THE ROLE OF MICROFINANCE BANKS IN THE ALLEVIATION OF POVERTY IN NIGERIA.

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ABSTRACT

 

Study shows the roles of the microfinance banks in the alleviation of poverty in Nigeria. The researcher revealed that the rate at which low income earner deposit their money at home rather than in microfinance banks is high. Data were collected January to February 2017. The main source of data collection was questionnaires and interviewed. The chi-square (x²) method was used for testing of hypotheses. Responses to the questionnaires were analyzed using percentage method of analysis. Based on the findings of this study, an attempt on the role of micro financing as stimulus to poverty alleviation in Nigeria may lack adequate knowledge of various financial transactions available and how the rural dwellers can access them. In conclusion, it hoped that the recommendation will help the microfinance banks to strengthen its weakness for better and effective services in order to achieve its sets of goals and socio-economic advancement for the alleviation of poverty in Nigeria and also Based on the results gotten, The study ended by giving recommendations that were considered necessary for microfinance bank in the alleviation of poverty in Nigeria.

 

 

 

 

 


 

 TABLE OF CONTENTS

 

CHAPTER ONE: INTRODUCTION

1.1           Background of the study--------   -----------------------------------9

1.2           BRIEF HISTORY OF MICROFINANCE BANKS IN NIGERIA…  11

1.3 Statement of problems-------------------  -----------------------------13

1.4 Objectives of the study-------------------------------------------------14

1.5 Research Hypothesis---------------------------------------------------15

1.6 Research questions---------------------------------------------------- 15

1.7 Significance of the study-----------------------------------------------15

1.8 Scope of the study-----------------------------------------------           16

CHAPTER TWO: LITERATURE REVIEW

2.1 Microfinance bank in Nigeria  …………………….........................……..19

 2.2. the challenges of microfinance bank in Nigeria…………….........20

2.3 names of some microfinance bank in Nigeria…………...................23

2.4. Distinctive feature of business of microfinance………………..….29

2.4.1credit risk study………………………........................................................30

2.4.2use of security……………………………………..........................................30

2.4.3credit authorization and monitoring……………………………..30

2.4.4 Controlling debit………………………………………………..30

2.4.5gradually increasing lending……………………………………..30

2.4.6group lending…………………………………………………….30

2.5 micro finance institution…………………………………………..30

2.5.1diversion of microfinace fund……………………………………31

2.5.2 indequate finance……………………………………………….31

2.5.3  unfavorable frequent change in government policies………31

2.5.4 high risk and mounting loan losses………………………………….31

2.5.5 low capacity and low technical skill on microfinance…………31

 

2.6 procedures for obtaining fund from microfinance bank………. 31

2.7 activities of informal microfinance institution in financing small business………………………………………………………………………....………32

2.8 Different between microfinance bank and institution……………33

2.9 roles microfinace bank in socio economic development of rural community……………………………………………………………….....…………..33

2.10 the role of microfinace bank in nigeria economy………………37

2.10.1   credit delivery……………………………………………………………37

2.10.2 Boosting small scale enterprises…………………………………37

2.10.3 employment generation…………………………………………………22

2.10.4 improvement in skill acquisition ……………………………………22

2.10.5 facilitate poverty alleviation…………………………………………..22

 

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design---------------------------------------------------------40

3.2 Sources of data collection---------------------------------------------40

3.3 Methods of data collection---------------------------------------------41

3.3.1 Primary data-----------------------------------------------------------41

3.4 Determination of population size-----------------------------------41

3.5 Determination of sample size----------------------------------------41

3.6 Sample procedures------------------------------------------------------42

3.7 Method of data analysis-----------------------------------------------43

3.8 Decision rule-------------------------------------------------------------43

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Data presentation-------------------------------------------------------44

4.2 Summary of responses-------------------------------------------------44

4.3 Test of hypothesis-------------------------------------------------------45

 

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary of Findings---------------------------------------------------55

5.2 Conclusion----------------------------------------------------------------56

5.3 Recommendations------------------------------------------------------56

REFERENCE               --------------------------------------------------------58

APPENDIX A------------------------------------------------------------------60

 

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION

 

 

1.1: BACKGROUND OF THE STUDY

Microfinance refers to an array of financial services, including loans, savings and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn't otherwise qualify for a standard bank loan. Most often, microloans are given to those living in still-developing countries who are working in a variety of different trades, including carpentry, fishing and transportation.

Microloans typically are not more than several hundred naira. Examples of uses include money for tools to start work in construction, or makeup and other supplies needed to become a cosmetologist. Because they are the ones that commonly use their profits to provide for their families with things like food, clothing, shelter and education, women currently comprise roughly two-thirds of all microfinance clients. The goal of micro financing is to provide individuals with money to invest in themselves or their business to help get them out of poverty. When providing loans, micro financing institutions do not require collateral, but do insist that the loan is repaid within six months to a year.

