The effort to fight poverty, including aid and subsidies, was not achieving its aim , and the banking system was incapable of providing for these poor populations. In the village of Jobra, Yunus decided to deliver a personal loan to a group of 42 women to help them start a business.
And it worked: these female makers of bamboo stools took advantage of the loan to boost their productivity, before repaying the sum in its entirety. The act established the basic principles of modern microfinance: combatting poverty through microcredit, and primarily serving women in emerging countries. What happened in Jobra could have remained an isolated incident. But Muhammad Yunus was determined to replicate this first microcredit experience elsewhere.
After receiving a lukewarm reception from the banking system, he decided to create his own program: Grameen. The Grameen system turned traditional banking on its head. It offered small loans to poor populations, with no financial guarantees required in return. It also ushered in the principle of joint responsibility , which involves solidarity between the members of beneficiary groups. Finally, the program targeted women, who had been traditionally excluded from the financial system.
Though it was a bold gamble, the program was an immediate success. In , the program obtained the status of a banking establishment. The s and s saw the model exported around the world through the intermediaries of NGOs and financial institutions.
Soon a full-fledged microfinance industry emerged in developing countries. The early 21st century marked the international rise of microcredit. While the first microcredit summit took place in Washington in , the G8 outlined the principles of microfinance in , tracing the contours of a new economic sector. BNP Paribas quickly recognized the revolution that microfinance represented in the global economy. Critiques of microfinance began to emerge in the s. The first cracks appeared in with the Compartamos scandal.
Founded in the early s to issue loans to poor Mexican women living outside of urban areas, this former NGO, valued at nearly two billion dollars, received a barrage of criticism including: high interest rates and consumer loans, intimidation of creditors, lack of transparency, and a focus on profits over its social objectives.
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List of Partners vendors. The goal of microfinance is to ultimately give impoverished people an opportunity to become self-sufficient. Microfinance services are provided to unemployed or low-income individuals because most of those trapped in poverty, or who have limited financial resources, do not have enough income to do business with traditional financial institutions.
Thus, many poor people typically look to family, friends, and even loan sharks who often charge exorbitant interest rates for help. Microfinance allows people to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices. Although they exist all around the world, the majority of microfinancing operations occur in developing nations, such as Uganda, Indonesia, Serbia, and Honduras.
Many microfinance institutions focus on helping women in particular. Microfinancing organizations support a large number of activities that range from providing the basics—like bank checking and savings accounts—to startup capital for small business entrepreneurs and educational programs that teach the principles of investing.
These programs can focus on such skills as bookkeeping, cash-flow management, and technical or professional skills, like accounting. Unlike typical financing situations, in which the lender is primarily concerned with the borrower having enough collateral to cover the loan, many microfinance organizations focus on helping entrepreneurs succeed. In many instances, people seeking help from microfinance organizations are first required to take a basic money-management class.
Lessons cover understanding interest rates, the concept of cash flow, how financing agreements and savings accounts work, how to budget , and how to manage debt.
Once educated, customers may apply for loans. Just as one would find at a traditional bank, a loan officer helps borrowers with applications, oversees the lending process, and approves loans.
Like conventional lenders, microfinanciers must charge interest on loans, and they institute specific repayment plans with payments due at regular intervals. Some lenders require loan recipients to set aside a part of their income in a savings account, which can be used as insurance if the customer defaults. If the borrower repays the loan successfully, then they have just accrued extra savings.
Empowering women in particular, as many microfinance organizations do, may lead to more stability and prosperity for families. Because many applicants cannot offer collateral, microlenders often pool borrowers together as a buffer.
After receiving loans, recipients repay their debts together. Because the success of the program depends on everyone's contributions, this creates a form of peer pressure that can help to ensure repayment. For example, if an individual is having trouble using their money to start a business, that person can seek help from other group members or from the loan officer.
Through repayment, loan recipients start to develop a good credit history , which allows them to obtain larger loans in the future. Interestingly, although these borrowers often qualify as very poor, repayment amounts on microloans are often actually higher than the average repayment rate on more conventional forms of financing.
For example, the microfinancing institution Opportunity International reported repayment rates of approximately 99 percent in Microfinance is not a new concept.
Small operations have existed since the 18th century. The first occurrence of microlending is attributed to the Irish Loan Fund system, introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish citizens. In its modern form, microfinancing became popular on a large scale in the s. The first organization to receive attention was the Grameen Bank, which was started in by Muhammad Yunus in Bangladesh.
In addition to providing loans to its clients, the Grameen Bank also suggests that its customers subscribe to its "16 Decisions," a basic list of ways that the poor can improve their lives. The "16 Decisions" touch upon a wide variety of subjects ranging from a request to stop the practice of issuing dowries upon a couple's marriage, to keeping drinking water sanitary.
In , the Nobel Peace Prize was awarded to both Yunus and the Grameen Bank for their efforts in developing the microfinance system. India's SKS Microfinance also serves a large number of poor clients. Formed in , it has grown to become one of the biggest microfinance operations in the world. SKS works in a similar fashion to the Grameen Bank, pooling all borrowers into groups of five members who work together to ensure that their loans are repaid.
There are other microfinance operations around the world. Some larger organizations work closely with the World Bank , while other smaller groups operate in different nations. Some organizations enable lenders to choose exactly who they want to support, categorizing borrowers with criteria such as level of poverty, geographic region, and type of small business. The emergence of miracle or magic banks from time to time has done a lot of disservice to the image of microfinance banks.
