Across the world, microfinancing has proved to be an effective tool for poverty alleviation and a better approach to development. It is based on the recognition that the war against poverty cannot be won without the poor themselves in the frontline. This is a critical factor of growth, particularly in poor societies where business activities are largely informal and access to credit is restricted.

One of the objectives of microfinance banking is to increase access to credit among local entrepreneurs who do not have the collaterals to obtain loans in commercial banks. However, the microfinance bank in Nigeria has not performed its expected roles. Women who ought to be its core constituents are largely underserved. Customers’ confidence has waned with many vowing never to have anything to do again with microfinance bank. With over sixty per cent of business activities being informal, less than five per cent patronise microfinance bank. Aside from concentrating in large cities, not less than 250 of the over 900-licensed microfinance banks in Nigeria have shut up shops.

Worried by the incessant closure of microfinance banks and the accompanying economic burden on their customers, the Central Bank of Nigeria recently embarked on a comprehensive examination of all microfinance institutions. Of over 68 microfinance banks in Lagos, only six of them were given a clean bill. Given the visible poor performance and the dearth of success stories, the result of the CBN’s examination merely confirms the extent of the rot in the sector. Most of the micro-lending operators usually cite unpaid loans as the cause of failure to break even. Laying the blame on unpaid loans might lead one to conclude that the poor are not credit worthy. This is misleading.

Even in the poorest countries, the poor save. A highly successful microfinance bank in Bangladesh is built on the philosophy that the poor always pay back. The founder of Grameen Bank, Muhammad Yunnus, in his book, “Banker to the Poor,” maintains that poor people throughout the world are credit worthy and one only needs to look at credit and poverty from their perspectives.

Local moneylenders and thrift societies are patronised and organized by the poor, particularly women. They hardly shut up shops over loans repayment. They obviously owe their continued existence to proper understanding of micro lending business, their customers’ needs and the risks involved in trying to behave like a conventional bank.

Read More: http://www.punchontheweb.com/Articl.aspx?theartic=Art20100630264370