CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Microfinance is defined as a development tool that grants or provides financial services and products such as very small loans, savings, micro-leasing, micro-insurance and money transfer to assist the very or exceptionally poor in expanding or establishing their businesses. It is mostly used in developing economies where SMEs do not have access to other sources of financial assistance (Robinson, 2003). The informal financial institutions constitute; village banks, cooperative credit unions, state owned banks, and social venture capital funds to help the poor. These institutions are those that provide savings and credit services for small and medium size enterprises. They mobilize rural savings and have simple and straight forward procedures that originate from local cultures and are easily understood by the population (Germinis, 1991). The development of microfinance programs gained a worldwide acceptance and popularity since 1980s in providing financial services to the poor. It is one way of the antipoverty instrument of the development programs.
Numerous institutions in many parts of the developing world have been providing micro-credit and recovering their loans. Throughout the world, poor people are excluded from formal financial system. Exclusion ranges from partial exclusion in developed countries to full or nearly full exclusion in Less Developed Countries (LDCs). Absent access to formal financial services, the poor have developed a wide variety of informal community based financial arrangement to meet their financial needs. Microfinance is created to fill this gap (Irobi, 2008). Microfinance pertain to the lending of small amount of capital to poor entrepreneurs in order to create a mechanism to alleviate poverty by providing the poor and destitute with resources that are available to the wealthy, alert at a small scale. According to Anyanwu (2004), microfinance bank is not just providing capital to the poor, but to also combat poverty at an individual level, it also has a role at institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. In Africa and other developing regions, microfinance institutions (MFIs) are regarded as the main source of funding micro enterprises (Anyanwu, 2004). Formal credit and savings institutions for the poor are also available around the globe providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperative and development finance institution. Suffice it to say that the unwillingness or inability of the formal financial institutions to provide financial services to the urban and rural poor, coupled with the unsustainability of government sponsored development financial schemes contributed to the growth of private sector-led microfinance in Nigeria.