I feel highly honoured and privileged that this citadel of learning which is a subsidiary of Lift Above Poverty Organisation (LAPO), founded by a highly reputable man of honour and integrity, Godwin Ehigiamusoe Ph.D., accepted me to spend my one year sabbatical leave with LAPO Institute. The Institute is a centre for excellence in the provision of quality training in microfinance and enterprise development. It is with a sense of awesome gratitude to the Almighty God and a fulfilled ambition that I stand before this distinguished audience to present this lecture.
On assumption of duties at the Institute, I was particularly humbled as I drew inspiration from what the Holy Bible says in first Corinthians 1:20, 24, 25, 28 and 29:
“Where is the Scholar? Where is the Philosopher of this age? Has God not made foolish the wisdom of the world? But Christ is the power of God and the wisdom, and the weakness of God is stronger than man’s strength. He chose the lowly things of this world and the despised things, and the things that are not to nullify the things that are so that no one may boast before Him.”
It is therefore my pleasure, and inspired by the wisdom of God to present this valedictory lecture to mark the conclusion of my one year sabbatical leave with LAPO Institute. The title of the lecture is “Town and Gown Nexus in Microfinance: The LAPO Institute Praxis.”
The topic of this lecture appears more complex than what the title may readily bring to mind. Nevertheless, efforts will be made in this lecture to present the critical elements of the topic in a lucid way. The lecture is organised into five sections. Following this introduction, we shall discuss:
I. Concept of Town and Gown
2. Microfinance Theory and Practice
3. Town and Gown Nexus in Microfinance: A Conceptual Framework
4. Empirical Evidence from LAPO Institute Experience
5. Challenges and Prospects
6. Recommendations and Conclusion
2. Concept of Town and Gown
Town and gown are two distinct communities of a university town; “town” being the non-academic population and “gown” metonymically being the university community. A town can be regarded as a place consisting of an agglomeration of houses, shops and other buildings bigger than a village but usually smaller than a city. Most towns have paved roads, street lights and public system of drainage, water supply, power and a good transport system as well as an organised local government.
The inhabitants are mostly engaged in trade, industry or administration. The New Webster Dictionary of the English Language (1992 edition) defines a gown as a woman’s dress, especially a particularly elegant one and also a loose robe worn as official dress by judges, lawyers, aldermen, etc. It is a woman’s dress, especially worn for special occasions and used by members of universities at special ceremonies such as graduation (or convocation), matriculation and during special lectures like the one of today.
A university is an institution at the highest level of education where you can study for a degree or do a research. It essentially consists of a group of faculties providing higher education and empowered to grant academic degrees. All universities can trace their spiritual origin (and many their actual origin) to the “studia generalia” of Middle Ages centres of study licensed and privileged by secular or ecclesiastical authority, open to students of all classes and nationalities.
The earliest universities (apart from the 10 century medical school of Salerno) were in Paris, Bologna, Oxford and Cambridge. University extension is the making available by a university of its lecturers, and the running of courses of instruction, for the benefit of people who are not members of that university. LAPO Institute, and indeed the entire LAPO organisation through the various collaborations with several universities in Africa and elsewhere in the world is a quintessential example of university extension.
2.1 Working Definitions
For the purpose of supervision, the guidelines provide working definitions and description of microfinance banks; micro-loans; micro-enterprises and a microfinance client. For example, the guidelines indicate that the size of a micro-loan which should not exceed N500, 000 (Five Hundred Thousand Naira only) or an amount to be periodically determined by the Central Bank of Nigeria. The policy guidelines also state that the tenure of microfinance loan is 180 days. It however provides exception on loans for the purpose of agriculture where gestation period could be longer.
2.1.1 Microfinance Banks: Any company licensed to carry out the business of providing financial services such as savings and deposits, loans domestic fund transfers and non-financial services, to microfinance clients.
2.1.2 Microfinance Bank client: economically active poor or low-income household, the un-banked and underserved people in particular vulnerable groups such as women, physically challenged, youths, micro entrepreneurs, informal sector operators and subsistence farmers.
2.1.3 Microenterprise: a business which,
• requires micro loans and little bits of other financial services
• is usually built and owned by a sole owner or an entrepreneur
• does not often require formal registration
• has basic or simple accounting system and flexible management procedures.
2.1.4 Microloan: a facility granted to an individual or a group of borrowers whose principal source of income is derived from business activities involving production sale of goods or services
2.2 Inclusive Financial System
Financial service plays a critical role in reducing poverty. Permanent access to financial service can help poor people take control of their lives. When good practice is applied, financial services empower poor households, allowing them to progress from hand-to-mouth survival to planning for the future, acquiring physical and financial assets, and investing in better nutrition, improved living conditions, and children’s health and education (CGAP, 2006).
