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World Resources 1996-97 (A joint publication by The World Resource Institute, The United Nations Environment Programme, The United Nations Development Programme, and the World Bank) (Data edited by Dr. Róbinson Rojas)
6. City and Community: Toward Environmental Sustainability Box 6.5 Nigeria's Community Banks: A Capital Idea
With a small loan, many low-income workers and craftspersons in Africa could expand their informal businesses enough to provide some security for their families. However, it is difficult, if not impossible, for most people to obtain a bank loan because few have holdings, such as land, houses, or livestock, that could be used as collateral to secure a loan. Without such leverage, a large segment of the population is consigned to persistent poverty.
A popular alternative in Nigeria is the community banking program, in which one's honor and standing in the community can take the place of collateral in securing a loan. The principal function of collateral is to ensure that the applicant does not renege on the commitment to repay the loan by the due date. In Nigeria, in places where strong community ties exist, a peer sanction system has been used to ensure correct behavior in credit transactions. The community's basic system of trust creates a climate in which residents can pool their money and then loan it to one another.
Although primarily designed to deliver credit to the rural population, Nigeria's community banking program has been launched in urban areas with large numbers of poor persons whose livelihoods depend on informal jobs. More than 35 percent of Nigeria's community banks are in urban areas--with one fifth of these in the Lagos metropolitan area. Most urban community banks are located close to urban markets, where they cater largely to the credit needs of market women, food sellers and wholesalers, drivers, and mechanics, many of whom, although not well-to-do, own some small shares in the bank.
The first community bank in Nigeria was commissioned in 1990 in Tudun Wada, in the Kaduna Local Government Area of Kaduna State. Within 3 years, some 879 community banks had been established throughout the country. Currently, 1,052 community banks are in operation in Nigeria.
To establish a community bank, a community must provide all of its own banking equipment--a building, safes, office furniture, ultraviolet lights for detecting forged currencies, and so forth--as well as a minimum working capital of about 250,000 Naira (US$11,000). Communities raise funds for the bank in much the same way as they finance other cooperative efforts such as building a school, a clinic, or a church. This entails mobilizing everyone with strong ties to the community, including sons and daughters living abroad, to pay a charge or make a donation. This sense of ownership by the community has contributed to the program's success.
The community is also responsible for appointing a board of directors and staff for the bank. According to its charter, a community bank must be owned primarily by a community development association, although overseas relatives and collectives such as trade associations, farmers' unions, market women's organizations, cooperative societies, social clubs, and corporate bodies can also be shareholders.
The only government involvement is a National Board of Community Banks, which develops, monitors, and provides provisional licensing for these banks. The National Board can provide a community bank with a matching loan equivalent to its working capital after it has been operating successfully for 3 months. The matching loan must be paid back within 5 years. Community banks may apply for a final license issued by the Central Bank of Nigeria. After receiving a final license, a community bank can apply to the Nigeria Deposit Insurance Corporation to have its customers' deposits insured against a bank failure.
By December 1993, community banks had mobilized more than N2 billion (US$90 million) nationwide--more than half of this as savings deposits. Total assets had risen to more than N3.2 billion (US$145 million), and loans and advances of nearly N750 million (US$34 million) have been made. Some 40 percent of the loans and advances were for commercial activities. Manufacturing accounted for more than 18 percent of loans, agriculture and forestry accounted for 17 percent, and transportation accounted for 8 percent. Most loans are for less than N5,000 (US$200).
The community bank program has far exceeded the country's expectation. The annual general meeting of these banks has become something of a community festival, with drums welcoming the community members, who often come out in their Sunday best. The chairmen and board members of the banks have acquired local respectability and feel a deep sense of accomplishment in the changes they are bringing to the economic fortunes of their neighbors.
At a few community banks, some minor problems that required intervention by the National Board have arisen. A more serious problem, however, has been the exposure of some community banks to the crisis in the financial sector of the economy. This has particularly affected those community banks that had placed funds in distressed banks and finance houses in Nigeria.
It is still too early to make a definitive statement of how much community banks have contributed to resolving the problems of urban poverty. Examples of specific loans, however, illustrate the potential of these types of credit arrangements for improving people's lives. For instance, an unemployed young man got a loan of N7,500 (US$340) from the Obeiudu Community Bank in Uromia, Edo State, to buy a maize grinder. Because he paid in cash, he got a discount that enabled him to buy a wheelbarrow as well. He employed another young man to use the wheelbarrow to help market women and customers to move their goods around. With money earned from that activity, he was able to pay back the first loan and to take out another one to buy a second maize grinder. When he paid back that loan, he took out yet another one to buy a portable electric generator, and he has not looked back.
--Akin L. Mabogunje
Akin L. Mabogunje is a chairman of the Development Policy Center in Ibadan, Nigeria. He formerly served as Chairman of the National Board for Community Banks in Nigeria.