THE SOCIAL AND ECONOMIC SIGNIFICANCE OF

MICROFINANCE INSTITUTIONS IN NIGERIA

BY:

NNABUIFE TONY OGECHUKWU

DEPARTMENT OF BANKING AND FINANCE

FACULTY OF MANAGEMENT SCIENCES
UNIVERSITY OF BENIN
BENIN CITY.

NOVEMBER, 2009.
THE SOCIAL AND ECONOMIC SIGNIFICANCE OF
MICROFINANCE INSTITUTIONS IN NIGERIA

BY:

NNABUIFE TONY OGECHUKWU

MAT. NO: SSC0404594

BEING A PROJECT WORK SUBMITTED TO THE

DEPARTMENT OF BANKING AND FINANCE, FACULTY OF
MANAGEMENT SCIENCES, UNIVERSITY OF BENIN,
BENIN CITY.
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
THE AWARD OF BACHELOR OF SCIENCE (B.SC) IN
BANKING AND FINANCE.

NOVEMBER, 2009.
 CERTIFICATION

We the undersigned, hereby approve this research and

certify that this work was done by Nnabuife Tony Ogechukwu.

That the project is adequate in scope and quality and accepted

in partial fulfillment for the award of the degree of Bachelor of

Science (B.Sc) in Banking and Finance, University of Benin,

Edo State.

______________________ __________________

Project Supervisor Project Coordinator

Date: ________________ Date: _____________

______________________________
Prof. Prince Famous Izedonmi
Head of Department
 DEDICATION

To the lives of the thousands of men, children and

women who lost their lives due to poverty, wars, ethnic and

civil strife all over the world and Nigeria, and of the victims

caught in the web of displacement in Africa.

I dedicate this academic masterpiece to all-sufficient, all-

providing and ever-benevolent God who is the author and

finisher of our faith. To HIM, be all the glory.

 ACKNOWLEDGEMENT

My most sincere gratitude goes to God Almighty for

making this project work a success.

As I go on, I thank Him because he is in charge of the

rest of the journey.

I heartily acknowledge the invaluable assistance and

close supervision, pioneer and founder of the Department of

Banking and Finance, Prof. Prince Famous Izedonmi. In fact,

he is a mentor and an instrument used by God to achieving

my goal in life, “as there would not have been a graduate in

the Department of Banking and finance if the Department of

Banking and Finance does not exist in the first place”. Thanks

a million Sir.

My most profound gratitude goes to my parent, Mr. and

Mrs. Nnabuife for believing in me and bringing me into the

world is not regrettable. I also thank them for the

unquantifiable and very encouraging financial and moral

support they gave me.

Permit me to state at this juncture that this

brainstorming work would not have known completion but for

the moral and financial support of the following people; Chief

S.I. Chima, Rv. Fr. James Chima, Mr. Alex Nnabuife, Mr. Uche

Nnabuife, Mr. and Mrs. Alex Chima.

To my siblings amongst whom are: Alex, Uche, Emeka,

Ndubuisi, Sis. Ngzi and Sis Nkechi, Gabros, for all the laughs

tears and fun we have shared together, for always being there

for me. Life would not have been worth living without you all.

To my collegiate of Friends, especially to Okoloh .C.

Jeremy (a.k.a CJ), Osaheni (a.k.a Obionwere), Sly, Chioma,

Christian, Diallo, Eidit, Endurance, Ese, Favour, Gabriel, Gift,

Greage, Henry, Shady, Ifeanyi, Ighodaro, LLi, Kelvin, Mary

Jane, Nat, Omo Ovo, Paul, Ralph, Regina, Salem, Stephanie,

Steven, Tony Dos, Uche Victor and to my entire class mates. I

say a big thank you to you all.

I will not also fail to acknowledge all lecturers of the

Department of Banking and Finance, especially my Course

Adviser, Mr. F. Emeni, for the very special attention and

interest he showed me. I will particularly mention my head of

department, Dr. Prince Famous Izedonmi

 ABSTRACT

This paper studies the social and economic significance of

microfinance institutions in Nigeria towards economic self-reliance.

The research was prompted by the fact that all Eyes are

focused on the fast and quick ways to set the economy up and going

so as to enable Nigeria compete in the International Market and

Standard, and at doing this, the basis for boosting any economy has

been neglected and almost forgotten. Also it is an obvious fact that

the major problem facing Small and Medium Scale Enterprises in

Nigeria is inadequate finance hence this neglected parts refers to the

simple and slow but tremendously effective ways of achieving

economic growth and development. Microfinance is one of such way.

The goals to achieve through this research work are as follows:

1) To show the present level of contributions to Nigeria’s

economic self-reliance Microfinance Institutions.

2) To show the growth trend of Microfinance Institutions.

3) To find out the impact of microfinance institutions on the

Expansion of Small and Medium Scale Enterprises (SMEs)

in Nigeria.
4) To disclose the problems and challenges constraining the

effectiveness of Microfinance Institutions in Nigeria.

5) To show the extent to which the poor and small scale

enterprise have embraced and utilized the products and

services offered by the microfinance institutions in Nigeria.

6) To examine and disclose the possible future for Microfinance

Institutions in Nigeria.
 CHAPTER ONE

1.1 INTRODUCTION

Economic self-reliance which actually means the Fusion of

economic growths development and stability, cannot be achieved

without putting in place well focused progrmmes to reduce poverty

through empowering the people, by increasing their access to factors

of production, especially finance and credit.

In recent years, increasing emphasis has been placed on

“Micro-financing” as a tool for poverty alleviation, economic growth,

economic development and socio-political empowerment. Efforts of

government have been geared towards narrowing the income gap

between the urban and the rural sectors through breaking the cycle of

unemployment, economic stagnation and poverty. In the past two

decades there has been an overwhelming consciousness in Nigeria,

on the need to put forward, improvement on the living standard of the

people especially those in the rural areas. This can be seen through

the numerous awareness programmes that have emerged and also

with the increase of microfinance institutions in Nigeria since 1980,

when formal microfinance institutions were registered with the Central

Bank of Nigeria (CBN Survey 2001).

 According to Robinson (2002) “microfinance refers to small

scale financial services for both credit and deposits that are provided

to people who are engaged in small or micro enterprises” and also

providing financial services to the poor who are traditionally not

served by the conventions. Financial institutions (banks, insurance

companies; discount houses). Schremer: (2000), stated that

Microfinance is a formal scheme designed to improve the wellbeing of

the poor through better access to saving and services loans.

In essence, a microfinance institutions (MFI) acts as bank for

the poor. In some cases, Micro-finance institutions is actually a bank,

but usually it is a non-governmental organization (CGO) or a

governmental programme and at poverty reduction and alleviation.

The purpose of microfinance is to provide financial loan to the poor

that are not made available to them through eh traditional banking

system (Brandsma and Chaoul, 1998:1). These loans can range from

at tiny as N5000 to N20,000 or more, and are typically used by the

client to start a small business. In 1976, the world finally witnessed a

truly effective approach to economic growth and development,

through microfinance. Muhammad Yanus, a professor at the

University of Chittangon in Bangladesh, decided to give act a few $50

loans to women in rural Bangladesh. A few moths later when the

returned to the villager, the women had started small tailoring and

weaving businesses. Not only were the women able to pay back their

loans, but their small businesses were profitable enough to improve

their living conditions of the women, their families and on the whole,

the community in which they resided convinced that he had

discovered a solution to poverty, Dr. Yanus launched an ambitious

programme to provide credit to entrepreneurs in Bangladesh. Thirty

years later the Grameen Bank had 3.7 million borrowers, 1,267

branches in 46,000 village worldwide and has proved to the world

that if presented with the right opportunities, the poor can be

empowered to improved their own lives (Grameen Bank 2005) so

Muhammad Yanus approach to poverty alleviation is known as

microfinance.

Microfinance is a relatively new concept that has growth

exponentially in the last two decades as private individuals investors,

donors, and banks realize the potential for capital that can be

provided through banking to the poor. In the past, it was assumed

that poor people were not bankable since they were only capable to

taking out small loans, and had no collateral (Brandsma and Chaouli
1998:12; (Simanowitz and Walter 2002:5). Grameen Bank in

Bangladesh, proved that not only is it possible to bank with the poor,

but microfinance in the informal sector can be quite profitable

(Brandsma and Chaouli 1998:1). Since their microfinance institutions

have sprung up all over the world and reached million of people.

The United Nations’ General Assembly, gathered at UN

headquarters in New York from September 14 th to 16th 2005 to hold

the 60th High-Level Plenary Meeting 151 heads of state from around

the world were presented. The Summit was held for world leaders to

review progress in reaching the Millennium Development Goals

(MDGs), whose primary aim is to eradicate extreme poverty by the

year 2015. Microfinance was prominent on the agenda of this historic

gathering. The most significant recognition of its importance was

made in the 2005 World Summit Outcome Document adopted by the

gathering, which states “we recognize the need for access to financial

services, in particular for the poor, including financial microfinance

and microcredit” (Paragraph 23(i)).

Support for microfinance was also strongly implied in the

endorsement by the summit of the 2002 Monterrey Consensus which

states: “Microfinance and Credit for micro, small and medium-sized

enterprises, including. In rural areas, particularly for women, as well

as national savings schemes, are important for enhancing the social

and economic impact of the financial sector” (aragrah II, A, 18).

Many countries today are developing at an incredible pace,

national currencies are fusing, English in transpiring as the world

language, the European Union (EU) and African Union (AU) are

uniting their countries, and it seems that in the future all nations will

be united one language, one currency, one leader, and one global

market. But while these countries rapidly expand they leave behind a

large portion on their own people. (Simanowitz and Walter: 2002).

This is from the fact that the growth of many countries is majorly

paper work and just very small portions of the country’s citizenry is

actually productive and posses the resources for production. The gap

between the rich and the poor continues to grow at an alarming rate

and in response to the increase in poverty, affluent countries have

instituted large amount of programmes to these impoverished

regions, so as to get an even development of their countries and thus

become economically self-reliant.

