The document provides an overview of microfinance concepts and practices. It discusses the goals of microfinance training to understand microfinance globally and locally, its evolution and regulation. It describes how microfinance arose in response to doubts about subsidized credit programs and how more market-based solutions were needed. It outlines typical microfinance activities like small loans, group guarantees, and savings products. The document also discusses the growth of microfinance institutions over the past 20 years, challenges they face, and principles of microfinance like financial sustainability and local institution building.

1. UNDERSTANDING
MICROFINANCE BANK AND CLIENTS

2. Why Are We Here?
• Learn
• Discuss
• Exchange Ideas
• Practice
• Attitude
• Work together

3. LETS MAKE THIS TRAINING A VERY PROFESSIONAL
LEARNING EXPERIENCE

4. Goals of Instruction
• At the end of this session, it is hoped that we
will all understand the very essence of
microfinance, its global as well as local
perspectives, its evolution, and regulation.

5. Background of Microfinance
• Microfinance arose in response to doubts
about state delivery of subsidized credit
to poor farmers
• Most programs accumulated large loan
losses and required frequent
recapitalization
• More market-based solutions were
therefore required

6. Microfinance is not simply banking, it is a
development tool
Typical Microfinance activities involve:
• Small loans, usually for working capital
• Informal appraisals of borrowers and
investments
• Collateral substitute, such as group guarantees
or compulsory savings
• Access to repeat and long loans, based on
repayment performance
• Streamlined loan disbursement and monitoring
• Secure savings products.

8. Recent Dimensions
• Over the past 20 years the field has
been revolutionized as dozens of
microfinance institutions (MFIs)
have demonstrated the feasibility
of delivering such services on a
financially sustainable basis.

9. • Began in 1976 in Bangladesh
• 3.5 million borrowers
• $4.4 billion lent
– 500 types of micro-businesses
– average amount: $160
– peer support and pressure
– $4.1 billion repaid
• 120,000 GB families overcome
Poverty each year (1992 WB Survey) Prof Yunus, Grameen Bank Founder

10. Microfinance Bank in Nigeria
• In Nigeria, the practice of alleviating
poverty and empowering the
underprivileged through credit assistance
gained prominence within the last two
decades.
• Before then several groups and individuals
championed the provision of microfinance
for disadvantaged groups. Such include
Mr Godwin Ehigiamusoe who established
the Lift Above Poverty Organization
(LAPO).

11. A number of government sponsored
interventions as well as Non-
Governmental Organizations (NGOs),
Community Based Organizations (CBOs)
as well as Faith Based Organizations
(FBOs) have emerged at different times.

12. Government Initiatives
There has been several initiatives by
Government over the years
• Peoples Bank of Nigeria
• Nigerian Agricultural and Co-operative Bank
Limited (NACB),
• Directorate of Food, Road and Rural
Infrastructure (DFRRI),
• National Directorate of Employment (NDE),

13. • National Agricultural and Land
Development Agency (NALDA),
• Nigerian Agricultural Insurance
Corporation (NAIC)
• Community Banking Scheme
• Better Life Programme
• Family Support Programme (FSP)
• Family Economic Advancement
Programme (FEAP).

14. Governmental initiatives on microfinance
provision
PERIOD ACTIVITIES
Between
1970- 1996
 Rural Banking Programme
 Lending as a percentage of savings
mobilized in rural areas to rural people
 Lending as a percentage of savings mobilized
in rural areas to rural people
 Sectoral allocation of credits
1980 - 1987 Concessionary interest rate
1977 to date Agricultural Credit Guarantee Scheme

15. Government initiatives contd.
1972 to
date
Nigerian Agricultural Co-operative and
Rural Development Bank Ltd
1990
-2007
Community Banks (CBs)
1996 -date Nigerian Agricultural Insurance Corporation
1999 “ National Poverty Eradication Programme
(NAPEP)
1989 –
2002
Peoples Bank of Nigeria (PBN)
1997 -
2001
Family Economic Advancement Programme
(FEAP)

16. Reasons for Failure of Past Initiatives
• Lack of adequate skills by the operators to
deliver services effectively.
• Unwillingness of conventional banks to
support micro enterprises.
• Paucity of loanable funds.
• Absence of support institutions in the
sector.
• Incompetent management, poor corporate
governance, insider abuse, weak internal
controls, poor credit administration and
poor asset quality.
• Low management capacity of clients.

17. 17
Challenges for Rural MFIs
• Dispersion of clients
• Infrastructure costs: communications,
systems, offices, power
• Higher potential risks: price and production
risks, little insurance
• Seasonality and covariance of rural client
incomes
• Collateral and contract enforcement
• Moral hazard: past experience of loan
defaults
• Higher transaction costs

18. Innovative lending methodologies
key to successful credit delivery:
• Lower transactions costs
• Maintain high repayment rates
–Start with small graduated loan sizes
–Award timely repayment with availability
of larger loans
–Employ training programmes to underscore
the expectation of prompt repayment
–Employ peer pressure
–Be aggressive towards late repayment

19. Types of MFIs Lending Methodologies
• Individual lending
• Group lending
• Wholesale lending
The Lending Methodology to be adopted
will depend on type and focus of the
MFB.

20. Challenges of Microfinance practice
• Institutional re-alignment and rigidities
• Policy implementation (fairness & firmness)
• Capacity building – regulators, operators,
investing public
• Ability to manage government participation
• Ability to internationalize the practice;
-donor agencies
-cross-border programmes
• Ability to inculcate best practices and
corporate governance.

