ACCOUNTING PROBLEMS IN MICROFINANCE BANKS A STUDY OF SELECTED MICROFINANCE BANKS IN ABAKALIKI METROPOLIS OF EBONYI STATE

ABSTRACT

This research is titled “ACCOUNTING PROBLEMS IN MICROFINANCE BANKS A STUDY OF SELECTED MICROFINANCE BANKS IN ABAKALIKI METROPOLIS OF EBONYI STATE.” This study analyzed the various categories of accounting problems facing microfinance banks. This was achieved through the use of survey research design and methodology which included questionnaires, oral interviews, discussion and study of related literature, inference and conclusion. In the test of hypothesis, chi-square technique was used. Some findings were made after proper analysis of data which include that Accounting problems affect the performance of Microfinance Bank. The researcher made the following recommendations: proper teaching and training of staff, provision of conducive environment both staff and customers, employment of qualified personnel in terms of education and experience in their field, and use of modern mechanize and computerized machines to facilitate the operation of microfinance banks.

TABLE OF CONTENTS

CERTIFICATION

DEDICATION

ACKNOWLEDGEMENT

ABSTRACT

TABLE OF CONTENTS

LIST OF TABLES

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

1.2 STATEMENT OF THE PROBLEM

1.3 OBJECTIVE OF THE STUDY

1.4 RESEARCH QUESTIONS

1.5 STATEMENT OF HYPOTHESES

1.6 SIGNIFICANCE OF THE STUDY

1.7 SCOPE AND LIMITATIONS OF THE STUDY

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 CONCEPTUAL FRAMEWORK

2.1.1 What is bank?

2.1.2 What is banking?

2.1.3 What is microfinance?

2.1.4 HISTORICAL EVOLUTION OF BANK

2.2 EMPIRICAL REVIEW

2.3 THE THEORETICAL FRAME WORK

2.4 CAPITAL, OWNERSHIP AND MANAGEMENT STRUCTURE OF MICROFINANCE BANK

2.5 THE RELATIONSHIP BETWEEN MICROFINANCE BANK AND COMMERCIAL BANK

2.6 MONITORING MEASURE AVAILABLE

2.7 OBJECTIVES OF MICROFINANCE BANKS

2.8 FUNCTION OF MICROFINANCE

2.9 PROBLEMS OF MICROFINANCE BANK

CHAPTER THREE

METHODOLOGY

3.1 RESEARCH DESIGN

3.2 AREA OF STUDY

3.3 POPULATION OF THE STUDY

3.4 SAMPLING TECHNIQUE AND SAMPLE SIZE DETERMINATION

3.4.1 Sample Size Determination

3.4.2 Sampling techniques

3.5 SOURCES OF DATA

3.5.2 Secondary source

3.6 METHOD OF DATA GENERATION

3.7 RELIABILITY OF INSTRUMENT

3.8 VALIDITY OF INSTRUMENT

3.9 DATA ANALYSIS TECHNIQUES

CHAPTER FOUR

FINDINGS

4.1 QUESTIONNAIRE ANALYSIS OR DATA PRESENTATION AND ANALYSIS

4.2 TESTING OF HYPOTHESES

CHAPTER FIVE

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Banking has historically been a cornerstone of economic activity and social development. Banks serve as service-oriented institutions that facilitate financial transactions for individuals, corporations, and organizations alike. As financial intermediaries, banks perform essential functions including deposit collection, credit delivery, and dealing with negotiable instruments, earning income through service charges and interest (Ozili, 2022). An institution qualifies as a bank when it is licensed to accept deposits repayable on demand or at short notice and to extend credit with the aim of generating profit.

The primary objectives of banking institutions revolve around deposit mobilization and credit extension, with all ancillary services being complementary to these core functions of financial intermediation (Babalola, Mhlongo, Obinyeluaku, Oladayo, & Daraojimba, 2023). The evolution of banking services in Nigeria can be traced to the colonial era when the activities of colonial merchants in West African colonies, and the subsequent establishment of territorial governments, necessitated the creation of locally based financial institutions.

