Impact of Covid-19 Pandemic on Microfinance Banks in Nigeria

1. Introduction

The Covid-19 pandemic which reportedly broke out in late 2019 in the Wuhan municipality, China have had a great toll on lives and means of livelihood of millions of people around the world (World Health Organization 2020; International Monetary Fund 2020). In Nigeria in particular, the Covid-19 pandemic has complicated the already dire health and poverty situation in the country (Nigeria Centre for Disease Control 2020b, 2020c, 2020a; Presidential Task Force-Covid-19 2020). It should be recalled that before the onslaught of Covid-19 pandemic, Nigeria was already the poverty capital of the world – a position she took over from India in 2018 (World Economic Forum 2019).

Rapid studies on the impact of the Covid-19 pandemic on the lives and means of livelihood of people in low-income countries show that the pandemic and the government-mandated lockdowns have had an unprecedented impact on the people (Afridi, Dhillon, and Roy 2020; Khawar 2020; Hadid 2020; Faux 2020; Banerjee and Jackson 2020; Baldwin and di Mauro 2020; Imai, Arun, and Annim 2010; Abi-Habib and Yasir 2020). Specifically, lower-income groups and vulnerable households in developing countries and emerging economies face not only the prospect of abject poverty in many cases but also the likelihood that their financial systems may not be sufficiently robust to help them through these trying times.

More importantly, the pandemic has threatened various poverty alleviation institutions that serve the poor and vulnerable groups in lower-income and emerging economies. Among the most crucial components of poverty alleviation institutions that are needed at this time of the pandemic is the microfinance institutions (Ogden and Bull 2020; Kashif, Aziz-Ur-Rehman, and Javed 2020; Dąbrowska, Koryński, and Pytkowska 2020). The microfinance sector is typically engaged in providing small loans (personal and business), savings accounts and non-financial support to help boost financial inclusion and entrepreneurship within the lower-income communities (Akanji 2006; Adeleye et al. 2017; Benerjee & Jackson, 2017). According to the Consultative Group to Assist the Poor (CGAP, 2020), the microfinance institutions have over the last two decades received global acclaim for reaching out to communities that have been largely neglected and ignored by the traditional financial institutions as well as by focusing on financially empowering low-income people especially women. Indeed, microfinance institutions have the power to offer immediate support to small businesses and vulnerable people impacted by the Covid19-induced lockdowns and the resultant economic disruptions, while also helping to provide badly needed financial support to their customers especially in communities that often do not have access to mainstream financial services (Bernard 2020; Civil Society Organizations 2020).

However, it has not been sufficiently illuminated how critical the situation has become for these institutions that serve as last line of defense for the poor and vulnerable groups. Microfinance institutions around the globe serve a large number of households that are poorly served by conventional commercial banks; helping these vulnerable groups to invest in microenterprises, save and maintain liquidity - services that are particularly critical during this period of the pandemic and unarguably even after the pandemic when small and medium scale enterprises may seek to re-capitalise.

1.1. Statement of the Research Problem

Pandemics are known to produce not only health shocks but more importantly economic shocks. Both the International Monetary Fund (2020) and the World Bank (2020b) in their separate reports had predicted that the Covid-19 will produce severe economic shocks that could impact negatively on the lives and means of livelihood of poor people and vulnerable households in low-come countries and emerging economies. Therefore, depending how governments in these regions responds with stimulus and how effective the interventions are, it is expected that households’ income will be severely affected and consumption may be disrupted. To smoothen consumption, households will need greater access to credit and this is where microfinance banks and institutions will be crucial.

Unfortunately, there is no completed studies in Nigeria yet to ascertain the difficulties microfinance institutions are facing as a result of the pandemic. There is also the question of how microfinance institutions in Nigeria are coping with the situation and what survival measures they have adopted in the face of the crisis. More importantly, there is need to ascertain how microfinance banks could be assisted by government in the absence of lender of last resort for the sector to enable them better support their clients’ businesses and wellbeing.

These form the basis for this study. It is expected that findings from this study will help to create evidence-based dialogue with regulatory authorities on policy and implementation of appropriate measures to support the microfinance institutions and their clients in Nigeria.

1.2. Research Objectives

The broad objective of the study is to assess the impact of the Covid-19 pandemic on microfinance institutions in Nigeria. Specific objectives are, to:

1. Ascertain the operational difficulties encountered by the microfinance institutions as a result of the Covid-19 pandemic in Nigeria
2. Assess to what extent these operational difficulties have constrained their activities especially service delivery to their clients
3. Identify operational strategies put in place by the microfinance institutions to address the challenges posed by the Covid-19 pandemic
4. Identify what type and level of assistance they might require from government to remain afloat and continue to render services to their clients

