2038 - Gjcra - Kanu Clementina Isu Gabriel 142207 PDF

Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)

2015 Vol: 1 Issue: 2
Microfinance Banks Operations in Nigeria, Constraints and

Suggested Solutions: An Evaluation
Kanu Clementina,
Accountancy Department,
Federal University,
Ebonyi State, Nigeria.
Email: [email protected]
Isu Gabriel,
BURSURY Department,
Federal University,
Ebonyi State, Nigeria.
_____________________________________________________________________
Abstract
The aim of establishing Microfinance banks by Central Bank of Nigeria is to make financial
services accessible to the poor because of inability of formal banks to include active poor in
financial services. Microfinance banks differ from formal banks in various respects these
include: absence of collateral; simplicity of operation; institutional role to connect the poor
and underprivileged of society in developing countries. The issue is that this objective has not
been achieved. Therefore, this paper discussed the mode of operations of microfinance banks
in Nigeria, the challenges that face microfinance and suggested solutions. Descriptive
analysis from SPSS package was used to determine the most challenging factors in the
operations of Microfinance banks in Nigeria. The results obtained indicate that Poor capital
base, targeting the wrong customers, Lack of Microfinance culture, insider abuse, inadequate
business opportunities available to microfinance banks and constant change in government
policy contribute immensely to the poor performance of microfinance banks in the country.
Based on our research findings we posit that Microfinance banks will breach the gap of
financial exclusion of the active poor in the rural areas, create job opportunities and increase
standard of living of the populace, therefore, Government should help in provision of capital
and infrastructure to the Microfinance bank. Appropriate and stable policy should be
designed by the government aim at contributing to the effective performance of the banks,
improving standard of living and contribute to the growth of economy. We therefore
recommend the introduction of insurance in the microfinance bank operations to protect the
banks against loan defaulters and for government as well as operator of the banks to source
for foreign donors. This will go a long way to reduce the operational costs and high rate of
interests charged to customers. The constraints to microfinance banks should be eliminated,
in order to have sustainable MFBs in the Country.
_____________________________________________________________________
Key Words: Microfinance banks, operations, constraints and solutions.
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1. Introduction
In Nigeria, the issue of financing active poor in both urban and rural areas through formal
financial institutions is difficult. Nigeria is facing various serious problems which are threats
to the Nation economy. 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 are:
- Directorate of food, Roads and Rural Infrastructure (DFRRI)
- Better Life/Family Support Programme
- The Family Economic advanced programme
- Peoples Bank
- 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.
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: (i) the
absence of asset-based collateral; (ii) the smallness of loans advanced and or savings
collected, and (iii) 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 services 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
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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.
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. Thus, Jamil.B. (2008) opines that a large number of active poor in
the rural areas is left unattended to by existing microfinance banks. The question is whether
the aim of establishing microfinance banks has been achieved.
The objectives of this paper is to find out the constraints that mostly challenged the
performance of microfinance bank in Nigeria and to propose strategy that will enhance the
elimination of those factors. The rest of this paper is as follows: review of the related
literature, describes the methodology, data presentation and discussion on the findings,
conclusion, recommendations and suggested area of further researcher.
2. Literature Review
(CBN, 2005) defines microfinance as the provision of financial services to the poor who
are traditionally not served by the conventional banks. This was captured by Jaffari, S. I. et.al
(2011) and (Conroy, J. D., 2003). As mentioned earlier, the characteristics that distinguish
microfinance from other forms of formal financial products are; (i) the absence of asset-based
collateral; (ii) the smallness of loans advanced and or savings collected, and (iii) ease of
operations (CBN, 2005) and( Iorchir, D., 2006).
It is clear that microfinance is a very good instrument for job creation and poverty
alleviation. Again, greater number business sectors in Nigeria are private and small in need of
the services of microfinance banks. It is the sustainable MFBs will provide the services to
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these small businesses to ensure their growth. Microfinance banks would improve the
standard of the living of active poor in the urban and rural areas, help the poor to be self-
reliant, increase their sources of income. Above all, Microfinance banks will help to produce
more entrepreneurs than job seekers.
2.1 Operations of Microfinance Banks in Nigeria
In order to enhance the accessibility of financial services to poor Nigerians in both rural
and urban areas, Government has, in the past, initiated series of publicly-financed micro/rural
credit programmes with the mandate of providing financial services to alleviate poverty and
for improved standard of living of the poor in both rural and urban areas of the Country.
However, none of these programmes achieved its objective because of the level of corruption
in the system and other factors that inhibited the performance of the programmes.
According to CBN (2005), ‘microfinance is about providing financial services to the poor
who are traditionally not served by the conventional financial institutions’.
“Micro finance refers to the provision of financial services to poor or low income clients
including consumers and the self-employed”.
Micro finance was defined by Ana. I. (2008) quoting Gert Van Manner, a micro finance
expert as banking the unbankable, bringing credit, savings and other essential financial
services within the reach of hundreds or millions of people who are too poor to be served by
regular banks in most cases because they are unable to offer sufficient collateral. A
microfinance bank can therefore be defined as the bank for the poor. It means investing in the
