Microfinance Institutions - Essay Example

? Microfinance s College Microfinance s (MFIs) History of microfinance s Microfinance s are relatively new developments in finance that emerged around the 1970s (Robbinson, 2001). Microfinance was an improvement of how donors and governments used to channel funds to the grassroots to help the poor in development projects. Between the 1950s and the 70s, governments and donors used to channel funds to the poor communities for development through rural credit programmes, with most of these funds being subsidised. The results were high loan default rates and high loses that made it impossible to reach the targeted rural poor households (Anyanwu, 2004). In the early 1980s, the history of microfinance institutions gained shape as more of these institutions sprouted in developing countries. The Grameen Bank was among the first pioneers to offer small loans and savings services to clients on a large scale with considerable profit margins. These banks did not have any subsidies, they had highly sustainable businesses and were not commercially funded; they also had a wide outreach in such rural areas (Robinson, 2001). The difference between these institutions and the credit programs rolled by governments in the 50s and 60s was that the new institutions had more emphasis on repayment of credits, charged some interests to cater for the costs of credit delivery and had more attention on customers in the informal sectors (Jegede, kehinde & Ahmed, 2011). In the early 1990s, there was increased growth of MFIs in the number of developed institutions initiated and outreach to more customers. The 90s was the microfinance decade, with attention changing from provision of microcredit to the informal sectors to provision of more services such as savings and pensions that the poor demanded, and which led to the name microfinance institutions (Jegede, kehinde & Ahmed, 2011). Doubts on their effectiveness Though microfinance institutions were believed to benefit the poor, there are ranging debates on the effectiveness of such institutions, with major doubts on their effectiveness in eradicating poverty among rural communities. Hulme & Mosley (1996) in a study on the effectiveness of microfinance institutions observed that the poor households in most cases do not benefit from these institutions (those below the poverty line). The institutions usually benefit those way above the poverty line, defeating the purpose of microfinance institutions in poverty reduction. Most poor individuals according to this study but with significant starting incomes, when given such microcredits had much less growth in incomes obtained compared to the groups that did not receive the microcredits. In other words, the study indicated that credit is not the only factor to be considered in income generation, but other factors such as entrepreneurial skills have to be considered. Karnani (2007) further concurs that most people do not have the skills, visions, creativity and the persistence necessary in entrepreneurship. According to Karnani, in more developed countries, over 90% of people with incomes are in employed labour and not in entrepreneurship. This suggests that it is a simplistic assumption to offer credit facilities to the poor to start successful businesses. Moreover Pollin (2007) asserts that small business run by the poor cannot be successful by the mere fact that they have more opportunities to obtain such credit to initiate them. There are other factors that are pertinent and which are addressed in microcredit provision in poor areas. These include roads, affordable transport to move produce and market support to identify and target customers, which is mostly ignored in such efforts (Pollin, 2007). Daley-Harris (2007) on the same note remarked that microfinance cannot be the solution to global poverty levels, and neither can education, economic growth or proper educational facilities. In other words, it is not possible to use a single intervention to address poverty across the globe comprehensively. On the contrary, the solution has to be found in integrating a wide array of empowering programs and microfinance institutions targeted at the right groups of poor people and effectively managed to be powerful tools towards poverty reduction across the globe. Consequently, microfinance institutions are not the miracle cure to poverty as has been alleged. However, the approach is effective in ending poverty and reducing the effects of poverty among many families when other programs are brought on-board to supplement its efforts. Such programs have to bring out the potential of the targeted people. This is what makes microcredit a powerful tool in eradicating poverty across the world. Moreover, Pollin (2007) asserts that one factor that would make micro-enterprises a success is a live and highly performing domestic market that has enough people with enough resources to purchase what these small businesses have to offer in the market, which in turn increases income for such poor families. Consequently, micro-finance institutions would benefit more when started in an economy with better wages to facilitate more disposable incomes to be spend on products made by such small enterprises. Otherwise, the