Thus, the purposes of this research work is to demonstrate that

microfinancing is an effective approach to the socio-economic growth

and Nigeria and also that microfinance institutions play a vital role in

Nigeria’s strive for economic self-reliance through reduction of

poverty and financial empowerment of the poor.

1.2 STATEMENT OF RESEARCH PROBLEMS

The research is focused on Microfinance institutions in Nigeria

and the Socio-Economic significance in the achievement of Nigeria’s

economic self-reliance.

A number of questions still persist, even though lots of

measures have been taken by the Government, Non-Government

Organizations (NG) and private individuals, to boost the economic

self-reliance of Nigeria’s Economy through the establishment of

microfinance institutions. The questions are a follows:

1) What it is the contribution of Microfinance Institutions to the

Nigeria economy presently?

2) What is the relationship between Microfinance Institutions in

Nigeria and Nigeria’s Socio-Economic growth, and to what

extent have Microfinance institutions been able to influence the

socio-economic growth of the Nigeria Economy?

3) What is the growth trend of Microfinance Institutions in Nigeria?

 4) What are the contributions of Microfinance Institutions to the

growth of Small and Medium Enterprises in Nigeria?

5) What challenges do Microfinance Institutions constrain their

effectiveness?

6) What is the future for Microfinance Institutions in Nigeria?

7) Is capital a major problem facing Small and Medium Scale

Enterprises in Nigeria?

1.3 OBJECTIVES OF THE STUDY

The research was prompted by the fact that all Eyes are

focused on the fast and quick ways to set the economy up and going

so as to enable Nigeria compete in the International Market and

Standard, and at doing this, the basis for boosting any economy has

been neglected and almost forgotten. Also it is an obvious fact that

the major problem facing Small and Medium Scale Enterprises in

Nigeria is inadequate finance hence this neglected parts refers to the

simple and slow but tremendously effective ways of achieving

economic growth and development. Microfinance is one of such way.

The goals to achieve through this research work are as follows:

7) To show the present level of contributions to Nigeria’s

economic self-reliance Microfinance Institutions.

 8) To show the growth trend of Microfinance Institutions.

9) To find out the impact of microfinance institutions on the

Expansion of Small and Medium Scale Enterprises (SMEs)

in Nigeria.

10) To disclose the problems and challenges constraining the

effectiveness of Microfinance Institutions in Nigeria.

11) To show the extent to which the poor and small scale

enterprise have embraced and utilized the products and

services offered by the microfinance institutions in Nigeria.

12) To examine and disclose the possible future for Microfinance

Institutions in Nigeria.

1.4 STATEMENT OF RESEARCH HYPOTHESES

The basic assumptions of this research work is that

microfinance institutions is a gateway to the attainment of Nigeria’s

economic self-reliance and as such, the following hypotheses were

formulated to serve as a guide in the research work and also to help

us show the relationship between Nigeria economic self-reliance and

the microfinance institutions in Nigeria.

Hypotheses 1
Ho: There is no relationship between the growth of Microfinance

Institutions in Nigeria and the eradication of poverty.

Hi: There is a relationship between the growth of Microfinance

Institutions and the Eradication of Poverty.

Hypothesis 2

Ho: Microfinance Institutions has relationship with the growth of

small micro and small lower scale enterprises in Nigeria.

Hi: Microfinance Institution do promote the growth of Small and

Medium Scale Enterprises in Nigeria.

1.5 SIGNIFICANCE OF THE STUDY

One would wonder what a research work like this is set out to

impact! Majority of Nigerians do not have the smallest of knowledge

as to the activities of Microfinance Institutions even when they are

opposite their homes. This is also to show the roles that these M.Is

plays or are supposed to play in the ‘development’ of the country’s

economy and on the well-being of the citizens.

1) To the Government: This will give them updated information

as to the contributions of M.Is in Nigeria’s strive for economic

 self-reliance and draw a reasonable attention to the betterment

of the Microfinance Institution in Nigeria.

2) To the Society: It will enlighten the society on the functions

and nature of Microfinance Institutions in the society, and their

importance in the economic well-being of Nigerians.

3) To Small and Medium Scale Enterprise and Other

Organization: It will enlighten the small and medium scale

enterprises on the operations and activities of Microfinance

Institutions in the Nigeria Economy and how well to utilize the

products and opportunities provided by these microfinance

institutions.

4) To the Microfinance Institutions: It will serve as a reminder of

their goals and objectives with regards to expectations owing

from their existence.

5) To the Student: It will add to their strength of knowledge and

also serve as an academic exercise for gaining academic

excellence.

6) To Database: It will be a source of information, reference and a

guide for future research and investigation for people who

 intend to study the Microfinance Institutions in Nigeria and other

related topics.

1.6 SCOPE AND LIMITATION OF THE STUDY

The research will intensively examine Microfinance Institution

and the socio-economic significance toward the achievement of

Nigeria’s self-reliance. An eleven-years empirical review is the time

for this study: 1998:-2008.

The research consists of all the Microfinance Institution in

Nigeria but for the purpose of this study, ten (10) Microfinance

Institutions in Edo State were chosen, five () from Oredo Local

Government Area in Edo State, and five (5) from Egor Local

Government Area also in Edo State.

The following are the limitations we encountered during the

researcher work:

1. Lack of sufficient and analytical data on the subject matter.

2. Inadequate indigenous literature on the subject matter.

3. The problem of generalization which is due the smallness of

the sample size in representing the whole population.

CHAPTER TWO

LITERATURE REVIEW
2.1 EVOLUTION OF MICROFINANCE

The concept of microfinance emanated from the combination of

various small informal financial and credit activities that have evolved

over time, in different parts of the world. Many societies had different

name and system through which their own small scale credit and

saving scheme operated. An overview of the savings and credit group

that have operated for centuries throughout the world includes the

“Susus” of Ghana, “Chit Funds” in Sri Lanka, “tontines” in some parts

of West African, “Pasanaku” in Bolivia, “Paliuwagan” in Philippines,

“Gameyo” in Egypt, “Ekub” in Ethiopia, and “Cuchubal” in Guatemala

as well as numerous savings clubs and burial societies (Series and

Damach, 1982).

In 875 AD the Romans had a vision to rule the world market. To

achieved, this, soft Blacksmith, Goldsmith, Carpenters, Farmers, and

Potters that were involved in international trade market. By the

Roman’s Government (Dambatta, 2000). These loans were collected

through the leader of various craftmen involved. Loans were paid

back at over market day (21 days) with little interest attached to it. In

the period since 1940, the world had witnessed two waves of

economic depression. These had become a matter of concern to

most nations of the world (Clark, 2002). In 1947 a summit was held in

Japan which was aimed at allevating poverty and reformation of posts

war regions (World Bank 2006).

In the early 1900s, various adaptations of theses models began

to appear in parts of the rural Latin America. While the goals of such

rural finance interventions was usually defined in terms of

modernizing the agricultural sector. They usually had two specific

objectives: increased commercialization of the rural sector by

mobilizing “idle” savings and increasing investment through credit,

and reducing oppressive feudal relations that were enforced through

indebtedness. In most cases, these new banks for the poor were not

owned by the poor themselves, as they had been in European, but by

the year, these institutions became ineffiencient and at time, abusive.

Between the 1950s and 1970s, government, non-governmental

organizations and individual donors focused on providing agricultural

credit to small and medium scale farmers in hopes of raising

productivity, and incomes. These efforts to expand access to

agricultural credit emphasized supply-led government interventions in

form of targeted credit through state-owned development finance

institutions or farmer’s co-operatives in some cases that received

rates. These subsidized schemes were rarely successful. Rural

development banks suffered massive erosion of their capital base

due to subsidized lending rates and poor repayment discipline and

the funds did not always reach the book, often ending up

concentrated in the hands of better-off farmers.

The 1970s conceived and gave birth to the modern day concept

of Microfinance institutions. This was accomplished through

experimental programmes in 1970 by Muhammad Yunus, Professor

In Chittagong University, Bangladesh. The experiment was carried

out through the issuing of small loans to groups of poor women

without any collateral attached to the loans. Issuing the loans was

based on solidarity group lending system; a system in which every

member of the group guaranteed the repayment of the loan for all the

members in the group (Yanus & Kari 2007). The loans were given on

the condition that the women were to invest it in micro-businesses.

Empowerment of rural poor women was addressed by Professor M.

Yanus through his programme of action-research. He achieved this

by designing an experimental credit programme to serve these

women. His hypothesis was that “people who had too little land to

support themselves as farmers could make productive use of small

loans that they would repay” this formed what could be described a

the mission of the Grameen Bank Grameen Bank) The Bank then set

out to encourage the rural poor, whose, productivity was low despite

the effort they put in. the Bank through it’s activities was determined

to identify this set of people and equipment through training skills

acquisitions encourage them to make regular savings and them to

credit for the sustenance of their household and micro-enterprises.

The success from the venture was recorded throughout Bangladesh

and at such it spread rapidly to hundreds of villages. The Grameen

Bank was founded in 1983 and now serves more than 6 million

borrowers. The initial success of Grameen Bank also stimulated the

establishment of several other gain microfinance institutions like

BRAC, ASA, Proshits, e.t.c. (CGAP 2003). Since then the concept of

microfinance has received a worldwide attention, and it has been

adopted by many countries, national and international organization, in

hope of eliminating poverty in the rural regions of their various

countries Nigeria is one of such countries. The Grameen Bank is

considered to be the beginning of Modern Microfinance Institutions.

2.2 MICROFINANCE INSTITUTIONS IN NIGERIA

 Microfinancing is the provision of financial services to poor and

low income households without access to Formal Financial

Institutions (Conroy 2003). Microfinance programmes provide loans,

savings and other financial services to low-income and poor people

for use in small business. Originally based on traditional forms of

community financing (a cross between finance and development

assistance), microfinance is found all over the world. The

microfinance movement began in earnest in the early 1980s in places

like Bangladesh and Bolivia and has, over the last 25 years, captured

the interest of multilateral donor agencies and private sector bankers.

Microfinance institutions are essentially needed to serve the poor

because they lack access to basic services such as education for

children and health care.

