Sunday, 24 April 2016

Impact Of Microfinance Reforms On The Performance Of Microfinance Banks in Nigeria

ABSTRACT
Central Bank of Nigeria (CBN) began to issue the Microfinance banking license in 2005 to cater for the need of the low income households and micro enterprises. Despite the effort of the government in enhancing the depth of the services of the microfinance banks, they still face several problems that affect their level of operation and reduce their performance below the projected objectives. In view of this, the CBN reviewed the microfinance framework in 2010 to enhance their performance. The reform saw the revocation of 224 microfinance banks licenses but 103 microfinance banks were later granted approval in principle to operate but based on the strict adherence to regulations and supervision of the CBN

This study examined the impact the reform has on the performance of the Microfinance banks. The study specifically examined the extent of the deposit liabilities and loan creation of these banks by comparing these variables in the pre and the post reform periods. The research employed secondary data of the microfinance banks from the archive of the CBN. Regression analysis was employed (at 10% level of significance) to test the significant increase in the loan creation and deposit liabilities of the microfinance banks. The research revealed that their performance did not increase significantly after the reform. This implies that the reform has less effect on the performance of the MFBs considering the banks’ credit administration and deposit holdings. Thus, the study recommended that the regulatory body should strictly scrutinize the problems facing the Microfinance banks and implement policies that will enhance the objectives of the reform.

CHAPTER ONE

INTRODUCTION

1.1    Background to the Study

The practice of microfinance in Nigeria has been routed to be the beginning of the modern banking system (Abiola, 2011). This financial practice has been in the culture of the ancient dwellers across various societies in the country. These societies form groups to attend to members financial needs. They are mainly of the informal Self-Help groups, thrift groups, Accumulating Savings and Credit Associations (ASCAs), Rotating Savings and Credit Associations (ROSCAs), Money Lenders etc.(Oloyede, 2008). They provide financial services to the members of the society they emanate from. 

They rely on the mutually supportive and benefit sharing nature of their society to empower themselves and improve the society (Abiola, 2011). This informal financial sector even though was efficient to an extent was not sufficient enough as it gave room for several anomalies in the country’s aggregate financial system. 

Apart from the fact that it has a low outreach of services as a major shortcoming, it activities also militate the performance of the government economic and financial policies since the larger aspect of the Micro, Small and Medium Enterprises (MSMEs) fall within this group(Ikechukwu, 2012). It imposes difficulty on the monetary authorities since they had to watch impotently as monetary strategies fall short of projected objectives.

Furthermore, the Nigerian government has been in the enigmatic race against the erratic increase in poverty level and the geometric rise in the rate of unemployment. The partial or full exclusion of the poor have also been a major concern to the Less Developed Countries (LDCs) like Nigeria.

In order to tackle these financial issues, the government had taken several unsuccessful strategies in the past, until 2005 when it introduced the microfinance policy. But microfinance scheme like many other schemes developed problems and it started losing focus of it aims and objectives. In the knowledge of these problems, the CBN in 2010 introduced the revised regulatory and supervisory guidelines to reduce these militating factors to the barest minimum. 

Therefore, the research carefully analyze the concept of microfinance and its  relevant related topics, the reform and it impact on the microfinance banks and finally test if the reform truly has impacted the banks positively or not.

1.2   Statement of the Problem

The microfinance policy was introduced to the Nigerian financial system to cater for the financially excluded citizens including the poor. It was meant to develop the informal sector of the economy.  The variance in the actual outcome and the proposed result of the operation of the MFBs led to the 2010 reform. 

The introduction of the microfinance reform of 2010 was meant to strengthen and enhance the aggregate operation of the microfinance banks to broaden their services provision and outreach. However, the 2010 reform was a new policy that focused on governance and ownership structure of microfinance banks, lending methodology, borrowers’ characteristics, appropriate management information system and internal control mechanism and procedures (CBN, 2010).

It is worth nothing that, despite the relentless effort of the CBN and it reforms on the microfinance subsector, the performance of the microfinance banks have not really been felt in the society especially in the rural societies, we still could understand there are less number of MSMEs that benefit from the services provided by this banks thus, creating a crucial and researchable gap that requires careful attention.

In other to fill this gap, the researcher believes that the performance of the microfinance banks could be determined by the patronage of their services by the public. The researcher further believes that the patronage of their services will determine the level of their deposit liabilities and the height of their lending which are major determinant of growth for any microfinance bank. Base on this, the researcher believes that the two determinant of growth stated above can be used to measure the performance of the microfinance banks in Nigeria.

1.3 Research Question

Based on the foregoing, this research provides solutions to the following questions;
  i.  Do the MFBs lend more to the entrepreneurs after the reform than before?
ii.  Did microfinance reform increase the size of the deposit liabilities of the microfinance banks?

1.4 Objectives of the Study

The main objective of this study is to assess the impact of microfinance reforms on the performance of microfinance banks in Nigeria. Specifically this study seeks:
  i.                  To examine the lending capacity of the MFBs before and after the reform.
ii.                  To assess the level of deposit liabilities of the MFBs in the pre and post reform periods.
iii.                  To make recommendations based on the findings of the study.

1.5  Hypotheses of the Study

In order to achieve the objective of this research study, the hypotheses stated below have been tested;
H01: There is no significant difference in the magnitude of deposit liabilities of the MFBs before and after the reform.
H02:There is no significant difference in the lending capacity of the MFBs before and after the reform.

1.6  Justification for the Study

Several researches have been carried out on the performance of the MFBs in Nigeria but most of them never largely talked about the impact of the 2010 microfinance reform. Therefore, this research has considered the pre-reform and the post-reform microfinance performances, compared these periods and made generalization as to how effective the reform has been. Also, previous researches have limited their scope to the operations of a single microfinance bank for their studies, but for the purpose of drawing a representative conclusion, this research focused on more-than-one MFB in Nigeria.

The study will also contribute to the existing knowledge of the efficiency of microfinance reform of 2010 and it prospect on the general MFB performance, provide information to government and microfinance banks on areas of improvement on the microfinance subsector and also created an avenue for further researches on microfinance for developmental purposes.

1.7         Scope of the Study

This research studies the total number of microfinance banks in Nigeria for six years. These years were segmented into two equal periods, three years before the reform and three years after the reform periods.

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