CASES AND CRITIQUES
0-Z Micro Finance Bank Limited is
a state Micro Finance Bank with a branch in Lagos Island. One of the women,
Mrs. Isasoko, selling provisions at Idumota market applied for a loan of N600,
000 from the bank in October, 2015 to beef up her circulating capital. Mrs.
Isasoko lives in Orile area of Lagos with her husband and their four children.
The bank visited her house and shop twice to access her worth.
The bank valued all
the Fixed assets and wares in her house and shop at N3, 500,000 [N3, 300,000
worth of assets at home and N200, 000 worth of assets in the shop}.
The two times the
bank visited the woman at home, they did not meet the husband. They however
asked the woman to produce all the receipts of the fixed assets and sign to
transfer same to the Micro Finance Bank as collaterals. They dropped forms for
the husband to sign as a guarantor to the whole transaction. The wife forged
the signature of the husband-and returned the forms to the bank. Immediately,
the loan was approved and disbursed to her. The repayment was to be for a
period of ten months.
Meanwhile, the bank did not know
that Mrs. Isasoko was heavily indebted to two other Micro Finance Banks to the
tune of N720, 000. The receipts of the fixed assets she gave to the O-Z Micro
Finance Bank Limited were forged, having given the authentic receipts to the
first two Micro Finance Banks she collected loans from. Because of the pressure
from the first two Micro Finance Banks, Mrs. A decided to use the entire
borrowed amount {N600,000}to settle the outstanding debts. As her business was
not doing well again, she could not pay back the new loan taken from O-Z Micro
Finance Bank.
Following continuous pressure
from O-Z Micro Finance Bank to recover their money,.Mrs. Isasoko decided to
close up her shop. The bank sent one of their Account Officers to trace her to
the house where she lives. The woman grabbed the loan Account Officers and
raised alarm that the man was raping her. This attracted her neighbors and
husband to the scene. The loan officer was beaten up and taken to the police
station. Mrs. Isasoko denied ever taken any loan from the bank. The husband
said he was not privy to any loan agreement between his family and the bank.
The matter is still a subject of litigation until date.
Credit facilities should not be
advanced to married women without the consent of their husbands. Married women
should have their husbands as part of their guarantors to the loan agreement.
Guarantors' consent should not be obtained in absentia or through
phone. He must be physically interviewed and appraised.
Again, only one staff should not be sent to the house of a debtor
to recover debt. This can be dangerous as in the case above. Afemale loan
officer should not be sent alone to recover debt from a male debtor; and a male
loan officer should not be sent alone to a female debtor for debt recovery.
Most debtors could be desperate and dangerous, and thus can do anything to loan
officers.
The business of loan recovery is not an easy one; it is very
hazardous. This can be made less risky through proper loan appraisal before
approval. A well-appraised loan hardly suffers set back.
CASE 2
Alhaji Bello K. S. has been a very faithful and loyal customer
with a Micro Finance Bank in Mina, Niger State. He did almost all his business
transactions with the bank. The bank had advanced credit facilities to him
thrice in the past. He honored all his loan agreements with the bank. In fact,
Alhaji was one of the best customers of the bank then.
Trouble started when Alhaji introduced a female friend (Mrs.
Jasper) to the bank to borrow money. Mrs. Mrs. Jasper is a petty trader in
Minna. She trades on foodstuff. She applied for a loan of N450,000 from the
Micro Finance Bank. The bank relied on their relationship with Alhaji and
approved the loan for the woman without doing all the needful concerning loan
appraisal.
The woman defaulted in the loan repayment. The bank contacted
Alhaji Bello, as the guarantor of the woman, to help pay back the loan. Alhaji
told the bank that he only introduced the woman to the bank and that he did not
sign any document guaranteeing loan for the woman. He further told the bankers
that he only helped them to advertise their bank to the woman, and that he
expected the bank to do their due diligence on the woman.
Critique
There was no evidence to prove
that Alhaji Bello even introduced the woman to the bank, not to talk of
guaranteeing her. The man did not sign any paper to that effect. Relationship
with a customer can be considered in loan appraisal, butitshould not be the
only criterion.
To even rely substantially on a
relationship with a third party (and not with the applicant) as a decisive
factor in loan appraisal is to say the least, dismal. It is an indication of
deficiency in risk management. Banks should be very solid in risk management.
This salient function should not inany way be compromised. If a Micro Finance
Bank must survive to achieve its objectives, then it must be alive to its risk
management function, which I believe is sine qua non.
CASE 3
Mr. Johnson graduated from the
University of Ife as an Economist in November 2015 and came to stay with a
friend in Lagos to search for an employment opportunity. All his search for a
job for three years was unfruitful. He decided to travel to meet a friend in
Canada for greener pastures. To achieve this aim, he opted to be doing
conductor work with the Bus Driver in the compound where he lived at Mushin,
Lagos.
With the little earnings from the
bus conducting work, Mr. S Johnson started processing his travelling documents.
As the money was not enough, he resorted to borrowing from a Micro Finance Bank
operating close to where he lived. He applied for the fixed assets acquisition
scheme OF Micro Finance Bank. He was asked to save thirty percent of the value
{N800,000}of the asset he wanted.
Mr. Johnson was able to raise the
N240, 000 {the 30% of N800,000}for the Micro Finance Bank within a month. The
loan was approved for him for the purchase of the asset {a Tokunbo bus}. Two of
the bank's officials went with him to where he bought the bus to take
possession of the vehicles particulars. Mr. Johnson had already arranged with
the vehicles dealer that he would return the vehicle for cash, and that he
would pay him {the dealer} the sum of N50,000 cash for the deal.
Mr. Johnson returned the vehicle
the following day to the dealer and collected his cash with which he embarked
on his journey to Canada. The bank could neither get Mr. Johnson to pay his
loan nor recover the vehicle he used as collateral; and there was no guarantor
to hold on to. The debt became part of the bank's bad debts that were written
off.
This is an example of a badly
appraised loan. A bank that is into fixed assets acquisition scheme should have
an approved competent vendor whose loyalty should not be in doubt. Asset under
this scheme should equally be insured against theft and accident.
The bank would have also asked
Mr. Johnson to provide a suitable person to' guarantee the loan, especially as
he was still a bachelor without a wife and children.
CASE 4
A Microfinance Bank in Port
Harcourt advanced a loan of N500, 000 to Mr. Young on 23 January 2015. All necessary
requirements, as stated by the bank, for the loan were met by Mr. Young. Mr.
Young and his guarantor worked with an oil services company in Port Harcourt.
The loan was to be repaid within twelve months with effect from February, 2015.
The repayments were agreed to be done from the monthly salaries of Mr. Young or
his guarantor, as the case may be. Mr. Y and his guarantor were on a monthly
salary of N130,000 each. he first installmental payment was done as at when due
without default. Before the second installment became due for payment in March
2015, Mr. Young and his guarantor lost their jobs due to the declining fortunes
of the oil industry worldwide. Mr. Young and his guarantor were contract staff
who had only worked for three years before their disengagement. No terminal or
severance benefit was paid to any of them. The bank has since been finding it
difficult to get Mr. Young and his guarantor to pay the remaining balance of
the loan.
Proper sectorial analysis was not
done during the appraisal of this loan. The oil industry has been precariously
volatile of recent because of the dwindling international oil price. Oil
production has not been all that profitable of recent .Most oil companies are
finding it difficult to meet up with their financial obligations. They are now
minimizing cost of operations where necessary even at the expense of some of
their staff Before a loan is granted to a customer, the industry where the
customer is working or trading should be thoroughly analyzed during the
appraisal of the loan. There is need for caution when we sense some risk in the
industrial sector where the customer is working. Portfolio risk management
policies identify the various sectors of the economy in which enterprises will
be funded. The policies also set the limit of proportion of portfolio that can
be lent to enterprises in the sector at a particular point in time.
CASE 5
Ten women applied to a Micro
Finance Bank at Alimosho in Lagos for a group loan of N30; 000 each.
