PROJECT TOPIC: An

evaluation of the regulatory and supervisory framework of

microfinance
TABLE OF CONTENTS 1.0. INTRODUCTION 1.1. STAEMENT OF PROBLEM 1.2. JUSTIFICATION OF STUDY 1.3. OBJECTIVES 1.4. HYPOTHESIS 1.5. SCOPE 1.6. METHODOLOGY 1.7. LIMITATION

CHAPTER TWO 2.0. LITERATURE REVIEW 2.1. CONCEPTUAL CLARIFICATION Please type the remaining part of the table of contents

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ABSTRACT

This study shall be divided into five chapters. In this chapter, we shall generally introduce the subject matter while Chapter two shall give delve into the literature and review some of the past efforts in relation to our effort. Chapter three will examine our research methodology while Chapter four will present and analyse our data. In Chapter five, we shall summarise, present our recommendations and conclude. The scope of the study shall be limited to the financial industry more specifically the microfinancing industry. We shall look at various regulatory and supervisory framework that guides the operations of microfinancing. We shall attempt to seek the opinion of stakeholders in the financial industry who have good knowledge of microfinancing. The operations of the exiting microfinancing institutions shall also be looked into. At the end of the study we shall attempt to draw suggestion that we useful for all stakeholders. In any research effort, a strong platform must be established for arriving at conclusions. In our attempt to do this, we intend to use the questionnaire approach as we seek the opinion of some people taken from a particular population

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CHAPTER ONE 1.0. INTRODUCTION The new wave of importance of microfinance can best be found in a report titled “ROLE OF MICROCREDIT IN THE ERADICATION OF POVERTY” by the Secretary-General of the United Nations. In the report he said, “The General Assembly, in its resolution 52/194 of 18 December 1997, noted that, in many countries microcredit programmes have proved to be an effective tool in freeing people from poverty and have helped to increase their participation in the economic and political processes of society”. In the same vein, it was reported that “The World Summit for Social Development, held in Copenhagen in March 1995, also underlined the importance of improving access to credit for small rural or urban producers, landless farmers and other people with low or no income, with special attention to the needs of women and disadvantaged and vulnerable groups”. The relevance of the above comes to the fore when poverty in Nigeria is x-rayed. The MicroStart Project Document reported, “The performance of the Nigerian economy has not been satisfactory despite its enormous potentials for growth and development”. The document posited “although the country is endowed with a sizeable natural resource base and financial resources accruing from the oil sector, it is still considered poor with a low per capita income and a ranking quite low according to its Human Development Index (HDI)”. The 1995 UNDP Human development report estimated that the life expectancy in the country is about 50 and that the human development index is 0.406, which ranks Nigeria as number 141 out of 174 countries in the world. The situation has been aggravated during the last decade by attempts to restructure the economy. Consequently, about 40 per cent of the population are estimated to be living in absolute poverty with about 80 per cent of them living in the rural areas. The gap between the rural and the urban, formal and informal sectors continues to grow rather than diminish with increasing economic growth and development. A fundamental cause of the underdevelopment of the economy is attributed to the structural characteristics of the economy, which has resulted in the persistent marginalization of the majority of the population. The gap between the rural and the urban, formal and informal sectors continues to grow rather than diminishing with increasing economic growth and development. 3

In mid 1985, the government estimated the rate of unemployment within this group in urban areas to be 40%. The situation has further deteriorated since 1985 and consequently an increasingly large number of job seekers now rely on the informal sector for employment. This drift to the informal sector for employment has further intensified the marginalization of the greater part of the Nigerian people, although the country remains potentially a viable economic entity that can achieve great economic growth. This viability can only be achieved according to the 2005 Central Bank Report by “……….. Putting in place well focused programmes to reduce poverty through empowering the people by increasing their access to factors of production, especially credit”. It went further to say that “The latent capacity of the poor for entrepreneurship would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant; increase employment opportunities, enhance household income, and create wealth”. This becomes important when viewed against the backdrop of the World Bank study, which revealed that poverty in Nigeria is highest in rural areas. The number of rural poor is roughly twice that of the urban poor. The average per capita expenditures of a rural poor household was one-fifth of the non poor in 1992. Of the extremely poor, 85 % lived in rural areas and more than two-thirds lived on farms. Rural poverty fell in 1985-1992, urban poverty increased. The number of rural poor declined from 26.4 million in 1985 to 22.8 million in 1992. In towns and cities, it rose from 9.7 million to 11.9 million in 1985-1992. The depth of poverty declined from 19 to 16 % in rural areas, while it increased in urban areas from 9 to 12 %, consequently, extreme poverty rose substantially in urban areas. According to the World Bank study in "Poverty in Nigeria" any successful strategy to improve welfare, involving all stakeholders, must include three simultaneous courses of action: 1. A strong and focused emphasis on economic growth 2. Better access for the poor to social services and adequate infrastructure 3. Targeted interventions to protect the poorest or the most vulnerable.

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Consequently, a big number of groups and institutions have been created over more than 15 years to meet some of the needs for financial and non financial services, particularly in rural poor areas. The results produced by the Nigerian microfinance institutions have been remarkable and can be shared with other West African countries, however many of the MFIs need to enhance their capacity, increase their management skills and provide more technical assistance to their clients Microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions. Three features distinguish microfinance from other formal financial products (CBN, 2005). These are: (i) the smallness of loans advanced and or savings collected, (ii) the absence of asset-based collateral, and (iii) simplicity of operations. According to The 2005 Central Bank of Nigeria report “In Nigeria, the formal financial system provides services to about 35% of the economically active population while the remaining 65% are excluded from access to financial services. This 65% are often served by the informal financial sector, through Non-Governmental Organization (NGO)-microfinance institutions, moneylenders, friends, relatives, and credit unions. The non-regulation of the activities of some of these institutions has serious implications for the Central Bank of Nigeria’s (CBN’s) ability to exercise one aspect of its mandate of promoting monetary stability and a sound financial system”. A microfinance policy which recognizes the existing informal institutions and brings them within the supervisory purview of the CBN would not only enhance monetary stability, but also expand the financial infrastructure of the country to meet the financial requirements of the Micro, Small and Medium Enterprises (MSMEs) (CBN, 2005). Such a policy would create a vibrant microfinance sub-sector that would be adequately integrated into the mainstream of the national financial system and provide the stimulus for growth and development. It would also harmonize operating standards and provide a strategic platform for the evolution of microfinance institutions, promote appropriate regulation, supervision and adoption of best practices.

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In these circumstances, an appropriate policy has become necessary to develop a long-term, sustainable microfinance sub-sector. 1.1. STATEMENT OF PROBLEM The aim of this research work is to evaluate the regulatory and supervisory framework of microfinance. Informal and small-scale lending arrangements have long existed in many parts of the world, especially in the rural areas, and they still survive. Good examples are schemes in Ghana, Kenya, Malawi and Nigeria ("merry-go-rounds", "esusus" etc.). They provide the rural population with access to savings within the local area and with a certain cushion against economic fluctuations, and they encourage a cooperative and community feeling. The groups formed provide joint collateral and serve as instruments for spreading valuable information that is useful for economic and social progress (UN, 1998). The government through different institutions has tried to eradicate poverty among the populace. The government provided the enabling policies to start community bank and People’s Bank of Nigeria. People’s Bank of Nigeria coalesced into Nigeria Agricultural, Cooperative and Rural Development Bank (NACRDB) {an amalgam of the former Peoples Bank of Nigeria, Nigerian Agricultural and Cooperative Bank and the Family Economic Advancement Programme (FEAP) was set up in 2000} when the previously established banks failed to fulfill it statutory obligation of eradicating poverty. Most analysts attributed the failure of all these banks to dysfunctional policy framework. The new wave of microfinance was made possible by the success achieved by Grameen Bank of Bangladesh. As the government begins the voyage into the provision of microfinancing in Nigeria and as the role of microfinance becomes more challenging in the new socio-economic and political order, the question many analysts we want to ask is, what is the workability of the regulatory and supervisory framework of the policy setting up microfinancing in Nigeria? In this context, the problems we shall attempt to tackle in this study include 1. Relatively low number of microfinancing institutions in Nigeria when viewed against the backdrop of the population of the poor. 2. Inadequate number of experts in the field of microfinancing in Nigeria. 3. Inadequate publicity on the existence of microfinance banks.

