Zenith Bank Plc has announced a profit before tax of N54.1 billion for the half year-ended June 30, 2013, indicating a growth of eight per cent above the N50.2billion recorded in the corresponding period of 2012.
According to the results made available by the Nigerian Stock Exchange (NSE) Thursday, profit after tax (PAT) grew by the same margin. PAT rose from N42.41 billion to N45.419 billion.
The bank had ended the period with a growth of 13 per cent in gross earnings from N151 billion to N171 billion. Interest income grew by 16 per cent from N111 billion to N128 billion, while net interest income appreciated by 15 per cent from N79.9 billion to N91.35 billion.
However, a higher tax of N8.664 billion paid during the review period compared with N7.752 billion last year reduced the profit growth to eight per cent.
But customers’ deposits grew by 18 per cent from N1.701 trillion to N2 trillion, indicating customers’ confidence in the bank. Also, cost to income ratio reduced from 57.2 per cent to 53.3 per cent.
Earnings per share followed the same positive trajectory, rising by 11 per cent from 134 kobo to 144 kobo.
Speaking on the bank’s outlook for 2013, the Managing Director/Chief Executive Officer of Zenith Bank, Mr. Godwin Emefiele, had said the drive for low cost and appropriately mixed deposit base to fund credit and money market transactions would continue.
“We are committed to be a dominant player in the money market space to drive up income and profitability going forward,” he said.
He added the representative office of the bank opened in Beijing, China, would fetch Zenith Bank some significant contributions considering the various emerging business opportunities in China.
On customer service, Emefiele said the bank would continue to focus on strengthening its relationship management in a bid to surpass stakeholders’ expectations.
Meanwhile, the stock market managed a marginal growth of 0.021 per cent as the bulls attempted to return after three consecutive days of dominance by the bears.
The Nigerian Stock Exchange (NSE) All-Share Index rose from 37,103.67 to close higher at 37,111.64.
As banks re-strategise to fill the vacuum expected to be created by the new policy on cash reserve requirement for all public sector funds, the outlook for 2013 banking sector performance appears to favour a regime of declined profitability and scramble for deposits, reports Festus Akanbi
Two weeks after the Central Bank of Nigeria (CBN) hit money deposit banks hard with the stringent monetary policy, which raised the cash reserve requirement (CRR) for all public sector funds to 50 percent from 12 percent, the echoes of the decision of the monetary policy committee of the apex bank is still reverberating in the banking sector. This is because, most analysts that have so far reviewed the emerging scenario in the nation’s banking industry appeared to have spoken in union by raising the fear in respect of two major developments, which they say may alter the course of banking in the remaining period of the year.
Dip in Profitability
One of the fears raised is the tendency of the “financial strangulation,” which the new policy on CRR will cause in the industry. According to them, the immediate fallout of this scenario will be a dip in the profit margins of most of the banks especially those with heavy exposure to public sector funds.
Unfortunately, the policy on cash reserves rolled out by the CBN came on the heels of the fear of lower yields from fixed securities in 2012. One of the institutions that raised this fear is Afrinvest Securities Limited. The investment firm reasoned that the significant earnings growth recorded by Nigerian banks in 2012 may be challenged this year following an anticipated lower yields outlook for fixed income securities as well as increasing cost in the industry.
A fixed income security is an investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. Unlike a variable-income security, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed-income security are known in advance.
An example of a fixed-income security would be a 5% fixed-rate government bond where a N1, 000 investment would result in an annual N50 payment until maturity when the investor would receive the NJ1, 000 back. Generally, these types of assets offer a lower return on investment because they guarantee income.
Afrinvest Securities Limited’s position is contained in its report titled: “Nigerian Banking Sector Report –Standing on the fourth Pillar,” which focused on the 2012 financial reports on banks.
First Quarter Performance
Virtually all the banks whose first quarter results for 2013 have been made public recorded significant profits, a feat, which analysts said may be reversed by the time the final results for the year are ready.
In its first quarter results, United Bank for Africa Plc recorded a profit after tax of N27.7 billion, Fidelity Bank declared N9.1 billion, while Skye Bank’s profit before tax and profit after tax were put at N10.5billion and N84 billion respectively. The same trend is obtained in other banks, which have released their results so far.
