An academic essay analyzing the Government Economic & Empowerment Program (GEEP) as a development finance intervention model seeking to improve the access to finance problem
Microfinance (microcredit) is a widely accepted poverty alleviation strategy, adopted by developing countries, to facilitate financial development by addressing the problems of access to finance. For people who are conversant with the topic, and already understand the basics including the conceptual issues of access to finance, please skip to the third section, GEEP Analysis.
Nigeria is said to be an economic powerhouse in Africa. A nation of 205 million people, tagged as the most populous black country in the world, with a GDP of $450bn as of December 2019. Its population accounts for about half of the population in West Africa.
The economy of Nigeria is diversified with a GDP composition of Agriculture (25.16%), Industries (22.25%) & Services (52.60%). However, the government is heavily reliant on the oil sector for its revenue, although contributing less than 10% to the GDP, it currently accounts for over 80% of the country’s revenue (NBS, 2020).
Figure 1 — Size of the Nigerian Economy
The informal sector of the GDP also plays a huge role in the size of the economy — contributing 65% of the GDP (Medina et al., 2017). Nigeria is an entrepreneurial economy. Despite being oil-rich and entrepreneurial, the nation has struggled to raise the standard of living with its resource wealth. The level of economic development has been poor in relation to economic growth, especially in the last decade. The need to promote enterprise growth to help the populace over the poverty line is paramount and the government, through its microfinance initiative and other interventions, is pushing to deal with this problem. Financial constraints limit the potentials of entrepreneurs and small business owners to perform their crucial role in contributing to poverty reduction as the activities of the informal sector to GDP are not translating to economic prosperity.
These microfinance programs, providing financial services through credit, are a direct response to the access to finance problems. Notwithstanding, several billions of naira have been channeled to MSMEs through various programs but still have not yielded the desired result. The availability of these funds to bring about inclusive development is having little or no impact. Nigeria’s Human Development Index stands at 0.534, putting the country in the low human development category — positioned at 158 out of 189 countries (UNDP, 2019).
According to World Data Lab (2020) exactly half of the Nigerian population (102.4m people) are currently living in extreme poverty — ranking as the poverty capital of the world and as of 2017, about 64% of the total population remains unbanked due to insufficient funds (Figure 2).
Figure 2 — Nigeria Statistics
As a result, most small business owners will continue to have difficulties accessing loans from microfinance institutions and banks because these conditions lead to unfavourable assessment, the key challenge being the inability to meet the demands for collateral and fixed assets (Worku & Muchie, 2019). Corruption has also been singled out as a challenge undermining the efforts in this area. Most notably, corruption between government interactions and small businesses (Page & Okeke, 2019).
In addressing some of these problems, the government recently introduced micro-credit programs under its Government Enterprises & Empowerment Programme (GEEP). GEEP’s narrow focus on low-income households and its adoption of mobile technology aims to broadened access to finance and limit the scope of the bottom-up approach to corruption within the system — reducing bumbledom activities.
What is GEEP?
Government Economic & Empowerment Program is an intervention to drive self-employment amongst the low-income households; it was designed to provide support to fund the businesses at the bottom of the financial pyramid, who rarely have the means to access credit from banks or other traditional means (GEEP, 2019). These loans are provided interest-free with zero-collateral to reduce the vulnerability to financial risks and ensure these petty traders, artisans, and micro-entrepreneurs can expand their business and improve their standards of livings.
Introduced in 2015 after the presidential elections, GEEP set out to give a minimum of 30,000 loans to petty traders and micro-entrepreneurs per state across every 36 states, including the Federal Capital Territory (FCT). It kicked off properly after three years in Lagos with N15bn earmarked for initial disbursement and managed by the Bank of Industry (BOI), a development finance institution targeted at the industrial sector, on behalf of the Federal Government.
Asides, GEEP’s objective of addressing the access to finance problem, it also aims to improve the financial inclusion gap especially gender and age discrimination. The program has a strong bias for women-led businesses; it is also driven by an agent network that captures beneficiaries’ details at the point of their trade. The use of financial technology for loan process — coverage, disbursement, and repayment — ensures that these micro-enterprises can transition to the formal financial sector via mobile wallets and bank accounts as they build financial habits and track record. Leading to over 1.8m people to be financially included and a total of NGN31bn disbursed, making GEEP the largest social investment program in Sub-Saharan Africa.
Figure 3 — GEEP impact
GEEP is regarded as more than just a socio-economic scheme but a homegrown technological achievement that shows the potential within the country to solving pressing issues. This has led to the program to be recognized by the African Development Bank for its efforts on financial inclusion (The Guardian News, 2020).
