Sustainability and Profitability of Microfinance in Nigeria - Thesis Proposal Example

SUSTAINABILITY AND PROFITABILITY OF MICROFINANCE IN NIGERIA Thesis Proposal Microfinance services are offered to Nigerian citizens who do not have a good credit history or employment. It is a service offered by microfinance institutions like commercial banks, and various financial institutions in Nigeria with a focus of alleviating poverty due to high unemployment rate. The clients of these institutions are offered financial resources in order to venture into SMEs, and repay the loans with the profits gathered from the endeavors. Therefore, there is a great need to discuss the way microfinance organizations can facilitate their profitability and sustainability in order to continue serving the citizens of Nigeria and alleviating. The paper begins with an introduction of the Nigerian Business environment and issues related to microfinance services and institutions. The research question, problems statement, research objectives and purpose of the study is well indicated. The literature review explores other sources in order to gather information related to sustainability and profitability of microfinance institutions. The methodology section describes the process of data collection and analysis in order to develop a substantial discussion and a good conclusion. Table of Contents Introduction 4 Research question 6 Problem statement and research objective 6 Problem statement 6 Research objectives 6 Research Questions 6 Purpose and significance of the study 7 Literature review 8 Research methodology 12 Discussion of the findings 12 Conclusion 13 Bibliography 13 Introduction The Microfinance in Nigeria focuses on facilitating the availability of financial services on a sustainable basis to those who are economically poor, low-income earners, micro, small and medium enterprises in the Microfinance banks. There is a fundamental role played by small and medium enterprises in the growth and development of economy of a nation. Moreover, small and medium scale enterprises also have a strategic role in the process of industrialization in both developing and developed nations1. According to Churchill and Frankiewicz, microfinance refers to the small, working capital loans, which are invested in microenterprises or other activities aimed at generating income. Most of the microenterprises are family businesses that have less than five employees, for instance retail shops, sewing workshops, market stalls and carpentry workshop. Microfinance refers to a broader concept that relates to provision of financial services in addition to extension of loan, including savings, insurance and leasing facilities to clients that are not included in traditional financial systems on account in relation to their economic status2. Clients without security, employment and provable credit history and other minimum qualifications for accessing traditional credit facilities, while the microfinance institutional models include services of commercial banks, restricted service banks, regulated non-bank financial institutions, society memberships and projects in non-governmental organizations. In fact, organizations serve as official sources of business finance for microenterprises through providing secure and remunerative depositories for domestic reserves. Microfinance institutions are considered providers of financial services in order to alleviate poverty for the low-income earners, and it regarded as a process of enhancing a greater accessibility of high quality financial services in order to finance their small businesses3. Therefore, the clients of the microfinance in Nigeria are poor people and low-income earners, who find difficulty in benefiting the conventional form of financial institutions. In this case, the financial services that are rendered by microfinance institutions are not constrained to credit facilities, since they entails the savings, insurance and transfer of money. Sustainability refers to the long-term continuation of microfinance programs after discontinuation of a project activity, whereby it entails appropriate systems and processes that are implemented to facilitate the availability of microfinance services4. This occurs on a continuous basis, and the clients are able to benefit from the services routinely. In this case, the program meets the needs of the members through a resource that are raised through the strength among the clients or the external sources. On the other hand, profitability refers to the provision of loans to the micro-entrepreneurs, who have a relatively attractive potential of generating profit and growth5. In a country like Nigeria, the profitability of microfinance institutions is constricted by significant competition in the industry, though there are issues related to sustainable and profitable expansion of microfinance in Nigeria has been considered an increasing disquiet for the government and private sector. Research question The main research question seeks to explore issues related to the profitability and sustainability of microfinance institutions in Nigeria, whereby the financial sustainability of the microfinance banks focuses on their operating income in order to cover their administrative costs. Problem statement and research objective Problem statement: the problem statement of the research seeks to elaborate on the sustainability and profitability of microfinance in Nigeria. Research objectives: The research objectives are; examine the significance of entrepreneurial activities for sustainability and profitability of Micro fiancé institutions in Nigeria. Assess the challenges and accessibility of capital for development of entrepreneurship in Nigeria through the sustainability of microfinance institutions. Establish the impact of microfinance institutions on development of entrepreneurship in Nigeria, while research will also generate knowledge of the significance of microfinance organizations to expansion of private enterprise in Nigeria. Research Questions: a) How is sustainability and profitability of microfinance maintained in Nigeria? b) Does sustainability and profitability of microfinance contribute to economic development in Nigeria? c) What are the prospects of development in microfinance in Nigeria? d) Does sustainability and profitability of microfinance in Nigeria have any implication on the industrial development? e) Does sustainability and profitability of microfinance in Nigeria facilitate the accessibility of capital for the development of small and medium Size entrepreneurship in Nigeria? Purpose and significance of the study The research will seek to elaborate on the ways financial services are offered by the microfinance institutions in order to fit the preference of low-income earners, hence giving the meaning of the short-terms and long-term loans and the extent of extending the repeat loans. The paper will