The bank asked them to guarantee one another so as to be collectively
responsible. They all signed a bond of collective responsibility with the bank
that they should all be held responsible for the failure and default of any of
them. All the women claimed to be doing one business or the other. They were
all assembling themselves in their leader's place throughout the appraisal
period. The bank's loan officers were all holding meetings with the women in
the Group leader's house during the appraisal of the loans.
Apart from the group leader, the
remaining nine members of the group disappeared into the tin air immediately
the loans were given to them. It was discovered that the group leader colluded
with the women to defraud the bank. They all collected the loans for the leader
who paid them N3, 000 each as commissions. Though the leader was arrested, she
could not still pay back the loan.
The appraisal of these loans was
highly flawed. The bank relied mostly on the group leader who had bad intention
from the beginning of the deal. One would have expected the bank to visit and
know the house and family of every member of the group. Their husbands would
have signed an undertaking for them. Even the group leader's husband did not
sign any guarantee for the bank. I feel that a husband should be made to be
among the guarantors of any married woman who approaches a bank for a loan
facility. If a man with moral rectitude is involved in the loan of the wife
from the beginning, he may help in the repayment when the chips are down.
A Micro Finance Bank
in Kaduna granted a loan of N450,000 to Mr. Halidu who works with a manufacturing company in Kaduna.
The loan was structured to be paid back for twelve months from the monthly
salaries of Mr. Halidu. Mr. Halidu convinced the Micro Finance Bank to accept a
standing order for the repayment of the loan. He did a standing order with his
bank {FCMB} where he receives his salary. Thus, the monthly installment
repayment was to be deducted through the standing orders to the bank on the 30th
of every month on the payment of his salaries.
Mr. Halidu was very faithful to
the loan agreement for the first two months. He however stopped the standing
order as from the third month. The Micro Finance Bank waited in vain for three
months for Mr. Halidu's standing order to drop. All efforts to compel Mr.
Halidu to pay the remaining ten installments failed. His company refused to be
involved as they were not brought into the picture at the beginning of the
contract.
A bank instrument like standing
order is good to guarantee a loan but it is not sufficient. Post dated cheques
are better instruments than standing orders, for
the former can be tempered with anyhow by the
customer.
In addition to any of the above,
a superior officer in the company of Mr. Halidu would have been made to be
aware of the deal from the beginning, in addition to the standing order, the superior
officer would have ensured compliance from Mr. Halidu.
CASE 7
Mr. Osagie was a regular customer
of a Micro Finance Bank in Benin for three years. During these three years, he
never collected a loan from the bank, but he was very friendly to all the
bank's staff especially the loan manager. Mr. Osagie was into transport
business within the metropolis of Benin
Mr. Osagie later applied one day
for a loan of N800, 000, he did not provide any property to collaterise the
loan, nor did he provide any guarantor to the bank. He used the loan manager to
convince the Managing Director of the bank to approve the loan for him. Mr.
Osagie did not even sign the loan application he filled for the bank, yet the
loan application was approved within two days without the usual appraisal
formalities. The loan manager did not know that Mr. Osagie used juju
{demonic}power on him. To worsen the situation, Mr. Osagie was given the loan
in cash instead of through his bank account.
Mr. Osagie refused to redeem the
loan for one good year. Mr. Osagie did not pay a kobo out of the loan, despite
all efforts of the bank to recover the loan. The man claimed that the bank did
not give him any loan, and there was no strong evidence to prove him to the
contrary.
One staff should not be allowed
to start and finish a loan appraisal process, especially when the amount
involved is large. There should be a loan committee to scrutinize and interview
all loan applications and their applicants. Undue influences by loan applicant
can be checked if, at least, three bank officials attend to such application.
Errors on loan application can also be detected easily when more bank's
officials are involved in the appraisal process of loans.
Mr. Osagie succeeded in tricking
the bank because the loan manager was allowed to appraise the loan alone.
CASE 8
A5FX Micro Finance Bank Limited
in Anambra state lent the sum of N750, 000 to one of its customers, Mr. Godwin
In March, 2013. Mr. Godwin was into motor spare parts business. He has been
having a lot of challenges in his business of recent because of his two
children that gained admission into a private university at the same time. He
had to sacrifice part of his working capital for his children .education. He
decided to go a borrowing to save his ^business from collapsing.
To convince the bank of his
capability, Mr. Godwin packaged and window dressed his business. ASFX Micro
Finance Bank carried out all necessary appraisals and found Mr. Godwin
qualified' for the loan. The bank did however go deep into the personal life of
Mr. Godwin before the loan was approved and disbursed to him. The bank did not
know that Mr. Godwin was highly indebted to two other banks. In fact, the N750,
000 borrowed was used by Mr. Godwin to settle some of his debts to one of the
banks he was still owing.
The loan of Mr. Godwin became due
and he could not service it. It was then the bank discovered, to its
astonishment, that Mr. Godwin was highly encumbered with loans to other banks.
Critique
A bank should call for all the
bank statements of its customers with other banks during a loan appraisal
process. The statements should be critically analysed with a view to finding
out the customer's commitments to other banks. Credit rating of the customer should
also be carried out. Thank God for the newly introduced BVN {Bank verification
number} which now makes it very easy to check a customer's relationship with
other banks. Banks should not advance credit facilities in a hurry. Reasonable
due care should be exercised to find out a lot of information about the loan
applicant.
Case 9
On 15th May 2012, a
Micro Finance Bank at Alaba International market in Lagos advanced a credit
facility of N1, 500,000 to Mr. Lawrence who trades on electronic items. The
loan was based on the wares and household properties of Mr. Lawrence that were
valued at N6, 200,000 then. Unknown to the bank, almost all the wares and
personal assets Mr. Lawrence used to collaterise the loan were borrowed from
friends, neighbours and business associates. He forged all the receipts of all
the assets which he gave to the bank. Mr. Lawrence returned all the borrowed
assets to their owners immediately the loan was approved for him.
The bank only visited Mr.
Lawrence's house and business place once during the appraisal. Mr. Lawrence
used the loan to acquire a landed property which he was defrauded off by the
Omonile {local traditional land owners}, he could not pay the loan back and the
bank had nothing to hold on to, as the collaterals were nowhere to be found.
Existence, value, and ownership
should always be the criteria for verifying the authenticity of an asset of a
loan applicant. The ownership of the assets in this case was not thoroughly
investigated and proven.
One dayrs visit to a
client's place is not enough to investigate the ownership of his assets. At
least, the bank would have visited Mr. Lawrence up to three times before
approving the loan. One of the visits would be arranged in an informal way,
unannounced. Again, the visits would have been spread over four week's period.
Assets borrowed by Mr. Lawrence would have been returned within two weeks. This
would have helped, to an extent, to expose some secrets concerning the
ownership of the assets.
CASE 10
A.
Micro Finance Bank in Enugu state bought a bus for a transporter, Mr. Muna in
late 2013. Mr. Muna has been I doing
his transport business in Enugu main town for
almost six years before he started banking with the
Micro Finance Bank. He banked with the Micro
Finance Bank for eight months before
he applied for a loan of N1, 200,000 to
acquire a new Tokunbo bus. He was properly appraised by the loan committee of the Bank.
The Bank followed Mr. Muna to
where he bought the vehicle. They even took possession of the original documents
of the vehicle pending when the loan would be fully liquidated. The total loan
(N1, 200,000) and interest
accrued for one year was N1, 920,000. This amount
was spread over fifty two weeks for repayment at N36,923 per week, with two
weeks period of grace.
Mr. Muna did not honour his
agreement with the Bank. He rather relocated himself and his family from Enugu
to only God knows where. Till today, the Bank has not been able to trace Mr.
Muna for the recovery of the loan.
Critique
A loan of a magnitude of N1,
200,000 by a Micro Finance Bank should have been guaranteed by at least two
reputable persons, in addition to the collaterals. Mr. Muna was able to abscond
from his responsibility because there was no reputable person that guaranteed
him. As a matter of fact, Micro Finance Banks should try and get all their
loans guaranteed by reputable people within their catchment areas.