Historically, banking services in Nigeria were predominantly urban-oriented, leaving rural dwellers largely excluded from formal financial systems. The People's Bank of Nigeria was established in 1989 to address the credit needs of the rural and urban poor including farmers, artisans, and carpenters but its supply-led model and heavy dependence on federal government subventions rendered it operationally inefficient. Persistent challenges of undercapitalization and overhead costs that outstripped earnings drove many Nigerians into deeper poverty, underscoring the urgent need for a more sustainable framework for grassroots credit delivery (Central Bank of Nigeria [CBN], 2005).

In Nigeria, the concept of microfinance banking did not emerge in a vacuum. Prior to 2005, community banks served as the primary vehicles for micro-level financial intermediation. However, these institutions suffered from weak institutional capacity, inadequate capital bases, poor governance structures, and an inability to serve the vast unbanked population (Acha, 2012, as cited in Akinyele, Oloba, & Mah, 2022). In December 2005, the Central Bank of Nigeria inaugurated the Microfinance Policy, Regulatory and Supervisory Framework under the administration of President Olusegun Obasanjo. This landmark policy required all existing community banks to convert to microfinance banks within a two-year period ending December 2007 (CBN, 2005).

The justification for this transition was multifaceted. According to the CBN (2005), the conversion of community banks to microfinance banks was necessitated by the need to: overcome institutional weaknesses of the existing community banks; strengthen the capital base of financial institutions serving low-income groups; promote economic empowerment of the poor; generate employment opportunities; reduce poverty; expand savings options for rural and underserved populations; and harness both local and international interests in micro-financing, including the utilization of the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) fund.

The global microfinance industry has grown significantly in scope and significance. The industry is projected to reach US$506 billion by 2030, representing an annual growth rate of approximately 12.3%, with approximately 10,000 institutions operating across Asia-Pacific (47%), Latin America and the Caribbean (19%), and Africa and the Middle East (19%) (Agusto & Co., 2025). Within Nigeria, the microfinance banking industry has undergone remarkable transformation over the past two decades. As of December 2024, there were 729 CBN-licensed microfinance banks, categorized into three tiers: nine national microfinance banks operating nationwide, 121 state-level microfinance banks serving specific states, and 599 unit-level microfinance banks with localized operations (Agusto & Co., 2025).

However, the sector continues to grapple with significant structural and regulatory challenges. In May 2023, the CBN revoked the operating licenses of 179 microfinance banks, citing reasons that included failure to carry on the type of banking business for which licenses were issued, non-compliance with licensing conditions, and contravention of obligations imposed under the Banks and Other Financial Institutions Act (BOFIA) 2020. Many of the affected institutions were cited for critical undercapitalization, with capital adequacy ratios below the prudential minimum prescribed by the CBN (Central Bank of Nigeria, 2023). This mass revocation underscored the persistent accounting and governance deficiencies confronting the microfinance banking sub-sector in Nigeria.

The establishment of microfinance banks in Abakaliki metropolis, the capital of Ebonyi State, reflects the national imperative to extend financial services to underserved communities. Ebonyi State, predominantly agrarian and with a significant proportion of its population living in rural areas, presents both an urgent need for accessible financial services and a context in which the accounting challenges of microfinance banks are acutely felt. Despite the proliferation of financial institutions in Abakaliki, many residents particularly rural dwellers, smallholder farmers, and petty traders remain excluded from formal financial services, making the effective operation of microfinance banks a critical development priority (Ugwuoke, Ogbonna, & Freeman, 2023).

The financial reporting environment in Nigeria has also been shaped by evolving regulatory frameworks. The paradigm shift toward International Financial Reporting Standards (IFRS) in 2012, the enactment of the Companies and Allied Matters Act (CAMA) 2020, and the oversight roles of the Financial Reporting Council of Nigeria (FRCN) have collectively transformed the landscape within which microfinance banks are required to operate (Echegu, Aleke, & Alum, 2024). Yet, many microfinance institutions in Abakaliki and across Nigeria continue to struggle with compliance, primarily due to inadequate accounting systems, poorly trained personnel, and insufficient infrastructure.

It is against this backdrop that this study examines the accounting problems confronting microfinance banks in Abakaliki metropolis, Ebonyi State, with a view to identifying the nature and extent of these problems and proposing pragmatic recommendations for improvement.

