CASE STUDY OF
MFI IN KADUNA METROPOLIS
The study sought to identify the mechanism employed by the management of MFIs and profitability levels in Nigeria. The research area was Kaduna Metropolis. The study was conducted with the following objectives; to assess the management of MFIs in Nigeria, to establish the profitability levels in Nigeria and to find the relationship between management of MFIs and profitability levels in Nigeria.
The study was both descriptive and analytical in nature and it involved the observation of the employees and also issuing of questionnaires that were answered by the respondents and later on returned to the researcher for analysis and presentation of the findings which were tabulated and presented in percentages. A sample of 100 respondents was used. The selection of the sample for each stratum was based on a random sampling technique. The technique was not appropriate as it increased the precision of sample results and it ensures that each stratum is represented in the sample that involves the general ability and multi -stage sampling design was also helpful in this study. The sampling units helped the researcher to achieve the objectives and the questionnaires hence getting the expected results.
The findings of the study revealed that the problems faced by MFIs include; high transaction and administrative costs. This reduces the profitability levels. There existed a strong relationship between management of MFIs and effectiveness and survival of MFIs will largely depend on their management. The researcher found out that management is a product of factors such as the management style of the company and these styles included autocratic style, value leverage, democratic, persuasive and consultative and all these have away they impact on the performance of the institutions such as timely preparation of the financial statements, quick and timely decision-making. And other factors such as the level of competition in the industry and he regulatory framework of the institution.
In conclusion therefore, the research found out that management is the pillar to the profitability levels of the company and this works in consultation with other factors such as the spread out of the company, the level of technology and the competition level in the sector yet the regulatory framework of the central bank over the microfinance institutions to cater for their profitability levels. The researcher therefore recommended that the microfinance institutions should adhere to the guidelines of the corporate governance provided by the central bank and ensure formulation of a human resources committee for the implementation of the management policies, improvement in the level of technology so as to serve more clients and to increase profitability.
The Micro Finance Act defines a microfinance institution (MFI) as an organization that provides microfinance services, ranging from small non-profit organizations to large commercial banks. Andrew (2006) defines micro finance as the supply of loans, savings, and other basic financial services to the poor. As the financial services of microfinance usually involve small amounts of money – small loans, small savings, the term microfinance helps to differentiate these services from those which formal banks provide.
Microfinance is a tool used in poverty alleviation and empowerment of low income earners in less developed countries (Tamil, 2010). The accessibility to microfinance services helps the low income earners to engage in projects and develop their entrepreneur skills by utilizing resources which leads to job creation and reduction in unemployment (Goetz, 2010). Micro financing therefore involves the provision of financial services to low income earners by firms described as microfinance institutions (MFIs) using lending methods which are both formal and non formal (Kareta, 2010). The lending methods are detailed in the credit policy which is used in determining the extent to which microfinance services are extended to customers in form of outreach.
In Nigeria micro finance industry started thriving in the early 1990s after the closure of failed commercial bank and co-operative banks, due to the gap that existed in the provision of financial services in the rural and urban areas, lack of industrial coordination and other challenges. This forced the micro finance practitioners to come together under the guidance of the Ministry of Finance, Planning and Economic Development to form micro finance committee in 1997. This committee was later named the Micro Finance Forum (MFF). Broadly, the committee aims at enhancing effective coordination, and mechanism to the professionalization of micro finance institution in Nigeria (MFPED, 2004).
According to the World Bank, there are now over 7,000 microfinance organizations providing services to over 13 million women clients, all located in developing nations. The 1997 Micro credit Summit was held in Washington, D.C., where representatives from over 100 countries pledged to reach 100 million of the world’s poorest people with microfinance services by 2015. The United Nations generated further attention for microfinance initiatives by designating 2015 as the International Year of Micro credit, with the goal of providing financial services to the huge reserve of entrepreneurial talent women across the globe. (Dawkin;2010).
A wide range of Micro Finance Institutions(MFIs) have, however, existed in Nigeria in many forms and for many years to respond to their source gap in the market and are working to become more responsive to the real needs of their clients who constitute low income households, thereby contributing to economic growth. However, though Nigeria has a long history of informal finance, a more organized micro-finance industry picked momentum in the early 1990s following the liberalization of the financial sector. The industry is therefore still young, but very vibrant. In the last over ten years, the industry has grown as high as 70 percent per annum.
Despite this growth, the rural financial sector in Nigeria is largely underdeveloped, fragmented and not adequately integrated with the formal financial sector. The costs of operation of MFIs are also generally higher than those of the formal financial institutions since MFI clients are generally located a distance from the branches and require continuous monitoring. Interest rates are hence necessarily higher for loans obtained at MFIs than those on loans obtained from the formal financial institutions (Ledger wood et al, 2002).