Before the emergence of formal microfinance institutions in

Nigeria, informal microfinance activities had flourished over time.

These informal microfinance activities varied from each other

because of the diversity of culture inherent in Nigeria. Informal

microfinance is provided by traditional groups that work together for

the mutual benefits of their members, providing saving and credit

services to their members. The informal microfinance arrangements

operated under different names with respect to the various ethnic

groups in different parts of Nigeria: to the Yorubas of Western

Nigeria, their own system of informal microfinance was referred to as

“Esusu”, “Etoto”, “Osusu”, “Nsusus” for the Igbos in the Eastern

Nigeria and “Adashi” in the North for the Hausas (CBN Report, 2000).

All the informal microfinance system mentioned above, through

different, in name and culture had the same key feature which were

savings and credit granting to the group members. These informal

microfinance systems, were only found among the poor and very low

income earners in both the rural communities and urban areas in

nigeria (Out, 2003). The informal microfinance systems exhibited their

effectiveness through the formation of informal self-helps. Groups

(SHSs) or Rotating Savings and Credit Associations (ROSCAs).

2.3A INFORMAL MICROFINANCE SYSTEM IN NIGERIA

Informal microfinance institutions are institution embracing all

the financial transactions that take place beyond the function scope of

various countries’ banking, and other financial sector regulations.

(Aryeetey, 1998). Chipeta and Mkandawaivre (1991) opined that they

are financial institutions that are not directly amenable to control by

the key monetary and financial policy instruments inherent in a

country. There is no known timeline for the periods that the various

types of informal microfinance systems operated in Nigeria, it must

however be noted that even from the medieval times, like many other

countries, informal thing activities and informal lending groups had

existed in Nigeria. These activities have again passed through

various stages including trading farm seeds for farm lands, borrowing

of crops in some seasons to be returned in other season rotational

savings and loan which are still quite prevalent today in most villages,

market places, Churches and Mosque association as well as

corporate in offices.

It is a well established fact that these informal microfinance

institutions actually existed, this dates back to when the need for

money, savings and banking started. Informal microfinance systems

still exist in Nigeria, though not as much as they were decades ago

Nigeria beings not a country that is characterized by low levels of per

capital income and disparities in both the distribution of the meager

income as well as wide variations in the savings propensity at

different level of income, which is further compounded by the vicious

cycle of poverty in which low levels of per capital income only allows

for low levels of savings and in turn limits the rate of investment and
capital formation and subsequently, growth of income, require all the

sectors of the economy to be up and doing in the pursuit of the socio-

economic growth in the pursuit of the socio-economic growth of the

country for the betterment of all Nigerians.

The role of the informal microfinance institutions cannot be

underestimated with regards to the growth of the Nigeria economy.

Bell (1990), posited that the informal sector of a country is better

positioned than the formal sector generally, and at such, the role that

the sector plays in the economy is far reaching into the rural economy

of Nigeria. Imagine the non-existence of informal microfinance

system sector in the rural sectors of Nigeria, it would have been

unthinkable and (then Nigeria economy would have been a write off.

Though the sector has not achieved it’s optimal level, its impact so far

cannot be understated and it is therefore important for the

government to give the necessary attention to this sector so that the

possible optimal to this sector so that the possible optimal level

achievable can still be achieved. This doesn’t means that they should

put all their efforts in the rural informal microfinance sector for it would

lead to overregulation, which would result to the loss of trust from the

contribution of this informal sector.

 The informal microfinance finance institutions can be broadly

classified into three namely:

1. Proprietary informal financial entities, such as self-help

groups, small money lenders and smallholders, farmers.

2. Rotating saving and credit Associations (ROSCAs); and

Mutual aid entities, such as, Accumulating Saving and

Credit Associations (CACAs); and

3. Staff and social welfare schemes such as those run by

employers, friends relatives and neighbours e.g. co-

operative societies.

2.3 B FORMAL MICROFINANCE SYSTEM IN NIGERIA

Prior to 1980s, the form of microfinance institution that exited in

Nigeria was referred to as informal because their activities were

wholly unregistered with the Central Bank of Nigeria (CBN), and also

they were not under the supervision or regulation of (CN or any other

recognized legal framework in Nigeria (Anyanwa 2004) The Central

Bank of Nigeria Survey (2001) indicated that the operations of formal

microfinance institutions in Nigeria are relatively new, as most of

them were registered after 1981. As at 1982, there were only three

registered microfinance institutions in Nigeria, Community Women

and Development (COWAD), African Traditional Responsive Banking

(ATRB) and Country Women Association of Nigeria (CWAN). There

were established by non-governmental organization and they

operated in the rural and urban areas of Western Nigeria, taking care

of the low-income earners. Their major focus was the empowerment

of the women population of the region in which they existed. This can

be seen from the percentage of their woman beneficiaries, which was

99% as at 1982. (Anyanwu 2004). Apart from the general belief that

women re marginalized in terms of economic opportunities, the view

was that women are marginalized in terms of economic opportunities,

the view was that women perform better than men in managing

meager resources and promoting microenterprises and also, the ego

problem of men makes it difficult for them to solicit for small sums of

money; and some of the cultural practices prevent men from

engaging certain businesses , such as petty-trading, hair-dressing,

e.t.c (Anyanwu, 2004).

From 1983 the number of NGOs involved in microfinance

activities increased significantly. These NGOs were Charity, Capital

lending and credit, only membership based institutions, their sources

of funds were majorly from grants, feeds and contributions from their
members. However, they had limited outreach dues, largely to

unsustainable sources of funds. Some of the notable Non-

Governmental Organization (NGOs) that existed during this period

include;

1) Development Education Center (DEC): Established in 1988

in Enugu State, to provide financial aid and non financial

services to rural poor women and unemployed females in order

to enable them achieve self reliance. DEC, provided services

that stimulate women in rural areas to act for positive change in

their situations through self help initiatives. The organization

also encouraged individuals to transform themselves by

becoming actors in the transformation of their societies. The

organization provided various types of financial services to its

members both on group and individuals basis. However, they

are presently de-emphasizing the individual lending basis. DEC

used a credit plus approach that is providing training and

savings facilities which are integral to its lending activities.

some of the non-financial services provided by DEC includes;

offering of training programmes to village health workers. More

 than 200 village health worker have been trained by DEC since

1993.

2) Lift About Poverty Organization (LAPO): Established in 1988

as a non-government organization. It is a poverty focused

development organization with the broad aim of assisting it

members to break out of the grip of poverty.

Beneficiaries are men and women, but mostly women who

could be considered poor. Women constituted over 90% of it’s

beneficiaries. LAPO provided its members with various types of

financial services such as:

(a) Regular Loan: This is obtained by members through their

groups for income generating purpose.

(b) Emergency Loan: This is given to a member on a request

to meet certain urgent needs.

(c) Joint Project Loan: This is granted to LAPO unions to

establish joint projects.

(d) Christmas Business Loan: This is disbursed in the monthly

of October to enable members benefit from the boom in

business activities during Christimas/New Year Festiviteis.

3) Farmer Development Union (FADU): Founded in Ibadan, Oyo

State in 1989 to provide development programmes aimed at

reaching the poor and vulnerable groups with basic economic

and social services for improved rural income, nutrition,

employment and living condition. In addition to the above

mission, FADU’s activities and objectives were those that were

community interest driven, emphasize community ownership,

create plans for long term solutions provide structure for

integrated programs, facilitate and empower grassroots

institutions that are services oriented, support community

initiatives that also emphasize quality of life and building

partnership with government agencies, donor agencies and

other NGOs.

4) Anambra Self Help Organization (ASHO): Established in

1996 to provide savings and loans services to poor indigenes

engaged in micro enterprise and farmer. It started with a pilot

group of 10, but to date over 20 groups have benefited. It was a

multi-purpose organization that conducted literacy campaigns

for boy’s school enrolment so as to reduce drop-out rate (which

was a very serious issue in Anambra State, at that time). ASHO

 supported the development of 14 savings and credit groups (10

women’s group and 4 men’s group0. the organization received

financial and technical assistance from both local agencies and

international agencies. Also as a self help organization, it

generated funds through it savings schemes. They also

received fund from other NGOS. ASHO provides financial

services. It grants loans to its group members – 4 times the

amount saved. It charges 36% p. 9 on its loans.

By 2001, almost twenty years later, the Registered

Microfinance Bank with CBN were up to 160 and as at the third

quarter of the same year (2001), 96 out of the 160 registered

Microfinance Institutions had an aggregate savings worth N99.4

million and outstanding credit of over N649.6 million, indicating huge

business transaction in the sector (CBN Report 2001).

The total number of approve Microfinance Banks at the end of

June 2008 was 782, which was made up of 607 community banks

(CBs) that were converted to Microfinance Banks at the conclusion at

December 2007, 87 new investors in the Microfinance Bank sub-

sector that were granted final operating licenses and 88 other

investors that were granted approved microfinance Banks to 782 at

the end of June 2008.

An analysis of the total number of licensed microfinance banks

showed that there was high concentration of the Microfinance Banks

in Lagos States (152), Anambra State (81), Ogun State (53), Oyo

State (46), Imo State (47). These five states accounted for 379 or

48.1 percent of the total number of approved Microfinance bank. The

remaining 31 states and Abuja accounted for 403 or 51.9 percent of

the total number of approved Microfinance Banks (Fabomwo: MIF

Newsletter 2009.

2.4 THE NEED FOR MICROFINANCE INSTITUTIONS

Microfinance is “the provision of financial services to low-

income earners and the poor, both in rural and urban communities “.

These financial services generally include savings and credit but can

also include other financial services such a insurance and payment

services (Mathons 2003). Cornford (2000) opined that microfinance is

“the attempt to improve access to small deposits and small loans for

poor household neglected by the traditional banks”. Therefore,

microfinance involves the provision of financial services such as

savings, loans and insurance to poor people living in both urban and
rural areas who are unable to obtain such services from the formal

financial sector.

