IMPACT OF MICROFINANCE ON RURAL ECONOMIC GROWTH IN NIGERIA

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TABLE OF CONTENTS

Title page        –           –           –           –           –           –           –           –           –           –           i

Approval page –           –           –           –           –           –           –           –           –           –           ii

Declaration      –           –           –           –           –           –           –           –           –           –           iii

Dedication      –           –           –           –           –           –           –           –           –           –           iv

Acknowledgements    –           –           –           –           –           –           –           –           –           v

Table of contents        –           –           –           –           –           –           –           –           –           vii

List of tables   –           –           –           –           –           –           –           –           –           –           xi

Abstract          –           –           –           –           –           –           –           –           –           –           xii

CHAPTER ONE: INTRODUCTION

  1. Background of the Study       –           –           –           –           –           –           –           1
    1. Statement of problem –           –           –           –           –           –           –           –           2
    1. Objectives of the study –        –           –           –           –           –           –           –           4
    1. Research questions –   –           –           –           –           –           –           –           –           4
    1. Research hypotheses – –           –           –           –           –           –           –           –           5
    1. Scope of the study –    –           –           –           –           –           –           –           –           5
    1. Significance of the study –      –           –           –           –           –           –           –           7
    1. Operational definition of terms          –           –           –           –           –           –          

References      –           –           –           –           –           –           –           –           –           9

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1       Conceptual Framework           –           –           –           –           –           –           –           12

2.1.1    Definition of micro-credit –    –           –           –           –           –           –           –           13

2.1.2    Micro-credit service providers –          –           –           –           –           –           –           13

2.1.3    Characteristics of micro-credit –         –           –           –           –           –           –           14

2.1.4    Micro-credit and the rural poor –        –           –           –           –           –           –           15

2.1.5    Micro-Finance –           –           –           –           –           –           –           –           –           17

2.1.6    Features of micro-finance –     –           –           –           –           –           –           –           17

2.1.7    Benefits of micro-finance programs – –           –           –           –           –           –           18

2.1.8    Goals of the microfinance banks        –           –           –           –           –           –           18

2.2       Theoretical Review     –           –           –           –           –           –           –           –           19

2.2.1    The evolution of micro-finance in Nigeria –    –           –           –           –           –           19

2.2.2    Justification for the establishment of microfinance bank       –           –           –           22

2.2.3    Micro-financial challenges –    –           –           –           –           –           –           –           22

2.2.3.1 Rate of interest –         –           –           –           –           –           –           –           –           23

2.2.3.2 High rate of defaults –            –           –           –           –           –           –           –           –           23

2.2.3.3 Limited Outreach        –           –           –           –           –           –           –           –           23

2.2.3.4 Lack of infrastructure and access to market – –           –           –           –           –           24

2.2.3.5 Diversion of loan to non-productive uses –     –           –           –           –           –           24

2.2.3.6 Poor monetary policy –            –           –           –           –           –           –           –           25

2.2.3.7 Inequitable distribution of wealth and income –         –           –           –           –           25

2.2.3.8 High cost of screening and recovering micro loans –  –           –           –           –           25

2.2.3.9 Lack of Experienced Credit Officers –           –           –           –           –           –           25

2.2.3.10Problem of illiteracy   –           –           –           –           –           –           –           –           25

2.2.3.11Inadequate or non-monitoring of micro and small enterprises by

 banks thereby leading to default of facilities.           –           –           –           –           26

2.2.4    The micro-finance policy –      –           –           –           –           –           –           –           26

2.2.4.1 An overview of the micro-finance policy –     –           –           –           –           –           26

2.2.4.2 Micro-finance policy objectives –        –           –           –           –           –           –           26

2.2.4.3 Policy target of microfinance scheme –           –           –           –           –           –           27

2.2.4.4 Policy strategies –        –           –           –           –           –           –           –           –           27

2.2.4.5 Millennium goals –      –           –           –           –           –           –           –           –           27

2.2.4.6 Principles for effective microfinance institution –      –           –           –           –           28

2.2.5    Policy measure instruments as framework for microfinance banks    –           –           29

2.2.5.1 Ownership of microfinance banks –    –           –           –           –           –           –           29

2.2.5.2 Participants in the microfinance activities –    –           –           –           –           –           30

2.2.6    The roles and responsibilities of stakeholders –          –           –           –           –           30

2.2.6.1 Government –  –           –           –           –           –           –           –           –           –           30

2.2.6.2 Central Bank of Nigeria (CBN) –       –           –           –           –           –           –           30

2.2.6.3 Microfinance institutions (MFIs) –      –           –           –           –           –           –           31

2.2.6.4 Public sector poverty alleviation Agencies –   –           –           –           –           –           31

2.2.6.5 Donor Agencies –        –           –           –           –           –           –           –           –           31

