THE ISSUES AND FUTURE OF MICROFINANCE IN NIGERIA

Introduction

1.1 Background Of The Study

The history of microfinance sector is as old as when man started using money. People have always been borrowing, lending and saving, for as long as there has been money. This has always been done within communities, using their own system and methods without any external assistance or services.

The micro finance scheme has primarily developed as a response to the inability or apathy of commercial banks and the formal financial system to serve the needs of low-income households and micro enterprise. According to the central Bank of Nigeria (2005:25), the formal financial system provides services to about 35% of the economically active population, while the remaining 65% are excluded from access to financial services.

Looking back into history, one would see that Nigerians have always engaged in economic activities, but such activities continued for a long time on subsistence basis. Agriculture, for instance was in most cases carried out simply to feed the immediate family. Other activities such as pottery, weaving, etc were for personal needs and market within the locality (Oladele, 1988:12).

Currently, these traditional rural occupations such as pottery, basket making, cloth dying, local brewing etc which used to keep people employed, have escaped the reach of small scale undertakers. This is because, these poor entrepreneurs do not have access to financial services, which will support their activities to enable them succeed in business and consequently reduce poverty and possibly bring about economic growth and development.

Furthermore, UNDP Human Development Report (1997) estimated that 40% of Nigerians live in absolute poverty, with 80% of them living in the rural areas. The significance of this is that most of these rural dwellers have been denied access to banking facilities to enable them engage successfully in agriculture, handicraft etc. The aggregate micro credit facilities in Nigeria accounts for about 0.2 percent of Gross Domestic Product(GDP) and less than one percent of total credit to the economy. Most microfinance funding go to the commercial sector to the detriment of the more vital economic activities, especially agricultural and manufacturing sectors which provide the foundation for sustainable growth and development. Currently, only about 14.1 and 3.5 per cent of total MFI funding went to these sectors, respectively, while the bulk, 78.4 percent, funded commerce (Anyanwu, 2004).

Over the years, a lot of programs and policies have emerged in a bid to improve the living condition of the Nigerian population. The CBN, in consultation with other relevant agencies, included the microfinance policy as one of its initiatives that started in 2004. The policy was designed to boost capacity of micro, small and medium enterprises towards economic growth and development through financial intermediation (Nwaogazi, 2010:5). In December, 2005, the micro finance policy, regulatory and supervisory framework for Nigeria was released by the Central Bank of Nigeria. Its main objective is to support the delivery of very small, uncollaterized or less than normally collaterized loans or other financial services such as savings or insurance for low income clients. In spite of these programs and policies, most of the poor entrepreneurs are yet to have access to micro finance.

1.2 Statement Of Problem

As highlighted in the previous section, the failure of community banking scheme and many previous government’s micro financing schemes was predicated on the challenges they faced. Many of these challenges are still bedevilling microfinance banking.

One of the most fundamental difficulties microfinance banks in Nigeria have is the near absence of basic infrastructure. This lack of basic infrastructure compounds the operational difficulties of these banks, which ordinarily are faced by high operational costs because of their nature of business. By dealing with many small clients microfinance banks’ transaction costs are usually higher than those of conventional banks. Unfortunately, these banks are also forced to incur additional costs to provide themselves with electricity and water. The absence of good roads especially in the rural areas also distorts their outreach. All these work in concert to drive cost of operations up and put them at a very big competitive disadvantage.

The lack of banking culture in the rural areas and among the urban poor is another factor militating against the progress of microfinance banks. Traditionally, these people borrow money from friends and relatives and repay the same amount of money borrowed no matter the tenure of such loans. They therefore find it difficult to understand the payment of interest on bank loans.