The common and most used words when talking of

microfinance or “poor” and “poverty”, this tells us that the concept for

microfinance came into existence because of the need to reduce and

if possible alleviated poverty. Thus microfinance cannot be mentioned

without bearing the poor or poverty in mind. It is therefore correct to

state that “Microfinancing in Nigeria” came up with sole objective of

empowering the poor and giving them the opportunity to break free

from poverty while contributing significantly to the socio-economic

growth of Nigeria. It should however be noted that microfinance

services is at optimal when they are directed to the economically

active poor, not the extreme poor person that demands fund for

survival (Hirschland, 2005). Economically active poor refers to the low

income earners and poor individuals, who want fund as to get

engaged in a business venture that will lead to the upliftment of

themselves and their families (Robison, 2001). The services of

microfinance institutions are aimed at the economically active poor,

who are already involved in some ventures and need some leverage

to boost their activities. The economically active poor have some

financial literacy, they known how to diversify, their portfolios, how to

save and where to invest. To such people microfinance is useful, by

increasing their income and improving their lives (Robinson, 2001).

Hirchland 2005) divided the people classified as poor into 4

categories. First, “Impoverished People”: who do not even feed their

families; second, “Poor”: who have irregular income and they are

financially active. They are engaged in some ventures. These groups

need micro-credit to stimulate or accelerated their financial activities.

Third group he defined as “Upper poor”; they have small but regular

cash flows they even can save but due to their living conditions they

are considered below poverty line. Fourth group is “near poor” they

consistently meet minimum standards of living like food and health

services but they do not have excess funds to face unseen problems

like prolong illness, pregnancy or death of a partner. From

Hirschland’s point of view, the economically active poor refers to the

last three classification of poor people, i.e. poor, upper poor and near

poor.

The economically, active poor makes the concept of

microfinance an admired reality because when such poor people are

microfinanced, it gives them the needed boost for growth and

sustainability. But when an individual or group of individuals, who live

in utter poverty, with no race or businesses venture, except for the

means of surviving, are microfinanced, microfinancing might not be

effective since the first income that gets into the hands of the

individual will have to go for the means of survival which is wholly a

loss on the part of the microfinance institution, demeaning their

efficiency, sustainability and going concern.

2.5 MICROFINANCE AND POVERTY ALLEVIATION

Schwartz (1005) stated that poverty the shortage of common

things such as food, clothing, shelter and safe drinking water, all of

which determine a quality of life. It may also include the lack of

access to opportunities such as education and employment which aid

the escape from poverty. According to Hazell and Haddad (2001)

poverty consists of two interacting deprivations which are

physiological and social deprivations. Physiological deprivation

describes the inability of individuals to meet or achieve material and

physiological needs which can be measured either as a lack of

income, which limits access of food and to education, health,

housing, water and sanitation services or by the failure to achieve

desired outcomes such as a high quality diet rich in micronutrients,

health status, educational attainment and the quality of health, water

and sanitations services received, while social deprivation refers to

an absence of elements that are empowering, such as autonomy,

time information, dignity and self-esteem.

Poverty is a major problem in developing countries including

Nigeria (UNDP Report 2001). Nigeria’s case is relatively serious. As

at 2001 about 70% of Nigerians were living in poverty. In addition to

this, the UNDP report of year 2001, ranked Nigeria as the 25 th

poorest country in the world. Nigeria is characterized by high level of

poverty as pointed out by World Bank report (2008). Fortunately the

level of poverty is decreasing with time. The yearly report by the

Economist Intelligence Unit (EIU) and the World Bank, indicated that

Nigeria’s G.D.P at purchasing Power Party (GDP PP) nearly doubled

from $170.7 billion in 2005 to $292.6 billon in November 2007, and

GPP per head moved from $692 per person in 2006 to $1.754 per

person in 2007, also there was a significant growth rate in the various

sectors of the Nigeria Economy. Barring all these the poverty, level in

Nigeria is still at an unwanted level.

Economies categorized as Least Developed Countries (LDCs)

suffer from a “vicious circle of poverty” which is depicted below:

 Low Productivity

Low Per Capital Low Per Capital

Accumulation Income

Low Savings

Vicious Circle of Poverty.

(Source: Enugu Forum Policy Paper 7, 2006)

The poverty circle in LDCs is vicious because savings are

generally low and therefore it is difficulty to accumulate capital for

investment purposes. Lack of investment leads in turn to low

productivity. This is it’s turn leads to low per capital income, low per

capital income obviously leads to low savings and the cycle repeats

itself. World Bank Development report (1990 indicated that

microfinance can assist immensely in poverty alleviation through

promotion of the productive use of the greatest asset accessible to

the poor – their labour. This can be achieved through wage

employment, raising marginal farmers as well as increasing

opportunities for self-employment in diverse areas. For all these to be

realized, there has to be an improvement in social services (e.g.

family health care, family planning, nutrition and education). It is in

the light of the foregoing that microfinance in the least development

countries (LDCs) has been seen as an intervention strategy that

helps the poor expand their economic activities, and increase their

income and assets. it also helps to improve their health and nutrition

as well as to improve their health and nutrition as well as build an

enabling environment for the growth of and development in the

country in which they reside.

In the year 2000, the United Nation drew up a list of eight (8)

Millennium Development Goals which aim to spur globalization,

development and eradicate extreme poverty (UNDP, 2009) poverty is

defined as those living on less that $1 a day (Simanowitz and Walter,

20002). The UN resolution adapted by the General Assembly States”

“we will spare no efforts to free our fellow me, women, and children

from the object and dehumanizing conditions of extreme poverty, to

which more than a billion of them are currently subjected “ The eight

Millennium Development Goals are as follows:

1) To eradicate extreme poverty and hunger.

 2) To achieve universal primary education.

3) To promote gender equality and empower women.

4) To reduce child mortality.

5) To combat HIV/AIDS, Malaria, and other diseases; and

6) To improve maternal health.

7) To ensure environmental sustainability.

8) To develop a global partnership for development.

These goals, which are to be achieved by the year 2015, are

monumental steps in the direction of poverty alleviation. As a result of

the above, in 2002 Jonathan Murdoch and Barbara Haley, leading

experts in study of microfinance and its effect on poverty alleviation,

were authorized to determined the impact that microfinance has on

the realization of the seven Millennium Development Goals. In an

extensive research paper entitled “Microfinance and its Effects of

Poverty Alleviation”, Murderoch a Haley concluded that there is

ample evidence to support the positive impact of microfinance on

poverty reduction as it relates to (the first six of the eight) Millennium

Development Goals”. If microfinance can expedited the attainment of

six of the Millennium Development Goals, it can therefore be used as

a valuable means to eradicate poverty. In fact, microfinance has been

proven again and again to be effective method of poverty alleviation

Murdorch and Haley, 2002). Clients who participate in microfinance

programs have enjoyed increased household income, better nutrition

and health, the opportunity to achieve higher education, as decrease

in vulnerability to economic shock, greater empowerment, and in

some cases, the ability to completely lift themselves and their families

out of poverty.

2.6 MICROFINANCE IN LIVELIHOOD SECURITY

Carney (1998) defines a livelihood as comprising the

capabilities, asserts (including both materials and social resources)

and activities required for a meaning. Chambers (1997, p. 10) stated

that livelihood security is “basic to well-being” and that security “refers

to secure right and reliable, access to resources, food, income and

basic services. It includes tangible and intangible assets to offset risk,

ease shocks and meet contingencies” Gindenberg (2002) defines

livelihood security as “a family’s or community’s ability to maintain

and improve its income, assets and social well-being from year to

year” Concern (2003), also stated that livelihood security is more than

just economic well-being as they define livelihood security as “the

adequate and sustainable access to and control over resources, both

materials and social, to enable households to achieve their rights

without undermining the natural resource base”. Livelihood security

therefore, like poverty, is not just about income, but includes tangible

and intangible assets, and social wellbeing.

Johnson and Rogaly (1997) stated that “NGOs aiming for

poverty, reduction need to asses the impact of their services on

users’ livelihoods”. They argue that in addressing the question of the

impact of microfinance NGOs must go beyond analyzing quantities

data detailing the numbers of users, and volumes and size of loans

disbursed, to understanding how their project are impacting on

clients’ livelihoods. They state the provision of microfinance can give

poor people “the means to protect their livelihoods against shocks as

well as to build up and diversifying their livelihood activities” therefore

when analyzing the impact of microfinance, the overall impact of the

microfinance services on the livelihood of the poor, needs to be taken

into consideration.

A livelihood security approach according to Concern (2003)

aims for a holistic analysis and understanding of the root causes of

poverty and how people cope with poverty. They identify livelihood

shocks such as natural disasters and drought, the social, political and
economic context, and people’s livelihood resources such as

education and local infrastructures as factors affecting people’s

livelihood security (Concern, 2003), Therefore, when analyzing the

impact microfinance is having on livelihood security, a holistic

analysis of people’s livelihood security must be conducted, rather

than just focusing on the material/economic impact microfinance is

having on the livelihoods of the poor.

2.6.1 SOCIAL IMPACT ANALYSIS OF MICROFINANCE

PROJECTS

Traditionally, the impact of microfinance projects was asserted

by the changes by in the income or well being of the clients. Mansell-

Carstens, cited in Rogaly (1996), argues that such a focus is flawed

because respondents may give false information. It is also very

difficult to ascertain all the sources of income of a client, so a casual

effect is difficult to establish, and it is also difficult to establish what

would have happened if the loan was not given. Therefore a broader

analysis is needed that takes more than economic impact into

consideration. We have see that poverty and livelihood security

consist of economic and social condition, therefore, when analyzing

the impact of microfinance social impact must be assessed.

 Kabeer (2003) stated that wider social impact assessment is

important for an organizations internal learning process as an MFI

should be aware of the “full range of changes associated with its

efforts and uses these to improve its performance”.

She considers social impact to relate to human capital such as

nutrition, health and education, as well as social networks. Impact

must be assessed on each of these issues if a true picture of the

impact of microfinance is to be obtained.

