THE REGULATION OF THE MICROFINANCE SECTOR IN NIGERIA, USING LAPO MICROFINANCE BANK IN BENIN CITY
CHAPTER ONE
INTRODUCTION
1.1        BACKGROUND TO THE STUDY
    As Microfinance Institutions (MFIs) grow from introduction to maturity stage, the issue of protecting MFIs’ clients and public savings become central to the regulatory agents (Ehigiamusoe, 2003). In Asia and other developing countries, the regulation of microfinance organization witnessed a pattern of transformation such that they grew from non-regulated microfinance institutions into self-regulated (regulation by the MFIs’ association) before finally regulated by the government regulatory authority. In Kenya and other African countries like Tanzania a number of challenges in regulation has been witnessed especially those that relates to operational methodology and governance (Omino, 2005).
    However, these challenges are either emanating from the implementation process or at the development of the policies (Vento, 2010). More disturbing is how regulated microfinance banks operate alongside non-regulated microfinance organization and how the lines between the regulated and non-regulated entities conduct their transaction such that regulation does not become an impediment on the operations of the regulated. Many practitioners and policy makers have consistently maintain the position that the microfinance sector is expected to lead to quality growth, broaden the funding base for MFIs eligible to mobilize and administer deposits, credit facilities, other financial services, and initiate the process of integrating these institutions into the formal financial system (Beck et al, 2000, Ehigiamusoe 2011, and Bhattacharjee et al, 2004).
The regulation of the sector will enable authorities to define procedures for their operations, entrance, exit, and ultimately create an environment for fair competition and efficiency in the sector.
    On the other hand, supervision encompasses all means by which regulators enforce compliance with a given legal and regulatory framework. The quest for compliance and how ready the regulatory authority is prepared to enforce compliance may be another source of challenge which the regulatory authority and the regulated entity share in common. The Nigerian regulatory content and context may not be far from either sides of the challenges seeing that more than 850 Microfinance Institutions received approval in principle to operate as microfinance bank in an environment where the regulatory policy is yet to be evaluated and many transformed microfinance banks and new entrants are still grasping with methodological challenges and inexperienced staff on micro-banking. Thus, the relative new regulatory policy amidst insufficient experienced staff in the sector may create far more reaching challenges for both the regulated and regulators. This investigation is designed to explore the challenges and prospects of microfinance regulation in Nigeria.
1.2     STATEMENT OF THE RESEARCH PROBLEMS
    Before now the Nigeria microfinance sector was dominated by charity or Christian non-governmental (non-profit) microfinance institution with little emphasis on sustainability as well as return on equity (ROE). Their operations was relatively formal but for few with international partners. Thus, operators of microfinance were simply but strictly implementing what their concept of micro-financing met to their founders or international partners. In 2004/2005 Central Bank of Nigeria took a bold direction to improve the provision of micro-financing to the poor clients as well as formalizing the sector.
    The formalization (commonly referred transformation of NGO microfinance organization) and new entrants led to the licensing of over 850 microfinance banks with approval in principle (AIP) from the Nigeria Central Bank. The establishment of these regulated entities was with clear guidelines by Central Bank of Nigeria – the regulatory authority. However, the implementation of the policy by the transformed MFBs and MFIs has led to deviation from the guidelines in that more than 120 MFBs in October, 2010 had their licenses revoked while about 50 MFBs were asked to recapitalize.  Sources of these deviations in operations of MFBs may not be far from the fact that many were operating as commercial banks. Also, the reason may be attributed to the slow response of the regulator in that many of the MFBs have on their own closed shop before the regulator embarked on its first compliance exercise. Thus, suggesting that both the regulator and the regulated may be facing more challenges that should be addressed if the sectors would yield its desired objectives.
    It is against this backdrop that the study seeks to examine not only the challenges and prospects of regulations of the Nigerian microfinance sectors, but the specific impact of the pre and post effective regulations on microfinance sector in Nigeria over time. The pre regulation era being taken from 2007 to 2009, the post regulations era from 2011 till date and while the effective regulations era by the Central Bank of Nigeria (CBN) is 2010.