CASE 11
In late 2013, a Micro Finance
Bank in Lekki area of Lagos lent the sum of N150, 000 to one of its customers,
Mr. Quadri. Mr. Quadri was just eight month old in his place of employment at
Victoria Island. He was a bonafide employee of the company but yet to be
confirmed as a permanent staff. The MFB based their lending on the ID card and
employment letter of Mr. Quadri. The company also confirmed to the MFB that Mr.
Quadri was having a stint with them.
The repayment of the loan was to
be made from the monthly salaries of Mr. Quadri for eight-month period. A
standing order was executed with his commercial bank {where his salaries were
being paid}for the purpose of the loan repayment. For the first three months,
Mr. Quadri did not default in the loan repayment. He was really paying as at
when due until tragedy struck when the company where he worked decided to lay
off all unconfirmed staff as a way of cutting down production cost. The staff
{including Mr. Quadri} affected were only paid one month salary as terminal
benefit. Consequently, Mr. Quadri could not meet up with his loan repayment.
Critique
It is professionally wrong for a
bank to give a loan to an employee who is yet to be confirmed by the company
where he works. An unconfirmed staff can be laid off at any time. Banks should
find a way of involving the employer of the employee in the contract of
lending. A superior officer of the company should be committed, one way or the
other, when an employee is being given loan by a bank, especially if the loan
repayment is tied to the monthly salaries of the staff {customer}.
CASE 12
A group of five women that were properly
appraised were given a loan facility of N50, 000 each for a period of three
months. All the women live and trade at Igando area of Lagos where the Micro
Finance Bank is located. The working capital in their businesses, as valued by
the bank, amounted to N90,000 each.
The loan repayment was done
without default. According to the bank policy, these women were now qualified
for second loan at N70, 000 each. The women however convinced them to increase
it to N100,000 each. The bank agreed, and the women were equally faithful in
repayment.
The women applied again for the
third time. This time around, some of them got N200, 000 to N300, 000 and their
leader got N500,000. The women could not meet up with the repayment plan within
the agreed six months duration. They were no longer as faithful as before. They
kept on giving different excuses for non repayment .The bank started harassing
and arresting them with police so as to compel them to pay. All efforts to
compel them to pay failed, for they were not liquid enough to pay.
The bank promoted these women
beyond and above their abilities, to the extent that the third loans they
collected were used for their personal projects rather than as working capital
in their businesses. Morally speaking, these customers were not bad, they only
saw a loophole in the bank lending system and exploited it to their advantage.
These were petty traders who wouldn't have been allowed to grow beyond N100,000
loan limits for the first year of their relationship with the bank.
The bank also erred by not
bringing their spouses into the whole contract deal. The husband would have
been appraised to guarantee the loans.
Do not lend money above the
capability of the customer; otherwise, the money will be wasted on frivolities
that do not have bearing with the business of the customers. Even if a customer
(borrower) did well in his first outing with the bank, there is still a need to
do thorough appraisal of the business each time he comes for more loans. You
cannot tell if he actually used the first loan for the business. It could have
been used for other personal white elephant projects that are not revenue
yielding. Do not forget, it is from the cash inflows from the business that the
loan will be serviced.
CASE 13
Mr. Fusoku collected a loan of
N2M Naira from a Micro Finance Bank in Delta State. Mr. Fusoku was into pure
water production business. He used his factory buildings to collateralize the
loan. The original documents of the property were given to the bank for
safekeeping. The man could not pay back the loan as at when due. The bank
threatened to dispose off his collateral security (the buildings) so as to
recover the loan and all the accrued interest.
Mr. Fusoku hired a boy whose
mission was to steal for him all the original documents of the property from
the custody of the bank. The boy (about 18 years old) went and smartly stayed
in one of the bank's toilet. The bank (unaware of the boy's presence) closed and
left for the day. The boy came out of the toilet in the night to ransack all
the cabinets in the bank and took away the documents used for the collateral
security. The boy stayed until the following morning and still pretended to be
one of the bank's customers. He quietly went away with the documents to Mr.
Fusoku.
The bank searched for the
documents for the sales of the property of Mr. Fusoku.. they could not lay
hands on the documents. Mr. Fusoku claimed that he did not borrow any money
from the bank. The loan is still unpaid till today, though the case is still on
in the court where the bank is spending money on lawyers.
The documents would not have been
kept in a filing cabinet. They would have been kept in a safe, instead of a
filing cabinet. Bank should form the habit of keeping all their valuable
documents in strongsafes.
Moreover, sensitive documents
relating to customers' 1 fixed assets would have been
scanned and saved online.
It is a security risk for a
Visitors' toilet to be attached to the banking hall. Visitor's toilet should be
separated from offices and bank halls. Otherwise, constant and daily security
checks should be carried out in all toilets and hidden places of the bank.
CASE 14
A Micro Finance Bank in Ojo,
Lagos advanced a loan of N200, 000 to Mr. Bukola on 24th March,
2014. Mr. Bukola lives at Okokomaiko but works with a hotel at Oshodi. Mr.
Bukola collateralized the loan with his monthly salaries from where he works.
He wrote post dated cheques for the repayment of the loans from his salaries.
All necessary appraisals were done by the bank on Mr. Bukola. The employment of
Mr. Bukola was confirmed to be legitimate. His place of domicile was equally
confirmed to be genuine.
Mr. Bukola defaulted, and could
not pay back as agreed. One of his cheque leaves was presented and bounced. It
was discovered that all the cheques of Mr. Bukola were having old numbers
instead of nuban numbers of ten digits. They were all fake cheques given by the
customer to deceive the bank into approving the loan for him. The bank started
a legal case with Mr. Bukola before the loan was eventually paid. A lot of time
and money were spent on this case before the bank could recover its money.
Critique
True, the Micro Finance Bank did
a thorough appraisal on the customer, but not on the collateral (cheque leaves
of the borrower). Collateral needs to be adequate and genuine. The cheque
leaves were fake, and the bank's official did not detect that. There is a need
for thdrough appraisal of the authenticity of collateral.
Again, the bank would have asked
the borrower to get one of his superior officers in his office to guarantee the
loan.
CASE 15
Mrs. Jamiu lives around
Ajangbandi area of Lagos state. She is into provisions retailing. She borrowed
N300, 000 from a Micro Finance Bank in Ojo area of Lagos State. The parents
used their cheques leaves to guarantee the loan for her. Mrs. Jamiu's parents
are retired civil servants on monthly pensions.
She adhered to her repayment plan
and the bank was very pleased with her. Pronto, she applied for another one,
which amounted to N500, 000. She convinced the bank that she had the approval
of her parents for the use of their cheques as collaterals guaranteeing the
loans. The bank, without consulting the parents, went ahead and disbursed the
second loan of N500,000 to Mrs. Jamiu. she defaulted this time and the bank
presented the cheques of the parents.
The cheques were dishonored
because they were stalled. The original cheques that were signed by the parents
were for a period of six months for the first loan. The bank did not remember
to take the cheques to the parents of the Lady for the adjustment or the second
loan. The parents were contacted. They refused to accept responsibility because
they were not contacted to give their consent for the second loan. They claimed
that they were not aware that their daughter collected a loan the second time
from the bank.
The second loan was not properly
appraised by the bank. The approval for the second loan was based on the appraisal
done on the first loan. Somebody can pretend to be good the first time while
planning for the evil he wants to do. Past performances can help in future
appraisal of loans. But this should not be the only criterion. As said earlier,
all standards put in place by the bank for loan processing/appraisal must be
religiously adhered to irrespective of the person involved and his performances
in the past.
CASE 16
Faithful group of customers of a
Micro Finance Bank in Ikeja, Lagos were advanced loans of N100, 000 each during
December, 2013. The loans were taken for the purpose of taking advantage of the
Christmas sales. This was what they made the bank to believe.
The women (customers) took the
loans and travelled for Christmas celebration in their villages in Anambra
state. Their businesses were closed down for the yuletide. They spent four
weeks at home, at the expense of their businesses.
