PROJECT TOPIC: An evaluation of the regulatory and supervisory framework of

PROJECT TOPIC: An evaluation of the regulatory and supervisory framework of
microfinance
TABLE OF CONTENTS
1.0. INTRODUCTION
1.1. STAEMENT OF PROBLEM
1.2. JUSTIFICATION OF STUDY
1.3. OBJECTIVES
1.4. HYPOTHESIS
1.5. SCOPE
1.6. METHODOLOGY
1.7. LIMITATION
CHAPTER TWO
2.0. LITERATURE REVIEW
2.1. CONCEPTUAL CLARIFICATION
Please type the remaining part of the table of contents
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ABSTRACT
This study shall be divided into five chapters. In this chapter, we shall generally introduce the
subject matter while Chapter two shall give delve into the literature and review some of the
past efforts in relation to our effort. Chapter three will examine our research methodology
while Chapter four will present and analyse our data. In Chapter five, we shall summarise,
present our recommendations and conclude.
The scope of the study shall be limited to the financial industry more specifically the
microfinancing industry. We shall look at various regulatory and supervisory framework that
guides the operations of microfinancing. We shall attempt to seek the opinion of stakeholders
in the financial industry who have good knowledge of microfinancing. The operations of the
exiting microfinancing institutions shall also be looked into. At the end of the study we shall
attempt to draw suggestion that we useful for all stakeholders.
In any research effort, a strong platform must be established for arriving at conclusions. In
our attempt to do this, we intend to use the questionnaire approach as we seek the opinion of
some people taken from a particular population
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CHAPTER ONE
1.0. INTRODUCTION
The new wave of importance of microfinance can best be found in a report titled “ROLE OF
MICROCREDIT IN THE ERADICATION OF POVERTY” by the Secretary-General of the
United Nations. In the report he said, “The General Assembly, in its resolution 52/194 of 18
December 1997, noted that, in many countries microcredit programmes have proved to be an
effective tool in freeing people from poverty and have helped to increase their participation
in the economic and political processes of society”. In the same vein, it was reported that
“The World Summit for Social Development, held in Copenhagen in March 1995, also
underlined the importance of improving access to credit for small rural or urban producers,
landless farmers and other people with low or no income, with special attention to the needs
of women and disadvantaged and vulnerable groups”.
The relevance of the above comes to the fore when poverty in Nigeria is x-rayed.
The MicroStart Project Document reported, “The performance of the Nigerian economy has
not been satisfactory despite its enormous potentials for growth and development”. The
document posited “although the country is endowed with a sizeable natural resource base and
financial resources accruing from the oil sector, it is still considered poor with a low per
capita income and a ranking quite low according to its Human Development Index (HDI)”.
The 1995 UNDP Human development report estimated that the life expectancy in the country
is about 50 and that the human development index is 0.406, which ranks Nigeria as number
141 out of 174 countries in the world. The situation has been aggravated during the last
decade by attempts to restructure the economy. Consequently, about 40 per cent of the
population are estimated to be living in absolute poverty with about 80 per cent of them
living in the rural areas. The gap between the rural and the urban, formal and informal sectors
continues to grow rather than diminish with increasing economic growth and development. A
fundamental cause of the underdevelopment of the economy is attributed to the structural
characteristics of the economy, which has resulted in the persistent marginalization of the
majority of the population. The gap between the rural and the urban, formal and informal
sectors continues to grow rather than diminishing with increasing economic growth and
development.
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In mid 1985, the government estimated the rate of unemployment within this group in urban
areas to be 40%. The situation has further deteriorated since 1985 and consequently an
increasingly large number of job seekers now rely on the informal sector for employment.
This drift to the informal sector for employment has further intensified the marginalization of
the greater part of the Nigerian people, although the country remains potentially a viable
economic entity that can achieve great economic growth.
This viability can only be achieved according to the 2005 Central Bank Report by “………..
Putting in place well focused programmes to reduce poverty through empowering the people
by increasing their access to factors of production, especially credit”. It went further to say
that “The latent capacity of the poor for entrepreneurship would be significantly enhanced
through the provision of microfinance services to enable them engage in economic activities
and be more self-reliant; increase employment opportunities, enhance household income, and
create wealth”.
This becomes important when viewed against the backdrop of the World Bank study, which
revealed that poverty in Nigeria is highest in rural areas. The number of rural poor is roughly
twice that of the urban poor. The average per capita expenditures of a rural poor household
was one-fifth of the non poor in 1992. Of the extremely poor, 85 % lived in rural areas and
more than two-thirds lived on farms. Rural poverty fell in 1985-1992, urban poverty
increased. The number of rural poor declined from 26.4 million in 1985 to 22.8 million in
1992. In towns and cities, it rose from 9.7 million to 11.9 million in 1985-1992. The depth of
poverty declined from 19 to 16 % in rural areas, while it increased in urban areas from 9 to
12 %, consequently, extreme poverty rose substantially in urban areas.
According to the World Bank study in "Poverty in Nigeria" any successful strategy to
improve welfare, involving all stakeholders, must include three simultaneous courses of
action:
1. A strong and focused emphasis on economic growth

2. Better access for the poor to social services and adequate infrastructure
3. Targeted interventions to protect the poorest or the most vulnerable.
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Consequently, a big number of groups and institutions have been created over more than 15
years to meet some of the needs for financial and non financial services, particularly in rural
poor areas. The results produced by the Nigerian microfinance institutions have been
remarkable and can be shared with other West African countries, however many of the MFIs
need to enhance their capacity, increase their management skills and provide more technical
assistance to their clients
Microfinance is about providing financial services to the poor who are traditionally not
served by the conventional financial institutions. Three features distinguish microfinance
from other formal financial products (CBN, 2005).
These are:
(i) the smallness of loans advanced and or savings collected,
(ii) the absence of asset-based collateral, and
(iii) simplicity of operations.
According to The 2005 Central Bank of Nigeria report “In Nigeria, the formal financial
system provides services to about 35% of the economically active population while the
remaining 65% are excluded from access to financial services. This 65% are often served by
the informal financial sector, through Non-Governmental Organization (NGO)-microfinance
institutions, moneylenders, friends, relatives, and credit unions. The non-regulation of the
activities of some of these institutions has serious implications for the Central Bank of
Nigeria’s (CBN’s) ability to exercise one aspect of its mandate of promoting monetary
stability and a sound financial system”.
A microfinance policy which recognizes the existing informal institutions and brings them
within the supervisory purview of the CBN would not only enhance monetary stability, but
also expand the financial infrastructure of the country to meet the financial requirements of
the Micro, Small and Medium Enterprises (MSMEs) (CBN, 2005). Such a policy would
create a vibrant microfinance sub-sector that would be adequately integrated into the
mainstream of the national financial system and provide the stimulus for growth and
development. It would also harmonize operating standards and provide a strategic platform
for the evolution of microfinance institutions, promote appropriate regulation, supervision
and adoption of best practices.
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In these circumstances, an appropriate policy has become necessary to develop a long-term,
sustainable microfinance sub-sector.
1.1. STATEMENT OF PROBLEM
The aim of this research work is to evaluate the regulatory and supervisory framework of
microfinance. Informal and small-scale lending arrangements have long existed in many
parts of the world, especially in the rural areas, and they still survive. Good examples are
schemes in Ghana, Kenya, Malawi and Nigeria ("merry-go-rounds", "esusus" etc.). They
provide the rural population with access to savings within the local area and with a certain
cushion against economic fluctuations, and they encourage a cooperative and community
feeling. The groups formed provide joint collateral and serve as instruments for spreading
valuable information that is useful for economic and social progress (UN, 1998). The
government through different institutions has tried to eradicate poverty among the populace.
The government provided the enabling policies to start community bank and People’s Bank
of Nigeria. People’s Bank of Nigeria coalesced into Nigeria Agricultural, Cooperative and
Rural Development Bank (NACRDB) {an amalgam of the former Peoples Bank of Nigeria,
Nigerian Agricultural and Cooperative Bank and the Family Economic Advancement
Programme (FEAP) was set up in 2000} when the previously established banks failed to
fulfill it statutory obligation of eradicating poverty. Most analysts attributed the failure of all
these banks to dysfunctional policy framework. The new wave of microfinance was made
possible by the success achieved by Grameen Bank of Bangladesh. As the government begins
the voyage into the provision of microfinancing in Nigeria and as the role of microfinance
becomes more challenging in the new socio-economic and political order, the question many
analysts we want to ask is, what is the workability of the regulatory and supervisory
framework of the policy setting up microfinancing in Nigeria?
In this context, the problems we shall attempt to tackle in this study include
1. Relatively low number of microfinancing institutions in Nigeria when viewed against
the backdrop of the population of the poor.
2. Inadequate number of experts in the field of microfinancing in Nigeria.
3. Inadequate publicity on the existence of microfinance banks.
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4. Absence of solid and adequate infrastructural base to support microfinancing and
development of a flexible, robust and knowledge-driven set of experts in the
microfinance subsector.
5. Absence of institutionalised and focussed policies and programmes on the part of
government to generate and build the kind of structure needed to grow the
microfinancing subsector.
1.2. JUSTIFICATION OF THE STUDY
This study can locate its justification on many grounds. As stated earlier, microfiancing is
becoming a key feature in attaining economy growth in any nation especially developing
countries thereby eradicating poverty. It is in this context that microcredit has recently
assumed a certain degree of prominence. It is based on the recognition that the latent
capacity of the poor for entrepreneurship would be encouraged with the availability of
smallscale loans and would introduce them to the smallenterprise sector. The study also
locate it justification on the ground that the country is just starting microfinancing and
when this is juxtapose with the ancestors of microfinancing; community banks, People’s
Banks of Nigeria, NAPEP (National Poverty Eradication Programme) then this study is
justified. Currently, there are estimated to be about 7,000 microfinance institutions in the
world.
In the opinion of analysts, how well a nation performs in terms of economic growth and
development, to a large extent, is determined by the availability of investable funds.
Microfinancing is lending (usually a few hundred dollars) to small enterprises in
agriculture, distribution, crafts, trading and similar activities. The contention is that for a