effectiveness of MFIs would be in great doubt. Failure of MFIs in Nigeria Most microfinance institutions fail shortly after launching in Africa with numerous factors blamed on this failure. Most MFIs fail due to use of services from inexperienced and unskilled staff, lack of proper controls in these institutions, unprofessional working cultures, lack of management and lack of proper management of information systems that would facilitate proper record keeping (Hartarska, 2005). Despite these factors, lack of skilled and competent skills and management has been the major cause of failure in most MFIs. Udoh (2012) explains that weak capital base, lack of skilled management and failure to lend to small business operators are some of the major factors that lead to failure of MFIs in Nigeria. For instance, in 2005 the Central Bank of Nigeria successfully audited 75 out of 600 MFIs (Udoh, 2012). The significance of this is that most of these banks failed to meet the basic levels of standards required in preparation of financial statements or had their accounts poorly prepared due to lack of records or for other reasons. The collapse of such a huge number of banks encourages infiltration of magic banks, local moneylenders, friends and families and other unregulated bodies to offer services. Consequently, most consumers lost faith in such community banks due to their poor performance. Moreover, there is a vacuum created by the required legal framework to support and safeguard MFIs in Nigeria. Lack of secured and low risk transactions has been one of the major barriers leading to failure of MFIs (Mejeha & Nwachukwu, 2008). Such would include lack of proper property rights in the real estate sector, lack of well performing leasing contracts and bankruptcy laws. The effect has been that in most courts, the differences in interpretation of these laws leads to variation and in adequate enforcement of such laws as well as other commercial based contracts. The Central Bank of Nigeria has also failed in that though the bank is mandated to regulate all banking activities in the country, in some cases it shares regulation of MFIs with NBCB, which offered inadequate regulation leading to unethical practices in MFIs, with the affected community banks failing (Mejeha & Nwachukwu, 2008). In addition, most MFIs do charge exorbitant interest rates of between 30 to 90% to borrowers making borrowing rather expensive for borrowers. The effect is that most borrowers shied away from these community banks, leading to lack of business and consequently failing to operate (Mejeha & Nwachukwu, 2008). Moreover, most community banks have very weak capital base and cannot effectively lend to micro-entrepreneurs as required. For instance about 75 among 600 community banks whose financial statements were received and approved by Nigerian Central Bank, in 2005 low rates of shareholders capital that was not impaired by losses (Mejeha & Nwachukwu, 2008). There has been a growing trend among some MFIs in Nigeria to give credit facilities to consumers based in commercial sector due to the impressive returns expected in this sector. This has seen more banks ignoring the agricultural based activities in areas where subsistence agriculture is the main livelihood of most poor Nigerians. The push for such high returns and ignoring the more stable agricultural activities leads to slowed growth and failure of these banks as most people are in farming activities compared to those in commercial activities in rural areas. Consequently, the banks ignore the low risk agricultural sector preferring the high-risk commercials sector, which has led to major losses and failure of some MFIs (Folake, 2005). References list. Anyanwu, C.M. 2004. Microfinance Institutions in Nigeria: Policy, Practice and Potential. Nigeria: Central Bank of Nigeria Research Paper Daley-Harris, S. 2007. Debate on Microcredit. Foreign Policy in Focus, [online] http://www.fpif.org/fpiftxt/4324.[Accessed 12th Sept. 2013]. Folake, A.F.2005. Microfinance as a Policy Tool for Poverty Alleviation: A Study of the Performance of Ten Microfinance Institutions in Nigeria. Morgan State University Hartarska, V. 2005. ‘Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States’ World Development, 33(10), pp. 1627-1643. Hulme, D. & Mosley, P. 1996. Finance Against Poverty. Routledge, London. Jegede, C.A, Kehinde, J & Hamed, A.B., 2011. “Impact of Microfinance on Poverty Alleviation in Nigeria: An Empirical Investigation.” European Journal of Humanities and Social Sciences. 2(1), pp. 97-111. Karnani, A. 2007. “Microfinance Misses its Mark”. Stanford Social Innovation Review, Summer Mejeha, O.R. & Nwachukwu, N.I. 2008. Microfinance Institutions in Nigeria. Munich Personal RePEc Archive. Paper No. 13711 Pollin, R. 2007. Microcredit: False Hopes and Real Possibilities. Foreign Policy Focus. [online] http://www.fpif.org/fpiftxt/4323. [Accessed 12th Sept. 2013]. Robinson, M. 2001. The Microfinance Revolution: Sustainable Finance for the Poor. Washington: World Bank. Udoh, F. 2012. Nigeria: Why Microfinance Banks Failed in Their Role As Grassroots Economic Developers. AllAfrica. [online] http://allafrica.com/stories/201208260196.html?page=2 [Accessed 12th Sept. 2013]. Read More