The loans were not invested in
their businesses. They only collected the loans to meet their Christmas needs,
unknown to the bank.
They could not pay back the loans
as at when due. They were threatened with police'before they eventually paid
off the loans, after eight months of default.
Banks
should be careful of customers they grant credit during festive period. Most
loans collected during festive times are never ploughed into business, but
spent on frivolities. Banks should slow down on lending during festive period
like Christmas, Salah, and so on. The women in this case defaulted in repayment
because the loans given to them were diverted from the purposes for which they
were collected.
Again, people spend heavily on
personal needs during yuletide season thereby making loan repayment difficult.
Most People prefer meeting up with their personal needs to any loan commitment
during this season. Even if the loan is invested in the business, there could
still be default during festive period, as finances will be diverted to defray
other personal expenses during this festive period.
CASE 17
Miss. Celina who was working with
a company in Apapa, Lagos obtained a loan of N400, 000 from a Micro Finance
Bank at Ojo area of Lagos where she lived. Miss. Celina was introduced to the
bank through an officer of the bank. It was a friend (Mr. Bello) of the Bank's
officer that introduced Miss. Celina to him'. The bank officer did not know
Miss. Celina from Adam, but he went ahead to introduce the lady to the bank as
if he knew her before. Miss. Celina however got a colleague of hers in the
office to help guarantee the loan.
She paid the first installment of
the loan as at when due. The remaining five installments of the loan were not
paid before she resigned and relocated to another state, without telling
neither her guarantor nor the bank officer that introduce her to the bank. None
of the persons that guaranteed and introduced Miss. Celina knew where she was
living when she came for the loan. The bank resorted to making trouble with
their staff and Miss. Celina's guarantor who assisted her to get the loan. It
took the bank one year to fully recover this loan that was originally meant to
be liquidated within six months.
Critique
No matter the relationship with a loan Applicant, her true KYC
(Know Your Client) must be part of the appraisal system. Micro Finance Bank
should know their
clients
to their places of domicile. Let their immediate relations be aware of their
intentions to secure bank loans.
Knowing the place of work of a client should not be j enough
evidence of knowing that client. Most colleagues of
employees do not know where they live. An Employee can
just resign his appointment with a company and keep {his place of residence
secret, especially if he did not initially gave his true address to the company.
CASE 18
A Micro Finance Bank in Benin advanced a loan of N300, 000 to Mr.
Salisu in February 2014. During the loan appraisal, Mr. Salisu took the bank
officials to a shop purportedly owned by him. He brought a friend to the bank
to stand as a guarantor for him. The friend brought all the documents the bank
asked for: ID card, letter of employment, bank statements, and post dated
cheques. The shop of the guarantor (who claimed to be a trader) was inspected
by the bank.
The day the man collected the loan was the last day the man and
his guarantor were seen by the bank. Till today no kobo has been paid by them
to the bank. All efforts by the bank to recover this loan have proved abortive.
All the information and documents given to the bank by Mr. Salisu were false. The
store shown to the bank did not belong to Mr. Salisu. Mr. Salisu and his
guarantor's documents given to the bank were all forged.
Critique
The appraisal in this case was not well perfected. The guarantor
would have been physically traced to where he claimed to be working. The
authenticity of his ID card and employment letter would have been confirmed at
his place of work.
Also, the guarantor was not well appraised.
The bank would have visited him up to three times (formally and informally)
before concluding him to be the bonafide owner of the shop. Unannounced visit
to a client's (or/and his guarantor) place of work or business and place of
residence can help to reveal a lot of salient facts about the customer.
CASE 19
Mr. Davison lives and works in Warri, Delta state. Apart from his
account with a commercial bank he also maintains an account with Micro Finance
Bank in Warri. Mr. Davison had banked with this Micro Finance Bank in Warri for
five years until his relationship with the bank went soured in January 2015
when he defaulted in repayment of the loan granted him by the bank. He was a
junior staff in a transport services company in Warri. He earned N50,000 as
salary monthly.
Mr. Davison got a loan of N450, 000 from the Micro Finance Bank at
interest rate of 4% per month on a reducing balance method. The repayment of
the loan was spread for a period of twenty-four months. Mr. Davison was to pay
the monthly installment of the loan from his monthly salary.
Mr. Davison, was very faithful for the first eight months in the
repayment of the loan. In the ninth month, the company was folded up and Mr.
Davison was not paid any severance allowance. Mr. Davison found it very
difficult to continue with his loan repayment plan with the bank, as all
efforts to get another job failed. All efforts of the bank to recover the loan
yielded no positive results.
Critique
The duration for the loan repayment was too long. Micro Finance
Banks should not give loan beyond one-year duration. Secondly, the loan was
given to Mr. Davison without a guarantor or collateral. Again, the loan amount
of N450, 000 was too much for a customer whose monthly salary was only N50,
000. Borrowers should not be loaded beyond their capacities.
CASE 20
Mrs. Egbeyeka has been a regular customer of a Micro Finance Bank
in Lagos. She trades on cosmetics. She applied to her Micro Finance Bank for a
loan of N2, 000,000 for the expansion of her business, from a working capital
base of N250, 000. Mrs. Egbeyeka was able to warm herself into the heart of the
Credit Manager by sleeping with him.
The Credit Manager, on his own, manipulated the Managing Director
of the bank to approve the loan. The loan committee was not involved in the
appraisal process of the loan. The woman did not provide any guarantor or
collateral to the bank to secure the loan. The appraisal was just based on the
relationship between the Credit Manager and the woman. The loan was squandered
by the woman and her family on personal items that had no bearing to the
business.
The woman paid only N100, 000 out of the loan for ten months. She
could not meet up with the remaining balance. The ware in her business were not
worth 300, 000 to pay for the loan. The Credit Manager, again, manipulated the
Managing Director into believing that the woman was dead, and that the loan
should be recommended to the Board of Directors for writing off.
Critique
Loans should be granted based on capacity to
pay, not on patronage or emotion. The credit manager and the Managing Director
threw caution to the wind and sacrificed professionalism on the altar of
emotion. The i Board of Directors of Micro Finance Banks
should put enough internal controls in place and ensure they are adhered to
religiously, especially in loans appraisal and approval. This will help check
irregularities and financial malfeasances by fraudulent and incompetent staff.
A badly appraised loan can lead to default, which can affect the liquidity of a
bank negatively.
Miss. Taiye, a personal friend of one of the
key officers of a Micro Finance Bank, approached the bank for a loan of N50,
000 to grow her bead making business. Because of the personal guarantee of one
of the bank officers, the lady was granted the loan. She paid back as agreed.
Having successfully redeemed the first loan,
Miss. Taiye applied for another one which was N200, 000. Based on her first
performance, she was given this new loan of N200, 000. The lady travelled with
this money to her village to attend to some personal family problems without
the knowledge of the guarantor, the bank officer. She stayed for two months at
home before she came back to resuscitate her abandoned beads business. She
returned to start telling the bank stories upon stories why she could not redeem
her loan, as promised.
The loan dragged on for two years before it
was finally liquidated, but not without a fight.
Critique
The bank would not have advanced more that
N50, 000 loans to this woman in the second outing. Her business does not worth N200, 000. Nobody appraised the business of
this lady. The lending was based on her relationship with one of the key
officers of the bank who, himself, did not really probe the lady's claim of
business. Thus, professionalism was sacrificed on the altar of emotions.
Loan appraisal should not be
based on sentiment or personal affinity to the customer but purely on the laid
down criteria of the bank for lending. Even if an applicant is related to a
staff of a bank, there is still a dire need for the normal laid down appraisal
procedures to be enforced.
CASE
22
Mr. Vincent was a contractor to a
manufacturing firm at Apapa in Lagos. He maintained accounts with two
commercial banks situated at Apapa. He did not meet the requirements of
securing ' a loan from any of the commercial banks he was transacting business
with. He was introduced to one of the Micro Finance Banks in Ikeja. Mr. Vincent
went there to apply for loans. The Micro Finance Bank agreed to be doing
business with him by financing all his executed works with the manufacturing
company.