Financial services for the poor encompass savings, credit, payment and transfer services, and insurance. Providers include NGOs, savings and credit cooperatives, private and state owned banks, postal banks, members-owned community organisations, nonbank intermediaries such as finance or insurance companies and other suppliers such as agricultural traders. Good practice guidelines codifies what is already known about basic principles of good practice which have been translated to eleven concrete operational guidance for staff of donors and investors already endorsed by the Consultative Group to Assist the Poor (CGAP, 2003):
a. Poor people need a variety of financial service, not just loans. In addition to credit, they want savings, insurance and money transfer services.
b. Microfinance is a powerful tool to fight poverty. Poor households use financial services to raise income, build their assets and cushion themselves against external shocks.
c. Microfinance means building financial systems that serve the poor. Microfinance will reach its full potential only if it is integrated into a country’s mainstream financial system.
d. Microfinance can pay for itself and can do so if it is to reach very large number of poor people. Unless microfinance providers charge enough to cover their costs, they will always be limited by the scarce and uncertain supply of subsidies from donors and government.
e. Microfinance is about building permanent local financial institutions that can attract domestic deposits, recycle them into loans and provide other financial services.
f Microcredit is not always the answer. Other kinds of support may work better for the people who are so destitute that they are without income or means of repayment.
g. Interest rate ceiling hurt poor people by making it harder for them to get credit, making many loans cost more than making a few large ones. Interest rate ceilings prevent microfinance institutions from covering their costs and thereby choke off the supply of credit for the poor people.
h. The job of government is to enable financial services, not to provide them directly. Government can almost never do a good job lending, but they can set a supporting policy environment.
i. Donor funds should complement private capital, not compete with it. Donors should use appropriate grant, loan, and equity instruments on a temporary basis to build the institutional capacity of financial providers, develop support infrastructure and support environmental service and products.
j. The key bottle-neck is the shortage of strong institutions and managers. Donors should focus their support on building capacity.
k. Microfinance works best when it measures — and discloses — its performance. Reporting not only helps stakeholders judge costs and benefits, but it also improves performance. MFIs need to produce accurate and comparable reporting on financial performance (e.g. loan repayment and cost recovery) as well as social performance (e.g. number and poverty level of clients being served).
These Good Practice Guidelines for funders of microfinance builds on the high level of commitment to good practice and donor harmonisation and incorporates lessons learned from a series of CGAP-led Country-level Effectiveness and Accountability Reviews (CLEARs). The first edition of these guidelines was endorsed in November 2004 by CGAP members.
3. Microfinance Theory and Practice
There are numerous definitions of microfinance by microfinance theorists (gown), practitioners and advocates (town) in the literature. The common denominator converge around two points: poverty alleviation and financing. This implies that microfinance is the point at which development (poverty alleviation in this case) and finance synchronise. Microfinance can also be regarded as an economic tool for providing financial services to the low income poor as an intervention.
Ehigiamusoe (2005) quoting Legerwood (1999) defines microfinance as provision of financial services to low-income clients including the self-employed. He asserts further that microfinance goes beyond disbursement and collection of loan repayments and savings, that it also refers to a set of elastic organisational structures and procedures by which appropriate financial services are delivered to low-income people and owners of micro enterprise on a sustainable basis (Ehigiamusoe, 2005). Microcredit is the extension of small loans to a group of poor people, especially women, for the purpose of investing in self-employment programmes. However, microfinance better describes the activities involved which include credit, savings and capacity building programmes. Microfinance programmes are targeted towards improving the earning capacity of the clients, hence their standard of living.
A poor woman who generates income through microcredit schemes but who does not have adequate access to healthcare for herself and her family, who lacks essential information about health and nutrition and who is unable to send her children to school is still living in poverty. There is a greater reduction in poverty when microcredit programmes are combined with increased access to basic social services than when the programme focus on credit alone. When microcredit is linked with access to basic social services and key social development messages, the health and nutrition of borrowers’ children, particularly girls improves; school enrolment increases, safe water and sanitation use broadens. This combined approach may be represented diagrammatically through the wealth distribution pyramid.
Through microfinance, we can adequately leverage the peculiar features of the poor at the bottom of the pyramid for the benefit of the poor themselves, the microfinance institutions/microfinance banks (MFIs/MfBs) as well as for development authorities or the government and development partners whose major objective is economic growth.
3.3 The Mission and Objectives of Microfinance
Basically the philosophical underpinning of microfinance is to help poor households overcome poverty through sustainable livelihood mechanism. This is usually possible through provision of credit, basic training in business management as well as other financial services that help low income persons to acquire productive assets and knowledge about their health. Microfinance has a dual mission of financial sustainability as well as non-financial goals contained in the social mission. Both are expected to facilitate easy access to microcredit and supporting services.
3.3.1 The Social Mission
The social mission of microfinance is to improve the standard of life of poor households through income generating ventures hence reducing vulnerability to poverty, disease, hunger, squalor, ignorance and fatalism. It is also to empower them to be able to leverage their initiatives and to have access to enjoy social recognition and the opportunities to exercise their fundamental human rights.
Human rights are rights that belong to human beings because they are human. The United Nations Universal Declaration of Human Rights (1948) contains these rights as a “Declaration” not a treaty. Article 17 is on the right of everyone to own property alone as well as in association with others and not to be arbitrarily deprived of such property.
The creditor faces credit risk once he/she parts with the money which is the risk of default by the debtor. When the debtor defaults, the creditor is obligated to go after him/her which automatically creates debtor-creditor relationship. That a debtor owes a creditor is not a criminal offence. It becomes a civil one where the creditor would have been arbitrarily deprived of his money contrary to Article 17(2) of the United Nations Universal Declaration of Human Rights.
To promote credit as a human right is also to promote the exposure of the debtor that obtained it to degradation that would be consequential upon default. It is also to promote their humiliation in the hands of justifiable angry creditors and perpetuate their poverty and misery upon a foreclosure. One good thing about the United Nations Human Rights document is that it is a “Declaration” and not a treaty.