Microfinance banking (MfB) started as a concept to provide financial services to the world poor, those who by circumstances of not being rich are excluded from access to the conventional commercial banks and other financial institutions due to lack of collateral.

The concept presents series of exciting possibilities and opportunities for improved markets, reducing poverty and fostering social development among citizens.

The concept of microfinance originated in the mid-1970s in Bangladesh, an Asian country, through the pioneering experiment by Dr. Muhammad Yunus, then a professor of Economics in one of the country's tertiary institutions, Chittagong University.

Yunus' objective was to offer the poor in that country financial services, entrepreneurship opportunities and an end to mistreatment by money-lenders, a system where they could produce, manage and maintain their own finances.

Yunus' experiment in microfinance was in the granting of microcredit; that is, extending small loans to entrepreneurs who are too poor to qualify for conventional bank loans.

The advantages of microfinance are numerous. First, it is sustainable and creates independence from aid. Yunus believed that by giving small loan to an individual or group of people who cannot access credits from the conventional banks would give them the ability to work their own way out of poverty.

Secondly, it means that the money goes directly to the people who need it - bypassing the bureaucracy and corruption that can compromise traditional methods of charity.

Moreover, Microloans are never lent to individuals without first providing them with the expertise and training to build business plan that is likely to succeed, and such projects are even monitored.

Yunus' interest in the scheme was aroused by the conditions of the poor in his country who, despite their entrepreneurial instinct, lacked the means of translating their desires into reality.

Thus, in 1974, Yunus led his students on a field trip to a poor village. They interviewed a woman who made bamboo stools, and learnt that she had to borrow the equivalent of 15 pence to buy raw bamboo for each stool made. After repaying the middleman, sometimes at rates as high as 10 per cent a week, she was left with a penny profit margin. Had she been able to borrow at more advantageous rates, she would have been able to amass an economic cushion and raise herself above subsistence level, Yunus thought.

Realising that there must be something terribly wrong with the economics he was teaching, Yunus took matters into his own hands, and from his own pocket lent $27 to 42 basket-weavers in nearby town of Jobra. He found that it was possible with this tiny amount not only to help them survive, but also to create the spark of personal initiative and enterprise necessary to pull themselves out of poverty.

Against the advice of banks and government, Yunus carried on giving out 'microloans', and in 1983 formed the Grameen Bank, meaning 'village bank' founded on principles of trust and solidarity.

In Bangladesh today, Grameen has 1,084 branches, with 12,500 staff serving 2.1 million borrowers in 37,000 villages.

On any working day, Grameen collects an average of $1.5 million in weekly instalments. Of the borrowers, 94 per cent are women, and over 98 percent of the loans are paid back, a recovery rate higher than any other banking system.

Grameen methods are applied in projects in 58 countries, including the United States (U.S.), Canada, France, The Netherlands and Norway.

Today, Yunus runs Bangladesh's Grameen Bank, a leading advocate for the world's poor that has lent more than $5.1 billion to 5.3 million people. The bank is built on Yunus' conviction that poor people can be both reliable borrowers and avid entrepreneurs. It even includes a project called Struggling Members Programme that serves 55,000 beggars. Under Yunus, Grameen has spread the idea of microcredit throughout Bangladesh, southern Asia, and the rest of the developing world.

People see microfinance as a viable commercial activity that can increase access to investment capital for the working poor.

With Yunus' experiment, millions of people around the world today have been liberated from economic slavery. Jobs have been created, families uplifted and standard of living improved remarkably.

According to Yunus, "At first, I didn't think that what I did had any significance in a broader context."

However, the scheme keeps expanding in scale, and Yunus has grown intimately familiar with the unbearable dimensions of global poverty. As many as 1.2 billion people around the planet lack access to basic necessities, he explains, and microfinance could be their pathway out of despair. In 1997, only about 7.6 million families had been served by microcredit worldwide, according to the 2005 State of the Microcredit Summit Campaign Report.

As of December 31, 2004, some 3,200 microcredit institutions reported reaching more than 92 million clients, according to the report. Almost 73 per cent of them were living in dire poverty at the time of their first loan.

"Yunus and Grameen have taken a first step, which has inspired others to take a look at microfinance as a business," says John Tucker, deputy director of the microfinance unit at the United Nations Capital Development Fund.

Origin Of MFBs In Nigeria

According to the Central Bank of Nigeria (CBN) in the preambles to its 'Microfinance Policy, Regulatory And Supervisory Framework for Nigeria', the practice of microfinance in Nigeria is culturally rooted and dates back to several centuries.

The traditional microfinance institutions provide access to credit for the rural and urban low-income earners.

However, they are mainly of the informal self-help group or rotating savings and credit association types.

Other providers of microfinance services include savings collectors and co-operative societies. The informal financial institutions generally limited outreach due to paucity of loanable funds.

To bridge the gap, successive Nigerian governments in the past had initiated series of publicly-financed micro-rural credit scheme and policies targeted at the poor. But all these have remained unsustainable as they always die with each successive government.

