CRITICAL ANALYSIS OF THE PERFORMANCE OF MICROFINANCE BANK A CASE STUDY OF UMUCHINEMERE PROCREDIT MICROFINANCE BANK

ABSTRACT

The goal of this research work is to carry out a critical analysis of the performance of microfinance bank in terms of meeting its objective on financial sustainability and economic empowerment. Umuchinemere Procredit Microfinance Bank one of the vibrant private owned micro-finance bank in operation in the eastern part of our country Nigeria, was therefore selected as case study of this research. The rationale behind the research work was the paucity situation of credit facilities available to the poor class of  the  society and effort  of the  government to remedy the  issue by formulating policies that promotes participation of private stakeholders in economic empowerment through financial intermediation targeted to the poor economic unit. The problem the research is about to solve therefore, is to analyze the performance of the microfinance bank which is a 100% private initiative, in the area of financial sustainability and economic empowerment. Suggestion from previous authors in the area of study was review for recommendation and solution on how to run an efficient and profitable funding unit by  applying some  of the  principles as  follows; corporate governance, financial sustainability, welfare impact, outreach to the poor e.t.c. considering the nature of study, the research design used was a case study of Umuchinere Procredit Microfinance Bank (UPMFB). Data was collected from a secondary source of published financial statement for a period that covered the trend of 10 years. The data was presented in tabular and graphical form. The tool for analysis was CAMEL rating and financial ratio. After critical analysis, the findings made was that the bank has strength in capital and liquidity base but with very poor earnings, poor asset quality, low or no capital growth and vulnerability of the  bank  asset to unsecured loan. The  researcher came  up with the recommendations  that  the  government should  provide  special  deposit insurance scheme to cushion the high risk vulnerability associated with the peculiar  nature  of  microfinance  bank.  The  microfinance  bank  should embark on risk management policy review, periodic staff training to enhance professionalism and efficiency, reaching out to untapped viable sources of the economy with the excess resources (deposits) available to it.

CHAPTER ONE

1.1   BACKGROUND OF STUDY

The practice of microfinance in Nigeria is culturally rooted and dated back several centuries. The traditional micro finance institutions provide access to credit for rural and urban low-income earners. They are mainly informal self help groups (SHGs) or Rotating Savings and Credit Association (ROSCAs) types. Other providers of microfinance services include savings collector and cooperative societies. The informal financial institutions generally have limited outreach due primarily to paucity of loanable funds.

In order to enhance the flow of financial services to Nigeria rural areas, government has, in the past, initiated a series of publicly financed micro/rural credit programs and policies targeted at the poor. Notably among  such  programmes  were  rural  banking  programme,  sectoral allocation  of  credits,  concessional interest rate,  and  agricultural credit guarantee scheme (ACGS). Other institutional arrangements were the establishments of Nigeria Agricultural and Cooperative Bank Limited (NACB), National Directorate of Employment (NDE), Nigerian Agricultural Insurance Cooperation (NAIC), the Peoples Bank of Nigeria (PBN), The

Community Banks (CBs), and Family Economic Advancement Programme

(FEAP).

Nigeria is one of the least develop countries relative to developed economies. The per capita income of the country is less than $200 currently. This is very little money to cover daily meal, let alone health, education and other emergency expenses which make the poor vulnerable to  unforeseen illness,  expenses  and  others.  There  is  a  high  level  of unemployment even with skilled labour force, and the unemployment is increasing from time to time as the population of the country is increasing.

It is also experience in the country that poor household are the main participants in some kind of informal sector, ranging from small petty trading to medium scale enterprise (Jean-Luc 2006). And due to the fact that this sector uses intensive labour force as well as since it is livelihood of most of the poor, developing this sector has been argued to be a weapon to resolve the problem of unemployment and poverty of household.

Several studies noted different causes of poverty in a country; some argued that the cause of poverty in developing economies among other things is that the poor does not have access to credit for the purpose of

working capital as well as investment for its small business. In Nigeria for instance, the unserved market by existing financial institution is large. The average banking density in Nigeria is one financial institution outlet to

32700 inhabitants (CBN, 2005). In the rural areas it is 1:57000 (CBN,

2005) that is less than 2% of rural households have access to financial services. This reveals the existence of huge gap in the provision of financial services to the large proportion of the active poor and low income group. Furthermore eight (8) leading microfinance institutions (MFIs) in Nigeria were reported to have mobilized a total of N2.666 million savings in 2004 and advanced N2.624 billion credit with an average loan size of N8206.90 (CBN,   2005).  This   translated  to   about  320000  membership-based customers that enjoyed one form of credit or the other from eight NGO- MFIs.

Also the aggregate microcredit facilities in Nigeria account for about

0.2 percent of GDP and less than one percent of the total credit to the economy (CBN, 2005). The effect of not appropriately addressing this situation would further exacerbate poverty and slow down growth and development.

The performance of most of the microfinance bank is said to be sub- optimal due to the weak institutional capacity; in terms of incompetent management, weak internal control and lack of deposit insurance schemes. Other  factors  are  poor  corporate  governance,  lack  of  well  defined operations and restrictive regulatory/supervisory requirement.

It is argued that weak capital base of existing institution/microfinance bank cannot adequately provide cushion for risk of lending to micro entrepreneurs without collateral. These institutional challenges also contribute to the slow pace in the development of micro credit facilities that will be outreached to the economic active poor, which constitutes the chunk of the Nigerian economy.