1.2 STATEMENT OF THE PROBLEM

Despite Abakaliki's status as an urban centre and the capital of Ebonyi State hosting various classes of financial institutions that

offer services to agriculturalists, industrialists, and businesspersons these institutions have not been fully able to satisfy the banking needs of both urban and rural dwellers. This gap has necessitated the establishment and operation of microfinance banks; however, these institutions face formidable accounting and operational challenges that undermine their effectiveness.

Research has shown that microfinance banks in Nigeria, particularly those operating in less commercially developed states like Ebonyi, are plagued by a constellation of problems including poor accounting procedures, weak record-keeping systems, inadequate capital, lack of trained and experienced accounting personnel, and failure to comply with regulatory reporting requirements (Babalola et al., 2023; Echegu et al., 2024). The quality of services rendered by microfinance banks often attracts criticism from customers and stakeholders, arising from dysfunctional operational equipment, distressed financial conditions, and the absence of adequate infrastructural facilities.

Furthermore, the regulatory response to these systemic weaknesses exemplified by the CBN's revocation of 179 microfinance bank licenses in 2023 demonstrates that accounting non-compliance and governance failures pose an existential threat to the sector. If left unaddressed, these accounting problems will continue to erode public confidence in microfinance banks, impair their profitability, and undermine their capacity to fulfill their mandate of promoting financial inclusion and poverty reduction (Akinyele et al., 2022; Agusto & Co., 2025).

The statement of the problem, therefore, lies in the fact that while microfinance banks were established to provide specific financial services to underserved populations, their existence is seriously threatened by persistent accounting inadequacies, poor financial reporting practices, and the broader institutional deficiencies that these engender.

1.3 OBJECTIVE OF THE STUDY

The main objective of this study is to evaluate the opportunities available to microfinance banks in Nigeria for thriving through a sound operational and accounting framework, which would lead to their efficient and effective operation, particularly in Abakaliki metropolis of Ebonyi State.

The specific objectives include the following:

1. To determine the various accounting problems that hinder the operations of microfinance banks in Abakaliki metropolis.

2. To determine the effect of accounting problems on the performance of microfinance banks in Abakaliki metropolis.

3. To determine the effect of accounting problems on the profitability and the confidence reposed in microfinance banks.

4. To determine the effect of accounting problems on accounting ratios and the profitability performance of microfinance banks.

1.4 RESEARCH QUESTIONS

This research will endeavour to find answers to the following questions:

1. To what extent do the various accounting problems hinder the operations of microfinance banks in Abakaliki metropolis?

2. To what extent do accounting problems affect the performance of microfinance banks in Abakaliki metropolis?

3. To what extent do accounting problems affect the profitability and the confidence reposed in microfinance banks?

4. To what extent do accounting problems affect accounting ratios and profitability performance of microfinance banks?

1.5 STATEMENT OF HYPOTHESES

In order to ensure the proper and successful execution of this study, the following hypotheses will be tested:

Hypothesis One

H₀: Accounting problems do not hinder the operation of microfinance banks.

H₁: Accounting problems hinder the operations of microfinance banks.

Hypothesis Two

H₀: Accounting problems do not have an effect on the profitability and confidence reposed in microfinance banks.

H₁: Accounting problems have an effect on the profitability and confidence reposed in microfinance banks.

Hypothesis Three

H₀: Accounting problems do not affect the performance of microfinance banks.

H₁: Accounting problems affect the performance of microfinance banks.

Hypothesis Four

H₀: Accounting problems do not have an effect on accounting ratios and profitability performance.

H₁: Accounting problems have an effect on accounting ratios and profitability performance.

1.6 SIGNIFICANCE OF THE STUDY

The significance of this research lies in its potential to contribute meaningfully to the understanding and improvement of microfinance banking operations in Nigeria, with particular emphasis on Abakaliki metropolis of Ebonyi State. The establishment of microfinance banks represents a deliberate step towards inclusive economic growth, poverty reduction, and improved standards of living for both urban and rural dwellers (Babalola et al., 2023; Osuma, 2025).