Apart from Afrinvest, other watchers of the banking sector fear that by compelling banks to leave a bigger chunk of public sector funds in CBN, banks would be denied investible funds with a negative consequence on their profitability at the end of the financial year.
Writing on the outlook for the banking industry in 2013, Financial Derivatives Company Limited, maintain that banks are likely to raise deposit rates as they compete more intensely for other sources of funding, raising the returns on naira deposits.
Scramble for Deposits
Last week, some banks, in response to the new challenges engaged their customers through SMS messages on various offers aimed at increasing the latter’s appetite for savings. One of such messages was the one that originated from Stanbic IBTC, notifying existing and potential customers of COT free transactions and the readiness of the banks to part with higher deposit rates.
Other banks are said to have begun exploring ways to make their retail products irresistible to customers. Federal government deposits with the DMBs are estimated at N1.3trn. FDC explained that the introduction of a 50% CRR on public sector funds amounts to N650 billion quarantined or interest free. The quarantined amount is equivalent to one month and 2-3 weeks of Federal allocations. “Imagine a situation where FAAC allocations are delayed, interest rates will rise sharply due to the cash shortage,” the company said.
It added, “The DMBs’ initial reaction will be to scramble for funds to cover their positions. To do this, banks will repurchase their AMCON bonds, sell down on their Net Open positions (NOPs) or seek for more deposits from the government or private sector. The liquidity gap created at the market is expected to result
in a 3-4% spike in interest rates, which are currently at an average of 11.2%p.a. There will also be a reduction in the use of Open Market Operations auctions as a mop-up strategy, which will be unnecessary in an illiquid market.
Head Research and Intelligence, BGL Plc, Mr. Olufemi Ademola, had explained that, “There is no doubt that the hike in CRR on public sector deposits will hurt the banks. By the policy, 50% of all public sector deposits generated by the banks will be reserved with the CBN. This prevents the bank from utilising the cash for regular transactions, either trading or lending.”
He spoke on the backdrop of the fact that the increased reserve requirement would not attract any remuneration (in line with CBN circular of March 3, 2011). All these will be happening at a period of reduced income from COT and increased charges for AMCON operation.
Group Head, Ecobank Capital Nigeria, Rotimi Oyekanmi, also shared the view that banks would be denied earnings under the current arrangement. He is of the opinion that the CBN action on public sector deposit will lead to reduced earnings for the banks coupled with the reduction in charges (COT, etc) as earlier announced by the CBN.
In order to block the hole, which the new CRR regime is bound to cause, analysts predicted a renewed scramble for deposits among banks.
According to the Afrinvest report, the era of ‘real banking’ appears to be gradually re-emerging as traditional sources of high income and profitability continues to come under threat from competition and regulation.
It stated that banks were currently confronted with the need to restructure their cost bases, improve risk and pricing as well as manage customer relationships more efficiently. Therefore, it advised banks to develop and grow the depth of their core retail banking business to retain and amplify cheap deposits, expand their geographic footprint and scope as urbanisation gradually remodels cities and sub-urban areas, even as the firm urged mid-tier banks to consolidate and integrate vertically in order to compete with tier 1 banks as economies of scale and scope becomes differentiating success factors.
“We expect most bank ratios (particularly liquidity and capital adequacy) to remain in line with 2012 numbers. The outlook for treasury yields in 2013 should down play profitability for banks that have reduction and risk assets. We forecast industry earnings growth declining by more than half compared to the remarkable 128 per cent in 2012.”
THISDAY also gathered that some commercial banks have been working out modalities to revive some of their retail and treasury products to make them attractive to customers.
Furthermore, THISDAY also learnt that some of banks might also adopt a strategy that would hinge the monthly salaries and other emoluments on target.
Areola said the banks’ sources of income would have to be expanded. This, he said, is likely to be through lending to the private sector, which may require longer term and more stable deposits. “The banks would therefore be forced to encourage private savings to sustain lending to the private sector.
However, the tough risk management posture of the CBN is likely to still discourage aggressive lending and curtail creativity by the banks. The fear of regulatory punishment for non-performing loans may still restrict lending by the banks,” he stated.
He said, “Yes it will motivate banks to encourage savings but the savings don’t amount to much. To be frank public sector funds move our economy. We are not a producing nation,” he observed.