In the northern part of the country, the issue of frowning at interest on loans takes a religious dimension. This part of the country is populated by mainly Muslims, a religion which abhors usury. This has hampered the development of microfinance banking in that part of the country. This was buttressed by who opined that “conventional microfinancing violates Islamic principles by charging interest. This matter is of concern for Muslims due to the consequences of dealing with interest (ribia)”. This may account for the lopsided location of microfinance banks in country as over 75% of them are located in the southern part of the country while the northern part with a higher incidence of poverty has less than 25% of.

Many microfinance banks established in communities where failed community banks existed are faced with an uphill task of convincing these communities that they will not go through the unfortunate experience of losing money in a bank failure. The sudden withdrawal of the licence of 224 of these banks has fuelled the lack of public confidence which community banks bequeathed them. Many of the customers of these banks have refrained from dealing with them in fearing the same fate would befall them. On the other hand, the Central Bank of Nigeria has constantly assured the public that it will not allow any commercial bank to fail this, places the microfinance banks at a great disadvantage by tilting public confidence in favour of commercial banks that are normally bigger and stronger.

Another important factor identified to militate against the performance of microfinance banks in Nigeria as identified by is limited support for human an institutional capacity building. The paucity of human capacity in the microfinance sub-sector in Nigeria has been an issue from the days of community banking.

1.3 Objective of the study

The aim of this research work is to examine the problems and prospects of microfinance bank in Nigeria with particular reference to Ogui microfinance bank.

The general objectives of this research work include the following;

1. To examine role of microfinance bank in the development of rural communities in Nigeria.
2. To evaluate the regulatory frame work of microfinance bank in Nigeria.
3. To evaluate the impact of Ogui microfinance bank on the residence of Ogui area of Enugu state.
4. To examine the challenges facing the operation of microfinance banks in Nigerian.
5. To proffer possible solutions to the problems identified.

1.4 Research question

The researcher formulated the following research questions;

1. What are the roles of microfinance bank in the development of rural communities in Nigeria?
2. What is the regulatory frame work of microfinance bank in Nigeria?
3. Does Ogui microfinance bank have any impact on the residence of Ogui area of Enugu state.?
4. What are the challenges facing the operation of microfinance banks in Nigerian?

1.5 Significance Of The Study

This research work will be of immense help to:

The Researcher:

It will be of help to the researcher to know moreon the problems and prospects of microfinance bank in Nigeria.

The rural communities:

This study will also be of great importance to the rural dwellers in Enugu state as it will help in identifying the roles of microfinance bank in the development of the rural areas as well as the challenges they face.

The management of microfinance banks:

This study will also serve as an eye opener to the management of microfinance banks in Nigeria in the area of identifying their problems and the suggesting possible way out.

The country at large:

This study will be of great importance to the country Nigeria as it will help the policy makers to politicize laws that will guide the operation of microfinance banks in Nigeria.

1.6 Scope And Delimitation Of The Study

In the course of this study, it would have been very important to look into the problems and prospects of all the microfinance banks in Nigeria both due to time constraint and money the study shall focus on the problems and prospects of microfinance banks in Nigeria with particular reference to Ogui microfinance bank.

1.7 Definition Of Terms

Below are the definitions of some terms used in the topic for more comprehension of the study.

Financial institution:

They are institutions viewed and established to provide financial services that fuel and move economic activities in an economy.

Development:

The application of new ideas to practical problems so as to achieve a better result.

Policy:

A principle of behavior, conduct thought to be desirable or necessary especially as formally expressed by government or other authoritative body.

Poverty:

This means the quality or state of been poor or indigent, want or scarcity of means of subsistence.

Gross Domestic product:

This is the total number of output or product produce within or in a country by its citizen within a period of time usually one year.

Agriculture:

This is the act or science of cultivating the ground, including the harvesting of crops and rearing and management of livestock, tillage husbandry and farming.

Rural area:

This is a non-populated area or the primitive area that is not yet developed.

Impediment:

This simply means hindrance.

Microfinance bank (MFBs):

These are financial institutions established to provide financial services to perceived section of the economy that cannot get access to the commercial banks.