A microfinance bank is one devoted to extending small loans, referred to as microloans, to individuals, businesses, and organizations in low-income regions, including under-developed countries where small amounts of money can go a long way. Some financial institutions are devoted entirely to microfinance, while others are part of larger companies, such as global investment banks. Ultimately, this type of bank provides credit to those who would otherwise be unable to access this form of capital. These loans foster the development of small businesses and provide tools to entrepreneurs to follow their dreams, all in an attempt to alleviate global poverty in vulnerable regions.

Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are relationship-based banking for individual entrepreneurs and small businesses; and group-based models, where several entrepreneurs come together to apply for loans and other services as a group. In some regions, for example Southern Africa, microfinance is used to describe the supply of financial services to low-income employees, which is closer to the retail finance model prevalent in mainstream banking.

Microfinance is a type of banking service that is provided to unemployed or low-income individuals, or groups who otherwise have no other access to financial services. Ultimately, the goal of microfinance is to give low-income people an opportunity to become self-sufficient by providing a way to save money, borrow money and get insurance.

The term microfinance refers to a range of financial products including microloans, microsavings and microinsurance products that microfinance institutions (MFI's) offer to their clients. While most entrepreneurs and small business owners have a wealth of knowledge and ideas for their businesses, very few of them have the right amount of capital to support these ideas. That is exactly why receiving a microloan is an ideal option for startups or businesses that need less money than a conventional bank would lend.

A microloan (also called micro-credit), as its name suggests, is a loan of a small amount primarily to help SME's (small to medium sized enterprises), entrepreneurs, and private individuals to finance their business demands or private investments. A microloan, in banking terms, usually refers to loans that usually range between ₦15,000 to ₦2,000,000 and is offered by banks as well as microfinance institutions around Nigeria.

The word "micro" literally means small and finance also mean investment orsupport, therefore microfinance can be defined literally as small investment orsupport. Microfinance can be defined as the practice of offering small, collateral freeloans to member of co-operatives who otherwise would not have access tothecapital necessary to begin small business or other income generating activities.

 

Microfinance banking is about providing financial services to the economically active poor and low income household, who are traditionally not served by the conventional financial institutions. These services include credit savings, micro-leasing, micro-insurance and payment transfers to enable them engage in income generating activities. (Asemota, 2002)

 

However, the microfinance policy launched on 15th December 2005 defined the framework for the delivery of these financial services on a sustainable basis to the micro, small and medium enterprises (MSMES) through privately owned microfinance banks. The Non-governmental Organizations or Microfinance institutions (NGO-MFIS) are also expected to transform to microfinance banks. (Dinye, 2006)

Existing Community banks and NGO-MFIS that want to convert and transform respectively to a microfinance bank but do not have the required minimum capital base can increase the share capital by capital injection, merger and acquisition. These would not only enhance monetary stability but also expand the financial infrastructural development of the country to meet the national financial system and provide stimulus for growth and development (Benson, 1985). It would also harmonize operating standards and provide a strategic platform for the evolution of microfinance institution, promote appropriate regulation, supervision and adoption of best practices. The establishment of microfinance banks has become imperative to serve the following purposes: Improve, diversified and create a dependable financial service to the active poor, low-income earners in a timely and competitive manner that would enable them to undertake and develop long.

term, sustainable entrepreneurial activities, mobilize savings for intermediation, create employment opportunities and increase the productivity of active poor and income earners in the country. Thus increasing their individual household income and capacity standard of living, enhance organized and systematic but focused participation of the poor in the social-economic development and resource allocation process. It will also provide veritable avenues for the administration of the micro credit programme of government and high net worth individual on non-resource basis. This policy ensures that state government shall delegate an amount of not less than 10% of their annual budgets for on-lending activities of microfinance banks in favour of their residents and render payment services such as salaries, pension for various tiers of government (Luck,2011).

 

1.2 BRIEF HISTORY OF MICROFINANCE BANKS IN NIGERIA

Microfinance banking came into existence in 2005 with the introduction of the microfinance policy by the past CBN governor Professor Chukwuma Soludo. This policy was induced by the internationally commended influence of microfinance in assisting the working population to leave the poverty level thereby resulting in substantial reduction in poverty. Consequently, microfinance banking was established with the anticipation that with time, it would assist in dropping poverty level in the country. Therefore, as indicated in section 4:2:1 of the microfinance policy, the policy objective includes catering for the majority of the poor but working population by the year 2020 thus establishing lots of jobs and decreasing poverty. To attain this, the CBN established and licensed Microfinance banks, which substituted community banks. It is essential to state that there are more than nine hundred (900) microfinance banks in Nigeria today which are regulated by the Central Bank of Nigeria (CBN 2005).

As already noted microfinance banks were founded because of the perceived deficiencies in the existing financing schemes for the poor and small businesses. They were licenced to begin operations in 2007 and existing community banks and NGO microfinance institutions that met the conditions spelt out by CBN for licencing were allowed to transmute into microfinance banks.