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4. Absence of solid and adequate infrastructural base to support microfinancing and development of a flexible, robust and knowledge-driven set of experts in the microfinance subsector. 5. Absence of institutionalised and focussed policies and programmes on the part of government to generate and build the kind of structure needed to grow the microfinancing subsector. 1.2. JUSTIFICATION OF THE STUDY This study can locate its justification on many grounds. As stated earlier, microfiancing is becoming a key feature in attaining economy growth in any nation especially developing countries thereby eradicating poverty. It is in this context that microcredit has recently  assumed a certain degree of prominence. It is based on the recognition that the latent  capacity of the poor for entrepreneurship would be encouraged with the availability of  small­scale loans and would introduce them to the small­enterprise sector. The study also  locate it justification on the ground that the country is just starting microfinancing and  when this is juxtapose with the ancestors of microfinancing; community banks, People’s  Banks of Nigeria, NAPEP (National Poverty Eradication Programme) then this study is  justified. Currently, there are estimated to be about 7,000 microfinance institutions in the  world.  In the opinion of analysts, how well a nation performs in terms of economic growth and development, to a large extent, is determined by the availability of investable funds. Microfinancing is lending   (usually   a   few   hundred   dollars)   to   small   enterprises   in  agriculture, distribution, crafts, trading and similar activities. The contention is that for a nation to achieve economic growth, it must have institutions in place that can lend money to her populace for the purpose of investing. 1.3. OBJECTIVES In the main, this research effort is particularly geared towards achieving the following objectives: 1. Evaluating of the regulatory and supervisory framework of microfinancing.

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2. Determine if proper and adequate microfinancing structure is in place within the entire banking system in general and the microfinancing subsector 3. Analyse the effecting of microfinancing on entrepreneurs. 4. Identify the deficiencies within the practice of microfinancing and recommend measures for future solutions 5. Suggest future policies and programme in a bid to aid the development of the microfinancing in Nigeria. 1.4. RESEARCH HYPOTHESIS As noted earlier, microfinancing is an essential tool of eradicating poverty and also bringing about economic growth. For the purpose of this research work, it is desirable to test the hypothesis, which represents the ideas, beliefs and assumptions put forward in order to make valid conclusions. The findings will lead to the acceptance or rejection of the hypothesis should they satisfy the reflection of the null hypothesis (HO), the alternative (HA) will be accepted. This indicates that at least, one of the independent/input variables has an effect in the dependent variable. HYPOTHESIS ONE Null Hypothesis (H0): The introduction of microfinancing has led to increase access to funds by active poor entrepreneur. Alternative Hypothesis (Hl): The introduction of microfinancing has not led to increase access to funds by active poor entrepreneur. HYPOTHESIS TWO Null Hypothesis (H0): Introduction of Microfinancing has led to improved standard of living of the poor. Alternative Hypothesis (Hl): Introduction of Microfinancing has not led to improved standard of living of the poor. 1.5. SCOPE The scope of the study shall be limited to the financial industry more specifically the microfinancing industry. We shall look at various regulatory and supervisory framework that guides the operations of microfinancing. We shall attempt to seek the opinion of stakeholders in the financial industry who have good knowledge of microfinancing. The operations of the

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exiting microfinancing institutions shall also be looked into. At the end of the study we shall attempt to draw suggestion that we useful for all stakeholders.

1.6. METHODOLOGY In any research effort, a strong platform must be established for arriving at conclusions. In our attempt to do this, we intend to use the questionnaire approach as we seek the opinion of some people taken from a particular population. The followings represent some of the hypotheses we shall test in the course of this research: 1. What is your level of the evaluation of the success of the microfinance banks against the backdrop of the supervisory and regulatory framework? 2. Is the regulatory and supervisory framework in accordance with internationally accepted framework? 3. Has the introduction of microfinance helped poor entrepreneurs to access the needed funds? 4. What is the level of licensed microfinance banks to the population of poor entrepreneurs? 5. Has the introduction of microfinance banks in Nigeria been able to impact on the life of poor people? 6. What is the level of the concentration of microfinance banks in the rural areas? 7. What is the level of the concentration of microfinance banks in urban areas 8. Has the introduction of microfinancing been able to stop the flow of rural-urban drift? 9. What is the level of poverty before and after the introduction of microfinancing banks in Nigeria? 10. What is the level of the impact of government policies on the operations of microfinance banks? 11. What is the level of performance of microfinance banks in Nigeria compared to other developing countries? 12. What will be the level of success of microfinance banks in the future (five years)? 13. What is the level of the role of the regulatory body in achieving success in the microfinance subsector?

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1.7. LIMITATION OF STUDY
As expected, this project shall face certain constraints in the course of its execution. Essentially, the first limitation shall be that of space. As much as efforts will be made to address all the issues involved in the research effort, we shall attempt to be as brief as possible in our exposition. Therefore, our population sample shall only be limited to about fifty respondents. Again, our purview in this project may be limited by the constraint of time. In this respect, we shall only direct the focus of our investigation to some few banks and audit firms. And finally, we may not be able to do as much as we can because of financial consideration. This project is anchored on a certain budget. Owing to the rising cost of living in Nigeria, our needs in terms of materials, transportation and logistics shall be kept under a particular framework.

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CHAPTER TWO 2.0. LITERATURE REVIEW 2.1. CONCEPTUAL CLARIFICATION For the world's poor getting a loan to start up a business is almost impossible, because of the strict rules most banks follow including the necessity to borrow against collateral. However, microfinancing - though not a totally new financing concept - is growing more popular now that it helps the poor and yet manages to get a bit of cash for the lenders. Microfinance can be defined as the provision of comprehensive financial services to micro-entrepreneurs. The concept of microfinancing is not new; it is traced back to Prof Muhammad Yunis, who founded the Grameen Bank in Bangladesh in 1976. Yunis was known as a ‘banker to the poor’. Microfinance institutions (MFIs) usually lend small loans to the poor people in 11

developing or under-developed countries who are usually ignored by commercial banks. Investors in microfinancing make profit in the form of interest payments in the order of 2-5 percentage points above the London Interbank Offered Rate, the international benchmark known as Libor. The World Bank estimates that there are now over 7,000 microfinance institutions, serving some 16 million poor people in developing countries. The total cash turnover of MFIs worldwide is estimated at $2.5 billion and the potential for new growth is outstanding. As the concept of microfinancing is to lend money to the poor, such loans cannot be backed by collateral, subjecting the lenders to a high risk of loss if the loans were not paid back. As per the United Nations Capital Development Fund (UNCDF), it is estimated that worldwide there are 13 million microcredit borrowers, with $7 billion in outstanding loans, and generating repayment rates of 97 per cent. It has been growing at a rate of 30 per cent annual growth. De Lesseps strongly believes that the human factor plays a big part in driving the borrowers to pay the loans back. "You are helping people for the first time, it is a lifetime chance. People like the idea to pay back, and [they] would they will cover for each other" he said. The principle of microfinance is simple: bring very little amount of money multiply it by the biggest number of poor people," said de Lesseps. "But you can't have a bank lending philosophy because you lend to people who get together” he added. To de Lesseps helping the poor to become entrepreneurs is what microfinance is about. "We visited a village in Cambodia where we lend 80 women $25 each. They have pulled their resources together and grew vegetables," he said. The whole village has been transformed from dust to productive. However, two approaches were advocated in a report by the Secretary General of the United Nations on the role of credit in poverty reduction. The reported said, while supporters of the income-generation approach maintain that credit should be provided mainly to the entrepreneurial poor to enable them to finance specific private income-generating activities to increase their revenues, proponents of the so-called new minimalist approach argue that credit progammes would still be helping the poor fight poverty by giving credit to any poor person who is able to repay a loan without dictating to that person how and on what the loan should be used. Some studies have pointed out that the problem of the non-productive use of credit, as advocated by the minimalist approach, lies in the fact that by consuming rather than investing their loans, the actions of such borrowers, if imitated by other poor people, could

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produce STUDIES

a

negative

impact

on

the

future

growth

of

microcredit.

2.2. EVALUATION OF THE IMPACT OF MICROFINANCE-SELECTED CASE The prevalence of microfinance impact evaluations has increased in recent years, with programs using studies not just to prove the effectiveness of microfinance, but to improve it as well. However, the quality and rigor of microfinance impact evaluations vary greatly. One of the first comprehensive microfinance impact assessments was “Credit for the Alleviation of Rural Poverty: The Grameen Bank in Bangladesh,” (1988) by Mahabub Hossain. Hossain found Grameen members’ average household income to be 43 percent higher than target non-participants in comparison villages, with the increase in income from Grameen highest for the landless, followed by marginal landowners. Hossain warned it was likely that his impact findings would be overstated, however, because Grameen members were found to be younger and better educated than nonmembers who were more likely to be landless. This type of difference between participants and comparison households is prevalent among microfinance impact evaluations and limits the conclusions we can draw from many of them. The 1998 book, Fighting Poverty with Microcredit by World Bank economist Shahidur Khandker, and the related paper, “The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?” by Khandker and Mark Pitt, a Brown University economist, were influential because they were the first serious attempt to use statistical methods to generate a truly accurate assessment of the impact of microfinance among three Bangladeshi programs: Grameen Bank, BRAC, and RD-12. The centerpiece of their findings was that every additional taka lent to a woman adds an additional 0.18 taka to annual household expenditures—an 18 percent return to income from borrowing. However, NYU economist Jonathan Morduch responded with the paper, “Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh” (1998), citing serious concerns with their data and their statistical model. With the benefit of more data, Khandker was able to improve their model, published in a 2005 update to the study, “Micro-finance and Poverty: Evidence Using Panel Data from Bangladesh.” The updated findings showed that each additional 100 taka of credit to women increased total annual household expenditures by more than 20 taka. There were no returns to male borrowing at all. Khandker found that between 1991/92 and 1998/99 moderate poverty