Tougher Regulations May Hamper Nigerian Banks' Earnings
CBN headoffice
BY Obinna Chima
Tougher regulations as well as anticipated higher cost of fund costs are likely to constrain Nigerian banks’ profitability over the next 18 months, global rating agency, Fitch Ratings has predicted.
In fact, the agency forecast that Nigerian banks are unlikely to see a repeat of their robust 2012 profits because of increasing pressure on earnings.
The Central Bank of Nigeria (CBN) had been focusing on consumer protection and encouraging financial inclusion and had outlined plans to phase-out most of the fees and commissions in the industry.
In addition to this, the latest decision by the CBN to indirectly tighten monetary conditions by raising the cash reserve requirement (CRR) for all public sector funds to 50 per cent from 12 per cent was also identified as another factor that could weaken banks’ earnings as the financial institutions would have to scramble for deposits to maintain their level of liquidity.
Therefore, Fitch said: “We expect new limits on bank charges imposed by the central bank to dent what have been highly profitable fees and commissions, particularly for those with large retail franchises. The most significant impact is likely to arise from the gradual phasing out of Commission on Turnover (COT)- a customer transaction fee - by 2016.
“We expect banks to fill any funding short-fall with more expensive sources or by selling liquid assets, leading to a sharp negative impact on net interest margins.”
Fitch pointed out that high treasury bills yields last year boosted banks' interest income.
“Although continuing tight monetary policy indicates that a sharp fall is unlikely, the yields have fallen slightly so interest income from banks' large sovereign bond portfolios is likely to be lower in 2013. The central bank has also stipulated that interest rates for savings deposits should not be lower than 30 per cent of the monetary policy rate, currently at 12 per cent.
“Overall, there could be at least an average 100-200 basis point negative impact on margins over the next 12 to 18 months. Further margin pressure may arise if the authorities impose caps on lending rates to nationally important sectors, such as SMEs or agriculture,” Fitch argued.
Furthermore, the firm indicated that with the development in the industry, the cost of the cleanup of the recent banking crisis was also rising, even as it anticipated a 200-300 basis points increase in cost/income ratios in the Asset Management Corporation of Nigeria’s (AMCON’s) annual level to 0.5 per cent of total assets, from 0.3 per cent.
It however pointed out banks would be able to partly offset the earnings pressure by boosting volumes, widening the range of fee-based products and concentrating on low-cost deposits.
“The AMCON bond maturities in December 2013 and October 2014 should give banks additional liquidity to expand as the AMCON bonds will be repaid with a mixture of cash and treasury bills. But if growth leads to a loosening of underwriting standards or exposure to new and untested segments, such as mass retail or the newly privatised sectors such as power, then there could be a relapse of bad debt problems.
“Weaker earnings and rapid growth would put greater pressure on capital. High capital buffers are necessary as the banking system is exposed to concentration risks and Nigeria's short credit cycles. These risks are reflected in the banks' low 'b' range Viability Ratings.
“A key rating driver is the maintenance of adequate core capital to support their growth in a difficult operating environment (Nigeria is rated 'BB-'/Stable). We would not view Tier 2 issuance as a substitute for raising new equity to support any material asset growth,” it added.
Zenith Bank Plc has announced a profit before tax of N54.1 billion for the half year-ended June 30, 2013, indicating a growth of eight per cent above the N50.2billion recorded in the corresponding period of 2012.
According to the results made available by the Nigerian Stock Exchange (NSE) Thursday, profit after tax (PAT) grew by the same margin. PAT rose from N42.41 billion to N45.419 billion.
The bank had ended the period with a growth of 13 per cent in gross earnings from N151 billion to N171 billion. Interest income grew by 16 per cent from N111 billion to N128 billion, while net interest income appreciated by 15 per cent from N79.9 billion to N91.35 billion.
However, a higher tax of N8.664 billion paid during the review period compared with N7.752 billion last year reduced the profit growth to eight per cent.
But customers’ deposits grew by 18 per cent from N1.701 trillion to N2 trillion, indicating customers’ confidence in the bank. Also, cost to income ratio reduced from 57.2 per cent to 53.3 per cent.
Earnings per share followed the same positive trajectory, rising by 11 per cent from 134 kobo to 144 kobo.
Speaking on the bank’s outlook for 2013, the Managing Director/Chief Executive Officer of Zenith Bank, Mr. Godwin Emefiele, had said the drive for low cost and appropriately mixed deposit base to fund credit and money market transactions would continue.
