A Study of the Microfinance Institutions Essay
A Study of the Microfinance Institutions
One factor inhibiting the attainment of development goals in less developed countries is the populace’s general inability to access factors of production, especially finance. This limits the entrepreneurial ability of the people, especially the poor. Consequently, potential employment opportunities and household prospects for creating wealth and improving income are lost. Microcredit has been one framework adopted to address this problem. Its evolution reflects acknowledgement of credit market failures especially in the formal financial sector.
There has been, therefore, a shift from the formal financial sector to microfinance Micro finance practice has had a long history in Nigeria and Africa as a whole, long before economist and world financial analyst recognized it as weapon against poverty. The practice of micro finance in Nigeria is as old as man; it has been a long-term practice in our context. It is mostly practiced in less developed countries, where per capita income is very low. In the mid twentieth, theorists were concerned over the poverty and process of development with specific attention on “under developed nations” as developing countries were then tagged.
According to the World Bank’s World
Development Report 1999/2000: Entering the 21st century, in 1998, about 1.2 billion people 24 percent of the population in developing and transition economies lived on less than $1 a day. In 1999, 4.5 billion people of 75 percent of the world’s population lived in low-and-lower-middle income economies. Of these, 2.4 billion were from low income economies with an average annual Gross National Product (GNP) per capita of $410, while 2.1 billion lived in lower middle income economies with an average annual GNP per capital of $1,200 (World Bank, 2000/2001). W.W. Rostows, a leading proponent on state of progression or growth, noted that the critical “take off stage” recognize certain minimal rate of investment to take place, to foster development and better the standard of living of individuals.
In an attempt to improve the live of the poor and to raise the standard of living in the country, the United states Agency and Implementation Development (USAID), 1995), recognizes while Government are involved in different programs because most government want to encourage the development of business, to supplement general, policy goals that apply to business, with specific policies and programs aimed at micro and small enterprises. More also, policies that minimize the costs of licensing and registering a business, provide easy access to information about laws and regulations, and facilitates commercial codes, which establish rules to minimize
the cost of doing business by defining the rights and responsibilities of all parties to a transaction. Hence the involvement of Federal Government, and other international agencies in the program of reducing the poverty level amongst Nigerians. Such programs as Directorate for Food, Roads and Rural Infrastructure (DEFRRI), Nigeria Agricultural Cooperative Bank (NACB) and Peoples Bank of Nigeria e.t.c. The aim of the program was to assist and deliver financial services and development to rural communities. The purpose of this paper is to take a cursory look at microfinance institutions and their effects on funding of small scale enterprises in Edo State.
Concept of Micro Finance Micro finance can be defined as a development tool used to create access for the economically active poor to financial services at a sustainably affordable price (CBN, 2005). Eluhaiwe (2005) opined that micro finance is the provision of thrift, credit and other financial services and products in very small amounts to the poor to enable them to raise their income levels and improve their standard of living. Micro finance has also been defined as the provision of very small loans that are repaid within short period of time and is essentially used by low income individuals and households who have few assets that can be used as collateral (Ukeje, 2005).
Micro finance is basically a tool designed to improve the capacities of the economically active poor to participate in the larger economy. The economically active poor are either micro entrepreneurs who operate in the informal sector (trading, farming, food catering, craftsmanship and artisanship) or people earning wages. Such poor people earn their living in either rural or urban areas; and the financial services for which access is sought are mainly savings and loans (Idolor, 2007). Micro finance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions.
Many features distinguish micro finance from other formal financial products. Five of these are: the smallness of loans advanced or savings collected, the absence of asset-based collateral, and simplicity of operations (Kimotha, 2005). Others are its targets as the marginalized group of borrowers, and its general employment of a group lending approach (Igbinedion and Igbatayo, 2004). The group lending approach has implication for the pressure that the members of the group bring to bear on one another to ensure loan repayment, so that the group can continue to enjoy borrowing or loan facilities. In developing countries, a majority of the population do not have access to financial services and thus constitute the group that micro finance tries to reach. Nigeria, like any other developing country, is saddled with the problem of rural urban migration, mass illiteracy, poor infrastructures, poverty and low
access to formal financial services. Hence the need for the government’s micro finance policy, aimed at expanding the financial infrastructure of the country to meet the financial requirements of the Small and Medium Enterprises (SMEs) as well as the rural and urban poor. The policy has created a platform for the establishment of Micro Finance Banks (MFBs) geared towards enhancing the provision of diversified micro finance services on a short-term or long-term and sustainable basis for the poor and low-income groups. It would also help create a vibrant micro finance sub-sector that would be adequately integrated into the mainstream of the national financial system and provide the stimulus for poverty reduction, economic growth and development (CBN, 2005).
It also has the potential of not only urban–rural but rural–rural migration as Nyberg and Rozelle (1999) noted with respect to China. Small and Medium Scale Enterprises Small and Medium Scale Enterprises are sub-sectors of the industrial sector which play crucial roles in industrial development (Ahmed S. 2006). Following the adoption of Economic reform programme in Nigeria in 1981, there have been several decisions to switch from capital intensive and large scale industrial projects which was based on the philosophy of import development to Small and Medium Scale Enterprises which have better prospects for developing domestic economy, thereby generating the required goods and services that will propel the economy of Nigeria towards
development. It is base on this premise that Ojo .O. (2009), argued that one of the responses to the challenges of development in developing countries particularly, in Nigeria, is the encouragement of entrepreneurial development scheme. Despite the abundant natural resources, the country still finds it very difficult to discover her developmental bearing since independence. Quality and adequate infrastructural provision has remained a night-mare, the real sector among others have witnessed downward performance while unemployment rate is on the increase. Most of the poor and unemployed Nigerians in order to better their lots have resorted to the establishment of their own businesses. Consequently, Entrepreneurship is fast becoming a household name in Nigeria. This is as a result of the fact that the so called white collar jobs that people clamour for are no longer there.
