Determinants of Loans and Advances Extended by Microfinance Banks in Nigeria

In consideration of the roles of microfinance banks (MFBs) in poverty reduction, employment generation and overall development of an economy, particularly a less developed economy, the paper employs the methodology of ARDL-based Bounds test approach to co-integration and error correction analysis to investigate the determinants of loans and advances extended by microfinance banks in Nigeria using data spanning the period from 1992 to 2013. The empirical evidence indicates that the major determinants of the amount of loans and advances extended by MFBs are deposits, shareholders’ fund, liquidity ratio and inflation. Customers’ deposits positively affect MFBs’ loans and advances in the short-run and long-run, though the long run effect is not significant. Shareholders’ fund also positively affects MFBs’ loans and advances in the short-run and long-run. Inflation and liquidity ratio negatively affect the amount of loans and advances extended by the MFBs. Measures recommended by the paper to boost the supply of loans and advances by the MFBs to enhance their contributions to economic growth and development of Nigeria include mobilization of more deposits, expansion of shareholders’ base and fund and, credit risk management by the MFBs, setting the liquidity ratio by the Central Bank at levels that will not over-contract the ability of MFBs to extend loans and advances to microenterprises and, control of inflation by the relevant authorities.