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AN APPRAISAL OF OPERATIONAL PROBLEMS FACING MICRO FINANCE BANK IN DELTA STATE2

AN APPRAISAL OF
OPERATIONAL PROBLEMS FACING MICRO FINANCE BANK IN DELTA STATE (A STUDY OF LAND
ROCK MICRO FINANCE ASABA DELTA STATE.

 

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

In Nigeria, the issue of financing active poor in
both urban and rural areas through formal financial institutions is difficult
(Ovia, 2007). Nigeria is facing various serious problems which are threats to
the Nation economy (Anyanwu, 2004). According to National Financial Inclusion,
in the provision of financial services, Nigeria lags behind many African
countries. In 2010, 36% of adults – roughly 31 million out of an adult
population of 85 million –were served by formal financial services. This figure
compares to 68% in South Africa and 41% in Kenya/. This is because formal
financial institutions deny the poor in both urban and rural areas access to
financial services. In order to breach this gap, Nigerian government
established various institutions as well as programmes to enhance the standard
of living of people, make poor people self–reliance and turn out more
entrepreneurs than job seekers in the country. Some of these programmes includes
Directorate of food, Roads and Rural Infrastructure (DFRRI), Better Life/Family
Support Programme, Family Economic advanced programme, Peoples Bank and Community
banks. These programmes failed to achieve their objectives due to poor
implementation, corruption and host of other factors. Government did not relent
in their efforts to make financial services accessible to the poor, thus, the
emergence of microfinance banks as an alternative credit system for the poor
(Helms, 2006).

According to CBN (2005), “microfinance is about
providing financial services to the poor who are traditionally not served by
the conventional financial institutions’. There are three features that
distinguish microfinance from other formal financial products. These are:

·       
the absence of asset – based
collateral;

·       
the smallness of loans advanced
and or savings collected, and

·       
ease of operations.

Microfinance, according to Otero (1999) is “the
provision of financial services to low – income poor and very poor self – employed
people”. These financial service s include: small loans, savings, current,
financing small business for the active poor both in rural and urban areas of
the country.

Microfinance is a term used to refer to different
methods for giving poor people access to financial services. Microfinance is
about providing of timely, affordable, diversified, and dependable financial
services to the active poor which otherwise would have little or no access to
financial services. It is a financial intervention that focuses on the low – income
group of a given society.

Many researchers conclude that in most developing
countries, the formal financial system reaches to only 25 per cent of the
economically active population. This leaves 75 per cent without access to
financial services apart from those provided by money-lenders and family.
Savings have continued to grow at a very low rate, particularly in the rural
areas of Nigeria. Most poor people keep their resources in kind or simply under
their pillows because of inadequate savings opportunities and products. Such
methods of keeping savings are risky, yield no returns, and reduce the
aggregate volume of resources that could be mobilized and channeled to deficit
areas of the economy.

The Microfinance Policy Regulatory and Supervisory
Framework (MPRSF) were launched in 2005 and the objectives are to address the
prolonged nonperformance of many existing community banks. This lack of
performance has been attributed to incompetent management, weak internal
controls and high cost of transactions. Other objectives to be addressed by
MPRSF are poor corporate governance, lack of well-defined operations,
restrictive regulatory/supervisory requirements, and weak capital base of
existing institutions. Indeed a huge gap exists in the provision of financial
services to a large number of active but poor and low income groups, especially
in the rural areas as a result of rigidity operations of formal financial
institutions in Nigeria. Problem of funding also militates against the
effectiveness of micro finance banks in Nigeria.

However, the conventional micro financing in Nigeria
aggravates the inequitable distribution of income and wealth in Nigeria. This
is due to the fact that while interest rate on both voluntary and mandatory
savings for the clients are between 4.5% and 6% per annum. Lending at this rate
is taking the rewards of poor and redistributes it to the rich. The poor
borrowers must pay the amount through group pressure even if it resort them to
another borrowing or selling their properties.

 

1.2   STATEMENT OF THE PROBLEM

CBN (2005) maintain that Microfinance banks are
aimed at empowerment of the poor and the private sector, through the provision
of needed financial services. This empowerment, it is hoped, will enable them
to engage or expand their present scope of economic activities and generate
employment. Doubts have been expressed about the effectiveness of the operation
of the micro finance banks in Nigeria. The general objectives of this study is
to find out the constraints that mostly challenged the operations of microfinance
bank in Nigeria and to propose strategy that will enhance the elimination of
those factors.

1.3   OBJECTIVES OF THE STUDY

The
following are the specific objectives of this study:

1.  To
examine the mode of operation of microfinance banks.

2.  To
examine the operational problems facing microfinance banks.

3.  To
identify the factors that can enhance the operations of microfinance banks.

1.4   RESEARCH QUESTIONS

1.  What
is the mode of operation of microfinance banks?

2.  What
are the operational problems facing microfinance banks?

3.  What
are the factors that can enhance the operations of microfinance banks?

1.6   SIGNIFICANCE OF THE STUDY

The
following are the significance of this study:

1.  Findings
from this study will be a useful guide for the government of Nigeria in tackling
the operational problems facing microfinance banks with a view providing
effective banking services to the rural dwellers.

2.  This research will also serve as a
resource base to other scholars and researchers interested in carrying out
further research in this field subsequently, if applied will go to an extent to
provide new explanation to the topic

1.7   SCOPE/LIMITATIONS OF THE STUDY

This
study on the operational problems facing microfinance banks will cover the
activities of microfinance banks in Nigeria with a view of identifying the
operational deficit.

LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the
efficiency of the researcher in sourcing for the relevant materials, literature
or information and in the process of data collection (internet, questionnaire
and interview).

 Time constraint– The researcher will simultaneously engage in this
study with other academic work. This consequently will cut down on the time
devoted for the research work.

REFERENCES

Anyanwu, C. M. (2004)
Microfinance Institutions in Nigeria: Policy, Practice and Potentials. Paper
Presented at G.24 Workshop on Constraints to Growth in Sub-Saharian Africa,
Protoria, South Africa November 129 – 30.

CBN, 2005,
Microfinance Policy Regulatory and Supervisory Framework for Nigeria.

Helms, B. (2006).
Access to All: Building Inclusive Financial Systems, Consultative Group to
Assist the Poor, World Bank p.2.

Otero, M.
1999, “Bringing Development Back into Microfinance”, Journal of
Microfinance.

Ovia, J. , 2007, Microfinancing: Some Cases,Challenges
and Way Forward.Abuja: synergy Resource and Technology Solutions Ltd.