2.2.7    Framework for supervision of microfinance banks –  –           –           –           –           32

2.2.7.1 Licensing and supervision of microfinance banks –    –           –           –           –           32

2.2.7.2 Establishment of a national microfinance consultative committee (NMFCC)           32

2.2.7.3 Credit reference bureau –        –           –           –           –           –           –           –           32

2.2.7.4 Deposit insurance scheme –     –           –           –           –           –           –           –           32

2.2.7.5 Management certification process –    –           –           –           –           –           –           32

2.2.7.6 Apex Associations of microfinance institutions –       –           –           –           –           33

2.2.7.7 Corporate Governance for microfinance banks –        –           –           –           –           33

2.2.8    Regulatory framework of microfinance institutions – –           –           –           –           33

2.2.8.1 Strengths regulatory framework of micro-finance institutions  –        –           –           33

2.2.8.2 Weaknesses of Regulatory framework of microfinance institutions –           –           34

2.2.9    Informal finance institutions in rural areas –   –           –           –           –           –           34

2.2.9.1 Daily savings enterprises –      –           –           –           –           –           –           –           35

2.2.9.2 Professional money lending scheme – –           –           –           –           –           –           36

2.2.9.3 Rotating savings and credit Associations –     –           –           –           –           –           37

2.2.9.4 Family fund pool scheme –     –           –           –           –           –           –           –           39

2.2.9.5 The local moneylenders –        –           –           –           –           –           –           –           39

2.2.9.6 Social clubs and age grade association –         –           –           –           –           –           40

2.2.9.7 Tied Credit –   –           –           –           –           –           –           –           –           –           41

2.2.10  Development finance institutions and microfinance in Nigeria –       –           –           41

2.2.10.1Nigerian Agricultural co-operative and rural development bank (NACRDB)          43

2.2.10.2Functions of NACRDB –      –           –           –           –           –           –           –           44

2.2.10.3The bank of Industry (BOI) –            –           –           –           –           –           –           –           44

2.2.10.4Failures of former Defunct Banks –   –           –           –           –           –           –           46

2.2.11  The concept of rural economic growth in Nigeria –    –           –           –           –           47

2.2.12  The Effectiveness of microfinance in rural development –     –           –           –           48

2.2.13  Impact assessment of microfinance    –           –           –           –           –           –           50

2.2.14  Arguments on loan default problem   –           –           –           –           –           –           53

2.3       Empirical Literature on Microfinance and Performance         –           –           –           49

References      –           –           –           –           –           –           –           –           –           52

CHAPTER THREE: METHODOLOGY

3.1       Research Design         –           –           –           –           –           –           –           –           59

3.2       Nature and Sources of Data   –           –           –           –           –           –           –           59

3.3       Population and Sample Size   –           –           –           –           –           –           –           59

3.4       Description of Research Variables      –           –           –           –           –           –           59

3.4.1    Independent Variable:            –           –           –           –           –           –           –           –           60

3.4.2    Dependent Variables  –           –           –           –           –           –           –           –           60

3.5       Technique for Data Analysis  –           –           –           –           –           –           –           61

3.6       Model Specification    –           –           –           –           –           –           –           –           61

References      –           –           –           –           –           –           –           –           –           63

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1       Introduction    –           –           –           –           –           –           –           –           –           64

4.2       Data presentation        –           –           –           –           –           –           –           –           64

4.3       Determination of Research variables  –           –           –           –           –           –           66

4.4       Test of Hypothesis      –           –           –           –           –           –           –           –           71

4.4.1    Test of Hypothesis One          –           –           –           –           –           –           –           71

4.4.2    Test of Hypothesis Two          –           –           –           –           –           –           –           72

4.4.3    Test of hypothesis Three         –           –           –           –           –           –           –           73

            References      –           –           –           –           –           –           –           –           –           74

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION

AND RECOMMENDATION

5.1       Summary of findings  –           –           –           –           –           –           –           –           75

5.2       Conclusion      –           –           –           –           –           –           –           –           –           75

5.3       Recommendations      –           –           –           –           –           –           –           –           76

5.4       Contributions to Knowledge  –           –           –           –           –           –           –           77

5.5       Suggestions for further research studies         –           –           –           –           –           77

            Bibliography   –           –           –           –           –           –           –           –           –           78

            Appendix        –           –           –           –           –           –           –           –           –           87

LIST OF TABLES

Table 4.1         Nominal Values of Model Data          –           –           –           –           –           64

Table 4.2         Determination of Microfinance Activities      –           –           –           –           66

Table 4.3         Determination of Agricultural Contribution to GDP –           –           –           67

Table 4.4         Determination of Rural Savings         –           –           –           –           –           69

Table 4.5         Determination of Rural Poverty         –           –           –           –           –           70

Table 4.6         E-view Regression Results     –           –           –           –           –           –           71