However, Kabeer moves beyond individuals or household

analysis to state that analysis should also be conducted at

community, market/ economy and national/state levels. She refers to

these as “domains of impact” because societies are comprised of

different institutions domains each with their own rules, norms and

practices which can be influenced by microfinance interventions in

different ways. IABEER (2003), not only refereed to domains of

impact but also highlights dimensions of change that should be

assessed. She lists cognitive change, behavioural change, material

change, relational change and institutional change as dimensions of

change, that need to be taken into account if the wider efforts of

microfinance interventions are to be understood.

 Zohir and Motin (2004), made a similar point when they stated

that the impact of microfinance interventions is being-estimated by

“conventional impact studies which do not take into account the

possible positive externalities on spheres beyond households”. They

propose that impact should be examined from cultural, economic,

social and political domains at individuals, enterprise and household

levels. Chowdhurb, Mosley, and Simanowitz (2004) argued that if

microfinance is to fulfill it’s social objectives of bringing financial

services to the poor, it is important to known the extent to which it’s

wider impacts contribute to poverty reduction.

CURRENT DEBATES ABOUT MICROFINANCE INSTITUTIONS

AND THEIR ROLE IN SOCIO-ECONOMIC GROWTH

When examining the impact microfinance has on poverty and

the socio-economic growth of a country, it is important to be aware of

the current debates that are taking place in the field of microfinance.

There are two major debates with regards to microfinance and

its role in the socio-economic growth of a country and poverty

alleviation. These debates are: reaching the poor and financial

sustainability.
2.7.1 MICROFINANCE IN REACHING THE POOR

As highlighted, one of the main roles microfinance has to play

in growth is in bringing access to financial services to the poor, to

those who are neglected by the formal banking sector. This is their

social mission. Main stream banks targets clients that have collateral.

The poor do not have assets to act as collateral. Therefore, they are

ignored by the formal financial sector. These banks tend to be found

in urban centres while the majority of the poor in the developing world

live in rural areas, where financial services are not provided.

Therefore, if microfinance institutions are to fill this void they must

reach the rural poor. However, according to most studies,

microfinance is only reaching a small functions of the estimated

demeans of the poor for financial services (Little field and Rosenberg,

2004).

Microfinance Institutions do not have the depth of outreach that

is needed to meet the demands of the rural poor. Serving the rural

poor in the developing world involves a major financial commitments,

as it is expensive to run rural microfinance projects. Claessens (2005)

stated that high transaction costs, small volumes and the costs of

expanding outreach make it unprofitable to serve the rural poor. It is

for this reason that commercial banks are positioned in areas of high

population density. However, if microfinance institutions are to meet

their social mission of serving the poor then financial services need to

reach the rural poor people.

2.7.2 MICROFINANCE INSTITUTION AND FINANCIAL

SUSTAINABILITY

Another common criticism of the current operational procedures

of microfinance institutions, for instance, peer group self selection

and the drive for self-sustainability, is that they end up working with

the moderately poor, and marginalizing the poorest of their poor.

Simanowtiz (2002) highlights a number of factors leading to the

marginalization of the poorest, which lessens the impact microfinance

has in poverty; self-exclusion, exclusion by other members exclusion

by MFI staff and exclusion by design.

Markowsky (2002) and Rogaly (1996) argue that microfinance

institutions in their project designs are failing to meet the needs of

the very poor and destitute, who do have a demand for microfinance

services, especially for savings Littlefield and Rosenberg, 2004 and

Dichter, 1999), Organizations have shown that the poorest people

can be
 targeted in a sustainable manner (Halder and Mosely, 2004).

Johnson and Rogaly (1997) stated that some features of savings and

credit schemes are able to meet the needs of the very poor. In

relation to reaching those living in extreme poverty, Littlefield,

Murduch and Hashemi (2003) refers to a study of 62 Microfinance

Institutions that have reached full financial self-sufficiency with 18

microfinance institutions that targeted what they defined as “the

poorest clients” averaging better profitability than the others. This

shows that when properly managed, programmes that target the very

poor can become financially sustainable. The onus is therefore on

other microfinance institution to develop products and services that

will meet the needs of the very poorest if the social mission of

microfinance is to be achieved. Microfinance institutions therefore

need to improve their depth and breadth of outreach. They must

design appropriate products based on the needs of the poorest and

they must ensure products are delivered in a cost-effective manner

(Simanowitz and Walter 2002) financial sustainability versus serving

the poor. Microfinance institutions have more than just a social

mission, Markowski (2002) stated they have a dual mission: social

mission “to provide financial services to large numbers of low-income

persons to improve their welfare”, and a commercial mission “to

provide those financial services in a financially viable manner”.

Simanowitz and Walter (2002) argued that microfinance is a

compromise between this social mission and commercial mission. As

there is more emphasis on financial and institutions performance,

opportunities for maximizing poverty impact and depth of outreach

have been compromised. They call for a balancing of social and

institution performance, opportunities for maximizing poverty impact

and depth of outreach have been compromised. They call for a

balancing of social and financial/ commercial objectives because the

current focus on financial objectives means fewer of those most in

need of microfinance services are being targeted. To do this they

argue “it is now time to innovate and design services that maintain

high standards of financial performance, but which set new standards

in poverty impact”.

Markowski (2002) state that (GAP estimates that only about 55

of Microfinance Institutions Worldwide are financially sustainable

while the IMF (2005) put the figure at only 1%, 80 this is a huge issue

for the microfinance sector. To achieve financial sustainability.

According to Havers (1996), an MFI must cover the cost of funds,

operating costs, loan write-offs and inflation with the income it

receives from fees and interest. According to the IMF (2005) the

microfinance institutions that have become self-sustainable tend to be

larger and more efficient. They also tend not to target and more

efficient. They also tend not to targeted the very poor, as targeting the

less poor leads to increases in loan size and improved efficiency

indicators, whereas Microfinance Institutions focusing on the poorest

tend to remain dependent on donor fund (IMF 2005). This is where

the compromise exists. In order to achieve such sustainability, while

at the same time reaching those most in need, microfinance

programmes need to be managed in a rigorous and professional

manner, subsidies must be removed, and tight credit control

procedures and follow-up on defaulters needs to be in place (Havers,

1996). There is no doubt that sustainability is also very important from

clients’ perspectives, as they place a high value on continued access

to credit, and if they feel that the MFI will not survive it reduces their

incentive to repay loans (Von Pischke, 2002),

Appropriate loan sizes for clients matching their needs, realistic

interest rates, savings as a prerequisite, regular, short and immediate

repayment periods and achieving scale can contribute to

sustainability (Havers 1996), if these measure to achieve

sustainability are put in place, while focusing on the needs of the

poorest, then both the social and financially objectives can be

achieved. In simple terms, the tradeoff between financial and social

objectives can be balanced, if they MFI is well managed and

understands the market and it clients (Morduch 2004 and by combing

both objectives, financial returns can potentially be increased in the

long run (Pawlak and Matul 2004).

2.8 CHALLENGES FACING MICROFINANCE INSTITUTIONS IN

NIGERIA

IMF-Act (2004) stated in when assessing the performance of an

MFI; both its financial and social performance must be assessed, as

both are need for the successful running of an MFI. Simanowtiz,

quoted in IMP-Act (2004) do refers to this as an MFI’s “double bottom

line”. As stated by Morduch (1999) “achieve profitability and strong

social performance is the ultimate promise of microfinance. It is not

impossible but neither is it easy” and this is the challenge facing all

microfinance institutions.

Therefore, the current challenges facing Microfinance

Institutions are threefold, but also outreach-extending the services

together numbers of the poor, and depth of outreach-trying to each

the poorest members of the society.

Other challenges facing microfinance institutions in Nigeria

include:

1) Governance problems.

2) Funding of loan and advances.

3) Huge unsaved/underserved market.

4) An uneducated population.

5) The active Poor’s current preference for gift than loans.

6) Undue Competition Roth than Cooperation from

formal/Commercial Banks.

7) Poor Correspondence Banking Attitudes by

Correspondence Banks.

8) Poor structuring of some Micro-Finance Banks due to

sacrifice of quality for cheap and inexperienced staff and

operational facilities.

2.9 THE ROLES AND RESPONSIBILITY OF STAKEHOLDERS IN

MICROFINANCE INSTITUTION IN NIGERIA

 The overall test of a good microfinance institutions design is

sustainable poverty reduction through increasing outreach resource

mobilization, cost coverage, profitability and dynamic growth.

In Nigeria we need to be wary of the problems that be deviled

past microfinance operations of development institutions such as

Peoples Bank. Many of them were ineffective on account of

incompatibility with existing traditional savings and loans schemes

operated by local communities, the lack of adequate professional

staffs, had tortuous lending procedures, were poorly funded, suffered

high administrative costs, and had inappropriate expectations from

poor, uniformed and illiterate clients. Building effective and

sustainable microfinance institutions in Nigeria will require a lot of

innovation on the part of the promoters, the government, NGOs and

donors. Governments, donors and promoters of microfinance

institutions should from the beginning take some decision that are not

necessarily of structure but have to do with social choice and

ideology and may have implications for the ultimate structure and

functional approaches of the microfinance institutions in specific local

context. For instance, should it be savings first or credit first? The

savings first Mantra is appropriate in low return subsistent activities

such as certain aspects of trading. What do the people want, access

to credit and other services or interest rate subsidy? Targeted public

sector credit tends to benefit the non-poor far more than the poor.

How much government involvement in the development of

microfinancing system of Nigeria is desirable?

The roles and responsibilities of stakeholders include the

following:

2.9.1 GOVERNMENT

Government shall be responsible for:

i) Ensuring a stable macro-economic environment, providing

basic infrastructures (electricity, water, roads

telecommunications e.t.), political and social stability;

ii) Fostering adequate land titling and other property rights

sufficient to sere the collateral needs of borrowers and

financial, institutions;

iii) Instituting and enforcing donor and foreign and guidelines on

microfinance to streamline their activities in like with this

policy;
 iv) Setting aside an amount of not less than 1% of the annual

budgets of state government for on lending activities of

microfinance banks in favour of their residents.