BRIEF LITERATURE REVIEW
Microcredit and microfinance are generally used interchangeably, according to Rashid & Ejaz (2019) microcredit aims to reach people that are financially excluded by providing collateral-free loans while microfinance is focused on improving the informally served population. For this purpose of this analysis, making a clear distinction between both financial services helps to better understand the nuances of access to finance problem in Nigeria and this paper strictly focuses on the widely known access to finance problems that microcredit has been able to improve: (i) Information Asymmetry and (ii) Transaction Cost
This is described as a form of market failure between a lender and borrower where one of the parties, mainly the lender, has less information about a specific transaction than the borrower. This imbalance of information creates challenges that tend to lead the lenders into taking costly actions to reach a financing decision. According to Wasiuzzaman & Nurdin (2019), the weight of these actions is usually greater when it involves small businesses because they possess greater risk. Small businesses also have lower standards; as most of them are informal and unregulated when compared to businesses operating in the formal sector (Panetta, 2012).
De La Torre et al., (2017) explain that these challenges that arise as a result of the imbalance of information can be termed as principal-agent problems — conflicts of interests between a lender i.e. principal and borrower i.e. agent. These principal-agent problems are not only at the beginning of a transaction. They can come up at different points over the transaction lifecycle. When a problem arises and how the information influences the decision-making will further determine if it is a moral hazard problem or an adverse-selection problem.
Masuko & Marufu (2003) explains the makeup of transaction costs indicating how it is incurred by both parties (lender and borrower) as follows:
- Borrowers’ cost: include amounts incurred that goes into meeting the loan condition and at disbursements such as collateral and documentation preparation
- Lenders’ cost: include amount incurred to gather information on borrower and loan administration for the life of the transactions
These monetary costs will vary depending on the profile of either party or the type of transaction to be conducted. This is further buttressed by De La Torre et al., (2017) stating that the adjustment of lending rate is determined by associated costs to be borne. These cost changes, either lower or higher, is largely driven by how much information is made available by either party to ameliorate the information asymmetries.
Empirically, findings from Masuko & Maruf (2003), takes it a step further to show the statistical significance of the two factors that determine the transaction cost: the size of firm and borrowers’ experience. First, the size of firm having a negative relationship with total borrowing cost. As firms get bigger, the borrowing costs reduce. Smaller companies will be expected to have a high transaction cost unless lenders find innovative ways to make it cheaper. Second, borrowers’ experience is indirectly related to the transaction cost. The more experience a borrower gains, the more different they are treated compared to a first-time borrower, resulting in lower borrowing costs.
GEEP operates as an informal scheme that is built on the blend of both individual and group lending models offering both micro-credit and microfinance. This program is simplified into 4 distinct loan process (Enumeration, Verification, Disbursement, and Repayment) and offered as a three-tier product as follows:
- TraderMoni: This is the entry-level loan product aimed at petty traders and artisans who belong to clusters or a form of a recognised and organized group. Loan amount starting at NGN10,000.
- MarketMoni: This loan product is targeted at small businesses operating under the auspices of their market association or cooperative societies. Loan amount starting at NGN50,000.00
- FarmerMoni: This is targeted at smallholder farmers in the agricultural sector starting at NGN250,000. This sector-driven intervention is pertinent because agriculture is the main source of livelihood for over 70% of the population besides contributing over 21% of the GDP.
Figure 4 — GEEP products
The adoption of these lending models is part of several techniques that were developed to improve information asymmetry, reduce transaction costs, and increase financial inclusion.
Improved Information Asymmetry
GEEP is driven by field agents across the nation registering beneficiaries who must either belong to clusters, an accredited market association, or community cooperative societies registered with the state’s Corporate Affairs Commission. As of June 2019, the scheme was working with over 4,000 agents and 15,000 cooperatives and associations.
The use of group lending ensures that loans are only disbursed to beneficiaries recommended by the representatives of their associations. This technique helps the government to immediately minimize adverse selection and moral hazard problems that could occur. Disbursement of collateral and interest-free loans to these micro-enterprises do not take into consideration the profile of these business owners and the risk to be financed. The magnitude of intervention required to address the problem of poverty and close the financing chasm of the low-income household and firms cannot be hindered by credit rationing. As a result, the scheme also makes the loans accessible on a rolling basis with increased amounts, as repayments are made, to help the beneficiaries grow their business steadily.
This will also allow the government to screen potential defaulters and consequently provide an avenue for others to build a track record and improve their creditworthiness. The gathering of this information further helps to determine beneficiaries’ financial habits and reduces the concerns of adverse selection for the government.
GEEP has also put in place a repayment process to ensure smooth and frequent collections. Firstly, there is a 2-week moratorium after disbursement after which beneficiaries can make payment through the agent network by buying voucher cards and depending on the loan tier, can also pay directly at a bank.
Reduced Transaction Costs
According to the program’s Chief Operating Offer, Uzoma Uwagba, “GEEP is designed to deliver last-mile credit delivery using an aggregation model that works with market cooperatives as the acquiring structure, and agent networks with technological tools” (Techpoint Africa, 2019).