1.2   STATEMENT OF THE PROBLEM

It has been argued that micro-finance bank in Nigeria does not operate efficiently and its performance is below the global standard, but the researcher has a different point of view. He is of the opinion that some microfinance banks do operate efficiently and also meet the macro economic objective of empowering the active poor .This controversy boils

down to empirical and factual investigation. This is to be done by choosing one of the typical microfinance bank located in the eastern part of the country,  called  Umuchinemere  Procredit  microfinance  bank.  The  bank would be used as a case study to validate either opinion of efficient or inefficient operation of microfinance bank management in Nigeria. The parameters that are to be used in gauging the performance indicators of the particular bank understudy is mainly CAMEL and some other financial ratios. This quantitative analysis will determine the qualitative report of management performance. In other words it will reveal some behavioral approaches of management on having either positive or negative impact to the bank in terms of competency, internal control, and supervision.

Therefore, analysis is to be carried out on capital adequacy, liquidity sufficiency, earning strength and this will score the performance of management efficiency in operation. Particularly the examination of asset quality and liquidity position of the bank will reveal its status on how its credit policies have facilitated the bank outreach to the economic active poor providing accessible loan/ credit facility that would help the economy to develop and at the same time maintain financial sustainability.

1.3   OBJECTIVE OF STUDY

The study seeks to achieve the following

1. If the capital of the microfinance bank under study is adequate enough to cushion or hedge against risk even in event of litigation

2. To see how exposed are asset of microfinance bank to risk of loss thus evaluate the position for asset quality of the microfinance bank understudy.

3. Checking the earning strength of the bank understudy in order to find out if the bank generate enough returns on investment thus to evaluate the efficiency in utilization of asset to generate earnings.

4. To determine the liquidity position if it is sufficient enough to meet short term obligation of the microfinance bank understudy and at the same time not impair on profitability. Find out if there is a good balance between liquidity and profitability.

5. Finally from the above analysis and findings the researcher would be able to judge the position of management as regards to efficiency in operation.

1.4.  RESEARCH QUESTION

i.  Is  the  capacity  of  the  microfinance  bank  understudy  adequate enough to hedge against risk even in event of liquidation?

ii. What  is  the  quality  of  asset?  Is  it  exposed  to  high  risk  of

diminution/loss in value?

iii. Is  the  earning  capacity  of  the  bank  strong  enough  to  recoup investment /capital employed?

iv. Does the liquidity position of the bank give evidence of the ability to fund its short-term contractual obligation?

v. Is the operation of overall management system efficient in other

words, does the bank understudy have efficient management system in operation.

1.5   STATEMENT OF HYPOTHESIS

1. The capital is not adequate enough to hedge against risk in event of litigation thus it is below the prudential required standard by CBN

2. The bank does not generate enough return on investment thus the earning strength is poor/below standard

3. The asset quality of the micro-finance bank understudy is poor thus the bank’s asset is highly exposed to high risk of loss in value.

4. The liquidity position of the micro-finance bank is insufficient to meet its short-term contractual obligation.

5. The  overall  management  performance  of  the  micro-finance  bank understudy is very poor, thus inefficient operation of management abounds.

1.6   SCOPE of RESEARCH

The researcher used Umuchinemere Procredit microfinance bank its case study, collecting ten (10) years annual report from the period of

1999-2010, to obtain statistical data and analysis. Thus the generation of

data and subsequent trend analysis was for at least, ten years period from

1999-2010.

Some years was not captured due to loss of document containing the data because it was missing from the company records in the head office. The years are 2003 and 2004 annual report and accounts respectively.

1.7   SIGNIFICANT of RESEARCH

The significance of this study can be viewed from two major standpoints- practical and academics

1.7.1        Practical Significance

This kind of study will assist in broadening understanding of the following scope of knowledge;

I.    It will give an insight to management of microfinance bank on how to utilize their resources to generate revenue/ income/earnings to stake holder e.g. shareholders investors, employees, governments, creditors E.T.C.

II.    It would x-ray the weak areas that need attention in the operation of microfinance bank.

III.    It would help the government to have a good understanding of the true financial position of microfinance institution by presenting a schema, through its analysis, which will assist the government in enunciating policies that will not only impact positively on the microfinance industry but also remain relevant in the economy by performing such functions as economic empowerment of active poor, entrepreneurial development and mobilization of fund to be accessed by productive sector of the economy to effective allocation of resources.

IV.    It would give an insight on management behavior in banking      sector and how it could be enhanced

1.7.2Academic Significance

i. It would contribute to the enrichment of literature on efficient operation and performance of microfinance bank/financial institution in Nigeria

ii. It  will  throw  more  light  on  the  causative  relationship  between management efficiency and performance of microfinance bank, in terms of asset quality, capital adequacy liquidity sufficiency and earning strength

iii. It  will  suggest  ways  (  of  interest  to  the  academics)  based  on empirical evidence, of enhancing the operation of microfinance bank in line    with  general economic objectives of  the  government of promulgating  the  establishment  of  microfinance  institution,  to address the poverty level of our country through economic empowerment

iv. The study wills serve as a body of reserved knowledge to be referred

to by researchers.

1.8. OPERATIONAL DEFINITION OF TERMS

The following key terms are defined below;

     Microfinance  bank;  bank  designed  to  provide  financial service targeted towards economic unit  of the  active poor who cannot access the formal banking institution e.g. commercial banks

     Capital adequacy; it is the measurement of tier one capital or

core capital also known as equity fund or shareholders fund, against risk  weighted  asset  of  the  bank  the  general  required  capital adequacy ratio (CAR) for microfinance bank is 10%

     Liquidity ratio; are used to measure how easily bank can lay hand on cash in order to meet its short-term indebtedness as and when due

     Asset  quality;  it  evaluates  the  degree  banks’  asset  are exposed to risk; i. the apparent level of risk, ii. The controllability of risk,   iii.   The   maintenance   of   adequate   loan   loss   provision (allowance), and iv. The earning power of the asset

     Earnings; are parameter used to measure the banks’ return on

investment –per share capital employed.

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