THE IMPACT OF MICROFINANCE BANKS IN RURAL DEVELOPMENT IN NIGERIA (A CASE STUDY OF OSUN STATE POLYTECHNIC, IREE MICROFINANCE BANK)
Microfinance banks are banks that provide banking or financial services other than services provided by commercial banks targeted at people living in the rural dwellers. Microfinance banks have able to improve the banking habit of the rural dwellers I,e the degree to which the rural dwellers make use of banking service or patronize banks. In view of even economic development, microfinance banks have played a great role by providing banking and financial services to peasant low-income earners, rural dwellers, and small-scale businesses.
CHAPTER ONE1.0 INTRODUCTIONMicrofinance has evolved as an economic development approach intended to benefit low-income women and men. The term refers to the provision of financial services to low–income earners, including the self–employed. Financial services generally include savings and credit; however, some microfinance organizations also provide insurance and payment service. In addition to financial intermediation, many MFIs 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 often includes both financial intermediation and social intermediation. Microfinance is not simply banking, it is a development tool.Microfinance activities usually involve: Small loans, typically for working capital. Informal appraisal of borrowers and investments. Collateral substitutes, such as group guarantees or compulsory savings. Access to repeat and longer loans, based on repayment performance Streamlined loan disbursement and monitoring Secure savings productsAlthough some MFIs provide enterprise development services, such as skills training and health care, these are not generally included in the definition of microfinance.MFIs can be nongovernmental organizations (NGOs) savings and loan cooperation, credit unions, government banks, commercial banks, or non-bank financial institutions. Micro finance clients are typically self-employed low-income entrepreneurs in both urban and rural areas. Clients are often traders, street vendors, small farmers, service providers (hairdressers, rickshaw drivers), and artisans and small procedures, 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”.Moneylenders and relating savings and credit associations are informal microfinance providers and important sources of financial intermediation.1.1 BACKGROUND OF THE STUDYMicrofinance in the 1980s as a response to doubts and research findings of state delivery of subsidized credit to poor farmers. In the 1970s government agencies were the predominant methods of providing productive credit to those with no previous access to credit facilities people who had lien forced to pay usurious interest rates or were subject to ransacking behavior. Governments and international donors assumed that the poor required cheap credit and saw this as a way of promoting agricultural production by small landholders. In addition to providing subsidized agricultural credit, donors set up credit unions inspired by the Raiffeisen model developed in Germany in 1864. The focus of these cooperative financial institutions was mostly on savings mobilization in rural areas in an attempt to “teach poor farmers how to save”.Beginning in the mid 1980s the subsidized targeted credit model supported by many donors was the object of steady criticism because most programs accumulated to continue operating. It became more and more evident that market based solutions were required. This led to a new approach that considered microfinance as an integral part of the overall financial system. Emphasis shifted from the rapid disbursement of subsidized loans to target populations toward the building up of local, sustainable institutions to serve the poor.At the same time, local NGOs began to look for a more long–term approach than the unsustainable income generation approaches to community development.In Asia, Dr. Mohammed Yunus of Bangladesh led the way with a pilot group lending scheme for kindles people. This later became the Grameen Bank, which now serves more than 24 million clients (94 percent of them women) and is a model for many countries. In Latin America, ACCION International supported the development of solidarity group lending to urban vendors, and foundation Carvajal developed a successful credit and training system for individual micro-entrepreneurs. Changes were also occurring in the formal financial sector. Bank Rakyat Indonesia, and owned, rural bank, moved away from providing subsidized credit and took an institutional approach that operated on market principles. In particular, Bank Rakyat Indonesia developed a transparent set of incentives for its borrowers (small farmers) and staff, rewarding on–time loan repayment and relying on voluntary savings mobilization as a sense of funds.Since the 1980s the field of microfinance has grown substantially. Donors actually support and encourage micro–finance activities with substantial outreach and financial services only, whereas the 1980s and much of the 1980s were characterized