Microfinancing in South East Nigeria
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This paper examines the need for promoting microfinance as a social business for a poverty reduction economic strategy in Nigeria. Through the development of microfinancePolicy, Regulatory and Supervisory Framework, microfinance banks are licenced and regulated by the Central Bank of Nigeria. This paper relies on primary and secondary data from microfinance banks within Anambra State the area of the study. With the help of structured questionnaires administered,information on preferences of microfinance bank clients were obtained on Account Opening Requirements, Credit/Loan services, Saving Products and their knowledge of other financial services. The focal group discussions with customers drawn from nine sampled micro finance banks were applied to validate and collaborate these views.
A multipleregression statistical tool was used for analysis. The responses within the various factor groups were tested for internal reliability using Cronbach’s Alpha test. The Principal Component Analysis (PCA) of factor analysis, with varimax rotation, was used to reduce a large number of variates.The result did support the theoretical formulation in thestudy. The paper however concludes that the government and its agencies should deliberately encourage microfinance banks to power their financial outreach. This will deepen the saving and investment culture and skills acquisition in Nigeria that will reduce the incidence of poverty in the country.Enlightment and educational campaigns programmes mounted by the regulators and the operators are needed to change the perception of the general public on the existence and contribution of MFBs to Financial Inclusion
Microfinancealso called Micro banking is a means of extending credit, usually in the form of small loans with no collateral, to non-traditional borrowers such as the poor in rural or undeveloped areas. This approach was institutionalized in 1976 by Muhammad Yunus, an American-educated Bangladeshi economist who had observed that a significant percentage of the world’s population has been barred from acquiring the capital necessary to rise out of poverty. Yunus set out to solve this problem through the creation of the Grameen Bank in Bangladesh. The Grameen approach is unique because the small loans are guaranteed by members of the borrower’s community; pressure within the group encourages borrowers to pay back the loans in a timely manner.
Grameen’s clients are among the poorest of the poor, many of whom had never possessed any money and relied on a barter economy to meet their daily needs. Using microloans, borrowers are able to purchase livestock or start their own businesses. Peer pressure acts as a replacement for traditional loan collateral. Grameen became an independent bank in 1983; headquartered in Dhaka, Bangladesh, it has more than 2,200 branches in the country. By 1996 Grameen had extended credit to more than three million borrowers and was the largest bank in Bangladesh, The Grameen model has come to symbolize an efficient means of helping the poor by providing them with opportunities to help themselves.
More than 97 percent of Grameen’s loan recipients have been women. In 2006 Grameen and Yunus were awarded the Nobel Prize for Peace The success of microloans in Bangladesh led to similar programs in other less-developed nations, including Bolivia and Indonesia. Some are sponsored by foundations, religious organizations, or nongovernmental organizations such as Opportunity International and the Foundation for International Community Assistance. An alternative approach to Grameen-style lending is stepped lending, in which a borrower begins with a very small loan, repays it, and qualifies for successive loans at higher values. .
Source: Concept of Microfinance as adopted from Helms, Brigit (2006). Access for All: Building Inclusive Financial Systems. Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.” Those who promote microfinance generally believe that such access will help poor people out of poverty.
Theoretically, microfinance may encompass any efforts to increase access to, or improve the quality of financial services poor people currently use or could benefit from using. For example, poor people borrow from informal moneylenders and save with informal collectors. There are not many bright lines that can sharply distinguish microfinance from similar activities. Claims could be made that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity that runs a heifer pool are engaged in microfinance. Furthermore, correcting the problem of access is best done by expanding the number of financial institutions available to them, as well as the capacity of these institutions. In recent years there has been increasing emphasis on expanding the diversity of these institutions as well, since different institutions serve different needs.
Some principles of microfinance that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004: 1.Poor people need not just loans but also savings, insurance and money transfer services. 2.Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. 3.Microfinance can pay for itself. Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. 4.Microfinance means building permanent local institutions. 5.Microfinance also means integrating the financial needs of poor people into a country’s mainstream financial system. 6.The job of government is to enable financial services, not to provide them. 7.Donor funds should complement private capital, not compete with it.
