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Mega Banking is for the rich and probably middle class, but Microfinance banks serve the poor. This article describes how you can establish your own Microfinance bank and profit from it.
Preamble
Businesses for which there are ready markets provide the owners quick return on their investments and are more likely to generate profits for a longer time than those whose
buyers are not readily available.Preamble
Businesses for which there are ready markets provide the owners quick return on their investments and are more likely to generate profits for a longer time than those whose
In developing economies like Nigeria, where statistics has continuously put the number of the poor people at more than half of the total population, investments which markets are the people at the lower rung of the economic ladder, have high prospects of meeting and surpassing owners’ expectations. With a ready market of over 70 million people, businesses that serve the poor remain veritable channels of investment in Nigeria. One of such is the microfinance bank.
The Regulatory and Supervisory Guidelines for Microfinance Banks in Nigeria, issued by the Central Bank of Nigeria (CBN), defines a microfinance bank as “any company licensed to carry on the business of providing microfinance services, such as savings, loans, domestic funds transfer, and other financial services that are needed by the economically active poor, micro, small and medium enterprises to conduct or expand their businesses.”
And according to Mr. Biodun Akinyemi, Managing Director, Crest Microfinance Bank Limited, the word “bank” does not mean a business in the mould of the universal (commercial) banks. There are marked differences in the modes of operations of a universal bank and a microfinance bank.
And according to Mr. Biodun Akinyemi, Managing Director, Crest Microfinance Bank Limited, the word “bank” does not mean a business in the mould of the universal (commercial) banks. There are marked differences in the modes of operations of a universal bank and a microfinance bank.
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The regulations and supervision of microfinance banks in Nigeria rest with the CBN, through its development finance office and other financial institution departments.
The customer (client) of a microfinance bank are predominantly the active poor, with any or combination of the following characteristics as explained by the CBN: The person has a monthly income of not more than twice the monthly per capita income of Nigeria, or minimum wage; he has a total productive asset of not more than N500,000; he has a meagre means of sustenance or livelihood and has a total annual income that is less than the minimum taxable limit set out in the law relating to income tax.
So, microfinance is all about providing services to the active poor.
How to start
The customer (client) of a microfinance bank are predominantly the active poor, with any or combination of the following characteristics as explained by the CBN: The person has a monthly income of not more than twice the monthly per capita income of Nigeria, or minimum wage; he has a total productive asset of not more than N500,000; he has a meagre means of sustenance or livelihood and has a total annual income that is less than the minimum taxable limit set out in the law relating to income tax.
So, microfinance is all about providing services to the active poor.
How to start
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A unit microfinance bank has the authority to operate within the local governments in the particular state of its jurisdiction, while a state microfinance bank can spread its tentacles to other states within the federation.
But as Akinyemi stated, “That is not the amount that is sufficient to start a microfinance bank.” This is because the amount is to be deposited with the CBN, and it would not be released to the bank until after a minimum of three months. It is a sort of commitment which the CBN needs from the proposed investors.
Having earmarked the fund, the licensing requirements, as provided by
the CBN, are followed to the letter. According to the regulating guidelines, applications to the CBN shall include the said amount and “(a) a non-refundable application fee of N50,000 for a unit microfinance bank or N100,000 for a state microfinance bank. (b) a copy of the feasibility report, disclosing relevant information such as the objectives and owners of the proposed banks, the services to be rendered, five-year financial projection for the operation of the organisation, organisational structure, and a copy of the memorandum and articles of association.
A microfinance expert, Mr. Bolaji Oladele, observed that many businesses had failed because the owners did not put all necessary things into consideration. “When an investor does not prepare a detailed feasibility study for his business, he cannot guarantee the success of such endeavour,” he said.
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All the documents are remitted to the CBN, which considers them and grants an approval-in-principle. This is attached to the application that is then filed to the Corporate Affairs Commission (CAC) for registration as a limited organisation.
Then, the recruitment stage comes in. Here, capable individuals are employed to carry out the business. Oladele advised that preference be given to field officers in the recruitment plan. That is, the organisation should employ more of the marketers, “because they are the main essence of operations of microfinance banks.” He condemned the practice of some microfinance banks who had placed higher premium on the administrative staff to the detriment of the field workers. The registration certificate from the CAC allows the business to commence while the final licence from the apex bank is being awaited.
Important tips for success
• A Service to the poor
According to Akinyemi, the first thing to note by microfinance investors in order to guarantee success was that the business was a service to the active poor. So, the bottom line is patience.
“It is a business that grows gradually,” he said, noting that when services were rendered to the poor, it was at a piecemeal. The business would mature slowly but positively.
