Problems And Prospects Of Micro Finance Banking In Nigeria (a Case Study Of Selected Microfinance Banks In Enugu Urban)

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Title page     -         -         -         -         -         -         -         -         -         i

Approval page       -         -         -         -         -         -         -         -         ii

Certification page   -         -         -         -         -         -         -         -         iii

Dedication   -         -         -         -         -         -         -         -         -         iv

Acknowledgement-         -         -         -         -         -         -         -         v

Table of contents   -         -         -         -         -         -         -         -         vi

Abstracts      -         -         -         -         -         -         -         -         -         viii

Chapter I


1.1          Background of the study-         -         -         -         -         -         1

1.2          Statement of problem       -         -         -         -         -         -         3

1.3          Objective of the study      -         -         -         -         -         -         4

1.4          Significance of the study-         -         -         -         -         -         5

1.5          Research questions-         -         -         -         -         -         -         7

1.6          Scope of the study-         -         -         -         -         -         -         7

1.7          Limitations of the study   -         -         -         -         -         -         8

1.8          Definition of terms-         -         -         -         -         -         -         8


Chapter II

LITERATURE REVIEW          -         -         -         -         -         10

2.1          An overview of microfinance activities in Nigeria   -         -         10

2.2          Justification for the establishment of micro-finance banks -         13     

2.3          Framework of the supervision of microfinance banks.      -         14

2.4          Interest Rate in microfinance     -         -         -         -         -         21

2.5          Understanding the peculiar characteristics of microfinance

 clients in Nigeria   -         -         -         -         -         -         -         28

2.6          Role of community Banks in microfinance intermediation -        34     

2.7          The problems of microfinance banks   -         -         -         -         44

2.8          The prospects of microfinance banks   -         -         -         -         47

2.9          Summary of Review        -         -         -         -         -         -         51


Chapter III


3.1          Research Design    -         -         -         -         -         -         -         53

3.2          Area of study         -         -         -         -         -         -         -         53

3.3          Population of the study    -         -         -         -         -         -         54

3.4          Sample Size Determination        -         -         -         -         -         54

3.5          Sampling Techniques      -         -         -         -         -         -         54

3.6          Sources  of Data Collection       -         -         -         -         -         54

3.7          Instrument of Data Collection    -         -         -         -         -         55

3.8          Validity of Instrument     -         -         -         -         -         -         55

3.9          Reliability of the Instrument      -         -         -         -         -         56

3.10      Procedure for Data Analysis      -         -         -         -         -         56


Chapter IV

DATA PRESENTATION AND ANALYSIS          -         -         -         57-71


Chapter V



5.1          Summary of Findings      -         -         -         -         -         -         72

5.2          Conclusion  -         -         -         -         -         -         -         -         73

5.3          Recommendation   -         -         -         -         -         -         -         75

Biology        -         -         -         -         -         -         -         -         77

Questionnaire        -         -         -         -         -         -         -         78

Appendix     -         -         -         -         -         -         -         -         79




This study examines the problems and prospects of MFLS in Nigeria.  The importance of MFLS in Nigeria’s economy cannot be over-emphasized; this is because it plays a vital role in the financial intermediation process and also the lives of the low income earners who constitute over 70 percent of the Nigerian population.  The sample size used at random selection is 262, and the simple random sampling technique will be used in selecting the sample.  The objectives of this study is to mobilize savings for intermediation, to render payment services, such as salaries, gratuities, and pensions for various tiers of government.  Percentage was used to analyse data collected and it was found that the outreach performance (financial and otherwise) of MFLS is discouraging and MFLS in Nigeria experience varying degree of problems.  The following findings were; that microfinance banks stand the chance of surviving the banking heat or competition going on in Nigeria because of loan.  That C.B.N staff as a result could not adequately keep to the regularly monitoring and supervision of microfinance bank.  Some recommendations were made, prominent amongst, which was that C.B.N should breast up to their function, which is imperative to the survival of the microfinance by: employing adequate staff that will enable adequate and regular monitoring and supervision of the microfinance banks so that this microfinance bank not die immediately after conception.