nation to achieve economic growth, it must have institutions in place that can lend money
to her populace for the purpose of investing.
1.3. OBJECTIVES
In the main, this research effort is particularly geared towards achieving the following
objectives:
1. Evaluating of the regulatory and supervisory framework of microfinancing.
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2. Determine if proper and adequate microfinancing structure is in place within the entire
banking system in general and the microfinancing subsector
3. Analyse the effecting of microfinancing on entrepreneurs.
4. Identify the deficiencies within the practice of microfinancing and recommend
measures for future solutions
5. Suggest future policies and programme in a bid to aid the development of the
microfinancing in Nigeria.
1.4. RESEARCH HYPOTHESIS
As noted earlier, microfinancing is an essential tool of eradicating poverty and also
bringing about economic growth. For the purpose of this research work, it is desirable to
test the hypothesis, which represents the ideas, beliefs and assumptions put forward in
order to make valid conclusions. The findings will lead to the acceptance or rejection of
the hypothesis should they satisfy the reflection of the null hypothesis (HO), the
alternative (HA) will be accepted. This indicates that at least, one of the independent/input
variables has an effect in the dependent variable.
HYPOTHESIS ONE
Null Hypothesis (H0): The introduction of microfinancing has led to increase access to
funds by active poor entrepreneur.
Alternative Hypothesis (Hl): The introduction of microfinancing has not led to increase
access to funds by active poor entrepreneur.
HYPOTHESIS TWO
Null Hypothesis (H0): Introduction of Microfinancing has led to improved standard of living
of the poor.
Alternative Hypothesis (Hl): Introduction of Microfinancing has not led to improved
standard of living of the poor.
1.5. SCOPE
The scope of the study shall be limited to the financial industry more specifically the
microfinancing industry. We shall look at various regulatory and supervisory framework that
guides the operations of microfinancing. We shall attempt to seek the opinion of stakeholders
in the financial industry who have good knowledge of microfinancing. The operations of the
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exiting microfinancing institutions shall also be looked into. At the end of the study we shall
attempt to draw suggestion that we useful for all stakeholders.
1.6. METHODOLOGY
In any research effort, a strong platform must be established for arriving at conclusions. In
our attempt to do this, we intend to use the questionnaire approach as we seek the opinion of
some people taken from a particular population. The followings represent some of the
hypotheses we shall test in the course of this research:
1. What is your level of the evaluation of the success of the microfinance banks against
the backdrop of the supervisory and regulatory framework?
2. Is the regulatory and supervisory framework in accordance with internationally
accepted framework?
3. Has the introduction of microfinance helped poor entrepreneurs to access the needed
funds?
4. What is the level of licensed microfinance banks to the population of poor
entrepreneurs?
5. Has the introduction of microfinance banks in Nigeria been able to impact on the life
of poor people?
6. What is the level of the concentration of microfinance banks in the rural areas?
7. What is the level of the concentration of microfinance banks in urban areas
8. Has the introduction of microfinancing been able to stop the flow of rural-urban drift?
9. What is the level of poverty before and after the introduction of microfinancing banks
in Nigeria?
10. What is the level of the impact of government policies on the operations of
microfinance banks?
11. What is the level of performance of microfinance banks in Nigeria compared to other
developing countries?
12. What will be the level of success of microfinance banks in the future (five years)?
13. What is the level of the role of the regulatory body in achieving success in the
microfinance subsector?
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1.7. LIMITATION OF STUDY
As expected, this project shall face certain constraints in the course of its execution.
Essentially, the first limitation shall be that of space. As much as efforts will be made to
address all the issues involved in the research effort, we shall attempt to be as brief as
possible in our exposition. Therefore, our population sample shall only be limited to
about fifty respondents.
Again, our purview in this project may be limited by the constraint of time. In this
respect, we shall only direct the focus of our investigation to some few banks and audit
firms. And finally, we may not be able to do as much as we can because of financial
consideration. This project is anchored on a certain budget. Owing to the rising cost of
living in Nigeria, our needs in terms of materials, transportation and logistics shall be
kept under a particular framework.
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CHAPTER TWO
2.0. LITERATURE REVIEW
2.1. CONCEPTUAL CLARIFICATION
For the world's poor getting a loan to start up a business is almost impossible, because of the
strict rules most banks follow including the necessity to borrow against collateral. However,
microfinancing - though not a totally new financing concept - is growing more popular now
that it helps the poor and yet manages to get a bit of cash for the lenders. Microfinance can be
defined as the provision of comprehensive financial services to micro-entrepreneurs.
The concept of microfinancing is not new; it is traced back to Prof Muhammad Yunis, who
founded the Grameen Bank in Bangladesh in 1976. Yunis was known as a ‘banker to the
poor’. Microfinance institutions (MFIs) usually lend small loans to the poor people in
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developing or under-developed countries who are usually ignored by commercial banks.
Investors in microfinancing make profit in the form of interest payments in the order of 2-5
percentage points above the London Interbank Offered Rate, the international benchmark
known as Libor.
The World Bank estimates that there are now over 7,000 microfinance institutions, serving
some 16 million poor people in developing countries. The total cash turnover of MFIs
worldwide is estimated at $2.5 billion and the potential for new growth is outstanding. As the
concept of microfinancing is to lend money to the poor, such loans cannot be backed by
collateral, subjecting the lenders to a high risk of loss if the loans were not paid back. As per
the United Nations Capital Development Fund (UNCDF), it is estimated that worldwide
there are 13 million microcredit borrowers, with $7 billion in outstanding loans, and
generating repayment rates of 97 per cent. It has been growing at a rate of 30 per cent annual
growth. De Lesseps strongly believes that the human factor plays a big part in driving the
borrowers to pay the loans back. "You are helping people for the first time, it is a lifetime
chance. People like the idea to pay back, and [they] would they will cover for each other" he
said. The principle of microfinance is simple: bring very little amount of money multiply it
by the biggest number of poor people," said de Lesseps. "But you can't have a bank lending
philosophy because you lend to people who get together” he added. To de Lesseps helping
the poor to become entrepreneurs is what microfinance is about. "We visited a village in
Cambodia where we lend 80 women $25 each. They have pulled their resources together and
grew vegetables," he said. The whole village has been transformed from dust to productive.
However, two approaches were advocated in a report by the Secretary General of the United
Nations on the role of credit in poverty reduction. The reported said, while supporters of the
income-generation approach maintain that credit should be provided mainly to the
entrepreneurial poor to enable them to finance specific private income-generating activities
to increase their revenues, proponents of the so-called new minimalist approach argue that
credit progammes would still be helping the poor fight poverty by giving credit to any poor
person who is able to repay a loan without dictating to that person how and on what the loan
should be used. Some studies have pointed out that the problem of the non-productive use of
credit, as advocated by the minimalist approach, lies in the fact that by consuming rather than
investing their loans, the actions of such borrowers, if imitated by other poor people, could
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produce a negative impact on the future growth of microcredit.
2.2. EVALUATION OF THE IMPACT OF MICROFINANCE-SELECTED CASE
STUDIES
The prevalence of microfinance impact evaluations has increased in recent years, with
programs using studies not just to prove the effectiveness of microfinance, but to improve it
as well. However, the quality and rigor of microfinance impact evaluations vary greatly. One
of the first comprehensive microfinance impact assessments was “Credit for the Alleviation
of Rural Poverty: The Grameen Bank in Bangladesh,” (1988) by Mahabub Hossain.
Hossain found Grameen members’ average household income to be 43 percent higher than
target non-participants in comparison villages, with the increase in income from Grameen
highest for the landless, followed by marginal landowners. Hossain warned it was likely that
his impact findings would be overstated, however, because Grameen members were found to
be younger and better educated than nonmembers who were more likely to be landless. This
type of difference between participants and comparison households is prevalent among
microfinance impact evaluations and limits the conclusions we can draw from many of them.
The 1998 book, Fighting Poverty with Microcredit by World Bank economist Shahidur
Khandker, and the related paper, “The Impact of Group-Based Credit Programs on Poor
Households in Bangladesh: Does the Gender of Participants Matter?” by Khandker and
Mark Pitt, a Brown University economist, were influential because they were the first serious
attempt to use statistical methods to generate a truly accurate assessment of the impact of
microfinance among three Bangladeshi programs: Grameen Bank, BRAC, and RD-12. The
centerpiece of their findings was that every additional taka lent to a woman adds an
additional 0.18 taka to annual household expenditures—an 18 percent return to income from
borrowing. However, NYU economist Jonathan Morduch responded with the paper, “Does
Microfinance Really Help the Poor? New Evidence from Flagship Programs in
Bangladesh” (1998), citing serious concerns with their data and their statistical model. With
the benefit of more data, Khandker was able to improve their model, published in a 2005
update to the study, “Micro-finance and Poverty: Evidence Using Panel Data from
Bangladesh.” The updated findings showed that each additional 100 taka of credit to women
increased total annual household expenditures by more than 20 taka. There were no returns to
male borrowing at all. Khandker found that between 1991/92 and 1998/99 moderate poverty
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in all villages declined by 17 percentage points: 18 points in program areas and 13
percentage 6 points in non-program areas. Among program participants who had been
members since 1991/92 poverty rates declined by more than 20 percentage points—about 3
percentage points per year. Khandker estimated that more than half of this reduction is
directly attributable to microfinance, and found the impact to be greater for extreme poverty
than moderate poverty, which microfinance was found to reduce by 2.2 percentage points per
year and 1.6 percentage points per year, respectively. Khandker further calculated that
microfinance accounted for 40 percent of the entire reduction of moderate poverty in rural
Bangladesh.
2.3. ELEMENT OF MICROFINANCE REGULATION
MicroCapital Institute identified the following elements of microfinance regulation
2.3.1. Legal status
Absence of basic registration and licensing requirements impedes the growth of the
micro.nance industry and its appeal as an investment. The most disappointing example is
China, where despite impressive progress in other sectors, micro.nance remains in its infancy
for lack of an enabling framework. Time-limited licensing as practiced in the West Africa
Monetary Union also creates uncertainty: if an MFI does not follow the standard cooperative
model, it must operate under a revolving .ve year memorandum of understanding.
2.3.2. Secured Transactions