One of the products of The Micro
Finance Bank is invoicing. It is designed to make money available to
contractors to do more approved jobs while waiting for their executed jobs to
be paid for. The loans are designed/structured to help grow the volume of a
contractor's business. The bank provided funds to finance all the executed
invoices that are yet to be paid for, so as to enable contractors do more
businesses while waiting for the executed invoices to be paid.
Mr. Vincent was asked to always
bring his approved executed invoices to the bank for financing. The first
invoice Mr. Vincent submitted to the Micro Finance Bank for financing was of
N3, 000,000 values. The N3, 000,000 was approved for Mr. Vincent without
procrastination. The Micro Finance Bank did not even bother to visit and know the
addresses of this man. They only visited the
manufacturing company where Mr. Vincent usually got contracts.
They did not know that Mr. Vincent have not 1 been getting contracts there again because of some other contractors
who had overshadowed him. The last time he got contracts there was two years
ago. The invoice he
gave
to the bank was forged by him.
Mr Vincent dashed into the tin air as soon as he was granted the
loan. At the time I was told of this story, the bank was yetto see Mr. Vincent.
Critique
All necessary, relevant, and adequate information should be
obtained on loan's applicant. This information should cover his residential and
business addresses, family, guarantor, collateral, nature of his business and
his banker(s).
The Micro Finance Bank did a very poor job on the appraisal of the loan
application of Mr. Vincent. They did not even contact the manufacturing company
to I confirm the authenticity
of the so-called executed invoices that they relied on.
CASE 23
Mr. Harrison has been a regular and faithful customer of HC Micro
Finance Bank Limited at Aspanda, Lagos. HC Micro Finance Bank has been the only
bank of Mr. Harrison for the past five years.
Mr. Harrison deals on men shoes and his shop is still located at
Aspanda (Trade fair complex). His business is at retail level, and of a capital
base of N500, 000. To buy a building a friend introduced him to at Badagry area
of Lagos, Mr. Harrison applied for a loan of I\I7, 000,000 from his bank. The
loan was approved at a monthly interest rate of 5% flat. The repayment of the
loan was spread over three years' period. The repayment was based on the net
cash flow from the business of Mr. Harrison.
It was also agreed that all the
documents relating to the building were to be in custody of the bank pending
when the whole loan (and accrued interest) is liquidated. The loan was
disbursed to Mr. Harrison who actually paid for the building and obtained all
necessary documents. However, Mr. Harrison was denied taking possession of the
building as the real owner of the building (Mr. Zonto) claimed total ignorance
of the sales of his building. Some men, fraudulently claimed to be acting on
behalf of Mr. Harrison was deceived.
Mr. Harrison who was already frustrated with the turn of event
decided to dispose off all his wares and personal properties and relocated out
of Lagos. He only paid N160, 000 out of the loan before he relocated. The bank
has not seen him till today.
Critique
Micro Finance Banks are not supposed to go into building
financing. Micro Finance Banks are not licensed for giving out large loans,
especially for capital projects like building acquisition. The duration of
Micro Finance Bank loans should be within a year. Any loan whose repayment
cannot be made within a year should not be considered by a Micro Finance Bank, j j Mr. Harrison in this case did not have the capacity to borrow a
large sum of N7, 000,000 even though he had a good relationship with the bank.
Banks should know the capacity of their clients, no matter how morally good
they are. It is not morally right for banks to over expose their clients, for
this equally over expose the banks. A bank is supposed to be a financial
advisor to its clients. Financial advisory is part of risk management function
of a bank.
CASE 24
Mr. Usman, a graduate of business Administration, approached a
newly licensed Micro Finance Bank at Agege, Lagos for a loan of N200, 000 to
start a photography business. He brought a man of about fifty- five years old
as his father .to guarantee the loan. The father brought all necessary
documents to confirm his employment with a company at lyano-paja area of Lagos.
The father was made to fill and sign all necessary guarantor-ship
forms of the bank. His son, Mr. Usman, was asked to submit the original copies
of his credentials to the bank. The credentials were to be in the custody of
the bank until the loan was fully redeemed. The loan was now advanced to him to
be paid back within eight months period at a monthly interest rate of 3.6%
flat.
The bank only visited the father and the son when they could not
see them to make the first installmental payment. The bank was told that no
such people ever lived in that area they claimed to be their address. All the
documents given to the bank were all counterfeited. A kobo was not recovered
from this loan till today.
Critique
This is another case of poorly
appraised loan. Banks should be very careful of
customers coming from the blues to seek for loans. Appraisal of loan should
include ! getting of reliable, sufficient, and relevant information i about the client and his guarantor.
Modern technology makes it very easy to forge : documents that
cannot be different from the originals.
Banks are to be very careful and analytical in this area, j Again,
there is a dire need for Micro Finance Banks to have ;! staff with forensic
skills. This should be part of risk Ijj management function of Micro Finance Banks.
CASE 25
Mrs. Adefaruso, a widow has been into petty trading since the
husband died in August 2011. She trades on variety of fruits and vegetables at
Asaba where she lives with her six children who are of the age bracket of four and
fifteen years.
Because of the heavy family commitment, Mrs. Adefaruso's business
has not been really doing well. The working capital keeps on fluctuating
between N10, 000 and N20, 000 which gives her an average sales daily income of
Nl, 000 (with N300 margin).
Mrs. Adefaruso approached a Micro Finance Bank that had just been
established at Asaba for a credit facility of N300, 000 to boost her business
and as well settle her landlord who has been pestering her for the overdue
rent. The bank refused her application that the amount was too high for her
business capacity. The bank however asked her to look for a capable person to
guarantee the loan for her. As Mrs. Adefaruso could not see a capable
guarantor, she decided to collude with a male friend to fake documents to
deceive the Bank. The bank fell to their tricks, and the loan was approved for
the woman.
The
woman could not pay back the loan. The bank contacted the guarantor to help the
woman out. The guarantor's condition was even worse than the one of the woman. He
was a jobless man with many mouths to feed. He could not even pay his house
rent for two years.
The woman was arrested by the police, but nobody went to bail her.
The police had to release her on the third day with an agreement that she should
be paying N100 daily from her sales to the bank. The loan dragged on for two
years before the principal sum was finally paid, and the accrued interest
written off as bad debt.
Critique
It is wrong for a Micro Finance Banks to rely substantially on a guarantor in granting a loan to a customer. The customer
(applicant) should be appraised and found qualified on his/her own. Ditto the
guarantor If collateral are involved, they should be equally appraised. If the
applicant (borrower) is not qualified, please don't go ahead in your appraisal, no matter how qualified the guarantor. If
the guarantor is actually appraised to be qualified, ask him to take over the
loan on his name and
give it to the applicant. Let the whole burden be on him.
CASE 26
Miss. Kate used her personal properties to obtain a loan of
N700,000 from a Micro Finance Bank in Isolo, Lagos on 25 March, 2013. Miss.
Kate, a graduate of Biology, was into trading on women's wares and baby cares.
The bank approved the loan for her, using her personal properties
as collaterals. Her properties which were valued at N2,100,000 were as follows:
A Toyota corolla car (1), Furniture(6), Refrigerator(2), Television(l),
Laptop(l), Gas cooker(l), Bed (1), Generator(l), Air conditioner(2), Home
theatre Player(l). All these items were new and in good condition. Miss. Kate
signed off these assets to the bank. All the receipts of the assets were handed
over to the bank. The loan was appraised, approved, and disbursed within five
days to her.
Miss. Kate (who was still single at age thirty-eight) collected
the loan for the purpose of financing her marriage. She did not disclose this
to the bank. She did her wedding a week after she got the loan and relocated
the following week to Abuja to join the husband.
The bank has not recovered this loan up till the time this book
was written.