8.The key bottleneck is the shortage of strong institutions and managers.Donors should focus on capacity building. 9.Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. 10.Microfinance institutions should measure and disclose their performance – both financially and socially. Ledgerwood, (1998) defines microfinance as the provision of financial services like savings, credit, insurance and payment services to low-income clients, including the self-employed. In the simplest terms, microfinance is “banking for the poor” and covers micro credit, micro savings, micro insurance and remittances, Westover,(2007). Asian Development bank defines Microfinance as the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their micro enterprises (ADB,2000).
In recent years, microfinance has emerged as an important instrument to help a large number of “unbankable” members of society, as a tool to help reduce poverty and encourage economic growth in neglected parts of the world. In order to achieve this, the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria was launched on December 15, 2005 with a view to addressing the financial needs of the low income people. Five years after the launch because of its critical importance to the development of an effective inclusive financial services in Nigeria, the Central Bank of Nigeria had considered and approved a revised Microfinance Policy, Regulatory and Supervisory Frame for Nigeria with effect from 29th April 2011. As at 31st June 2009, a total of 768 microfinance banks were licensed by the Central Bank of Nigeria of which 166 are in South East Nigeria, Anambra State, the commercial nerve centre of the region with its population of about 2.4 million (NPC 2006)has 79 microfinance banks representing 47.6% of Microfinance Banks in this zone.
Today, poverty comes at the head of man’s present plight. It may be considered the roof of life’s problems that leave a pervasive impact on man’s material interests and social conditions. The result has a direct effect not only on the life of the individual but also on the community and on the level of their material progress and civil development. According to Abdullahi (2008), over 1.2 billion people in the world live under unacceptable conditions of poverty, mostly in developing countries, and particularly in rural area of low-income Asia and the Pacific, Africa, Latin America and the Caribbean, and the least developed countries. In 2004, the World Bank report asserts that around 30,000 people in the world die every day because they are too poor to stay alive. Nigeria is rated as one of the 20 poorest countries in the world with a worsening poverty incidence of well over 75% among its population (International Fund for Agricultural Development, 2008).
The situation contradicts the nation’s abundant resources in terms of enormous agricultural, oil, gas and several untapped solid mineral resource endowments. Key to any poverty reduction strategy is the provision of specially tailored financial services to enable the poor engages in economic activities that will generate employment, increase earnings and improve standard of living. This will lead to economic growth and development. Microfinance, as the tool that reaches households, is thought to have the best mechanism towards eradicating poverty. Like any other economic development activity, it represents an upward directional movement of society’s growth “from lesser to greater levels of energy, efficiency, quality, productivity, complexity, comprehension, creativity, mastery, enjoyment and accomplishment (Bashir, 2009).
In order to achieve the above and to create appropriate financial institutions to serve the economically active poor and low income households, the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria as a policy provides for the establishment of microfinance banks. The banks are expected to, among other things, make diversified financial services accessible to a large segment of the potentially productive Nigerian population which otherwise would have little or no access to financial services; promote synergy and mainstreaming of the informal sub-sector into the national financial system; enhance service delivery; contribute to rural transformation; create employment opportunities; enhance participation of the poor in economic development; and promote linkage programs between universal/development banks, specialized institutions and microfinance banks.
Problem of the study
In our development economics, we are often confronted with mutually reinforcing set of activities, more especially in providing credible market information on the Nigerian financial sector. Many Nigerians, for numerous reasons are unbanked and lack access to formal financial services. Billions of Naira circulates through the informal sector and this has a negative impact on the country’s economic growth and development. Financial inclusion is the provision of a broad range of high quality financial products (such as savings, credit, insurance, payments and pensions) which are relevant, appropriate and affordable, to serve the needs of the entire adult population and especially the low income segment.
