The Evolution Of Microfinance Institutions In Nigeria Economics Essay

The Evolution Of little pay Institutions In Nigeria Economics EssayWith the vast shortage of funds in the affirming industry, failure of the established commwholey banks and an other(a)(prenominal) establishment programs in finance smallenterprises in Nigeria, gave rise to the creative thinker of transforming existing microfinance NGOs into microfinance banks. In the past years, microfinance institutions were informal in nature. They were characterized by polar mechanism such(prenominal) as ability of the members of these microfinance institutions to have credit support from other members which could be utilise in expanding their businesses mainly in the agricultural sector.For close to three decades it has been a challenge for governments to provide micro-credit to the measly batch who are operating micro and medium enterprises. It is known that in every country nearly the world, over 90% of the businesses are micro and small businesses (Jenkins, 2009).In Nigeria, the re used to be people who go round taking money from other people in their job places. These kinds of people shell out analogous village banks, where they accept the money as deposit and save it for the people. This kind of agreement amid the inhabitants of the respected area and the people going round to invite their money establishes a trust in the midst of them. Although it differs between community to community, the whole idea is the same which is deposit taking and saving, only if what remains provoke here is that in some cases, these people that agree to save, form free radical amongst themselves, and one or twain people among them borrow the money after it has been accumulated. They usually gather the money for six to twelve months. The members who collect the money usually use it to invest in their businesses but they also know that they are ask to return the money back to the depositors. This way other members will also have a take chances to borrow. This is one o f the interesting cases as it gives us an insight on how the fiscal sector operates in Nigerian villages and towns.This process of formation of own borrowing groups was not only common in Nigeria, but it was experienced around the world. An empirical evidence in Ghana (Owusu and Tetteh, 1982), Zimbabwe (Bratton, 1986) and Dominican Re creation (Desai, 1983) shows that local conditions have influenced the precedent size of membership and that below or supra the ideal size of membership correlates negatively with gumminess and joint accountability.Anyanwu (2004) conducted a battlefield on micro-finance institutions in Nigeria, their insurance indemnity practice and potential. In this study, he analyse at that time, the ten major micro-finance institutions in Nigeria with respect to their location. These micro-finance institutions were Farmers ontogenesis Union (FADU), in Ibadan Community Women and growing (COWAD), in Ibadan Country Women Association of Nigeria (COWAN), in Akure Lift Above Poverty (LPO), in Benin Justice ontogenesis and Peace Commission (JDPC), in Ijebu-Ode Women Development Initiative (WDI), in Kano Development Education Centre (DEC ENUGU), in Enugu Development Exchange Centre (DEC BAUCHI), in Bauchi Outreach Foundation (OF), in Lagos and Nsukka Area Leaders of Thought fall in Self-Help Organization (NLTNUSHO), in Nsukka.The top of the analysis carried out by Anyanwu in 2004 showed that most of the beneficiaries of the go provided by the micro-finance institutions in Nigeria were women. About 97.4 per cent of the clients in the sample were women. Four of the institutions exclusively provide services to women, go five had over 90 per cent of their clients as females (Anyanwu, 2004 pp.5). This shows clearly how women have been the most important can for the micro-finance institutions which is viewed as normal because of the fact that women in Nigeria are alship canal believed to be marginalized in terms of socio-economic matters. The s tudy was one of the triggering factors that led to the worldly concern sector seeing the fact that almost 60 percent of the Nigerian populations which reside in the unsophisticated or remote areas do not have access to micro-credit. This gave the public sector a thinking of coming out with alternative solution to this problem. The following t sufficients 1 to 4 summarize the ten major micro-finance institutions in Nigeria and their activities before 2005.As the analysis in Table 1 to 4 shows, in average all these microfinance institutions source their funds from every government grants or grants from other individual or international donors. This kind of source tells us that the microfinance institutions in Nigeria were dependent on these grants which imbed 51.2 percent of their whole source of funds. This is a very big modus operandi in respect of sustainability of the good microfinance sector that they take to heart to the deplorable people. Microfinance institutions in Nig eria should be able to have continual supply of micro-credit to the Nigerian poor and abandoned population on their own without receiving whatsoever exogenous grants or donations. Having that huge standard of remote support as 51.2 percent grants or donations, gives us a hint that a more than qualified and self-sustainable institution is compulsory in order to serve the poor on sustainable basis. So overall, self-sustainable institutions are fateed to be able to tackle the indigence alleviation question addressed by the government through the micro-finance sector in Nigeria.With these downturns and global concern about poverty, micro-finance became a very important interchange and top priority of even international development