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in all villages declined by 17 percentage points: 18 points in program areas and 13 percentage 6 points in non-program areas. Among program participants who had been members since 1991/92 poverty rates declined by more than 20 percentage points—about 3 percentage points per year. Khandker estimated that more than half of this reduction is directly attributable to microfinance, and found the impact to be greater for extreme poverty than moderate poverty, which microfinance was found to reduce by 2.2 percentage points per year and 1.6 percentage points per year, respectively. Khandker further calculated that microfinance accounted for 40 percent of the entire reduction of moderate poverty in rural Bangladesh. 2.3. ELEMENT OF MICROFINANCE REGULATION MicroCapital Institute identified the following elements of microfinance regulation 2.3.1. Legal status Absence of basic registration and licensing requirements impedes the growth of the micro.nance industry and its appeal as an investment. The most disappointing example is China, where despite impressive progress in other sectors, micro.nance remains in its infancy for lack of an enabling framework. Time-limited licensing as practiced in the West Africa Monetary Union also creates uncertainty: if an MFI does not follow the standard cooperative model, it must operate under a revolving .ve year memorandum of understanding.

2.3.2. Secured Transactions Financial laws of emerging economies may not address an MFI’s legal authority to pledge and enforce security interests, restricting the transferability of its assets in capital market transactions such as loan securitization. Without a clear rule of law allowing perfection of liens, assets could wind up being pledged more than once. 2.3.3. Loan Terms Individual borrower lending limits for microcredit are sometimes stated as a certain amount that does not vary with changes in economic conditions, such as inflation. This means an MFI cannot grow with its customer, or diversify into related products such as home mortgages. A more enabling approach is to have flexible limits that move with GDP per capita or an MFI’s core capital.

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2.3.4. Interest Rates Public prejudice against exploitative interest rates is strong in many countries13. Yet, experience shows that interest rate controls may serve local political interests but ultimately hurt the poor by cutting off access to credit. When an MFI cannot cover its costs, it will die, or worse, turn to permanent subsidies. This reduces availability of credit for poor borrowers, who are then at the mercy of the truly usurious. Strong consumer protection laws such as Truth in Lending type disclosures and consumer education would better help the poor to make informed choices. 2.3.5. Tax Burden In markets where for-profit and nonprofit MFIs compete for the same business, the playing field will be uneven when there is unequal tax treatment of the same activity. Policy should distinguish taxes on financial transactions from taxes on net profits that arise from such dealings. Specifically, taxes on financial transactions such as a value added tax on lending or a tax on interest rate should be equalized across the industry. Moreover, rules for net income or profit taxes such as tax-deductibility of expenses (such as provisioning for bad loans) should apply consistently to all types of institutions, regardless of whether they are prudentially licensed14.

2.3.6. Capital and reserves A certain threshold capital requirement is an effective hurdle for new licenses. However, if excessive capital and reserve requirements are based on a misperception of risk, then growth is hindered by a minor hidden tax that further distorts the playing field. 2.3.7. Minority interests Minority investor shares may be protected from misappropriation through transparent disclosures, laws protecting small investor rights and the ability to enforce claims in court, or with a regulatory body. Minority investor rights can also be protected by placing board members and having access to shareholder lists, annual reports and board meeting minutes. 2.4. REGULATION AND SUPERVISION Of MICROFINANCE-THE AFRICAN EXPERIENCE 15

Ascanio Graziosi, a Senior Banking Consultant & Microfinance Specialist said in an article “Microfinance in Africa: Rethinking the role of the actors” said ‘the definition of rules of the game in the Africa microfinance industry is by now a requirement and in the last couple of years regulation and supervision have been emerging as a dominant issue in the microfinance industry in Africa’. There is a wide consensus that MFIs have to give account of what they are doing and how they do it. It is not possible here to go into details and we can spend a few lines only on the subject. We would like to notice that the big question: sustainability versus outreach? Has come to a solution by agreeing that the two objectives are complementary and not opposite. It is worthwhile to notice that microfinance is no more seen as a distinct sector but as a component of the overall financial system. In relation of the size and the sophistication of the market some countries are at debate stage on how to regulate and supervise, others have been matching the benchmarks and in a third group the regulatory framework is running at full speed. Obviously, each country has been mapping out the road referring to its own environment within the agreed institutional and legal framework. Transformation from donor ship to ownership, the role of NGO as well as governance are as many as leading questions which have been given an answer or the discussions are at drafting process. Last but not least all regulatory systems foresee that deposit taking from the public must be carefully regulated and supervised. Graziosi reported that the trend has marked a turning point in the microfinance industry in Africa and since then nothing will be as before. All around the Continent we witnessed the promulgation of new regulatory frameworks sponsored or at least not hampered by governments. We have to recognise that the insiders have already been discussing on the suitable way to monitor activities carried out by MFIs (supervise) and set up clear rules governing the intermediation activities (regulate) (Graziosi). The systems have been set up range from a rigid control to a more flexible intervention. The first option has been prevailing in West Africa, mainly in the Francophone regions where the disasters caused by the past failure of big financial institutions and recently some disappointed performance of credit programmes are still burning wounds. In some Anglophone Countries MFIs major functions the interventions of monetary and credit authorities hasn’t been so direct in ruling MFIs’ functions and activities.

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In a word it can be said that there is a “continuing” process in relation of the sophistication of the market. Some Countries have been debating how to regulate, others have been matching the benchmarks and in a third group a bill has been running at full speed. It is worthwhile to notice that microfinance is no more seen as a distinct sector but as a component of the overall financial system. Obviously, each country has been mapping out the road referring to its own environment within the existing institutional and legal framework together with the market reality. Transformation from donor ship to ownership, the role of NGO as well as governance is as many as questions that have been given an answer or are at drafting process. All regulatory systems foresee that MFI-deposit-taking from the public must be carefully regulated and supervised. From our direct experience there is evidence that in West Africa, mainly in the Francophone Countries tight regulatory and supervision laws have been promulgated because of the disasters caused by the past failure of big financial institutions (mainly development banks under government control) and recently because of some disappointed performance of micro credit programmes (Graziosi). In some Anglophone Countries, initially the commercial code rather than the monetary and credit authorities regulated the activities of MFIs. Recently in Kenya a draft bill proposed that the Central Bank would regulate all microfinance institutions collecting deposits from the public. A key proposal in the Microfinance Bill 2005 is a requirement that institution seeking to operate as a microfinance must have a core capital of Sh 60 million. The UN report by the Secretary General said, in West Africa, where microfinance institutions are still in their infancy, a World Bank case study of nine microfinance programmes - the Pride, Credit rural and credit mutuel de Guinee; Credit mutuel du Senegal and Village Banks Nganda of Senegal; Reseau des caisses populaires and Sahel Action Project de promotion du petit credit rural of Burkina Faso; and Caisses villageoises du pays dogon and Kafo Jiginew of Mali - concluded that all nine of these programmes are very much in the mainstream of best practice in the field of microfinance. In terms of sustainable lending to microentrepreneurs, the study gave high marks to the programmes on the following basis: all

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nine programmes are located near their clients and in the largest catchment areas possible; they use lending technologies that are simple, well-tailored to the cultural environment and inexpensive for both lender and client; they have employed effective techniques for obtaining high repayment rates; most include savings, which meet a critical need of many people, and they price their loans far above commercial lending rates, though not at full cost recovery. A recent study of 11 major microentreprise finance programmes - Agence de credit pour l'entreprise privee of Senegal, Asociacion Dominicana para el Desarrollo de la Mujer of the Dominican Republic, Banco Solidario of Bolivia, Badan Kredit Desa, Bank Rakyat Indonesia and Lembaga Perkreditan Desas of Indonesia, Bankin Raya Karkara of the Niger, Corporacion de Accion Solidaria of Colombia, Fondacion Integral Campesina of Costa Rica, Grameen Bank of Bangladesh, and the Kenya Rural Enterprise Programme - showed that 10 of the programmes were operationally efficient. Five institutions were fully profitable, generating inflation-adjusted positive returns on assets. It was reported that, in 1993, the Agence de credit pour l'entreprise privee of Senegal, Banco Solidario of Bolivia and Lembaga Perkreditan Desas of Indenosia had covered 100, 103 and 137 per cent of their costs, respectively. In view of the growing popularity of microfinance institutions, some of which now explore the possibility of deposit mobilization or leverage commercial capital, it is reported that bank regulators in such countries as Bolivia, Ghana, Kenya and Peru, and other countries, are creating laws or special regulations for this new breed of institutions. In Bolivia, it is reported that Banco Solidario, a private commercial microenterprise bank, is regulated by the Superintendency of Banks, with the same financial and reporting requirements as traditional banks, but with simpler loan documentation and risk classification rules. In the case of Bolivia, which seeks to encourage new microfinancial institutions, it is reported that the Government has begun licensing a new class of intermediaries, known as private financial funds, subject to the same solvency and reserve requirements as banks, but with lower minimal capital requirement. In Nigeria all licensed Universal Banks currently engaged in microfinance services have to set up a subsidiary to effectively carry out that function by obtaining a microfinance banking licence or setting up a department for such services. More recently,to be precise August 22, 2006 the Central Bank of Nigeria (CBN) gave approval-in-principle to Accion, a United 18

