Microfinance History in Nigeria

Microfinance History in Nigeria

The Nigerian business environment offers many entrepreneurial opportunities. Various programs and policies were being put in place by both the Federal and State governments to encourage entrepreneurial activities. The Nigerian nterprises Promotion Decree (NEPD) of 1972 which was revised in 1977, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), and National Directorate for Employment (NDE) are some of the means through which Nigerian government aims at encouraging entrepreneurial spirits in the country (Ubom, 2003). The extent to which the Nigerian populace has taken advantage of the numerous business opportunities in the country however remains a perturbed issue. This is especially so if one considers the rate of unemployment that keeps increasing over the years in the country. Despite the numerous advantages of being an entrepreneur, an average Nigerian citizen seems to prefer salaried job which has led to high unemployment rate in the country. The bedrock of any nation’s industrial development is entrepreneurial activities. Unfortunately, there is uneasy access to the conventional loan from the commercial banks to start up a small or medium scale enterprise. The resultant effect is that the underdevelopment situation of the country is getting worse while government seems incapable of taming the ugly incidence. The symptom of this situation is high poverty rate, high unemployment rate, and economic dependence on foreign countries.

Commercial banks usually demand for collateral security before giving out loans for business purposes. This is a necessary factor in obtaining loan as collateral security serves as guarantee for recovering of loans given out by commercial banks in case of repayment default. An average citizen in Nigeria cannot provide such collateral security.

This results to inability of an average Nigerian to access loans from commercial banks. Thus the difficulty of access to loan from financial institutions such as commercial banks constitutes a great setback to entrepreneurial development in Nigeria (Parker, 2006). The evolution of microfinance in the 1970s is to break the barricade to access capitals by low income individuals for developmental purposes. Microfinance is the provision of financial services to low-income, poor and very poor self-employed people (Otero, 2000). To say that microfinance empowers the entrepreneurial spirits that exist among small-scale entrepreneurs worldwide is not an exaggeration. Microfinance has the ability to strengthen micro enterprises and encourage best practices among operators of small and medium scale enterprise. Over two and half decades, governments of developing countries have formulated great programs for economic development. One possible explanation for the relative absence of SMEs in the poor economies is the difficulty of obtaining access to finance. Large firms in these countries can secure financial assistance because they have assets that can serve as collaterals for loans. It could be recalled that the Central Bank of Nigeria (CBN) in its monetary policy circular No. 35 for the year 2001, stated the new initiative that evolve under the aegis of the bankers committee to give impetus to current efforts aimed at ensuring adequate resource allocation to SMEs.

This initiative requires banks to set aside 10% of their profit before tax for the financing and promotion of SMEs in Nigeria. A recent survey of funding sources for businesses in 40 developing nations conducted by the World Bank (USAID, 1995) confirms this general picture very well. Large firms generally have more access to bank credit both local and foreign than small firms, whereas the latter rely heavily on internal funds and retained earnings. Nonetheless, the survey suggested that there is considerable heterogeneity across countries in sources of finance for SMEs. Microfinance has evolved as an economic development approach intended to benefit low income men and women. The term refers to the provision of financial services to low income clients, including the self employed.

Financial services generally include savings and credit; however, some microfinance institutions also provide insurance and payment services. In addition to financial intermediation, many microfinance institutions provide social intermediation services such as group formation, development of self confidence, and training in financial literacy and management capabilities among members of a group.

Thus, the definition of microfinance also includes both financial intermediations and social intermediations. Microfinance clients are typically self-employed, low income entrepreneurs in both urban and rural areas. Clients are often traders, street vendors, small farmers, service providers and artisans and small producers such as blacksmiths and seamstresses. Usually, their activities provide a stable source of income (often from more than one activity). Although they are poor, they are generally not considered to be the poorest of the poor (Ledgerwood, 1997).

The practice of microfinance in Nigeria is rooted in its culture and dates back several centuries. While the microfinance institution has not been structured in the past, the informal sector of the microfinance institution was always present. The family unit, a component of the informal sector in Nigeria, is strong and people frequently rely on their family’s support when other avenues fail. Other informal microfinance institutions provide savings and credit loans to its members; structured like solidarity loans. In recent years, the microfinance institution has developed to more than just the informal sector. The formal microfinance institutions provide savings, credit and insurance facilities to the public. Similar to other countries, the goal of the microfinance institutions is to provide access to credit for the rural and urban, low-income earners, however its impact has been limited due primarily to inadequate funds. In order to enhance the flow of financial services to Nigerian rural areas, the Nigerian government initiated a series of publicly-financed micro credit programs and policies targeted at the poor, for example, the Agricultural Credit Guarantee Scheme. This credit encouraged lending institutions to lend to the poor because the Nigerian government bore the risk of loan default. Microfinance services in Nigeria have adopted both the supply led and demand driven strategy of microfinance, as a result, the number of NGOs involved in microfinance activities has increased dramatically to 900. The inefficiencies of the formal sector in providing funds for the poor have also led to this increase in microfinance institutions.

As the microfinance institutions in Nigeria continued to grow, there were no established governmental policies for regulating and supervising activities in the industry. In 2000, the World Bank, in a meeting with the Nigeria government regarding microfinance, recommended the Central Bank of Nigeria take up the responsibility of developing an appropriate policy, as well as regulatory and supervisory framework for the operation of MFIs. In responding to this recommendation, the Central Bank of Nigeria conducted a baseline study of MFIs in 2001. The survey identified constraints on the operations of MFIs, specifically the lack of performance standards and the absence of a regulatory framework.

Why then is there a need to study microfinance in Nigeria, one might ask? There remain inefficiencies in the current state of microfinance in Nigeria and future roadblocks can be avoided by studying what others have done. Furthermore, there is a need for more capital in the microfinance sector of the economy to increase its impact in the lives of people. There is also a need for the government to review its policies and renew its resolve on its proposed legislation.

The Nigerian experience of micro finance institutions can be a valuable road map to enable policy makers in other countries develop vibrant MFIs that will impact positively on the development of small businesses in their respective countries.