institutions. Huge funds were set aside by these institutions to combat poverty. These institutions are membered by the world countries which made it powerful enough to deal with questions of poverty and pass on consensus solution amongst themselves. With the clear international concern about the effect of poverty which the world income dispersal with a Gini coefficient of around 0.85 makes it an excellent indicator of unsuccessful nature of the aggregate world economy these days. This result shows an unjust income distribution, which roughly 15 percent of worlds population receive 80 percent of the aggregate income generated, whereas almost half of the worlds population to fall under massive conditions of poverty (Birtek, 2009).Microcredit is a critical anti-poverty tool and a wise investment in human great(p). Now that the nations of the world have committed themselves to reduce the number of people living on less than $1 a day by half by the year 2015, we must look even more seriously at the pivotal role that sustainable microfinance can play and is playing in reaching this Millennium Development Goal (Annan, 2006).Year 2005 was accept by the United Nations as Year of Microfinance (Jenkins, 2009). United Nations is one of the sole organizations which foster the continual population of micro financing in both the developed and developing countries. The millennium development goals addressed the trend of alleviating poverty not only by giving exotic aid to the less developed and under-developed countries, but also by supporting the poor to stand on their own.With all these developments that took place since early mid-nineties, like the other governments, the Nigerian government also reacted. The primordial patois of Nigeria (CBN) responded in 2005 by establishing laws which will promote the establishments of better monetary institutions to serve the Nigerian poor population. The microfinance constitution, regulatory and supervisory mannequin for Nigeria entered into force in 2005. This law obligates microfinance institutions to be regulated in Nigeria. With this policy, regulatory and supervisory manakin, the government addressed different issues needed to strengthen microfinance institutions in Nigeria. This law inevitable the private sector to acquire license from the Central Bank of Nigeria. The license was open to start-up a micro-finance banks or an already established microfinance institutions that wanted to convert into a micro-finance bank. The policy aimed at having adequate regulation and supervision over the microfinance sector in Nigeria.According to Jenkins (2009), one of the ways of incorporating microfinance into the financial outline can be achieved through the change of microfinance NGOs into a formal regulated financial institutions. With this, adequate credit allocations to the poor could be achieved. As (white and Campion, 2002) termed it to be up scaling of microfinance institutions. Furthermore, Jenkins (2009) stated that since 1990s a large number of microfinance institutions have transformed into a regulated microfinance bank such as BancoSol, K-Rep and ACLE-DA Bank. These microfinance NGOs were all unregulated, but they later transformed into a fully regulated institution under their various(prenominal) country laws.3.2 Regulation of Micro Finance Banks in NigeriaThe microfinance policy, regulatory and supervisory framework in 2005 was the initial formal policy established for microfinance institutions that are becoming microfinance banks in Nigeria. some months later, another formal textbook was released on regulatory and supervisory frameworks for micro-finance banks (MFBs) in Nigeria. These provisos were established in line with the Millennium Development Goals (MDGs) as every member of the United Nations should respect. Analysis would be made on the policies establishing the micro-finance banks in Nigeria. This policy was the proceeding of the National Conference on Microfinance organized between the Ministry of Finance (MoF) and Central Bank of Nigeria (CBN) in 2000. As a result, in 2001, the Central Bank of Nigeria conducted a baseline study of the microfinance institutions in Nigeria. Some of the aims of the study among others as indicated by Okojie, Monye-Emina, Eghafona, Osaghae Ehiakhanem (2009, pp22-23) wereIdentifying the role of MFIs in financial intermediation in Nigeria,Determining the aim of financial intermediation of MFIs with a view to developing a regulatory and supervisory framework to bring and enhance its accomplishments in Nigeria, andRecommending policies that would facilitate the linkage of informal, semi-formal, and formal financial services providers to micro- and small-scale rural entrepreneurs.Also the study shows that as of third quarter of 2001, about 60 percents of technical banks had aggregate nest egg of about N99.4 million about 662,666 USD and outstanding credit of N649.6 million about 4,330,666 USD, indicating huge business proceeding in the sector. This clearly indicates the large size of their equity base. (Okojie, Monye-Emina, Eghafona, Osaghae and Ehiakhanem, 2009).With the above indications addressed by the study which explained the need for a proper regulatory framework, the Central Bank of Nigeria (CBN) responded as indicated by (Anyanwu, 2004) as followsDevelopment of a regulatory and supervisory framework for the operations of MFIs in NigeriaEstablishment of an apex regulatory institution aerated with the responsibility of building capacity through the training of directors and managers of MFIs to change them to develop an efficient information system for identifying and managing risks, and satisfying relevant data and information requirements of regulators and stakeholders,Improvement