Why Having Two Financial Sectors is a Problem for Nigeria
Nigeria faces serious challenges as it attempts to use microfinance to overcome the serious problems affecting its financial sector. These problems are generally related to the dualistic nature of its financial life, which has long been split between a formal financial sector — consisting of the country’s central bank along with other banks and official institutions — and an informal one that consists of direct borrowing and lending through various unofficial channels and networks. The existence of an extensive, informal financial sector in Nigeria has been attributed to various factors, including the lack of sufficient banking facilities in rural areas, despite the fact that these locations have high population levels. Among the other possible causes cited are low literacy levels, reduced confidence in the banking system and the absence of alternative financial institutions in rural locations.
Whatever the causes of the growth of Nigeria’s informal financial sector may be, the existence of such a large, unofficial sector makes efficient and reliable economic management very difficult indeed. The dualistic or split nature of the country’s financial sector has brought about a difficult situation in which financial authorities have repeatedly seen their monetary-policy initiatives failing to achieve their intended aims. These very serious problems, which other government measures have failed to resolve over the years, suggest that Nigeria should follow other developing countries by fully availing of the great potential of microfinance banking to reduce poverty by promoting economic growth and social progress.
Microfinance Banking and Nigeria’s Road to Progress
Microfinance can certainly make a vital contribution to the urgent task of putting Nigeria’s financial life on a sound footing, thereby enabling effective national planning for a secure and successful future for the country. It must be acknowledged, though, that the task of properly establishing microfinance banking in Nigeria itself faces some daunting challenges. Although the project has been underway since 2005, when the Nigerian government initiated its microfinance-banking strategy, the challenges just mentioned will have to be overcome before a fully successful outcome is achieved. The hurdles that a successful microfinance-based strategy will have to jump include inadequate regulatory and legislative structures, the lack of sufficient infrastructure, misunderstandings about the nature and purpose of microfinance, a scarcity of properly qualified personnel, and the danger of moving away from the proper function of microfinance.
From now on, microfinance banks will need to avoid both slavishly imitating the practices of commercial banks and engaging in unrealistic levels of competition with them. They will also need to keep their interest rates at sustainable levels, since the present rates are far too high to ensure orderly growth within their sector.
Having taken account of these potential challenges and obstacles, though, there is good reason to be optimistic about the prospects of implementing a successful microfinance-banking strategy in Nigeria. The success of the strategy will depend on the presence of proper and comprehensive regulation of the sector and, perhaps most of all, on the unswerving commitment of all of the various stakeholders in this great project to the core mission and objectives of microfinance banking.