This study contributes to the literature in the following ways. It is the first systematic attempt to investigate the impact of Covid-19 pandemic and government-mandated lockdown on Microfinance Banks (MFBs) in Nigeria, enriching the literature regarding the effect of the pandemic on lives, means of livelihood and institutions that support the poor and vulnerable groups in Nigeria. This is also the first study to demonstrate causality among Covid-19 pandemic, government-mandated lockdowns and activities of MFBs in Nigeria and indeed, the West African sub-region. Methodologically, the findings of our study are more robust than previous studies especially a similar study by Foundation Grameen Credit Agricole in collaboration with Inpulse and Appui Au Developpement Autonome (2020) on the impact of the Covid-19 pandemic on microfinance institutions in seven selected countries in Southeast Asia, Sub-Saharan Africa and Central America, as we employed an eclectic approach in data collection and disaggregated the MFBs according to size, namely, national, state and unit MFBs. This affords us the opportunity to understand more deeply the problems faced by the different categories of MFBs as a result of the Covid-19 pandemic and the government-mandated lockdown.

The results of this study could provide the government, policy makers and development partners with a more comprehensive understanding of the extent to which Covid-19 pandemic and government-mandated lockdown have affected the activities of MFBs and the appropriate policy response to salvage these institutions that serve the banking and credit needs of small businesses, rural communities and vulnerable households.

Following this introduction, the rest of the paper is organized as follows. Section two is a review of literature on microfinance institutions and financial services delivery in Nigeria. The methodology of the study is provided in section three and in section four; we present the data and the analysis thereof. In section five, we discuss the findings of the study and the policy implications. This will be followed by the recommendations.

2. Review of Literature

2.1. Review of Microfinance Institutions in Nigeria

It was realised in the late 1990s that efforts by successive governments in Nigeria to ensure flow of funds from the formal financial sectors to the poor and vulnerable households in Nigeria have not been successful (J. C. Anyanwu and Uwatt 1993; C. M. Anyanwu 2004; Akanji 2006). In 1999, the Federal Government of Nigeria and a number of donor agencies started discussions on a programme to strengthen the capabilities of rural financial institutions in Nigeria. The donor agencies comprised the African Development Bank (AfDB), the International Fund for Agricultural Development (IFAD) and the World Bank (WB). A number of missions followed these in 2000 and 2001, to assess the rural financial landscape and identify its potential and constraints. Institutions that were identified to benefit from an eventual support programme comprised the Nigerian Agricultural, Cooperative and Rural Development Bank (NACRDB), the Nigerian Agricultural Insurance Corporation (NAIC), community banks, commercial banks, non-licensed microfinance institutions and the Central Bank of Nigeria (CBN) as a regulatory body. Design and pre-formulation missions undertaken by the Department for International Development (DFID), IFAD and the United States Agency for International Development (USAID) confirmed the intention of donors to strengthen the community banks (FGN, 2006). Community Banks were identified as having the greatest potential to ensure the flow of funds to the rural populace who are usually not well catered for in terms of financial services by the conventional financial institutions.

It should be noted that the community banking programme was launched in Nigeria with the establishment of Alheri Community Bank in Tundun Wada, Kaduna State on Monday, 31 December, 1990 (National Board for Community Banks 1990). The Community Banks were specialized institutions established by community development associations (CDAs) in conjunction with private shareholders in various communities in Nigeria (Adelesi 2015). No individual shareholder was allowed to own more than 5% of the shareholding of a community bank while the CDA, the primary promoters of the community banks will hold not less than 30% of the shares (National Board for Community Banks 1990).

Shortly after commencement, the community banking scheme ran into troubled waters due to changes in government policy and lack of supervisory clarity between the sub-regulator of the system, the defunct National Board for Community Banks (NBCB) and the apex regulator, the Central Bank of Nigeria. Matters came to head when the NBCB was scrapped in 1998 and the functions of establishment and supervision of the community banks were handed over to the Other Financial Institutions Department (OFID) of the Central Bank of Nigeria. After several years of uncertainty and lack of appropriate operational framework, the Central Bank of Nigeria decided to intervene in 2005 to re-jig the community banking scheme into the microfinance banking scheme. The existing community banks were required to convert to microfinance banks after meeting certain criteria (CBN, 2006).

2.2. Microfinance Banking Scheme (MFB)

By 2005, it was shown that the community banking scheme had lost favour with the people and the scheme had been derailed by conspiracy of events (Adewunmi 2016). According to the Central Bank of Nigeria (2006),

"the latent capacity of the populace in the rural areas for entrepreneurship would be significantly enhanced through the provision of credit especially microcredit and micro-financial services to enable them engage in economic activities and be more self-reliant, increase employment opportunities, enhance household income and create wealth (p.10).

These were the reasons canvassed by the apex regulator for the re-christening and re-tooling of the erstwhile community banks to microfinance banks to enable them deliver more efficiently and effectively the services of providing micro-credit and micro-finance to the segments of the society who are ordinarily overlooked and under-served by the conventional banks (Central Bank of Nigeria 2006).