“We are committed to be a dominant player in the money market space to drive up income and profitability going forward,” he said.
He added the representative office of the bank opened in Beijing, China, would fetch Zenith Bank some significant contributions considering the various emerging business opportunities in China.
On customer service, Emefiele said the bank would continue to focus on strengthening its relationship management in a bid to surpass stakeholders’ expectations.
Meanwhile, the stock market managed a marginal growth of 0.021 per cent as the bulls attempted to return after three consecutive days of dominance by the bears.
The Nigerian Stock Exchange (NSE) All-Share Index rose from 37,103.67 to close higher at 37,111.64.
The Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, has disclosed that the N220 billion micro small and medium enterprises (MSMEs) fund will be accessed by Microfinance Banks (MFBs) at a maximum interest rate of nine percent.
The fund was officially launched in Abuja Thursday. The MFBs are in turn expected make the funds available for on-lending to young entrepreneurs, particularly businesses managed by women at reasonable rates.
Sanusi, who inaugurated the facility at the 7th Annual MSMEs Finance Conference and D-8 workshop on microfinance for SMEs themed: "Strategies for Sustainable MSMEs Financing", said the fund would further boost access to finance by MSMEs by providing wholesale financing windows for participating financial institutions (PFIs) as well as improve their capacity to meet credit needs of MSMEs.
The central bank governor further said the initiative was expected to offer funds at reduced cost to PFIs and particularly improve access of women entrepreneurs to finance, reiterating that 60 per cent of the fund would be allocated to women.
According to him, the intervention would also improve access of Non-Governmental Organisations (NGOs) to finance.
Sanusi however, cautioned that MFBs' access to the fund would not be automatic as they would still need to apply for the fund and meet certain regulatory requirements including competence as well as a record of good behaviour.
It was learnt that prospective beneficiaries of the fund would also need to present a three-year financial report.
The CBN governor said it would be premature to estimate the actual economic impact of the fund because governments at all levels also needed to improve the state of infrastructure in their states in order to complement access to finance.
Sanusi said as at 2012, the country had about 17.6 million MSMEs employing about 32.4 million people, who contribute about 46.54 percent of nominal GDP.
However, citing a survey by the International Finance Corporation (IFC) in 2010, he said 80 per cent of the MSMEs were excluded from the financial markets.
According to him, commercial bank loans to small scale enterprises declined from 7.5 percent in 2003 to only about 0.14 percent in 2012.
He said: "A number of reasons have been proffered for this financing gap. The banks readily attribute their risk aversion stance for not lending to MSMEs to demand-side constraints, which include the lack of managerial capacity, inadequate collateral, and poor record keeping, amongst others.
"However, there also exist supply-side issues such as high transaction costs and lack of understanding by the banks of the nature and operations of MSMEs Other constraints plaguing the MSME sub-sector in Nigeria include infrastructure deficit (especially, power and transport), policy inconsistencies, bureaucracy, multiple taxation and levies, weak intellectual property protection and contract enforcement, and insecurity."
Meanwhile, the Governor of Edo State, Comrade Adams Oshiomole, his Ekiti State counterpart, Dr. Kayode Fayemi as well as the Kano State Governor, Alhaji Rabiu Kwankwaso-all commended the CBN intervention fund in the MSME sector.
Oshiomole at a joint media briefing shortly after the event, said the new MSME scheme showed that the CBN Governor was still in touch with the masses especially the youths and women in the country.
He said the CBN must go beyond the launch and employ aggressive supervision to ensure that MFBs adhered to stipulated interest regime to customers if the scheme must succeed.
Fayemi on his part said the fact that a huge chunk of the fund would be provide to women was a commendable move adding that women were key to economic development and poverty reduction in the country.
The President, National Association of Microfinance Banks (NAMB), Mr. Jethro Akun, welcomed the initiative stressing that it would provide liquidity and force down lending rates.
The Football Association of Malawi (FAM) has written to Fifa to ask for their decisive Group F World Cup qualifier against Nigeria to be moved from Calabar.
The FAM is also unhappy with the appointment of Hamada el Moussa Nampiandraza as referee for the match.
Malawi trail Nigeria by two points and must win to progress to the play-offs.
Belgian coach Tom Saintifiet (pictured), who volunteered to lead the Flames against the Super Eagles, told local media this week that he is not comfortable with the match being played in Calabar.
