CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

Credit has been recognized as an essential tool for promoting small and medium enterprises (SMEs) in Nigeria. About 70 percent of the Nigerian population is engaged in the informal sector or in subsistence agricultural productions.

Governments at all levels have seen the fact that for sustainable growth and development to be achieved, the financial empowerment of the rural area is salient. This is being the repository of the predominantly the poor in the society. Again, credits to micro-enterprises are assuming importance in rural areas in response to the need of the less privileged entrepreneurs with limited or no capital base.

Institutions such as commercial banks have not been performing optionally in this direction. This is evidenced by the less than one percent share of total credit to small and medium enterprises (SMEs) in the recent years. The only reasons adduced for this apathy to cater

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for the rural grassroots development are that commercial loans to private small and microfinance business were regarded is highly risky and unprofitable due to lack of acceptable collateral. Moreover, the formalities of commercial banks are formidable deterrents to micro-business operators, many of whom even lack the formal education necessary to cope with them.

Community banking was introduced and adopted as part of the Federal Government’s measures to open up credit lines and other financial services to people at the grassroots and, thus, alleviate poverty. The community banks, however, failed unlike what are obtainable in Ghana, Gambia and some other countries of the world due to their ownership structures and lending rules coupled with the Nigerian’s experience of difficult economic climate of the 1990s

This scenario has led to the emergence of microfinance institution in Nigeria. This institution has taken up the task and responsibilities to provide funding for the poor as well as micro-enterprises in Nigeria since the big and more capitalized financial institutions are most likely to focus more on financing big businesses. To achieve the expected goals, two forms of microfinance banks were

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introduced in Nigeria; a unit microfinance banks and microfinance banks licensed to operate in a state.

A unit microfinance banks are licensed to establish and operate branches and/or cash centers gradually subject to meeting the prescribed prudential requirements and availability of free funds for opening branches/cash centers. While microfinance banks licensed to operate in the State are the ones licensed to operate in all parts of the State at once without recourse to gradual coverage as in unit microfinance banks.

The above mentioned issues triggered the researcher’s interest to embark on this study of the role of microfinance institutions in mobilization of fund for micro-credit scheme in Nigeria. The research will present opportunities offered by the micro-credit giving institutions and the role they play in mobilization of micro-credit funds to foster collaborative interventions that will support building of long term sustainable micro-credit delivery scheme in Nigeria.

1.2      STATEMENT OF THE PROBLEM

There exists a huge unutilized potential for financial intermediation at the micro and rural levels of the Nigeria economy. Attempts by

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governments in the past to fill this gap through the creation of financing institutions have failed. This is due to the poor capitalization and restrictive regulatory and supervisory procedures.

The community banks were primarily designed to fill the gap, but some conventional banks which regarded them as competitors frustrated their efforts by discriminating against their payment instruments such as cheques and demand drafts. The inability of commercial banks to provide financial services to micro-businesses due to lack of acceptable collateral by and their proximity to beneficiaries have not really helped in their roles of mobilization of fund for micro-credit scheme in the country.

Microfinance banking scheme has not been able to prove its relevance in charting a new path for the economic development of the poor people. The global economic meltdown is one of such challenges which have caused some of the microfinance institutions that could not cope to close shop.

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1.3      OBJECTIVES OF THE STUDY

The general objective of this study is to evaluate the role which microfinance institutions play in the mobilization of fund for micro-credit scheme in Nigeria.

However, the specific objectives are:

1.                To identify the specific roles performed by microfinance institutions in Nigeria.

2.                To ascertain the level of implementation of micro-credit scheme in Nigeria.

3.                To identify the problems and challenges facing microfinance in Nigeria.

4.                To identify the need for establishment of micro-credit institutions in Nigeria.

5.                To identify policies that would facilitate the linkage of informal

and formal financial services providers to micro-credit users.

1.4      RESEARCH QUESTIONS

For the purpose of this research work, the researcher deems it necessary to ask the following research questions:

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1.                To what extent do microfinance institutions play their roles in mobilization of micro-credit fund?

2.                What are the impacts of microfinance banks policies in Nigeria?

3.                What are the challenges of microfinance in Nigeria?

4.                Why are the establishments of micro-credit institutions necessary in Nigeria?

5.                What policies would facilitate the linkage of informal and formal financial services providers to micro-credit users?

1.5      STATEMENT OF HYPOTHESES

A number of hypothesis were formulated the researcher to enable her test the validity or otherwise of the information obtained from the research work.

The two types of Hypothesis to be considered are;

-                   Null Hypothesis (HO): this is a tentative statement that has no binding force; it is an invalid statement that has no value.

-                   Alternative Hypothesis (Hi): Is defined as a tentative statement of fact that leads itself for an empirical test which occurs by turn successively.