The Role of Microfinance Banks in Poverty Alleviation inNigeria–A Study of Selected Microfinance Banks

A Research Submitted to the Department Banking andFinance In Partial Fulfillment of the Requirements for the Award Of Master Of Science (MSc) Degree in Banking and Finance

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TABLE OF CONTENTSTitle page iApproval page iiDedication iiiAcknowledgment ivTable of content viAbstract. ix

CHAPTER ONE: INTRODUCTION1.1 Background of the Study 11.2 Statement of the problem 31.3 Objective of the study 51.4 Justification of the Study 61.5 Research hypothesis 71.6 Research questions 71.7 Scope of the study 8

1.8 Limitation of the study 81.9 Definition of terms 9

CHAPTER TWO: REVIEW OF RELATED LITERATURE 132.1 What is microfinance 132.2 Origin of microfinance 142.3 Importance of microfinance 182.4 Providers of microfinance services 192.5 Beneficiaries of microfinance services 202.6 Overview of microfinance banks in Nigeria 212.7 Microfinance banks activities 232.8 Benefits of microfinance banks in rural development andpoverty alleviation 272.9 Challenges of microfinance banks to rural development andpoverty alleviation 29

CHAPTER THREE: RESEARCH METHODOLOGY3.1 Research design 343.2 Area of study 343.3 Population of the study 353.4 Sample size determination 373.5 Sampling techniques 383.6 Sources of data 393.7 Validation and reliability 403.8 Data collection 413.7 Data analytical techniques 43

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS4.1 Poverty incidence in the state 454.2 Ownership structure, capitalization and spread of microfinance banks inAnambra state 524.3 Services offered by microfinance banks in Anambra State 554.4 Evaluation of the services in the microfinance banks in the state 63

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION ANDRECOMMENDATIONS 775.1 Summary of findings 775.2 Conclusion 785.3 Recommendations 79Appendix I 84Appendix II 92Appendix III 95References 98

ABSTRACT

The broad objective of this study was to examine the operations of microfinancebanks in Anambra State and to assess their contribution to poverty alleviation. Atotal of 140 randomly selected customers and officials of 14 purposively selectedmicrofinance banks from the three geo-political zones of Anambra State.Descriptive statistics such as averages, tables, frequencies were extensivelyemployed to analyze data. Also multiple regression analyses were also adopted toexamine determinants of deposit and credit. Findings show that 57% of thehouseholds in Anambra State fall within the poverty bracket, while 42% are abovepoverty line. Though Anambra State may not be among the poorest in the country,identified statistics on poverty incidence give cause for worry. The microfinancebanks in the state have been contributing modestly towards promoting the socioeconomic welfare of the citizens through lending and savings mobilizationactivities. Indeed, microfinance banks have been responsive to the credit needs oftheir customers; microfinance banks do not just mobilise deposits and walk awaybut rather they give back multiples of it to the depositors as credit; and creditbeneficiaries are living up to their responsibility of repaying the credits theyreceived. In spite of the above, however, certain operational problems hinder thefull realisation of the benefits of microfinance, including high interest rates, lackof awareness, lack of collateral, weak access to refinancing facilities, clientapathy and internal control measures, repayment problems. In view of theabove, the study recommends that efforts should be made to strengthen andsupport microfinance bank in the state and thereby enhancing their role in povertyalleviation in Anambra State.

CHAPTER ONEINTRODUCTION1.1 BACK GROUND OF THE STUDYRobust economic growth cannot be achieved without putting in placewell focused programmes to reduce poverty through empowering thepeople by increasing their access to factors of production, especiallycredit. The latent capacity of the poor for entrepreneurship would besignificantly enhanced through the provision of micro finance services toenable them engage in economic activities and be more self-reliant;

Micro finance is concerned with providing financial services to the poor

who are traditionally not served by conventional financial institutions.Three features distinguish micro finance from other formal financial -products. These are: (i) the small- scale loan level of operations. (ii) Noninstanceon asset-based collateral for loans, and (iii) simplicity ofoperations.