Access to a range of affordable, safe and reliable financial services provide the necessary lubricant for economic growth and contribute to reducing poverty. Financial Inclusion is therefore key to tackling the poverty trap in Nigeria From a recent study conducted by EFInA (2010) for Central Bank of Nigeria, only 30% of the adult population currently has a bank account, which is equivalent to 25.4 million people. 67.2% of the adult population have never been banked, which is equivalent to 56.9 million people. 78.8% of the rural population is unbanked. The main barriers to having a bank account are irregular income, unemployment and distance to the bank branch. Bank proximity is of greater concern to the rural population which is the constituency of Microfinance Banks.
Objectives of the Research
On the strength of the foregoing, this study is set to pursue the following objectives: 1.To determine those factors that create awareness to customers for the services of microfinance banks in their localities. 2.To assess the impact of intervention activities of microfinance Banks on the immediate environment 3.To ascertain if any the differences in operations between the conventional Banks and the microfinance Banks 4.To establish credible benchmarks and indicators of financial penetration of microfinance Banks to their catchment areas.
The microcredit era that began in the 1970s has lost its momentum, to be replaced by a ‘financial systems’ approach. While microcredit achieved a great deal, especially in urban and near-urban areas and with entrepreneurial families, its progress in delivering financial services in less densely populated rural areas has been slow. The new financial systems approach pragmatically acknowledges the richness of centuries of microfinance history and the immense diversity of institutions serving poor people in developing world today. It is also rooted in an increasing awareness of diversity of the financial service needs of the world’s poorest people, and the diverse settings in which they live and work. Brigit Helms (2006) distinguishes between four general categories of microfinance providers, and argues for a pro-active strategy of engagement with all of them to help them achieve the goals of the microfinance movement.
They include: Informal financial service providers
These include moneylenders, pawnbrokers, savings collectors, money-guards, ROSCAs, ASCAs and input supply shops. Because they know each other well and live in the same community, they understand each other’s financial circumstances and can offer very flexible, convenient and fast services. These services can also be costly and the choice of financial products limited and very short-term. Informal services that involve savings are also risky; many people lose their money.
These include self-help groups, credit unions, and a variety of hybrid organizations like ‘financial service associations’ and CVECAs. Like their informal cousins, they are generally small and local, which means they have access to good knowledge about each others’ financial circumstances and can offer convenience and flexibility. Since they are managed by poor people, their costs of operation are low. However, these providers may have little financial skill and can run into trouble when the economy turns down or their operations become too complex. Unless they are effectively regulated and supervised, they can be ‘captured’ by one or two influential leaders, and the members can lose their money.
The Microcredit Summit Campaign counted 3,316 of these MFIs and NGOs lending to about 133 million clients by the end of 2006. Led by Grameen Bank and BRAC in Bangladesh, Prodem in Bolivia, and FINCA International, headquartered in Washington, DC, these NGOs have spread around the developing world in the past three decades; others, like the Gamelan Council, address larger regions. They have proven very innovative, pioneering banking techniques like solidarity lending, village banking and mobile banking that have overcome barriers to serving poor populations. However, with boards that don’t necessarily represent either their capital or their customers, their governance structures can be fragile, and they can become overly dependent on external donors.
Formal financial institutions
In addition to commercial banks, these include state banks, agricultural development banks, savings banks, rural banks and non-bank financial institutions. They are regulated and supervised, offer a wider range of financial services, and control a branch network that can extend across the country and internationally. However, they have proved reluctant to adopt social missions, and due to their high costs of operation, often can’t deliver services to poor or remote populations. The increasing use of alternative data in credit scoring, such as trade credit is increasing commercial banks’ interest in microfinance. Brigit Helms (2006) therefore argues that with appropriate regulation and supervision, each of these institutional types can bring leverage to solving the microfinance problem. For example, efforts are being made to link self-help groups to commercial banks, to network member-owned organizations together to achieve economies of scale and scope, and to support efforts by commercial banks to ‘down-scale’ by integrating mobile banking and e-payment technologies into their extensive branch networks.