Table 4.7         E-view Regression Results     –           –           –           –           –           –           72

Table 4.8         E-view Regression Results     –           –           –           –           –           –           73

ABSTRACT

This study examines the impact of microfinance activities on rural economic growth in Nigeria for the period: 2000-2015; the introduction of microfinance banks is the inability of commercial banks to provide sufficient credit, savings and other financial services to the poor and so have taken up the challenges of the gap created by them;  the primary objective is to investigate the impact of microfinance on rural economic growth in Nigeria with the specific objective of examining and evaluating the impact on agricultural contribution to GDP, rural saving and poverty reduction; literature was reviewed along the line of conceptual framework, theoretical and empirical literature; methodology adopted used the ordinary least square (OLS) regression technique to estimate the hypotheses, values of aggregate loan and advances to aggregate deposit ratio was used as proxy for microfinance activities and adopted as the independent variable while the dependent variables include agricultural sector contributions to gross domestic product (GDP), rural savings (RS) and poverty index (PI); Data analysis considered three hypotheses and the result from the  study reveals that regression coefficient of microfinance activity is negative in explaining agricultural contribution to GDP and rural poverty but positive and significant in explaining rural savings in Nigeria; based on these findings, the study recommends that conscious effort showed be made by government to industrialize rural areas as a means of improving rural economic growth; microfinance institutions should be encouraged to lend to rural dwellers as a way of promoting rural saving habits in Nigeria while policies related to agricultural diversification should be intensified by government in combating the menace of poverty in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Over the past three decades, there has been growing awareness of the spatial dimension in the development of the rural areas especially in developing countries where rural communities have earlier experienced decades of neglect (Olawepo and Ariyo, 2011). There is therefore special interest in the accelerating processes of rural community transformation by various governments in the areas of poverty alleviation, provision of rural infrastructure such as health and medical facilities, electricity, pipe borne water. Schools; agricultural extension and in the development of micro finance establishments that will affect the lives of the rural investors and community organizations. Based on these and other strategies, the central bank of Nigeria (CBN) in 1990 established an economic policy that would encourage the extension of banking business to the rural area of the country in order to mobilize rural savings. This was aimed at development and fostering rural transformation (Ariyo, 2003 and Olawepo, 2004). The whole idea of rural banking stemmed from a realization of the abundant resources available in the rural areas, the need to channel these resources to production and make such business activities contribute to economic development shifted research focus and government policy to promoting rural banking habit. An increase in rural investment as a result of provision of loans and advances will gear up output level and this will in turn raise the consumption level and possibly improve accessibility to public good s and services within the rural environment (See Direvedi, 1980; Adedayo, 1983; Jenyo, 2002 and Olawepo 2004).

According to Smith and Yeboah, (2005), throughout most of the post World War II period, government across the developing world have intervened in rural financial markets in order promote income expansion and alleviate rural poverty. In many of these efforts especially during the 1950s, 1960s and 1970s, the authorities pursued the direct credit approach which is targeted at increasing production or adopting new technologies without external assistance in the form of credit since they were assumed to be too poor to save. But private banks could not lend on appropriate terms to this sector and thus farmers were forced into the hand of money lenders This Development lead to the establishment of government owned specialized institutions like Agricultural Credit Guarantee Scheme to provide subsidized credit to the target population.

By the early 1990s two general approaches to financial market reform had taken shape. The first was known as financial liberalization and the second the financial  system development Approach. The goal of rural financial market reform was to expand access to financial services and efficiency of financial intermediation Restrictive government polices was said to be the principal cause of the shallow, fragmented and inefficient financial systems plaguing many developing countries (Mckinnon 1973).

To enhance the efficiency of the financial system and to create more access to financial services for marginalized groups, the prescription was liberalize the financial system by eliminating restrictions on interest rates, mandatory sector credit allocations and credit ceilings (Pill and Pradhan, 1997; African Development Bank, 1994; and Aryeetey et al, 1997).

Today the task of taking the financial system and the entire economy to the next level is squarely placed on financial system strategy 2020. The blue print of financial system strategy is to reposition the country to one of twenty largest economies in the world. The objectives were articulated strategies to make Nigeria the financial hub of Africa, join the league of the top 20 economies and build financial institutions that are global players.

Above all, there can be no meaningful discussion of  Nigerian’s rural economy without due consideration of crucial role of not only Agriculture that has remained largest revenue earners for Nigerian living in rural area but also those engage in small scale business such as pottery, weaving, carving, tool making, trading hairdressers, photographers, welders , bakery, small and medium scale  enterprises’ have been fully recognized by government and development experts as the main engine of economic growth and a major factor in promoting the realization of FSS2020, improve standard  of living of rural populaces, bring local capital formation, achieve high level of productivity and capacity and act as principal catalyst  for achieving equitable and sustainable industrial diversification.