According to the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria (CBN, 2005), the objectives of the microfinance policy are, to:

1. Make financial services accessible to a large segment of the potentially productive Nigerian population who otherwise would have little or no access to financial services;
2. Promote synergy and mainstreaming of the informal sub-sector into the national financial system;
3. Enhance service delivery by microfinance institutions to micro, small and medium entrepreneurs
4. Contribute to rural transformation; and
5. Promote linkage programmes between universal/development banks, specialized institutions and microfinance banks

Based on the above objectives, the policy had the following targets (CBN, 2005):

1. To cover the majority of the poor but economically active population by 2020 thereby creating millions of jobs and reducing poverty
2. To increase the share of microcredit as a percentage of total credit to the economy from 0.9 percent in 2005 to at least 5 percent in 2020.
3. To promote the participation of at least two-thirds of state and local governments in microcredit financing by 2015
4. To eliminate gender disparity by improving women's access to financial services by 5 percent annually; and
5. To increase the number of linkages among universal banks, development banks, specialised finance institutions and microfinance banks by 10 percent annually.

2.3. Covid-19 and Microfinance Institutions/Banks

The government-mandated lockdown and restrictions in various countries of the world have affected business and economic activities (Afridi, Dhillon, and Roy 2020; Abi-Habib and Yasir 2020; Department for International Development 2020; Hadid 2020; Malik et al. 2020). Although these restrictions like social distancing and ban on travels were aimed at slowing the spread of the Covid-19 pandemic, the measures has caused great disruptions and declines in economic activities especially as businesses were ordered to close down and workers to stay at home. These in turn, has led to disruptions in domestic demand for goods and services and affected supply chains domestically and internationally.

Several micro and small businesses who usually access microfinance banks services suspended or closed down their economic activities with the owners and workers left with no income and employment. This has affected microfinance banks and their core activities as they were also mandated to lockdown and observe covid-19 protocols.

Studies by Dabrowska, Korynki and Pytkowska (2020) on the impact of Covid-19 pandemic on microfinance sector in Europe shows that the pandemic affected all countries in the European Union, although the severity of the impact was markedly different from very strong in some countries to almost negligible in others. But all the countries in the European Union implemented some form of lockdown which affected microfinance institutions and their clients. Specifically, the Covid-19 pandemic affected the microfinance institutions’ portfolio performance, decreased demand for credit, increased credit rationing, distorted product offers and led to breakdown in communication and interaction with clients.

In a similar study on the impact of the Covid-19 pandemic on microfinance institutions in Pakistan, Malik et al (2020) found that the Covid-19 pandemic has not only threatened lives and livelihoods but has created serious challenges for microfinance institutions that serve communities in Pakistan. Specifically, their study found that on average, week-on-week sales of clients of microfinance institutions fell by about 90 percent. As a result, 70 percent of microfinance borrowers could not repay their loans and only 34 percent repayment rate was recorded by the microfinance institutions in April, 2020 in Pakistan. Their study concluded that Covid-19 represents a crisis for microfinance institutions in low-income communities in Pakistan.

Also studies by Foundation Grameen Credit Agricole in collaboration with Inpulse and Appui Au Developpement Autonome (2020) on the impact of the Covid-19 pandemic on microfinance institutions in seven selected countries in Southeast Asia, Sub-Saharan Africa and Central America in 2020 shows that microfinance institutions have been hard hit by the Covid-19 pandemic. The study showed that microfinance institutions in the selected countries surveyed reported increased portfolio at risk, reduction in loan portfolio, increased expenses for materials and equipment, slowdown or complete halt in disbursement by funders, rapid depletion/shortage of equity, lack of liquidity, increase in financing and/or hedging costs, significant depreciation of reserves, difficulties to repay funders and large saving withdrawals by clients. However, the study shows that the situation of microfinance banks, the scope and severity of the problems identified above differ markedly from country to country, so also were the policy implications and recommendations.

Several studies have also been conducted in Nigeria on the impact of Covid-19 pandemic on various sectors of the economy. For instance, Adekoya and Aibangbee (2020) carried out a study on the impact of Covid-19 pandemic on corporate debts and recovery actions for corporate entities in Nigeria. Adenomon, Maijamaa, and John (2020) conducted a study on the effects of the pandemic on the performance of stocks in the Nigerian Stock Exchange. Akpoveta and Joy (2020) focused their study on the impact of the Covid-19 pandemic on the Nigerian economy and the disruptions to businesses occasioned by the pandemic-induced lockdown. Aref-Adib and Martin (2020) examined the impact of the pandemic on the economy and policy response by the government. Similarly, Ekeruche (2020), Lenon (2020), Nseobot et al. (2020) and Ataguba (2020) conducted studies on the impact of the Covid-19 pandemic on the Nigerian and African economies respectively.

