In Nigeria, credit has been recognised as an essential tool for promoting small and Micro Enterprises (SMEs) About 70 percent of the population are engaged in the informal sector or in agricultural production. The Federal and State governments have recognized that for sustainable growth and development, the financial empowerment of the rural areas is vital, being the repository of the predominantly poor in society and in particular the SMEs. If this growth strategy is adopted and the latent entrepreneurial capabilities of this large segment of the people is sufficiently stimulated and sustained, then positive multipliers will be felt throughout the economy. To give effect to these aspirations various policies have been instituted over time by the Federal Government to improve rural enterprise production capabilities. (Olaitan 2006)
Rural transformation is all about seeking to bring about improvement in the living condition of the farmer, the artisan, the tenant and the landless within the simple and rustic economies of the country-sides and urban slums. The basis for employment generation and entrepreneurship development in rural areas, therefore, is to enhance the improvement of the living condition of the people.
The small and medium scale entrepreneurs in rural areas lack the necessary financial services, especially credit from the commercial banks; this is because they are considered not credit worthy. Consequently they depended on families, friends and other informal sources of funds to finance their businesses. Successive governments have come up with special rural biased programmes, whose principal targets is the overall development of rural enterprises with special consideration on small and medium scale enterprises and also to empower rural dwellers. These programmes range from Agricultural Development Projects (ADPs), the establishment of Agricultural Credit Banks to Better Life Programme for Rural Women and the like. Unfortunately most of the programmes failed to achieve the desired result. That lead to the emergence of microfinance banks aimed at extending credits to microenterprises and encouraging entrepreneurship especially in semi urban and rural areas.
This paper is aimed at examining the role played by microfinance banks towards the promotion of entrepreneurship in semi urban and rural areas of Nigeria, it will also identify the challenges facing the microfinance banks.
Data used in the study is gathered through the use of documentary research where by information is obtained from published sources such as the publications of the Central Bank of Nigeria (CBN), the National Bureau of Statistics, as well as other published sources and annual reports of microfinance banks. The collected data was analyzed using the simple content analysis.
To this end the paper is organized into four parts, after the introduction, part two contains the conceptual and theoretical issues relating to entrepreneurship and the microfinance. Part three contain the discussion on the roles of microfinance banks in promoting entrepreneurship in rural areas, and the last part contains concluding remarks.
Microfinance refers to the entire flexible structures and processes by which financial services are delivered to micro entrepreneurs as well as the poor and low income population on a sustainable basis. It recognized poor and micro entrepreneurs who are excluded or denied access to financial services on account of their inability to provide tangible assets as collateral for credit facilities (Jamil, 2008) Microfinance can be seen as a supply of loans, savings and other financial services to the poor. It is the practice of delivering those services in a sustainable manner so that poor households will have access to financial services so that they can build sustainable microenterprise. While microenterprise is a business that is independently owned and operated by its owners and does not meet certain standards of size which in most cases operated as informal business.
Credits to microenterprises are assuming importance in rural areas in response to the need of the less privileged entrepreneurs with limited capital base. In Nigeria access to formal credit is a major problem facing the small and medium scale entrepreneurs due to the prevalence of some factors such as delays in loan disbursement on the part of the financial institutions and payment defaults on the part of the beneficiaries (Olajide, 1980)
The aim of microfinance is not only to extend credits to beneficiaries but to promote entrepreneurship and boost rural financial markets that will provide sustainable access to financial services by creating a relationship between those with financial resources and those who need them
An entrepreneur is a person of very high aptitude who pioneers change, organizes production and takes the risks associated with the production process. Entrepreneur can also be viewed as a person that wants to works for himself; it is sometimes synonymous with self employment. Entrepreneurship therefore by implication is the act of being an entrepreneur, it involves all the activities and function undertaken by an entrepreneur. Entrepreneurship is believed to provide an important avenue for individuals to advance up the income ladder. For some, it may provide a better route than paid employment, while for others, who may be disadvantaged when pursuing paid employment, it may provide the only route. Entrepreneurs are charged with the responsibility of innovating new products, better production method, creation of markets and managing the production process. They are in a nutshell engaged in wealth creation. Financing therefore is needed by entrepreneurs to enable them carry out their function effectively.