income generating activities of the poor. Microfinance bank is meant for those who cannot be
efficiently served by regular commercial, universal or merchant banks because their activities
and volumes are too low to warrant the high cost of services by big institutions.
As a result of provision of financial services to about 35% of the economically active
population while the remaining 65% are excluded from access to financial services from
formal financial system, government introduced Microfinance banks in order to make
accessible the financial services to the poor. The practice of microfinance in Nigeria has been
in existence for over decades, but they have been informal. Hence, Onoyere. I.A. (2014) said
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.
The launching of the microfinance policy, regulation, and supervisory framework
guideline was launched by the Central Bank Nigeria in 2005 and were licensed to begin
operations in 2007. Ana.I. (2008) said that microfinance banking in Nigeria is guided by the
microfinance regulatory policy and guideline of 2005. No micro banker may, therefore,
operate outside the dictates of this policy. The microfinance banks in Nigeria were made up
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of community banks and Microfinance –NGO that met with the requirements Central Bank of
Nigeria. In Nigeria, microfinance can be owned by government, individual, group. Hence,
Acha. A.I. (2012), maintain that the point of divergence between the community banks and
their microfinance successors is in those which the regulatory guideline allows to own them.
In addition to individuals, group of individuals, community development associations, private
corporate entities which could own community banks, commercial banks and foreign
investors could also own microfinance banks.
There are two categories of microfinance banks: State based microfinance with a
minimum paid up capital of N1b. This type of microfinance bank was authorized to have
branches anywhere within the state.
The second one is Local Government Area based; with a minimum paid up of capital of
N20m and should have just one branch within the LGA.
On that note, Alegieuno.J. ( 2008) captured thus: that Universal banks that intend to set
up any of the two categories of MFB as subsidiaries shall be required to deposit the
appropriate minimum paid up capital and meet the prescribed prudential requirements.
Statutorily, a microfinance bank is not allowed to lend more than N500,000 (Five Hundred
Thousand Naira) to a single individual or business and N5,000,000 (five million Naira) to
companies. However, some of them exceed this limit which will give rise to the problem of
non-repayment of some loans. Microfinance banks classify their loans as loss if they remain
unpaid for 90 days.
MFBs in Nigeria charge high interest rates just like commercial banks, yet receive
customers patronage because of the need for their services, while some clients will abandon
their accounts. Mohammed, A. D. et at, maintain that the usurious interest rates and poor
outreach are among the challenging factors to MFBs. They focus less on the active poor and
greater numbers of microfinance banks are situated in the urban areas. In their operations,
they imbibe the culture of commercial banks, leaving the micro economy to suffer. Again, the
services of the existing MFBs are insufficient to large number of people in Nigeria who are in
dare need of these services and the striving MFBs are bedeviling by numerous constraints.
On the issue of insufficient number of MFBs, Adeyemi, K. S., (2008) pointed out that,
“despite decades of public provision and direction of provision of microcredit, policy
orientation, and the entry of new players, the supply of microcredit is still inadequate”.
What prevented the efficient and effective delivery of microfinance services are those
constraints that have stunted their growth and performances.
2.2 Benefits of Microfinance Banks
According to microfinance policy regulatory and supervisory frame work for Nigeria,
“robust economic growth cannot be achieved without putting in place well focused
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programmes to reduce poverty through empowering the people by increasing their access to
factors of production, especially credit”. This was the primary aim of establishing
microfinance banks in Nigeria.
Microfinance banks should enhance the capacity of the poor for entrepreneurship
significantly 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.
Again, prior to the establishment of microfinance banks, 65% of un served populace
were obtaining financial services through informal sector thereby preventing CBN from
carrying out their duty of promoting monetary stability, and a sound financial system. The
establishment of microfinance banks should eliminate this problem by operating under a
regulated system that will aid CBN for effective and efficient performance of their duties.
Microfinance banks should expand the financial infrastructure of the country to meet the
financial requirements of the Micro, Small and Medium Enterprises (MSMEs). This also
creates 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 harmonizes operating standards and provides a strategic platform for the
evolution of microfinance institutions.
Nigeria has a large number of populations and is endowed with resources; therefore, the
effective operation of microfinance banks should enhance fairly distribution of these
resources through elimination of poverty and sustaining the active poor to be self- reliant. To
buttress this point, Acha. A.I (2012) said that large number of Nigerians still live in poverty
and that it is in the bid to address this that the government formulated the microfinance
policy guidelines in 2005.
Onoyere A.I. (2014), confirmed this by saying that Africa in general and Nigeria in
particular, there exists high-level of poverty and increasing unemployment rates.
Poverty and unemployment are two major development challenges facing Nigeria. The
problems of poverty and unemployment can be solved vigorously through microfinance
policy, regulatory and supervisory framework for the Nigerian economy.
(Umo, Ju. 2007) maintain that these two problems are not as separate as they appear or
mere once conceived by economic analysts. They can be referred to as twin sisters or as
Siamese twins. Therefore, the policy thrust for dealing with one to a very large extent can be
effective in resolving the other. It appears that a consensus is emerging on the idea that the
problem of poverty can be solved by vigorously dealing with unemployment through the
generation of remunerative and employment opportunities provided by microfinance
activities.
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Microfinance banks would encourage savings and investment opportunities and