also focus on discussing the streamlined operations that are aimed at reduction of costs in order to maximize profitability, through operations like maintaining inexpensive offices and standardizing processes. It also explains the way these institutions motivate clients for them to repay loans through motivational incentives and developing staff competence and public image. Nevertheless, the ultimate objective of the research is to contribute to the body of existing knowledge in issues related to profitability and sustainability of microfinance institutions. Literature review The business environment in Nigeria provides the entrepreneurs with opportunities, through programs and policies that are implemented by the government in order to facilitate the entrepreneurial activities. In 1972, there was establishment of Nigerian Enterprises promotion Decree (NEPD), which was later revised, while Small and Medium Enterprises Develop Agency of Nigeria (SMEDAN), and National Directorate for Employment (NDE) are used by Nigerian government in order to facilitate entrepreneurship6. The population of Nigeria has taken benefit of many business opportunities in the country, due to the rate of unemployment increasing over the years. There are numerous advantages of entrepreneurship among Nigerian citizens, though there is preference of salaried jobs that has led to an increase in the rate of unemployment. Therefore, there is a need to explore the sustainability and profitability of microfinance institutions since they assist in reduction of unemployment in Nigeria7. Moreover, microfinance institutions provide loan losses and cost of funds, taking cognizance of the inflation effects and funding requirements to plough back their profits for growth and sustainability. Sustainability of microfinance in Nigeria can be understood through financial terms or resource terms, though the broad dimensions and major dimension is the financial sustainability. Nevertheless, there are other dimensions of sustainability, which include; Institutional sustainability that focuses on organization’s dimension that deals with internal organizational environment. In fact, these refer to dimensions that complete the organization through a wholesome, vibrant and the current concern of the microfinance institutions. The other sustainability refers to mission that keeps the organization in the appropriate path in their long term endeavors8. There are activities that the microfinance organizations should be engaged in and have a constant evaluation of compatibility with defined mission of the organization. However, changes that are brought about in the mission statement of the microfinance are articulated appropriately with participation in the processes in the organization. The other form of sustainability concerns the perception of the stakeholders in relation to the service received, and their significance, value and willingness for making assumption, responsibility and ownership9. Therefore, in the case of microfinance, there is development of phasing out strategy due to the program for supporting the clients and seeking external subsidy. The microfinance institutions should focus on the recruitment, inducement, training and maintenance of qualified staff with the capability of delivering the required services to the organization. The staff should have the capability of monitoring and maintaining organization in order to ensure that it is not the right track by understanding the parameters of sustainability. In fact, financial sustainability refers to ability of microfinance to cover all its present costs and those incurred during its growth during the expansion of operations. Consequently, this indicates that the microfinance institution has the ability to meet its operating costs, financial costs and adjustment of inflation and other costs. Financial stability focuses on the charging interest rates that are sufficient to cover for the operating costs, loan losses and interest and adjusting expenses. On the other hand, microfinance operates efficiently through reasonable, competitive and affordable interest’s rates that are charged over their costs. Long-terms sustainability requires the management of delinquency by the microfinance in order to minimize the costs of capital through mobilizing savings, rotating their portfolio efficiency, minimizing their operating costs, and setting interest rates to cover their costs. The other form of sustainability refers to dealing with the gamut of issues for coping with demand and supply of microfinance. Market sustainability also caters for the issues concerning different forms of clientele, different types of needs and design products that fits the needs of the clientele10. Sustainability, if demand in microfinance institutions serves the needs of the clients in a friendly way and sustainability of supply of resources require the microfinance to have self-sufficiency in finance in order to meet all operational cost. They should also access resources that are raised from the clients and other external sources at interest rates that are commercially viable11. Market sustainability of the microfinance also concerns the availability of numerous choices for the clientele, though the sustenance of effective and efficient services are not due to artificially developed imperfections. Market sustainability is also entails existence of stability and friendly legal and environmental policy that facilitate proliferation of a large number of organizations involved in delivery of microfinance services. It also deals with issues related to legal forms of organization, interest rates, mobilizing savings and resources form the capital market and other commercial sources. In addition, impact sustainability in microfinance has been established through an effective methodology for alleviation of poverty in disadvantaged areas. Therefore, there is necessity involved in services delivered through organization that are focusing on positively influencing poverty12. In terms of the microfinance profitability, institutions offering microfinance service has to focus on the costs that can be distinguished between the cost of related financial services and the functional costs13. There is a possibility of separating the segments of costs of microfinance institutions in the services such as training, technical assistance, consultancy and ensuring a good credit behavior that minimizes the risk of losses. The financial service earning subsidizes the costs that are incurred because of non-financial services. There are other costs attributed to the services offered by the microfinance services by the personnel expenses. The expenses include refunding staff moving, preparation loan officers, loan loss provisions and interest expense on borrowing in order to refinance the loan assortment, while other categorization of microfinance cost that include both fixed and variable