Once upon a time, microcredit, the extension of financial services to those unable or unlikely to access traditional finance, was considered the silver bullet to poverty alleviation around the world.
The revolution began in the 1970s when the Grameen Bank provided financial services to small businesses that were too poor to access traditional banks in Bangladesh. With small loans at low interest rates and an account to store extra income, poor households were able to increase their earnings, create savings buffers and build assets.
Microcredit surged in popularity at the start of the new millennium as it seemed to lift millions of people out of poverty through the simple vehicle of financial inclusion. The United Nations declared 2005 as the "International Year of Microcredit" and in 2006, the Grameen Bank and its founder, Muhammed Yunus, were jointly awarded the Nobel Peace Prize.
Fast-forward to 2018 and microcredit has spread throughout the world. In Africa, microfinance institutions have extended their reach: from 3 million depositors and 3 million borrowers in 2002 to 20 million depositors and 7 million borrowers in 2012. But, despite this expansion and supportive government policies in mobile money and micro-insurance, financial inclusion still evades Nigeria. A 2016 Enhancing Financial Innovation and Access (EFInA) survey estimated that 42% of Nigerians are financially excluded.
Keen to tap into the power of microfinance, particularly in its favoured agriculture sector, the Federal Government launched the Anchor Borrowers’ Programme (ABP) through the Central Bank of Nigeria (CBN). Aimed at empowering smallholder farmers by transforming their subsistence farms into commercial businesses through financial inclusion, the ABP targets small farmers who are too risky to lend to since they typically would not have the collateral required by conventional banks.
The scheme supports farmers with low interest rate loans and farm inputs on the condition that the individual farmer is part of a larger group of farmers and linked to an anchor (agro-processor) or state government that stands as a guarantor for the farmer. The farmer repays the loan after selling the farm produce to the anchor who processes the produce for sale or storage. In essence, the blueprint of the ABP is to increase food production by providing credit facilities to farmers and reduce food waste by linking farmers to agro-processors.
By many accounts, the program has succeeded. The ₦55 billion programme currently serves over 250,000 farmers across 30 states and has recently partnered with the Rice Farmers Association of Nigeria (RIFAN) to extend its reach to 300,000 more farmers across 20 states. In earnest, Your Nigerian Economist believes that ABP’s coverage and reach are commendable. Such inclusive and large-scale programmes on farming have the potential of building sustainable food production systems and ensuring food security.
Be that as it may, some stakeholders have raised concerns about the performance of the ABP. Farmers are struggling with loan repayments, and several thousand have already defaulted on their obligations. ₦950 million was lent to farmers in Kano State, but only ₦6 million has been recovered, with 4,5000 farmers defaulting. The issue has turned particularly sour in many states as some state governments have taken defaulting farmers to court. In Kebbi State, where the state government stood as a guarantor for farmers, over 5,000 defaulting farmers have been sent to prison.
Meanwhile, farmers alleged that government officials had sabotaged the ABP. The story goes that these officials included their supporters as the primary beneficiaries of the scheme, with some of these beneficiaries considering the loans as rewards for political support during the 2015 elections, thus harbouring no intentions to pay back.
Some farmers that actually benefitted from the ABP complained that loans were disbursed after the farming season, reducing their ability to pay back. Others have suggested that the finer details of the scheme were unclear and misinformation is to blame for the high levels of default.
Amid all the confusion, one thing is clear. Ideas are important, but policy design is an underrated skill in Nigeria. For example, it is clear that a proper beneficiary monitoring mechanism should have been required for the ABP. Likewise, an adequate and robust regulatory framework that supervises the implementation and operation of the programme is needed for the ABP to achieve its purpose.
The ABP is just one example of the potential for microcredit in the Nigerian economy and it's mixed results should serve as a warning to a government keen on further diversifying its economy. Nigeria is not Bangladesh, and as the IMF* recently hinted, the CBN is not a Grameen Bank style development institution. However, a more enlightened approach is vital in enjoying the gains of microcredit.
*Read the IMF's recent report on Nigeria's economy here