States-based microfinance company and seven others, including indigenous firms, to operate as Micro-Finance Banks (MFBs) in the country. Under the regulatory and supervisory framework for microfinance banks, the CBN stated that there shall be two categories of licences available for promoters (both local and foreign) of Micro Finance Banks based on geographical coverage. The first category would be Micro Finance Bank licensed to operate as a unit bank (also known as community banks) and which shall operate and open branches within a specified local government area (LGA). CBN said the minimum capital requirement shall be N20 million or such amount as may be prescribed by it from time to time. The second category would be Micro Finance Bank licensed to operate in a State and open branches within a specified state or Federal capital territory and the minimum capital requirement of N1billion only is required or such an amount as maybe prescribed 2.5. REVIEW OF MICROFINANCE ACTIVITIES IN NIGERIA The CBN reported in 2005 that the practice of microfinance in Nigeria is culturally rooted and dates back several centuries. The traditional microfinance institutions provide access to credit for the rural and urban, low-income earners. They are mainly of the informal Self-Help Groups (SHGs) or Rotating Savings and Credit Associations (ROSCAs) types. Other providers of microfinance services include savings collectors and co-operative societies. The informal financial institutions generally have limited outreach due primarily to paucity of loanable funds. The report went further to say in order to enhance the flow of financial services to Nigerian rural areas, Government has, in the past, initiated a series of publicly-financed micro/rural credit programmes and policies targetted at the poor. Notable among such programmes were the Rural Banking Programme, sectoral allocation of credits, a concessionary interest rate, and the Agricultural Credit Guarantee Scheme (ACGS). Other institutional arrangements were the establishment of the Nigerian Agricultural and Co-operative Bank Limited (NACB), the National Directorate of Employment (NDE), the Nigerian Agricultural Insurance Corporation (NAIC), the Peoples Bank of Nigeria (PBN), the Community Banks (CBs), and the Family Economic Advancement Programme (FEAP). In 2000, Government merged the NACB with the PBN and FEAP to form the Nigerian Agricultural Co-operative and Rural

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Development Bank Limited (NACRDB) to enhance the provision of finance to the agricultural sector. It also created the National Poverty Eradication Programme (NAPEP) with the mandate of providing financial services to alleviate poverty. 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 shortlived, due to the unsustainable nature of the programmes. Since the 1980s, Non-Governmental Organizations (NGOs) have emerged in Nigeria to champion the cause of the micro and rural entrepreneurs, with a shift from the supply-led approach to a demand-driven strategy. The number of NGOs involved in microfinance activities has increased significantly in recent times due largely to the inability of the formal financial sector to provide the services needed by the low income groups and the poor, and the declining support from development partners amongst others. The NGOs are charity, capital lending and credit-only membership based institutions. They are generally registered under the Trusteeship Act as the sole package or part of their charity and social programmes of poverty alleviation. The NGOs obtain their funds from grants, fees, interest on loans and contributions from their members. However, they have limited outreach due, largely, to unsustainable sources of funds. On August 22, 2006 the Central Bank of Nigeria (CBN) gave approval-in-principle to Accion, a United States-based microfinance company and seven others, including indigenous firms, to operate as Micro-Finance Banks (MFBs) in the country. Under the regulatory and supervisory framework for microfinance banks, the CBN stated that there shall be two categories of licences available for promoters (both local and foreign) of Micro Finance Banks based on geographical coverage. The first category would be Micro Finance Bank licensed to operate as a unit bank (also known as community banks) and which shall operate and open branches within a specified local government area (LGA). CBN said the minimum capital requirement shall be N20 million or such amount as may be prescribed by it from time to time. The second category

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would be Micro Finance Bank licensed to operate in a State and open branches within a specified state or Federal capital territory and the minimum capital requirement of N1billion only is required or such an amount as maybe prescribed 2.6. REGULATORY AND SUPERVISORY FRAMEWORK The December 2005 Central Bank report on microfinance stated that the “growing awareness of the potential of microfinance in poverty reduction, economic growth and development coupled with the emergence of several highly successful and fast growing Micro Finance Institutions [MFIs], has effectively put the issue of microfinance on the political agenda of most developing countries”. Consequently, the supervisory authorities have taken active measures to address the issue of microfinance through the development of an appropriate regulatory and supervisory framework based on the particular features and risks associated with this activity. The challenge supervisors’ face, which is sometimes complicated by a multitude of legal initiatives in this area, is how to accommodate or reasonably encourage microfinance within a framework of generally accepted norms and prudential standards for the financial services industry. In general, a framework that does not adequately address the features and risks of microfinance would not effectively serve these institutions or the people who depend upon them. Therefore, bank supervisors should ensure that the supervisory framework in place is such that would result in innovative, rapid and balance growth of the industry as well as consistent with accepted banking practices. The issue of savings/deposits is central to the regulation and supervision of microfinance. Supervisory authorities are supposed to ensure that the poor clients do not lose their savings in failing institutions. A new challenge for developing an appropriate regulatory and supervisory framework for microfinance lies in the great diversity of institutions that offer microfinance services. A comprehensive framework significantly based on microlending as an activity should, therefore, be developed and made applicable to all supervised institutions that offer this service, regardless of whether they are licensed as a bank or new institutional form created specifically for microfinance. The regulation should be defined to include standards for portfolio classification, loan documentation, loan loss provisioning and write-offs for microfinance operations.

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It is instructive to note that the characteristics of microfinance clients are distinct, the credit methodology different and, in many cases the ownership structure of the institutions is not the same as that typically found in conventional financial institutions. These and other factors give rise to a unique risk profile that needs to be addressed through the regulatory framework and supervisory practices. In this regard, a risk-based supervision shall be implemented which would focus mainly on (a) governance and ownership structure (b) lending methodology (c) borrower characteristics (d) appropriate management information system (e) internal control mechanisms and procedures. The report (CBN, 2005) concluded by saying that a simple and rational regulatory and supervisory framework, which would achieve a balanced growth, promote transparency, control risks faced by the institutions engaged in microfinance, eliminate barriers and unnecessary requirements has therefore, been developed and should be implemented for the sector. 2.7. THE ORIGINS OF SMALL LENDING Microlending often starts in small villages, where family members and friends get together in money-sharing groups. Mary Coyle, director of the International Institute at St. Francis Xavier University in Nova Scotia, Canada, has studied the history of microcredit and says that these savings clubs can be traced to all parts of the world. "They have operated for centuries -- probably since the introduction of currency." From region to region, these clubs developed their own names. In West Africa, they were known as "tontines;" in Bolivia, "pasanaku;" and across Mexico and Central America, "tandas." Tanda means "shift" in Spanish and works on the premise that members of the group contribute to a pool of money, which shifts to a single member that has the most need. The tontines of West Africa can be traced back to 17th-century Europe and are named for the Italian banker Lorenzo de Tonti. An early version of microlending was the Irish Loan Fund system, introduced in the early 1700s, by writer and nationalist Jonathan Swift. Swift's early success helped the Irish when

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many were living in impoverished conditions. Swift's original system was standardized in 1837, when hundreds of independent loan funds were brought under the control of the Loan Fund Board. By law, no loan could be more than £10 or run for longer than a 20-week term, with weekly repayments. As with many contemporary microcredit institutions, interest rates were low – in this case around 8 percent per year – much lower than those charged by local profiteers. 2.8. THE PIONEERS OF MODERN-DAY MICROFINANCE The concept of microloans took a big leap in the 1960s and 1970s, when groups such as ACCION International, in Venezuela, and Yunus's Grameen Bank, in Bangladesh, began to institutionalize the process. By formalizing and expanding the basic concept of sharing programs, these microfinance institutions helped to build capital for small businesses rather than just loaning for basic necessities such as food, water and clothing. Yunus first came across the idea of microcredit while studying the lives of poor entrepreneurs in his native Bangladesh during the famine of 1974. He began by loaning to groups of women, and his program soon proved that small loans could not only quickly improve lives but were paid back with interest and on time. The next step was setting up a consistent on-the-ground program. In the case of the successful institutions, this meant sending a representative, or "field manager," to the prospective region to educate and advise and to oversee the loans locally. After a few members of the group were accepted for a loan, the rest had to wait for that initial loan to be repaid before they could obtain their own loans. "Peer pressure" from other members of the group to repay the initial loan helped to set the bar high. In 1961, another early pioneer, ACCION, opened its doors in Caracas, Venezuela, when law student Joseph Blatchford raised $90,000 to start a community development program to help the poor jump-start their own businesses. Over the next two decades, ACCION set up scores of independent microfinance institutions and expanded across Latin America. It, too, offered people a choice besides the local loan