Financial laws of emerging economies may not address an MFI’s legal authority to pledge
and enforce security interests, restricting the transferability of its assets in capital market
transactions such as loan securitization. Without a clear rule of law allowing perfection of
liens, assets could wind up being pledged more than once.
2.3.3. Loan Terms
Individual borrower lending limits for microcredit are sometimes stated as a certain amount
that does not vary with changes in economic conditions, such as inflation. This means an
MFI cannot grow with its customer, or diversify into related products such as home
mortgages. A more enabling approach is to have flexible limits that move with GDP per
capita or an MFI’s core capital.
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2.3.4. Interest Rates
Public prejudice against exploitative interest rates is strong in many countries13. Yet,
experience shows that interest rate controls may serve local political interests but ultimately
hurt the poor by cutting off access to credit. When an MFI cannot cover its costs, it will die,
or worse, turn to permanent subsidies. This reduces availability of credit for poor borrowers,
who are then at the mercy of the truly usurious. Strong consumer protection laws such as
Truth in Lending type disclosures and consumer education would better help the poor to
make informed choices.
2.3.5. Tax Burden
In markets where for-profit and nonprofit MFIs compete for the same business, the playing
field will be uneven when there is unequal tax treatment of the same activity. Policy should
distinguish taxes on financial transactions from taxes on net profits that arise from such
dealings. Specifically, taxes on financial transactions such as a value added tax on lending or
a tax on interest rate should be equalized across the industry. Moreover, rules for net income
or profit taxes such as tax-deductibility of expenses
(such as provisioning for bad loans) should apply consistently to all types of institutions,
regardless of whether they are prudentially licensed14.
2.3.6. Capital and reserves

A certain threshold capital requirement is an effective hurdle for new licenses. However, if
excessive capital and reserve requirements are based on a misperception of risk, then growth
is hindered by a minor hidden tax that further distorts the playing field.
2.3.7. Minority interests
Minority investor shares may be protected from misappropriation through transparent
disclosures, laws protecting small investor rights and the ability to enforce claims in court, or
with a regulatory body. Minority investor rights can also be protected by placing board
members and having access to shareholder lists, annual reports and board meeting minutes.
2.4. REGULATION AND SUPERVISION Of MICROFINANCE-THE AFRICAN