    More specifically, the study seeks to provide answers to the following research questions;
1.    What is the impact of loan disbursement on microfinance sector in the pre and post regulation era.
2.    Is there any relationship between the number of clients and the pre and post regulation era of finance sector in Nigeria?
3.    What is the effect of loan portfolio in the pre and post regulations era of the Nigerian microfinance sector?
4.    Is there any relationship between savings balance and the pre and post regulations era in Nigeria?
5.    Does P.A.R has any impact on the pre and post regulation of microfinance sector in Nigeria?
1.3    OBJECTIVE OF THE STUDY
    The broad objective of the study is to examine the pre and post regulations effect on     microfinance sector in Nigeria. However, the specific objectives are to;
1.    Determine the relationship between loans disbursement in microfinance sector and the pre and post regulations.
2.    Examine the impact of the number of clients on microfinance banks in the pre and post regulations.
3.    Determine the effect of loans portfolio on microfinance institution in the pre and post regulations.
4.    Examine the influence of savings balance on microfinance sector in the pre and post regulation era in Nigeria.
5.    Determine whether P.A.R has any impact on microfinance sector in pre and post regulation era in Nigeria.
1.4    HYPOTHESES OF THE STUDY
    The hypotheses of the study are:
1.    There is no significant relationship between loans disbursement in microfinance sector and the pre and post regulations era in Nigeria.
2.    The pre and post regulations era do not have any impact on number of clients of microfinance sector in Nigeria  
3.    There is no significant relationship between loans portfolio and the pre and post regulations era in Nigeria.
4.    Savings balance in microfinance has no relationship with the pre and post regulation era in Nigeria.
5.    There is no significant relationship between portfolio at risk (P.A.R) of microfinance sector in pre and post regulation era in Nigeria.
1.5     SIGNIFICANT OF THE STUDY
    Deposit taking involves a potential risk of loss depending on how the deposits are employed. As such, MFIs intending to take deposits must be regulated and supervised by an external authority to ensure that deposits are prudently employed and cushioned by adequate capitalization. Thus, the main reason for regulation of financial institutions is to ensure that public deposits are well secured. Also, regulation helps to make the microfinance organizations more prudent and efficient and as such serves as increase to their outreach and general objective of addressing poverty through economic empowerment.
    Thus, the investigation into the challenges and prospects of the regulatory framework would help in the understanding of the sources of total compliance or partial compliance with the microfinance policy. Results from the investigation would be beneficial to both regulatory authority and the MFBs in charting the right ways for effective policy implementation.
    Furthermore, the results from the study will in no doubt constitute pool of viable data that will be very relevant to researchers, academia and students of management sciences and allied disciplines who will want to carry out further studies in the same are or similar areas.  
1.6    SCOPE OF THE STUDY
    The study is a Nigeria-specific study which focuses on the regulation of the Microfinance sector in Nigeria, using LAPO Microfinance Bank in Benin City, Edo State as a case study. The reason for the choice of LAPO is that it one of the foremost and leading microfinance institutional in the country, coupled with its numerous branch network and huge capital base. The study will specifically examine the pre regulation era (2007 to 2009) and the post regulation era (2010 to 2012), with a view to assessing the impact over time if any. Relevant data shall be sourced from LAPO Microfinance financial statements and the Central Bank of Nigeria financial reports on microfinance banks.
1.7    LIMITATION OF THE STUDY
    Generally, there is no study without limitations and this study is not an exception.
1.    The fact that only one microfinance bank (LAPO) is used as a sample representative of all microfinance banks in Nigeria in the empirical analysis from which further generalization are made. There is the fear that this sample may not fully represent all the microfinance banks in the country.
2.    Another major limitation is that one cannot guarantee a 100% accuracy of the data used, its measurement, as well as the method of data analysis. However, effort will be made to ensure that errors are minimized so that he results obtained are valid and reliable with respect to the data used.