contribute to the growth of the Nation’s economy. Savings have continued to grow at a very
low rate, particularly in the rural areas of Nigeria and 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 existing
formal financial institutions have denied the active poor in the urban and rural areas of
Nigeria access to financial services. The existence of sustainable microfinance free from
constraints will improve standard of living of the poor and contribute towards the growth and
development of the country’s economy.
2.3 Constraints of Microfinance Bank
The licensing of MFBs by the Central Bank in 2007 caused the emergence of greater
number of MFBs in Nigeria. The challenges which contributed to the failure of earlier
community banks, the converted infected the newly established microfinance banks and their
performances crippled.
These poor performances lead to the failure of microfinance banks and the withdrawal of
the license of 224 microfinance banks in 2010. Since then, some microfinance banks have
closed shops. This impacted negatively the public, the owners of the banks, staff of the banks
and economy of the Nation.
Thus, Adeyemi, K. S., (2008) identified some of the challenges which microfinance
institutions face that impinge on their ability to perform to include; undercapitalization,
inefficient management and regulatory and supervisory loopholes. To these, Mohammed, A.
D. and Hassan, Z. (2009) added usurious interest rates and poor outreach. Further buttressing
the challenges facing microfinance banks, Nwanyanwu, O. J.,(2011), identified diversion of
funds, inadequate finance, and frequent changes in government policies, heavy transaction
costs, huge loan losses, low capacity and low technical skill in the industry as impediments to
the growth of this subsector. These constraints contributed to the failure of previous
microfinance banks. The most challenged factors to microfinance banks in Nigeria are
discussed below:
2.3.1 Low Capital Base
Micro-finance banks with their level of capital cannot satisfy the need of the large
percentage of the active poor that are now relying on them for loans to start business.
Microfinance banks finance their fixed assets and operate with customers’ deposits. The
result is that the Microfinance institutions in Nigeria lack finance required extending financial
services to clients. According to microfinance letter (2007), the problem of microfinance
banks primarily arise from low capital base of the institution, inordinate fixed asset
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acquisition, ostentatious operational disposition, inability to mobilize deposits, poor lending,