EXPERIENCE
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Ascanio Graziosi, a Senior Banking Consultant & Microfinance Specialist said in an article
“Microfinance in Africa: Rethinking the role of the actors” said ‘the definition of rules of the
game in the Africa microfinance industry is by now a requirement and in the last couple of
years regulation and supervision have been emerging as a dominant issue in the microfinance
industry in Africa’.
There is a wide consensus that MFIs have to give account of what they are doing and how
they do it. It is not possible here to go into details and we can spend a few lines only on the
subject. We would like to notice that the big question: sustainability versus outreach? Has
come to a solution by agreeing that the two objectives are complementary and not opposite.
It is worthwhile to notice that microfinance is no more seen as a distinct sector but as a
component of the overall financial system. In relation of the size and the sophistication of the
market some countries are at debate stage on how to regulate and supervise, others have been
matching the benchmarks and in a third group the regulatory framework is running at full
speed. Obviously, each country has been mapping out the road referring to its own
environment within the agreed institutional and legal framework. Transformation from donor
ship to ownership, the role of NGO as well as governance are as many as leading questions
which have been given an answer or the discussions are at drafting process. Last but not least
all regulatory systems foresee that deposit taking from the public must be carefully regulated
and supervised.
Graziosi reported that the trend has marked a turning point in the microfinance industry in
Africa and since then nothing will be as before. All around the Continent we witnessed the
promulgation of new regulatory frameworks sponsored or at least not hampered by
governments. We have to recognise that the insiders have already been discussing on the
suitable way to monitor activities carried out by MFIs (supervise) and set up clear rules
governing the intermediation activities (regulate) (Graziosi). The systems have been set up
range from a rigid control to a more flexible intervention. The first option has been prevailing
in West Africa, mainly in the Francophone regions where the disasters caused by the past
failure of big financial institutions and recently some disappointed performance of credit
programmes are still burning wounds. In some Anglophone Countries MFIs major functions
the interventions of monetary and credit authorities hasn’t been so direct in ruling MFIs’
functions and activities.
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In a word it can be said that there is a “continuing” process in relation of the sophistication of
the market. Some Countries have been debating how to regulate, others have been matching
the benchmarks and in a third group a bill has been running at full speed. It is worthwhile to
notice that microfinance is no more seen as a distinct sector but as a component of the overall
financial system.
Obviously, each country has been mapping out the road referring to its own environment
within the existing institutional and legal framework together with the market reality.
Transformation from donor ship to ownership, the role of NGO as well as governance is as
many as questions that have been given an answer or are at drafting process. All regulatory
systems foresee that MFI-deposit-taking from the public must be carefully regulated and
supervised.
From our direct experience there is evidence that in West Africa, mainly in the Francophone
Countries tight regulatory and supervision laws have been promulgated because of the
disasters caused by the past failure of big financial institutions (mainly development banks
under government control) and recently because of some disappointed performance of micro
credit programmes (Graziosi).
In some Anglophone Countries, initially the commercial code rather than the monetary and
credit authorities regulated the activities of MFIs.
Recently in Kenya a draft bill proposed that the Central Bank would regulate all microfinance
institutions collecting deposits from the public. A key proposal in the Microfinance Bill 2005
is a requirement that institution seeking to operate as a microfinance must have a core capital
of Sh 60 million.
The UN report by the Secretary General said, in West Africa, where microfinance institutions
are still in their infancy, a World Bank case study of nine microfinance programmes - the
Pride, Credit rural and credit mutuel de Guinee; Credit mutuel du Senegal and Village Banks
Nganda of Senegal; Reseau des caisses populaires and Sahel Action Project de promotion du
petit credit rural of Burkina Faso; and Caisses villageoises du pays dogon and Kafo Jiginew
of Mali - concluded that all nine of these programmes are very much in the mainstream of
best practice in the field of microfinance. In terms of sustainable lending to
microentrepreneurs, the study gave high marks to the programmes on the following basis: all
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nine programmes are located near their clients and in the largest catchment areas possible;
they use lending technologies that are simple, well-tailored to the cultural environment and
inexpensive for both lender and client; they have employed effective techniques for obtaining
high repayment rates; most include savings, which meet a critical need of many people, and
they price their loans far above commercial lending rates, though not at full cost recovery.
A recent study of 11 major microentreprise finance programmes - Agence de credit pour

l'entreprise privee of Senegal, Asociacion Dominicana para el Desarrollo de la Mujer of the
Dominican Republic, Banco Solidario of Bolivia, Badan Kredit Desa, Bank Rakyat Indonesia
and Lembaga Perkreditan Desas of Indonesia, Bankin Raya Karkara of the Niger,
Corporacion de Accion Solidaria of Colombia, Fondacion Integral Campesina of Costa Rica,
Grameen Bank of Bangladesh, and the Kenya Rural Enterprise Programme - showed that 10
of the programmes were operationally efficient. Five institutions were fully profitable,
generating inflation-adjusted positive returns on assets. It was reported that, in 1993, the
Agence de credit pour l'entreprise privee of Senegal, Banco Solidario of Bolivia and
Lembaga Perkreditan Desas of Indenosia had covered 100, 103 and 137 per cent of their
costs, respectively. In view of the growing popularity of microfinance institutions, some of
which now explore the possibility of deposit mobilization or leverage commercial capital, it
is reported that bank regulators in such countries as Bolivia, Ghana, Kenya and Peru, and
other countries, are creating laws or special regulations for this new breed of institutions. In
Bolivia, it is reported that Banco Solidario, a private commercial microenterprise bank, is
regulated by the Superintendency of Banks, with the same financial and reporting
requirements as traditional banks, but with simpler loan documentation and risk classification
rules. In the case of Bolivia, which seeks to encourage new microfinancial institutions, it is
reported that the Government has begun licensing a new class of intermediaries, known as
private financial funds, subject to the same solvency and reserve requirements as banks, but
with lower minimal capital requirement.
In Nigeria all licensed Universal Banks currently engaged in microfinance services have to
set up a subsidiary to effectively carry out that function by obtaining a microfinance banking
licence or setting up a department for such services. More recently,to be precise August 22,
2006 the Central Bank of Nigeria (CBN) gave approval-in-principle to Accion, a United
18
States-based microfinance company and seven others, including indigenous firms, to operate
as Micro-Finance Banks (MFBs) in the country. Under the regulatory and supervisory
framework for microfinance banks, the CBN stated that there shall be two categories of
licences available for promoters (both local and foreign) of Micro Finance Banks based on
geographical coverage.
The first category would be Micro Finance Bank licensed to operate as a unit bank (also
known as community banks) and which shall operate and open branches within a specified
local government area (LGA). CBN said the minimum capital requirement shall be N20
million or such amount as may be prescribed by it from time to time. The second category
would be Micro Finance Bank licensed to operate in a State and open branches within a
specified state or Federal capital territory and the minimum capital requirement of N1billion
only is required or such an amount as maybe prescribed
2.5. REVIEW OF MICROFINANCE ACTIVITIES IN NIGERIA

