FACTORS DETERMINING LOAN REPAYMENT IN MICRO-FINANCE BANKS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY        

The practice of microfinance in Nigeria is culturally rooted and pre-dates modern banking era. 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. Informal financial groups exist in all parts of the country and they are in form of traditional groups that work together for the mutual benefits of their members. The micro and small business entrepreneurs in Nigeria rely heavily on the informal financial market for funding. This condition provides a platform for informal institutions to attempt to fill the gap usually based on informal social networks. In many countries, people have relied on the mutually supportive and benefit-sharing nature of the social networking of these sectors for the fulfillment of economic, social and cultural needs and the improvement of quality of life (Portes, 1998).

In order to enhance the flow of financial services to micro, small and medium enterprises in the country, the Federal

Government of Nigeria (FGN) launched the new Microfinance Policy, Regulatory and Supervisory Framework

(MPRSF) in December, 2005. The MPRSF aimed among other things to bring the existing informal institutions under supervisory purview of the Central Bank of Nigeria (CBN). By doing this, monetary stability in the country is enhanced and financial infrastructure of the country is expanded to meet the financial requirements of the Micro,

Small and Medium Enterprises (MSMEs) in the country (CBN, 2005). The policy is also meant to address the problem of lack of access to credit by small business operators.

According to CBN (2005), “microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions’. There are three features that distinguish microfinance from other formal financial products. These are: (i) the absence of asset-based collateral; (ii) the smallness of loans advanced and or savings collected, and (iii) ease of operations.

Microfinance, according to Otero (1999) is “the provision of financial services to low income poor and very poor self-employed people”. These financial services include: small loans, savings, current, financing small business for the active poor both in rural and urban areas of the country. Microfinance is a term used to refer to different methods for giving poor people access to financial services. Microfinance is about providing of timely, affordable, diversified, and dependable financial services to the active poor which otherwise would have little or no access to financial services. It is a financial intervention that focuses on the low income group of a given society.

Credit risk evaluation and lending decisions made in the past by lending institutions put a lot of emphasis on security than other similar important considerations (Santomero, 1997). There are instances in the past when it was easier to get a loan from a financial institution as long as the borrower had security to be charged rather than the ability to service the loan. Cash flow projections, viability of the project, character of the borrower, previous loans completion and ability to repay were not considered as important. This way a number of lending institutions ended up with many loan defaults due to incomplete, poor and unprofessional credit risk assessment and valuation particularly using all the 5C’s of credit appraisal model that is: capacity, credibility, capital, collateral and character. Effective loan portfolio management begins with oversight of the risk in individual loans Sundarajan (2007). Prudent risk selection is vital to maintaining favorable loan quality. Therefore, the historical emphasis on controlling the quality of individual loan approvals and managing the performance of loans continues to be essential.

It seems appropriate for any discussion of risk management procedures to begin with why these firms manage risk. According to standard economic theory, managers of value maximizing firms ought to maximize expected profit without regard to the variability around its expected value. However, there is now a growing literature on the reasons for active risk management including the work of Parrenas (2005), Sundarajan (2007), and Fallon (1996) to name but a few of the more notable contributions.

1.2     STATEMENT OF THE PROBLEM

Controlling non-performance of loans is very critical for both the performance of an individual bank and the economy’s financial environment. Adeyemi, K. S., (2008) identified some of the challenges which microfinance institutions face that impinge on their ability to perform to include; undercapitalization, inefficient management and regulatory and supervisory loopholes. To these, Mohammed, A. D. and Hassan, Z. (2009) added usurious interest rates and poor outreach. Further buttressing the challenges facing microfinance banks, Nwanyanwu, O. J.,(2011), identified diversion of funds, inadequate finance, and frequent changes in government policies, heavy transaction costs, huge loan losses, low capacity and low technical skill in the industry as impediments to the growth of this subsector. These constraints contributed to the failure of previous microfinance banks.

Waruinge (2009) did a survey of factors contributing to non-performance of loans among commercial banks in Nigeria and established that economic factors and poor credit management greatly contributed to high portfolio of nonperforming loans among commercial banks in Nigeria. These studies concentrated on microfinance enterprises which have a different operational and marketing strategies from those employed by microfinance banks.

1.3     OBJECTIVES OF THE STUDY  

The general objective of this study is to examine the factors determining loan repayment in microfinance banks in Nigeria, a case study of Idemili North of Anambra State. The specific objectives include the following:

1.     To examine the influence of socioeconomic factors on loan repayment among customers of microfinance banks in Nigeria.

2.     To determine the effect of lenders’ factors on loan repayment among customers of microfinance banks in Nigeria

3.     To find out the extent to which borrowers factors affect loan repayment among customers of microfinance banks in Nigeria.

4.     To establish the effect of loan factors on loan repayment among customers of microfinance banks in Nigeria.

5.     To investigate the suggestion on how to improve loan repayment among customers of microfinance banks in Nigeria.

1.4     RESEARCH QUESTIONS

The relevant research questions related to this study include the following:

1.     What is the influence of socioeconomic factors on loan repayment among customers of microfinance banks in Nigeria?

2.     What is the effect of lenders’ factors on loan repayment among customers of microfinance banks in Nigeria

3.     To which extent do borrowers’ factors affect loan repayment among customers of microfinance banks in Nigeria?