"Nigeria would like to play in Calabar because it is close to Cameroon in the south-east of Nigeria - not so easy to reach with the only connection via Lagos and Abuja but with no international flights," he said.
"There are not so many hotels available so it will be very difficult to get there. I have one question also about security because the UK's Foreign & Commonwealth Office says it is a no-travel area.
"Fifa they may have to think of shifting the match either to Abuja or to another place outside Nigeria because Calabar is obviously not the capital and it is not a big city. The accommodation is not good for such a big game.
"But I think it is also a plan by Nigeria. They try to disturb their opponents on and off the pitch. So in all the ways we must be prepared as top professionals to try to find solutions and make good plans."
FAM's letter to Fifa states: "There is security risk in Calabar where the match will be played, as reported by the Commonwealth Commission. The venue of the match is risky to our delegation and we would like Fifa to shift the match to Abuja or to a neutral country where our delegation will be safe.
"Calabar has been flagged as a high-risk security area and this alert cannot be taken lightly. Our Minister of Sports will be part of the travelling delegation and we do not want to take security risks by travelling to Calabar."
FAM has also protested over the appointment of referee Nampiandraza, who it believes gave a "below par" performance at the 2013 Africa Cup of Nations.
The Central Bank of Nigeria on Wednesday began the implementation of its new 50 per cent Cash Reserve Requirement policy, which requires Deposit Money Banks to keep 50 per cent of all public sector funds with the central bank.
Consequently, the CBN withdrew an estimated N1tn from the banking system on Wednesday, forcing interbank lending rates to jump by seven percentage points from 12 per cent at close on Tuesday to 19 per cent on Wednesday, according to a Bloombergreport.
The CRR is the amount of cash that banks have to keep with the central bank and is used to drain out excessive money from the system.
Three weeks ago, the CBN had expressed concern over the excess liquidity in the balance sheets of the banks and imposed a 50 per cent Cash Reserves Requirement on all government deposits with commercial banks.
The CBN governor, Mr. Lamido Sanusi, had said the introduction of the 50 per cent CRR on public sector funds became imperative in order to further tighten liquidity owing to increased spending in preparation for the 2015 elections.
The CBN boss noted that about N1.3tn of public sector deposits was currently with commercial banks, adding that such huge funds posed a risk to the current liquidity condition.
The central bank said the 50 per cent CRR would tighten liquidity and supports the naira, after fixing August 7 as the commencement date for the new policy.
But the naira fell slightly against the dollar on Wednesday, closing at N160.10 on the interbank market, weaker than the N159.65 to the dollar it closed at on Tuesday, according to Bloomberg.
Dealers said this was because banks had already sold their dollar positions to meet the new requirement ahead of Wednesday, so the impact had already been priced in.
“The central bank finally debited our accounts today (Wednesday), draining the market of liquidity and the overnight rate went up to 19 per cent,” one dealer told Bloomberg.
Traders said many lenders had already sold down liquid assets and dollars to replenish their cash balances in preparation for the withdrawal.
“The market had priced the effect of the huge cash withdrawal since the announcement two weeks ago, while fresh dollar demand and lack of dollar flows are expected to push down the value of the naira next week,” another dealer said.
Analysts say Nigeria will need to attract back foreign inflows for the central bank’s move to have a sustained positive effect on the naira.
Efforts to defend the naira helped to shrink foreign reserves to $46.96bn by the end of July, from $48bn in June.
The CBN has spent billions of dollars of foreign reserves over the past two months on keeping the naira within its target corridor of plus or minus three per cent around 155 to the dollar.
The secured Open Buy back rose to 18 per cent from 11.5 per cent on Friday; six percentage points higher than the central bank’s benchmark interest rate.
Dealers expect interbank rates to rise further early next week after the market reopens from a two-day Muslim holiday, but should moderate toward the end of the week on the back of additional cash flows from matured treasury bills.
The spokesman for the CBN, Mr. Okoroafor Ugochukwu, could not be reached for comments.
However, financial analysts had disagreed with the CBN over the imposition of the 50 per cent CRR on all government deposits with the commercial banks.
According to the analysts, the application of the 50 per cent CRR will not guarantee reduced pressure on both the exchange rate and inflation rate as a result of increased government spending.