Further studies on the impact of the Covid-19 pandemic on the Nigerian economy were carried out by Oji (2020), Ozili and Arun (2020), Sanni (2020), Obiakor and Adeniran (2020) and Sun Business Network (2020).

None of these studies however, assessed the state of the microfinance banks and institutions and the constraints they may be facing as a result of the Covid-19 pandemic. More importantly, there is need to ascertain what challenges microfinance institutions are facing; the type and nature of support they might require to enable them continue to render financial services to their clients who might be in dire need of financial support to smoothen consumption at this period of the Covid-19 pandemic and for small scale enterprises who might need credit to recapitalise when the Covid-19 pandemic is over.

3. METHODOLOGY

3.1. Area of Study

The area of study is South West Nigeria. South West Nigeria has six states, namely (in alphabetical order): Ekiti,^[1] Lagos,^[2] Ogun,^[3] Ondo,^[4] Osun^[5] and Oyo.^[6] The South West Region is majorly a Yoruba speaking area, though there are different dialects within the same state (Mabogunje 1962).

3.2. Design

The cross-sectional survey design was adopted by the study. The study build insights from a series of interconnected surveys and interviews in 6 states of South West, Nigeria. We document the immediate consequences of the lockdown on microfinance institutions, drawing on structured questionnaires and interviews with management and staff of microfinance institutions. The select interviews were over the telephone for in-depth information that could not be captured by the structured questionnaire.

3.3. Sample and Sampling Technique

There are 1008 microfinance banks licensed in Nigeria as at 31^st December, 2019, out of which 348 microfinance are in the six states of South West, Nigeria. In other words, the South West Nigeria is home to approximately 35% of all licensed microfinance banks in Nigeria. Lagos state has 178 microfinance banks or approximately 51% of all licensed microfinance banks in the region, making it the state with the highest number of microfinance banks in the Zone and also in Nigeria.

More importantly, Lagos state is home to 5 out of the 8 large national microfinance banks with a combined market share of 44 percent of the sector’s assets and 38 percent of deposits. The average assets and deposits of these 8 National MFBs far outweigh those of the State and Unit MFBs. And of the credit provided by the MFBs, 52 percent was intermediated by the 8 National MFBs, 21 percent by the 109 State MFBs, while the 867 Unit MFBs only provided 28 percent (World Bank 2017). Therefore, the sample size is large enough to be representative of microfinance banks in Nigeria.

The multi-stage and purposive sampling technique was adopted. The first stage was to create two strata of microfinance banks – those in urban areas and those in semi-urban/rural settlements. The second stage involves the creation of additional two strata – national banks and others (i.e. state and unit banks). The final stage involves the random sampling of microfinance banks within each strata to give all the microfinance banks equal opportunity of being selected. From this approach, 305 microfinance banks were selected for the study. Out of this number, 105 are in urban areas while 200 are semi-urban/rural areas in line with World Bank (2020a) classification of urban and rural areas.^[7]

3.4. Administration of the Questionnaire

The questionnaires for the rural banks were administered directly (face to face) with the help of research assistants^[8] who are familiar with the areas and the local language. The purpose of the study and items in the questionnaire were well explained to the respondents. For the urban banks, the questionnaire were administered online through the survey monkey app.

The research assistants were given face masks and hand sanitizers and were assigned to communities that were contiguous to minimize long distance travel because of the lockdown in Nigeria during the first phase of the study.

The first phase of the study took place between April and May, 2020 during the lockdown and the second phase of the study took place between May and June, 2021 which was purposive - essentially to give enough time for recovery and comparison of performance parameters after the relaxation of lockdown restrictions in August, 2020.

3.5. Data Analysis Technique

The combinations of descriptive and statistical techniques were employed in analysing the data for the study. First, the socio-economic characteristics of the MFBs respondents were descriptively analysed. Second, the technique of Foundation Grameen Credit Agricole & Inpulse and Appui Au Developpement Autonome (2020) was employed to assess the incidence, depth and severity of the Covid-19 pandemic and government-mandated lockdown on the performance of MFBs using systematic percentage approach. In this approach, we constructed three time-frames as basis for analysis, namely, pre-Covid-19, during lockdown and post-lockdown. These periods correspondent with 2019, 2020 and 2021 respectively. Accordingly, in Tables 2-7, we compare the performance indicators of MFBs within these time-frames and presents the outcomes in simple percentages using 2019 as basis for comparison. The data for 2019 were generated from the findings of the study by Enhancing Financial Innovation & Access (EFInA, 2020).^[9]

4. DATA PRESENTATION AND DISCUSSION

4.1. Characteristics of Respondents

Table 1 shows that approximately 66 percent of the MFBs are located in rural areas. This in line with the regulatory conception of these institutions to be established in rural areas where conventional banks do not usually have presence. In terms of scale of operations, the unit MFBs dominate. Approximately 84 percent of the MFBs sampled were unit banks – these set of banks are not allowed to have branches outside their approved single location. Approximately 15 percent are state banks – these set of banks are allowed to have branches but within a particular state and only about 2 percent are national banks who are permitted to have branches in all the states in Nigeria including the Federal Capital Territory, Abuja.