Critique
The bank erred in its appraisal of the loan. The bank did not
display professionalism in risk management. A bank | should be very careful in
advancing credits to single ladies. In addition to the collaterals, Miss. Kate
would have been asked to produce a person of high repute as Guarantor. Banks
should be cautious of applicants who appear desperate when they apply for loans.
Loan committees
should
avoid unnecessary pressures from applicants. Formal and informal information that
are reliable, sufficient, and adequate should be obtained about the loan
applicant and his guarantor.
CASE 27
Madam Dancy worked with an oil producing company in Lagos as a
contract staff for almost ten years. She was living big as all her children
were in top private schools in Lagos. She lives with her children in a choice
area in Lekki where she pays N3, 000,000 as house rent annually. She is a
divorcee, and she takes care of the children alone, for the children's father
could hardly makes end meet.
As her monthly salary of N350,000 could not defray all her
numerous domestic expenses, she decided to approach a Micro Finance Bank for a
loan of Nl, 000,000. The bank appraised her and found her qualified for the
loan. She was asked to get a colleague in her office to get the loan
guaranteed. The loan was approved and disbursed to her. The repayment was
spread over twelve month's period beginning from February, 2014.
The woman was faithful to her repayment plan with the bank. She
however paid four installments [out of the twelve}before she applied for a top
up {additional loan}. The bank without any additional appraisal approved a top
up loan of N333, 400 in addition to the left over unpaid balance {N666,600}of
the previous initial loan.
Madam Dancy only paid five installments out of the new
restructured loan before she was laid off along with the most of her colleagues
because of the melt down in the oil industry. Her guarantor was equally laid
off, though he refused responsibility for the new restructured loan as he was
not consulted during the second appraisal.
Because of her ostentatious and spendrift nature of life,
Madam Dancy did not have any savings the day she was disengaged
from her work, and her company was yet to pay her any severa nee allowance.
As the bank was pestering her to pay for the loan balance
outstanding, she decided to change her address. The bank is still looking for
her.
Critique
This is an example of poor risk management by a bank. The loan was
not well appraised. The industrial analysis was not perfectly done. Risk
analysis was not properly carried out by the bank; otherwise they would have
known that there was financial meltdown in the industry where the woman worked.
The top up loan was granted under poor appraisal. The guarantor
was not contacted. Banks should be careful of top up loans; they could be
indications of financial pressures on the debtor. To ask for additional loan
when a customer is still owing is a sign that the customer is highly encumbered
and therefore risky. Should banks still want to venture into this, let all
reasonable due diligence be carried out.
CASE 28
A group of women numbering eight approached a Micro Finance Bank
at Ajangbandi, Lagos for a group loan of N100,000 each. All the women live and
do their personal businesses at Ajangbandi. The bank visited all their places
of domicile and businesses. The women were made to get their spouses and
religious leaders to sign and guarantee the loans for them. They were also
asked to sign a group agreement that they would be collectively responsible for
the default of any member of the group.
The women were thoroughly scrutinized and interviewed on their
capacities to repay the loans. The loan committee of the bank found all the
women qualified after the appraisal. The sum of N80,000 was then approved as
loan for each of them. The women however pleaded with the bank to allow them to
be paid through cash as they would be going to market to replenish their stocks.
They told the bank that their leader would go to the bank the following morning
to collect the cash (N640, 000) on their behalf. The bank accepted without
suspecting any sinister motive.
Meanwhile,
the group leader had arranged with two armed robbers to storm the bank at the
time she would be given the money. The robbers were to collect the cash from
the hand of the Bank's Teller (Cashier). This was perfectly done by the robbers
who escaped with the N640, 000. The group leader claimed innocent of the whole
deal, and denied knowledge of the robbery incident.
Critique
An approved loan should be credited to the account of the customer
with the bank. A cheque may equally be issued in favour of the customer.
Alternatively, the customer's account with any commercial bank can
be credited through online fund transfer. Under no circumstance should approved
loan (no matter how small) be given to a customer in cash.
CASE 29
A newly established Micro Finance Bank at Egbeda, Lagos was
approached by Mr. Timothy for a credit facility of N700, 000. Mr. Timothy has a
property agency that is located along the same street the Micro Finance Bank is
located.
Mr. Timothy submitted some documents (ID cards, Electricity Bill,
Vehicle receipt, and land receipt) along with the application he gave to the
bank for the loan processing. The bank politely rejected the application of Mr.
Timothy on the ground that the amount requested was too much for a new timer
with the bank. He was advised to do business with the bank for at least six
months before applying for a loan. He was also asked to provide a suitable
guarantor acceptable to the bank.
Mr. Timothy got infuriated and requested for all the documents he
gave to the bank. One of the loan officers of the bank gave the documents to Mr.
Timothy without getting him signed for the receipt of the documents.
Mr.
Timothy went back to the bank the following day to demand for the same
documents he collected yesterday from the bank. The bank was nonplus, but they
had no evidence to prove that Mr. Timothy had collected his documents from
them. Mr. Timothy went as far as arresting the managing director of the bank
over the alleged missing documents. The bank had to hire a lawyer before they
could get out of the matter. The bank ended up spending the sum of N460, 000
before the case eventually ended.
Critique
Every error in banking operations can be very costly, in terms of
time and money. The image of the bank may even be affected. Banks should be
very professional and meticulous in all their dealings. Prevention, they say,
is better than cure. One of the most important assets of a bank is the liquid
cash. No matter how big a bank is in terms of fixed assets, its demise can be
instantaneous should it run out of cash. Anything that negatively affects the
cash flow of a bank should be seriously guided against.
It is very unprofessional for any corporate entity (like a bank)
to release sensitive documents (like receipt of a car and landed property)
without getting the other party to acknowledge such. This is a clear case of
dereliction of duty of professionalism.
CASE 30
K-L Micro Finance Bank Limited started business operations in
November 2011 in Ibadan, Oyo state. One of the first customers it got was Chief
Papalanto. Chief Papalanto has been into the business of buying and selling of
food items like yam, Plantain, and garri for donkey years in Ibadan. First bank
was his major bank until K-L Micro Finance Bank was established in a place near
Chief Papalanto's office in Ibadan. '
The chief had a very robust relationship with K-L Micro finance
Bank. He made most of the staff (especially the credit manager) of the bank his
friends .He sold foodstuffs to them at a much reduced price and gave them free
sometimes.
Chief Papalanto collected loan. from the bank four times without
defaulting. He decided to be dubious in the fifth one he collected in January
2015. Unlike the previous loans he collected in the past, Chief Papalanto
cleverly avoided signing the documents for the fifth loan (of N1, 000,000) he collected.
He did not even sign the withdrawal slip of the N1, 000,000 cash he collected.
It was the credit manager of the bank that helped cash the money for the chief
while he was busy chatting with the Managing Director of the bank in his
office.
The Chief
did not pay anything to liquidate the loan except the N10, 000 he gave as gift
to the staff of the bank on the day he collected the loan. He denied1
knowledge of the transactions, that he did not at any time collect N1, 000,000 from
the bank in the year 2015. He challenged the bank to produce any document he
signed to that effect. The matter has since been a subject of litigation
Critique
Banks should be very careful of their relationships with their
customers who may want to take advantage of such relationships. Naturally,
honest people can be tempted to be fraudulent when loopholes are opened before
them in any system they find themselves, especially when there are financial pressures.
No matter how close a customer is to a bank, all necessary relevant
documents pertaining to loan and withdrawals must be signed by the customer.
The signature must be the same as the one in his identity card, for a customer
may even decide to fake his signature.
CASE 31
Mr. Samuel was into haulage business at Abeokuta. He maintained an
account with a Micro Finance Bank at Abeokuta. He was one of the loyal
customers of the Bank. He leased motor vehicle each time he had goods to carry
for people. Most of his profits went into the lease rentals, which he had to pay
each time he rented vehicle. He decided to acquire a vehicle of his own, though
he did not have enough savings to finance it. He approached his bank to help
him out on this. He was advised by the bank to save N600, 000, thirty percent
of the N2, 000,000, he needed for the vehicle.