An analyst and a director at DLM Securities, Mr. Idowu Ogedengbe, who said the 50 per cent CRR was meant to reduce the banks’ assets, noted that the development might force banks to explore consumer and small and medium scale enterprises lending in order to retain their profitability.
While the world routinely extols people like Richard Branson and Bill Gates, there is a much larger world of entrepreneurship to be found in emerging markets. Rajesh Chandy and Om Narasimhan explain how micro-entrepreneurs may be a major factor in the return of a robust global economy.
Many in the West are used to hearing scholars, practitioners and policy makers extolling the virtues and benefits of entrepreneurship. A listing of the world’s top hotspots for entrepreneurship therefore comes, quite often, as a surprise. Entrepreneurship, traditionally defined as the activities associated with the starting and owning of one’s own business, is, in fact, much more prevalent along the alleyways of a poor country than along the highways of Silicon Valley.
Walk into any food market in a developing country, and amid the noise, amid the crowds, and amid all the energetic activity and apparent chaos, one glimpses capitalism in its most unvarnished form. One part of the market is occupied by vegetable vendors, all selling seemingly identical assortments of vegetables, at close to identical prices. Another, more enclosed space is taken up by the meat vendors, with those selling chicken clustered together and slightly away from those selling goat meat. Walk a little further across the market, passing by the fruit vendor section, you reach those selling cooking utensils — again selling seemingly identical assortments at close to identical prices. Each of these vendors is a micro-entrepreneur, in that he or she owns and operates a business with five or fewer employees.
Of course, micro-entrepreneurship in emerging markets is not restricted to food markets alone. For most of the world’s poor, micro-entrepreneurship is the only way to eke out a living. In Peru, 69 per cent of urban households earning less than $2 a day operate a non-agricultural business. In India, one estimate puts the number of urban poor who are self-employed at 40 per cent. Most rural farmers in developing countries also fall within the definition of micro-entrepreneurs. For these reasons, the percentage of entrepreneurs in the population is substantially higher in developing countries than in developed countries. For example, Bolivians engage in entrepreneurial activity at three times the rate as Americans, and five times the rate as those in the UK.
Eking out a living
Entrepreneurs in low-income countries are mostly small, and they often operate informally. In contrast to the successful serial entrepreneurs featured in business magazines, many among the world’s poor are parallel entrepreneurs, in the sense that they start, own and operate multiple businesses at the same time. In The Wealth of Nations, Adam Smith famously evoked the self-interest of the butcher, the baker and the brewer to describe the logic of capitalism. Today, a reasonable argument can be made that our own self-interest lies in better understanding microentrepreneurs, for at least three reasons:
The first reason has to do with the sheer numbers involved. Vast armies of micro-entrepreneurs populate the poor parts of the world. For multinationals and local players alike, they are customers of a large and changing assortment of goods and services. They are distributors for firms large and small; they ensure that others’ goods and services reach otherwise hard to reach markets. And despite their size, they can be formidable competitors to large multinationals. At the individual level, the local egg vendor has at least one advantage against the hypermarket — he can deliver half a dozen eggs on call! At the collective level, opposition by traders, farmers, and their micro-entrepreneur cousins has toppled governments, and forced giant corporations to withdraw. Moreover, even large firms can learn a few things from microentrepreneurs about managing in hypercompetitive environments, where margins are puny.
The second reason has to do with the promise inherent in microentrepreneurship. Initiatives that improve the lives of micro entrepreneurs can provide a way of helping people help themselves out of poverty. For policy makers and taxpayers, such initiatives might allow more effective use of the scarce funds available for poverty alleviation efforts. If successful, they could lead to an explosion in growth and prosperity and transform the face of many economies.
The third reason has to do with how little we know about micro-entrepreneurs. Barely any systematic research exists on the question of why some micro-entrepreneurs do better than others. In the absence of systematic research, potentially promising approaches to help micro-entrepreneurs improve their prospects may fail to get implemented because they face uncertainty and skepticism on the part of decision makers. What are the impediments that micro-entrepreneurs face? What are the most effective ways of removing these?
