Increasing access to formal financial services in Northeast Nigeria
Introducing innovative partnership models
Written by: Nicholas Meakin, John Rachkara, Sambou Coly
Introduction
Financial inclusion works to increase people’s access to and use of affordable financial services. It is not an end in itself; rather it enables people to borrow to invest in their farms and businesses, save for the future, and insure against shocks. Through the USAID-funded Feed the Future Rural Resilience Activity (RRA), Mercy Corps is using financial inclusion in Northeast Nigeria to help people facing poverty — including rural women, youth, and people on the move — to improve and protect incomes and assets, and to manage risks.
Challenges
The four states in Northeast Nigeria are facing recurring and acute shocks and stresses, including rising food, fuel, and fertiliser prices, adverse weather conditions, and conflict and insecurity. About 55% of adults in the region are unbanked and unable to access and use formal financial services. The high risks and cost of serving a predominantly rural region, heavily reliant on agriculture, deter many financial service providers from entering the market. Mercy Corps’ target population — women, youth, and internally displaced peoples — often do not have sufficient assets to pledge as collateral. In many cases they lack experience and understanding of formal financial services and find most formal credit products unaffordable and not suited to their seasonal cash flows and needs.
Mercy Corps’ approach
By applying a Market Systems Development (MSD) approach, and by providing catalytic grants and technical assistance to partners, Mercy Corps, through the USAID funded RRA activity, utilised three different models to provide formal financial services, in particular credit and savings products, to previously excluded populations in NE Nigeria:
Model 1: Microfinance Bank (MFB) direct to customers: Mercy Corps provided catalytic grant funding and technical assistance to Standard Microfinance Bank (SMFB) to enable them to lend directly to smallholder farmers and micro, small, and medium-sized enterprises (MSMEs).
Model 2: Commercial Bank partners with a Business Development Service Provider: Mercy Corps facilitated a partnership between FCMB bank and CMD, a business development service provider, with the latter acting as an aggregator of the bank; the bank disburses loans to the business development service provider who on-lends them to smallholder farmers and MSMEs.
Model 3: Fintech company partnering with savings groups: Mercy Corps supported Riby Financial Services to onboard groups onto their ‘Co-banking platform’, enabling groups to save and access loans from Riby’s partner banks. Mercy Corps also partnered with Rindev Consulting Limited to onboard groups onto their MiKashBoks app to digitise the groups’ record-keeping.
All of these models involve enabling existing financial service providers to offer more affordable and accessible products to populations who were previously unable to access credit and saving products.
Intervention features
To ensure that smallholder farmers and MSMEs could access savings and credit, Mercy Corps supported the partners to:
Tailor loan products to the needs of smallholder farmers and MSMEs: loan tenure and repayment were matched to cash flow patterns of the income generating activities, particularly agriculture and petty trading; agricultural loan amounts were increased to reflect the rise in the costs of inputs, such as seeds and fertiliser; the need for collateral was removed as a result of joint liability within groups and the bundling of insurance with loans; and interest rates were kept low through the increase in scale.
Provide training and monitoring to groups before and after disbursement of these funds, on financial literacy, business development and good agricultural practices to ensure they were able to use and repay loans as intended.
Link smallholder farmers with input providers and off-takers and help to aggregate demand and supply across farmer groups, to enable smallholder farmers to access high quality, affordable inputs, and profitable, reliable markets.
Develop and deploy digital financial services, such as Point of Sale Agents and a banking app to facilitate loan disbursements and repayments, and savings deposits and withdrawals.
Results and impact
RAA’s support enabled the microfinance bank (SMFB) and the business development service provider (CMD) to increase their outreach to new areas and to previously underserved markets. 19,000 loans worth $2.3 million were disbursed, the majority for agricultural production; smallholder farmers were able to increase production by renting or buying land and equipment, and purchasing fertiliser and high-quality, drought resistant seeds. 90% of loan recipients were first time borrowers, the percentage of female customers increased from 30% to 40%, and repayment rates were generally excellent.
Most of the loans were disbursed by the microfinance bank under Model 1. Building on their existing expertise and experience of lending in NE Nigeria, they extended their outreach in seven Local Government Areas. Under Model 2, the partnership between a commercial bank and a business development service provider was also successful: having gained access to low cost, donor funded capital, FCMB (the commercial bank) was able to on-lend this to CMD (the business development service provider) who had the local presence and experience of working with smallholder farmers. CMD were therefore able to increase their lending to smallholder farmers.
Model 3 proved less successful. Although 1,519 groups were onboarded onto Riby Co-banking platform and 140 group members received loans, lending did not continue after the end of the partnership. Groups did not receive adequate training and supervision on how to manage and repay loans and some of them viewed loans as grant funds, potentially due to Mercy Corps’ involvement and its NGO status. Therefore, repayments rates were low.
However, more than 600 groups have started to use the MiKashBoks app to digitally record their transactions during meetings. Groups report improved efficiency, accuracy and transparency of record-keeping that has reduced disputes within the group, particularly at share-out. The provision of training and support by Village Agents has helped groups to start and continue using the app.
Sustainability and scalability
SMFB (the microfinance bank) and CMD (the business development service provider) both intend to continue to serve the new communities and will seek to further increase outreach. They will build on the enhanced trust, continue to deploy digital technology to reduce costs and improve the customer experience, and further develop innovative finance products and training services that meet the varied needs of the communities.
However, the scale-up of lending through the partnership between the FCMB Bank and the business service provider may be contingent upon the bank’s continued access to low cost, donor funded capital. Without this funding, lending would be done at market rates, or near-market rates, which might make this unattractive to smallholder farmers, and unviable for business service providers to stay involved.
Anecdotally, groups have indicated that they will continue to use the MiKashBoks app, as they appreciate the greater accuracy and transparency of record-keeping. To further improve the value proposition, Rindev is finalising integration with MTN — a mobile money provider — which will allow groups to make deposits and withdrawals on the group account digitally and should enable groups to borrow from Rindev’s partner banks.
Lessons and recommendations:
The following lessons and recommendations can be drawn from these partnerships and interventions:
- To ensure that interventions are designed and delivered appropriately, it is necessary to develop close collaboration with the partners during the co-creation stage and throughout the partnership. However, during implementation the partner should take the lead, not only to ensure ownership but also to avoid any misconceptions in the market, such as the case of groups that viewed loans as grants, which resulted in low rates of repayment.
- Partners may require technical assistance and training to enable them to identify and realise new opportunities through the design and implementation of new strategies, products, processes and digital services. While these partnerships were successful, partnerships with other microfinance banks and business development service providers proved to be less successful; microfinance banks faced challenges in their leadership, governance and portfolio management, and business development service providers generally had little experience of lending.
- Provision of loans should be accompanied by appropriate training, credit assessment and supervision of groups to ensure members are willing and able to repay the loans. Training and support are also critical to the adoption of new technology — the support from Village Agents is helping to attract and retain groups on the MiKashBoks app.
- The high cost of commercial capital is a real hindrance to the provision of affordable financing to smallholder farmers and MSMEs and future interventions should support lenders to identify and access low-cost capital for on-lending.