Mr. Samuel was able to meet up with all the requirements forthe
loan. The bank advanced him the loan but without a guarantor. The bank only
took custody of the vehicle papers. Mr. Samuel actually bought the vehicle and
took a third party insurance against accident.
Mr. Samuel was very faithful to the loan repayment plans. He did
this for only one month before he was involved in a fatal motor accident. He
did not survive it, and the vehicle was damaged beyond repair. The driver of
the other vehicle also died in the accident. His vehicle was also damaged
beyond panel beating. The bank was unable to recover this loan, it was written
off as bad debt.
Critique
Loans
that are for businesses, which are volatile in nature, should
be insured by banks. Every transport business is precariously risky. Insurance
helps to reduce business risks. Mr. Samuel would have been compelled by the
bank to take comprehensive motor vehicle insurance. This would have helped the
bank to recover Mr. Samuel's damaged vehicle from the insurance company. Again,
the bank would have recovered some amount from the insurance company had the
loan of late Mr. Samuel been insured.
CASE 32
1-3 Micro Finance Bank is a Micro Finance Bank that has just been
established in the Sango area of Ogun sate. It commenced operations precisely
in February 2015. Mr. Adesina was one of the few customers the bank started
operations with.
Mr. Adesina worked with a chemical manufacturing company in Sango
Ota, where the Micro Finance Bank is located. He had been working with the
company for the past three years, before the bank came to locate in that place.
He was able to meet up with the requirements for securing a loan of N400, 000
from the bank, except the issue of providing a suitable guarantor. He was able,
however to persuade their company's Accountant to sign as a guarantor for him.
The bank asked the Accountant to sign the guarantorship on behalf of the
company, that the monthly installment repayment of the loan would be deducted from
Mr. Adesina's salaries at source. The agreement also provided that Mr.
Adesina's company would be responsible for the loan repayment should there be
ceasation of Mr. Adesina's appointment at any time before the loan is fully
liquated.
Mr. Adesina was granted the loan on 15 March 2015; and he lost his
job in a month later. As he was involved in a case of fraud, his appointment
was terminated without any benefit paid to him by the company. He was able to
pay for only one (out of the twelve) installment before he lost the job.
As Mr. Adesina could not continue with the repayment plan, the
bank approached the Accountant to honour the agreement he signed on behalf of
his company for the loan of Mr. Adesina. The Accountant informed the M D/CEO so
as to get approval for the payment of the loan balance of Mr. Adesina. This got
the MD/CEO infuriated. Pronto, the Accountant's appointment was terminated for
entering into such an agreement with a bank on behalf of the company without
the knowledge of the General Manager or the MD/CEO of the company.
All efforts of the Micro Finance Bank to plead and appease the
MD/CEO fell on deaf ears as he refused to be placated in any way. He told the
bank that the company would never be involved in the loan matter in any way. Until
date, the loan has not been recovered!
Critique
The Micro Finance Bank erred by not involving the management of
the company into the whole deal. Only the Accountant of a company can never be
regarded as the management of the company. The MD/CEO is in a better position
to act on behalf of a company, or other two top management staff (who could be
General Manager, Accountant, Personnel Manager, etc). Alternatively, the bank
would have allowed only the Accountant guaranteed the loan without involving the
company. Both the Accountant and the Micro Finance Bank seriously acted in
error.
CASE 33
Mr. V. Adetekun sells provisions at Oshodi, in Lagos. His net
worth is about Nl, 000,000. She runs the business with the wife who has three
children for him. They also live in Oshodi where they trade.
To increase his working capital, Mr. Adetekun decided to have a
relationship with a Micro Finance Bank that is located in Oshodi. After six
month of banking with the Micro Finance Bank, he applied for a loan of
N200,000. As he was able to meet up with all the conditions of the Micro
Finance Bank for lending, the loan was granted to him without delay.
Mr. Adetekun was faithful to the loan repayment plans. He
immediately applied for another loan o,f the same amount, having successfully
liquidated the first one. He was not lucky to get a guarantor to sign for him
this second time. His friend he used as a guarantor to get the first loan
refused to be part of the second loan as Mr. Adetekun refused to give him the
N20,000 agreed as commission.
Mr. Adetekun however went ahead to forged the signature of the
guarantor but could not forge the hand writing when filling the form of the
guarantor. As Mr. Adetekun was faithful in the first agreement, the Bank did
not bother much about the guarantor's issue this second time.
Mr.
Adetekun could not pay back the second loan as he was attending to his wife
that was very sick to the point of death. The wife was hospitalized for about
five months. Their business suffered severely during this period. This
seriously affected his ability to redeem the loan as agreed with the bank.
The bank went to the guarantor to take over the repayment of the
loan. The bank presented one of the post dated cheques the guarantor gave to
them during the first loan. The guarantor, who was now highly infuriated, sued
the bank that he was not a party to the second loan. It was at the court it was
discovered that the handwriting on the first form was different from the second
one, though the two signatures looked somehow identical. The case was still on
at the time of writing this book.
Critique
The consent of a guarantor to a loan should not be in doubt. This
consent must never be obtained in absentia. A guarantor should personally fill
and sign the guarantor form in the presence of a representative of the bank.
The signed form, along with other documents {such as ID card, bank statement,
cheque leaves, etcjshould be thoroughly scrutinized for authenticity. Let me
repeat this{for emphasis}, appraisal of loan should not be restricted to only
the loan applicant, it should cover all parties to the loan, as well as all
assets being used to collaterisethe loan.
In the second loan the bank failed to do due diligence on the
guarantor.
CASE 34
ABCD Micro Finance Bank limited is a unit Micro Finance Bank
located in Ikeja area of Lagos state. It has been in operation since May
2012.The bank has many traders as customers. Mr. Donatus happened to be one of
the traders that transact business with the Micro Finance Bank.
Mr. Donatus is into books marketing. He has a lot of primary and
secondary schools he sells books to in Lagos. Though his business is located in
Ikeja, Mr. Donatus resides with his family at Isheri/in Alimosho area of Lagos
State.
To increase his working capital, Mr. Donatus then applied to ABCD
Micro Finance Bank to get a loan of N600,000. As he was able to meet up with
all the conditions of the bank, the loan was approved for him, though the
amount was reduced to N500, 000. The loan was to be paid back for twelve months
at three percent interest rate per month, with effect from 30th March, 2014.
As there were so many customers waiting to be attended to by the
bank, the loan of Mr. Donatus was not set up and recorded among the loans of
the bank. Mr. Donatus was however faithful to his repayment plans, though he
was not keeping any of his records concerning the loan. He made all his
payments by cash, that were always collected by two different loan recovery
officers of the bank.
The two loan recovery officers discovered that Mr. Donatus' loan
was not recorded in their office. They decided not to remit Donatus' payments
to the bank. Meanwhile, Mr. Donatus somehow smelt the rat and refused to make
any further payments, having paid only six installments. He argued with the loan
recovery officers that he had finished paying for the twelve installments. He
threatened to let the cat out of the bag should the loan recovery officers
disturb him again. That ended the matter till today. The bank did not recover a
kobo from Mr. Donatus1 loan.
Critique
Weak internal control was what gave rise to this case of loan
default. Both the borrower and the recovery officers took advantage of the
loopholes in the system. Good recording system is part of internal control
measures management should put in place to safeguard Assets of an organization.
Frankly, loan repayment puts pressure on borrowers. Many consider
loan repayment as a burden. Thus, anything (legal or illegal) that will help to
reduce this burden will be welcome by them. Poor (or lack) of record can make a
borrower (or even your staff) to take advantage of you (the lender).
There should be good accounting system that captures all records
of loans.
All loans must be properly documented. There should be relevant
and adequate records for every loan. These records should include: the names
and addresses of the borrowers and his guarantor(s), the principal amount,
interest amount, interest rate, monthly/weekly installment repayments, mode and
method of repayment, repayment plan, duration of payment, collaterals (if any),
and any other relevant information.