Obstacles to growth
We see three key obstacles to the economic advancement of micro-entrepreneurs:
They lack basic business skills. The management practices of most micro-entrepreneurs are a world away from those taught at leading business schools. They continue to use the set of practices they have seen and used for generations, even though demonstrably better options exist. Even literate and numerate micro-entrepreneurs don’t often have basic business skills. Rarely do they ponder basic questions such as those about differentiation (“Why do people buy from me and not others? If they didn’t buy from me, then whom would they buy from?”), customer targeting (“Am I selling to the right customers? Are there other customers who might be more attractive?”), product or service lines (“Why do I sell what I sell?”), and other similar questions in operations, money and people management.
They lack access to adequate information. Despite the remarkable progress that the mobile phone revolution has brought across the world, and despite the impressive success of IT companies from countries such as India, basic information about buyers, sellers and the larger marketplace around them remains elusive to most businesses. Too often, they end up selling to the wrong people, at the wrong time, and at the wrong price.
They lack access to money. Cheap, secure and convenient savings and remittance mechanisms remain stubbornly beyond the grasp of many entrepreneurs. For instance, according to the Reserve Bank of India, only 40 per cent of Indians have access to bank accounts. The situation is similarly bleak in most low-income countries, including in large emerging markets such as South Africa and China. Bank accounts often require minimum balances that are unrealistic for many micro-entrepreneurs. Or the time and effort necessary to trudge to the nearest bank branch — likely located far away, both physically and psychologically — is too large. The need for access to savings mechanisms is so intense that many micro-entrepreneurs are willing to pay substantial fees to so-called “deposit collectors” who go door to door and collect savings deposits from them. Effectively, they are willing to accept negative interest on their savings, just so they can save conveniently and (somewhat) securely. (As an aside, why not just put savings under the mattress? We’ve been asked this question many times, and we’ve put it to micro-entrepreneurs ourselves. Certainly, it’s hard to beat the convenience of a mattress-based savings scheme. But our respondents point out that it’s hard to assure security when your front door is just a flimsy piece of wood, and when potential burglars — or even your relatives — know exactly where your savings are likely to be located.)
Path to progress
While each of the problems above — in access to information, access to skills, and access to money — seems daunting, there is much cause for optimism. New technologies and business models — dreamt up by innovators within firms large and small, indigenous and multinational, profit and non-profit, governmental and non-governmental — are offering means to unlock the potential for growth. They are building the “soft” infrastructure necessary to drive inclusive growth across the world.
On the skills front, exciting initiatives to deliver low-cost, scalable means of teaching business are now underway. For example, Michael Hay of London Business School is leading the Business Bridge Initiative, which offers access to high-quality business education at low cost on a global scale. Business Bridge combines online learning with face-to-face tutoring by trained business school alumni, delivered through a network of local hubs. Having trained a range of entrepreneurs in South Africa and Ghana, Hay and his colleagues plan to soon introduce the initiative elsewhere.
There is even some preliminary evidence on the enormous gains to be had from such training. Dean Karlan and Martin Valdivia conducted a rigorous experiment wherein they provided basic business training to a set of Peruvian female microentrepreneurs. They found that relative to a control group that received no training, micro-entrepreneurs who received basic business training significantly improved revenues and practices. Interestingly, the highest gains went to those micro-entrepreneurs who, before the experiment, were least interested in the training programme!
Even stronger effects, albeit not at the micro-entrepreneur level, are reported by Nicholas Bloom and his colleagues, based on an experiment conducted by them on a set of mediumsized textile firms in India. They find that even basic education in concepts such as inventory management and quality control produced “startling” effects on productivity and profitability.
On the information front, access to the internet and to specially tailored content via mobile and wired broadband holds great promise. Reuters Market Light is an initiative that provides weather, crop related and marketing information to farmers through text messages sent to their mobile phones. Farmers now report using this information to decide on when to plant seeds, when to harvest and how best to market the produce (including such sophisticated actions as selling soybean produce early because of an anticipated glut in world markets). Preliminary results from work in India by Chris Parker, Kamalini Ramdas, and Nicos Savva suggest significant gains to farmers using the service.