The CBN reported in 2005 that the practice of microfinance in Nigeria is culturally rooted
and dates back several centuries. The traditional microfinance institutions provide access to
credit for the rural and urban, low-income earners. They are mainly of the informal Self-Help
Groups (SHGs) or Rotating Savings and Credit Associations (ROSCAs) types. Other
providers of microfinance services include savings collectors and co-operative societies. The
informal financial institutions generally have limited outreach due primarily to paucity of
loanable funds.
The report went further to say in order to enhance the flow of financial services to Nigerian
rural areas, Government has, in the past, initiated a series of publicly-financed micro/rural
credit programmes and policies targetted at the poor. Notable among such programmes were
the Rural Banking Programme, sectoral allocation of credits, a concessionary interest rate,
and the Agricultural Credit Guarantee Scheme (ACGS). Other institutional arrangements
were the establishment of the Nigerian Agricultural and Co-operative Bank Limited (NACB),
the National Directorate of Employment (NDE), the Nigerian Agricultural Insurance
Corporation (NAIC), the Peoples Bank of Nigeria (PBN), the Community Banks (CBs), and
the Family Economic Advancement Programme (FEAP). In 2000, Government merged the
NACB with the PBN and FEAP to form the Nigerian Agricultural Co-operative and Rural
19
Development Bank Limited (NACRDB) to enhance the provision of finance to the
agricultural sector. It also created the National Poverty Eradication Programme (NAPEP)
with the mandate of providing financial services to alleviate poverty.
Microfinance services, particularly, those sponsored by government, have adopted the
traditional supply-led, subsidized credit approach mainly directed to the agricultural sector
and non-farm activities, such as trading, tailoring, weaving, blacksmithing, agro-processing
and transportation. Although the services have resulted in an increased level of credit
disbursement and gains in agricultural production and other activities, the effects were short-
lived, due to the unsustainable nature of the programmes.
Since the 1980s, Non-Governmental Organizations (NGOs) have emerged in Nigeria to
champion the cause of the micro and rural entrepreneurs, with a shift from the supply-led
approach to a demand-driven strategy. The number of NGOs involved in microfinance
activities has increased significantly in recent times due largely to the inability of the formal
financial sector to provide the services needed by the low income groups and the poor, and
the declining support from development partners amongst others. The NGOs are charity,
capital lending and credit-only membership based institutions. They are generally registered
under the Trusteeship Act as the sole package or part of their charity and social programmes
of poverty alleviation. The NGOs obtain their funds from grants, fees, interest on loans and
contributions from their members. However, they have limited outreach due, largely, to
unsustainable sources of funds.
On August 22, 2006 the Central Bank of Nigeria (CBN) gave approval-in-principle to
Accion, a United States-based microfinance company and seven others, including indigenous
firms, to operate as Micro-Finance Banks (MFBs) in the country. Under the regulatory and
supervisory framework for microfinance banks, the CBN stated that there shall be two
categories of licences available for promoters (both local and foreign) of Micro Finance
Banks based on geographical coverage.
The first category would be Micro Finance Bank licensed to operate as a unit bank (also
known as community banks) and which shall operate and open branches within a specified
local government area (LGA). CBN said the minimum capital requirement shall be N20
million or such amount as may be prescribed by it from time to time. The second category
20
would be Micro Finance Bank licensed to operate in a State and open branches within a
specified state or Federal capital territory and the minimum capital requirement of N1billion
only is required or such an amount as maybe prescribed
2.6. REGULATORY AND SUPERVISORY FRAMEWORK
The December 2005 Central Bank report on microfinance stated that the “growing awareness
of the potential of microfinance in poverty reduction, economic growth and development
coupled with the emergence of several highly successful and fast growing Micro Finance
Institutions [MFIs], has effectively put the issue of microfinance on the political agenda of
most developing countries”. Consequently, the supervisory authorities have taken active
measures to address the issue of microfinance through the development of an appropriate
regulatory and supervisory framework based on the particular features and risks associated
with this activity.
The challenge supervisors’ face, which is sometimes complicated by a multitude of legal
initiatives in this area, is how to accommodate or reasonably encourage microfinance within
a framework of generally accepted norms and prudential standards for the financial services
industry. In general, a framework that does not adequately address the features and risks of
microfinance would not effectively serve these institutions or the people who depend upon
them. Therefore, bank supervisors should ensure that the supervisory framework in place is
such that would result in innovative, rapid and balance growth of the industry as well as
consistent with accepted banking practices. The issue of savings/deposits is central to the
regulation and supervision of microfinance. Supervisory authorities are supposed to ensure
that the poor clients do not lose their savings in failing institutions.
A new challenge for developing an appropriate regulatory and supervisory framework for
microfinance lies in the great diversity of institutions that offer microfinance services. A
comprehensive framework significantly based on microlending as an activity should,
therefore, be developed and made applicable to all supervised institutions that offer this
service, regardless of whether they are licensed as a bank or new institutional form created
specifically for microfinance. The regulation should be defined to include standards for
portfolio classification, loan documentation, loan loss provisioning and write-offs for
microfinance operations.
21
It is instructive to note that the characteristics of microfinance clients are distinct, the credit
methodology different and, in many cases the ownership structure of the institutions is not
the same as that typically found in conventional financial institutions. These and other factors
give rise to a unique risk profile that needs to be addressed through the regulatory framework
and supervisory practices. In this regard, a risk-based supervision shall be implemented
which would focus mainly on
(a) governance and ownership structure (b) lending methodology (c) borrower characteristics
(d) appropriate management information system (e) internal control mechanisms and
procedures.
The report (CBN, 2005) concluded by saying that a simple and rational regulatory and
supervisory framework, which would achieve a balanced growth, promote transparency,
control risks faced by the institutions engaged in microfinance, eliminate barriers and
unnecessary requirements has therefore, been developed and should be implemented for the
sector.
2.7. THE ORIGINS OF SMALL LENDING
Microlending often starts in small villages, where family members and friends get together in
money-sharing groups. Mary Coyle, director of the International Institute at St. Francis
Xavier University in Nova Scotia, Canada, has studied the history of microcredit and says
that these savings clubs can be traced to all parts of the world. "They have operated for
centuries -- probably since the introduction of currency."
From region to region, these clubs developed their own names. In West Africa, they were
known as "tontines;" in Bolivia, "pasanaku;" and across Mexico and Central America,
"tandas." Tanda means "shift" in Spanish and works on the premise that members of the
group contribute to a pool of money, which shifts to a single member that has the most need.
The tontines of West Africa can be traced back to 17th-century Europe and are named for the
Italian banker Lorenzo de Tonti.
An early version of microlending was the Irish Loan Fund system, introduced in the early
1700s, by writer and nationalist Jonathan Swift. Swift's early success helped the Irish when
22
many were living in impoverished conditions. Swift's original system was standardized in
1837, when hundreds of independent loan funds were brought under the control of the Loan
Fund Board. By law, no loan could be more than £10 or run for longer than a 20-week term,
with weekly repayments. As with many contemporary microcredit institutions, interest rates
were low – in this case around 8 percent per year – much lower than those charged by local
profiteers.
2.8. THE PIONEERS OF MODERN-DAY MICROFINANCE