2.9.2 CENTRAL BANK OF NIGRIA (C.B.N)

The roles of the CBN shall include the following:

i) Establishing a National Microfinance Consultative

Committees;

ii) Evolving a clear micro-finance policy that spells out eligibility

and licensing criteria, provides operational/prudential

standards and guidelines to all stakeholders;

iii) Evolving a microfinance sub-sector and institutional policies

aimed at providing regulatory harmony, promoting healthy

competition and mainstreaming microfinance with formal

intermediation;

iv) Adopting an appropriate regulatory and supervisory

framework;

v) Minimizing regulatory arbitrage through per role reviews of

the policy and guidelines;

 vi) Promoting linkage programmes between

universal/development banks, specialized-finance institution

and the microfinance banks.

vii) Continuously advocating market-determined interest rates

for government-owned institutions and promote the

channeling of government microfinance funds through

microfinance bank; and

viii) Implementing appropriate training programmes for

regulators, promoters and practitioners in the sub-sector, in

collaboration with stakeholders.

2.9.3 MICROFINANCE INSTITUTIONS

Microfinance service providers shall:

i) Provide efficient and effective financial services, such

as credit, deposits, commodity/inventory

collateralization, leasing and innovate transfer/payment

services;

ii) Undertake appropriate recruitment and retention and

competitive processes;

iii) Adopt continues training and capacity building

programmes to improve the skills of staff; and

 iv) Strictly observed their fiduciary responsibility, remain

transparent and accountable in protection saver’s

deposits.

2.9.4 PUBLIC SECTOR POVERTY ALLEVIATION AGENCIES

Public sector microfinance institution and poverty alleviation

agencies such as the National Poverty Eradication Programme

(NAPEP) in the development of the sub-sector, shall be encouraged

so as to perform the following functions.

i) Provision of resources targeted at difficult-to-reach clients

and the poorest of the poor.

ii) Capacity building.

iii) Development of microfinance institution’ activities nation

wide;

iv) Nurturing of new microfinance institutions to a sustainable

level; and

v) Collaborating/partnering with other relevant stakeholders.

2.9.5 DONOR AGENCIES

Donor agencies offer free or subsidized funds, donations or

technical assistance for the development of the microfinance

industry in nigeria. They include bilateral and multilateral

 institution. NGOs and missionaries with a pro-poor orientation.

The services provided by donor agencies include grants,

donations, technical assistances, e.t.c. The donor agencies, in

conducting their microfinance activities, shall comply with the

relevant provision of this policy, or the target clients for donor’s

support may include: Microfinance Institution, NGOs, regulators

and other relevant agencies. However for the purpose of

averaging the evolving microfinancing initiative, donors are

expected to direct most of their assistance to lincesed

Microfinance Banks to ensure an orderly resource injection,

transparency and synergy.

2.10 APPROACHES TO MICROFINANCE

According to Robison (2001), there are basically two leading

approaches to microfinance which are: poverty lending approach and

financial systems approach. Both of the approaches tend to provide

neither the availability of financial services for the poor, despite

having consonance in their goals, each approach tends to adopt a

different modus operandi nor the achievement of their desired aim.

We will look at how these two approaches tend to operate.

2.10.1 POVERTY LENDING/SUPPLY LENDING APPROACH

Robinson (2001), opined that “poverty lending approach

focuses on reducing poverty through credit and other services

provided by institution that are funded by donor and government

subsides and other concessional funds”. The basic aim of the poverty

lending approach is to reach the poor people through the services of

credit. Robinson furthermore stated that saving is not given any

significance. In the poverty lending approach the role of saving is of a

retrieval nature i.e. mandatory saving is only considered as a pre-

condition for the purpose of receiving a loan, other than this role there

is no other role for the saving to play in the poverty lending approach.

Gulli (1999) however stated that the overall goal of the concept

of microfinancing should be the reduction poverty and empowerment

of the poor financial stability of microfinance institutions is worthless

unless these institutions have any impact on the lives on the poor. He

donor funding is important. The supply lending approach perceives

credit as an important and effective tool for poverty reduction the

target market is poorest of the poor.

In view of enhancing the economic growth in the rural areas of

any country, Development Economists are of the view that the

farmers need credit to attain the production inputs. The supply

lending approach is based on the assumption that farmers are faced

with shortage of capital and/or are devoid of access to financial

resources. As a result, these farmers look forward towards informal

money leaders for relying upon these sources is to organize funds for

fulfillment of their needs especially during the cultivation season.

Consequently they re exploited by the informal lenders who charge

unreasonably high interest rates. In this available to supply loans and

inputs required for cultivation of improved varieties of crops at

subsidized interest rates. Institutions using the poverty lending

approach are not sustainable in the long run because they charge

subsidized rates on credit advanced, the internet rates charged by

these institutions are not adequate enough to cover their operating

expense (Robinson, 2001). These institutions also do not cater to the

demand for micro saving services among the poor. The focus of

poverty lending approach is upon micro-credit not microfinance.

2.10.2 FINANCIAL SYSTEM/DEMAND DRIVE APPROACH:

The financial system approach focuses on the commercial

financial intermediation among poor borrows and savers. It

emphasizes on the institutional self sufficiency. They provide micro-

credit and saving services to the economically active poor, financing

their loans by savings and different commercial investments.

Commercial microfinance (financial system approach0 is not for the

starving borrowers, it’s not for the people who are literate, who do not

have skills. Starving borrowers spend their loans for buying food and

other things for their survival. On the other hand economically active

poor spend their loans on their ventures and ‘they have the capacity

to repay the loans (Robinson, 2001). The financial system approach

focuses on demand of commercial financial services of the poor

borrows and savers. The aim of the institutions operating under the

financial the financial systems approach is to provide dual benefits to

their clients i.e. these institutions not only provide easy access to

credit at reasonable interest rates to the economically active poor and

micro-entrepreneurs but also facilitate the provision of convenient and

safe saving services to these who want to store cash and gain

positive interest rte upon donors for the availability of funds, the aim

of this model is to enable microfinance institutions reach self-

sufficiency and expand outreach of services to low-income clients

profitability. The financial systems approach represents a more

globally acceptable model of microfinance.

Poverty Lending Approach Financial System Approach
1) Poor can’t afford market rate. 1) Poor can afford market rates.
2) Need of services like training health to 2) Focus on full cost recovery and
supplement credit saving.
3) Mobilization of saving not a core 3) Institutional sustainability as the core
principle. principles
4) Donor/Government funds required. 4) Government roles is limited to
regulations.

Microfinance services, particularly, those sponsored by

government, have adopted the traditional supply-led subsidized credit

approach mainly directed to the agricultural sector and non-farm

activities, such as trading, tailoring, weaving, blacksmithing, agro-

processing and transportation. Although the services have resulted in

an increased level of credit disbursement and gains in agricultural

production and other activities, the effects were short lived due to the

unsustainable nature of the programme.

2.11.1MICROFINANCE INSTITUTIONS IN NIGERIA THE WAY

FORWARD

In many development countries, governments are still struggling

with how to regulate microfinance (Arun, 2005). Many Central Banks

are inclined to attempt to regulate Microfinance Institutions in the

same way as they do formal sector banks. Whilst in theory this will
provide savers with security, in practice it discourages the evolution

of Microfinance Institutions and often means that established

Microfinance Institutions cannot develop savings products. This

keeps depositors ‘safe’ from unscrupulous or poorly-managed

Microfinance Institutions, but means that they have to use other

savings mechanisms (hiding ash in slum dwellings, buying livestock

or asking a trader to hold cash). These other mechanisms are often

risker than the services that Microfinance Institution can provide.

Although the enhanced financial options can offer valuable services

to poor people, there is a need to regulate the entry of bad practices

and products, which could harm the financial system itself, lenders

may disproportionately target minority and lower-income people with

higher-priced products on inferior terms. The entry of aggressive

consumer lenders and their competition may encourage underwriting

practices and poor-loan screening which devalues the portfolio

quality. These kinds of situations pose new regulatory challenges for

the microfinance institutions and the economy of the country.

2.11.2APPROACH
 The debate whether Microfinance Institutions should pursue a

‘poverty lending’ or a ‘financial system’ approach (Robinson, 2001) is

largely resolved. In most parts of the world the microfinance sector is

adopting a financial system approach, either by operating on

commercial lines or by systematically reducing reliance on interest

rate subsides and/or aid agency financial support. This is well-

illustrated by the experience in Bangladesh, where the Grameen

Bank has shifted from its classic ‘Grameen I’ group lending to the

poor model, to ‘Grameen II’, which is much closer to the financial

system model (Hulme, 2008).

The move towards the financial system approach and growth of

the competitive environment has put the client back at the centre of

microfinance operations. This shift in the composition of two main

processes the first, illustrated by the Grameen Bank, is of existing

Microfinance Institutions reducing the ‘poverty lending’ focus of their

activities and shifting to the financial service needs of low-income

households, i.e. operating savings alongside loans.

The second process is of established formal banks and

financial institutions moving into microfinance. This is happening with

many commercial banks than have public acknowledged the potential

profits they believe can be generate d from potential profits they

believe can be generated from engaging in the microfinance sector.

2.11.3 TECHNOLOGICAL CHANGE

The original ‘microfinance revolution’ took advantage of the

technological advances in ICTs of the 1990s and 2000s. However,

often this was as a relatively late adopter, with many Microfinance

Institutions having to convert manual records to electronic system in

the mid 2000s. The dramatic reductions in the cost of new ICT

products-mobile phones; palm pilots and even laptops-and the rise in

connectivity through mobile phones and the internet mean that in the

next decade there is enormous potential for microfinance institutions

to develop new services: Services that in the past would have been

economically infeasible because of high transaction costs.