21. Facts about Microfinance
• Subsidized credit undermines sustainability
and development of microfinance
• Poor people can pay interest rates high
enough to cover MFI’s transaction costs and
the consequences of imperfect information
markets
• Goals must include sustainability
• Because loan sizes are so small, MFIs must
achieve sufficient scale to be sustainable
• Outreach and repayment rates can be
proxies for impact, enterprise growth

22. Understanding the Country context
(Supply side)
Suppliers of Financial Intermediation
Services:
• Formal financial institutions: public/
private banks, insurance firms, finance
companies
• Semiformal: credit unions, cooperative
banks
• Informal: NGOs, self-help groups,
individuals

23. • Effect of Government programmes:
Often perceived as a social welfare
 --> forgive existing debts of the
poor
 --> Tremendous effect on private
sector MFIs
Understanding the Supply side 2

24. • Considerations when regulating MFIs:
 Minimum capital requirements
 Capital adequacy (Debt vs. Equity)
 Liquidity requirements
 Asset quality (measures risk)
 Portfolio diversification
Understanding the supply side1

25. Understanding the Supply side 2
• Economic and Social Policy Environment:
 Inflation results in a real cost to MFIs
that must be covered by interest
 Positive or stagnant GDP growth
preferred
 Transition and political unrest leads to
trust issues
 Existence of adequate infrastructure and
social services

26. MF Target Market and Impact
Analysis: - Demand side1
Direct targeting:
o Allocation of funds to a particular sector
of the economy or population
o Segmentation of finances by region
o Focus on the vulnerable and the people at
the bottom of the pyramid
o Naively transfers notions from the world
of the wealthy to the world of the poor

27. MF Target Market and Impact
Analysis - Demand side2
Indirect targeting:
–Self-selection takes place by virtue of the
design of microfinance services
–“incentive compatibility”: unwanted
clients will not be interested
MFIs need to consider debt capacity as
opposed to a “credit need” approach
– Debt capacity: amount of additional debt a client can
take on without running the risk of inadequate cash
flow.

28. The Growth of Microfinance 1
Microfinance has been growing for several
reasons:
• The promise of reaching the poor
Microfinance activities can support
income generation for enterprises
operated by low-income households.
• The promise of financial sustainability
Microfinance activities can help to build
financially self- sufficient, subsidy- free,
often locally managed institutions.

29. The Growth of Microfinance 2
• The potential to build on traditional
systems Microfinance activities
sometimes mimic traditional systems
(such as ROSCA- rotating savings and
credit associations)
• The contribution of microfinance to
strengthening and expanding existing
formal financial system Microfinance
activities can strengthen existing formal
financial institutions, such as savings
and loan cooperatives

30. Microfinance Impact
• Microfinance is the supply of loans and savings
services to the economically active poor.
• It is the provision of financial services such as micro
loans, micro savings, micro insurance, and other
local/Domestic financial services to the economically
active poor/entrepreneur who has an existing business
but require capital to grow and sustain the business.
• Although most microfinance practitioners agree that
their goal is to improve the welfare of the poor, they
do not agree about how best to achieve this goal.
• Most approaches to microfinance is tailored towards
improving the poverty state of the client while
ensuring the financially sustainability of the bank.

31. Story: 1994

32. Impact: 2000

33. Impact Study (Bath, Sheffield & Sussex Universities – England)
1) 76.8% of the clients experienced significant reduction in their
poverty over the last four years of which;
i. 38.4% moved from Very Poor to Moderate Poor
ii. 17.6% moved from Very Poor to Not Poor
iii. 20.8% moved from Moderate Poor to Not Poor
2) 38.4% are in the Non Poor category.
3) 80% witnessed increase in income levels.
4) Women actively participate in family decisions.
5) Most of the members’ children are being sent to schools.
6) 17 different combinations were used as paths out of poverty.

34. • The poor need a variety of financial services
• Microfinance is a powerful instrument for
poverty alleviation
• Microfinance must be able to build financial
systems that serve micro enterprises
• Financial sustainability is necessary to reach
a significant number of poor people
• Microfinance is about building permanent
local financial institutions
Principles of Microfinance

35. • In addition to credit, microfinance
provides;
- financial services
- social services
- health services
• Sustainable credits as cheap loans can
harm micro enterprises (e.g. Govt. loans)
Principles contd.1

36. Principles contd. 2
• MF can pay for itself, and must do so if it is to
reach a very large number of poor people.
• Microcredit is not always the answer.
• Institutional and human capacity building is
imperative
• There is need for transparency and good
corporate governance: Herein lies the key
issue in Board Responsibility.

37. • Interest rate ceilings hurt poor people by
making it harder for them to access credit.
• The role of government is to enable
financial services, not to provide them
directly.
• Donor funds should complement private
capital, not compete with it.
• The key bottleneck is the shortage of strong
institutions and managers.
• MF works best when it measures and
discloses its performance.
Principles contd. 3

38. Conclusion
• Microfinance lending is not new in Nigeria
• The new policy on microfinance has recognized the
various models of targeting credits to active poor
• Operators of Microfinance banks must be prepared to
provide financial, social & health services to their
clients
• For the microfinance activities to be sustainable, the
institutions must be privately owned and market-
driven.
• Regulators and operators must develop appetite for
learning (with financial implications)
• Regulators will need to manage funding agencies such
as government so as to eliminate political interests

39. Final Note!
• There exists huge untapped potentials for
financial intermediation at the micro and rural
levels of the Nigerian economy.
• Attempts by Government in the past to fill this
gap through supply-driven policies have failed.
• Microfinance banks established in line with the
Microfinance Policy, Regulatory and
Supervisory Framework should be adequately
capitalized, appropriately regulated and
supervised to address the financing needs at
the lower segment of the economy.

40. »THANK YOU