In terms of respondents from the MFBs, the loan officers dominate, purposely so, because they are the ones that interface more regularly and directly with the customers. More importantly, they are the ones that generate revenues for the banks through the loan portfolios they create. In the sample, the loan officers accounted for approximately 50 percent of the total respondents.

Table 2 shows that the covid-19 pandemic and government mandated lockdown have led to serious deterioration in the quality of loan portfolio of MFBs in Nigeria. The pre-covid-19 level of PaR for all categories of MFBs were generally high at approximately 15 percent and this has worsened as a result of the covid-19-induced lockdown. All the three categories of MFBs had their PaR level almost doubled. The unit MFBs were worst hit as their PaR level was more than doubled during the lockdown. Although, there have been some recovery as a result of the lifting of the lockdown, the PaR level is yet to return to the pre-Covid-19 level.

Table 3 shows that the covid-19 pandemic has generally affected the average loan portfolio of MFBs. With the covid-19 induced lockdown, there was little appetite for loans as businesses were grounded and those that opened offered skeletal services. Table 3 shows that all the categories of MFBs experienced significant decrease in average loan portfolio during the lockdown. As usual, the worst hit were the unit microfinance banks, with a decrease of over a hundred percent from their pre-covid-19 level. Even the national microfinance banks witnessed approximately 60 percent decrease in loan portfolio as a result of covid-19 induced lockdown. Again, there have been some recovery after the lifting of the lockdown, but none of the three categories of MFBs have fully returned to the pre-covid-19 pandemic level.

Table 4 shows that before the covid-19 induced lockdown, all categories of MFBs had liquidity level above the 20 percent minimum prescribed by the Central Bank of Nigeria (CBN, 2019). However, the covid-19 pandemic and the consequent lockdown had affected the liquidity situation of the banks. Apart from the national MFBs, the state and unit MFBs had liquidity level below the 20 percent minimum. However, state microfinance banks have returned to a liquidity level above the 20 percent after the lifting of restrictions but are yet to attain the level before the covid-19 pandemic.

The liquidity constraints could also have accounted for the credit rationing. Most of the MFBs have had to limit the disbursement of new credits to customers to shore up their liquidity level. This has implications for the microfinance banks clients – mostly poor and vulnerable households who need credit at this time of pandemic to smoothen consumption and take care of medical expenses.

Table 5 shows that overall, MFBs in Nigeria have high level of non-performing loans which inevitably resulted in the increased portfolio at risk (PaR). At approximately 20 percent level pre-covid-19, the non-performing loans for all categories of MFBs was much higher than the 5 percent recommended by the Central Bank of Nigeria. Moreover, the covid-19 and the associated lockdown had led to higher level of non-performing loans and loan losses resulting in higher level provisioning for loan losses.

Table 5 shows that the covid-19 pandemic and the consequent lockdown had impacted on all categories of MFBs as their level of non-performing loans had almost doubled. Even after the lockdown, none of the three categories of MFBs had returned to the pre-covid-19 pandemic level.

Table 6 shows that the capital adequacy ratio (CAR) of all categories of MFBs were affected by the Covid-19 pandemic and the consequent lockdown. On the face of it, the overall capitalisation of all categories of MFBs, measured by the CAR, may be considered adequate for their current risk level, with a risk weighted capital adequacy ratio (CAR) of approximately 33 percent during the lockdown, the high level of non-performing loans and increased risk weighted assets have moderated the CAR to 24 percent post lockdown, which is still above the regulatory minimum of 10%.

However, the reported capital adequacy ratio (CAR) may be misleading as the measurement of CAR for MFBs in Nigeria is highly dependent on the reliability in reporting the quality of the loan portfolio. Moreover, for unit MFBs, the CAR during and post lockdown is below the regulatory minimum, which means the banks are grossly undercapitalised coupled with the increase in risk weighted assets and greater provisioning which altogether may have eroded the shareholders’ funds.

Table 7 shows that other activities of microfinance banks were also affected by the Covid-19 pandemic and the government-mandated lockdown.

From the table, 82%, 61% and 39% of national, state and unit MFBs respectively, admitted that they have had to alter their product offers in terms of features and eligibility requirements. For instance, most of the MFBs had to adjust interest rates on existing loans and advances during the lockdown to encourage borrowers to continue to service the facilities. Some suspended interest payment altogether during the lockdown while others altered the eligibility criteria for certain classes of facilities especially consumer loans to encourage more of their clients to borrow to smoothen consumption during the lockdown.

Moreover, 32%, 75% and 82% of national, state and unit MFBs respectively admitted that communication with customers changed dramatically during the Covid-19 induced lockdown. Most of the national MFBs were able to maintain interactions with customers using digital channels especially Automated Teller Machines (ATM) and Point-of-Sale Terminals (POS). However, the banks admitted that their inability to visit customers for loan monitoring and other due diligence activities created room for the emergence and high prevalence of delinquent loans during the lockdown.