However, real attempts at introducing officially administered microfinance bank (MfB) scheme started when the then military president, General Ibrahim Badamosi Babangida, introduced the defunct Peoples Bank that later metamorphosed into Community Bank and later to Microfinance Bank.

One astonishing thing about the introduction of the concept into Nigeria is that while micro-credit or microfinance has been able to uplift the too poor in other developing countries in Africa, Asia and some parts of Europe and America, the introduction of MfB in Nigeria has made the poor to be poorer and further lead them to grinding poverty.

Wrong Models, Low Capacity

As more microfinance banks in Nigeria are finding it difficult to meet their obligations to depositors in the wake of the paucity of capital in the financial system, analysts insisted that the bane of the financial sub-sector is a combination of wrong model and low capacity of the banks among others.

As the financial regulatory authorities continue to expand energy sorting out the mess uncovered by the famous bank audit of August 2009, concerns are being raised over the seeming replication of the crisis in the microfinance banking sector as the number of distressed institutions are swelling by the day.

Investigations showed that the number of frustrated MfB depositors is growing as more banks continue to shut their doors because of their failure to meet depositors' demands.

There seems to be unanimity of opinion among analysts who blamed the unfavourable development on a combination of low capacity of the banks and wrong model adopted by a number of MfBs.

The exasperation of investors in MFBs is said to have been compounded by the resolve of the apex bank not to bail out any of the distressed firms.

At a meeting with chief executives of MfBs, Other Financial Institutions Director (OFID) of the CBN, Femi Fabanwo, said although the regulators were worried by the increasingly widespread incidence of illiquidity in the microfinance banking sub-sector, there would be no bailout for any of them having liquidity problem.

However, further investigations have shown that apart from those suffering from acute illiquidity, a number of the ailing MfBs are at the verge of a change of ownership, a development said to have informed special audit of their accounts.

A CBN source explained that the recent audit of money deposit banks could be blamed for some of the problems presently affecting MfBs

It was gathered that a combination of factors including the bank audit, the clampdown on bank debtors and the refusal of banks to lend are the factors frustrating attempts to inject fresh funds into the banks.

But operators and financial experts said beyond the issue of injection of additional capital, the foundations for some of the MfBs were too weak for efficient operation in a complex economic climate like Nigeria.

Wrong Business Models

Biodun Adedipe, senior Partner, Biodun Adedipe and Co, a firm of financial analysts, said many of the promoters of MfBs got it wrong from the start.

He noted that some of the owners of MFBs have decided to compete with money deposit banks which have better structure, a development he attributed to the inability of the MFBs to meet their obligations to their depositors.

"Most of them have wrong business models because they came and tried to operate like money deposit banks.

"Microfinance banks are expected to engage in neigbourhood banking. All their customers are supposed to be those who operate within their localities. They are supposed to know them and have the capacity to monitor their progress," he said.

Adedipe said the loss of focus is responsible for the myriad of problems confronting microfinance institutions.

However, chief executive of Financial Derivatives Nigeria Limited, Bismark Rewane, said the trouble with microfinance institutions is not peculiar to Nigeria.

According to him, bank failure is a consequence of economic problems besetting the global community, as over 155 banks have failed in the U.S. alone.

However, Rewane said apart from the global economic crisis, other impediments to a regime of smooth operation of MfBs are the Nigerian economic crisis and lack of capacity of the affected banks.

He said the low capacity of the MfBs was responsible for the systemic failure of these banks.

He would not indict the system or regulators as the current challenges, according to him, can be described as the consequence of the general downturn in the economy.

Rewane, who noted that MfBs are lending at the retail level, said most of those who took facilities in the MFBs are facing problems that make it difficult to service their loans.

"Lending to someone who has lost his job can be challenging. How do you expect a man that has just been sacked to repay his facilities? The process is therefore fallout of the general recession in the country," Rewane said.

But managing director, Gold Microfinance Bank Limited, Lagos, Lanre Abiola, admits that these banks were faced with liquidity challenges and consequently closed shops. But he adds that they have plans to reopen for business this year.

But a former director of the Nigeria Deposit Insurance Corporation (NDIC), Joel Ahimie, attributed the liquidity crisis in the MFBs to haste for profit and wrong lending practices as well as inadequate supervision by the regulatory authorities.

He said: "Our people were just too much in a hurry. Most of the operators see microfinance bank as a mini bank, and that is wrong. Some see it as a profit-making business, forgetting that the profit will come but not now. The money-lenders are making money and they charge 100 per cent interest, but MFBs charge over 30 per cent, which is a lot of money.

Executive director of Lift Above Poverty Organisation (LAPO), Godwin Ehigiamusoe, said there is the need for a review of the minimum capital for the sector.

"Internationally, it is agreed that N1 billion for a microfinance institution is rather high, so there may be need for a downward review in that aspect," he said, admitting that N20 million was not sufficient to run a microfinance institution at the state level.