SUMMARY OF THE MESSAGE
The warning and advice I am trumpeting to the operators of Micro
Finance Banks in this book is summarized here. This is my message, which is my
sermon that was prepared from my experience in the field as a Management
Consultant on Micro Finance Banking.
Despite all the awful behavior of many borrowers of bank loan, the
general professional maxim and the common philosophy remain that: 'there are no
bad borrowers, only bad loans'. In other words, delinquent loans are products
of poor appraisal of loans. In this way, I am summarizing here below the
lessons from the cases studied above to assist us in loans appraisal.
1.
The business of lending is a very risky venture, and such risks
must be managed well if banks must survive. The core business of every
Microfinance Bank is to manage risk and provide a return to shareholders in
line with the accepted risk profile.
2.
It is to be noted that Risk Management Systems are essential
components of a robust microfinance
program. Microfinance Banks' owners should realize and understand that
efficient and sound risk management system is fundamental to the viability of
their businesses. Management is required to design risk management procedures
and policies to Mitigate Risk.
3.
The Board of Directors of Micro Finance Banks should put enough
internal controls in place to help check irregularities and financial
malfeasances by fraudulent and incompetent staff who may want to create
atmospheres for loan defaults.
4.
Borrowers constitute part of these risks banks face. Moreover,
most of these borrowers are not honest. They are ready to take advantage of any
weak system.
5.
Loan repayment' default can cripple a bank. All banks should
develop workable strategies to guide against loan default. Thorough appraisal
of loan applications and their applicants is primus inter pars. Appraisal
procedures should be put in place, and must be seriously adhered to.
6.
Proper appraisal of customers is part and parcel of risk
management function of a bank. This should not be neglected or ignore in
anyway. Every staff of Microfinance Bank should be trained on, and involved in,
risk management. The comprehensive appraisal process of a loan should involve
the following.
7.
From the beginning of the loan appraisal, let the terms and sizes
of loans be got right. If terms and sizes of loans are right,borrowers can repay. Loan terms
should match business cycles of the borrowers. That is why they say, 'there are
no bad borrowers, only bad loans'.
8.
Get
and analyze/ scrutinize all reasonable, adequate,
reliable and relevant information of the applicant- his background, his family, his business,
his guarantor, and his collaterals, etc. The KYC (Know your client) of your
customer and his Guarantor is very important.
9.
Loan
processing time for Customers from the blues should be longer, at least three
weeks. Appraisal of Loans for new timers to the bank should not be done in a
hurry.
10.
Adequate, reliable, and relevant information about the firm and the
industry where a staff (customer) works is very important as well. This should
be subject to critical analysis.
11.
All
documents (ID card, Bank statements, cheques, receipts, etc) from the customers
must be well studied, scrutinized, and verified for authenticity and
legitimacy.
12.
The
customer's places of abode and business/work must be well established beyond all
doubts.
13.
Scan
and nose around for some information about the credibility of the client. This
can be of great help in knowing about the client personally. Is he an armed
robber? Is he a difficult person? Is he a legalistic person? Is he a 419er (a
dubious person)? Is he an imposter? Is he-a failure in life.? Is he already
encumbered with loans'to other banks? Is he under serious financial pressure?
There is the need for environmental scanning for information about the client
and his guarantor(s).
14.
Only
one bank's staff should not be allowed to start and complete loan processing.
There should always be a loan committee for loan appraisals.
15.
Loan
that cannot be recovered should not be granted in the first place. Are you sure
you will be able to collect that loan you are given out? Ask yourself this
question, and answer it before you recommend or approve that loan.
16.
Find
a way to have total or some element of control over the source of repayment,
the income of the borrower. ‘
17.
Sentimental
and emotional affinity of any kind should not influence loan appraisals in
anyway.
18.
Loans should be given on capacity {ability to pay} not on
patronage or emotion. In your appraisal don't be carried away with the client's
needs but the ability to repay the loan. Most borrowers are only desperate and
concerned with their pressing needs, not minding their ability to repay the
loans.
19.
Loans should be matched with the capital {especially working
capital}of the applicant's business. Customers should not be tempted with money
that is above their capacities. For example, given a credit of N300, 000 to a
petty trader with N200, 000 working capital is very wrong. He may engage in
over trading that he would not be able to manage; or rather, he may divert it
to frivolities that do not have any bearing to his business.
20.
NOTE very strongly that loans are very easy to access by customers
of Microfinance Bank, because of their flexible nature of operations. Most
customers take advantage of this flexible nature of Microfinance Banks to
default in their loan repayment. Caution and thorough appraisal is the way out
here.
21.
Bank instrument like post dated cheques should always be demanded
by Microfinance Banks from borrowers
or/and
their guarantors to further collaterise their loans of higher amount. A dubious
customer can easily be prosecuted by the court for dud cheque. Again, post
dated cheque can be used to monitor the bank account of a recalcitrant
customer. The cheques can be presented when he least expected. He can now be
prosecuted if the cheques are dishonoured by his bank. Microfinance Banks can
approach the court for their fraudulent customers to be arraigned .for
allegedly issuing dud cheques.
22.
Fraudulent customers should not be allowed for a repeat. Try to
forget them, but do not forget the experience. Have something to. learn and
gain from the experience, and let it form part of your risk management policy.
In fact, this is one of the major reasons for this book: documenting the
experiences of others for you to learn from. You do not need to be a victim
before you take precaution.
23.
There should be good accounting system that captures all records
of loans. Good documents are the starting point of any successful business
relationship. This requires good, clear, concise definitions of everybody's
responsibilities and rights of all parties involved.
24. Example of loan appraisal and recovery processes Pre-Loan
Disbursement:
Ø Promote/market
client's products to perspective clients
Ø Visit
and evaluate potential client businesses
Ø Prepare
loan documents for credit committee
Ø Present
loan files to credit committee
Ø Analyse
financial data of client businesses
Ø Analysis
of qualitative data of client businesses and household assets
Ø Loan
committee scrutinizes all documents and makes recommendations
Ø Application
is either disapproved or approved for Loan Disbursement
Ø Ensure
loan approved is properly documented in the system.
Post-Loan Disbursement:
Ø Conduct
monitoring visits to business and households
Ø Follow
up on loan repayment
Ø Manage
loan recovery
Ø Assess
the impact of loan before renewal or repeat.
TRAINING PROGRAMMES
The author is giving comprehensive lectures, in seminars and
workshops, on the contents of this book. Declining fortunes of banks are being
turned around through these lectures. Distressed Micro Finance Banks are being
resuscitated by the author's training programmes. Risks managers of banks are
benefitting immensely from his In- house training programmes.
Interested banks can book appointments with him through these
lines: 08025538021,07033136711
...THE AUTHOR
Andy Oghenerioja Imedo hails from Isoko in Delta state of Nigeria.
He attended the Federal Polytechnic, Kaura Namoda (Zamfara State), and Federal
Polytechnic, llaro (Ogun State) where he studied Accountancy. Mr. Imedo also
obtained an MBA (Masters of Business
Administration) degree,, in finance & Accounts, from Ambrose AliUniversity, Ekpoma. Mr. Andy Imedo is a member of the Chartered Institute of Bankers of Nigeria
(CIBN).
At various times, Andy has had a stint as an Accountant, an
Auditor (internal and External) and a lecturer with various establishments in
Nigeria. Mr. Imedo is presently into books publishing and Management Consulting
in Lagos. Andy, who is a consultant to many Micro Finance Banks and cooperative
societies in Nigeria, is the Principal/Managing Partner of Megandi Associates.
He helps in the formation and management of Micro Finance Banks and cooperative
societies.
Erudite
and intellectually endowed, Andy was always the best student in English
Language throughout his secondary school days. The prolific writer, Mr. Imedo,
has to his credit, other books, and many articles that had been published in
the national dailies.
Andy,
an ordained minister of God, is happily married with children. He has
traveling, reading and writing as his hobbies. He can be contacted online at
any time: andimedo@yahoo.com,andrewsimedo@gmail.com, Tel:
08025538021,07033136711.
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