The concept of microloans took a big leap in the 1960s and 1970s, when groups such as
ACCION International, in Venezuela, and Yunus's Grameen Bank, in Bangladesh, began to
institutionalize the process. By formalizing and expanding the basic concept of sharing
programs, these microfinance institutions helped to build capital for small businesses rather
than just loaning for basic necessities such as food, water and clothing.
Yunus first came across the idea of microcredit while studying the lives of poor entrepreneurs
in his native Bangladesh during the famine of 1974. He began by loaning to groups of
women, and his program soon proved that small loans could not only quickly improve lives
but were paid back with interest and on time.
The next step was setting up a consistent on-the-ground program. In the case of the
successful institutions, this meant sending a representative, or "field manager," to the
prospective region to educate and advise and to oversee the loans locally.
After a few members of the group were accepted for a loan, the rest had to wait for that initial
loan to be repaid before they could obtain their own loans. "Peer pressure" from other
members of the group to repay the initial loan helped to set the bar high.
In 1961, another early pioneer, ACCION, opened its doors in Caracas, Venezuela, when law
student Joseph Blatchford raised $90,000 to start a community development program to help
the poor jump-start their own businesses.
Over the next two decades, ACCION set up scores of independent microfinance institutions
and expanded across Latin America. It, too, offered people a choice besides the local loan
23
shark, who would charge rates as high as 500 percent a year and often pushed people into
permanent debt.
Like the founders of ACCION, Yunus realized that if individuals who wanted to start their
own businesses could not free themselves from start-up debt, they would never be able to
grow.
Since the Grameen Bank was founded, it has paid out more than $5.7 billion in loans, and
more than $5.1 billion of that has been repaid -- a recovery rate of approximately 98.9
percent. It has made more than 950,000 loans and has 6.7 million members, around 96
percent of whom are women.
In October, the Norwegian Nobel Committee said of Yunus and his work, "Yunus's long-term
vision is to eliminate poverty in the world. That vision cannot be realized by means of
microcredit alone. But Muhammad Yunus and Grameen Bank have shown that in the
continuing efforts to achieve it, microcredit must play a major part."
Following the success of these early institutions, other microfinance organizations began to
launch throughout the developing world. Among the largest is FINCA International,
established by economist and Fulbright scholar John Hatch. Hatch believed that using locals'
knowledge rather than bringing in outsiders was key to building successful local economies.
Using an approach he has always stood by, Hatch said, "Give poor communities the
opportunity, and then get out of the way!" By 2005, FINCA had 400,000 clients in 21
countries across Latin America, Africa, Central Asia and Eastern Europe.
One year after the United Nations called 2005 the International Year of Microcredit, the
World Bank estimates that there are more than 7,000 microfinance institutions now operating
around the world.
24
CHAPTER THREE
3.0.INTRODUCTION
Essentially in this chapter we shall look into such issues as the population under
consideration, sample design, data collection instrument and procedures used in processing
collected data. The essence of this chapter is to evaluate the regulatory and supervisory
framework of microfinance, in as much scientific terms as possible. Integrated Microfinance
Bank, Lagos was used as the case study. In the main, the evaluation of the regulatory and
supervisory framework of microfinance in Integrated Microfinance Bank, Lagos and in
indeed the microfinance subsector as whole will be exhaustively brought to the fore.
3.1. RESEARCH DESIGN
The basic research design that will be used in this study is “Survey Research”. This method
actually focuses on a specific population or universe. Under this arrangement, data will be
collected and processed through analysis. For the constraint imposed by time, cost and space,
the entire population of the microfinance subsector cannot be studied. On this basis, a careful
25
selected sample size has been chosen to form the basis of our investigation. The sampling
technique used in this respect is the Probability Sampling Method. It employs the principle of
randomization whereby every element of the population has an equal chance of being
selected to form part of a sample.
3.2. SAMPLE OF THE STUDY
As it has often been repeated in this project, the underlying plan is to evaluate the regulatory
and supervisory framework of microfinance in the microfinance subsector. To that extent, the
financial sector, the banking sector and more specifically the microfinance subsector will
form the basic constituency of this research effort. The sample population therefore will be
employees of Integrated Microfinance Bank, Lagos , financial analysts, bankers and officials
of regulatory body (CBN). In terms of ranking, most of those whose opinions will be
accessed will fall within the ranks of those who have spent more than four years in the
banking sector. They will be drawn from all the spheres of the financial sector. These
categories of people have been chosen because of their privileged positions and moreso for
the fact that they are active players in the insurance industry.
3.3.QUESTIONNAIRE DESIGN
An open-ended questionnaire was designed for the purpose of this research project. It was
designed in such a way as to evaluate the regulatory and supervisory framework of
microfinance in Nigeria from our population sample. The questionnaire has two sections the;
personal data section and the research information section. The research information has
thirteen questions. The personal data has questions relating to the biodata of our respondents.
Below is a breakdown of how the questions will be distributed.
Table 3.1
PERCENTAGE
DEPARTMENT NO OF QUESTIONNAIRES COMPOSITION
Commercial Bankers 10 23
Financial Analysts 12 29
Regulatory officials 8 19
Microfinance Bankers 12 29
Total 42 100
26
3.3.1. PERSONAL INTERVIEW: This is a face-to-face question and answer session
between the person asking the questions and the respondents. The personal interview enable
the researcher to clarify a lot of conflicting issues and eliminate misunderstanding and
contradictions since it requires the presence of the researcher.
Table 3.2.
DEPRTMENTS No of Interviewees Percentage Composition
Total 9 100
PERCENTAGE
DEPARTMENT NO OF QUESTIONNAIRES COMPOSITION
Total 42 100
3.4. ADMINISTRATION OF QUESTIONNAIRE

