THE IMPACT OF MICROFINANCE BANKS IN RURAL DEVELOPMENT IN NIGERIA

CHAPTER ONE

1.0       INTRODUCTION

Micro finance has evolved as an economic development approach intended to benefit low income women and men. The term refers to the provision of financial services to low – income earners, including the self – employed. Financial services generally include savings and credit; however, some microfinance organizations also provide insurance and payment service. In addition to financial intermediation, many MFIs provide social intermediation services such as group formation, development of self confidence, and training in financial literacy and management capabilities among members of a group. Thus the definition of microfinance often includes both financial intermediation and social intermediation. Microfinance is not simply banking, it is a development tool.

Micro finance activities usually involve:

• Small loans, typically for working capital.
• Informal appraisal of borrowers and investments.
• Collateral substitutes, such as group guarantees or compulsory savings.
• Access to repeat and longer loans, based on repayment performance
• Streamlined loan disbursement and monitoring
• Secure savings products

Although some MFIs provide enterprise development services, such as skills training and health care, these are not generally included in the definition of micro finance.

MFIs can be non governmental organizations (NGOs) savings and loan cooperation’s, credit unions, government banks, commercial banks, or non bank financial institutions. Micro finance clients are typically self employed low income entrepreneurs in both urban and rural areas. Clients are often traders, street vendors, small farmers, service providers (hairdressers, rickshaw drivers) and artisans and small procedures, such as blacksmiths and seamstress. Usually their activities provide a stable source of income (often from more than one activity). Although they are poor, they are generally not considered to be the poorest of the poor”.

Money lenders and relating savings and credit associations are informal microfinance providers and important sources of financial intermediation.

1.1       BACKGROUND OF THE STUDY

Microfinance in the 1980s as a response to doubts and research findings about state delivery of subsidized credit to poor farmers. In the 1970s government agencies were the predominant methods of providing productive credit to those with no previous access to credit facilities people who had lien forced to pay usurious interest rates or were subject to ransacking behaviour. Governments and international donors assumed that the poor required cheap credit and saw this as a way of promoting agricultural production by small landholders. In addition to providing subsidized agricultural credit, donors set up credit unions inspired by the Raiffeisen model developed in Germany in 1864. The focus of these cooperative financial institutions was mostly on savings mobilization in rural areas in a attempt to “teach poor farmers how to save”.

Beginning in the mid 1980s the subsidized targeted credit model supported by many donors was the object of steady criticism, because most programs accumulated to continue operating. It became more and more evident that market based solutions were required. This led to new approach that considered microfinance as an integral part of the overall financial system. Emphasis shifted from the rapid disbursement of subsidized loans to target populations toward the building up of local, sustainable institutions to serve the poor.

At the same time, local NGOs began to look for a more long – term approach than the unsustainable income generation approaches to community development.

In Asia Dr. Mohammed Yunus of Sangladsh led the way with a pilot group lending scheme for kindles people. This later became the Grameen Bank, which now serves more than 24 million clients (94 percent of them women) and is a model for many countries. In Latin America ACCION international supported the development of solidarity group lending to urban vendors, and foundation Carvajal developed a successful credit and training system for individual micro entrepreneurs. 

Changes were also occurring in the formal financial sector. Bank Rakyat Indonesia, a owned, rural bank, moved away from providing subsidized credit and took an institutional approach that operated on market principles. In particular, Bank Rakyat Indonesia developed a transparent set of incentives for its borrowers (small farmers) and staff, rewarding on – time loan repayment and relying on voluntary savings mobilization as a sense of funds.

Since the 1980s the field of microfinance has grown substantially. Donors actually support and encourage micro – finance activities substantial out reach and financial services only, whereas as the 1980s and mush of the 1980s were characterized by an integrated package of credit and training which required subsides. Most recently micro finance NGOs. (Including PRODEM / Bancosol in Boliva, k – Rep in Kenya, and ADEKMI/Banco ADENI in the Dominican Republic) have begin transforming into formal financial institutions that recognize the need to provide savings services to their clients and to access market funding services, rather than rely on donor funds. This recognition of the current “Financial systems” approaches to microfinance. This approach is characterized by the following beliefs: 

1. subsidized credit undermines development
2. Poor people can play interest rates high enough to cover transaction costs and the consequences of the imperfect information markets in which lenders operate.
3. The goal of sustainability (cost recovery and eventually profit) is the key not only to institutional permanence in lending. But also to making the lending institution more focused and efficient.
4. Because loan sizes to poor are small, MFIs must achieve sufficient scale if they are to become sustainable.
5. Measurable enterprise growth, as well as impacts on poverty, cannot be demonstrated easily or accurately outreach and repayment rates can be proxies for impact. One of the main assumptions in the above view is that many poor people activity want productive credit and that they can absorb and use it. But as the field of micro finance has evolved, research has increasingly found that in many situation poor people want secure savings facilities and consumption loans just as much as productive credit and in some cases instead of productive credit. MFIs are beginning to respond to these demands by proving voluntary savings services and other types of loans. 

