Definition and Objectives of Microfinance         Banks

        Definition of Microfinance Banks

Microfinance is defined as the provision of thrift, credit and other non-financial services and product in very small amount to the poor to enhance them raise their income level and improve their standard of living (Eluhaive, 2005). It is the provision of very small loans that are repaid with short period of time and is essentially used by poor individual and household who have few assets that can be used as collateral. A Microfinance bank therefore,  may be construed as a company licensed to carry on the business of providing microfinance services such as saving, loans, insurance, money transfer service and other financial service that are needed by the economically poor, micro-, small- and medium enterprises (CBN, 2009).

Microfinance recognizes the peculiar challenges of micro-enterprises and of their owners. It recognizes the inability of the poor to provide tangible collateral and therefore promotes collateral substitution. Disbursement and repayment are structured to suit credit need and cash flow pattern of small businesses (Aderibigbe, 2001).  Kimotha, (2005) also defined microfinance simply as the provision of every small loans (micro- credit) to the poor, to help them engage in new productive business activities and or to grow or expand existing ones. However, overtime microfinance has to include a broader range of services. These include mainly credit, savings opportunities, insurance and money transfer, as practitioners came to realize that the poor who lacked access to the traditional formal financial institutions needed and required a variety of financial products to achieve meaningful improvement in their business activities.

 

According to the United Nation Capital Development Fund (UNCDF), the government of Nigeria identified microfinance as an effective tool in achieving the three objectives of:

i)       A strong and focused emphasis on economic growth;

ii)    Better access by the poor to social service and adequate infrastructure; and

iii)  Targeted interventions to protect low-income population or the most vulnerable, because it helps poor people to expand their business, increase their revenue and augment employment thereby contributing to the economic development of the country.

 

According to CBN (2005) microfinance is defined as a means of providing the economically active poor and low income households with financial services such as credit (to help them engage in income generating activities or expand their small businesses), savings, micro leasing, micro insurance and payment transfer.

 

Micro finance banks are basic instrument through which the whole concept of micro finance is executed. According to the basis of micro finance, it is a term, which is related with promoting the habit of savings. At the same time, the concept also aims at providing loans and insurance and other traditional service to the poor people to support their business, which can also be termed as micro business. The prime aim of these banks is to provide institutional financial services to those people who are denied from all these because of their poverty.

However, Microfinance Bank is any company licensed by the Central Bank of Nigeria to carry on business of providing microfinance services such that are needed by the economically active poor, micro, small and medium enterprises to conduct or expand their businesses as defined in the guideline for MFBs in Nigeria. This is to create vibrant micro-financing that provide the necessary stimulants for national growth and economic development.

        Objectives of Microfinance Banks

The objectives of the microfinance Banks in Nigeria in line with CBN (2005) provision among others include to:

i.          Promote rural development through financial intermediation

ii.        Stimulate of productive activities in the rural sector

iii.     Develop banking habit in rural dwellers and ensuring the development of an integrated national financial system.

iv.     Improve the economic status of small-scale producers in the rural and urban areas

v.        Provide diversified, dependable end timely financial services to the economical active poor

vi.     Create employment opportunities

vii.   Render payment services such as salaries, gratuities and pension on behalf of various tiers of government

viii.Increase access to credit as well as productive assets and enhance opportunities for ownership through savings mobilizations

ix.     Increase the financial capacity of participating organization to provide micro finance services to the economical active poor

x.        Develop co-ordination and collaboration between the different actors in the microfinance sector and promote an appropriate regulatory framework

xi.     Contribute to the development of knowledge, expertise and information in microfinance

xii.   Enhance the local capacity to provide technical assistance on a sustainable basis and ensure the continuity of the initiatives taken in the pilot programme.