Credit and the Growth of a Rural Enterprise
For any business to grow credit is essential, lack of credit is a barrier to investment and the growth of income of poor households. Access to credits enhances the adoption of new and more advance technologies that will enable rural households to expand agricultural and non agricultural enterprise which in turn improve their income levels and hence help in reducing the incidence of poverty. Capital as a result of access to credit also enhances the level of householdís productive and physical assets and also raise expenditure that lead to improvement in the consumption of the rural poor. Olajide (1980) identified two sources of credits for entrepreneurs and classified them as internal and external. While the internal funds arise from net flow as a result of entrepreneurial activities, the external funds arise from Loans extended by micro finance providers, and Equity introduced by new proprietors. Rural enterprise require capital which is believed to be provide by microfinance providers, as financing to microenterprise is universal not only in rural areas but even in urban areas. Credit to small and medium enterprises have been an important instrument in fostering the development of industrialization and improving the efficiency of the enterprise as well as expanding productivity.
Microfinance banks are institutions constructed as a company licensed to carry on the business of providing microfinance services such as collection of savings, loans provision, insurance money transfer services and other non financial services that are needed by the poor as well as the microenterprise. The clients of microfinance banks are typically self employed low income entrepreneurs in both urban and rural areas, they include traders, subsistence farmers, street vendors, service provides (hair dressers, motorcycle riders), blacksmith and artisans.
Overview of Microfinance Banks in Nigeria
Currently microfinance banks are of two forms, as all licensed community banks in Nigeria that met CBN guidelines have been transformed to Microfinance Bank. The two forms of microfinance Banks (MFBs) are; (i) Microfinance Banks (MFBs) licensed to operate as a unit. These are hitherto community banks licensed to operate branches and/or cash centres subject to meeting the prescribed prudential requirements and availability of free funds for opening branches/cash centres. The minimum paid-up capital for this category of banks is N20 million for each branch. The branching should be gradual within a local council before it spreads to other local councils and state. (ii) Micro-Finance Banks licensed to operate in a state. These are MFBs licensed to operate in all parts of the state at once without recourse to gradual coverage (spread) as in unit MFBs. Branches are opened subject to meeting the prescribed prudential requirements and availability of free funds. The minimum paid-up capital for this category of banks is N1 billion. About 600 Community Banks have migrated to Microfinance Banks by January 1st, 2008 and there are several others that have been licensed to operate. (CBN, 2008)
Role of Microfinance Banks in Promoting Entrepreneurship in Rural Areas
This is perhaps one of the most important roles of Microfinance banks, as the loans extended are used to expand existing businesses and in some cases to start new ones. According to CBN (2008) microfinance loans granted to clients is increasing from 2007 to date and most of it goes to financing microenterprises in rural areas. Ketu, (2008) observed that microfinance banks have disbursed more than N800 million micro credits to over 13,000 farmers across the country to empower their productive capacities. As such it is expected that agricultural output will increase with the increase in funding. The entrepreneurial capacity of the farmers will thus improve.
Boosting Small Scale Enterprises/Agriculture
About 60 percent of poor people in the country live in the rural areas and 80 percent of them are farmers and artisans (NBS, 2005). Microfinance banks have therefore been the main sources of funding to these less disadvantaged groups. Rural people are empowered through microfinance loans and services, and hence small scale agricultural practice and microenterprise is developed. Governments go into co-operatives to partner with the microfinance banks to raise bulk loans to be disbursed to the beneficiaries, in so doing the banks are increasing and sustaining the number of people going into small businesses.
Agriculture and microenterprises contributes immensely to job creation, and are of particular interest to all Microfinance Bank in rural areas. Microfinance banks have so far engaged in extending credits and other services to many rural enterprise and hence generating employment and promoting entrepreneurship. The promotion of employment in rural areas by microfinance banks covers the following areas; blacksmithing, gold-smiting, watch repairing, bicycle repairing, basket weaving, barbing, palm wine tapping, cloth weaving, dyeing, food selling, carpentry, brick-laying, pot-making, leather works and drumming. Even though found in urban areas, these industries are more prominent in the rural areas. It has, therefore, been acknowledged that the rural setting is an arena of many industries, which could be developed to contribute significantly to the national economy, just as rural people are more frequently self-employed than urban people (Ketu, 2008).