and questionable governance and management arrangement. Onoyere I,A. (2014) maintain
that some of the major challenges include poor capitalization and restrictive regulatory and
supervisory procedures. The low capital base and the isolated mode of operation have
hindered any meaningful contributions to financing activities. A minimum of Paid-up capital
of N1.0 billon for a licensed microfinance bank to operate multiple branches within a state
can act as serious bottleneck for efficient management of such Banks. As a result of the
problem of finance, Ovia. J. (2007), observes that there is inadequate channeling of fund for
real sector development especially agriculture and manufacturing. According to him, only
about 14.1% and 3.5% respectively are allocated to these sectors as against 78% funding for
commerce. Low capital base of microfinance banks hinder their ability to meet the demand
of their clients.
2.3.2 Insiders Abuse
Another factor that hamper the performance of microfinance banks is insider abuse. The
“insider abuse” in microfinance bank is made manifest in granting credit. Okpara G. C.
(2009) pointed out that directors misuse their privileged positions to obtain unsecured loans
which, in some cases are in excess of their banks’ statutory lending limits. This is in violation
of the provisions of policy of microfinance banks. Furthermore they approve loans for their
friends and relatives without proper documentation. These loans turn out to be non
performing credit. In addition, some of these owners grant interest waivers on non
performing insider-credits without obtaining approval from the CBN. They are known to have
compelled their microfinance banks to directly finance trading activities through proxy
companies. The benefits that accrue from such transactions are not ploughed back to the
banks. They use microfinance banks as sources of funds for their private ventures.
Board members are also known to misuse their positions to obtain loan facilities that are
above the regulatory limit for insider related loans and with no intentions of repaying such
facilities. They also use their positions to unduly influence and manipulate the recruitment
processes in favor of their cronies. Frauds and forgeries by both insiders and outsiders to the
banks are rife and people generally obtain loans with no intention to repay (Acha I. A. 2012).
2.3.3 Inadequate business opportunity in Nigeria
In Nigeria, the availability of business opportunities authorized by Central Bank
of Nigeria to microfinance banks are inadequate, as a result, the chances of survival
for the microfinance banks are very lean. Unlike Bangladesh and some other
countries, where some microcredit organizations give their clients more than loans,
offering education, training, healthcare, and other social services. Typically, these
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organizations are not-for-profit or are owned by customers or investors who are more
concerned about the economic and social development of the poor than they are with
profits. The definition of microfinance bank by Asian Development Bank (2000) as
the provision of broad range of services such as savings, deposits, loans, payment
services, money transfers and insurance to poor and low income households and their
micro-enterprises confirm the fact that in Asian countries, microfinance banks have
more available business opportunities than they have in Nigeria.
2.3.4 Change in Government Policies
The constant change of government policies is also a challenge to microfinance banks in
Nigeria. Hence, Nwanyanwu C. M. (2004) said that policy instability has impacted negatively
on the performance of primary institutions responsible for policy monitoring and
implementation. There have been cases of sudden reversal of policy which has resulted in
abandoned projects and in the case of microfinance banks; a good number of them could not
survive this storm.
Another challenge that faces microfinance banks in Nigeria is inability of the stakeholders
to perform their roles as indicated in the Microfinance Policy, Regulatory and Supervisory
Framework for Nigeria. Some of these roles include:
- Government role to ensuring the stable macro-economic environment, providing basic
infrastructures (electricity, water, roads, telecommunications, etc), political and social
stability;
- Instituting and enforcing donor and foreign aid guidelines on microfinance to streamline
their activities in line with this policy; and
- Setting aside an amount of not less than 1% of the annual budgets of state governments for
on-lending activities of microfinance banks in favour of their residents.
Again, the role of Central Bank of Nigeria (CBN) to
- adopt an appropriate regulatory and supervisory framework;
- Minimizing regulatory arbitrage through periodic reviews of the policy and guidelines;
- Implementing appropriate training programmes for regulators, promoters and practitioners
in the sub-sector, in collaboration with stakeholders.
The MFB policy recognizes the roles of public sector MFIs and poverty alleviation
agencies such as the National Poverty Eradication Programme (NAPEP) in the development
of the sub-sector. Public sectors perform the following functions:
- Provision of resources targeted at difficult-to-reach clients and the poorest of the poor;
-. Capacity building;
- Development of MFIs’ activities nation-wide;
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- Nurturing of new MFIs to a sustainable level; and