These technological changes have made it easier to address

two main obstacles in providing financial services to the poor people-

managing information and services delivery costs (Economists,

2005). The challenges for microfinance institutions is rethink their

business models and to innovate ways they deliver and receive the

services, so that products are more convenient and cheaper for

customers, services can be accessed by people in remote areas, and

security is enhanced. Until now, the predominate use of technology

among microfinance institutions has been to internally manage

information. However, technology has an immense potential in other

areas, such as payment services and credit underwriting for instance,

as mobile phone usage expands opportunities to provide financial

services in remote rural areas become feasible. The concept of

mobile banking, ‘M-banking’, has great promise safe-save in

Bangladesh provides low income slum-dwellers with flexible financial

services. On six days a weak its clients can deposit or withdraw

savings and take out or repay loans, when their collector calls at their

house or business place. Such flexibility creates relatively complex

micro-finance portfolio, but the use of palm pilots by collectors

provides a real-time record of transaction and permits the bank’s

books to be balanced, at a very low administrative cost, shortly after

the close of business each day. The stage is now set for many other

innovations of this type.

The concept and practice of microfinance have changed

dramatically over the last decades. Conceptually the financial

systems approach has gained ground over poverty lending and most

serious analysts how view micro-credit as only one of several

components of microfinance. The arguments advanced by Robinson

(2001) that microfinance should seek to meet the demand of low-

income people for finance services, rather than poor and extremely

poor people, widely informs present-day practice. Microfinance is

seen as a set of services that raises the prospects for low-income

house holds, and some poor people, to achieve their goals, business,

consumption, education, health and other areas and not as a magic

bullet that automatically lifts poor people out of the poverty through

micro-enterprise. Microfinance specialist concerned with poverty

reduction and/or extreme poverty are increasingly focusing on

“graduation” programmes (Hulme and Arun, 2008; Matin and Hulme,

2003) that link microfinance sector seems set to continue to.

However, the speed and nature of these processes is unclear in

Africa. While many factors will shape the future of microfinance, one

factor merits highlighting in this conclusion. That factor is the social

energy fo the tens of thousands of people who are committed to

analyzing microfinance and debating how additional financial services

can be made accessible to the hundreds of millions of people who

have no access to formal financial services very few other

development issues have managed to generate such passion and

commitment as that of microfinance. It is the collective imagination

and social energy of this dispersed community of anti-poor

researchers that hat created the microfinance revolution of the late

20th century and will take it forward in the coming years.

 CHAPTER THREE

3.1 INTRODUCTION

This chapter is directed at the description of various processes

involved in obtaining, analyzing and interpreting the relevant

theoretical and empirical data, which should yield this required

information to satisfy the research purposes. It shows the modes of

data gathering, collection of information and classification of such

data according to their importance to the research study and how

they are analyzed in due course. Specifically; the chapter explains

the research methodology, sources of data, sample size and

sampling technique, questionnaire design and administration,

techniques of data analysis and model to be used for study.

3.2 RESEARCH DESIGN

An ex-port facto research design was adopted for the study.

This is because the relationships that exist between Microfinance

Institutions in Nigeria and Nigeria Economic Self-reliance cannot

manipulate for result.

3.3 RESEARCH POPULATION

The research population of a study is the totality of a group

about whom the research wants to draw conclusion(s) on. In our

case, the population of the study is made up of microfinance

institution in Nigeria, all small and medium scale enterprise in Nigeria

and the Nigerian economy/citizenry.

3.4 SAMPLING PROCEDURES

Judgmental and purposive sampling procedure was adopted to

draw the sample. The choice of this became necessary because of

the fewness in the number of Microfinance Bank in Benin City, Edo

State.

3.5 SAMPLE SIZE

The sample of the study consist of 10 Microfinance Institutions

from Oredo and Egor Local Government Areas of Edo States the

Small and Medium Scale Enterprise resident in these local

government areas, and the residents of these Local Government

Ares in Edo State.

3.5.1 SOURCES OF DATA

These are majorly two sources from which data for this

research were gathered, they are the primary and the secondary

sources of data.

 Primary Sources: Questionnaires, Personal interviews and

direct observation.

 Secondary Sources: Textbooks, Journals, Seminar Papers,

Newspapers, Magazines newsletters, Internet and workshop

materials, and CBN Annual Reports.

3.6 RESEARCH INSTRUMENT AND FIELD WORK

Together the research information from respondent the two

sources of data as mentioned above were used.

1. PRIMARY SOURCE OF DATA

(a) Questionnaire administration. The questionnaires were

administered to information from microfinance clients the

questionnaires contained questions on the social and

economic effects of microfinance institutions on them as client

and on their family; the level of awareness of Nigeria in

microfinance services and products; the ways in which

microfinance institutions have impacted the livelihood of

 clients and beyond their households, and the exact ways that

micro-loan and savings are carried out. Combinations of open-

ended and closed-ended questions were used in the

questionnaire design.

(b) Direct interview was also conducted to elicit information about

the history of background, types and functions, operations and

activities of microfinance institutions both in Nigeria and in the

global world. The interview was directed majorly at the

microfinance institutions.

(c) The use of direct observation was also helpful. It was directed

at the clients of microfinance institutions, their livelihood and

their households, and also on the entire community in which

they reside.

(2) SECONDARY SOURCES OF DATA

Data from the published annual statistical and financial report of

the central bank of Nigeria (year 1998 to 2008) was primarily used to

determine the effectiveness of microfinance institutions in the

economy of Nigeria. It constituted the main source of empirical data

related to the Microfinance Institutions and their contribution to the

economic self-reliance of Nigeria.

 The data from textbooks, journals, seminar papers,

newspapers, Newsletters, Magazine Online (Internet) and workshop

materials were all used; mostly for descriptive and explanatory

purposes.

3.7 DATA PRESENTATION

The data from this research work will be presented using tables

and charts. These methods were chosen because of their simplicity

and clarity.

3.8 METHOD OF DATA ANALYSIS

Since the data collected were non-parametric in nature, the

methods used for data analysis were the simple statistical table,

regression technique is expected to identify the relationship between

the dependent and independent variables.

3.9 MODEL SPECIFICATION

In order to capture the relationship between microfinance

institutions and the socio-economic growth of Nigeria, the following

model was specified.

The model in it’s functional form:

GDP = F (TCR, TLA, TDL, TA, TI)

The model in it economic form

 GDP –β0 + β1TCR+ β2TLA + β3TPL + β4TA + β5 T + ut

Where:

GDP = Gross Domestic Product used as proxy to measure the

socio-economic growth of Nigeria.

TCR = Total capital Reserve of Microfinance Institutions.

TA = Total Assets, used as a proxy to measure the growth of

microfinance institutions.

TDL = Total Deposit liabilities of microfinance institutions.

TLA + Total Loans and Advances of microfinance institution to

clients and SMEs.

TI = Total Investment of microfinance institution.

Ut = stochastic error term.

B0 - B5 = Parameters to be estimated

A – prior expectation: β0 > 0, β1 > 0, β2 – 0, β4 > 0, β4 > 0,

If TCR, TA, TDL, TLA and TI of microfinance institution are

increasing over the yeas, it deductively means that their clients thus

far, are being economically empowered. The empowerment of these

clients should have an increasing effect on the socio-economic

growth of the communities, in which they reside, (thus leading to

increased per capital income of the average. Nigerian, and a general

positive contribution to the self-reliance of Nigeria economy

DATA FOR REGRESSION

GDP At TOTAL TOTAL TOTAL TOTAL TOTAL

YEAR CURRENT CAPITAL ASSET DEPOSILIABILITIES LOAN & INVESTMENT

PRICES RESERVE ADVANCES

1998 2,765.67 1,479 5.961.8 3,870.8 1,972.5 244.7

1999 3.193.67 2,048.6 7,913.4 5,102.8 2,6310.0 436.7

2000 4,537.64 2,773.6 12,014.7 7,689.4 3,666.6 450.2

2001 4685.90.90 1,034.8 4,884.4 3,294.0 1,314.0 304.3

2002 5,405.01 3,825.6 15,463.5 9,699.2 4,310.9 925.5

2003 6,947.82 7,011.1 28,689.2 18.,075.0 9,954.8 2,261.0

2004 8,264.96 8,156.4 34.162.3 21,409.9 11,353.8 2,612.7

2005 14,572.24 10,054.10 46.062.70 28,728.40 14,547.40 3,594.10

2006 18,564,59 12,619.9 55,056.10 34.008.80 16,498.60 3868.20

2007 20,657.32 14,250.70 55,616.10 33,088.30 16,450.80 2,592.40

2008 23M842.16 33,361.30 11,5124.30 58,481.30 42,024.40 7,317.70

 CHAPTER FUR

4.1 INTRODUCTION

In this chapter, we will attempt to analyze the data collected,

and present the regression results. Equal the stated hypothesis will

be tested, using the regression result.

The chapter is divided into two sections, Section One and

Section Two.

Section one contain the presentation and interpretation of the

results from the regression that was run in order to determine the

impact of microfinance institutions in the socio economic growth of

the Nigerian economy towards the economic self-reliance of Nigeria.

A graphical illustration was also used to show the trend of the

research variable through the research period.

In section two, the stated hypotheses were tested using the

regression result. The results from the tested hypotheses were

presented alongside the decision rules.

PRESENTATION AND INTERPRETATION OF REGRESSION

RESULT

4.1.1 Regression Result

Table 4.1 Cochrane-Orctt Method AR(2) Converged after 25 Interactions

 Dependent Independent Co-efficient t-Ratio
Variable Variable
GDP INPT 1.35 3.79

TCR -15.72 -8.96

TA 7.35 9.89

TDL -4.65 -7.43

TLA 1.18 2.14

TI -11-83 -9.03

R2 = 0.998 R2 0.991

F – Stat. F (7.1) = 140.02

DW – Stat = 3. 19

Equation 4:1

Interpretation of Result

The result from the regression shows that R 2 with a value of

99.8% of the systematic variation in GDP was explained by the

regressors. After adjusting for the degree of freedom, it showed R 2

with a value of 0.991, meaning that the model could still explain about

99.1% of the systematic variation in GDP. Only about 0.8% was left

unexplained by the model, which was capture by the stochastic error

term. This show a significant linear relationship between GDP and the

regressors.

On the basis of the overall significance of the model, the F –

Statistics shows that there is no significant linear relationship

between GDP and independent variable at 5%, since the F –value of

140.02 is less than the critical F – value of 236.8 at 50% level of

significance.