MIX inMicro Banking Bulletin (2006)has been much critical of the high interest rates charged to borrowers of microfinance banks. The real average portfolio yield cited by a sample of 704 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006 was 22.3% annually. However, annual rates charged to clients are higher, as they also include local inflation and the bad debt expenses of the microfinance institution. In Southeast Nigeria, Microfinance banks interest rates range between 2.5% to 3.5% per month.Muhammad Yunus (2011) has recently made much of this point in Nigeria, and in his First Bank Impact series,argues that microfinance institutions that charge more than 15% above their long-term operating costs should face penalties.
The microfinance industry has long speculated about potential trade-offs between financial and social goals. While struggling to achieve rapid growth, serve more clients, improve portfolio quality, and become financially sustainable, microfinance banks (MFBs) with a double bottom line have to ensure they are meeting their development goals (women’s empowerment, rural outreach, and socialresponsibility to clients). Often, development goals put pressure on financials, and many MFBs worry that becoming “socially-focused” may deteriorate their efficiency, portfolio quality, or productivity.
At the same time, the microfinance industry is giving more importance to avoiding over-indebtedness, having better human resource policies in place, and implementing proper staff training andincentive schemes that may improve financial performance as well. These potential synergies between social performance (SP) and financial performance (FP) can compensate for some of the trade-offs commonly associated with pursuing a double bottom line.The main goal of this paper is to identify and quantify both trade-offs and synergies between the social performance and financial performance goals of microfinance banks. The main questions explored are whether significant relationships between social and financial performance exist, and whether these relationships lead to trade-offs and synergies in terms of MFBs’ achievement of their double bottom line.
Many impact evaluation studies, mostly using the non-experimental approach, findthat microfinance programmes have positive impacts on households’ economic and socialwelfare and contribute to poverty reduction. Microfinance programmes of various forms havebeen implemented in many countries in the past few decades to help reduce poverty byimproving access to finance by the poor. Many studies have empirically examined theimpact of such programmes on incomes of households, especially those that are relativelypoor.
Hulme and Mosley (1996) examined the role of thrift and credit cooperativesin improving people’s living standards and in assisting micro entrepreneurs inSri Lanka. Their survey shows an impressive average increase in average monthlyhousehold income of about 15.8% in real terms due to such cooperatives. Theyalso find that income benefits have accrued to members across the differenteconomic strata, including the poorer households.
A special survey carried out in 87 rural Bangladeshi villages during 1991 to 1992reveals that credit is a significant determinant of household expenditure, assets,children’s schooling, and labor supply (Pitt and Khandker 1998). Credit accessedthrough a group-based credit program (such as those run by Grameen Bank,Bangladesh Rural Advancement Committee, or Bangladesh Rural DevelopmentBoard) significantly influences household spending, asset acquisition, andchildren’s schooling. The study results show that improved access to credit increases household consumption level, especially when women borrowed. Thestudy estimated that more than 5% of borrowers would be able to lift their familiesout of poverty every year.
Also in Bangladesh, Khandker (2003) finds a positive impact of microfinanceon household consumption and asset acquisition, mainly non-food as well asnon-land asset. Microfinance’s impact is positive for all households, includingnon-participants, thereby increasing local village welfare. Microfinance helpsreduce extreme poverty more than moderate poverty at the village level. Cotlerand Woodruff (2007) find a similar effect of micro lending in Mexico. The effect ofthe micro lending program on sales and profits is positive and significant for thesmallest retailers, while it is negative on larger retailers.
Zaman (2004) agrees with the findings on the impact of the various microfinanceprograms in Bangladesh that microfinance programs are reasonably successfulat reaching the poor, and that access to microcredit contributes to povertyreduction by reducing the poor’s vulnerability. He adds that microfinance helpsreduce vulnerability through consumption smoothing, emergency assistanceduring periods of acute natural disasters, and female empowerment—the latterenhancing a woman’s decision-making role, her marital stability, and her controlover resources and mobility.