For state and unit MFBs that lacked the resources and manpower for digitalization of their operations, the lockdown completely crippled their operations, as they have no way of interacting with customers, many of whom used the opportunity to default in servicing their facilities with the banks. As high as 82% of the unit MFBs admitted that they did not open their offices nor interacted with their customers during the lockdown with severe implications on their operations and profitability.

Also from Table 7, 45%, 65% and 84% of national, state and unit microfinance banks respectively reported changes in reserves as a result of the covid-19 pandemic and subsequent lockdown. Despite the CBN’s directives that "an MFB shall not appropriate any sum from its Reserve Fund without the prior written approval of the CBN (2019), it is apparent that many of the MFBs may have depleted their reserve funds in order to stay afloat. For instance, during the lockdown, most of the MFBs were still paying salaries, utilities and other essential services with no value addition. By maintaining these costs when the banks were not generating income means that the banks would have no option but to tamper with reserve funds despite the regulatory consequences that might follow such action.

Moreover, 75%, 61% and 32% of national, state and unit MFBs respectively reported to have adjusted and modified their risk management framework in response to the Covid-19 pandemic associated risks. For instance, the national MFBs has adopted the time-and-risk adjusted cashflows framework using largely the discounted cashflows in their revenue projections. Some of the state MFBs also reported to have adjusted downwards the maximum loan obligations to certain business activities like hotels, tourism, entertainments and logistics. Some MFBs especially the unit MFBs have however, decided not to adjust their risk management frameworks until the pandemic is over.

Furthermore, most of the MFBs have resorted to cost reduction as part of their survival strategies. For instance, 65%, 43% and 22% of national, state and unit MFBs respectively reported to have reduced their operational costs to enable them stay afloat. The national MFBs have a lead in terms of cost reduction because of their national spread unlike the unit MFBs who may find it more difficult to adjust costs in the short to midterm horizon because of their unique locational characteristics. Areas where the MFBs have tried to cut down costs include: staff training, staff development, reduction in salaries, staff layoffs and curtailment in non-essential services. These cost-cutting devices like reduction in salaries, staff training and development will have adverse impact on the morale of the staff especially if the situation persists for a long time.

In terms of impact of the covid-19 pandemic on clients/customers of the MFBs, table 7 shows that the impact of customers have been severe especially for the unit MFBs. For instance, 79% of customers of unit MFBs have been constrained by the covid-19 pandemic and government-mandated lockdown to request for outright debt cancellation of their existing loans. 61% for state and 39% for national MFBs respectively. Again, 22%, 54% and 73% of national, state and unit MFBs customers respectively have requested for debt rescheduling due to their inability to service their debts because of the covid-19 pandemic and the associated lockdown.

Moreover, as high as 83% of customers of unit MFBs have requested for interest waiver while 74% and 45% of customers of state and national MFBs respectively have also requested for same. Also, 64% of unit MFBs customers are constrained to ask for principal and interest waiver at least until the pandemic is over or the situation improves to enable them resume servicing of their debts.

More importantly and of greater danger is that as high as 77% of loan customers for unit MFBs may have totally abandoned their existing loan obligations as evidenced by zero activity in terms of loan repayment of debts which have fallen due within the period under review. This obviously may have accounted for the increase in portfolio at risk (PaR) for the MFBs within the period under review. The state MFBs also reported that as high as 62% of their existing loan customers may have abandoned their loan obligations as a result of the covid-19 and consequent lockdown implemented to curtail the spread. Even for the national MFBs, as high as 33% of their loan customers have not serviced their loans that have fallen due within the period of the lockdown.

5. Discussion of Findings, Conclusion and Recommendations

5.1. Discussion of Findings

In discussing the findings of this study, the key question is to what extent has the coronavirus pandemic impacted on the activities and wellbeing of Microfinance Banks (MFBs) in Nigeria? To put the discussion in context, we compare the findings of the study with the result of the survey on ‘Nigeria’s Microfinance Banks Sector’ conducted by the World Bank Group in 2017 (WB, 2017). The 2017 survey by the World Bank Group is the largest, most comprehensive and up-to-date survey on Microfinance Banks Sector in Nigeria.