One of the clearest demonstrations of the transformative power of access to information for micro-entrepreneurs is a pioneering study by Robert Jensen on fishermen in the coastal state of Kerala in India. He found that within a few months of the availability of mobile network coverage in the fishing communities he studied, about 80 per cent of all fishermen had purchased mobile phones. And these fishermen were using mobile phones as tools of business — they would communicate with contacts at each fish market while still at sea, and bring their catch in to the markets that offered the best prices. Prices became much more uniform and predictable, and fishermen’s profits increased on average by eight per cent, even as consumer prices declined by four per cent. Dumping of unsold fish (which averaged five to eight per cent of daily catch before mobile phones) was eliminated because buyers and sellers found each other more efficiently. Perhaps inspired by these findings, an NGO based in the southern Indian city of Chennai has launched a programme called Fisher Friend to provide free mobiles and free information to fishermen.
While mobile devices are the leading edge of the trend toward access to information, the more “traditional” computer-based access to the internet continues to see innovative models. The IT landscape of the Indian state of Kerala — the site of Jensen’s famous fishermen study — is now being transformed thanks to access to the internet via thousands of internet kiosks (called Akshaya Centres) distributed throughout the state and via a statewide training drive by the IT authorities there. “Almost every household in Kerala now has at least one member who is internet-literate,” says Ajay Kumar, until recently IT Secretary in the Government of Kerala. The Akshaya project, which is a publicprivate partnership between the Kerala government and small entrepreneurs, has now spawned thousands of internet-based businesses that offer services ranging from VoIP telephony to computer-based English lessons to online astrology readings.
Insights from the Kerala experience are relevant to the African nation of Rwanda, where an even more dramatic information-based transformation is taking shape. Rwanda’s leaders have embarked upon a plan to take the nation directly from an agrarian economy to an information-based economy, leapfrogging the manufacturing stage of development that most countries in the West went through. Rwanda is in the midst of a nationwide broadband access initiative that involves, among other things, putting down fiber optic cable throughout the country, with the hope that entrepreneurs will use this network to create information-based businesses.
On the money front, initiatives such as M-Pesa, the mobile money service introduced in Kenya in 2007 by Safaricom, the local affiliate of UK-based Vodafone (see sidebar) have resulted in almost 50 per cent of all economically active individuals using their mobile phones to transact money, with very few of these individuals having access to formal bank accounts. Similar efforts are on in many countries, such as India, Afghanistan, Tanzania and Haiti, where a number of technology and financial service providers are vying to offer low-cost, mobile-based means of saving, sending and spending money. How many of us would have thought of Kenya as a hotbed of innovation in financial services, and an inspiration to so many entrepreneurs around the world? Who would have thought that shackbased businesses in Kenya would have easier access to banking services before garage-based businesses in Silicon Valley?
Until recently, much of the focus with respect to access to money for micro-entrepreneurs was on microlending. Thanks to the Nobel Peace Prize winning efforts of Muhammad Yunus and others, millions of microentrepreneurs have received small loans that have helped them in a million different ways — tiding over crises, investing in equipment, building new businesses, etc.
Interestingly, initial results from the impact of M-Pesa in Kenya seem to suggest that when micro-entrepreneurs have a choice between M-Pesa and traditional micro-finance, they overwhelmingly prefer to borrow using M-Pesa. And the reason is not just the convenience of receiving money over the phone. Micro-entrepreneurs seem to vastly prefer borrowing from friends, family and acquaintances. Mobile money networks such as M-Pesa also serve as peer-to-peer platforms that allow borrowing, lending, spending and investing via existing social and commercial networks.
A glimpse of the future?
Although the direct beneficiaries of these initiatives for access to skills, information and money are the microentrepreneurs involved, these efforts are of keen interest to a range of other parties as well. Initial results from Kenya suggest that the children of these direct beneficiaries benefit from a greater share of household expenditures being allocated to education expenses. As they grow, micro- entrepreneurs may employ others from the community who prefer steady jobs to the uncertainty of owning one’s own business. Customers of micro-enterprises — whether in the local community or in lands far away — might become the beneficiaries of improved goods and services. Banks might find that businesses they previously ignored are now quite attractive as customers. Suppliers might find not only their sales volumes going up, but also the likelihood that they get paid for what they sell. And as microentrepreneurs grow and throw off the “micro” qualifier, they are more likely to join the formal economy, and contribute more actively to their nation’s tax base. So the next time you walk into a market in a developing economy, look past the noise, the crowds and the seemingly timeless activities that accost your senses. What you might see is a world in transition. And if initiatives to remove the biggest impediments confronted by micro-entrepreneurs are successful, you could be looking at the wheels of progress accelerating before your eyes.
From Business Strategy Review, insights for global business.