of infrastructural facilities so as to reduce the transactional approachs associated with the regime of microcredit in the country.These areas above indicated by the Central Bank of Nigeria (CBN) brought about the entire regulatory and supervisory framework for microfinance banks (MFBs) in Nigeria. Below will be analysis on the kinds of regulatory and supervisory issues are addressed.3.2.1 What determines the Central Bank of Nigeria (CBN)s Power?The regulatory and supervisory guidelines and rules are issued by the CBN in the exercise of powers given by the provisions of incision 28 subsection (1) (b) of the CBN Act 24 of 1991 (as amended) and in pursuance of the provisions of section 56-60A of the Banks and Other Financial Institution Act (BOFIA) 25 of 1991 (as amended). These guidelines were to organize and establish micro-finance banks (MFBs) that will be able to utilize deposit acceptance and savings from the public and engage in microfinance activities with their clients (CBN, 2005). This power made CBN above any other government department or parastatal in decidng regulatory and supervisory rules for these microfinance banks in Nigeria.3.2.2 What Defines a Micro Finance Bank by law?As indicated by the policy law, a microfinance bank unless otherwise stated shall be taken to mean any kind of company licensed to canalize out the business of providing microfinance services which includes such things as savi ngs, adds, domestic funds transfer and other financial services that economically active poor, micro enterprises and small and medium enterprises need to station out and march on their businesses as indicated by these rules and guidelines (CBN, 2005).3.2.3 Who should be the micro-finance clients ?It is clealy indicated in the policy establishing the microfinance banks in Nigeria that who their clients should be. The policy clealy states that the main purpose is to serve the economically active poor which will be a way of empoering them to have more choices. The policy indicated that for a person to benefit from the microfinance banks, certain characteristics should be met (CBN, 2005), which includes Having a monthly income of not more than in 2 ways the monthly per capital income of Nigeria or minimum wage, whichever is higherHaving a total productive assets inclusive of those arising from loans but excluding the cost of land of not more than five hundred thousand Naira N500, 0 00.00 only, about 3,333.33 USD.Is not a regular employee of any organizationAge between 18 and 60 years.Unless if someone fall in that category, or else microfinance loan would not be granted.3.2.4 What defines a Poor Person?A poor person as explained by the policy is one who has meager means sustenance or livelihood, and who earns a total income in a year that is less than the minimum taxable income set by the Nigerian government (CBN, 2005).3.2.5 Which businesses are termed as micro-enterprises?It is indicated in the policy that micro enterprises are those firms that require micro credit or loans to operate and shape up their businesses. These kinds of businesses are characterized of mainly sole proprietorships and are family basic in nature. Employments are provided to few which are for the most part immediate family members. These micro entrepreneurs work informally and usually are enmeshed in activities which are primary(a) in nature like local craft and subsistence agricul ture.3.2.6 What defines Collateral and what is the Loan Duration?Unlike the commercial bank lending where collateral is a requirement, micro loans are given to the micro entrepreneurs such as peasants, farmers, artisans, fishermen, women, senior citizens and non-salaried workers in the formal and informal sector based on their character and the cash fertilize of the businesses and their household (CBN, 2005).Collateral is not needed to secure any micro-credit loan due to the fact that the idea is to help the poor, low income earners and micro entrepreneurs boost their businesses as indicated by the policy (CBN, 2005).The micro-loan duration should not pass away 180 days (6 months), but in some exceptional cases where a loan is giving to micro-enterprises engaged in agricultural activities with longer gestation period, maximum of 12 months (one year) would be granted. The loan may be repaid daily, weekly, monthly or bi-monthly basis depending on the amortization schedule in the co ntract (CBN, 2005).3.2.7 Ownership and manifest of Microfinance Banks (MFBs) In NigeriaThe policy framework explained that micro-finance banks can be established by a single person, group of individuals, community development associations, and domestic private and foreign investors. The policy further explained that significant diversification in ownership would continue to be encouraged in order to enhance good corporate plaque of licensed MFBs. Also those universal banks that intend to create any category of MFB as their subsidiaries shall be required to satisfy all the requirements set by the law.Talking about granting license, it requires that any investor thats willing to operate a MFB in Nigeria shall put it in writing to the governor of Central Bank of Nigeria (CBN).It indicated that there shall be two categories of licenses. These categories as indicated by the Micro-Finance policy wereThose Micro Finance Banks (MFBs) licensed to operate as a unit bank otherwise known as Community banks shall operate and open branches within a condition local government area LGA. N20 million twenty million naira roughly 133,333.333 USD or such amount shall be the minimum capital requirement as may be prescribed by the CBN from time to time.And Those Micro Finance Banks (MFBs) licensed to operate in a State and open