ASSESSMENT OF MICROFINANCE BANK ON POVERTY ALLEVIATION IN NIGERIA
CASE STUDY OF
SEEDVEST MICROFINANCE BANK LIMITED (OYOSTATE)
- BACKGROUND TO THE STUDY
Microfinance is a means of extending credit, usually in the form of small loans with little or 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. Throughout the world, poor people are excluded from formal financial system, exclusion ranges from partial exclusion in less developed countries to total exclusion in developing countries These poor people have developed a wider variety of informal community based financial arrangement to meet their financial needs, thus, micro finance is created to fill this gap. Microfinance is the lending of small amount of capital to small entrepreneurs in order to create a mechanism to alleviate poverty by providing the poor and the destitute with resources that are available to the wealthy. Anyanwu (2004).
Micro-finance banks are not just providing capital to the poor, but also to combat poverty at an individual level; it also has a role at institutional level. It seeks to create institutions ignored by the formal banking sector, so microfinance is implemented to over-come the failure of the formal banking system to the poor citizens. In Africa and other developing regions, micro finance institutions are regarded as the main sources of funding micro enterprise (Anyawu 2004). The unwillingness or inability of the formal financial institution to provide financial service to the urban and rural poor people coupled with unsustainability of government sponsored developmental schemes contributed to the growth of the private sector led microfinance in Nigeria.
The roles played by micro finance institutions have made it to become part of the formal financial system of Nigeria and therefore can access capital market to fund their lending portfolio allowing them to drastically increase their lending capacity. The importance of microfinance is to alleviate poverty and that made the federal government of Nigeria adopted it as the main source of small business finance in Nigeria and mandated the central Bank of Nigeria (CBN) to develop an appropriate policy and frame work for the operation of Micro Finance System (MFS). However, numbers of microfinance banks are in significant proportion of the people in need of micro finance services. It has observed that formal financial institutions only serve view individuals in a country where an average citizen lives below one U.S dollar (1$) per day. It is therefore necessary to under-take an assessment of the extent to which microfinance has impact on poverty alleviation in Nigeria that is the overall objective of this study.
In December 2005, the Federal Government of Nigeria (FGN) through the Central Bank of Nigeria (CBN) introduced microfinance
Policy framework to enhance the access of micro entrepreneurs and low income households to financial services required to expand and modernize their operation in order to contribute to rapid economic growth. The rationale was that no inclusive growth can be achieved without improving access of this segment of the economic strata to factors of production, especially financial services.
The basis of this bold initiative in 2005 is still valid. With the benefit of experience spanning over five years of operating the microfinance policy, the CBN believes that review of the policy to reflect lessons from experience, global economic trends and the envisioned future for small business development in Nigeria has become auspicious. Microfinance services refer to loan, deposits, insurance, fund transfer and other ancillary non-financial products target at low-income clients. Three features distinguish microfinance from other formal financial products:
- Small loans and savings.
- Absence or reduced emphasis on collateral.
- Simplicity of operation.
Before the emergence of microfinance banks (MFBs) under the microfinance policy, the people that were under served by the formal financial institutions usually found succor in non-governmental-microfinance institutions (NGO-MFIs), money lenders, friends, relatives, credit unions, etc. these informal sources of funds have helped to partially fill a critical void, in spite of the fact that their activities were neither regulated nor supervised by the CBN. This revised policy framework continues to take cognizance of this category of institutions, which have now become key players in the Nigeria microfinance land scape.
However, emphasis would be placed on MFBs because they are under the regulatory and supervisory purview of the CBN. The envisioned microfinance sub-sector under the policy regime recognizes the existence of informal institutions and provides for their mainstreaming into the national financial system. The policy also seeks to harmonize operating standard and institutions particularly MFBs. Existing non- deposit taking service providers, which continue to operate outside the purview of regulation and supervision of the CBN, would be encouraged to make periodic returns on their operations for statistical purposes to the CBN.