1.2       STATEMENT OF THE PROBLEM

The major problem necessitating the study operated from the Central Bank of Nigeria’s laws, regulation, supervision and central placed over the activities of micro finance banks are:

1. These relive the micro finance and every micro finance bank is excepted with respect to their proper books of account and it must be submitted to the National Board not later than 28 days.     
2. Another problem can be seen its books and affairs because it is a fully fledged banks, it books and affairs are subject to continuous examinations by Central Bank working through natural board for micro finance  banks.
3. Equally, not later than for months after end of its financial year, each micro finance bank must submit to the National Board and exhibit prominently to the view of all members of the micro finance banks balance sheet and profit and loss account.

1.3       OBJECTIVE OF STUDY

The objective of this study is to critically examine the impact of micro – finance banks in rural development in Nigeria, in order to pose the strengthen of the micro finance bank capital base, increase their branch network both locally and offshore.

The study further gave the micro finance banks to invest in state of the art information technology and working capital i.e (having adequate working and sufficient liquidity to meet its immediate and foreseeable obligation and funding requirement).  

1.4       STATEMENT OF HYPOTHESIS

Hypothesis I                                                                                           

Ho:      There is no relationship between microfinance Banks service and the rural development. 

Hi:       There is relationship between microfinance Banks service and the rural development. 

Hypothesis II

Ho:      Microfinance bank does not enhance the development of the rural areas.    

Hi:       Microfinance bank enhance the development of the rural areas.

Hypothesis III

Ho:      Microfinance banking does not enhance the development of banking habit of rural areas.

Hi:       Microfinance banking enhances the development of banking habit of rural areas.

1.5       SCOPE OF THE STUDY

This research is centered on the impact of microfinance banks in rural development in Nigeria. Osun state polytechnic microfinance banks is used as a case study for the purpose of the research work. 

1.6       LIMITATION OF THE STUDY

In the course of this research work the researcher encounter a lot of problem, which have all contributed enormously to the quality of the information that found and used in the study.

The following limitation are considered as the major constraints to this research work i.e non availability of sufficient past work on the study particularly textbook on the impact of Microfinance Bank in rural Development in Nigeria. The availability of such past work will contribute to the quality and quantity of the information that will be deriving to work on the subject.

Finally, time and financial constraints also hindered the research covering more number of micro-finance banks in Nigeria 

1.7       SIGNIFICANCE OF THE STUDY

The study has revealed the important and the impact of microfinance banks on the rural areas. Most especially the contribution of Osun state polytechnic microfinance banks on the development of the banking habits of people in its environs.

The result of the study will be useful to the following:

1. Government: The result will be useful to the three tiers of government as well as the three arms of government in formulating their respective policies as touching the monetary and economic policies.
2. Communities: local communities (towns and villages) will fund the result of the project useful in the area of determination and creation of small scale community based employment opportunities for the rural areas.     
3. Individuals and corporate bodies: This set of people will find the result of the project useful in the area of mobilization of credit for smooth ruining of their businesses in the case of corporate bodies and in the area of building savings for self actualization.

1.8       ORGANIZATION OF THE STUDY

Chapter one of this project deals on the round of the study, statement of the problem, objective of the study, statement of hypothesis, scope of the study, limitation of the study, significance of the study and definition of the terms.

Chapter two talk about review of related literature, historical background of micro-finance Banks, objectives of micro-finance Banks in Nigeria, operation of Microfinance Banks in Nigeria, problems of Micro-finance Banks in Nigeria, the impact of Micro-finance Banks in Nigeria Development in Nigeria.

Chapter three reveals restatement of hypothesis, Research design, Description of the study population, Sample design and procedure, Data collection instrument, Method of data collection and method of data analysis.        

Chapter four focus on area of study brief history of ospoly Micro-finance Bank limited, presentation and analysis of data according to hypothesis and interpretation of findings / results.

Chapter five expiations much on summary, conclusion, recommendation, references and appendix

1.9       DEFINITION OF TERMS

i.          According to Joanna Ledgerwood (2000) in his book AN INSTITUTIONAL PERSPECTIVE MICRO-FINANCE as a financial institution establishment to cater for the savings and credit needs of small scale producers throughout the country.

ii.         According to Joanna Ledgerwood (1999) in his book AN INSTITUTIONAL AND FINANCIAL PERSPECTIVE MINIMUM capital requirements are set for all organizations entering the financial sector. This means that financial organizations wanting to formalize must have a minimum amount of capital to support their activities (stated as a currency amount rather than as a percentage of assets). 

iii.        Elder O.A Ajayi (2005) in his book STRATEGIC MANAGEMENT capital refers to the amount of equity an institution holds.     

iv.        Elder O.A Ajayi (2005) in his book STRATEGIC MANAGEMENT capital adequacy as a situation were adjusted is sufficient to absorb all losses  as fixed assets of the bank leaving a comfortable surplus for the current operation and future expansion.

v.         Joanna Ledgewood (2002) in his book AN INSTITUTIONAL AND FINANCIAL PERSPECTIVE liquidity requirements: refers to the amount of available cash (or near cash) relate to the MTIs demand for cash.

vi.        Joanna Ledgerwood (2000) in his book AN INSTITUTIONAL AND FINANCIAL PERSPECTIVE ASSET quality: represents the role to earnings derived from made by the organization.

vii.       Mathew O. Omotoso (2007) in his book INVESTMENT ANALYSIS portfolio: as a combination or collection of investments, through the diversifying of holdings and owning of several stocks instead of owning a single stock.