costs, whereby fixed costs include office rent and variable costs include travel expense for meeting clients. The profitability of the microfinance from the loan portfolio occurs through the nature of business as the fundamental source of revenue for the microfinance institutions with two components that include the charges and commissions. Moreover, the microfinance institutions obtain their revenue from other sources other than lending, whereby it allocates its assets as loan portfolio in order to create the need for increasing returns through other activities that are beyond lending. The profitability is a representation of the general interest on investment, net gain on financial assets and revenue for non-lending services such as trading seeds with cooperative clients that are financed by their loan. The profitability of microfinance institutions has relatively insignificant gain from the economies of scale since the microcredit is considered labor intensive, whereby the salaries contribute significantly to their expenses14. However, there are other fixed costs that are relatively low, compared to the variable costs, while the operating cost entails the expenses though personnel and administrative costs. On the other hand, microfinance institutions incur a certain percentage of provisions in loans loss in profit and loss account that requires a consideration of the major costs from the outset. There is a need to monitor the reports of the microfinance institutions in relation to borrower of the loan and servicing behaviors that means a timely and controlling and repayment rates, thereby serving as indicators of the relevant portfolio quality15. The rates of repayment are based on the cash flows within a certain period, whereby they do not report cumulative arrears in their portfolio. In numerous cases, there is an inconsistence in repayment of loan, whereby there is ninety-eight percent repayment and two percent loan loss. In fact, the repayment rate is an evaluation of the cash flow during a period, but do not account for the accumulation of loss or risk that is increased in the future in relation to delinquent loans. Nevertheless, in order to facilitate the profitability of microfinance institution there is a need to undertake precautions related to measurement and provision of sufficient loan loss in advance, hence it facilitates correct measurement of costs of loan. There are other sources of gains, which include insurance, conveying services or non-financial revenue from offering financial services like sale of passbooks, smartcards and net exchange gains, while other source of cash flow for the microfinance relates to mandatory savings accounts of the clients. Research methodology Data collection Data will be collected from both primary and secondary sources of data in the process of conducting the study, whereby data from the primary sources will be collected through an interview of randomly selected respondents from local microfinance institutions in Nigeria. There will also be structured questioners that will assist in collection of relevant data from the field of study. The secondary sources will be other researches on the same field, which will be obtained through an internet search using the commonly known search engine such as Google. Data analysis This is a qualitative research; hence, collected data will be analyzed qualitatively, whereby data collected from the structured questions in the interviews and the open-ended questioners will be analyzed by descriptive statistics. The descriptive analysis will entail identification of the frequency distribution for the information in the interviews. Other open-ended question will be analyzed through comment analysis, and results will be presented through charts, graphs and tables. Discussion of the findings Findings from the analysis will be used to establish a basis of a discussion in order to determine whether information collected from the study relates to the literature review in order to answer the research question. The discussion of the results will use textual write-ups that are formally applied in analysis of the graph tables and charts. Therefore, ideas established in this section will be discussed on the basis of the literature review and studies conducted earlier. Conclusion The research proposal seeks to explore issues related to profitability and sustainability of the microfinance in Nigeria. This research is an effort to override the need of small business in order to facilitate the establishment of a sustainable economic development. On the other hand, there is relevance of microfinance institutions, whereby finance required for servicing the financial needs of the SMEs in Nigeria has also been documented in this work. In fact, the literature review covers both aspects of sustainability and profitability of the microfinance in Nigeria. It also explains the effort made by the microfinance institutions in empowering their sustainability and profitability. Therefore, factor that contributes to profitability and sustainability of microfinance institutions in Nigeria, and through a discussion of these factors the purpose of the research is achieved. Bibliography Agbola, Adeleke. “Prospects Challenges of SMEs and Micro- finance in Post Consolidated banks”, The Guardian, 25 June, p.23: 2007. Baumback Anyanwu. Micro finance institutions in Nigeria: Policy, Practice and Potentials being a paper presented at G24 Workshop “Constraints to Growth in Sub Saharan Africa” Pretoria, South Africa, November, 29-30, 2004. Nitin Bhatt and Shui-Yan Tang. (2001). Delivering microfinance in developing countries: controversies & policies perspective: Policy Studies Journal 29(2) 319-333. James Brau and Gary Woller. 2004. Microfinance: A Comprehensive Review of the Existing Literature, Journal of Entrepreneurial Finance and Business Ventures, vol. 9, no. 1, pp. 1-26. Guy Vincent. Sustainable Microentrepreneurship: The Roles of Microfinance, Entrepreneurship and Sustainability in Reducing Poverty in Developing Countries. Retrieved on 30 Setember 2012 from   Félix Mawuko Agbobli and Adamu Garba. Undp/Uncdf: Support to the Development Of Sustainable Microfinance Sector in Nigeria. Mid – Term Evaluation Report. September 2007 . Retrieved on 30 September from Shahidur Khandker. “Microfinance and Poverty: Evidence Using Panel Data from Bangladesh”. World Bank Economic Review 19(2): 2005. 263–86. Ugwu, Cris (2007) “The place of Microfinance banks in Nigeria’s economy”, The Guardian, 17 January, p.27. Ledgerwood, Joanna, White, Victoria and Brand, Monica. Transforming microfinance institutions: providing full financial services to the poor. Washington DC, World Bank Publications. 2006 Ledgerwood, Joanna, “Microfinance handbook: an institutional and financial perspective” Washington DC, World Bank Publications, 1999 Okaro Sunday Chukwunedu. 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