Even, the touted sectors (Banks and companies) known to be the largest employer of labour are on the down-turn following the consolidation crisis and fraudulent practices of the high and mighty in the banking sector. The companies of course are folding up as a result of erratic power supply, insecurity and persistent increase in interest rate which has lead to high cost of production and undermines profit making potentials of companies operating in Nigeria. As a result of banking sector practices and continuous folding up of companies, a lot of Nigerians are thrown into unemployment which inevitably detriment the economic situation of the country.
Since the office jobs that people desire are no longer there for the teeming population, and the few ones that succeeded in getting the jobs are thrown out as a result of the factors identified above, the need for the government and the people to have a rethink on the way-out of this mess became imperative. Hence, the need for Small and Medium Scale Enterprises (SMEs) became a reality as a means of ensuring self independent, employment creation, import substitution, effective and efficient utilization of local raw materials and contribution to the economic development of our dear nation (Nigeria). All the aforestated benefits of Small and Medium Scale Enterprises cannot be achieved without the direct intervention of the government and financial institutions.
Over the years a number of policies have been formulated by the government with a view to developing Small and Medium Scale Enterprises. The Nigerian government under the then leadership of Chief Olusegun Obasajo promulgated micro-finance policy and other regulatory and supervisory frame work in 2005. Funding of Small Scale Enterprises Through the Microfinance Institutions in Edo State Among the economically active population of Edo State, there is a strong demand for small scale financial services. Micro finance institutions try to bridge the gap by accessing credit to low income people to improve household and enterprise management, increase productivity, smooth income flows and consumption costs, enlarge and diversify their micro businesses, and increase their incomes.
Using LAPO Microfinance Bank as a reference point, the challenges hitherto faced by most small scale business owners in accessing finance in the state have reduced drastically. Before, most small scale business found it extremely difficult to expand principally due to the lack of access to loans from financial institutions. This inability is mainly as a result of the stringent conditions attached to such loans. One of the conditions demanded by financial institutions before loans are granted is the provision of the necessary collaterals. The inability of small investment owners to provide such collaterals has often led to the nonexpansion of their businesses.
With the establishment of microfinance institutions in the state, all that challenges in accessing needed funds for businesses have been reduced to the bearest minimum. This is so because these various microfinance institutions in the state have been able to provide small and medium scale entrepreneurs with more funds for their business ventures. METHODOLOGY In writing this paper the researchers principally used existing literatures and record relevant to the subject matter of this paper. Using deductive approach, the researchers were able to draw conclusion having critically reviewed salient issues in existing literatures and records.
This method was adopted because time would not permit the use of questionnaire which ordinarily has to be administered to a sizeable number of small and medium scale Enterprises, as well as micro finance banks across the state. However, reviewing related works by other researchers gave a deeper insight to the researchers which enabled us to draw reasonable conclusion. CONCLUSION There is absolutely no doubt that small and medium scale Enterprises contribute tremendously to the nation’s economic development. Small and Medium Scale Enterprises constitute essential ingredients in the lubrication and development of any economy.
In Edo State, the story makes no remarkable difference as Small and Medium Scale Enterprises dominate the economy. Though access to funds by small business owners in the state is still poor, the various microfinance institutions, vis-à-vis, microfinance banks have been able to provide easy access to the needed funds to small scale enterprises. The mainstream Banks which are suppose to complement and implement government policies on the development of small scale enterprises also clamour for huge collaterals which prospective poor borrowers usually do not have even borrowers who could afford to provide benefiting collateral are further discouraged by continuous increase in interest rate which make borrowers vulnerable to the risk of continuous indebtedness to rich lenders.
CBN (2005), Micro Finance Policy, Regulatory and Supervisory Framework for Nigeria. Abuja: Central Bank of Nigeria. Eluhaiwe, P. N. (2005), “Poverty Reduction Through Micro Financing: The Case of India”. CBN Bullion, Vol. 30, No. 3, pp. 42-51. Idolor, E. J. (2007), “Micro Financing in Nigeria: Challenges and Prospects”. Nigerian Journal of Business Administration, Vol. 9, No. l&2, pp. 134144. Igbinedion, O. J. and A. S. Igbatayo (2004), “Micro Credit and Poverty Reduction in Sub-Saharan Africa: Challenges and Policy Framework in Nigeria”. Nigeria Journal of Business Administration, Vol. 6, No. 2, pp. 15-35. Kimotha, M. (2005), National Micro Finance Policy Framework and its Expected Impact on the Micro Finance Market in Nigeria. CBN Seminar to Mark the International Year of Micro Credit in Nigeria, 15-16 December, Abuja. Nyberg, A. and S. Rozelle (1999), Accelerating China’s Rural Transformation. Washington, D.C.: World Bank. Ukeje, E. U. (2005), “Poverty Reduction Through Micro Financing: The Case of Uganda”. CBN Bullion, Vol. 30, No. 3, pp. 52-63. Ahmed S. A.(2006), the role of SMEs in developing economy, Abuja, Omotayo and co. ltd. Ojo O. (2009), Impact of Micro Finance on Entrepreneurial Development: A case of Nigeria. A
paper presented at the International Conference on economic and administration, organized by the faculty of Administration and Business, University of Bucharest, Romania, 14th 15th November, 2009. 2000, World Development Report 1999/2000; Entering the 21st Century. New York: Oxford University Press, 2001, World Development Report 2000/2001; Attacking poverty. New York; Oxford University Press.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 18 October 2016
Let us write you a custom essay sample on A Study of the Microfinance Institutions
for only $16.38 $13.9/page