Montgomery (2005) finds that Pakistan’s microfinance sector developmentprogramme (specifically the Khushhali Bank) positively affected both economic andsocial indicators of welfare as well as income-generating activities, especially forthe poorest borrowers. Although there is no impact on either food or non-foodnon-durable consumption, the programme enabled the poorest borrowers to increaseexpenditures on their children’s education. The study also finds that agricultureis more important in terms of aggregate programme impacts on income-generating activities, which were higher for the poorest borrowers. The study stresses thatthese positive poverty reduction effects have been achieved by an institution thatis clearly profit-focused.
Indonesia’s experience with the unit system of Bank Rakyat Indonesia (BRI)provides another example of how microfinance can have a strong impact on thepoor’s living standards (Hulme and Mosley 1996, Maurer 2004). The BRI’s storyshows how microfinance can be provided profitably and sustainably on a largescale, using locally mobilized savings without subsidies from government ordonors. Maurer (2004) notes that after the collapse of Indonesia’s banking systemin 1998, the BRI’s unit system remained profitable, loan repayment rate stayedhigh, and savings deposits more than doubled.Hulme and Mosley (1996) suggest that different poverty groups may requiredifferent forms of financial intermediation and different poverty alleviation strategies toensure their effectiveness.
Matin and Yasmin (2004) argue that for microfinance to benefit the ultra-poor, access to microfinance should be supplemented with safety net measures such as food and health subsidies, training, and social empowerment programs. Husain (2004) notes that the financial sector reforms initiated in the late 1990s inPakistan created a favorable environment in which the poor and middle class havea better chance of receiving credit from formal institutions.
In his study of the relationship between financial development, savingsmobilization, and poverty reduction in Ghana, Quartey (2008) finds that financialsector development has a positive impact on poverty reduction, although theimpact is insignificant in view of the fact that financial intermediaries have notadequately channeled savings to the pro-poor sectors of the economy—mainlydue to government deficit financing, high default rate, lack of collateral, and lack ofproper business proposals. Burgess and Pande (2005) find that increased savings mobilization and creditprovision in rural areas contributed to reductions in rural poverty in India.
Theyfind that branch expansion in rural India led to faster growth of non-agriculturaloutput, growth of agricultural wages, and decline in poverty in states that startedthe period with a lower level of financial sector development. Ang (2008) showsthat income inequality in India decreases as the financial system deepens andbroadens. In examining the impact of financial sector development on earnings inequalityin Brazil in the 1980s and 1990s, Bittencourt (2006) finds that broader accessto financial and credit markets had a significant and robust effect in reducinginequality. He attributes this impact not only to the earnings potential from credit,but also to the greater capacity of those with access to financial markets toinsulate themselves against recurrent poor macroeconomic performance.
Gine and Townsend (2003) studied the growth and distributional effects of financial liberalization, specifically on savings mobilization and access to credit at marketinterest rates of SMEs in Thailand from 1976 to 1996. While they find that theincome growth effect was considerable, they find an initial rise in inequality assome segments benefited faster than others.
The distinction between microfinance and micro credit has to be underlined. Specifically, microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients whereas micro credit refers to a small loan to a client made by a bank or other institution. Micro credit can be offered, often without collateral, to an individual or through group lending. Christen et. al. (1984) have viewed the microfinance movement as an environment in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. It is thus the provision of a board range of financial services such as deposits, loans, payment services, money transfers and insurance to poor and low income households and their micro enterprises (Sriram and Kumar, 2007).
The typical microfinance clients are low-income persons that do not have access to formal financial institutions. Microfinance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, microfinance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income (the Microfinance Gateway).
This study covered the period 2006 to 2010. A period that may be considered too short for the validation of some of our research questions. We need to also reason in terms of age of microfinance industry in Nigeria. A structured questionnaire and focal group discussion were used to obtain primary information on the perception of activities of microfinance banks by their customers and potential clients. The questionnaire was divided into two sections. Section One tried to collect bio-data of the respondents. Options were provided for each question and the respondents were expected to mark-off in the box that applies. Section Two tackled the core areas of the subject matter of this research study. Secondary data used for the study were obtained from the microfinance banks that provided the focal group discussion participants and also from where a sample of the respondents to the questionnaire was drawn.