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shark, who would charge rates as high as 500 percent a year and often pushed people into permanent debt. Like the founders of ACCION, Yunus realized that if individuals who wanted to start their own businesses could not free themselves from start-up debt, they would never be able to grow. Since the Grameen Bank was founded, it has paid out more than $5.7 billion in loans, and more than $5.1 billion of that has been repaid -- a recovery rate of approximately 98.9 percent. It has made more than 950,000 loans and has 6.7 million members, around 96 percent of whom are women. In October, the Norwegian Nobel Committee said of Yunus and his work, "Yunus's long-term vision is to eliminate poverty in the world. That vision cannot be realized by means of microcredit alone. But Muhammad Yunus and Grameen Bank have shown that in the continuing efforts to achieve it, microcredit must play a major part." Following the success of these early institutions, other microfinance organizations began to launch throughout the developing world. Among the largest is FINCA International, established by economist and Fulbright scholar John Hatch. Hatch believed that using locals' knowledge rather than bringing in outsiders was key to building successful local economies. Using an approach he has always stood by, Hatch said, "Give poor communities the opportunity, and then get out of the way!" By 2005, FINCA had 400,000 clients in 21 countries across Latin America, Africa, Central Asia and Eastern Europe. One year after the United Nations called 2005 the International Year of Microcredit, the World Bank estimates that there are more than 7,000 microfinance institutions now operating around the world.

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CHAPTER THREE 3.0.INTRODUCTION Essentially in this chapter we shall look into such issues as the population under consideration, sample design, data collection instrument and procedures used in processing collected data. The essence of this chapter is to evaluate the regulatory and supervisory framework of microfinance, in as much scientific terms as possible. Integrated Microfinance Bank, Lagos was used as the case study. In the main, the evaluation of the regulatory and supervisory framework of microfinance in Integrated Microfinance Bank, Lagos and in indeed the microfinance subsector as whole will be exhaustively brought to the fore. 3.1. RESEARCH DESIGN The basic research design that will be used in this study is “Survey Research”. This method actually focuses on a specific population or universe. Under this arrangement, data will be collected and processed through analysis. For the constraint imposed by time, cost and space, the entire population of the microfinance subsector cannot be studied. On this basis, a careful 25

selected sample size has been chosen to form the basis of our investigation. The sampling technique used in this respect is the Probability Sampling Method. It employs the principle of randomization whereby every element of the population has an equal chance of being selected to form part of a sample. 3.2. SAMPLE OF THE STUDY As it has often been repeated in this project, the underlying plan is to evaluate the regulatory and supervisory framework of microfinance in the microfinance subsector. To that extent, the financial sector, the banking sector and more specifically the microfinance subsector will form the basic constituency of this research effort. The sample population therefore will be employees of Integrated Microfinance Bank, Lagos , financial analysts, bankers and officials of regulatory body (CBN). In terms of ranking, most of those whose opinions will be accessed will fall within the ranks of those who have spent more than four years in the banking sector. They will be drawn from all the spheres of the financial sector. These categories of people have been chosen because of their privileged positions and moreso for the fact that they are active players in the insurance industry.

3.3.QUESTIONNAIRE DESIGN An open-ended questionnaire was designed for the purpose of this research project. It was designed in such a way as to evaluate the regulatory and supervisory framework of microfinance in Nigeria from our population sample. The questionnaire has two sections the; personal data section and the research information section. The research information has thirteen questions. The personal data has questions relating to the biodata of our respondents. Below is a breakdown of how the questions will be distributed. Table 3.1 PERCENTAGE DEPARTMENT Commercial Bankers Financial Analysts Regulatory officials Microfinance Bankers Total NO OF QUESTIONNAIRES 10 12 8 12 42 COMPOSITION 23 29 19 29 100

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3.3.1. PERSONAL INTERVIEW: This is a face-to-face question and answer session between the person asking the questions and the respondents. The personal interview enable the researcher to clarify a lot of conflicting issues and eliminate misunderstanding and contradictions since it requires the presence of the researcher. Table 3.2. DEPRTMENTS Commercial Bankers Financial Analysts Regulatory officials Microfinance Bankers Total No of Interviewees 2 2 2 3 9 Percentage Composition 22 22 22 34 100

PERCENTAGE DEPARTMENT Commercial Bankers Financial Analysts Regulatory officials Microfinance Bankers Total NO OF QUESTIONNAIRES 10 12 8 12 42 COMPOSITION 23 29 19 29 100

3.4. ADMINISTRATION OF QUESTIONNAIRE In the course of implementing this research project, 42 copies of questionnaires will be and distributed to all the respondents. These include ten workers of Platiniun-Habib Bank Plc who are in the micro-credit department; twelve financial analyst with over six years experience in the financial sector; eight officials of the Central Bank of Nigeria and twelve employees of Integrated Microfinance Bank of Lagos. The questionnaires will be personally delivered to the entire population sample. This is to avoid loss in transit that might be associated with postage via any of the courier organizations. The questions asked were earlier stated (See Appendix A for the sample of the questionnaire). 3.5. METHOD OF DATA ANALYSIS During an analysis, the data is broken down and interpreted in line with the objectives set at the commencement of the research effort. In this case, interpretation can be defined as the explanations given in respect of the associations and the relationship found among the 27

data or groups of data, which include the interferences and conclusions drawn from the relationship drawn among data or group of data. The data analysis method used in this case is relevant statistical methods such as percentages, mean and statistical tools which include tables. It is expected that by the application of these statistical analysis, conclusion can easily be reached on this research project. 3.6. RE-INSTATEMENT OF RESEARCH QUESTIONS In any research survey, it is always necessary to identify a set of research questions. Those questions will not only form the basis upon which the research will be anchored but will also provide a guide on the direction of the project. The following will be the research questions of this study: 1. What is your level of the evaluation of the success of the microfinance banks against the backdrop of the supervisory and regulatory framework? 2. Is the regulatory and supervisory framework in accordance with internationally accepted framework? 3. Has the introduction of microfinance helped poor entrepreneurs to access the needed funds? 4. What is the level of licensed microfinance banks to the population of poor entrepreneurs? 5. Has the introduction of microfinance banks in Nigeria been able to impact on the life of poor people? 6. What is the level of the concentration of microfinance banks in the rural areas? 7. What is the level of the concentration of microfinance banks in urban areas 8. Has the introduction of microfinancing been able to stop the flow of rural-urban drift? 9. What is the level of poverty before and after the introduction of microfinancing banks in Nigeria? 10. What is the level of the impact of government policies on the operations of microfinance banks? 11. What is the level of performance of microfinance banks in Nigeria compared to other developing countries? 12. What will be the level of success of microfinance banks in the future (five years)?

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13. What is the level of the role of the regulatory body in achieving success in the microfinance subsector?

CHAPTER FOUR 4.0. PRESENTATION OF DATA AND ANALYSIS In any statistical enquiry or survey, the use of sampling cannot be overemphasized. This essentially is owning to its ability to save time, labour, money and space. This is responsible for our decision to adopt this approach in this survey. Nevertheless, regardless of whether one is dealing with a sample or a population, as a rule of thumb, whenever a batch of data contains about 25% or more observations, the best way to examine such data is to present it in summary form by constructing appropriate tables. From these, we can then extract the important features of the data for further analysis. In this regard, we will employ the use of tables, percentages and mean and other relevant statistical data in the presentation and analysis of the data gathered. 4.1. RESPONSES TO QUESTIONNAIRE As stated earlier, active players in the financial sector, the banking industry, regulatory officials and microfinance subsector were interviewed personally and through questionnaires. The total number of people personally interviewed was 9 while those who were give questionnaires were 42. However out of the 42 questionnaires that were distributed, 40 were properly administered and returned, representing 95%. This size of respondents becomes the usable sample of the population. In the table shown below, the 42 respondents who were served with questionnaires were classified according to their sector, industry and subsector. This distribution is deliberate and the number was made in each case in an attempt to get adequate information concerning the research questions administered to the respondents.

