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AN APPRAISAL OF OPERATIONAL PROBLEMS FACING MICRO FINANCE BANK
CHAPTER ONE
INTRODUCTION 1.1
BACKGROUND OF THE STUDY
Nigeria is an immensely endowed country in both natural and human resources, with the population of over 140 million people who are largely engaged in the farming sector and small scale business. This sector is primarily dominated by micro, small and medium scale enterprises (MSMEs) and both peasant farmers who require financial assistance to boost their business and improve their livelihood. The history of microfinance sector is as old as when man started using money. People have always been borrowing, lending and saving, for as long as there has been money. This has always been done within communities, using their own system and methods without any external assistance or services. The micro finance scheme has primarily developed as a response to the inability or apathy of commercial banks and the formal financial system to serve the needs of low-income households and micro enterprise. According to the central Bank of Nigeria (2005), the formal financial system provides services to about 35% of the economically active population, while the remaining 65% are excluded from access to financial services. Looking back into history, one would see that Nigerians have always engaged in economic activities, but such activities continued for a long time on subsistence basis. Agriculture, for instance was in most cases carried out simply to feed the immediate family. Other activities such as pottery, weaving, etc were for personal needs and market within the locality (Oladele, 1988). Microfinance is all about providing financial services to the active poor who have been excluded from such services by conventional financial institutions, for reasons of inadequate collateral, unstructured businesses and small sizes of transactions. The major services offered by microfinance banks include savings, microcredit, money transfers, leases, and insurance. In Nigeria, statistics reveal that only 35% of the economically active population has access to formal financial services.Pauline Nsa (2010) Fabanwo A.O.(2010) notes that very often, the target groups gain access to financial Services for the very first time through micro finance. Making financial services widely available in rural areas and low –income urban areas help the poor to create wealth, improve their financial security, empower women, generate Employment and promotes sustainable development. In realization of the above inequality, the CBN introduced the Microfinance Policy, Regulatory and supervisory framework on December 15, 2005. The specific objective of the policy is to make financial services accessible to a large segment of the productive Nigerian population. According to Lemo (2006),the lunching of the new policy is to ensure that financial services reach the over 80million Nigerians not served by formal financial institutions, especially the economically active poor and low income households who could not have access to services of the formal financial institutions. Hence , the micro-finance policy is to complement the banking sector reforms (Ojo,2007 and Anyanwu,2007). Thus , micro-finance is expected to the gap in the financial system to assist the financial requirements of some neglected group who would be unable to obtain finance from the formal financial system. Since then, hundreds of microfinance institutions have been licensed by the CBN to provide these services to the target market. However, a significant number of these banks have performed below expectation due to dearth of skills, capital inadequacy, poor quality risk assets and inadequate supervision. According to Attah J.A.A(2010), despite the interest created, interventions initiated and patronage engendered, a large percentage of Nigerians are still excluded from financial services. The 2010 EFInA STUDY revealed a marginal increase of those served by formal financial market from 35.0 per cent in 2005 to 36.3 per cent in 2010, five (5) years after the launching of the microfinance policy. When those that had financial services from the informal sector such as savings clubs/pools, Esusu, Ajo, money lenders are included, the total access percentage for 2010 was 53.7 per cent or which means that 46.3 per cent or 39.2 million adult population were financially excluded in Nigeria.
1.2 STATEMENT OF THE PROBLEM
The idea behind every micro finance programme is to improve accessibility to appropriate financial and non-financial services to the active poor, in order to enhance their economic activities, increase their revenues and promote opportunities for ownership. Looking at the volume of credit disbursed, one will tend to believe that there is an increase in the volume of credit, given the importance of the sector and its awareness by clients willing to access funds, but it is still not what it is supposed to be. Micro finance banks in Nigeria are threatened by sustainability and continuity in service delivery, despite the well spelt out policy and objectives due to the following problems:
1. Diversion of Micro Finance Fund.
2. Inadequate finance.
3. Unfavorable/Frequent Changes in Government Policies.
4. High Risk, Heavy Transaction Cost and Mounting Loan Losses.
5. Low Capacity and low Technical Skills on Micro financing.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study is to appraise the operational problems of Micro Finance Banks in Delta Sate, Nigeria. Specific objectives of the study are:
1. To examine operational structures of Micro Finance banks in Delta state.
2. To appraise operational problems of Micro Finance banks in Delta state.
3. To examine the effects of these operational problems on the performance of Micro finance banks in Delta state.
4. To determine if operational problems of Micro finance banks in Delta state affect micro finance access to Small and Medium Scale Enterprises in Delta state.
1.4 RESEARCH QUESTIONS
In-order to guide the study and achieve the stated objectives of the study, the following research questions were formulated:
1. What operational structures exist in Micro finance banks in Delta state?
2. What are the operational problems facing Micro finance banks in Delta state?
3. How do operational problems of Micro finance banks affect its performance?
4. Have operational problems faced by Micro finance banks affected access to micro finance by SMEs in Delta state?
1.5 RESEARCH HYPOTHESIS
Ho: There is no significant relationship between operational problems and performance of Micro finance banks.
Hi: There is no significant relationship between operational problems and performance of Micro finance banks.
1.6 SIGNIFICANCE OF THE STUDY
The study will aid policy makers in the state to develop policies that will help block loopholes in the operations of Micro finance banks in Delta state. Findings and recommendations from the study will highlight the various operational problems facing micro finance banks in Delta state and how these identified problems can be effectively tackled. Access to micro finance or credit will also be improved for small and medium scale enterprises if the various operational problems identified in the study will be addressed. The study will also serve as a guide and foundation for other student researchers who may wish to further examine operational problems in other financial institutions in Nigeria.
1.7 SCOPE OF THE STUDY
The study will be delimited to some selected Micro-finance banks in Delta State of Nigeria. This is due to financial and time constraints as the researcher could not cover a wider area.
1.8 DEFINITION OF TERMS
Micro-Finance Bank: This is a type to banking service that is provided to unemployed or low income individuals or groups who would otherwise have no other means of gaining financial services. Operational Problem: Operational problem is the problem that is not inherent in financial, systematic or market-wide risk. It is the risk remaining after determining financing and systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems. Loan: In finance, a loan is a debt provided by an entity (organization or individual) to another entity at an interest rate, and evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower. Risk: Risk is potential of losing something of value. Values (such as physical health, social status, emotional well-being or financial wealth) can be gained or lost when taking risk resulting from a given action or inaction, foreseen or unforeseen. Risk can also be defined as the intentional interaction with uncertainty. SME: Small and Medium Enterprise