- Collaborating/partnering with other relevant stakeholders.
Also donor Agencies should offer free or subsidized funds, donations or technical
assistance for the development of the microfinance industry in Nigeria. The problem is that
none of these stakeholders make sincere effort to perform its responsibility. According to IMF
working paper on microfinance on Africa: Experience from selected countries, in Guinea,
microfinance activities are regulated by central bank. Guinea has three main types of
institutions: credit only MFIs, MFIs that collect deposits and lend to members only, and MFIs
that collect deposits and lend with no membership restriction. The two well-known
institutions that are wholly donor-financed, micro-lending entities operating solely in the
urban sector in Guinea: This impacted negatively on the performance of microfinance banks.
2.3.5 Focusing on wrong group of customers
Microfinance banks in Nigeria, instead of targeting poor clients whom they are meant to
serve, they compete with commercial banks, for rich customers. Microfinance bank activities
should cover the rural dwellers who deal more on agriculture and petty trading. Instead, many
Microfinance banks engage in commercial banks activities - grant big loans to companies and
big customers which are outside the scope of their duties. Taking the issue of targeting wrong
customers, Udo F. (2012) pointed out that many of them have assumed a larger than life
clout, attempting to finance big projects and other traditional functions of commercial banks,
even when they don’t have the required capital base and managerial capabilities. They also
tend not to target the very poor, as targeting the less poor leads to increases in loan size and
improved efficiency indicators, whereas MFIs focusing on the poorest tend to remain
dependent on donor funds (IMF, 2005). In so doing, they stray from the policy framework
establishing them, leaving the micro-economy to suffer.
2.3.6 Lack of culture by microfinance banks
The culture of microfinance bank is quite different from commercial banks.
Microfinance banks are meant to visit their customers in their various locations and attend to
their needs. The activities of microfinance bank are more in the field than in the office.
However, it is common to see microfinance banks staff dress in suits and sit in air conditioned
office, waiting for customers to come. This is because many microfinance bank managers and
other management staff were in most cases commercial banks’ staff that joined microfinance
banks with orientation, philosophy and culture of commercial banks. Akinmutimi (2013)
opines that microfinance institutions should go back to the people if they are meant for the
poor and for the people. They should concentrate their efforts on going to meet the people
where they are, where they do their businesses and reduce the level of formality that is in that
system today. It must be understood that microfinance is not micro-commercial bank, it is a
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special kind of banking requiring a different approach, philosophy and client base.
Unfortunately however, many microfinance banks spend a lot of money building office
complexes, purchasing cars and embarking on promotional activities. They also engage in
inordinate competition with the commercial banks. The orientation and practice run counter to
the essence of microfinance (Acha. I. A. 2012).
Another consequence of adopting commercial banks method of operations is high cost of
operation. They involve in computerization, and employment of staff poorly experienced in
microfinance, engagement of the services of External auditors, online renditions of monthly
returns. These activities attract enormous operational cost. Microfinance letter (2008)
observes that some microfinance institutions conduct their businesses in manners that are at
variance with international best practices as regards the management of microfinance banks.
For example, expenses on office accommodation, official cars, and fixed asset acquisition,
constitute a heavy burden on the institutions. Nwanyanwu.O.J. (2011) opines that salaries and
allowances of staff and Board members have not, in some cases, been based on affordability
of the institution. The result is that these high operational costs are transferred to customers;
hence multiple charges with different names like commission on turnover, handling charge,
IT charge and service charge, commitment fee amongst other. Thus poor customers are made
to bear the burden of high interest rates. It must also be pointed out those small units of
services lead to high operational cost. Economic fundamentals exhort that every borrower is
interest sensitive. Some researchers in India maintain that capacity of borrowing decreases
with increase in interest rates. High interest rates may prove to be counterproductive, and
weaken the social and economic condition of poor clients. The high interest rate charged by
the MFIs from their poor clients is perceived as exploitative. The interest rates are not well
regulated for private MFIs as well as for formal banking sector. These services include
several loan applications to be processed, numerous accounts to be managed and monitored,
and repayment collections to be made from several locations especially in rural communities
(Abdullahi. I.G. 2008). Microloans sometimes even reduce cash flow to the poorest of the
poor, observes Vijay Mahajan, the chief executive of Basix, an Indian rural finance
institution. He concludes that microcredit “seems to do more harm than good to the poorest
this is as the result of the high interest rates charged by microcredit organizations This
hinders sustainability and continuity in service delivery; hence the closure of some
microfinance banks.
3. Methodology
The study was carried out in the South East Zone of Nigeria where some selected
microfinance banks were used as targets for the study. The researchers made use of primary
sources to collect data. For the primary source, a structured questionnaire was used. 1000
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respondents were randomly selected from the total population of 1200 which include the
management staff (Internal Auditors, Managing and Board of Directors, Accountants and
Supervisors) and the clients (Saings ,Currents, Loans and Fixed deposit customers) who have
established relationship with these microfinance banks under study. They were initially
identified through a preliminary survey. There were two different sets of questionnaires – the
first set solicited information from the management staff and the second set from the clients
of the micro-finance banks.
The data was analysed using descriptive statistics from SPSS software package which
including pearsons chi-square tests and bar charts.
Table 1: Responses of MFB workers on constrains affecting MFC most
LCB AI TWC LMC GP IBOAM

Response Response Response Response Response Response
POSITION Agree Dis Agre Dis Agre Dis Agr Dis Agr Dis Agre Dis
d Agre ed Agre ed agree eed agree eed agre ed agree
ed ed d d ed d
Internal 180 20 160 40 178 22 155 45 190 10 140 60
Auditors
Accountants 185 15 175 25 170 30 145 55 170 30 125 75
Supervisors 170 30 185 15 160 40 160 40 160 40 170 30
Managing 187 13 165 35 180 20 170 30 180 20 170 30
Directors
Board of 180 20 180 20 165 35 40 160 175 25 180 20
Directors
Total 902 98 865 135 853 147 670 330 875 125 785 215
Figure 1: Responses of MFB Workers on constrains affecting MFC most