Findings from the study showed that the Covid-19 pandemic has impacted negatively on the performance of loans made by MFBs. Traditionally, the performance of loans is measured using the portfolio at risk (PAR). The PAR shows the portion of the loan portfolio that is affected by arrears of non-performance and therefore at risk of not being repaid. In other words, PAR represents the outstanding amount of all loans that have one or more installments of principal and interest past due by a certain number of days. Findings from the study showed that PAR of all categories of MFBs deteriorated during the lockdown from 14.8% (pre-Covid-19) to 23.8%, during lockdown and 17.6% after the lockdown. More importantly, the unit MFBs which has the highest number in the sample had PAR of 43.8% as against 20% reported during the World Bank Survey in 2017. This is far above the 5% recommended by the Central Bank of Nigeria and compares less favorably with some selected countries in Africa. For instance, South Africa (5%), Egypt (3.9%), Botswana (3.9%), Lesotho (4.5%), Gambia (3.3%), Mauritius (5.6%), Seychelles (2.6%), Rwanda (4.9%) and Uganda (5.7%) (World Development Indicators 2020). Such a high level of PAR indicates that the financial self-sustainability of MFBs especially the unit-based MFBs is suspect. Consequently, the MFBs might resort to raising interest rates, which is already high at average of 60% per annum (World Bank 2017), to offset their loan losses.

Again, the study reveals that the overall loan portfolio of MFBs have shrunk as a result of the Covid-19 pandemic and the associated lockdown. Pre-Covid-19, the average loan portfolio of MFBs as a percentage of deposits was 68% which was slightly higher than the 60% recommended by the Central Bank of Nigeria. During the lockdown, the average loan portfolio decreased to 30.9%, with a slight recovery to 38.9% after the lockdown but still below the pre-Covid-19 level and below the 60% recommended by the regulatory authority. MFBs need to create loans in order to generate income and ensure self-sufficiency.

Moreover, the study reveals that the Covid-19 pandemic created liquidity problem for the MFBs in Nigeria. Findings from the study showed that nearly all the MFBs sampled reported having liquidity problem and in consequence, many had to reduce or suspend lending and expenses during the lockdown. Overall, the liquidity ratio for all categories of MFBs decreased from 34.2% pre-Covid-19 to 14.7% during the lockdown, with a slight recovery to 18.2% after the lockdown. At 18.2%, the liquidity level is below the 20% recommended minimum by the regulatory authority. More importantly, as many of the MFBs could not access funding from outside sources (lenders and investors) during the lockdown, they resorted to lowering of staff salaries and laying off staffs in order to cut down on cost in the face of liquidity constraints. The absence of lender-of-last resort for MFBs in Nigeria dealt a heavy blow on MFBs ability to cover liquidity shortages to pay salaries and other current expenses.

Furthermore, the Covid-19 pandemic and the associated lockdown affected MFBs ability to interact with clients. It should be noted that personal interactions and onsite visits to clients are unique selling points that differentiate them from other service providers like Fintechs. However, the Covid-19-induced lockdown prevented MFBs from these personal interactions and may have contributed to the increase in the number of delinquent loans witnessed during the lockdown. Moreover, most of the MFBs especially those in the rural areas lacked the technology to go virtual and only few MFBs, mostly the national MFBs have electronic channels like ATM, POS, etc for service delivery during the lockdown. The implication is that most MFBs lost complete touch with their customers at a time such personal and intimate communications are badly needed.

However, the most remarkable impact of the Covid-19 pandemic was that most of MFBs were ill-prepared and ill-equipped to support their customers and their businesses during the lockdown. Elsewhere, MFBs were the last line of defense for the poor and vulnerable households who make up the larger percentage of their clienteles. Findings from the study showed that most of the MFBs surveyed were in a very fragile position to offer any assistance to their customers at a time such assistance was badly needed. For instance, out of approximately 40% of customers that requested for debt cancellation, less than 1% of such requests were honored. For the nearly 73% that requested for debt rescheduling, less than 15% had their requests granted while out of the 83% that requested for interest waiver, only about 22% had their request granted. In consequence, many of the customers abandoned their existing loan obligations. For instance, approximately 77% of loan customers of unit-based MFBs did not service their loan obligations during the lockdown while 62% and 33% of customers of state and national MFBs respectively did not service their loan obligations during the lockdown. Indeed, the quest for food and medicine may have been prioritized over loan repayments. Regrettably, despite their large numbers, the MFBs achieved little in terms of expanding credit and other financial services to their customers at a time such services were critical.

Finally, we must mention that the findings of our study are consistent with the results of similar studies in other jurisdictions. In particular, studies by Dabrowska, Korynki and Pytkowska (2020) on the impact of Covid-19 pandemic on microfinance sector in Europe shows that the pandemic affected all countries in the European Union, although the severity of the impact was markedly different from very strong in some countries to almost negligible in others. But all the countries in the European Union implemented some form of lockdown which affected microfinance institutions and their clients. Specifically, the Covid-19 pandemic affected the microfinance institutions’ portfolio performance, decreased demand for credit, increased credit rationing, distorted product offers and led to breakdown in communication and interaction with clients. In a similar study on the impact of the Covid-19 pandemic on microfinance institutions in Pakistan, Malik et al (2020) found that the Covid-19 pandemic has not only threatened lives and livelihoods but has created serious challenges for microfinance institutions that serve communities in Pakistan. Specifically, their study found that on average, week-on-week sales of clients of microfinance institutions fell by about 90 percent. As a result, 70 percent of microfinance borrowers could not repay their loans and only 34 percent repayment rate was recorded by the microfinance institutions in April, 2020 in Pakistan. Also studies by Foundation Grameen Credit Agricole in collaboration with Inpulse and Appui Au Developpement Autonome (2020) on the impact of the Covid-19 pandemic on microfinance institutions in seven selected countries in Southeast Asia, Sub-Saharan Africa and Central America in 2020 shows that the Covid-19 pandemic have led to increased portfolio at risk, reduction in loan portfolio, increased expenses for materials and equipment, slowdown or complete halt in disbursement by funders, rapid depletion/shortage of equity, lack of liquidity, increase in financing and/or hedging costs, significant depreciation of reserves, difficulties to repay funders and large saving withdrawals by clients.