          In this chapter the following subheadings will be reviewed, background of the study, statement of problems, objectives of the study importance of the study research questions, scope of the study, limitations of the study, definition of terms.


1.1     Background of the Study

          Microfinance as a specialized scheme aims at providing funds in form of loans to poor households who are mainly small savers that cannot afford obtaining loans from money deposit banks or other money lending institutions microfinance has been proven to be an effective and powerful tool for poverty reduction.    It has sufficiently penetrated the poorer states of society especially in developing countries, though not rampant in Nigeria yet.

          The microfinance policy was introduced in exercise of the powers conferred on the Central Bank of Nigeria (CBN) by the provisions of section 28, sub section (16) of the CBN Act 24 of 1991.  the policy recognizes existing informal institutions and brings them within the supervisory purview of the (CBN) creating a platform for the regulation and supervision of microfinance banks through specially crafted Regulatory Guidelines.  Though the microfinance policy and framework was launched on December 15th, 2005 which saw an unprecedented rise in microfinance institutions in Nigeria financing in micro set-ups is a practice that was culturally rooted and dated back to many centuries in Nigeria.  These were in the form of self-help groups, rotating savings, co-operative set-ups (still existing) and money-lending activities.  All these were means of getting access to credit and finances.  Subsequently, most of these self-help groups grew into recognized community banks while some community banks were products of government programmes, most came into being through self-help gathering.  The government induced community bank was an attempt to reduce the people’s poverty.  But like all other government’s pro-poor projects, it also failed.

          In 1986 Gen Ibrahim Babangida came and established Directorate of foods, Roads and Rural Infrastructure (DFRRI) to accelerate rural development under his regime, various projects such as the Peoples Bank of Nigeria as well as the Community banks were established.

          But in Nigeria, the re-originated microfinance sub-sector, which was a welcome idea to many people had also failed.  A MFB operator Olusanya, explained that those objectives behind the reformation in MFBs in the country namely; weak institutional capacity and capital base, need to increase savings opportunity and economic empowerment were the reasons why they failed.  Payment default people wanted to return the loan but could not because of unyielding business investment due to lack of basic infrastructure.  Without infrastructural facilities put in place, no reform of microfinance can work.

          Since the Central Bank of Nigeria made a pronouncement for the establishment of microfinance system late last year with the aim of assisting the small scale entrepreneurs, several microfinance banks have sprang up in every nook and cranny of the country.  The question poised by many Nigerians is, has the bank lived up to expectation in performing its responsibilities of meeting the yearnings of the average Nigerian entrepreneur? While many believe that the system is still far from touching the grassroots considering the fact that they are located in the cities and not rural areas where their services will be needed most.


1.2     Statement of Problems

          In Nigeria today all licensed community banks prior to the approval of this policy shall transform to microfinance banks licensed to operate as a unit bank on meeting the prescribed new capital and other conversion requirements within a period of 24 months from the date of approval of this policy.  Any community bank, which fails to meet the new capital requirement within the stipulated period shall cease to operate as a community bank.  A community bank can apply to convert to a micro finance bank licensed to operate in a state if it meets the specified capital and other conversion requirements.

          In Microfinance banks, we encounter problem in repayment.  Loan delinquency is a major threat institutional sustainability, it is the deadly virus which afflicts MFLS.  Delinquency demoralizes staff and deprives beneficiaries of valuable services.  Delinquency is a symptom of poor leadership.  In high operating cost, small units of services pose the problem of high operating cost, several loan applications to be processed, numerous accounts to be managed and monitored, and repayment collections to be made from several locations especially in rural communities.  Also savings culture among the people and credit availability.

          The above stated problems have necessitated the need for a through investigation into the entire system with a view to finding solution on how to improve on the system.


