CHAPTER ONE

1.0 INTRODUCTION

1.2 BACKGROUND OF THE STUDY

Microfinance has emerged as an effective strategy for poverty reduction.

Across developing countries (Nigeria for example) micro small and medium

enterprises are turning to microfinance institutions (MFIS) for an array of

financial service-microfinance is acknowledged as one of the prime strategies to

achieve the millennium development goals (MDGs)- access to sustainable

financial service enable owners of micro enterprises to increase their capital

base build assets and reduce their vulnerability to external stocks. Access to

financial services enable poor household to move from everyday struggle for

survival to planning for the future investing in better nutrition their children’s

education health and empowering women especially.

However the potency of microfinance as a development strategy is

contingent upon the existence of microfinance institutions which:

1. Have adequate outreach and more impact on poverty

2. Achieve financial and operating self-sufficient

3. Deliver responsive services to micro and small enterprise

Microfinance is the study of loans savings and other basic financial services to

the poor who are traditionally not served by the conventional financial

institution.

These owners of micro and small enterprise require a diverse range of financial

instruments to meet working capital requirement build assets stabilize

consumption and shield themselves against risk. According to Ehigiamusoe (2008)

microfinance primarily focuses on alleviating poverty through provision of

financial services to the poor or owners of micro enterprises. Services users

include artisans small holder farmers food processors petty traders and other

persons who operate micro enterprises according to (Okereke et al 2009). The

financial services include working capital loans consumer credit savings pension

etc. in practice microfinance is much more than disbursement management and

collection of little bits of loans.

Microfinance is not charity organization despite its application as “poverty

lending”. Primarily microfinance seeks to create access to credit for the poor who

ordinarily are locked out of financial services in the formal financial market for

reasons of their poverty that is lack of command over assets. If therefore places

obligation on the borrowers for proper utilization and complete repayment of the

borrowed amount even at commercial interest rate.

Microfinance is not new especially history we come across schemes and

social arrangement which enable people to poor their financial resources for on-

ward distribution to co-operating and needy individual. Example includes

“adachi” and several variants of “esusu”. Nigerian microfinance institutions have

also intergraded best practice of traditional schemes into the operational

procedures.

1.2 STATEMENT OF THE PROBLEM.

Although microfinance services have Endeavour to offer financial services

to the vulnerable groups (youth women especially) their impact on the

economic activities of the beneficiaries still remain low due to its high operating

cost repayment problem in adequate experienced credit staff client apathy and

dropout internal control challenges etc. for instance the percentage dropout rate

of FINCA wobulenzi beneficiaries stands at 33% on average (FINCA internal

annual management report 2004).

Some dropout may be due to improvement on welfare of the bank or the interest

rate while in other cases some have lost –even the little they used to own

(Nakalnesi 2003) this therefore sets the basis for the study.

1.3 OBJECTIVES OF THE STUDY

The study was guided by the following objectives:

1. To examine the nature of financial services offered by microfinance

institutions to the rural communities

2. To identify the indicators of growth in economic activities of microfinance

beneficiaries in Nigeria.

3. To establish the contribution of microfinance banking to capital formation

in Nigeria.

4. To design appropriate strategies that will increase the outreach of

microfinance institutions so as to enhance economic development and

growth in Nigeria.

5. To solve the problems of inadequate experienced credit staff client apathy

and dropout high operating cost repayment problems etc.

1.4 Research Questions

The following research questions are formulated to enable us find lasting

solutions to the problems of this study:

1. Of what importance are the contributions of microfinance banks?

2. How does a microfinance bank credit a small and medium scale enterprise

on capital formation?

3. Do microfinance banks enhance individual household ability to accumulate

assets and create wealth?

4. Is it important for microfinance banks to aid in the facilitation of rural

transformation?

5. How do microfinance banks engage in making finance assessable to

enlarge segment of the Nigerian population?

6. How do microfinance banks create capital?

1.5 HYPOTHESIS FORMULATION

For a purposeful data collection and interpretation the following

hypothesis are hereby formulated

Hypotheses 1

Ho: Microfinance banks loans and advances to rural people have not

contributed much to capital formation

Hi: Microfinance banks loans and advances to rural people have contributed

much to capital formation

Hypotheses 2

Ho: Microfinance bank credit to small and medium scale enterprise of

agriculture and fishery don’t have much impact on capital formation

Hi: Micro finance bank credit to small and medium scale enterprise of

agriculture and fishery have much impact on capital formation.

Hypotheses 3

Ho: Microfinance bank investments are not good tools for the formation of

capital.

Hi: Microfinance bank investments are of good tool for the formation of

capital

1.6 SIGNIFICANCE OF THE STUDY

Poverty is a major challenge facing Nigeria as a country. Many people

continue to suffer deprivation even as reforms continue successful. This condition

is being addressed to avoid a divide that can engulf Nigeria as a country and the

only way to curtain this divide is by expanding opportunities to the poor through

microfinance.

Microfinance itself is not a new phenomenon in the Nigerian society as

evidence by some cultural economic activities like the “Esusu” “Aso” “Otataje”

etc. which were practiced to provide funds for producers in our rural

communities. What is current however is the effort of the government of Nigeria

to modernize micro financing in our rural and urban communities so as to

improve the productive capacity enhance their economic standing which

alleviate the level of poverty and aggregate to improve development of the

national economy. Therefore the significance or importance of this research is to

look at how micro financing through the help of the government can help

improve the lives and standard of living of individuals or citizens in the rural and

urban areas.

There by helping to alleviate poverty and ensuring economic development

of the nation at large.

1.7 SCOPE OF THE STUDY (1992-2010)

The research work study expected to appraise the contributions of

microfinance banking institution to capital formation in Nigeria. As a result all

works microfinance banks instituted at Mberi in Owerri was chosen as a case

study out of the numerous microfinance banks in Imo state.

1. Time: This constitutes a major problem for the research due to the fact

that the study was carted out during the academic period it became a

huge problem attending lectures and going about the organization of the

study.

2. Lack of information: there was also difficulty in getting the required

information especially from workers of the firm. Also laying hands on

literatures that has treated these matters was also an impediment to the

flow of the required information.

3. Inadequate materials: this constitutes a hindrance to an effective research

work. The insufficient supply of literatures such as books journals was also

a problem. Even when seen they are either out dated or out of use for

referencing purpose.

4. Financial resources: Cost implication on conducting and presenting this

research work was enormous. Buying materials needed for this study cost a

lot.

Notwithstanding these constraints the research was well conceived and

packed to serve the purpose of which it is intended which is to look at the

various contribution of microfinance banking institutions of capital formation in

Nigeria.

1.9 ORGANIZATION OF THE STUDY

In the course of achieving the stated objective of this study this work has

been arranged under five chapters to deal with the relevant issues f the topic.

Chapter one gave an average of the background of the study significance of the

study the limitation scope of the study organization of the study and definition

of terms.