Chapter One

1.0     INTRODUCTION

          This research work is to find out the impact, problems and prospects of micro finance banks as a viable tool for economic empowerment and development at the grass root level. A survey of Obudu Micro Finance Bank.

          This chapter will cover the background of the study which will give the brief history of Micro-Finance Banks.

1.1     BACKGROUND OF THE STUDY

          For many years, efforts were made to involve sub-urban and rural people of Nigeria in modern banking practice in order to help in financing the growth of small scale businesses.

          Apart from encouraging the establishment of commercial banks, merchant banks, specialized, development banks were created focusing on mortgages, agricultural saving, making it impossible for small scales businesses and low income earners to get access to loans and other credit facilities.

          The problem persisted over the years and has led the government and some of it agencies to seek acceptable solution to the problem, hence the Central Bank’s injunction creation of rural banks branches across the country. But they have not been able to make banking attractive to the people for whom they were created. Banking operations has continued to be complex, sophisticated and often turn cumbersome to the extent that the low level of education and outright illiteracy of the rural people have made participation difficult. The rural people have always had viable and functional local credit mobilization system which though informal serve their purpose. In various parts of Nigeria the systems are given different names base on their purpose. The main characteristic of these local system are voluntary contribution from members on daily, weekly, monthly basis. Such monies collected are given out as loans to needy members according to the rules. Nominal interests are charged on the loan. Development at the grass root level has been stalled most time by the lack of proper economic structures. This was the rationale for the Central Bank’s continued search for solution to money problems of the rural economy through the planned establishment of the rural co-operative banks which did not take off properly because of low capital base and poor management. Since then, the Directorate of Food Roads and Rural Infrastructure (DFRRI) by virtue of its grass root and idea of grass root unit banks and the programmes of rural development, self-reliance and better economic well-being for the majority of the people in sub-urban and rural areas. The Obudu Micro-Finance Bank was among the community banks that commence operation in early 2000. This was done following the government support on any community who have the capacity to establish their own, would be encouraged to do so. The government assistance in this regard, apart from helping to incorporate the license the banks and train their staffs, consists largely in providing them with matching loan to aid them through the initial teaching period. Grassroots banking is a new phenomenon in Nigeria economy.

          It attempts to reach the today masses of the people who have not been able to cope with modern banking system with its attendant complex, and sophisticated operations and emphasis on collateral. A Micro Finance Bank therefore, is a self-sustaining finance institution owned and managed by group of communities under the guidelines of the Central Bank of Nigeria for the purpose of providing credit deposit and other financial services to it members largely on the basis of their self-recognition and credit worthiness to support the growth of grassroot businesses.

1.2     STATEMENT OF THE PROBLEM

          Rural economics of all developing countries are heavily dependent on agricultural production, agricultural processing and other small scale industries. Nigeria is not an exception since it is estimated that over 70% of her population are actively engaged in production of food and fibers. These rural dwellers produce at least 90% of raw materials needed in our industries. Although some organization like Nigeria Breweries PLC, Guinness Nigeria PLC, UAC, etc. participated in promoting agricultural production and micro enterprises, there were a lot of setbacks due to some unforeseen operational problems.

          Unfortunately, credit which is one of the most important inputs in agricultural production remain one of the limiting factors militating against increase of agricultural output and development of micro enterprises because of limited capital base. The lack of banking habit by the rural dwellers imposes limited access to credits especially institutional credits.

          Therefore, this research study shall aim at determining the effect and problems as well as the prospect of Micro Finance Bank as a vital too of economic empowerment and development at the grassroot level.

1.3     PURPOSE OF THE STUDY

i.      The major objectives of the study are to highlight the main roles of Micro Finance Bank to economic development of the country.

ii.     To give sound knowledge to the reader on how Micro Finance Banks operate.

iii.    It will be of great help to both the teacher and student, as the study would expose the reader to problems of Micro Finance Bank as financial institution and equip them with principles and technique on how to tackle such problems.

iv.    Also to be helpful to those who want to carry out further research on the topic to build upon.

v.     Another purpose is the fulfillment of the requirements for award of national diploma.

1.4   RESEARCH QUESTION

        The following research questions will guide the study:

i.                   What are the requirements by Central Bank of Nigeria (CBN) before license will be awarded to financial institution?

ii.                 What are the impacts of Micro Finance Banks on their customers?

iii.              How can loans and advances be obtained from Micro-Finance Bank?

iv.              What are interest rates on loan?

1.5     SIGNIFICANCE OF STUDY

          The significance of this research work will help the public especially rural dwellers of Obudu Local government area of Cross River State to know the need, importance as well as problems of Micro Finance Banks as vital tool in economic transformation at the grassroot level.

          Micro finance help in reducing poverty by providing financial services to the poor, generating and providing small loan to grow small scale businesses. It will also be of great important to the government to know that there is need for regulatory and statutory bodies to monitor the interest rate on loan and advance to make it accessible to micro clients that are economically active.

          It will stimulate the interest of the government to make available necessary infrastructural facilities that will help increase the output of micro entrepreneurs at the grassroot. Micro Finance Policy should further be publicized so that members of the low income groups will be aware of what micro finance institution have to offer them and how they can obtain financial services to grow their small businesses.

1.6     OPERATIONAL DEFINITION OF TERMS

i.        LOAN: It is a sum of money lent.

ii.                 INTEREST: Money paid for the use of money lent

iii.              CREDIT: An entry in an account recording a sum received

iv.              COLLATERAL: Something promised if one cannot repay a loan.

v.                 BANK: An organization offering financial services especially the safe keeping of money and intermediate in economics.

vi.              ACCOUNT: Credit arrangement with a bank or firm.

vii.            CHEQUE: A written order to a bank to pay a stated sum from an account.

viii.         OVERDRAFT: An arrangement with a bank allowing one to take out more than one’s account holds.

ix.              ECONOMY: The state of a country in terms of the production and consumption of goods and supply of money.

x.                 CAPITAL: Wealth that is owned, invested, lent or borrowed.

xi.              EQUITY: Stocks and shares not paying a fixed amount of interest.

xii.            DIVIDEND: That part of profit of an establishment, which is distributed to the shareholders of the company.

xiii.         SHARE: Any of the equal parts into which a company’s wealth is divided entitling the holder to a proportion of the profits.

xiv.         SHAREHOLDERS: These are the owners of the company through equity share.

xv.            AUTHORISED CAPITAL: These are the numbers of share approved by the shareholders at ordinary general meeting of the shareholders through simple resolution.

xvi.         FINANCE: The management of Money.