The desire to enlarge banking facilities in the rural areas of Nigeria started with the rural banking scheme in the 1970s, and up to the 1980s. However, by the end of the 1980s, it became clear that the conventional banks were no longer willing to open more rural branches; this was simply because such branches were mostly unprofitable. Opening them therefore ran contrary to the profit objective of the owners. In facing this challenge, Nigeria, like most other countries of the world have adopted the concept of micro financing as a means of mobilizing deposits in the rural areas. Microfinance banks in Nigeria operate in diverse environments where they render various categories of services and products to the target clients.
Microfinance banking is a type of banking service that is provided to unemployed or low income individuals or groups. Microfinance banking as a means of creating economic and social development has come a long way in Nigeria. Various comprehensive surveys of the diversified activities of microfinance banks have been provided since 2005 when the policy guidelines became operative. Since its inception, Microfinance Institutions (MFIs) has contributed in a special way in supporting small and medium enterprises by
effectively channeling the idle funds obtained through deposit mobilization to the general public in the forms of loans (short, medium or long term loan), so that it is being put into valuable production and other investment projects helping people to reach their goals.
The importance of Microfinance Institutions can never be overemphasized. Deposit mobilization is one of the major objectives of banks. Deposit is the foundation of all banking activities. However, microfinance banks as well as the banking sector in general do depend on customer’s deposit to advance its clients.
Since the proclamation of the term Micro financing in Nigeria in the mid-term 1970’s, several countries have copied this model, mostly in the developing world. However, the government of Nigeria adopted this policy in the year 2005 and inaugurated the microfinance scheme. The main objective for the promulgation of this policy is to provide finance to the economically active poor, excluded from financing from conventional banks, provide employment, engender rural development and reduce poverty. More so, in Nigeria it is important to note that there are over nine hundred (900) Microfinance banks today in Nigeria and they are regulated and supervised by the Central Bank of Nigeria.
Bello (2005) is of the view that banking system is the backbone of financial intermediation through the mobilization and channeling of financial resources. Therefore, Micro-finance Banks acts as a financial intermediary; by financial intermediary the Microfinance Banks serves as a middleman for parties in a financial transaction. It consolidates deposits and uses the funds to transform them into loans.