In the course of implementing this research project, 42 copies of questionnaires will be
and distributed to all the respondents. These include ten workers of Platiniun-Habib Bank
Plc who are in the micro-credit department; twelve financial analyst with over six years
experience in the financial sector; eight officials of the Central Bank of Nigeria and
twelve employees of Integrated Microfinance Bank of Lagos. The questionnaires will be
personally delivered to the entire population sample. This is to avoid loss in transit that
might be associated with postage via any of the courier organizations. The questions
asked were earlier stated (See Appendix A for the sample of the questionnaire).
3.5. METHOD OF DATA ANALYSIS
During an analysis, the data is broken down and interpreted in line with the objectives set
at the commencement of the research effort. In this case, interpretation can be defined as
the explanations given in respect of the associations and the relationship found among the
27
data or groups of data, which include the interferences and conclusions drawn from the
relationship drawn among data or group of data.
The data analysis method used in this case is relevant statistical methods such as
percentages, mean and statistical tools which include tables. It is expected that by the
application of these statistical analysis, conclusion can easily be reached on this research
project.
3.6. RE-INSTATEMENT OF RESEARCH QUESTIONS
In any research survey, it is always necessary to identify a set of research questions. Those
questions will not only form the basis upon which the research will be anchored but will also
provide a guide on the direction of the project. The following will be the research questions of
this study:
accepted framework?
funds?
entrepreneurs?
of poor people?
in Nigeria?
microfinance banks?
28
CHAPTER FOUR
4.0. PRESENTATION OF DATA AND ANALYSIS
In any statistical enquiry or survey, the use of sampling cannot be overemphasized. This
essentially is owning to its ability to save time, labour, money and space. This is responsible
for our decision to adopt this approach in this survey. Nevertheless, regardless of whether one
is dealing with a sample or a population, as a rule of thumb, whenever a batch of data
contains about 25% or more observations, the best way to examine such data is to present it
in summary form by constructing appropriate tables. From these, we can then extract the
important features of the data for further analysis.
In this regard, we will employ the use of tables, percentages and mean and other relevant
statistical data in the presentation and analysis of the data gathered.
4.1. RESPONSES TO QUESTIONNAIRE
As stated earlier, active players in the financial sector, the banking industry, regulatory
officials and microfinance subsector were interviewed personally and through questionnaires.
The total number of people personally interviewed was 9 while those who were give
questionnaires were 42. However out of the 42 questionnaires that were distributed, 40 were
properly administered and returned, representing 95%. This size of respondents becomes the
usable sample of the population.
In the table shown below, the 42 respondents who were served with questionnaires were
classified according to their sector, industry and subsector. This distribution is deliberate and
the number was made in each case in an attempt to get adequate information concerning the
research questions administered to the respondents.
29
SUMMARY OF RESPONSES
% ACTUAL TO
DISTRIBUTION EXPECTED ACTUAL EXPECTED
Commercial Bankers 10 10 100
Financial Analysts 12 12 100
Regulatory officials 8 6 75
Microfinance Bankers 12 12 100
Total 42 40 95
4.2. ANALYSIS
From the fore going in chapter three, this chapter deals with the systematic presentation of
the data collected through the methods described .The presentation is in tabular form using
simple percentage technique to ease understanding.
Question 4.1. What is your level of the evaluation of the success of the microfinance banks
against the backdrop of the supervisory and regulatory framework?
Table 4.1
OPTIONS No OF RESPONDENTS PERCENTAGE
(a) High 21 52
(b) Low 19 48
Total 40 100
From the table above, 21 respondents with a percentage of 52 percent said the microfinance
banks have been successful against the backdrop of the guiding supervisory and regulatory
framework while 19 respondents with a percentage of 48 percents said it is low when view
from the purview of the supervisory and regulatory framework that they operate.
Question 4.2. Is the regulatory and supervisory framework in accordance with
internationally accepted framework?
Table 4.2
(a) Yes 36 90
(b) No 4 10
Total 40 100
The table above shows an overwhelming 36 respondents with a percentage of 90 percent said
the regulatory and supervisory framework is in accordance with international practice while
30
just a mere 10 percent of the lot with a population of 4 respondents said it is not in
accordance with internationally accepted framework.
Question 4.3. Has the introduction of microfinance helped poor entrepreneurs to access the
needed funds?
Table 4.3
(a) Yes 28 70
(b) No 12 30
Total 40 100
From table 4.3, 70 percent of the respondents with a population of 28 respondents said yes it
has helped poor entrepreneurs accessed the needed funds while 28 respondents with a
percentage of 70 percents said no it has not it has helped poor entrepreneurs accessed the
needed funds.
Question 4.4. What is the level of the numbers of licensed microfinance banks to the
population of poor entrepreneurs?
(a) High 5 12
(b) Low 35 88
Total 55 100
The table above depicts 5 respondents with a percentage of 12 percents who said the level of
the numbers of licensed microfinance banks is high compared to the population of poor
entrepreneurs while 88 percents corresponding to a population of 35 respondents said the
level of the numbers of licensed microfinance banks is low compared to the population of
poor entrepreneurs.
Question 4.5. Has the introduction of microfinance banks in Nigeria been able to impact on
the life of poor people?
Table 4.5
(a) Yes 22 55
31
(b) No 18 45
Total 40 100
From the table above, 22 respondents (55 percents) said the introduction of microfinance
banks in Nigeria has been able to impact on the life of poor people while 18 respondents (45
percents) said the introduction of microfinance banks in Nigeria has not been able to impact
on the life of poor people.
Question 4.6. What is the level of the concentration of microfinance banks in the rural areas?
Table 4.6
(a) High 0 0
(b) Low 40 100
Total 40 100
The table above shows an interesting result. All the respondents said the level of
concentration of microfinance banks in rural areas is low.
Question.4.7. What is the level of the concentration of microfinance banks in urban areas
Table 4.7
(a) High 40 100
(b) Low 0 0
Total 40 100
The table above showed the same result that was obtained in Table 4.6. All the respondents
said all the microfinance banks are concentrated in the rural areas.
Question 4.8. Has the introduction of microfinancing been able to stop the flow of rural-urban
drift?
Table 4.8
(a) Yes 11 28
(b) No 29 72
Total 40 100
Table 4.8 gives 11 respondents with a percentage of 28 percents who yes it has been able to
stop the flow of rural-urban drift while 29 respondents (72 percents) said no it has not been
able to stop the flow of rural-urban drift in Nigeria.
Question 4.9. What is the level of poverty before and after the introduction of
microfinancing banks in Nigeria?
Table 4.9
32
(a) High 0 0
(b) Low 5 12
(c) Same 35 88
Total 40 100
From table 4.9, none of the respondent said it is high, 5 respondents said it is low while a
large percentage of the population precisely 88 percent with a population of 35 said it is the
same.
Question 4.10. What is the level of the impact of government policies on the operations of
microfinance banks?
Table 4.10
(a) High 31 77
(b) Low 9 23
Total 40 100
The table above shows 31 respondents with a percentage of 77 percents who said the level of
the impact of government policies on the operations of microfinance banks is high while 23
percents corresponding to a population of 9 respondents said the level of the impact of
government policies on the operations of microfinance banks is low.
Question 4.11. What is the level of performance of microfinance banks in Nigeria compared
to other developing countries?
Table 4.11
(a) High 19 48
(b) Low 21 52
Total 40 100
From the table above, 19 respondents (48 percents) said the level of performance of
microfinance banks in Nigeria compared to other developing countries is high while 21
respondents (52 percents) said the level of performance of microfinance banks in Nigeria
compared to other developing countries is low.
Question 4.12. What will be the level of success of microfinance banks in the future (five
years)?
Table 4.12
(a) High 37 92
(b) Low 3 8
33
Total 40 100
Table 4.12 gives 37 respondents with a percentage of 92 percents said the level of success of
microfinance will be high in the future while 3 respondents (8 percents) said the level of
success of microfinance will be low in the future
Question.4.13. What is the level of the role of the regulatory body in achieving success in the
Table 4.13
(a) High 38 95
(b) Low 2 5
Total 40 100
In Table 4.13 38 respondents corresponding to a percentage of 95 percent said the role of
regulatory body in achieving success in the microfinancing subsector is very high while 2
respondents with a percentage of 5 percent said the role of regulatory body in achieving
success in the microfinancing subsector.
4.3. TEST OF HYPOTHESIS
Hypothesis is an assumption. It decides a statement of probability, which is subject to
empirical testing. It is an idea or suggestion put forward as a starting point for reasoning and
explanation to determine the correctness by employing various sampling techniques.
As noted earlier, microfinancing is an essential tool of eradicating poverty and also bringing
about economic growth. For the purpose of this research work, it is desirable to test the
hypothesis, which represents the ideas, beliefs and assumptions put forward in order to make
valid conclusions. The findings will lead to the acceptance or rejection of the hypothesis
should they satisfy the reflection of the null hypothesis (HO), the alternative (HA) will be
accepted. This indicates that at least, one of the independent/input variables has an effect in
the dependent variable.
HYPOTHESIS ONE
HYPOTHESIS TWO
34
of the poor.
The null hypothesis (H0) is the assumption that there is no difference between the hypothesis
and the sample result, while the alternative hypothesis (Hl) describe the explanation not
covered by the null hypothesis.
4.4. STATISTICAL CALCULATION
CHI-SQUARE
Σ(O-e)2
The formula is: x2 = -----------
e
RT x CT
Expected Frequency (e) = ---------------------
Grand Total
Where: x2 = Chi-square
Σ = Summation
O = Observed frequency
e = Expected frequency
x2 = Chi-Square
RT = Row Total
CT = Column Total
4.4.1. HYPOTHESIS ONE

OPTIONS No OF EXPECTED O-e (O-e)2 (O-e)2
RESPONDENTS FREQUENCY e
OBSERVED(O) (e)
(a) Yes 26 20 6 36 1.8
(b) No 14 20 -6 36 1.8
35
Total 40 40 3.6
Note: Since it is one variable distribution we use average/mean of the responses obtained as
the expected frequency
26 + 14
For one Variable Expected Frequency (e) = ----------
2
40
e = ------
2
e = 20
At 5% level of significant = 0.05

Degree of freedom (df) = 2-1 = 1
Table value of x2 (value from Chi-square table) = 3.84
Calculated value (value from the Chi-square calculation above) = 3.6
4.4.2. Decision Rule:
The alternative hypothesis (Hl) is rejected in favour of the null hypothesis (H0) because x2
which is 3.6 is less than critical value from Chi-square table which is 3.84.
Hence the null hypothesis is accepted.
4.4.3. Interpretation
The rejection of alternative hypothesis Hl shows that the introduction of microfinancing has
led to increase access to funds by active poor entrepreneur
4.4.4. SECOND HYPOTHESIS
of the poor.
OPTIONS No OF EXPECTED O-e (O-e)2 (O-e)2
RESPONDENTS FREQUENCY e
36
OBSERVED(O) (e)
(a) Yes 21 20 1 1 0.05
(b) No 19 20 -1 1 0.05
Total 40 0.10
21 + 19
For one Variable Expected Frequency (e) = ----------
2
40
e = ------
2
e = 20
At 5% level of significant = 0.05