5.2. Conclusion

From the foregoing, it is clear that the Covid-19 pandemic and the government-mandated lockdown to curtail the spread have dealt a heavy blow on the operations and viability of MFBs in Nigeria especially the unit based MFBs. It must be remarked that even before the pandemic, a study on Nigeria’s MFBs Sector by the World Bank (2017) showed that most of the MFBs in Nigeria especially the state and unit based ones were in precarious situation; many of them terminally ill. According to the study, the state of the MFBs in Nigeria shows that the government aspirations in setting up the MFBs have only been marginally achieved despite the large number of licensed MFBs in the country. The Covid-19 pandemic have further complicated the situation and would require urgent and multi-stake holder approach to salvage these institutions who are supposed to be serving the most vulnerable populations and are plausibly most in need of support at this time of Covid-19 pandemic.

5.3. Recommendations

Based on the findings, we recommend as follows:

a) There is urgent need for special regulatory forbearance for the MFBs. This could come by way of emergency liquidity facilities by the Central Bank of Nigeria (CBN) and regulatory forbearance (or forgiveness) of loans or facilities currently enjoyed by the MFBs. The CBN should expand its existing credit guarantees^[10] and discount window to accommodate the MFBs who are hitherto not eligible for the CBN discount window or the lender of the last resort services to fill the funding gap that the pandemic has brought to bear. This should be done as a matter of urgency and later on, the MFBs should be directed to recapitalize. The study has shown that most of the MFBs are in dire need of liquidity to enable them to continue to serve clients from relatively poor backgrounds and vulnerable households who needs access to credit to smoothen consumption and manage liquidity until the pandemic is brought under control. To this end, it is important that MFBs are not allowed to collapse under the weight of the Covid-19 pandemic as that will spell doom to millions of their clients (especially vulnerable households and microenterprises) who are working hard to move forward in the face of the pandemic.

b) There is need for the creation of a special social fund for MFBs for on-lending to customers. This special fund should be funded by the government from the Covid-19 Palliative Fund already appropriated by the National Assembly of Nigeria. Access to this fund should be for eligible MFBs who will be required to on-lend same to their customers at a concessionary rates and encouraged to show empathy to their customers. For instance, while the MFBs work towards limiting their loan losses, they should also show empathy to struggling customers by restructuring their loan obligations through longer moratorium, interest waivers and debt cancellation where possible. The special social fund could be helpful in this direction to reduce further misery on struggling customers who need all the financial assistance they could get at this critical time.

c) There is urgent need to encourage MFBs especially the unit MFBs who are majorly found in semi-urban and rural areas to leverage on information and communication technology (ICT) in their operations. This will enable them service their customers remotely through electronic channels and reduce the need for physical contact. To this end, there is need for the Central Bank of Nigeria to galvanize the National Association of Microfinance Banks (NAMFBs) to speed up the implementation of the National Association of Microfinance Banks Unified IT Platform (NAMBUIT) which implementation has remained in the pipeline for too long. This unified information technology platform for MFBs will enable the MFBs especially those in the rural areas to automate their operations, enhance statutory reporting and opening the MFBs to the electronic payment system and achieving economics of scale through bulk purchases and provision of broad array of microfinance products covering payments, savings and credit services.

d) Going forward, there will be need for the regulatory authorities especially the Central Bank of Nigeria to undertake a comprehensive assessment of the MFBs especially the state and unit MFBs to determine their going-concern status. The proposed assessment should also involve a thorough review of the regulatory framework and prudential requirements as applied to MFBs, with a view to adjusting these requirements where necessary. In particular, there is need for enforce new capital regulations in view of the deterioration of asset quality of these banks. The study show that capital adequacy of most of the MFBs especially the unit ones have been serious eroded and shareholders’ funds impaired by huge loan losses. There is therefore, need for the CBN to enforce a new regulatory capital requirements that will involve fresh injection of funds from the shareholders and consolidations through mergers and acquisitions. Everything must be done to ensure the existing MFBs are standing on sure financial footing to put an end to future regulatory forbearance.