Improvement in Skill Acquisition
Improvement of the condition of women through the provision of, skills acquisition and adult literacy is another role played by microfinance banks. This is done through building capacities for wealth creation among enterprising poor people and promoting sustainable livelihood by strengthening rural responsive banking methodology and the introduction of simple cost-benefit analysis in the conduct of businesses. In most cases a profit sharing agreement is entered between a bank and an entrepreneur and new methods and innovations are passed to the prospective entrepreneur by the banks professionals, while at the end of the production period the proceed is being shared and the entrepreneur if so wishes can continue on his own after the necessary skills and production techniques are acquired. (Umar, 2008)
Facilitates Poverty Alleviation
Employment and income generation are important aspects of poverty alleviation efforts. Microfinance banks have accelerated the operation of government poverty alleviation programmes and in doing that promising entrepreneurs are supported and new ones emerged. The federal governments National poverty Eradication Programme (NAPEP) and National Economic Empowerment and Development Strategy (NEEDS) to mention a few aimed at achieving the United Nationís Millennium Development Goals (MDGs) by 2015 required these microfinance institutions for success. The success of these programmes and projects for advancement of the MDGs are linked with the promotion of entrepreneurs in rural areas and subsequent reduction in the level of poverty (Ketu, 2008)
Other roles played by microfinance banks include; reorientation of the rural populace on a sound financial practices, as well as issues such as reproductive health care, and girl child education. All these areas have a direct link with entrepreneurial capabilities of the rural people.
Challenges facing Microfinance Banks
(i) High Operating Cost: Small Units of services pose the challenges of high operating cost, several loan applications to be processed, numerous accounts to be managed and monitored, and repayment collections to be made from several locations especially in rural communities.
(ii) Repayment Problem: Loan default is a major threat to microfinance banksí sustainability; it is the deadly "virus" which afflicts the operation of the banks. It demoralizes staff and deprives beneficiaries of further valuable services.
(iii) Inadequate Experienced Credit Staff:
Micro financing is more than dispensing loans, to be viable, microfinance banks require experienced and skilled personnel. As a young and growing industry, there is a dearth of experienced staff in planning, product development and effective engagement with clients.
(iv) Problems of illiteracy, which affects record keeping and decision-making ability of borrowers and consequently affects their relationship with the banks.
(v) Inadequate or non-monitoring of micro and small enterprises by banks, leading to defaults.
The CBN recognised micro finance as an important tool for poverty alleviation through empowering the micro and small entrepreneurs. The CBN wanted to see sustainable financial services available to those who donít have access to formal financial resources. Microfinance institutions are important in achieving this objective and are being promoted to be commercially viable through an appropriate policy and regulatory framework. From this guidelines have been developed for microfinance institutions and other micro finance service providers. It is also important for the microfinance sector to gain both public and donor confidence.
Microfinance banks have played a great role especially in promoting entrepreneurs in rural areas, they are however facing problems of high operating cost, it is recommended that the banks should encourage the formation of cooperatives so that a number of beneficiaries that are engaged in the similar business can collectively enjoy their services and hence a reduction in operating cost as well as a reduction in the likelihood for borrowers to default.
There is also the need to establish more microfinance banks especially in rural areas so as to further promote and develop the entrepreneurial capacity that is needed for transforming the areas and accelerating economic growth.
Central bank of Nigeria (2008) "Guidelines and Procedures for the establishment of Microfinance banks in Nigeria" Published by the CBN
Hansen J.J (2007) "The Poor as Producers in Rural Economy"
Jamil B (2008) "Microfinance as a tool for poverty alleviation in Nigeria" Paper Presented at Sensitization Workshop on Microfinance Banking in Kano State.
National Bureau of Statistics (2005) "Social Statistics in Nigeria" Published by NBS
Olaitan M.A (2006) "Finance for Small and Medium Scale Enterprises in Nigeria"
Journal of international farm management Vol 3 No 2 January
Olajide O.A (1980) "Financing Enterprises in Nigeria Through Cooperative"
Nigerian Institute of Social and Economic Research (NISER), Ibadan
Ketu A. A (2008) "Microfinance banks in Nigeria: An Engine for Rural Transformation"
West African Institute for Financial and Economic Management, Lagos Nigeria.
Umar S.H (2008) "The Experience of Microfinance Banks Operation in their Operational Location. Paper Presented at Sensitization Workshop on Microfinance Banking in Kano State.