branches within a condition state or Federal capital territory. N1.0 billion (one billion naira) only roughly 6,666,666.667 USD or such an amount shall be the minimum capital requirement as may be prescribed by the CBN from time to time (CBN 2005, p10).With these features mentioned above, one can see the differences between a universal bank and a micro-finance bank regulation in Nigeria. A clear demarcation can be seen in the amount of capital requirement. For a universal bank, its 25 Billion Naira about 166,666,666.7 USD, which is 25 times the minimum capital requirement for a microfinance bank licensed to operate in a state. This is a huge good luck because microfinance banks in Nigeria are only restricted to given impute to the class of people that are either low income earners, aged or senior citizens. These only are allowed to receive a micro-credit loan.3.3 Permissible acts for Microfinance Banks in NigeriaThere are number of permissible acts indicated by the policy establishing microfinance banks in Nigeria. As indicated by the framework policy, a microfinance bank shall only be allowed to provide the following services to its clients (CBN, 2005 pp8-9)Acceptance of various types of deposits including savings, time, object lens and demand from individuals, groups and associations except public sector deposits government,provision of credit to its customers, including formal and informal self-help groups, individuals and associationspromotion and supervise of loan usage among its customers by providing auxiliary capacity building in areas such as commemorate keeping and small business managementissuance of redeemable de bentures to interested parties to raise funds from members of the public with approval of the CBNcollection of money or proceeds of banking instruments on behalf of its customers through correspondent banksprovision of wages services such as salary, gratuity, pension for the various tiers of governmentprovision of loan disbursement services for the delivery of credit programme of government, agencies, groups and individual for poverty alleviation on non-recourse basisprovision of ancillary banking services to their customers such as domestic remittance of funds and safe custodymaintenance and operation of various types of account with other banks in Nigeriainvestment of surplus funds of the MFB in suitable instruments including placing such funds with correspondent banks and in Treasury Billspay and receive interests as may be agree upon between them and their clients in accordance with existing guidelinesoperation of micro leasing facilities, micro finance related remove purchas e and arrangement of consortium lending and supervise credit schemes to ensure access of micro finance customers to inputs for their economic activitiesreceiving of refinancing or other funds from CBN and other sources, private or public, on terms inversely acceptable to both the provider of the funds and the recipient MFBsprovision of micro finance related guarantees for their customers to enable them have greater access to credit and other resourcesbuying, selling and supplying industrial and agricultural inputs, parentage , machinery and industrial raw materials to poor persons on credit and to act as agent for any association for the sale of such goods or livestockinvestment in shares or equity of any body-corporate, the objective of which is to provide microfinance services to poor personsencouragement of investment in cottage industries and income generating projects for poor persons as may be prescribed by the CBNprovision of services and facilities to customers to hedge var ious risks relating to microfinance activitiesprovision of professional advice to poor persons regarding investments in small businesses rendering managerial, marketing, technical and administrative advice to customers and assisting them in obtaining services in such fieldmobilize and provide financial and technical assistance and training to micro- enterprisesprovision of loans to microfinance clients for home improvement and consumer credits andperformance of non-banking functions that relate to micro finance related business development services such as co-operatives and group formation activities, rural industrialization and other support services needed by micro enterprises.Unless otherwise stated by the CBN, no microfinance bank is allowed to spill over these permissible acts, in other words only these services can be performed and provided by microfinance banks in Nigeria. These permissible acts are take to review by the CBN from time to time.3.4 Prohibitive acts for Microfi nance Banks in NigeriaAs indicated by the policy, microfinance banks are not allowed to carry activities (CBN, 2005 pp9-10) such as acceptance of public sector government deposit except for the permissible activities like provision of payment services such as salary, gratuity, pension for the various tiers of government and provision of loan disbursement services for the delivery of credit programme of government, agencies, groups and individual for poverty alleviation on non-recourse basisforeign exchange transactions,international commercial papers,international corporate finance,international electronic funds transfer,cheque elucidation activities,dealing in Land for speculative purposes,real estate except for its use as voice accommodation,allow any facility for speculative purposes andenter into leasing, renting, and sale/purchase of any kind with its directors, officers, employees or persons who either individually or in concert with their family members and beneficiaries ow n five percent 5% or more of the equity of the MFB, without the prior approval in writing of the Central Bank of Nigeria