The respondents were asked, “the influence and impact of the microfinance bank’s activities in their lives and businesses, factors that influence the choice of bank to open account with?” The factors were measured on a five point likert-type scale of importance ranging from 1 as “not important at all” to 5 being “very important”. The instrument received face validity as the final version of the instrument emerged after corrections were effected after a pretest on 9 microfinance bank customers on group loan lending methodology from Nibo Microfinance bank limited. 200 persons participated in the final survey. Using their responses, the instrument was subjected to a reliability test using the Cronbach’s Alpha. The result of the Cronbach’s Alpha reliability statistics was 0.854 which is considered sufficiently high for social sciences and business research investigations (see Hair et al, 2010)
The sample respondents were purposively drawn from the catchment areas of microfinance banks under our study. The Microfinance banks are 9 in number and are Awka, Nibo, Umunne, Adazi-Ani, Adazi-Enu, Akalabo, Obeledu, Nice and Oko. They are all first generation microfinance banks having transmuted from Community banks to Microfinance banks in 2007. This characteristic, agreeably, must have engendered them with high microfinance banking culture. Their dispersion is also within some urban and rural areas of Anambra State.
The statistical software MINITAB Release 11.23 was used for processing and analyzing the primary data of this study. The responses within the various factor groups were tested for internal reliability using Cronbach’s Alpha test. The Principal Component Analysis (PCA) of factor analysis, with varimax rotation, was used to reduce a large number of variates to some smaller number by telling which belong together and which seem to say the same thing. Hair et al(2010, p16) states that the objective of the PCA is to find a way of condensing the information contained in a number of original variables into smaller set of variates (factors) with a minimal loss of information. PCA can be conducted on an un-rotated or rotated basis, and if it is carried out on a rotated basis, various techniques are available. Hair et al (2010) sustained that among of the various techniques; varimax tends to be the preferred one for clearer separation of the factors. The results of our factor analysis with varimax rotation are presented on Table 2 of Appendix 3 Findings
Our study confirms Mauer (2004) assertion that inspite of the collapse of Indonesia Banking System in 1998, the unit MFIs remained profitable, loan repayment rate stayed high and saving deposits more than doubled. Apart from loan repayment quality, the other indicators from our survey of MFBs within our sample group showed improved saving deposit mobilisation and remained profitable despite the financial crisis in the Nigerian Banking industry between 2008 and 2009. Deposits mobilisation by our sampled banks increased by 16% in 2009 and moved further by 7% in 2010. The total deposit involved in 2010 is N1.37 trillion and N1.28trillion in 2009. These MFBs showed some elements of integrationbetween the microfinance sector and the main financial industry.
Some of the mobilised saving were put as fund placement with conventional Banks, some made investments in quoted companies, financed commerce and small scale industry entrepreneurs and to some extend invested in real estate properties for investment and own use. In short their Gross Loan Portfolio increased from N911million in2009 to N1.07trillion in 2010 thus achieving a growth rate of 18%. In line with the observed tendencies in other economies, the average Operating Expense Earning Ratios of these MFB’s were high at 61% in 2009 and 60% in 2010. This is as a result of their inability to scale up their operations to sufficient level to absolve the ever increasing personnel costs, power, fuel and transportation expenses. The funding of all microfinance banks within our study group were all through private indigenous capital contribution. There were no external donors to their capital formation, and this has influenced their mission objective more to profit motive than to social mission.
Microfinancehas been defined as financial services for poor and low-income clients. The term is often used more narrowly, referring to services delivered by microfinance institutionswho usually use techniques developed over thelast three decades to make and manage tiny uncollateralized loans. These techniques includegroup lending and liability, pre-loan savings requirements that test clients’ willingness andability to make regular payments, graduated loan sizes, and most importantly an implicitguarantee of quick access to future loans if present loans are repaid promptly.