Then the investor, he also said, should adjust his social outlook. That is, ability to come down to the level of the clients, speaking the language they understand and showing them the need to be banked.
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Start small
Oladele and Akinyemi stated that a small office was enough to start the business and not a flashy complex. And probably with just a car, the business can commence. Appoint about five principal officers only and about 10 field workers to start with.
•Do not invest much on capital projects at the initial stage.
Much emphasis on capital asset would eat away the expected profit, and that can discourage prospective investors.
- Place your field workers on target
It has been observed that workers do not always show total commitment until they are pushed to. Placing them on target would help you realise your objectives.
Widen your client base
Akinyemi advised that a wider client base, say 2,000 people, even with a deposit as little as N500 each would allow the investor realise his targets than a client base of just 300 people with a deposit of N2 million each. “Such large depositor can withdraw their money anytime and that would spell doom for the business,” he noted.
Create and nurture your brand
It is better to design products that are unique in the market and focus on alleviating poverty, experts have said.
Challenges
Akinyemi stated that the first challenge is power generation. An investor should be ready to provide alternative source of generating power, with the collapse of electricity supply in Nigeria.
Then, there is the need to liaise with the banks already in place, probably joining an association, if such is in place.
Profitability
Oladele and Akinyemi stated that all things being equal and with enough prudence in spending, the money invested in a Microfinance bank would be recovered within two years.
Impact of microfinance bank in Nigeria economy.
The impact of microfinance on economic growth in Nigeria. Emphasis is made on the primary role of microfinance institutions in Nigeria which is poverty reduction and small scale enterprise financing. Assets, Deposit Liabilities, Loans & advances microfinance banks were used proxy the activities of microfinance institutions in Nigeria while Gross Domestic Product was used as a proxy for economic growth.
Using secondary data and applying ordinary least square of multiple regressions, it was revealed from the findings that Asset base and deposit liability has an insignificant impact on economic growth while Loan and Advances to the public has a significant impact on economic growth in Nigeria. However, the overall significance of the model shows that the activities of the microfinance banks cannot be overemphasized in the pursuance of a sustained economic growth in Nigeria. It is therefore recommended that the government should create an enabling environment capable of supporting the microfinance banks in microcredit delivery.
Keywords: microfinance, economic growth, loan and advances, microcredit, asset base and deposits.
INTRODUCTION
Over the years, microfinance has emerged as an effective strategy for enhancing economic growth across developing countries. Micro, small and medium enterprises are turning to Microfinance Institutions (MFIs) for an array of financial services. Credit allocation is a powerful instrument to fight poverty, increase productivity, output and enhance economic growth. Access to financial services enable poor households to move from everyday-for-survival to planning for the future, investing in better nutrition, their children's education and health and empowering women socially (Ehigiamusoe, 2005). With the advent of Grammen Bank and other such programs micro-credit obtained a new identity, a new meaning and a place in development literature. It is no more a mere concept; it is now a worldwide movement. Microfinance is acknowledged as one of the prime strategies to achieve the Millennium Development Goals (MDGs).
OVERVIEW OF MICROFINANCE BANKS IN NIGERIA
In Nigeria, micro-financing is not a new phenomenon as evidenced by such cultural economic activities as "Esusu", "Adashi", "Otataje", etc, which were practiced to provide funds for producers in our rural and urban communities. What operates at present however is the effort of governments in Nigeria to modernize micro-financing in rural and urban communities to improve the productive capacity of the rural and urban poor, enhance their economic standing which alleviates the level of poverty and enhance economic growth and development in the economy.
After failed trials in Directorate of Food, Road and Rural Infrastructure (DFRRI), Rural Banking by commercial Banks and even People's Bank programme (1986), the government of the Federal Republic of Nigeria took the bull by the horns by enacting legislation for the establishment of community banks (now microfinance institutions). To complement government efforts, over the years, a lot of NGOs has formally been licensed to operate as micro finance institutions. Some existing NGO microfinance institutions were transformed and Universal Banks were encouraged to engage in microfinance services. Of recent, microfinance banks regulation and supervisory guidelines were inaugurated.
The dismal performance of the conventional finance sectors triggered the advocation of micro financing by policy makers, practitioners, and international organizations as a tool for economic growth. Since its emergence, the number of microfinance institutions around the world has proliferated at a fast pace after the 1970s. Today there are more than 7000 micro - lending organizations providing loans to more than 25 million poor individuals around the globe (Mohammed and Hasan, 2008). The Nigerian microfinance industry has come a long way. It boasts of the entire four well - known models in the industry. …
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