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Monday, February 22, 2016

Microfinance Bank to be established by Lagos Government - Pros and Cons

A Micro-finance Bank (MFB) will be established by Lagos Government very soon. This announcement was made by the Governor Akinwunmi Ambode, Governor of Lagos State on 19 February at 5th edition of the Lagos Corporate Assembly tagged “A-plus meets business” held at the Lagos House Banquet Hall, Alausa.

Now the question that quickly comes to our mind is: OK, Whats so good about it? You'd be interested to learn that there are number of pros and cons of government setting up this bank and therefore this makes an interesting topic to ponder.

Pros of having a Micro-finance Bank by Lagos Government

There are number of benefits of having a microfinance bank owned by a committed government. 

SME and Artisans

  • Lagos Government owned and operated micro-finance bank will be a big boon for the Small and Medium Enterprises and artisans. Majority of the entrepreneurs in Lagos are in this segment. The MFB is planning to target this particular segment. If the bank is successful, this has a potential to revive the entire SME sector of Lagos and also has potential to act as role model for other states and other MFBs to follow.

Interest Rate

  • Interest rate for loans to these segments is going to be highly affordable. Governor Ambode made an announcement that the plan is to lend at a rate of 3%. Cheaper funds always help in reducing their financing costs and increasing profitability of the potential SMEs. 

Boost in economy and increase employment

  • Economy in Lagos is struck with lot of difficulties. The new microfinance bank in Lagos will help in ease of doing business. Ambode's assurance that his administration is committed to maintain a business-friendly environment. 

Cons of having a Micro-finance Bank by Lagos Government

There is a section of our community which has completely a different view about Lagos Government starting a micro-finance bank. The reasons why they do not like this initiative are:

Reinventing the Wheel

There are number of Micro-finance Banks in Nigeria. Majority of them are based in Lagos. The question then will be why do we need yet another micro-finance bank when there are already many existing. Would it not be better for the Government to partner with these MFBs and support their initiatives rather than reinventing the wheel altogether? 

Capital is a Scarce Resource

We all know that the capital is a scarce resource. Reviving an economy would require putting the scarce resource to the optimal use. Given the fact that Micro-finance does not have concrete evidence to show that it is a panacea for the poor, how prudent it is for government to start a microfinance bank? Instead, it could work with other areas of providing some basic amenities like roads and drinking water. 

Infrastructure Challenges 

Financing infrastructure development projects and making sure they are implemented indeed fetches more results than financing SMEs who will struggle with the infrastructure bottlenecks. Lagos is still gripped with deplorable roads, multiplicity of taxes and traffic gridlock. Shouldn't government be focused on addressing these challenges rather than merely creating a new financing of sick SMEs that cannot overcome these challenges to make a profitable living. 

Private - Public Partnership with Foreign Collaborations

Lagos government's plan to start a micro-finance bank completely ignores the potential in leveraging private-public partnerships. More importantly, as a business capital, Lagos has the potential to attract foreign investors with state-of-the-art technologies to boost the micro-finance sector. A large number of Micro-finance Banks still lack training on financial management, treasury management, marketing and Human Resource Management. These are the areas where capacities of local Nigerians needs to be improved through an outsourced expertise from other countries that were successful at it. Government should focus on these strategic areas rather than diverting its energies in an operational task such as starting up a micro-finance bank. 

Government owned Micro-finance leads to High Default Rates

It is a well-known fact that most of the state-owned projects have operational inefficiencies. This is not to undermine the potential of these projects but the clients do not pay properly because they consider Government is always a soft lender. With a low interest rate of 3%, Government is already positioning itself as a Messiah of the poor. But does it know the impact of taking such a position. There will be high default rates, loss of portfolio and low profitability. These are perfect recipes for becoming a sick institution. 

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8 comments: on "Microfinance Bank to be established by Lagos Government - Pros and Cons "

dissertation said...

Of course a lot of votes, with the bank to grow the economy, people have a lot of desire but little opportunity

Anonymous said...

Well the Cons outweigh the Pros. (In this article) Research have shown that micro sector of the economy is very critical to the development of an economy.
we know know the Micro-finance sector itself needs to be re-positioned for it core activity of financing the micro section of the economy.
what we lack in this part of the world is total coping of a concept. when you want to copy a concept, you need to relate it to your environment, what works there might not work here.

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