The delivery of financial services to the poor and low-income people has changed significantly over the recent past.
The long-standing assumptions that the poor cannot be good clients of the financial institutions have been challenged by well-documented experiences of a number of researchers. A number of micro finance programs have demonstrated that low-income clients can use small loans productively and are willing to pay higher rates of interest for their loans. It has also been proved that the poor need saving services as much or more than credit services. This process has tremendous impact on development of a country.
That there is a relationship between financial development and economic development is not an academic question, considering the fact that most productive processes and by extension economic processes that constitute development are measured in monetary terms, most of the money stock of which, is maintained and kept by financial systems. Moreover, the credit creation functions of financial institutions in general, and banking institutions in particular, can help to create wealth by facilitating the manipulation of other factors of production, labour and land to produce the desired goods and services. In addition, provision of credit enables the enhancement of innovations, the total sum of which, if properly coordinated, can help spur growth and thus development. This is because users of funds have innovative skills to ascertain which investments are more viable than savers and by pooling savings together, they minimize aggregate risk.
A further explanation of the positive association between financial development and economic development can be found in the works of post-Keynesian economists Like Keynes [(1936) one of the world’s reckoned economist of last century), these economists argue that in minimally developed financial systems credit creation causes economic growth. The former is not constrained by the supply of deposits because of idle balances in the banking sector nor because of possibility of borrowing from the money, or capital markets or even from the central bank. They observe that more liquid financial markets made it possible to develop projects that required large capital injections for a long period before the same project can yield profits. They further observe that financial markets played a critical role in igniting the industrial revolution in England, by facilitating the mobilisation of capital for immense works. Overall they argue that growth is only possible if there is credit to generate the investments that can produce the goods and services necessary to enhance development. As will be argued later in this thesis this demands the establishment of strong intermediaries, to mobilise savings from small or dis-similar units of savers and avail these to large units of investors who have the technical expertise to invest.
Micro finance is quite young in Africa in general and not well developed like in Latin America and Asia. The challenge therefore lies in creating micro credit schemes that will respond to the needs and potentials of the targeted communities. The micro credit programs should not just be uprooted from one locality and transplanted in another. It is therefore important to consider all the dimensions and complexities of MFI programs so as to ensure their successful implementation.
Many micro-finance programs have been created as an after thought, where a false demand is created for the kind of credit being pushed for, by the proposing institutions. There are some instances where it is clear that no proper feasibility study was conducted and the organization in question was blindly pushing for a product with imaginary demand.
With regard to regulation of MFIs, a number of these are licensed under banking Act whose requirements and specifications can’t address the financial operations and financing challenges of MFIs. Some of these forms of registration do not address issues such as governance, accountability and ownership of MFIs and yet these are variables which are fundamental to their long-term survival and sustainability. As a result of these gaps, MFIs are operating in an ambiguous environment permitting the emergence of unscrupulous MFIs which fleece their customers. The issue of governance is perhaps most critical of the other factors. Research available indicates that, most of the causes of the failure of MFIs revolve around governance. Most of these are formed with people whose qualifications and experience in managing a financial institution are wanting. These governance issues require proactive policy and regulatory framework to avoid loss of customers’ deposits and more importantly TRUST. The policy and regulatory environment enhances the micro finance sector by giving it a free hand on interest rates setting regime. This unregulated interest regime boosts the MFI sector by cushioning the risks of their financial operations which are collateral free. On the other hand the regulatory environment has not set the minimal micro finance registration requirements with exception of capital adequacy rates, and in some cases management requirements. Thus opening of branches, and credit to asset ratios are not monitored carefully to ensure operational efficiency of MFIs. Moreover, there is need to monitor their gearing levels, liquidity ratios, solvency ratios and their off balance sheet assets which could be substantial and yet less disclosed.
There is a need to prepare MFI bill in order to enhance a conducive MFI operational environment and to expedite policy and regulatory framework, if these institution are to play their development role. Unless this is addressed urgently, it is likely that mushrooming MFIs may be a problem to manage and this may affect the over all financial systems in the country especially if their failure rate increase which can only be mitigated by a good policy, legal and regulatory framework.