First, this study will benefit government policymakers, microfinance managers, and customers by directing attention to optimal strategies for managing microfinance banks in Abakaliki metropolis. Given the regulatory emphasis on compliance and sound accounting practices underscored by the CBN's revocation of 179 microfinance bank licenses in 2023 (Central Bank of Nigeria, 2023) findings from this study will provide actionable guidance for institutional reform.

Second, the implementation of this study's findings and recommendations will help to ameliorate, if not entirely eradicate, the accounting problems that continue to impair the effectiveness of microfinance banks in Ebonyi State. This is particularly significant given that research has established a direct relationship between sound financial reporting and the long-term sustainability of microfinance institutions (Echegu et al., 2024; Akinyele et al., 2022).

Third, the study will be of benefit to equity holders and creditors of microfinance banks by providing insights that can boost confidence in these institutions. Additionally, it will add to the body of scholarly literature on microfinance banking in Nigeria, serving as a reference point for future researchers seeking to investigate related topics.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

This study focuses on selected microfinance banks operating within Abakaliki metropolis of Ebonyi State, Nigeria. The research examines accounting problems and their effects on the performance, profitability, and accounting ratios of these institutions. Several factors limited the successful execution of this study:

1. Time Constraint: The execution of this project alongside other academic obligations posed significant challenges. The time available was insufficient for a more extensive survey of microfinance banks across the state.

2. Cost Constraint: Limited financial resources constrained the scope of data collection activities. The process of travelling between locations in search of facts and primary data was financially demanding, particularly given the current economic conditions in Ebonyi State.

3. Lack of Infrastructural Facilities: The dearth of literature specifically focused on microfinance banking in Abakaliki metropolis posed a challenge to the literature review component of this study. Much of the existing research on Nigerian banking tends to concentrate on commercial banking and Central Bank of Nigeria (CBN) activities, leaving microfinance institutions comparatively understudied.

4. Respondent Reluctance: Many microfinance bank staff members expressed reluctance to respond to questionnaire items or participate in oral interviews. Some were unwilling to disclose information they perceived as sensitive, which constrained the volume and depth of primary data collected.

DEFINITION OF TERMS

1. Banking: An activity carried out by institutions licensed to accept and safeguard money owned by individuals and entities, and to lend out such funds with a view to earning profit.

2. Unit Banking: A banking system which precludes the establishment of branch networks, confining operations to a single location.

3. MFBN: Microfinance Bank in Nigeria a deposit-taking financial institution licensed by the CBN to provide microfinance services to low-income individuals and small businesses.

4. MFI: Microfinance Institution an entity established to provide financial resources for the small-scale investments of poor individuals or groups.

5. Capital Base: The authorized minimum deposit requirement for the establishment of a microfinance bank, as stipulated by the CBN's regulatory framework.

6. Metropolis: A large, developed city forming the principal hub of a geographical or administrative area.

7. UMP: Urban Management Programme an initiative aimed at improving governance and infrastructure in urban areas.

8. Management: In this context, refers to the process of coordinating human, financial, and material resources to achieve the objectives of a microfinance bank.

9. Correspondent Banking Relationship: An arrangement by which microfinance banks are required to maintain a minimum of three correspondent banking relationships with commercial banks closest to them, primarily for the purpose of cheque clearing.

10. CBN: Central Bank of Nigeria the apex regulatory authority responsible for monetary policy, financial system stability, and the supervision of all deposit-taking institutions in Nigeria, including microfinance banks.

11. IFRS: International Financial Reporting Standards a set of globally recognized accounting standards issued by the International Accounting Standards Board (IASB), which Nigerian financial institutions are required to comply with.

12. BOFIA: Banks and Other Financial Institutions Act the primary legislation governing the establishment, operation, and supervision of banks and other financial institutions in Nigeria.

REREFERENCES

Agusto & Co. (2025). The changing landscape of Nigeria's microfinance banking industry. Agusto & Co. Research Publications. https://www.agusto.com/publications/the-changing-landscape-of-nigerias-microfinance-banking-industry/

Acha, I. A. (2012). Microfinance banking in Nigeria: Problems and prospects. International Journal of Finance and Accounting, 1(5), 106–111. https://doi.org/10.5923/j.ijfa.20120105.04

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