What Are The Problems And Prospects Of Microfinance Banks In Nigeria?

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The objective of microfinance is similar to that of microcredit, its goal is to provide financial services to help encourage entrepreneurs in impoverished nations to act on their ideas and obtain the financial tools available to do so and to eventually become self-sustainable. These companies primarily benefit the low-income group and the underprivileged section of the society. They objectively aid people from low-income groups by providing them credit through relaxed provisions. Microfinance generally refers to the provision of basic financial services such as loans, saving accounts and insurances for low-income but economical active people. In most instances the term microfinance refers to the provision of small loans for micro-entrepreneurs. This article will provide information about "what are the problems and prospects of Microfinance Banks In Nigeria?" and also provide answers to questions regarding Microfinance Banks in Nigeria.

What Are Microfinance Banks?

Microfinance Bank (MFB) is any company licensed by the Central Bank of Nigeria CBN to carry on the business of providing financial services such as savings and deposits, loans, domestic funds transfer and non-financial services to microfinance clients. Microfinance banks are small scale banks that aid small scale businesses in Nigeria. They are semi-formal institutions and it can be non-governmental or a community development initiative. They are made up of a system that involves a wide range of structures which provide financial support to small scale businesses, these structures in each of these banks vary and this is dependent on the nature and type of the bank.This bank is a financial institution that accepts deposits from the public and creates credit, by acting as a source of financial services for entrepreneurs and small businesses lacking access to banking and related services thereby helping to promote the economy of Nigeria.

The Advantages Of Microfinance Banks In Nigeria

  • Disburse Quick Loan Under Urgency
  • Microfinance companies provide secure and collateral-free funds to an individual in the demanding situation to meet their financial need, as financial crisis is are unpredictable and it could creep up at any point in time without intimating anybody.
  • Provides Collateral-Free Loans
  • Some of these microfinance companies seek no collateral for providing financial credit. The minimum paperwork and hassle-free processing make them a suitable option for quick fundraising.
  • They Help People To Meet Their Financial Needs
  • They provides unparalleled services when it comes to loans or credit. Microfinance companies offer different proposition altogether and are dedicated to serving a poor and unemployed individual by providing them easy financial credit.
  • Promote Self-Sufficiency And Entrepreneurship
  • Microfinance companies ensure entrepreneurship and self-sufficiency among the lower-income group, they can provide much-need funds to an individual for setting up a healthy business that seeks minimum investment and offers sustainable profit in the long run.
  • Provide An Extensive Portfolio Of Loans
  • They are not limited to providing emergency credit and are also capable of disbursing housing loans, business loans, and working capital loans with minimum formalities and processing.
  • Provision Of Loans For Small Scale Business
  • Microfinance banks makes it easier for loans to be obtained for small scale businesses in Nigeria. These loans obtained enable starting businesses with the potential to generate mega income as well as support those who want to start a small scale business. They are therefore better ways for starting small scale businesses to obtain loans in Nigeria.
  • Promotion Of The Nigerian Economy
  • Small scale business is among the best methods of promoting the Nigerian economy, this is also a way of reducing Nigeria’s too much dependence on crude oil as the main substance of the Nigerian economy. The more these small scale businesses are supported through loans from microfinance banks, the more the Nigerian economy is promoted.
  • Increasing Job Opportunities
Since microfinance banks support these small scale businesses , which make up a reasonable percentage of the Nigerian economy, they tend to increase the availability of jobs for Nigerians Increasing these small scale businesses increase job opportunities.

The Disadvantages of Microfinance Company

  • Small Loan Amount
  • Unlike other financial institution, Microfinance Companies offers a smaller loan amount. Because they do not ask for collateral against the credit these makes disbursement of the large loan amount is practically impossible.
  • Harsh Repayment Criteria
  • Microfinance Companies adopts a harsh repayment approachIn the absence of the legit working protocol and compliance's that their clients would not prefer in the state of the financial crisis because they work under strict compliance's and can manipulate their customer for repayment unethically.
  • High-interest rate
Microfinance Companies do not give low-interest based loans, because they don’t follow traditional banks’ footprint as they also have to borrow money from these banks to execute appropriately and allocate some part of it for risk management.