200
180
160
140
120
100 Internal Auditors
80
Accountants
60
40 Supervisors
20 Managing Directors
0
Board of Directors
Agreed
Agreed
Agreed
Disagreed
Disagreed
Agreed
Disagreed
Disagreed
Agreed
Disagreed
Agreed
Disagreed

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Table 2: Pearson Chi-square test on responses of MFB workers on constrains affecting MFC
most.
Value df P-Value
Low Capital Base (LCB) 9.797 4 .044
Insiders Abuse (IA) 18.411 4 .001
Targeting Wrong Customers (TRC) 11.452 4 .022
Lack of microfinance Culture (LMC) 257.123 4 .000
Government Policy (GP) 22.857 4 .000
Inadequate Business Opportunity (IBO) 64.583 4 .000
Table 3: Responses of MFB Customers on constrains affecting MFC most.

Agreed Dis Agree Dis Agree Dis Agree Dis Agre Dis Agree Dis
POSITION agree d agree d agree d agree ed agree d agree
d d d d d d
Loan 220 30 250 0 210 40 200 50 200 50 200 50
Customers
Savings 190 60 200 50 190 60 160 90 250 0 250 0
Account
Customers
Current 200 50 200 50 200 50 150` 100 200 50 100 150
Account
Customers
Fixed 240 10 230 20 200 50 150 100 250 0 200 50
Deposit
Customers
Total 850 150 880 120 800 200 660 240 900 100 750 250
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Figure 2 - Responses of MFB Customers on constrains affecting MFC most
200
180
160
140
120
100
80 Loan Customers
60
40
20 Savings account Customers
0
Current Account Customers
Agreed
Agreed
Disagreed
Disagreed
Agreed
Disagreed
Agreed
Disagreed
Agreed
Disagreed
Agreed
Disagreed
Fixed Deposit Customers

Table 4: Pearson Chi-square test on responses of MFB customers on constrains affecting MFC
most.
Value df P-Value
Low Capital Base (LCB) 46.275 3 .000
Insiders Abuse (IA) 68.182 3 .000
Targeting Wrong Customers (TRC) 5.000 3 .172

Lack of microfinance Culture (LMC) 30.303 3 .000
Government Policy (GP) 111.111 3 .000
Inadequate Business Opportunity (IBO) 253.333 3 .000
Figure 3: Response by Gender
Response by Gender
500
450
400
No of Response
350
300
250
200
150
100
50
0
AGREED DISAGREED
MALE 450 50
FEMALE 400 100
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4. Discussion on the findings