1.2       Statement of Problem

Evidence in Latin American, Asian and African countries show that savings mobilization is one of the key activities in building a sound financial system (Lamberte et al, 2006; Amel et al, 2004; Gonzalez-vego, 2003; Roberts and Hanning ,1998; Deaton,1992; Bencivensa and Smith, 1991; Braverman and Guasu, 1986; Begashaw, 1978). However, in developing countries, savings are often under mobilized. Two commonly cited underlying causes are: (1) prevalence of inappropriate saving products and poor services by depository institutions, (2) lack of confidence in the safety or liquidity of financial institutions by rural people (Sec, De Aghion and Morduch, 2005; Gonzauz-vega, 2003; Ghosh et al, 2000; Feder, 1993). Therefore, to effectively and efficiently mobilize savings, saving products appropriate for rural savers need to be developed and depository institutions need to improve their services to this category of the population. Also, the institutions need to win the confidence of the rural people by building easy and friendly saving and withdrawal procedures.

The core objectives of national integrated rural development plan (2000) for microfinance bank are: to ensure significant reduction of poverty and ultimately its eradication in the shortest possible time; mobilize and empower rural population to create wealth through increased agriculture , industrials and other productive activities; promote the expansion of the productive base of the rural economy through the creation of non-agricultural enterprises; provide access to extension services, input, credit and marketing services and to raise rural productivity in general. The integrated rural development plan identifies poverty reduction, mobilization of savings and financing agriculture as the three cardinal transmission channels through which micro financing will enhance rural economic growth and development.

In Nigeria, the government through its legislation seem to exacerbate the micro credit banking crises. For example, in 1990 the government established the community bank to promote banking habit among the rural people and accelerate rural development through financial intermediation. In 2005, the government through the central bank of Nigeria mandated the existing community banks to migrate to Microfinance Banks CBN (2005) (10) (Vanguard, 2011). The regulatory framework for microfinance banks changed the ownership structure of the community banks by allowing a single individual to own a microfinance bank. The regulation also increased the minimum share capital for microfinance banks to N20 million for unit bank and N2 billion for state bank. Such has the ability of creating unlevel playing ground between the poor and the rich. The reform targets economically active poor without effectively addressing the deluge of problems the defunct community banks encountered.

Moreover, the Nigerian deposit insurance corporation conducted a nationwide investigation in 2011 on all the microfinance banks in the country. The findings led to the complete closure of about 224 microfinance bank (Vanguard, 2011). The remote causes of such crises could be traced to the lagging supervision and liberal licensing of microfinance banks. This is because CBN was giving microfinance bank license without proper regulatory and supervisory requirement. This situation led to the proliferation of microfinance banks without complying to the regulatory issues like regular rendition of reports to Central Bank and keeping proper book of account.

This development triggered widespread criticisms on the microfinance model by depositors and customers of the affected microfinance banks. The Nigerian Deposit Insurance Corporation (NDIC) promised full protection for depositors and publishes regularly depositors that are yet to collect their claims. However the nature of microfinance clients makes the NDIC promise mere window dressing as some of them can not read nor write let alone have access to national dailies.

With such policy vacillation, the ability of micro finance banks in achieving the national integrated rural development plan in the Nigerian economy is not certain and so constitutes a very good research area. The essence of this study is to fill this research gap.

1.3       Objectives of the Study

The major objective of this study is to investigate the impact of microfinance on rural economic growth in Nigeria. To achieve this objective, the study strives to fulfill the following specific objectives.

  • To examine the impact of microfinance activities on agricultural contribution to gross domestic product in Nigeria.
  • To evaluate the impact of microfinance activities on rural savings in Nigeria.
  • To assess the impact of microfinance activities on rural poverty in Nigeria

1.4       Research Questions

The following are the research questions which this study seeks to answer.

  • To what extent has microfinance activities impacted positively and significantly on agricultural sector contribution to Nigeria’s gross domestic product.
  • To what extent has microfinance activities impacted positively and significantly on rural savings in Nigeria.
  • To what extent has microfinance activities impacted positively and significantly on rural poverty reduction in Nigerian.

1.5       Research Hypotheses

In line with the objective of the study, the following hypotheses were formulated.

(1)  Ho:Microfinance banks activities do not have positive and significant impact on  agricultural sector contribution to Nigerian’s gross domestic product.

Hi:Microfinance banks activities have positive and significant impact on agricultural sector contribution to Nigerian’s gross domestic product.

(2) Ho: Microfinance banks activities do not have positive and significant impact on rural savings in Nigeria.

Hi: Microfinance banks activities have positive and significant impact on rural savings in Nigeria.

(3) Ho:Microfinance banks activities do not have positive and significant impact on rural poverty reduction in Nigeria.

Hi:Microfinance banks activities have positive and significant impact on rural poverty reduction in Nigeria.

1.6       Scope of the Study