Most of the victims of these scams are customers that microfinance banks should service but become skeptical about banking after the miracle bank experience. Many others do not see any difference between those magic banks and the licensed microfinance banks.
Another prevalent problem among microfinance banks is the copying, competing and mimicking the practices of commercial banks. To these staff microfinance banking is just an extension of the commercial banking they know.
They also come with their organizational orientation, philosophy and culture. They refuse to understand that microfinance is not micro-commercial banking but a different kind of banking requiring a different approach, philosophy and client base.
This may be why many microfinance banks spend colossal sums on office complex, exotic cars and the wardrobe of their staff. They also engage in inordinate competition with the commercial banks. This class of staff lack orientation as to the essence of microfinance. The constant government policy changes offer its set of challenges to the microfinance banks. In , commercial banks were consolidated; they became so big obviously leaving the not too wealthy client segment to microfinance banks.
Today banks have been reclassified into regional, national and international, fuelling fears that the regional banks might be in direct competition with microfinance banks. In addition to this, Islamic banks are being licenced and may end up in the same market segments as microfinance banks.
The rate of interest charged by microfinance banks leaves a lot to be desired. Prospects of Microfinance Banking in Nigeria That a lot of opportunities exist in the microfinance subsector in Nigeria is unarguable. Scholars are unanimous in their agreement that there exist a large untapped market for microfinance banks. In the same line though differing in figures,[18] held that microfinance banks in Nigeria only serve less than one million people against the over 40 million that require their services.
The gap in this subsector was further demonstrated by[6] when it showed that microcredit facilities in Nigeria account for about 0. The scenario above is indicative of an enormous market which microfinance banks can take advantage of. To say that this leaves a lot of room for existing microfinance banks to expand their scope of operations and for new ones to enter will be stating the obvious.
One indication of this is the implementation of training programmes for regulators, promoters and practitioners by the Central Bank of Nigeria CBN. The CBN has even gone ahead to adapt the suggestion of[22] that it subsidizes the training of practitioners in the sector to reduce the burden on the banks.
Today the CBN pays 60 per cent of the cost of training the management staff of these banks, this is aimed at improving capacity in the industry. This has improved public confidence in the subsector. Furthermore, the review of the deposit insurance limit from one hundred thousand N, Conclusions Nigeria is a country with enormous resources, unfortunately despite this a great number of Nigerians still live in poverty. It is in the bid to address this that the government formulated the microfinance policy guidelines in This guideline among other things provided for the licensing of microfinance banks.
The microfinance banking subsector in Nigeria is therefore relatively young having taken-off in Like many new ideas, it is undergoing a challenging and trying period. Some the challenges microfinance banks in Nigeria face are, regular changes in government policies, lack of requisite human capital, infrastructural inadequacies and socio-cultural misconceptions.
In addition to these, the banks are further inhibited by corruption, frauds and forgeries and poor corporate governance. To address these issues concerted efforts on the part of regulators, promoters, practitioners and other stakeholders in the microfinance banking subsector is required. This is to ensure that they do not drag the subsector under as was the case of previous microfinance schemes of government.
It is expedient that these banks succeed and grow considering their poverty amelioration potentials. The extent of poverty being experienced in the country, the large informal finance sector, the huge rural economy and the involvement of over 70 per cent of the population in agriculture and small and medium scale enterprise are clear indications that a vast untapped market exist for these banks. If this huge market challenges identified are addressed, then the prospects of microfinance banking in Nigeria is very bright.
Recommendations To enable microfinance banks in Nigeria take advantage of the enormous market potentials, the following suggestions to mitigate the challenges they face are advanced; i. The capacity building for the practitioners which the CBN and NDIC are undertaking is a welcome development and should be extended to the Board of Directors of these banks.
This will ensure that the Directors who craft the policies for these banks are on the same page with their management staff.
They should be made to understand the operational limits, modalities and objectives of microfinance banks. Particularly, they should be made to realize that these banks are not mini commercial banks and that microfinance banks pursue social motives in addition to financial sustainability. The government should make good its promises of improving social infrastructure in the country. Special attention should be paid to power supply as this constitutes a major cost to microfinance banks.
Since poor banking culture is one of the fundamental problem plaguing microfinance banking in Nigeria, it becomes expedient that these banks should train their clients in financial literacy before disbursing loans to them. The clients should be made to understand the intricacies of such facilities, including repayment mode, interest charges and benefits of keeping to the terms of the credit contract.
There is need for microfinance banks especially those operating in the Northern part of the country to be proactive in product development. Since the religious precepts of many people in that part make them abhor interest on loans, the banks should provide them with interest free loans. Better still the regulators should encourage interest free microfinance banking by producing guidelines to ensure its success as they have done for the conventional banks.
References [1] Okpara, G. In Okonkwo, I. Issues in National Development ,pp. The Nigerian Accounting Horizon, 2 1 , 54 — Abuja: CBN. Singapore: Institute of Southeast Asian Studies.
African Journal of Entrepreneurship , 1 1 , Journal of Business Management , 1 2 , Public Affairs , Uyo: Abaam Publishing Co.
Journal of Sustainable development in Africa , 12 6 ,
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