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SUMMARY OF RESPONSES % ACTUAL TO DISTRIBUTION Commercial Bankers Financial Analysts Regulatory officials Microfinance Bankers Total EXPECTED 10 12 8 12 42 ACTUAL 10 12 6 12 40 EXPECTED 100 100 75 100 95

4.2. ANALYSIS From the fore going in chapter three, this chapter deals with the systematic presentation of the data collected through the methods described .The presentation is in tabular form using simple percentage technique to ease understanding. Question 4.1. What is your level of the evaluation of the success of the microfinance banks against the backdrop of the supervisory and regulatory framework? Table 4.1 OPTIONS No OF RESPONDENTS PERCENTAGE (a) High 21 52 (b) Low 19 48 Total 40 100 From the table above, 21 respondents with a percentage of 52 percent said the microfinance banks have been successful against the backdrop of the guiding supervisory and regulatory framework while 19 respondents with a percentage of 48 percents said it is low when view from the purview of the supervisory and regulatory framework that they operate. Question 4.2. Is the regulatory and supervisory framework in accordance with internationally accepted framework? Table 4.2 OPTIONS No OF RESPONDENTS PERCENTAGE (a) Yes 36 90 (b) No 4 10 Total 40 100 The table above shows an overwhelming 36 respondents with a percentage of 90 percent said the regulatory and supervisory framework is in accordance with international practice while

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just a mere 10 percent of the lot with a population of 4 respondents said it is not in accordance with internationally accepted framework.

Question 4.3. Has the introduction of microfinance helped poor entrepreneurs to access the needed funds? Table 4.3 OPTIONS No OF RESPONDENTS PERCENTAGE (a) Yes 28 70 (b) No 12 30 Total 40 100 From table 4.3, 70 percent of the respondents with a population of 28 respondents said yes it has helped poor entrepreneurs accessed the needed funds while 28 respondents with a percentage of 70 percents said no it has not it has helped poor entrepreneurs accessed the needed funds. Question 4.4. What is the level of the numbers of licensed microfinance banks to the population of poor entrepreneurs? OPTIONS No OF RESPONDENTS PERCENTAGE (a) High 5 12 (b) Low 35 88 Total 55 100 The table above depicts 5 respondents with a percentage of 12 percents who said the level of the numbers of licensed microfinance banks is high compared to the population of poor entrepreneurs while 88 percents corresponding to a population of 35 respondents said the level of the numbers of licensed microfinance banks is low compared to the population of poor entrepreneurs. Question 4.5. Has the introduction of microfinance banks in Nigeria been able to impact on the life of poor people? Table 4.5 OPTIONS (a) Yes No OF RESPONDENTS 22 PERCENTAGE 55

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(b) No 18 45 Total 40 100 From the table above, 22 respondents (55 percents) said the introduction of microfinance banks in Nigeria has been able to impact on the life of poor people while 18 respondents (45 percents) said the introduction of microfinance banks in Nigeria has not been able to impact on the life of poor people. Question 4.6. What is the level of the concentration of microfinance banks in the rural areas? Table 4.6 OPTIONS No OF RESPONDENTS (a) High 0 (b) Low 40 Total 40 The table above shows an interesting result. All PERCENTAGE 0 100 100 the respondents said the level of

concentration of microfinance banks in rural areas is low. Question.4.7. What is the level of the concentration of microfinance banks in urban areas Table 4.7 OPTIONS No OF RESPONDENTS PERCENTAGE (a) High 40 100 (b) Low 0 0 Total 40 100 The table above showed the same result that was obtained in Table 4.6. All the respondents said all the microfinance banks are concentrated in the rural areas. Question 4.8. Has the introduction of microfinancing been able to stop the flow of rural-urban drift? Table 4.8 OPTIONS No OF RESPONDENTS PERCENTAGE (a) Yes 11 28 (b) No 29 72 Total 40 100 Table 4.8 gives 11 respondents with a percentage of 28 percents who yes it has been able to stop the flow of rural-urban drift while 29 respondents (72 percents) said no it has not been able to stop the flow of rural-urban drift in Nigeria. Question 4.9. What is the level of poverty before and after the introduction of microfinancing banks in Nigeria? Table 4.9

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OPTIONS No OF RESPONDENTS PERCENTAGE (a) High 0 0 (b) Low 5 12 (c) Same 35 88 Total 40 100 From table 4.9, none of the respondent said it is high, 5 respondents said it is low while a large percentage of the population precisely 88 percent with a population of 35 said it is the same. Question 4.10. What is the level of the impact of government policies on the operations of microfinance banks? Table 4.10 OPTIONS No OF RESPONDENTS PERCENTAGE (a) High 31 77 (b) Low 9 23 Total 40 100 The table above shows 31 respondents with a percentage of 77 percents who said the level of the impact of government policies on the operations of microfinance banks is high while 23 percents corresponding to a population of 9 respondents said the level of the impact of government policies on the operations of microfinance banks is low. Question 4.11. What is the level of performance of microfinance banks in Nigeria compared to other developing countries? Table 4.11 OPTIONS (a) High (b) Low Total From the table above, No OF RESPONDENTS PERCENTAGE 19 48 21 52 40 100 19 respondents (48 percents) said the level of performance of

microfinance banks in Nigeria compared to other developing countries is high while 21 respondents (52 percents) said the level of performance of microfinance banks in Nigeria compared to other developing countries is low. Question 4.12. What will be the level of success of microfinance banks in the future (five years)? Table 4.12 OPTIONS (a) High (b) Low No OF RESPONDENTS 37 3 33 PERCENTAGE 92 8

Total 40 100 Table 4.12 gives 37 respondents with a percentage of 92 percents said the level of success of microfinance will be high in the future while 3 respondents (8 percents) said the level of success of microfinance will be low in the future Question.4.13. What is the level of the role of the regulatory body in achieving success in the microfinance subsector? Table 4.13 OPTIONS No OF RESPONDENTS PERCENTAGE (a) High 38 95 (b) Low 2 5 Total 40 100 In Table 4.13 38 respondents corresponding to a percentage of 95 percent said the role of regulatory body in achieving success in the microfinancing subsector is very high while 2 respondents with a percentage of 5 percent said the role of regulatory body in achieving success in the microfinancing subsector. 4.3. TEST OF HYPOTHESIS Hypothesis is an assumption. It decides a statement of probability, which is subject to empirical testing. It is an idea or suggestion put forward as a starting point for reasoning and explanation to determine the correctness by employing various sampling techniques. As noted earlier, microfinancing is an essential tool of eradicating poverty and also bringing about economic growth. For the purpose of this research work, it is desirable to test the hypothesis, which represents the ideas, beliefs and assumptions put forward in order to make valid conclusions. The findings will lead to the acceptance or rejection of the hypothesis should they satisfy the reflection of the null hypothesis (HO), the alternative (HA) will be accepted. This indicates that at least, one of the independent/input variables has an effect in the dependent variable. HYPOTHESIS ONE Null Hypothesis (H0): The introduction of microfinancing has led to increase access to funds by active poor entrepreneur. Alternative Hypothesis (Hl): The introduction of microfinancing has not led to increase access to funds by active poor entrepreneur. HYPOTHESIS TWO

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Null Hypothesis (H0): Introduction of Microfinancing has led to improved standard of living of the poor. Alternative Hypothesis (Hl): Introduction of Microfinancing has not led to improved standard of living of the poor. The null hypothesis (H0) is the assumption that there is no difference between the hypothesis and the sample result, while the alternative hypothesis (Hl) describe the explanation not covered by the null hypothesis. 4.4. STATISTICAL CALCULATION CHI-SQUARE The formula is: x2 Σ(O-e)2 = ----------e

RT x CT Expected Frequency (e) = --------------------Grand Total Where: x2 = Chi-square Σ = Summation O = Observed frequency e = Expected frequency x2 = Chi-Square RT = Row Total CT = Column Total 4.4.1. HYPOTHESIS ONE Null Hypothesis (H0): The introduction of microfinancing has led to increase access to funds by active poor entrepreneur. Alternative Hypothesis (Hl): The introduction of microfinancing has not led to increase access to funds by active poor entrepreneur. OPTIONS No OF EXPECTED FREQUENCY (e) 20 20 35 6 -6 36 36 1.8 1.8 O-e (O-e)2 (O-e)2 e RESPONDENTS (a) Yes (b) No OBSERVED(O) 26 14

Total 40 40 3.6 Note: Since it is one variable distribution we use average/mean of the responses obtained as the expected frequency 26 + 14 For one Variable Expected Frequency (e) = ---------2 40 e = -----2 e = 20 At 5% level of significant = 0.05 Degree of freedom (df) = 2-1 = 1 Table value of x2 (value from Chi-square table) = 3.84 Calculated value (value from the Chi-square calculation above) = 3.6 4.4.2. Decision Rule: The alternative hypothesis (Hl) is rejected in favour of the null hypothesis (H0) because x2 which is 3.6 is less than critical value from Chi-square table which is 3.84. Hence the null hypothesis is accepted.

