Best Microfinance Bank in Nigeria
Before we identify the best microfinance banks in Nigeria, we must first answer the question; what metrics are tracked by top microfinance banks in Nigeria?
The microfinance banking sector in Nigeria is the only industry that has devoted itself so much to creating metrics for assessing and monitoring social performance management to establish best practices, creating ratings, and certifications. All this allows institutions in this sector to align their activities with their social missions.
However, even though there is the availability of ample knowledge, many microfinance impact investors, such as LAPO Mfb or equipment leasing companies like Micro Investment Support Services (MISS), do not oversee the social components of the financial services providers (FSPs) that they fund.
One reason why this might be the case is that some impact investors are on the fence as regards how social performance management in a microfinance business impacts the company’s success. Thus, considering it as only good practice but not a necessity, it’s easy to miss the big picture with this ideology.
Social performance goes beyond the practice of monitoring the progress of a social mission. It is a complete business strategy that has a positive impact on an institution’s financial performance and a pathway to achieving business success, especially for financial service providers operating in competitive markets.
Here are five areas of social performance management that are often followed by the market:
- A management board knowledgeable in social performance
A large number of FSP board members are not well experienced in social performance operation. From analysis, organisations that tend to have better portfolio, productivity, and efficiency are those whose management bord members have adequate training in social performance. Particular, the amount of written-off loans (loans the FSP doesn’t anticipate to recover) and operational charges are lower by 3%, compared to that of their counterparts.
- Open-minded HR policies
From observation, there’s a clear link between FSP staff productivity, staff retention, and portfolio quality and an HR policy that takes into consideration social protections like pension contribution or medical insurance. Productivity level improves when social performance goals like high-quality data monitoring is integrated with staff incentive scheme, both recognition and cash compensation. It is of high disadvantage not to invest in staff. Our research also highlights a 5% increase in staff turnover rate and a 3% decrease in borrowers retention rate. These figures implies that when investing in FSPs, investors need to place more emphasis on HR policies, staff incentives, and compensation schemes.
- Tracking of Borrowers’ retention
Monitoring borrower retention is crucial. Retention rates help to evaluate customer satisfaction levels, especially seeing the significant gap between the demand and supply of financial services. Also, the institution saves time and money when they retain clients, as against attracting new customers, which in turn increases the productivity of loan officers.
We found from our research that a simple 1% increase in retention rate can impact staff productivity significantly, which is approximately about 20 borrowers per loan officer, and a lesser average cost per borrower by about $4.
Borrower retention rates are not easy to track either. FSP operation information systems (MIS) frequently don’t take into account customers who are presently not taking a loan but anticipate taking a new loan in the future. However, for those institutions whose MIS can give similar data, investors can track retention rates by computing borrower retention, or using simplified formulas espoused by request raters that can give approximations.
Most of all, monitoring retention trends through market assessment will help investors understand why clients tend to leave. Do they leave because they no longer need the financial service, they are not satisfied with the financial services, or they prefer a competitor?
- Focusing on Poverty
Research has shown that institutions that target the underprivileged have a higher operating expense of up to 7% and lower costs per borrower, compared to institutions with a more diversified strategy. One reason why this might be the case is that these institutions are probably adopting the group-lending methodology, which allows for loans to be distributed amongst a group of clients instead of individuals. With the group-lending approach, members guarantee the repayment of each other’s loans, which often targets the poor, and possibly reduces costs per borrower.
Furthermore, about 50 additional borrowers per staff member were reported for institutions that exclusively served the poor, which is significantly higher compared to clients that do not serve low-income customers or that did not have a specific poverty-focused strategy.
So, investors’ choice of what poverty-focused FSP to invest in must consider the higher operating expenses, and ensure that any attempt to reduce operating cost or encourage portfolio growth affect the FSP’s main target market or mission negatively.
- Targeting Female Client
Still from our analysis, it was observed that FSPs that focus on women as the target audience do better and show better portfolio quality, efficiency, and productivity. The research also shows that having more female loan officers is directly proportional to a higher number of female active borrowers. Hence, recruiting female loan officers is a smart way to attract more female clients. However, having women management board members does not seem to have the same effect. In addition, the research also suggests that providing empowerment services like business and leadership training to women may be linked to lower portfolio risk.
Investors that are interested in empowering women might also consider focusing on other key financial indicators that are not tied to gender. For example, the percentage of new borrowers that are women, average loan size per female borrower, retention rates of female borrowers, women’s portfolio at risk, and retention rates for female staff. These indicators are relatively easy for an FSP to track, which could also provide essential insights into how well the institution is targeting its female clients.
While our analysis of operational and financial performance is connected to the social performance metrics above, the takeaway is that there are a lot of tools and data for the microfinance industry for impact investors, which will make the practice of social performance easy to monitor. First, investors in the microfinance field need a change in mindset. They need to shift their perspective to focus more on social performance management as the right thing to do to promote continuous business growth and success.