by an integrated package of credit and training that required subsidies. Most recently microfinance NGOs. (Including PRODEM / Bancosol in Boliva, k – Rep in Kenya, and ADEKMI/Banco ADENI in the Dominican Republic) have begin transforming into formal financial institutions that recognize the need to provide savings services to their clients and to access market funding services, rather than rely on donor funds. This recognition of the current “Financial systems” approaches to microfinance. This approach is characterized by the following beliefs: subsidized credit undermines development Poor people can play interest rates high enough to cover transaction costs and the consequences of the imperfect information markets in which lenders operate. The goal of sustainability (cost recovery and eventually profit) is the key not only to institutional permanence in lending. But also to making the lending institution more focused and efficient. Because loan sizes to the poor are small, MFIs must achieve sufficient scale if they are to become sustainable. Measurable enterprise growth, as well as impacts on poverty, cannot be demonstrated easily or accurately outreach and repayment rates can be proxies for impact. One of the main assumptions in the above view is that many poor people activity want productive credit and that they can absorb and use it. But as the field of micro finance has evolved, research has increasingly found that in many situations poor people want secure savings facilities and consumption loans just as much as productive credit and in some cases instead of productive credit. MFIs are beginning to respond to these demands by proving voluntary savings services and other types of loans. 1.2 STATEMENT OF THE PROBLEMThe major problem necessitating the study operated from the Central Bank of Nigeria’s laws, regulation, supervision and central placed over the activities of micro finance banks are: These relive the microfinance and every microfinance bank is excepted with respect to their proper books of account and it must be submitted to the National Board not later than 28 days. Another problem can be seen in its books and affairs because it is a fully fledged bank, its books and affairs are subject to continuous examinations by Central Bank working through the natural board for micro finance banks. Equally, not later than for months after the end of its financial year, each microfinance bank must submit to the National Board and exhibit prominently to the view of all members of the microfinance banks balance sheet and profit and loss account.1.3 OBJECTIVE OF STUDYThe objective of this study is to critically examine the impact of micro–finance banks in rural development in Nigeria, in order to pose the strengthen the micro-finance bank capital base, increase their branch network both locally and offshore.The study further gave the micro finance banks to invest in state-of-the-art information technology and working capital i.e (having an adequate working and sufficient liquidity to meet its immediate and foreseeable obligation and funding requirement). 1.4 STATEMENT OF HYPOTHESISHypothesis I Ho: There is no relationship between microfinance Bank's services and rural development. Hi: There is a relationship between microfinance Banks service and the rural development. Hypothesis IIHo: Microfinance bank does not enhance the development of the rural areas. Hi: Microfinance banks enhance the development of the rural areas.Hypothesis IIIHo: Microfinance banking does not enhance the development of banking habit of rural areas.Hi: Microfinance banking enhances the development of banking habits in rural areas.1.5 SCOPE OF THE STUDYThis research is centered on the impact of microfinance banks in rural development in Nigeria. Osun state polytechnic microfinance banks are used as a case study for the purpose of the research work. 1.6 LIMITATION OF THE STUDYIn the course of this research work, the researcher encounters a lot of problems, which have all contributed enormously to the quality of the information found and used in the study.The following limitation is considered as the major constraints to this research work i.e nonavailability of sufficient past work on the study particularly textbook on the impact of Microfinance Bank in rural Development in Nigeria. The availability of such past work will contribute to the quality and quantity of the information that will be deriving to work on the subject.Finally, time and financial constraints also hindered the research covering more number of micro-finance banks in Nigeria 1.7 SIGNIFICANCE OF THE STUDYThe study has revealed the importance and the impact of microfinance banks on rural areas. Most especially the contribution of Osun state polytechnic microfinance banks on the development of the banking habits of people in its environs.The result of the study will be useful to the following: Government: The result will be useful to the three tiers of government as well as the three arms of government in formulating their respective policies as touching the monetary and economic policies..