(Source: Microfinance policy, regulatory and supervisory framework for Nigeria: Central Bank of Nigeria (2005))
1.2 STATEMENT OF THE PROBLEM
The microfinance industry in Nigeria had been confronted by numerous challenges since the launch of the microfinance policy framework (MPF) in December 2005. Coming on the heels of banking sector consolidation, many of those adversely affected found their way into microfinance. Thus, a significant number of newly licensed MFBs were established or operated like “mini-commercial banks.” Also, the formal community banks (CBs) that converted to MFBs did not fare belter. An assessment of microfinance sub-sector, following the launching of the policy however revealed some improvements. These include increase awareness among stakeholders such as governments, regulatory authorities, investors, development partners, financial institutions and technical assistance providers on microfinance. Specifically a total of 866 microfinance banks have been licensed, microfinance banks put in place promotional machinery beefed up. Accordingly, entrepreneurs taking advantage of the opportunities offered by increasingly demanding for financial services such as credit, savings, payment services, financial advices and non-financial services. Despite the above development, a larger percentage of Nigerian are still excluded from financial services. A study carried out by Enhancing Financial Innovation and Access (EFInA) in August 2010, revealed that 39.2 million representing 46.3 percent (%) of adults in Nigeria were excluded from financial services. Out of the 53.7 percent (%) that had access, 36.3 percent (%) derived their financial services from formal financial institutions, while 17.4 percent (%) exclusively patronized the informal sector. Also, the results of the survey revealed that Nigeria was lagging behind South Africa, Botswana and Kenya with26 percent (%), 33 percent (%), and 32.7 percent (%) in financial exclusion rate respectively. Several factors have accounted for the persisting gap in access to financial services. For instance, the distribution of microfinance banks in Nigeria is not even, as many of the banks are concentrated in a particular section of the country, which investors perceived to possess high business volume and profitability. Also, many of the banks carried over the in-efficiencies and challenges faced during the CBs era. In addition, the dearth of knowledge and skills in micro financing affected the performance of the MFBs. Furthermore, there are still inadequate funds for intermediation owing to lack of aggressive saving mobilization, inability to attract commercial capital, and the non-establishment of the microfinance development funds (MFDF). In order to redress this unintended development, bank commenced a programme of capital building, sensitization and awareness on the appropriate model for microfinance banking in December 2007. Maiden, routine and target examinations, as well as nurturing and mentoring of the MFBs were also embarked upon during the same period to inculcate the microfinance concept and assist them to stabilize. The impact of global financial crisis of 2007/2008 on MFBs was more severe than anticipated. Credits line dried up, competition became more intense and credit risk increased to the extent that many clients of MFBs were unable to pay back loans owing to hostile economic environment.
The banking sector reform of 2009 did not leave the MFBs scattered as many of them experienced panic withdrawals by clients who were under the notion that if the deposit money Banks (DMBs) could have challenges, the MFBs would not fare better, the run on some of MFBs were so severe that they had to close shop. The combination of these factors significantly weakened the microfinance sub-sector and its ability to achieve its objectives. It is against this background that this study seeks to assess the microfinance poverty alleviation in Nigeria using Seedvest Microfinance Bank Limited as a case study.
1.3. OBJECTIVES OF THE STUDY
The prolonged sub-optimal performance of many formal community banks, microfinance and development financial institutions are due to incompetent schemes. Other factors are poor corporate governance, lack of well-defined operations, restrictive regulatory and supervisory requirements, among others. The size of un-served market by the existing financial institutions is large. EFInA, in its Access to financial survey in Nigeria in 2008, alluded to the fact that 79 percent (%) of the total population in Nigeria is unbanked out of which 86 percent (%) are rural dwellers. Also in 2005, the aggregate microcredit facilities in Nigeria accounted for about 0.2 percent (%) of gross domestic product (GDP) and less than 1 percent (%) of total credit to the economy. This revealed the existence of a huge gap in the provision of financial service to a large number of the economically active poor and low income households. The effect of not addressing this situation appropriately would further accentuate poverty and slow down the growth and development. The primary aim of microfinance development initiative includes promoting inclusive financial system which entails creating sustained financial awareness. Therefore, the target clients for change are those people that equate microfinance with microcredit and see banks and other funds providers not as partners in business, but mere source of loans and advances.
Globally, Micro, Small and Medium Enterprises (MSMESs) are known to contribute to poverty alleviation through their employment generating potential. In Nigeria, however, the employment generation potentials of small business have seriously constrained by lack of access to finance, either to start, expand or modernize their present scope of economic activities. Delivering on empowerment generation and poverty alleviation by MSMEs, would require multiple channels of financial services, which improved microfinance framework should provide. Poor people can and do save, contrary to general held notions. However, owing to the inadequacy of appropriate savings opportunities and products savings have continued grow at a very low rate, particularly in the rural areas of Nigeria. The microfinance policy provides the window of opportunity and promotes the development of appropriate (safe less costly and easily accessible) saving products that would be attractive to rural clients and improve the savings level in the economy. Many local and international investors have expressed interest in investing in the country’s microfinance sub sector. Thus, the establishment of microfinance policy framework for Nigeria provides an opportunity for them to participate in financing the economic activities and low income households and economically active poor.
Finally, most of existing banks are located in urban centers, and several attempts in the past to at encouraging them to open branches in the rural areas did not produce the desired results, with higher proportion of Nigerian population living in the rural areas. It has become imperative to develop an institutional framework to reach the hitherto under-served population with banking services. Despite all of these policies and encouragement by FGN through CBN this study seeks to: –
- Establish the relationship between microfinance and poverty alleviation in Nigeria.
- Establish to what level has microfinance being able to alleviate poverty.
- Possibly recommend ways in which poverty alleviation can be improve upon.
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