The analysis of data on ‘the responses from operators of microfinance banks on the
constraints that affect MFB most’ was done using Pearson Chi-Squared Statistic. The Chi-
square test statistic is a statistic used to test the independence or otherwise of two or more
attributes. The test statistic is given as
2  
n  oi ei 2
i 1 ei
Where,
Is the observed frequency, is the expected frequency and is the chi-square statistic.
The results of Pearson Chi-square test on responses of MFB workers on constrains
affecting MFB most as show in table 2 indicates that there are significant difference in Low
Capital Base, Government policy, Insider Abuse, Targeting wrong customers at 5%
significant level.
The result indicates that all these factors challenged microfinance banks most. While the
Pearson Chi-square tests on responses of MFB customers on constrains affecting MFB most
as show in table 4 indicate that there are significant difference in almost all the examined
factors at 5% significant level except ‘Targeting wrong customers (TWC)’ which p-value is
above 0.05. The result shows that all other factors challenged MFBs most except Targeting
wrong customers.
The results from the responses from the management, staff and clients of microfinance
banks in table 3 and 4 indicate that the constraints that affect microfinance banks most are:
Low Capital Base, Government policy, Insider Abuse, as well as lack of microfinance culture
and inadequate business opportunities available for microfinance banks.
Again considering number of responses obtains according to the gender, four hundred and
fifty male and four hundred female out of one thousand respondents agreed that the
aforementioned constraints mostly affect the performance of microfinance banks in Nigeria.
4.1 Suggested Solutions
As a result of numerous challenges facing Micro Finance Banks it is our belief that the
following suggestions will help to eliminate some of these difficulties.
4.1.1 Provision of infrastructure and adequate capital base by Government
Government should be engaged in microfinance banks, finance them by providing
adequate capital base and promote the viability of the banks. State government should
contribute its own quota in a situation where Federal Government is ready to give some
percentage to the Microfinance banks in the state. Government should help in providing
infrastructure: buildings, roads and electricity to Microfinance banks in order to reduce cost.
326
In order to build a world where financial services will be available to all, effort should be
made to effect the systemic change necessary to incorporate the poor into financial markets.
This is a challenge which is massive indeed, and operators of microfinance cannot achieve it
all alone. Government should therefore help to give people the tools they need to make them
self-reliant by providing “micro” loans, business training and other financial services to poor
men and women to start their own businesses. Microfinance does not necessarily require new
institutions. In most cases all that is needed is effective transformation of existing institutions
so that they become more business-minded (Anupam .B., Rodolphe . B., and Murat .Y. 2004)
4.1.2 Elimination of insider abuse
Mismanagement and misappropriation of depositors’ money should be avoided by the
management, directors and proprietors of Microfinance banks. Resources should be
channeled properly to yield appropriate returns and avoid using customers’ money to enrich
themselves.
Stakeholders should perform their roles. The stakeholders should perform their role as
stipulated in the microfinance policy framework. Good corporate governance should be
maintained. All sorts of corruption, fraud and forgery by insiders of microfinance banks
should be avoid.
This will enhance sustainable of Microfinance Institutions (MFBs) aim at continuous
service provision to clients profitably as a going concern.
4.1.3 Microfinance banks culture
Operators of microfinance banks should be imbibe the culture of microfinance banks.
They should be made to understand the modalities, aims and operational styles of
microfinance banks. Microfinance banks are not mini commercial banks. Staff of
Microfinance banks should concentrate their efforts on going to meet their customers where
they are and where they do their business. In some other countries, Microfinance field staff
managers perform village surveys before entering a village, conduct interviews with potential
members, train members on credit discipline, travel to villages by motorbike every week to
collect interest and disburse loans, and follow-up to ensure the loans are being used for their
intended purpose.
4.1.4 Provision of other services
Microfinance banks in Nigeria should be authorised to perform other services that will
enhance their sustainability. In India, Bangladesh and other countries, Microfinance banks
not only extending small loans (micro-credit), but also provides various other financial and
non-financial services such as savings, healthcare, insurance, guidance, skill development
training, capacity building and motivation to start income generating activities to enhance the
productivity and improve standard of living.
327
4.1.5 Technical Innovations

