Yesterday (November 5, 2014), while putting an article
together, I got a report that a microfinance bank customer was stopped from
taking her own life. She is a customer to three different microfinance banks
and, in total, owned them about 1 million naira, her business has taking a
nosedive and banks are pressing for their money.
She had gone to a river near her house around Orimerunmu
(between Ibafo and Mowe, Ogun state, Nigeria). Fortunately, she was spotted by
fishermen before she could accomplish her task.
Who is at fault?
How did she get to this state?
Would she have been better off if she is never involved with
microfinance and had opted for commercial banks?
WHEN MICROFINANCE BANK IS A BAD CHOICE
1. When you are a Non-Active poor
Microfinance is for the poor - Yes! The birth of microfinancing
is to see a reduction in poverty thus the coinage that 'microfinance banks are
POOR MAN/WOMAN)'s banks is not misplaced.
The definition of POOR however needs to be understood. In
microfinance, POOR is of two definitions (i) active poor, (2) non_active poor.
(i) Active poor are those lacking sufficient money to live
at a standard considered comfortable or normal in a society BUT ARE ACTIVELY
DOING ONE BUSINESS OR THE OTHER.
These populations are experienced in business, have the
knowledge of their business environment and are player in the economy, what is
missing is more capital to increase their supply.
(ii) Non-active poor are those lacking in sufficient money
to live at a standard considered comfortable or normal in a society and are not
engage in any business or profit viable enterprise.
These population depend, daily, on gift, succor etc to feed.
When a non-active poor approach a microfinance bank for loan
to 'improve his/her standard of living, a time-bomb has just been activated.
The cycle of business growth, for many new business, involve
months of investment with no hope of returns. I say it here that no financial
institution, microfinance or commercial, will be patient enough for a business
to mature - no matter how promising such business is.
A non-active individual who wish to change his status to
active poor will have to start his/her business using funds source from friends
and family; source that can be patient for the business to mature.
2. When you are a Multi-borrower
Multiple borrowing is a situation where an individual
cross-borrow from different financial institutions. For many who are involved,
I will like to say that IT IS A TIME BOMB! It outcome is ALWAYS over-indebtedness.
Loans tend to become a burden few months into repayment due
to the fact that repayments are being drawn from sales proceeds. When a new
loan is added (possibly to restock), the rate at which goods reduce in store
has just been increase by two. While it might look smooth at first, the same
syndrome that pushed the businessman to seek another loan will soon set in.
Before long, a bottleneck scene is created as few stocks in store are servicing
three or more loans.
The story I sighted at the beginning of this article is a
typical example of multiple-borrower and in my many years in the microfinance
industry, such report is not new.
BECAUSE LOAN REPAYMENT ALWAYS DRAINS STOCK IN STORE,
COMPULSORY SAVINGS ALONG WITH LOAN REPAYMENT IS A BETTER OPTION. Along the line
of loan repayment, your business always need replenishment and with the option
of your personal (business) savings, you are mostly left with, at least, 50-70%
of required capital needed to bring more goods into your store.
P.S. For the wise ones, they stick with these available
funds.
3. Loan for mortgage
Microfinance banks offers range of financial services BUT
NOT MORTGAGE. But due to less strict requirements for loans, many people hide
under a business or the other to secure loans then divert such fund to building
houses etc.
In Nigeria, many microfinance banks prefer weekly repayment
while a few accommodates monthly repayment BUT WEEKLY OR MONTHLY, REPAYMENT
STARTS TWO WEEKS AFTER DISBURSEMENT OR THE SECOND MONTH AFTER.
FOR SOMEONE BUILDING HOUSE WITH A MICROFINANCE LOAN, HOW
WILL SUCH PERSON REPAY? Proceed from business?
Business that pays loan need to be restock at one time or
the other, if a business hasn't seen a tangible investment (because it has been
diverted to building house):-
* How will such business get itself ready for repaying such loans?
* Where will the savings come from?
* Where will the capital needed for restock come from?
The outcome of such venture is either cross-borrow or death
of such business (if the business is able to repay the loan).
Again, microfinance loan period cannot exceed
twelve months, Mortgage finance houses spread their loans between five
and twelve years.
Aside
from inducing pressure on his/her business by using a short term loan
to develop a project of long term, such individual cut his/her own money
spinning income avenue.
If you are in business and you call into any of the category
above, you are trailing a dangerous path created by you and not the financial
institution(s), seek advice from a business expert immediately.
P.S. Business success
is never an overnight journey, be focus and patiently grow your business using
the advantage of microfinancing.
I will see you tomorrow
Don Abiodun is business consultant,
a radio host, cinematographer and a blogger.
Follow him on
twitter @donabiodun
***Continue tomorrow 06/11/2014
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