1.3     Objectives of the Study

          The broad objective of this study is to appraise the problems and prospects, the microfinance banks face and also to show case opportunities that abound within their operations and derive implications with specific reference to Ogbete micro finance bank of Enugu state.  This will be achieved through the following specific objectives:

(i)                       To provide diversified, affordable and dependable financial services to the active poor in a timely and competitive manner that would enable them to undertake and develop long-term, sustainable entrepreneurial activities.

(ii)                     To mobilize savings for intermediation.

(iii)                   To create employment opportunities and increase the productivity of the active poor in the country thereby increasing their individual household income and uplifting their standard of living.

(iv)                   To enhance organized systematic and focused participation of the poor in the socio-economic development and resource allocation process.

(v)                     To provide veritable av0enues for the administration of the micro credit programmes of government and high net worth individual on a non-recourse basis.  In particular, this policy ensures that state governments shall dedicate an amount of not less than 1% of their annual budgets for the on-lending activities of microfinance banks in favour of their residents.

(vi)                   To render payment services, such as salaries, gratuities, and pensions for various tiers of government.


1.4     Significance of the Study

          Studies such as this usually offers insight into the operations of these institutions, their difficulties as well as opportunities they offer.

(i)                       It is a poverty alleviation strategy: poverty was a major challenge facing the country and that all efforts should be geared towards its eradication.  Microfinance would expand opportunities to the poor and identified three principal challenges confronting the poor as access to capital, information and stable market.  For micro financing to succeed in the fight against extreme poverty, he enumerated the expected roles of stakeholders to include that:

(a)                      The CBN should provide policy guidelines and oversight in ensuring a healthy, formal and sustainable micro finance market.

(b)                     Government shoul.d co-ordinate and promote micro financial services through community economic sensitization, str.gic partnership building and effective participation of the grassroots.

(c)                      Development partners should assist in bridging capacity gaps; and

(d)                     The private sector and civil society should own, expand and ensure the success of micro credit and micro financial services.

(ii)                     It assists the active poor in accumulating productive assets.

(iii)                   It stimulates the saving culture.

(iv)                   It helps the active poor to work their way out of perpetual poverty.

(v)                     It assists in general economic growth.


1.5     Research Questions

(i)      Can a cosigner borrow from the MFB?

(ii)     Must the poor provide physical collateral/security when lending?

(iii)    Are the deposits in the MFB safe and insure?


1.6     Scope of the Study

          The study covers all the activities of the microfinance banks: savings, credits and funding of projects including partnership in commerce and manufacturing.  Microfinance is an economic development strategy intended to provide finance services such as micro insurance, micro leasing and payment services to the poor and low income clients.

          In order to enhance the flow of financial services to Nigerian’s rural areas, government has in the past initiated a series of publicly financed/rural credit programmes and policies targeted at the poor.




1.7     Limitations of the Study

          In this study, we limit ourselves to the operations of banking services and government regulations of these banks including the prospects and problems within the scope of banking activities.

          The informal financial institutions have limited outreach due to paucity of loan-able funds, sub-optimal performances of some of the institutions and the reluctance of commercial banks to be involved in micro-financing.

          The poor and unencouraging attitude of some respondents constituted a serious problem to this study. Such attitudes ranged from failure to keep dates with the researcher to outright refusal to complete questionnaires administered or to grant oral interviews.  Some respondents did not give accurate answers to the questions despite the researchers earlier promise that all information given shall be treated confidential.


1.8     Definition of Terms

MICRO FINANCE BANK:       Is any company licensed by the Central Bank of Nigeria to carry on business of providing microfinance services such as; savings, loans, domestic funds transfer and other financial services that are needed by the economically active poor, small and medium enterprises to conduct or expand their business.


CENTRAL BANK OF NIGERIA (CBN):     This is the apex bank of the nation.  This bank regulates all the money deposit in the bank of the nation and serves as the bankers bank.  It is also the governments bank and as well regulate the money in circulation through treasury bills etc.


MICRO FINANCE:         Is the supply of loans, savings and other basic financial services to the poor.


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