Chief executive officer, ACCION Microfinance Bank, Bunmi Lawson, said "the principle behind MFBs is that you give a lot of small loans and you should ensure that you have a steady capital base that would enable you meet any liquidity problems at any point in time. Most MfBs operators are regrettably not too conscious about their lending processes. They give loans to too many people without proper monitoring and at the end of the day, what you would hear are issues of bad loans. MfB operators lend to Small and Medium Enterprises (SMEs) and instead of giving to say 10 people, they actually loan to over 10,000 clients and before you know it, there would be cash problem. As you know, MfBs are still very new and people are not yet putting many deposits into them. So, they do not have huge credit to give out to the active poor and they do not have enough funds from the commercial banks. All of that just made it a bit difficult for them."

The CBN recently said that in addition to monetary penalties, it would remove the managing director of any MfB that fails to render monthly returns promptly or makes false or late renditions two consecutive times.

Repeated failure to render the returns for a period of six months by any MfB, according to the CBN, will amount to the revocation of the bank's operating licence.

Even with the licensing of over 910 MfBs in Nigeria by the CBN, the operations of most of them left much to be desired, as most of them have even derailed from the main objectives setting them up.

For instance, instead of catering for the rural population and those living in hinterlands as well as make credits available to artisans and MSMEs, the MfB operators are preoccupied with competing with the large commercial banks.

Some analysts argued that the problem of the MfBs in Nigeria is compounded by the fact that the sponsors of most were ex-staffs of distressed and liquidated banks, hence their operational methodologies are mainly carry-over from the distressed banks.

They argued that such managers still see MfBs as another avenue for self-enrichment. Therefore, the recent proposed certification of the chief executives /managing directors of the MfBs by the CBN to ensure that they are run professionally in line with international best practices anchored on transparency and risk-based corporate management come as a welcome development.

Head of corporate affairs of the CBN, Mohammed Abdullahi, said the apex bank is doing everything possible to ensure that microfinance banks play their roles effectively in the Nigerian economy.

"There is a committee of which some members just returned recently from a trip abroad and we are considering all options. We are considering ideas from all over the world, so that microfinance banks can play their roles effectively in the economy," he said.

But for how long will depositors of these troubled MfBs wait?

The Nigerian Experience

The MfBs in Nigeria were soon after their establishment caught in the web of corruption and inefficient Nigerian economic system. The concept was hijacked by moneybags, infected with bureaucracy of the Nigerian politics and economics.

Due to poor policy formulation, high cost of doing business in the country. The microfinance concept has been misapplied with dire consequences for the poor in Nigeria.

According to analysts, the CBN policy that mandated MfBs to have a minimum reserve of not less than N20 million with the apex bank, while at the same time directed that the NDIC insures each depositor for a maximum N100,000 regardless of the amount of money invested, has taken the MfBs out of the reach of the poor it was intended to serve. The policy, according to analysts, also discourages prospective investors because their funds are not sufficiently secured.

Also, high cost of incorporating business ventures, taxes, approvals, rents and salaries have eaten deep into the banks' vault thereby making access to cheap fund impossible.

Another area the MfBs in Nigeria have faltered is in the area of corporate governance. Most of the MfBs operating in the country today have abandoned their primary area of responsibility. Rather than focusing on small businesses and entrepreneurs, they have shifted their focus into big businesses in competition with conventional commercial banks. The implication of this is that when the big businesses default, the banks go down with them, as they do not have the required capital base to absorb such shock. This is apart from the fact that they lacked the required expertise for such ventures.

Other issues that bordered on corporate governance among microfinance institutions in the country is the unusual overhead cost imposed on themselves by these banks. Many of them, even before commencing operations, rented buildings that compete in standard with that of a commercial or an investment bank. Some, apart from the lavish furnishing of the rented premises and fleets of expensive cars, will also deploy bulletproof doors that run into millions of naira. The implication of these is that these banks, even before commencing operations, are already in debt on frivolities, hoping to cover it up with depositors' money when operation commences.

All these lapses led to the collapse of microfinance institutions in the country, coupled with poor regulatory framework and lack of punishment for those that run them aground.

Looking at the situation in Nigeria, who then are at the receiving end?

It is often the too poor who the scheme was meant to salvage from the claws of poverty. The poor who deposited their little earnings in these institutions with the sole aim of getting small credit, loses all with the collapse of the institutions. No CBN or NDIC to come to their aid while the young man who mismanaged their small savings continue to live "big" in the city.

As of today, 80 per cent of poor Nigerians who participated in the country's microfinance scheme from Peoples Bank to Community Bank and now Microfinance Bank ended up regretting their actions.

Then what are the solutions?

Analysts have suggested that a typical micro-credit or MfB, in cutting its coats according to its cloth, should not have more than a small three-room office, no air-conditioners, no suits required for staff as they are expected to be on the field most of the time monitoring clients' deployment of monies loaned to them for the implementation of their business, while staff salaries ought not be more than N20,000 per month. No cars; if they must, they should go for a bus. There is need to start small, gain experience then win customer confidence. By so doing, the business will grow to accommodate expansion.