Challenges Faced By Microfinance Institutions

  • Higher Interest Rates In Comparison To Commercial Banks
  • Most Microfinance Institutions charge a very high rate of interest when compared to commercial banks as the financial success of MFIs is limited when compared to commercial banks.
  • Over Indebtedness
  • Over-indebtedness poses a severe challenge to the growth of microfinance banks, as the increase in trend of multiple borrowing by clients and inefficient risk management are the most significant factors that stress the microfinance industry as the sector gives loans without collateral it increases the risk of bad debts. Over-indebtedness makes the MFIs open to credit risk and increases the cost of monitoring that they have to incur to stay profitable in the long run.
  • Inadequate Investment Validation
  • Investment valuation is an important capability for the healthy functioning of an MFI. The developing nature of the markets in which MFIs operate and market activity is very limited, making it difficult for MFI to gain access to market data for valuation purposes.
  • Widespread Dependence on Banking System
  • Microfinance institutions are dependent on financial institutions such as commercial banks for stabilized funding to carry out their own lending activities Because most microfinance institutions function as registered Non-Governmental Organizations (NGOs) and this dependence makes them incompetent as a lending partner.
  • Lack Of Consistent And Reliable Valuation Procedures
  • Microfinance institutions are unable to achieve the level of quality information that they need to be able to make investment decisions as they lack consistent and reliable valuation procedures.
  • Regulatory Issues
  • The regulatory body for the microfinance industry cares more for commercial and traditional banks more than it helps MFIs as even the needs and the structure of microfinance institutions are totally different from those of other lending institutions. The Microfinance industry appears to be struggling to sustain as the new regulations result in structural and operational changes and also result in ambiguity in norms of conduct as it results to sub-optimal performance and failure in the development of new financial products and services.
  • Choice of Appropriate Model
  • Most MFIs choose the models randomly, regardless of the situation they hardly select the model based on scientific reasoning and this choice of the model increases the risk of borrowings for the weaker section beyond they can bear and is irreversible.
  • Poor Finance Management
  • Funds that are meant to serve as loans in microfinance banks are being smuggled into other purposes and this is very rampant in microfinance banks and this has dramatically reduced the functional ability of microfinance banks to disburse their loans to their staff. Measures should be taken to ensure the proper utility of funds in microfinance banks. This will make them more functional and more effective in their banking operations.
  • Lack Of Enough Awareness Of Financial Services In The Economy
  • There is a severe lack of awareness of financial services provided by the microfinance industry among the masses, this lack of adequate knowledge is an important factor that stops the rural population from accessing MFIs for easy credit to meet their financial needs and also contributes to widespread financial exclusion in the country and makes it difficult for these institutions to thrive in excessively competitive environments.
  • Poor Mentality About Loans In Nigeria
  • The poor mentality in Nigeria that loans are too risky for Nigerians and that it is a bad way to start a business has actually reduced the performance of microfinance banks in Nigeria.
  • Inadequate Support
  • The Nigerian central banking system do not give microfinance banks the best support that they need this is due to the fact that the central banking system in Nigeria is yet to realize that microfinance banks are one way of promoting the Nigerian economy.
  • Low banking culture
The banking culture of Nigerians with respect to microfinance banks is still very low and needs a lot of improvement as Nigerian small scale businesses are yet to fully approve an appropriate banking culture that is necessary for the advancement of their business potentials and this is one of the problems of microfinance banks in Nigeria.

Ways To Improve Microfinance Banks In Nigeria

  • Improved banking culture among small scale businesses
  • Leniency to clients
  • Reductions in lending
  • Flexible staffing arrangements
  • Increase flexibility
  • Use holistic financing
  • Employ research
  • Take advantage of technology
  • Scaling up remote channels
  • Comply with registration requirements
  • Know the current legal requirements
  • Study your target market
  • Hire the right employees
  • Learn how to screen and collect from clients
  • Spreading Loan Availability Awareness Among Nigerians
  • Government Support

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