AN INVESTIGATION OF THE CONTRIBUTIONS OF MICROFINANCE BANKING INSTITUTION TO CAPITAL FORMATION IN NIGERIA (1992-2010)

AN INVESTIGATION OF THE CONTRIBUTIONS OF MICROFINANCE BANKING INSTITUTION TO CAPITAL FORMATION IN NIGERIA (1992-2010)

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CHAPTER ONE

1.0      INTRODUCTION

1.2      BACKGROUND OF THE STUDY

Microfinance has emerged as an effective strategy for poverty reduction. Across developing countries (Nigeria for example) micro, small and medium enterprises are turning to microfinance institutions (MFIS) for an array of financial service-microfinance is acknowledged as one of the prime strategies to achieve the millennium development goals (MDGs)- access to sustainable financial service enable owners of micro enterprises to increase their capital base, build assets and reduce their vulnerability to external stocks. Access to financial services enable poor household to move from everyday struggle for survival to planning for the future, investing in better nutrition their children’s education, health and empowering women especially.

However, the potency of microfinance as a development strategy is contingent upon the existence of microfinance institutions which:

1.     Have adequate outreach and more impact on poverty

2.     Achieve financial and operating self-sufficient

3.     Deliver responsive services to micro and small enterprise


Microfinance is the study of loans, savings and other basic financial services to the poor who are traditionally not served by the conventional financial institution.

These owners of micro and small enterprise require a diverse range of financial instruments to meet working capital requirement, build assets, stabilize consumption and shield themselves against risk. According to Ehigiamusoe (2008) microfinance primarily focuses on alleviating poverty through provision of financial services to the poor or owners of micro enterprises. Services users include artisans, small holder farmers, food processors petty traders and other persons who operate micro enterprises according to (Okereke et al 2009). The financial services include working capital loans, consumer credit, savings pension etc. in practice, microfinance is much more than disbursement management and collection of little bits of loans.

Microfinance is not charity organization despite its application as “poverty lending”. Primarily microfinance seeks to create access to credit for the poor who ordinarily are locked out of financial services in the formal financial market for reasons of their poverty that is lack of command over assets. If therefore places


obligation on the borrowers for proper utilization and complete repayment of the borrowed amount even at commercial interest rate.

Microfinance is not new especially history we come across schemes and social arrangement, which enable people to poor their financial resources for on-ward distribution to co-operating and needy individual. Example includes “adachi” and several variants of “esusu”. Nigerian microfinance institutions have also intergraded best practice of traditional schemes into the operational procedures.

1.2      STATEMENT OF THE PROBLEM.

Although microfinance services have Endeavour to offer financial services to the vulnerable groups, (youth, women especially), their impact on the economic activities of the beneficiaries still remain low due to its high operating cost, repayment problem, in adequate experienced credit staff, client apathy and dropout, internal control challenges etc. for instance the percentage dropout rate of FINCA wobulenzi beneficiaries stands at 33% on average (FINCA internal annual management report 2004).


Some dropout may be due to improvement on welfare of the bank or the interest rate while in other cases some have lost –even the little they used to own (Nakalnesi, 2003) this therefore sets the basis for the study.

1.3       OBJECTIVES OF THE STUDY

The study was guided by the following objectives:

1.     To examine the nature of financial services offered by microfinance institutions to the rural communities

2.     To identify the indicators of growth in economic activities of microfinance beneficiaries in Nigeria.

3.     To establish the contribution of microfinance banking to capital formation in Nigeria.

4.     To design appropriate strategies that will increase the outreach of microfinance institutions so as to enhance economic development and growth in Nigeria.

5.     To solve the problems of inadequate experienced credit staff, client apathy and dropout, high operating cost repayment problems etc.


1.4     Research Questions

The following research questions are formulated to enable us find lasting solutions to the problems of this study:

1.     Of what importance are the contributions of microfinance banks?

2.     How does a microfinance bank credit a small and medium scale enterprise on capital formation?

3.     Do microfinance banks enhance individual household ability to accumulate assets and create wealth?

4.     Is it important for microfinance banks to aid in the facilitation of rural transformation?

5.     How do microfinance banks engage in making finance assessable to enlarge segment of the Nigerian population?

6.     How do microfinance banks create capital?

1.5      HYPOTHESIS FORMULATION

For a purposeful data collection and interpretation the following hypothesis are hereby formulated


Hypotheses 1


Ho:     Microfinance banks loans and advances to rural people have not contributed much to capital formation

Hi:       Microfinance banks loans and advances to rural people have contributed much to capital formation

Hypotheses 2

Ho:     Microfinance bank credit to small and medium scale enterprise of agriculture and fishery don’t have much impact on capital formation

Hi:       Micro finance bank credit to small and medium scale enterprise of agriculture and fishery have much impact on capital formation.

Hypotheses 3


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