In order to improve the quality of microfinance banks services in Nigeria, the directors
and owners need to introduce some technical innovations. A number of electronic devices are
being used in different countries to expand the outreach and to improve the microfinance
functions. Some of these devices are mobile phones, ATMs, processor cards, computers etc.
Mobile phone provides the rural poor borrowers with the communication facility (Ghate
2008). In Nigeria, many rural roads are not accessible. The unfortunate thing about this is
that those rural dwellers produce food as well as cash crops, but cannot be sent to market or in
the city where they are in great demand. Banks cannot in any way build branches in such
rural areas. Therefore, ATMs should help to facilitate saving, payment and loan transactions
in the remote and rural areas where it is difficult to open bank branches.
4.1.6 Community based microfinance banks
Microfinance banks should be initiated by the members of the community who pool their
resources together and as well give out the contribution to some other members of the
community to use to establish small businesses. These members must be known by the
members of the community and be identified by the community heads. In order to sustain the
business the microfinance banks should charge minimal interest from the clients who desired
the services of the microfinance banks.
4.1.7 Microfinance banks should be involved in the insurance agreement
The nature of microfinance banks services, and the active poor are very vulnerable to
natural uncertainties, insurance is necessary for them. These insurance services should cover
the losses of both microfinance institutions and their customers at the lowest cost. It may be
envisaged that micro-insurance would facilitate penetration of insurance to rural and remote
areas. Microfinance banks should provide accident, life, and crop insurances. The
microfinance banks customers who wish to obtain credits from the banks should insure their
businesses with the insurance company. The amount to be paying as premium should be
determined by the amount of money applied for as loan. In a situation where any customer
finds it difficult to repay the credit, insurance company will pay the outstanding loan.
4.1.8 Group lending
The use of group lending which substitutes group guarantees for collaterals. Group loan
is one major way microfinance banks seeks to reduce credit risk because each should know
and identify themselves. In a situation where any of the members of the group default those
that guaranteed the default client will refund the outstanding balance. There is need to
identify each member in a group. Banks should cultivate the attitude of KNOW YOUR
CUSTOMER as instructed by the CBN. Although group lending is more effective in rural
areas and individuals loans are more appropriate in the urban area. In every community of the
328
rural area, the head of the community should be involved in the introduction and guaranteeing
of the group. The study of IMF on Microfinance in Africa state that group lending with joint
liability tends to encourage self-selection and group formation among good credit risks,
addressing partially the problem of imperfect information faced by the lender, and thereby
lowering the overall risk of the group lending scheme. It went further to express that a
number of limits/risks may exist in group lending schemes with joint liabilities, where the
behavior of one individual may affect the repayment of the group as a whole:
4.1.9 Contributions from International Agencies
In Nigeria, successful microfinance banks are those that have benefited greatly from
technical assistance and funding provided by international agencies. It is stated clearly in the
microfinance banks policy framework that International agency should be involved in the
provision of fund at a minimal rate of interest to make the cost of borrowing cheaper.
Therefore, effort should be made by the owners of Microfinance banks and the Government
to engage the technical assistance of international agencies. This should not only enhance the
efficient performance of Microfinance banks but also attract foreign investors in Nigeria as
well as reducing the cost of operations. In many countries, credit-only schemes have been
developed by NGOs, often with donor support.
4.1.10 Records of Accounts
Operators of microfinance banks should know that proper accounting system is a key to
success of every business organization. It gives true financial position of the business
organization and equip the owners of business with ideas on what to do in an ugly situation.
Many microfinance banks have been distressed because of incomplete records and window
dressing of their accounting records. Qualified and experienced accountant should be
employed to do the work of the accountant.
5. Conclusion and Recommendations
This study has examined the constraints that most affect the performance of microfinance
banks in the Nigeria. Our overall observations emanating from the statistical results, suggest
that the constraints that most affect the performance of microfinance banks in Nigeria are low
capital base, Insider Abuse, lack of microfinance bank culture, constant change of
government policies, Targeting wrong customers and Inadequate business opportunities
available to microfinance banks.
The potential economic advantages of viable and sustainable microfinance banks in
Nigeria are needed, therefore, this calls for concerted efforts of government, proprietors of
microfinance banks, operators and clients to facilitate the elimination of the constraints to
microfinance banks to enhance the development of the microfinance banking sector to
329
unleash its potential for economic growth and development. There is need to improve the
microfinance banks so as to help to incorporate the poor into financial markets.
We therefore recommend that government should design firm, sustainable and favorable
policies to enhance the performance of microfinance in Nigeria considering the advantage of
eliminating the twin problems of poverty and unemployment that are tormenting the country
and other potentials of microfinance banks in Nigeria. In Nigeria, large number of people is
involved in agriculture and other in small and medium enterprises which may not have access
to formal financial institution for financial services; there is need for sustainable microfinance
banks for survival and sustenance of these enterprises. Government should provide the
required capital and infrastructures to microfinance banks instead of embarking on number of
unachievable programmes. There is need for urgent elimination of insider abuse and all the
operators of microfinance banks should be imbibe with the culture of microfinance banks.
Above all, all the factors that mostly affect the performance of microfinance banks should be
carefully eliminated.
We also suggest that further research should be conducted on the impact of performance
of MFBs on Nigeria economy.
References
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Adeyemi, K. S., 2008, Institutional Reforms for Efficient Microfinance Operations in
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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)

An Online International Research Journal (ISSN: 2311-3162)

Microfinance Banks Operations in Nigeria, Constraints and

Microfinance banks would encourage savings and investment opportunities and

acquisition, ostentatious operational disposition, inability to mobilize deposits, poor lending,

- Nurturing of new MFIs to a sustainable level; and

LCB AI TWC LMC GP IBOAM

Figure 1: Responses of MFB Workers on constrains affecting MFC most

Response Response Response Response Response Response

Low Capital Base (LCB) 9.797 4 .044

Insiders Abuse (IA) 18.411 4 .001

Targeting Wrong Customers (TRC) 11.452 4 .022

Lack of microfinance Culture (LMC) 257.123 4 .000

Government Policy (GP) 22.857 4 .000

Inadequate Business Opportunity (IBO) 64.583 4 .000

Table 3: Responses of MFB Customers on constrains affecting MFC most.

LCB AI TWC LMC GP IBOAM

Figure 2 - Responses of MFB Customers on constrains affecting MFC most

Response Response Response Response Response Response

Low Capital Base (LCB) 46.275 3 .000

Insiders Abuse (IA) 68.182 3 .000

Targeting Wrong Customers (TRC) 5.000 3 .172

Figure 3: Response by Gender

4. Discussion on the findings

4.1.5 Technical Innovations

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