Evaluating Microfinance Banks’ Capacity to Purvey Credits to Micro and Small Enterprises (MSEs) in South-West, Nigeria: Adopting Financial Ratio Technique

Abstract

We would like to appreciate all the microfinance banks (MFBs) whose financial statements were assessed in the study. Also Mr. Afolabi Kehinde Victor of Banking Supervision Department, CBN, Lagos, for providing us with additional data used in the study. Abstract

Despite the review of Microfinance Banks (MFBs) regulatory and supervisory policy framework in the banking sub-sector in Nigeria, microfinance banks (MFBs) have not satisfied the intended purpose(s) for which it was created in 2005; such as provision of income, creation of employment opportunities and reduction of poverty among unbanked segment of the economy. This has further led to the premature death and untimely liquidation of micro and small businesses because many micro and small business owners found it difficult to access credits from MFBs. This problem has remained a major concern for stakeholders. In view of this, this paper intended to evaluate microfinance banks’ capacity to provide credits to Micro and Small Enterprises (MSEs) in South-West, Nigeria; using financial ratio technique for a period of ten (10) years (2007 – 2016). The study used secondary data that was collected via the financial statements of eight (8) microfinance banks in Lagos–West Senatorial District (5 MFBs) and Ogun Central Senatorial District (3 MFBs). The MFBs were selected through purposive sampling. Data gathered was analyzed via the use of Capital Adequacy Ratio (CAR). Findings showed mixed results as CAR values varied among the selected MFBs. The MFB with the highest CAR was valued at 203% while the lowest CAR valued at 21.2%. CAR benchmark set by Central Bank of Nigeria (CBN) for MFBs was 10%. This explained that the MFBs under consideration were financially strong to provide credits to MSEs’ operators. However, the paper recommended that MFBs should have access to Microfinance Development Funds (MDFs) to further strengthen their liquidity capacity in order to purvey more credits to micro and small entrepreneurs and regulatory authorities should review the current microfinance regulatory framework on a regular basis with global standard.

Keywords: Microfinance Bank, Capital Adequacy, Micro and Small Enterprises, Credits, Financial Ratio Technique, Central Bank of Nigeria.