These technological tools consist of locally designed solutions for each loan process, implemented by local tech start-ups in partnership with the government. This allows for a completely digitized program where all eligible beneficiaries are captured into a database using facial recognition technology and a total of 48 data points to enable credit assessment. Examples of such data points include GPS coordinates of the beneficiary’s trade points and information on the market. The data captured from the field are sent real-time to a command center managed by BOI for verification, appraisal, and validation. Qualified beneficiaries then receive disbursement directly in their mobile wallets or bank accounts linked at registration.
The deployment of these technologies end-to-end has increased the efficiency of the credit process by eliminating the need for visits by credit officers to collect data first-hand which decreased the lenders’ costs for providing loans. Furthermore, the institution of Bank Verification Number (BVN)  as a unique identifier, especially for the MarketMoni product, has served as an effective digital collateral. Beneficiaries provide an undertaking to BOI giving them the right to block the BVN when there is a default. Once a BVN is blocked, the defaulter cannot perform any financial service anywhere until the debt obligation is settled. The BVN is also an additional data tool available for monitoring financial activities to help improve the information asymmetry between the lender and beneficiaries.
Lastly, GEEP being a collateral-free loan has also eliminated the possible borrowers’ costs that would have been incurred by any beneficiary seeking to access intervention programs.
Increased Financial Inclusion
GEEP has leveraged the use of technology to ensure every registered beneficiary must operate at the minimum a mobile wallet through its agent network. The beneficiaries can operate their wallets either via the mobile money app directly or USSD codes, for the ones without smartphones. The adoption of USSD is paramount to the GEEP operations because 44% of Nigerians still use ordinary mobile phones while 17% do not have phones at all (Taylor & Silver, 2019). GEEP has been able to provide opportunities for qualified beneficiaries to have free phones through sponsorships from the private sector.
The beneficiaries’ phone numbers’ serve as their e-wallet account numbers and by using the USSD codes get the loan disbursed directly. The funds can be cashed with agents that are strategically located within the beneficiaries’ trade points. This technological-driven approach has simplified the loan process — from disbursement to repayment — thereby ensuring continuous adoption of the financial services. Allowing for the beneficiaries, as their loan amounts graduate, to move from being informally served and underbanked to joining to the banked population.
GEEP has been successful in expanding its reach, it has enabled over 1.62m mobile wallets and 300,000 bank accounts since its inception. It has also increased the number of beneficiaries from about 1,865 in 2016, to over 1.8m in 2019 with a total outstanding loan of NGN31bn (Figure 3). GEEP is also focused on closing the gender and age gap in terms of financial inclusion; about 52% of these loans are directed at women and the demographic of the beneficiaries is largely youth (over 53% within the age group of 18–34).
GEEP’s approach to improving access to finance problems has shown recognized growth. firstly, it has leveraged on technology to develop a simplified lending model that seeks to address these challenges faced with government assistance. The deployment of financial innovation using mobile money will help to reduce high administrative costs and bureaucratic obstacles to an extent, been able to minimize the interactions between government officials and beneficiaries should reduce excessive red tapes and internal bureaucracy system created to extract rents. Limiting these corruptive actions allow beneficiaries to access finance for their business without hindrances. Though, the ease of its operation could create repayment problems where defaulters seek to take advantage of the lack of a properly integrated identification system in the country. This is why repayment collection figures need to be publicly available alongside the loan disbursement figures for proper accountability.
Secondly, its financial inclusion drive happens to also address the lack of data problems through the digital data gathering of beneficiaries’ information. The hiring of private-sector agents has been pivotal in the capturing of this information for public records. The embracing of private sector partnerships allows for improved coordination and engagement in rebuilding public trust. It helps in reducing political interferences as well as improve the effectiveness of these government programs. Further avenues to introduce more partnerships between the private sector and government agencies should be embraced. For instance, adopting a result-based financing (RBF) approach can attract innovative finance solutions for development from the likes of the World Bank that can help ensure the program’s funding is sustainable and not solely reliant on the Federal Government.
In conclusion, GEEP is a welcomed development that should be viewed as an innovative intervention in addressing institutional failures. However, the enormous task of reducing poverty and bringing about economic prosperity rapidly requires a more coordinated and measurable approach from the government. Although the issues of poverty are multidimensional, the impact of collaboration can help identify synergies and exploits benefits. First, there is an urgent need to breakdown silos — BOI’s reach is limited, and to access more people, most especially in the rural communities, there has to be greater cross-government collaboration amongst the various government-led intervention efforts currently in place. Until there is first, a working synergy within government, and then with the private sector (NGOs inclusive), the overall impact of GEEP might not be accomplished.
 A biometric identification system introduced by the Central Bank of Nigeria. It is an 11-digit number that acts as a unique identification that can be verified across all financial institutions in Nigeria.
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