In Nigeria, the formal system provides services to about 35% of theeconomically active population, which implies that the remaining 65%are excluded from access to such financial services (CBN, 2005). Thedisadvantaged 65% often rely on the informal financial sector, comprising non-government organizations (NGO)-micro finance institutions, moneylenders, friends, relatives and credit unions. The non regulation of the activities of such institutions has serious implications forthe effectiveness of monetary policy and the development of a sound financial system.A micro finance policy, which recognizes the existing informalinstitutions and brings them within the supervisory purview of the central

Bank of Nigeria (CBN), would not only enhance monetary stability, butwould also expand the financial infrastructure of the country to meet thefinancial requirements of the micro, small and medium enterprises. Sucha policy would create a vibrant micro finance sub-sector that would beadequately integrated into the mainstream of the national financial systemand provide the stimulus for growth and development. It would alsoharmonize operating standards and provide a strategic platform for theevolution of micro finance institutions, promote appropriate regulation,supervision as well as the adoption of best practices. In the circumstancethe development of an appropriate and all embracing policy has becomenecessary to achieve long-term, sustainable micro finance sub-sector.

1.2 STATEMENT OF THE PROBLEMThe Federal Government of Nigeria has made several concerted but

largely unsuccessful efforts at financing the poor and small business forseveral years. Notable among the specific initiatives taken by governmentin that regard are the establishment of the Peoples’ Bank, the CommunityBanks and such other schemes/programs like the Family EconomicAdvancement Program (FEAP),, the Nigeria Agricultural CreditGuarantee Scheme (NACGS), etc The target of the government inputting all these facilities in place is to enhance rural transformation andsustainable robust economic growth and development by making creditavailable to the disadvantaged poor who are discriminated against by theformal credit institutions.

Worst amongst the problems of credit availability to the rural poor is theprolonged sub optimal performance of many existing micro financeinstitutions due to incompetent management, weak internal controlmeasures, poor corporate governance, which has intensified the unusual

reluctance of the deposit banks to fund rural and micro economicactivities in the economy.

Millions of people in developing countries live in a state of destitution.Their opportunities for developing are extremely restricted by economicand political conditions as well as their financial and social situations.Through different micro finance and insurance policies the poor couldattain a better standard of life (Islam, 2006) and (Mamun, 2005) throughprograms prepared in the field of financial business services. But therelevant issue has always been whether the available micro financeresources have really empowered the poor and if yes to ascertain theextent, degree or dimension of such empowerment. Globally, micro creditis considered as an important tool for poverty reduction. Different microfinance institutions (MFIs) have different mechanisms and practices for

micro credit delivery. Poor people confront many of the same risks facedby the non-poor (e.g. death illness or injury, loss of property due totheft/fire and natural disasters). But these risks have greater financialimpact and occur with greater frequency among the poor. Moreover thevulnerability of poor people is made worse each time they incur a loss,creating a vicious cycle that precludes lasting improvements in humanand economic welfare.

In Nigeria microfinance banks were established to address creditaccessibility problem of micro and small businesses and thereby to contribute to the efforts of government in the fight against poverty.However after years of operation, many are beginning to question theimpact of the banks particularly on savings mobilization and creditextension to the poor and vulnerable groups. Another pertinent questionwhich arises is as regards the structure and operational procedures of

microfinance banks can deliver services that meet the expectations ofNigerians, particular the poor vulnerable groups.Adequate knowledge of the above is necessary to enable stakeholders,including policy makers, to develop appropriate strategies to enhancetheir operations.

1.3 OBJECTIVES OF THE STUDYThe broad objective of this study is to examine the operations ofmicrofinance banks in Anambra State and to assess their contribution topoverty alleviation. To achieve this goal the following specific objectiveshave been set out for the study.1. To assess poverty incidence and/or level in the state2. To determine ownership structure, capitalization and spread ofmicrofinance banks in the state.3. To assess deposit mobilization, sectoral lending and repaymentprofiles of microfinance banks in the state.4. To evaluate the effect of microfinance banks’ services on economicwell-being as represented by growth in income and profitability ofborrowers’ businesses in the state5. To identify operational and other problems impeding the

performance of microfinance banks in the state.6. To suggest strategies to enhance the operation of microfinancebanks in the state

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