4.4.3. Interpretation The rejection of alternative hypothesis Hl shows that the introduction of microfinancing has led to increase access to funds by active poor entrepreneur 4.4.4. SECOND HYPOTHESIS Null Hypothesis (H0): Introduction of Microfinancing has led to improved standard of living of the poor. Alternative Hypothesis (Hl): Introduction of Microfinancing has not led to improved standard of living of the poor. OPTIONS No OF EXPECTED FREQUENCY O-e (O-e)2 (O-e)2 e RESPONDENTS

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(a) Yes (b) No Total

OBSERVED(O) 21 19

(e) 20 20 40

1 -1

1 1

0.05 0.05 0.10

21 + 19 For one Variable Expected Frequency (e) = ---------2 40 e = -----2 e = 20 At 5% level of significant = 0.05 Degree of freedom (df) = 2-1 = 1 Table value of x2 (value from Chi-square table) = 3.84 Calculated value (value from the Chi-square calculation above) = 0.10 4.4.5. Decision Rule: The alternative hypothesis (Hl) is rejected in favour of the null hypothesis (H) because x2 which is 0.10 is less than the critical value from Chi-square table which is 3.84. Hence the null hypothesis is accepted.

4.4.6. Interpretation The rejection of alternative hypothesis Hl shows that Introduction of Microfinancing has led to improved standard of living of the poor.

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CHAPTER FIVE SUMMARY, RECOMMENDATIONS AND CONCLUSION 5.1. SUMMARY This research study did a critical evaluation of regulatory and supervisory framework of microfinance in Nigeria and it also took an in-depth look at the effect of microfinace on active but poor entrepreneurs in Nigeria. Essentially, the aim was to evaluate how much microfinance has affecte active poor entrepreneurs and it has indeed affected the common man. In this regard, emphasis was laid on the opinion of stakeholders, particularly those in the banking industry and indeed the financial sector. The overall objective was to ascertain the reliability or otherwise of microfinance and how well it has affected the active poor entrepreneur in Nigeria

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In Chapter One , we presented an overview of the study while Chapter two took an excursion into the literature. In the third chapter, we identified our methodology while in Chapter four, we analysed and presented our results. In this chapter, we shall summarise our efforts, make certain policy recommendations and essentially conclude on the basis of our numerous findings. 5.1.1. Summary Of Findings Based on the analysis of the data obtained, just a fair majority believes that the microfinance banks have been successful against the backdrop of the guiding supervisory and regulatory framework. However majority of respondents also believe that the regulatory and supervisory framework for micofinance is in accordance with international practice. From the analysis it could be inferred that majority of the respondents believe that it has helped poor entrepreneurs accessed the needed funds. Further to this, majority of the respondents also believe that the level of the numbers of licensed microfinance banks is low compared to the population of poor entrepreneurs. However a fair majority of the respondents believe that the introduction of microfinance banks in Nigeria has been able to impact on the life of poor people. All respondents believe that the level of concentration of microfinance banks in rural areas is low. The analysis of the result clearly shows that all the respondents believe that microfinance banks are not concentrated in the rural areas. This consequently led majority of the respondents to say that it has not been able to stop the flow of rural-urban drift in Nigeria. It was however surprising to note that majority of the respondents believe that the level of poverty before and after the introduction of microfinancing banks in Nigeria is the same. Majority of the respondents however concurred that that the level of the impact of government policies on the operations of microfinance banks is high. It was not surprising when fair no of the respondents said the level of performance of microfinance banks in Nigeria compared to other developing countries is low. Majority of the respondents however stake a better future for microfinance in Nigeria. 5.2 RECOMMENDATION

The following recommendations are posited for effective regulation and supervision in the microfinance subsector

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• • • • •

Less regulatory and supervisory control should be exerted on microfinance banks. Necessary infrastructure should be put in place so that the subsector, microfinance will have unhindered growth. Both the government and the microfinance banks should do awareness campaign. Even licensing of microfinance should be done so as to have an even distribution throughout the country. A microlending institution should not receive a license to take deposits until it has demonstrated that it can manage its lending profitably enough so that it can cover all its costs, including the additional financial and administrative costs of mobilizing the deposits it proposes to capture.

Prudent regulations should not be imposed on “credit-only” MFIs that merely lend their own capital, or whose only borrowing is from foreign commercial or noncommercial sources or from prudentially regulated local commercial banks.

• • •

As much as possible, prudential regulation should be focused o the type of transaction being conducted rather than the type of institution conducting it. Minimum capital needs to be set high enough so that the supervisory authority is not overwhelmed by more new institutions that it can supervise effectively Before regulators decide on the timing and design of prudential regulation, they should obtain a competent financial and institutional analysis of the leading MFIs, at least if existing MFIs are the main candidates for a new licensing widow being considered.

5.3. CONCLUSION The state of regulation and supervision may appear to be in terrible disarray, but given the slow evolution of the microfinance industry in general, policy is where we might expect since in most countries less than 10 percent of low income households have access to basic savings and credit services. Remember, regulation follows, it doesn’t lead. Until the relevant structures are in place to meet the demand for financial services for the bulk of the population, investors must content themselves with those precious few market leaders that understand the business of micro finance and how to protect both their investment and its customers’ confidence.

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Summing up, we would like to conclude this necessarily rapid excursus on microfinance in Africa and indeed Nigeria with a common sense statement: the perspectives of the industry are in the hands of the MFIs themselves and the future will be shaped according to the way the practitioners will be capable to face the above problems & challenges. Microfinance is a right tool to unlock the potentials of the Nigerian/African poor people; however it should be less an instrument of economic policy and more and more an industry relying in its own forces. Africa has a well-rooted tradition in tiny loans matters and the practitioners have a lot to capitalise from the financial practices and accordingly they are in a good position to design MFI best practice.

REFERENCES Alexander, Gwen, 2001 “An Empirical Analysis of Microfinance: Who are the Clients?” Paper presented at 2001Northeastern Universities Development Consortium Conference. Armendáriz de Aghion, Morduch, Beatriz, and Jonathan, 2005, The Economics of Microfinance Cambridge, MA: The MIT Press. Barnes, Carolyn, 2001 “Microfinance Program Clients and Impact: An Assessment of Zambuko Trust, Zimbabwe.” Washington, D.C.: AIMS. Barnes, Carolyn, Gaile, Gary and Kimbombo, Richard, 2001 “Impact of Three Microfinance Programs in Uganda.” Washington, D.C.: AIMS. Brüntrup, Michael, Alauddin, S.M., Huda, Afroz, and Rahman, Mizanur, 1997 “Impact Assessment of ASA.” Dhaka, Bangladesh: The Association for Social Advancement,

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Chen, Martha A., and Snodgrass, Donald, 2001 “Managing Resources, Activities, and Risk in Urban India: The Impact of SEWA Bank.” Washington, D.C.: AIMS. Cheston, Susy, and Reed, Larry, 1999 “Measuring Transformation: Assessing and Improving the Impact of Microcredit.” Washington, D.C.: Microcredit Summit Campaign. Coleman, Brett, 1999 “The Impact of Group Lending in Northeast Thailand.” Journal of Development Economics 60, 105-42. Coleman, Brett, 2002 “Microfinance in Northeast Thailand: Who Benefits and How Much?” Manila: Asian Development Bank. Copestake, James, 2002 “Inequality and the Polarizing Impact of Microcredit: Evidence from Zambia’s Copperbelt.” Journal of International Development. Copestake, James, Bhalotra, Sonia and Johnson, Susan, 2001 “Assessing the impact of microcredit: A Zambian case study.” Journal of Development Studies 37 No. 4 : 81-100. Copestake, J., Dawson, P, Fanning, J-P., McKay, A, and Wright-Revolledo, K., 2005 “Monitoring Diversity of Poverty Outreachand Impact of Microfinance: A Comparison of Methods Using Data From Peru.” Development Policy Review 23 No. 6 : 703-723. Copestake, James, Greely, Martin, Johnson, Sue, Kabeer, Naila and Simanowitz, Anton, 2005, Money with a Mission Volume 1: Microfinance and Poverty Reduction. Warwickshire, UK: ITDG Publishing. Daley-Harris, Sam, 2003 “State of the Microcredit Summit Campaign Report 2003.” Washington, D.C.: Microcredit Summit Campaign. Daley-Harris, Sam, 2004 “State of the Microcredit Summit Campaign Report 2004.” Washington, D.C.: Microcredit Summit Campaign. Dunn, Elizabeth 2002 “Research Strategy for the AIMS Core Impact Assessments.” Washington, D.C.: AIMS. Dunn, Elizabeth 2005 “Impacts of Microcredit on Clients in Bosnia and Herzegovina.” Foundation for Sustainable Development of the Federation of Bosnia and Herzegvonia and Republika Srpska Development and Employment Foundation. Dunn, Elizabeth, and Arbuckle, J Gordan, Jr., 2001 “The Impacts of Microcredit: A Case Study from Peru.” Washington, D.C.: AIMS.