Profitability is the process of determining the financial worthiness of any business undertaking (Gittinger, 1984). It is indicated by returns from issuance of loans, costs of administration and liquidity position of the institutions. Micro finance institutions have low response to customer complaints, high value of Nonperforming Assets (NPAs), low loan recovery and managers are reluctant to respond to risk changes. This has prompted measures such as putting up loan securities for effective loan recovery, proper documentation of records, carrying out on job and off job training in order to improve on the skills of employees, disposal of Non Performing Assets in order to manage liquidity of the institution, introduction of customer complaints desk, sending monthly statements to the Bank of Nigeria, improving on the risk tolerance by management and management of information system and in order to provide timely and accurate informative.
To reverse this trend, the government and key stakeholders have started initiating policies aimed at implementing market based rural financial services on a sustainable basis with the major objective of increasing access to and availability of micro finance services in rural areas where the poor people live and work. Therefore, the role played by MFIs is high in the growth strategy of Nigeria. In its original form, micro-finance business was considered as ‘charity.’ As a result, the performance of the schemes was adversely affected by very poor loan recovery, inefficiency and high management costs which consequently led to underperformance or collapse. The view that prevailed for many years was that micro borrowers were too poor to pay back their loans at commercial rates and therefore, any loans to them must be subsidized. However, over the past decade the industry has transformed into a large, dynamic private sector catering for the financial needs of the low -income households and economically active poor. Over the years, the MFIs have demonstrated considerable comparative advantage in their service provision to rural and low -income urban clients. (Churchill,2010). Furthermore, most institutions have embraced amore business oriented outlook and maintaining their target groups of economically active poor while focusing on achieving operational and financial sustainability. These will therefore call for a research to be carried out to cater for the sound management and how it impacts on the profitability level of the microfinance institutions in Kaduna Metropolis.
Commercial banks traditionally lend to medium and large enterprises which are judged to be creditworthy, avoid doing business with the poor and their micro enterprises because the associated cost and risks are considered to be relatively high. Microfinance institutions (MFIs) have therefore become the main source of funding micro enterprises in Africa and in other developing regions. Anyanwu (2004) Five banks including the popular Cooperative Bank unexpectedly closed because of internal financial problems, partly due to inadequate prudential supervision, which led to gross violation of banks regulations. They fell short of capital requirements stemming from problems of poor loan documentation, inadequate provisioning, insufficient risk assessment capacity, internal fraud and other management weaknesses. Moreover, the partial privatization of the Nigeria Commercial Bank, which resulted in the closing of many rural branches, left large areas of the country without any formal financial services and opened the way for microfinance institutions this fact prompted the researcher to investigate sound management and profitability level of microfinance institutions.
1.3 Purpose of the study
The purpose of the study was to establish the relationship between the sound management of microfinance institutions and their profitability levels in Kaduna Metropolis.
- To assess the management of microfinance institutions in Kaduna Metropolis
- To establish the level of profitability levels in microfinance institutions in Kaduna Metropolis
- To establish the relationship between the sound management of microfinance institutions and their profitability levels in Kaduna Metropolis.
- What is the level of sound management of microfinance institutions in Kaduna Metropolis?
- What is the level of profitability levels in microfinance institution in Kaduna Metropolis?
- What is the relationship between the sound management of MFIs and their profitability levels in Kaduna Metropolis?
The researcher was concentrated on the geographical area covering microfinance institutions operation in Kaduna Metropolis. Kaduna Metropolis is a third-order administrative division and is located in Kaduna State, Northwestern Region, Nigeria.
Kaduna Metropolis is mainly divided in three divisions which are Kaduna South, Kaduna North and Kaduna Central.
The researcher was looking at the management of MFIs in Kaduna Metropolis as an independent variable and profitability levels as a dependent variable. This study looked at management principles of micro finance and how they impacted on their profitability level of the microfinance institutions and these included the financial, operational and risk management of the microfinance institutions.
The research helped the managers in reducing the levels of non performing advances by equipping them with knowledge of good lending practices to prevent further losses.
The research helped the researcher in understanding the sound management principles and how these have been use in the organizats to ensure effective performance and how the absence of sound management affects the profitability level of the microfinance institutions.
The study was of vital use to the microfinance institutions as it helps them to understand the impact of sound management on their profitability level and go further in to establish the other factors that affect the profitability level of the microfinance institutions.
The study helped to give the researcher the needed confidence as it enable me to apply the class theory work in the actual field for example the knowledge of collecting the information using the different methods such as interview and observation.
The study also enables the researcher boost my confidence as it enables me to interact with several people in the profession. That’s to say interact with the practicing members which enabled me gain the insight of the actual field.
The study was of vital use to the regulatory bodies such as AMFIU to get to understand the reasons for their profitability level of the microfinance institutions and the impact of the management of these institutions on their performance.
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