Degree of freedom (df) = 2-1 = 1
Table value of x2 (value from Chi-square table) = 3.84
Calculated value (value from the Chi-square calculation above) = 0.10
4.4.5. Decision Rule:
The alternative hypothesis (Hl) is rejected in favour of the null hypothesis (H) because x2
which is 0.10 is less than the critical value from Chi-square table which is 3.84.
Hence the null hypothesis is accepted.
4.4.6. Interpretation
The rejection of alternative hypothesis Hl shows that Introduction of Microfinancing has led
to improved standard of living of the poor.
37
CHAPTER FIVE
SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1. SUMMARY
This research study did a critical evaluation of regulatory and supervisory framework of
microfinance in Nigeria and it also took an in-depth look at the effect of microfinace on
active but poor entrepreneurs in Nigeria. Essentially, the aim was to evaluate how much
microfinance has affecte active poor entrepreneurs and it has indeed affected the common
man. In this regard, emphasis was laid on the opinion of stakeholders, particularly those in
the banking industry and indeed the financial sector. The overall objective was to ascertain
the reliability or otherwise of microfinance and how well it has affected the active poor
entrepreneur in Nigeria
38
In Chapter One , we presented an overview of the study while Chapter two took an excursion
into the literature. In the third chapter, we identified our methodology while in Chapter four,
we analysed and presented our results. In this chapter, we shall summarise our efforts, make
certain policy recommendations and essentially conclude on the basis of our numerous
findings.
5.1.1. Summary Of Findings
Based on the analysis of the data obtained, just a fair majority believes that the microfinance banks
have been successful against the backdrop of the guiding supervisory and regulatory framework.
However majority of respondents also believe that the regulatory and supervisory framework for
micofinance is in accordance with international practice.
From the analysis it could be inferred that majority of the respondents believe that it has helped
poor entrepreneurs accessed the needed funds. Further to this, majority of the respondents also
believe that the level of the numbers of licensed microfinance banks is low compared to the
population of poor entrepreneurs.
However a fair majority of the respondents believe that the introduction of microfinance banks in
Nigeria has been able to impact on the life of poor people. All respondents believe that the level of
concentration of microfinance banks in rural areas is low. The analysis of the result clearly shows
that all the respondents believe that microfinance banks are not concentrated in the rural areas.
This consequently led majority of the respondents to say that it has not been able to stop the flow
of rural-urban drift in Nigeria. It was however surprising to note that majority of the respondents
believe that the level of poverty before and after the introduction of microfinancing banks in
Nigeria is the same. Majority of the respondents however concurred that that the level of the
impact of government policies on the operations of microfinance banks is high. It was not
surprising when fair no of the respondents said the level of performance of microfinance banks in
Nigeria compared to other developing countries is low. Majority of the respondents however stake
a better future for microfinance in Nigeria.
5.2 RECOMMENDATION
The following recommendations are posited for effective regulation and supervision in the
microfinance subsector
39
• Less regulatory and supervisory control should be exerted on microfinance banks.
• Necessary infrastructure should be put in place so that the subsector, microfinance will
have unhindered growth.
• Both the government and the microfinance banks should do awareness campaign.
• Even licensing of microfinance should be done so as to have an even distribution
throughout the country.
• A microlending institution should not receive a license to take deposits until it has
demonstrated that it can manage its lending profitably enough so that it can cover all its
costs, including the additional financial and administrative costs of mobilizing the
deposits it proposes to capture.
• Prudent regulations should not be imposed on “credit-only” MFIs that merely lend
their own capital, or whose only borrowing is from foreign commercial or non-
commercial sources or from prudentially regulated local commercial banks.
• As much as possible, prudential regulation should be focused o the type of transaction
being conducted rather than the type of institution conducting it.
• Minimum capital needs to be set high enough so that the supervisory authority is not
overwhelmed by more new institutions that it can supervise effectively
• Before regulators decide on the timing and design of prudential regulation, they should
obtain a competent financial and institutional analysis of the leading MFIs, at least if
existing MFIs are the main candidates for a new licensing widow being considered.
5.3. CONCLUSION
The state of regulation and supervision may appear to be in terrible disarray, but given the
slow evolution of the microfinance industry in general, policy is where we might expect
since in most countries less than 10 percent of low income households have access to basic
savings and credit services. Remember, regulation follows, it doesn’t lead. Until the relevant
structures are in place to meet the demand for financial services for the bulk of the
population, investors must content themselves with those precious few market leaders that
understand the business of micro finance and how to protect both their investment and its
customers’ confidence.
40
Summing up, we would like to conclude this necessarily rapid excursus on microfinance in
Africa and indeed Nigeria with a common sense statement: the perspectives of the industry
are in the hands of the MFIs themselves and the future will be shaped according to the way
the practitioners will be capable to face the above problems & challenges. Microfinance is a
right tool to unlock the potentials of the Nigerian/African poor people; however it should be
less an instrument of economic policy and more and more an industry relying in its own
forces. Africa has a well-rooted tradition in tiny loans matters and the practitioners have a
lot to capitalise from the financial practices and accordingly they are in a good position to
design MFI best practice.
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45
APPENDIX
QUESTIONAIRE
46
This questionnaire is designed to evaluate the regulatory and supervisory framework of microfinance
in Nigeria. It is being circulated for the purpose of collecting opinions and information, which will be
used in a research project being, carried out in part fulfillment of the conditions for the award of
B.Sc. degree in the department of ------------------- of Olabisi Onabanjo University Ago-Iwoye, Ogun
State. You are humbly required to answer the questions asked below as truthfully as possible. Your
responses to the questions will be treated as confidential and shall only be used for the purpose
stated above.
PERSONAL DATA
NAME: ………………………………………………………………….
OCCUPATION: …………………………………………………………
PLACE OF WORK: ……………………………………………………
POSITION HELD: …………………………………………………….
YEARS OF EXPERIENCE: …………………………………………
RESEARCH INFORMATION
accepted framework?
funds?
entrepreneurs?
of poor people?
in Nigeria?
microfinance banks?
47
48

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PROJECT TOPIC: An evaluation of the regulatory and supervisory framework of

1.1. STAEMENT OF PROBLEM

1.2. JUSTIFICATION OF STUDY

2.0. LITERATURE REVIEW

2.1. CONCEPTUAL CLARIFICATION

Please type the remaining part of the table of contents

1. A strong and focused emphasis on economic growth

countries thereby eradicating poverty. It is in this context that microcredit has recently

Banks of Nigeria, NAPEP (National Poverty Eradication Programme) then this study is

Microfinancing is lending (usually a few hundred dollars) to small enterprises in

agriculture, distribution, crafts, trading and similar activities. The contention is that for a

2.3.2. Secured Transactions

2.3.6. Capital and reserves

2.4. REGULATION AND SUPERVISION Of MICROFINANCE-THE AFRICAN

A recent study of 11 major microentreprise finance programmes - Agence de credit pour

2.5. REVIEW OF MICROFINANCE ACTIVITIES IN NIGERIA

2.7. THE ORIGINS OF SMALL LENDING

2.8. THE PIONEERS OF MODERN-DAY MICROFINANCE

3.4. ADMINISTRATION OF QUESTIONNAIRE

4.4.1. HYPOTHESIS ONE

At 5% level of significant = 0.05

At 5% level of significant = 0.05

5.1.1. Summary Of Findings

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