To qualify for a microfinance license an existing community bank was required to increase its paid-up capital from N5m to N20m. Unlike the community banking policy framework which compulsorily confined all community banks to unit banking, the microfinance banking guideline permitted the branching of microfinance banks within a state. For the microfinance banks intending to open branches within a state their paid-up capital was put at N1 billion. Another point of divergence between the community banks and their microfinance successors is in those which the regulatory guideline allows to own them. In addition to individuals, group of individuals, community development associations, private corporate entities which could own community banks, foreign investors and commercial banks, foreign investors could also own microfinance banks.

These changes in the policy framework establishing microfinance were due to the perceived failure of the existing microfinance framework.( ADEYEMI K.S 2008) captured this thus, “despite decades of public provision and direction of provision of microcredit, policy orientation, and the entry of new players, the supply of microcredit is still inadequate”. He identified some of the challenges which microfinance institutions face that impinge on their ability to perform to include; undercapitalization, inefficient management and regulatory and supervisory loopholes. To these,(MOHAMMED AD 2009) added usurious interest rates and poor outreach. Further buttressing the challenges facing microfinance banks,( NWANYANWU O.J 2011) identified diversion of funds, inadequate finance, and frequent changes in government policies, heavy transaction costs, huge loan losses, low capacity and low technical skill in the industry as impediments to the growth of this subsector. These challenges many of which contributed to the failure of previous microfinance schemes are still bedeviling the microfinance banking scheme in Nigeria. The next section discusses some of them.

 

1.3 : STATEMENT OF PROBLEM

The country of study which is Nigeria consists of different classes of individuals, who are either small scale business, enterprising or industrial low class that account for over half of the population who do not have access to formal banking services. Savings have continued to grow at a very low rate particularly in the rural areas of Nigeria. One of the problems brought to bear is the inability of rural dwellers to channel their savings into banks. Most rural people keep their money at home.Themethod of keeping money at home is risky because it might be  stolen, lost or wasted in extravagant spending. Moreover, returns which would have accrued to the depositors in form of interest are forfeited.

The contribution of government to alleviate poverty through the establishment of microfinance banks appears a little progress. Inspite of the establishment of microfinance banks, it was observed that most people are not able to obtain loan. This is attributed to a number of challenges such as the high level of interest rate, lack of collaterals required by the commercial banks before loans can be granted which necessitated the establishment of Microfinance to address these economic imbalances. If the banking industry continue to meet the demands of Nigerians especially the rural poor, this shows that there is a gap which need to be filled and this can be done through the contribution of government by establishing more microfinance banks in Nigeria to help in alleviation of poverty.

Another problem observed is the inability of prospective borrowers of most microfinance banks to repay their loans as at when due. This may be attributed to high rate of poverty in the country. The high rate of poverty is noticeable in such area such as unemployment, high rate of inflation, non-payment of salaries, mismanagement of loan granted to rural dwellers, infrastructural

deficiencies, such as power, road network, etc. and all kinds of political, economic and bureaucratic bottlenecks.

 

1.4: OBJECTIVES OF THE STUDY

The general objective of this study was to know the  role of microfinance bank in poverty alleviation in Nigeria.

The specific objectives of this research work were as follows:

1. To determine the effect of financial services of MFBs on the growth of SMEs.

2  To examine the impact of non-financial services of MFBs on performance of SMEs.

3  To find the contribution of government in alleviation of poverty through the   establishment of microfinance banks

4 To find out the rate at which rural dwellers are able to repay their loans.

5.To find out the rate at which rural dwellers deposit their money in microfinance banks rather than putting it.


1.5: RESEARCH HYPOTHESIS

The following hypotheses have been developed around which this research would revolve:

H0: The rate at which rural dwellers deposit money in microfinance bank is low than they keep under their pillows.

H1: The rate at which rural dwellers deposit money in microfinance banks is high than they keep under their pillows.

H0: The government has not assisted microfinance meet the needs of rural dwellers and communities.

H1: The government has assisted microfinance meet the needs of rural dwellers and communities

H0: Microfinance borrowers react negatively towards loan repayment.

H1: Microfinance borrowers react positively towards loan repayment.


1.6: RESEARCH QUESTIONS

1 Why do most people that collect loan in microfinance bank don’t like to pay back or react negatively?

2 What is the contribution of government in alleviation of poverty through the establishment of microfinance banks in Nigeria?

3 What is the rate at which rural dwellers deposit their money in microfinance banks rather than putting it at home?


1.7 : SIGNIFICANCE OF THE STUDY

The significance of this study cannot be overemphasized, considering the fact that rapid development of the

SMEs sector will contribute immensely to the development of any nation. A major barrier to this rapid development is the dearth of both debt and equity financing. Accessing finance has been identified as a key element for SMEs to succeed in their drive to build productive capacity, to compete, to create jobs and to contribute to poverty alleviation in developing countries. Thus, this study is significant to the extent that it determines the contributions that MFBs have had on the SMEs.

Furthermore, this study is of immense benefit to government as it would aid in the fine-tuning ofpolicies that are intended to boost the SME sector through Micro Banking. The study also adds to the existingbody of knowledge available to students and other researchers.


1.8 : SCOPE OF THE STUDY

The research on the role of microfinance banks in poverty alleviation which requires a thorough analysis of the Babcock Microfinance Bank.




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