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Ebentreich, A., April 2005 “Micro.nance Regulation in Peru: Current State, Lessons Learned and Prospects for the Future” Essays on Regulation and Supervision Series., Published by the Consultative Group to Assist the Poor (CGAP) and The IRIS Center at the University of Mary land. EDA Rural Systems, 2004 “The Maturing of Indian Microfinance.” New Delhi. Edgcomb, Elaine, and Garber, Carter, 1998 “Practitioner-Led Impact Assessment: A Test in Honduras.” Washington, D.C.: AIMS. Faisel, Arjumand, 2004 “Impact Assessment of Kashf’s Microfinance and Karvaan Enterprise Development Programme.” Islamabad: Arjumand and Associates. Gibbons, David, ed., 2005 “Moris Rasik: An Interim Impact Assessment.” Manuscript. Goetz, Anne Marie, and Gupta, Rina Sen G, 1996 “Who Takes the Credit? Gender, Power, and Control Over Loan Use in Loan Programs in Rural Bangladesh.” World Development 24 No.1: 45-63. Hashemi, Syed, 1996 “CGAP Focus Note 21: Linking Microfinance and Safety Net Programs to Include the Poorest: The Case of IGVGD in Bangladesh.” Washington, D.C.: Consultative Group to Assist the Poor. Hashemi, Syed, R. Schuler, Sidney S., and Riley, Ann P., 1996 “Rural Credit Programs and Women's Empowerment in Bangladesh.” World Development 24 No.4: 635-653. Hishigsuren, Gaamaa, Beard, Brian, Opportunity International, Opoku, Opoku and Sinapi Aba Trust, 2004 “Client Impact Monitoring Findings from Sinapi Aba Trust, Ghana.” Oak Brook, IL: Opportunity International Hossain, Mahabub, 1988 “Credit for the Alleviation of Rural Poverty: The Grameen Bank in Bangladesh.” Washington, D.C.: IFPRI, Research Report No. 6. Hossain, Mahabub and Diaz,Catalina P., 1997 “Reaching the Poor with Effective Microcredit:. Evaluation of a Grameen Bank Replication in the Philippines.” Los Baños, Philippines: International Rice Research Institute. Hulme, David, 1997 Northeastern Universities Development Consortium Conference “Impact Assessment Methodologies for Microfinance: A Review.” Washington, D.C.: AIMS. Husain, A. M. Muazzam, ed., 1998 “Poverty Alleviation and Empowerment: The Second Impact Assessment Study of BRAC’s Rural Development Programme.” Dhaka, Bangladesh:

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BRAC. John Paul: Microfinance: Fighting world's poverty through investment Kaboski, Joseph and Townsend, Robert, 2005 “Policies and Impact: An Analysis of Village-Level Microfinance Institutions.” Journal of the European Economic Association 3 No.1: 1-50. Karlan, Dean, 2001 “Microfinance Impact Assessments: The Perils of Using New Members as a Control Group.” Journal of Microfinance 3 No. 2 : 76-85. Khandker, Shahidur, 1998. Fighting Poverty with Microcredit. Dhaka, Bangladesh: University Press Limited. Khandker, Shahidur, 2005 “Micro-Finance and Poverty: Evidence Using Panel Data from Bangladesh.” World Bank Economic Review.. Koffi Anan: Role of Microcredit in the Eradication of Poverty Littlefield, Elizabeth, Morduch, Jonathan, and Hashemi, Syed 2003 “CGAP Focus Note 24: Is Microfinance an Effective Strategy to Reach the Millennium Development Goals?” Washington, D.C.: Consultative Group to Assist the Poor. Manroth, Astrid 2001 “How Effective is Microfinance in CEEC and the NIS? A Discussion of Impact Analysis to Date.” Washington, D.C.: AIMS Microcredit Summit Campaign, 2000 “State of the Microcredit Summit Campaign Report 2000.” Washington, D.C.: Microcredit Summit Campaign. MkNelly, Barbara and Dunford, Christopher, 1998 “Impact of Credit with Education on Mothers and Their Young Children’s Nutrition: Lower Pra Rural Bank Credit with Education Program in Ghana.” Davis, California: Freedom from Hunger. MkNelly, Barbara and Dunford, Christopher, 1999 “Impact of Credit with Education on Mothers and Their Young Children’s Nutrition: CRECER Credit with Education Program in Bolivia.” Davis, California: Freedom from Hunger. MkNelly, Barbara, and Karen Lippold, 1998 “Practitioner-Led Impact Assessment: A Test in Mali.” Washington, D.C.: AIMS. Morduch, Jonathan, 1998 “Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh.” Princeton University working paper. Morduch, Jonathan and Haley, Barbara, “Analysis of the Effects of Microfinance on Poverty Reduction.” NYU working paper, 20

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Mustafa, Shams et al., 1996 “Beacon of Hope an impact assessment study of BRAC’s Rural Development Programme.” Dhaka, Bangladesh: BRAC. Neponen, Helzi, 2003 “ASA-GV Microfinance Impact Report 2003.” Trihcirappalli, India: The Activists for Social Alternatives. Peck Christen, R., Lyman, T. and Rosenberg, R. 2002 “Guiding Principles on Regulation and Supervision of Micro.nance” CGAP Microfinance Consensus Guidelines. March. Pitt, Mark, 1999 “Reply to Jonathan Morduch's "Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh.” Working Paper, Brown University. Pitt, Mark and Khandker, Shahidur , 1998 “The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?” Journal of Political Economy 106 No. 5: 958-996. Pitt, Mark, Khandker Shahidur, Chowdhury, Omar Haider and Millimet, Daniel, 2003 “Credit Programs for the Poor and the Health Status of Children in Rural Bangladesh.” International Economic Review 44 No. 1: 87-118. Rahman, Rushidan Islam, 1986 “Impact of Grameen Bank on the Situation of Poor Rural Women.” In Rahman et al., eds.: Early Impact of Grameen: A Multi-Dimensional Analysis: Outcome of a BIDS Research Survey. Dhaka, Bangladesh: Grameen Trust. Rosenberg, R., Lyman, T., Ledgerwood, J. May 2003 “Regulation and Supervision of Micro.nance” CGAP Donor Brief No. 12. Steele, Fiona, Amin, Sajeda, and Naved, Ruchira T. 1998 “The Impact of an Integrated Microcredit Program on Women’s Empowerment and Fertility Behavior in Rural Bangladesh.”Population Council. Todd, Helen, 1996.Women at the Center. Dhaka, Bangladesh: University Press Limited. Todd, Helen, 2000 “Poverty Reduced Through Microfinance: The Impact of ASHI in the Philippines.” Washington, D.C.: AIMS. Todd, Helen, 2001 “Paths out of Poverty: The Impact of SHARE Microfin Limited in Andhra Pradesh, India.” Unpublished Imp-Act report. Tsilikounas, Caroline, “ICMC and Project Enterprise Bosnia and Herzegovina.” Washington,

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APPENDIX

QUESTIONAIRE

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This questionnaire is designed to evaluate the regulatory and supervisory framework of microfinance in Nigeria. It is being circulated for the purpose of collecting opinions and information, which will be used in a research project being, carried out in part fulfillment of the conditions for the award of B.Sc. degree in the department of ------------------- of Olabisi Onabanjo University Ago-Iwoye, Ogun State. You are humbly required to answer the questions asked below as truthfully as possible. Your responses to the questions will be treated as confidential and shall only be used for the purpose stated above. PERSONAL DATA NAME: …………………………………………………………………. OCCUPATION: ………………………………………………………… PLACE OF WORK: …………………………………………………… POSITION HELD: ……………………………………………………. YEARS OF EXPERIENCE: ………………………………………… RESEARCH INFORMATION

1. What is your level of the evaluation of the success of the microfinance banks against the backdrop of the supervisory and regulatory framework? 2. Is the regulatory and supervisory framework in accordance with internationally accepted framework? 3. Has the introduction of microfinance helped poor entrepreneurs to access the needed funds? 4. What is the level of licensed microfinance banks to the population of poor entrepreneurs? 5. Has the introduction of microfinance banks in Nigeria been able to impact on the life of poor people? 6. What is the level of the concentration of microfinance banks in the rural areas? 7. What is the level of the concentration of microfinance banks in urban areas 8. Has the introduction of microfinancing been able to stop the flow of rural-urban drift? 9. What is the level of poverty before and after the introduction of microfinancing banks in Nigeria? 10. What is the level of the impact of government policies on the operations of microfinance banks?

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11. What is the level of performance of microfinance banks in Nigeria compared to other developing countries? 12. What will be the level of success of microfinance banks in the future (five years)? 13. What is the level of the role of the regulatory body in achieving success in the microfinance subsector?

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