Creation of Microfinance Banks in Nigeria: What is Their Main Object?

Abstract

This paper recognises the Central Bank of Nigeria’s (CBN) reference to Microfinance Institutions (MFIs) as “Banks” and notes that this appellation connotes a meaning, which is liable to misinterpretation; hence, microfinance practice has been misconstrued and extended by some Nigerian practitioners, as synonymous with conventional banking practice. Therefore, we have examined the operating functions of Microfinance Institutions (MFIs), vis-a-vis conventional banking practice to ascertain and highlight the differences. In the main, both are depository financial intermediaries, but their objectives are different. While MFIs create social capital which transforms into wealth, conventional banks create wealth primarily via lending of money and other core banking activities. Additionally, MFI operations are limited to micro credit and micro deposit while target population is the poor; and their relation with clients is guided by social traits of trust, norms and networks. Conventional banks have no banking limitations; and banker-customer relation is guided by conventional banking ethics. These differences have tended to throw serious doubts on the appropriateness of the appellation of “Bank” as a proper nomenclature for an MFI. Therefore, the conclusion is made, that MFIs are not banks; at best, they can be described as quasi-financial institutions, which are liable to financial regulation. Hence, as social institutions, their main object should be crafted to reflect the objective of creation of social capital. The paper recommends that existing and up-coming Nigerian MFIs should be compelled by the CBN to adopt the Grameen Bank-style of management.