies. It is important to point out that in 2010, the two MFI in Abia South (ECO and EAS) had the lowest SDI attributable to their ability to mobilize high savings on account of their location within the area of high commercial activities. Sustainability Index The sustainability of MFIs depends on their capacity to minimize transaction costs, especially administrative expenses. According to Christen (1997) the norm of optimal practices assumes that well managed MFIs should be able to maintain the ratio of annual administrative expenses to transaction charges between 15% and 25%. Table 8 indicates that none of the MFIs involved in the survey was administratively efficient. The table shows that the average administrative expense to transaction charges by MFI in 2010 was 43.33%. NJAFE VOL. 12 No. 3,

6 Table 7: Distribution of MFI according to their subsidy dependence index (2010) Profile OHA UZU OVM LAP ECO EAS 1. Market interest rate = m (%) Subsidy on concessional borrowing Annual average equity (000 ) Subsidy on equity = E*m (000 ) Miscellaneous grants (000 ) Profit/loses = P(000 ) Total subsidy = (2)+(4)+(5)-(6) Interest income = LP*1 (000 ) Subsidy dependence index = 7/8% Table 8: Distribution of MFI according to ratio of administrative expenditures to transaction charges (%) Annual Year OHA UZU OVM LAP ECO EAS Average CONCLUSION AND RECOMMENDATIONS MFIs reach small scale cassava farmers in groups, despite the growth of MFIs in recent years. The outreach of MFIs still remains low against the high potential demand by cassava farmers. More so, MFIs have showed interest in provision of short term interest credit services. Also mobilizing more savings by MFIs could lead to better selfsustainability. Loan portfolios and repayment rates was high amongst cassava farmers that obtained credit from MFIs. The study reveals that MFIs in the area are not self-sustainable. All the MFIs in the area depended greatly on subsidies to cover transaction costs (administrative cost, financial cost, and loan losses). Government policy direction should focus on the establishment of more MFI which will increase outreach and encourage production in the study area REFERENCE Abia State Agricultural Development Project ABSADP A colossus in Agricultural Transformation pp Adeyemi, K. S Institutional Reforms for Efficient Microfinance Operations in Nigeria. Central Bank of Nigeria Billion, 32 (1): Anyanwu, C. M Microfinance Institutions in Nigeria: Policy, Practice and Potentials. A Paper Presented at the G24 Workshop on Constraints to Growth in Sub Sahara Africa, Pretoria, South Africa, November Central Bank of Nigeria (CBN) Microfinance Policy, Regulatory and Supervisory Framework for Nigeria. Abuja, Nigeria pp Chirinko, R. S Business Fixed Investment Spending Modeling Strategies, Empirical Results and Policy Implications. Journal of Economics Literature 31(1): Christen, R. P Banking services for the poor: Managing for financial success. (An expanded and revised guidebook for microfinance institutions). Washington, DC: ACCION International Consultative Group to Assist the Poor CGAP Branchless Banking-Scenarios for Papers/ Ellsasser, K Le projet de promotion du petit crédit rural, in C. E. Cuevas and M. Benoit-Cattin (eds), Finance et développement rural en Afrique de l Ouest. Monpellier, France: CIRAD-MED. Ezeh, C. I Comparative study of Institutions in Financing Agricultural Production in Rural Community in Abia State Nigeria. An unpublished PhD thesis, Department. of Agricultural Economics, University of Nigeria Nsukka. Gibbons, D. S. and Meelan J. W Le defi du sommet du Micro-credit: Commet obteair I autonomie institutionelle tont en preservant I engagement de la compange due microcredit, June Abijan. Gurgand, M., Peterson, G. and Yaron, J Outreach and Sustainability of Six Rural Finance Institution in Sub Saharan Africa. World Bank Discussion Paper N NJAFE VOL. 12 No. 3,

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