Microfinance banking takes services closer to the customer by establishing in the hard to reach areas. They ensure that the benefits of having a bank account arewidely appreciated by the unbanked and low income population through several different banking products and lending methodologies. They are trying to tackle abject poverty through by developing innovative savings and loan products to encourage the 23.8 million adults currently saving at home to save in a bank.
When one compares the MFBs in a country with the commercial banks in the same country the MFBs tend to be considerably more profitable. Return on Assets (ROA) forthe MFIs averaged 2.8 percent, compared to 1.5 percent for the banks. This differential doesnot indicate that microfinance is inherently more profitable than commercial banking. Rather,the explanation is probably the fact that microfinance is an immature industry where fewer ofthe providers are having their profits squeezed by competition. However, it seems evidentthat microfinance is profitable enough so that it can be integrated into the mainstreamfinancial sector in many places.
Microfinance allows poor people to protect, diversify,and increase their sources of income, the essentialpath out of poverty and hunger. The ability to borrowa small amount of money to take advantage of abusiness opportunity, to pay for school fees, or tobridge a cash-flow gap can be a first step in breaking the cycle of poverty. Similarly poor households willuse a safe, convenient savings account to accumulateenough cash to buy assets such as inventory for a smallbusiness enterprise, to fix a leaky roof, to pay forhealth care, or to send more children to school.
Microfinance also helps safeguard poor householdsagainst the extreme vulnerability that characterizestheir everyday existence. Loans, savings, and insurancehelp smooth out income fluctuations and maintainconsumption levels even during lean periods. Theavailability of financial services acts as a buffer for suddenemergencies, business risks, seasonal slumps, orevents, such as a flood or a death in the family thatcan push a poor family into destitution.Various studies, both quantitative and qualitative, havedocumented increases in income and assets and decreasesin vulnerability of microfinance clients.
Access to financial markets for consumers and producers can reduce poverty, as when the poor have access to banking services and credit. The importance of microfinance can be seen in this context. This access allows consumers to smooth consumption over time by borrowing and/or lending; in addition, it stabilizes consumer welfare in the presence of temporary shocks to wages and income. By contributing to the diversification of savings and of portfolio choices, microfinance can also increase the return on savings and ensure higher income and consumption opportunities. Insurance services can help mitigate a variety of risks that individuals and firms face, thus allowing better sharing of individual or even macroeconomic risks.
The regulatory frameworks that govern the establishment of these banks must make these microfinance banks strong in order to exhume confidence in their operations from the banking public. Frequent changes in their guidelines of operations must also be avoided to give these banks enough time to consolidate their activities within their catchment areas. A massive programme for capacity building for all categories of staff is required for the sub sector of the banking industry. Thereafter the certificate in microfinance banking should constitute a benchmark or pre-requisite qualification to hold management positions in any MFB in the country.
Enlightment and educationalcampaigns programmes mounted by the regulators and the operators are needed to change the perception of the general public on the existence and contribution of MFBs to Financial Inclusion.As a way of further inducement of the banked and unbanked population to patronise the services of MFBs the Central Bank of Nigeria, through the Federal Inland Revenue Services (FIRS) to the Federal Ministry of Finance to grant a waiver on withholding taxes arising from interest income generated from MFB operations.
In line with the regulatory and supervisory policy guidelines governing the establishment of MFBs, state and local governments are called upon to contribute 1% of their total budget to the funding of micro-economic activities through the MFBs in their catchment areas on wholesale on-lending basis. The Federal and State Governments should thereafter collapse all their small loan granting schemes as they are better served with MFBs. Networking of microfinance operators is also recommended. A process that fosters the exchange of information and ideas among individuals or groups that share a common interest. This is a business Networking, one of the implicit objectives is to form professional relationships that will boost MFB’s future business and employment prospects.
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