Microfinance is an array of financial services, including loans, savings and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn’t normally qualify for a standard bank loan. The first microfinance bank, Grameen Bank, was founded in 1983 by Professor Muhammed Yunus, a Bangladeshi economist from Chittagong University. The objectives of the bank were:

1. Extending banking facilities to poor men and women;

2. Eliminate the exploitation of the poor by money lenders;

3. Create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh;

4. Bring the disadvantaged, mostly the women from the poorest households, within the fold of an organization format which they can understand and manage by themselves; and

5. Reverse the vicious circle of “low income, low savings & low investment” into virtuous circle of “low income, injection of credit, investments, more income, more savings, more investment, more income”.

The original idea of microfinance was to provide banking for the poor and poorest and help solve the problem of poverty.

Before the emergence of Microfinance banks in Nigeria, the people who were unable to utilize the financial services of formal financial institutions relied on non-governmental organization-microfinance institutions, moneylenders, friends, relatives, credit unions etc. MFB’s were licensed to begin operations in Nigeria in 2007 by the CBN and existing community banks and NGO microfinance institutions that met the conditions of CBN for licensing were allowed to convert into MFB’s.

The two major differences between MFB’s and commercial banks ought to be:

1. Microfinance banks grant loans to low-income individuals for their businesses without requiring collateral. For the commercial banks, loans for business and investments require the borrower to submit collateral to the bank before being granted the loan. The collateral cannot be of a value less than the loan applied for.

2. Commercial banks have no limit to how much they can lend, usually with high interest rates. MFB’s should provide easy loans for small enterprises but should also be limited on how much they can lend out.

Unfortunately, there are many flaws with microfinance banking in Nigeria compared to the original concept.

Some of these flaws are:

1. The founder of the first MFB, Professor Muhammed Yunus, envisaged it as a bank for the poor and very poor. But with the high interest rates charged by Nigerian MFB’s, it is more suited for traders, suppliers and importers. Some MFB’s charge as high as 30% interest on loans.

2. MFB’s in Nigeria are predominantly in the cities and urban areas instead of the rural areas and villages where they ought to be.

3. MFB’s in Nigeria do not lend to start a new business.

4. Nigerian MFB’s are profit oriented. The original idea and objective of microfinance banking was to solve the problem of poverty. Nigerian MFB’s, however, are more interested in profit-making.

The progress of MFB’s in Nigeria faces many challenges. One such challenge is the lack of banking culture in the rural areas and among the poor. These people traditionally borrow money from friends and relatives and repay the same amount of money borrowed no matter how long the tenure of the loan is. They, therefore, find it difficult to understand the payment of interest on bank loans.

The failure of community banks and the 2010 withdrawal of licenses of over 200 MFB’s also damaged public confidence in the banks. Many customers of these MFB’s who lost their money in the bank failures have refrained from dealing with them again for fear of once again losing their money.

Another challenge faced by Nigerian MFB’s is corruption. Corruption has wreaked havoc in many sectors of the Nigerian economy including the microfinance sub-sector. Examples are corporate governance failures, frauds and forgeries, theft and refusal by customers to repay loans. Board members of MFB’s have been known to misuse their positions to obtain facilities way above the regulatory limit for insider related loans with no intention of repaying such facilities. Fraud and forgeries by both insiders and outsiders to the bank are also rife.

While the CBN has the responsibility of supervising and regulating the activities of MFB’s as well as supervising commercial banks, primary mortgage institutions, bureau de change and other financial institutions, the multiplicity of the institutions and their diverse natures is a regulatory challenge. A regulator trained to inspect and supervise the activities of a commercial bank may be handicapped in the supervision of an MFB.

Another challenge faced by MFB’s in Nigeria is the copying, competing and mimicking of the practices of commercial banks. Many management staff of MFB’s were former commercial banks staff. They usually come with the orientation, philosophy and culture of commercial banks and refuse to understand that microfinance is not micro-commercial banking but a different kind of banking requiring a different approach, philosophy and client base.

As stated earlier, the rate of interest charged by MFB’s in Nigeria leaves a lot to be desired. The rates are as high as 30% interest on loans and are way too high and may not help in the smooth development of this sector.

It is this writer’s opinion that the current microfinance banking framework in Nigeria cannot achieve the cardinal objective of poverty eradication with its activities and high interest rates. What we see are just micro-commercial banks.