The DW – statistic with a value of 3.19 indicates the absence of

first order auto-correlation which are eliminated using Co-chrane

Orccutt Method AR (2) which converged after 25 iterations.

4.1.2 INTERPRETATION OF GRAPHICAL RESULT

The graph above shows the trend of all variables that were

used in the research model. It illustrates the growth trend of the

variables through the period of the research:1998 to 2008.

From the graph above, it can be deduced what all the

independent variables had a steady growth trend between the year

1998 and 2000, but in the year 2001 they all suddenly dropped,

except the dependent variable (GDP Curve). The drop in all the

independent variable was as result of the activities of the Central

Bank of Nigeria with respect to the establishment of Other Financial

Institutions Department (OFID), for the supervision and regulation of

the community banks in Nigeria. A total of 1,013 community banks

were covered in two inspection exercises carried out in October 2000

and October/November 2001. Of these 1,013 community bank, 747

or 74% were in operation while 366 or 26% were either inactive or

had closed shop. These gave rise to the dramatic drop of the

activities of community thereby reducing the independent variable, as

depicted in the graph.

It can also be observed from the graph, that in the year 2002,

the financial result of the community banks were better and this led to

another growth trend, with higher percentage growth rate as depicted

I the table below:

Table 4.2 Percentage Changes In the Variable

YEAR GDP At TOTAL TOTAL TOTAL TOTAL

Capital ABSENT Deposit Loans advances Investment
reserves % % Liabilities % %
%
1998 79.80 35.70 41.80 21.40 196.6

1999 38.50 32.70 31.80 33.40 78.5

2000 35.40 51.80 50.70 39.40 3.1

2001 -62.70 -59.30 -57.20 -64.20 -32.4

2002 269.70 216.30 194.50 228.10 204.1

2003 83.30 85.50 86.40 130.90 144.30

2004 16.30 19.10 18.40 14.10 15.60

2005 23.30 34.80 34.20 28.10 37.60

2006 25.50 19.50 18.40 13.40 7.60

2007 12.90 1.00 2-70 -0,30 -33.00

2008 134.10 1.00 -2.70 -155.50 182.30

Source: Annual Statistical and Financial Report of CBN 1998-2008

The year 2005 showed another positive turn in the growth

trend, as depicted in the graph and the table above. This was due to

the activities of the CBN, with regard to the emergence and launch of

the official regulatory framework in 2005, and the conversion of

community banks to microfinance banks in 2007. From 2005, more

investors trooped into community banking and this led to higher levels

of activities in the sector.

In the year 2008, the graph shows a dramatic geometrical

increase in all variables (both the dependent and the independent

variables), resulting from the injection of fresh capital by the new

investors as well as the higher level of retained earnings by the

existing institutions.

SECTION TWO

Test of Hypothesis
 The hypothesis was tested using the regression result of the

independent variables. The t-Radio was used in testing the

hypothesis.

The study adopts 5% level of significance under the two

tailed tests.

Hypothesis One

Ho: There is no relationship between the growth of microfinance

institutions in Nigeria and the economic growth of Nigeria.

H1: There is a relationship between the growth of microfinance

institutions in Nigeria and the economic growth of Nigeria.

Figure 4.1

Acceptan
ce Region

-2.26 2.26
6.72
Decision Rules: From the result above, it can be observed that the

calculated t-value of 6.723 is greater than the table t-value of 2.26

which falls outside the acceptance region into the rejection region as

show in figure above. Therefore we reject the null hypothesis and

acceptance the alternative hypothesis, which states that there is a

positive relationship between the growth of microfinance institution in

Nigeria and the economic growth of Nigeria.

Hypothesis Two

Ho: Microfinance institutions do not promote the growth of small

and medium scale enterprises in Nigeria.

H1: Microfinance institutions promote the growth of small and

medium scale enterprises in Nigeria.

Figure 4.2

Acceptan
ce Region

Rejection
Region

-6.7 -2.26 2.26

Decision Rules: Since the calculated t-value of 6.7 is greater than

the critical t-value of 2.26, which falls outside the acceptance region

and into the rejection region as depicted in the figure above we

therefore reject the null hypothesis and accept the alternative

hypothesis which states that microfinance institutions promote the

growth of small and medium scale enterprises in Nigeria.

 CHAPTER FIVE

5.1 SUMMARY OF FINDINGS

This study has been on the social and economic impact of

microfinance. Institutions in Nigeria towards the economic self-

reliance of Nigeria’s economy and ten microfinance institution in Edo

State were used as case studies.

During the course of the study various issues relating to the

practices of Microfinance Institutions were carefully discussed and

analyzed. These issues include: the target market of microfinance

institutions, specialist knowledge of microfinance, as well as effects of

microfinance on poverty alleviation, socio-economic growth and

livelihood security. Impacts of microfinance both at the household

levels and beyond the household levis were also discussed.

After a careful analysis of both the primary and secondary data,

the following discoveries were made:

1. The level of awareness of Nigerians with regard to the operations

and activities of formal Microfinance Institutions is relatively low,

although it is still in the development stage.

2. Nigeria believe that the concept of Microfinancing the poor is a

tool for poverty alleviation.

3. There is a positive impact of microfinance institutions both in the

household levels of the clients and beyond the households of the

clients.

4. There has been a positive growth trend for microfinance

institutions in Nigeria for the past 11 years, in client based

operations and financial results.

5. CBN polices of regulations have had a positive impact on the

effectiveness and efficiency of microfinance institutions in Nigeria

since the inception of the Microfinance Policy, Regulatory and

Supervisory Framework in December 2005.

6. There is a positive relationship between Microfinance Institutions

in Nigeria and Nigeria’s Socio-economic growth. Also, it was

discovered that Microfinance Institutions have been able to

influence the Socio-economic growth of the Nigeria-Economy.

5.2 CONCLUSION

The coming into being of microfinance institutions in Nigeria

has helped to reach those who otherwise would not have access to

credit from the formal finance sector. Although the figures of

membership of these institutions appear small compared to the vast

population of their supposed areas of operation, they are impressive

in the light of the literacy level and the cultural, legal and economic

environment under which they operate in Nigeria. Not to mention the

relatively small capital base and lack of access to adequate funds,

needs to scale up their activities. The lack of proficient and efficient

personnel needed to provided professional services and training,

alongside the credit facilities granted to clients so as to ensure

successful repayment of loan, is also a mitigation factor. A host of so

many other challenges limit the overall contribution of microfinance

institutions to the economy of Nigeria.

In conclusion, at an aggregate level, microfinance services are

means of broadening economic growth and this can be heightened by

having more stakeholders participate in the correct of microfinance.

Microfinance institutions alone cannot improve roads, housing, water

supply, education and health services to those in the rural area, nor

can they lift the poor (in entirely) in the economy out of poverty.

Perhaps the greatest contribution of microfinance is that it empowers

people-poor people providing them with confidence, self-esteem and

financial means to play a larger role in their socio-economic growth

and the economic self-reliance of the Nigerian economy.

5.3 RECOMMENDATIONS

From the analysis and observation of microfinance institutions

records and activities, the following recommendations are suggested:

1) In order to increase the rate of repayments, an Audit

(monitoring) unit should be introduced as a full fledged section

to help monitor credit and repayment rates (status). This unit

must act to check the flaws, loopholes and excesses in the

activities of the operation (credit) unit. The unit must be

aggressive n chasing its goals especially in gathering data on

current state of clients and it must ensure a follow up of actual

verification of their records, because sometime paper reports

differ from the realities on ground, clients may be making

repayment without corresponding recording of such

repayments.
2) The organization should strive to reduce its expenditure cost.

This will involve reducing cost of operations in order to

increase funds available for disbursement as credit of clients.

3) Efforts should be made to gradual clients to the formal

financial sectors. This becomes necessary especially when

clients have exceeded the loanable funds that microfinance

institution can deliver.

4) Consultants, both local and international, including multilateral

donors, should be signed on to give technical support,

capacity building and back-up funding to starters and existing

MFIs.

5) Government should facilitate and not over-regulate

microfinance operations. Governments and policy-makers

must ensure that financial regulation does not result in

financial repression, which make it difficulty for Microfinance

Institutions to Operate. Examples of financial repression are

impose interest rate ceilings, subsidized credit, and tax

structures that discourage investment in microfinance.

i. Recognize the multidimensional nature of poverty and bring on

board and relevant institutions and agencies dealing with

 livelihood provisioning in the planning and coordination of

microfinance developments including development partners

(bilateral, multilateral and non-governmental).

Other policy recommendation to the government includes:

i. Recognizes the multidimensional nature of poverty and bring on

board all relevant institutions and agencies dealing with

livelihood provisioning in the planning and coordination of

microfinance developments including development partners

(bilateral, multilateral and non-governmental).

ii. Providing for demonstration models and encourage replicability

of successful microfinance institutions approaches in line with

best practice, but with clear sensitivity to local contexts.

iii. Mount campaigns through the National Orientation Agencies to

enlighten people on the usefulness of micro-credit and

microfinance institutions.

iv. Design microfinance institutions to complement what already

exits in terms of other supporting institutions, tradition institution

and practices (Isusu, e.t.c) whuman capabilities, and available

technologies.
v. Microfinance Institutions that finance manufacturing and

technology-intensive activities should received more incentives

in the policy. This is because evidence shows that loans

disbursed by major Microfinance Institutions in Nigeria. Up to

2003 were mainly to trade and commercial activities (78%),

leaving manufacturing (3.5%), Agriculture, (14.1%)

multipurpose (4.0%) services (0.7%) and others trailing behind

(Anyanwu 2004).

vi. Provider clear guidelines for weaning dependants Microfinance

Institutions from Financial dependency as soon as possible as

part of legislation guiding the operations of Microfinance

Institutions in Nigeria.

vii. Provide for the establishment of national and apex

organizations for guidance, training, consultancy services, self-

regulation and supervision, liquidity exchange and refinancing

of microfinance institutions.
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