CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The study presents empirical findings on the impact of Microfinance (MF) on poverty alleviation in Nigeria. poverty is the number one problem in the world today as depicted by the following startling statistics: three billion people live below US$2 per day (World Bank, 2003); one and half billion people live below US$1 per day; 70-90 per cent of people in the developing world are poor; poverty is number one of the eight Millennium Development Goals (MDGs); and 75 per cent of the world poor are women. It seems as if all the strategies applied in the past to fight poverty have proved ineffective, but the world seems to have found a most promising strategy.
Poverty is the condition in which a person is deprived or lacks the essentials for a minimum standard of well-being. A state of being without, often associated with needs, hardship and lack of resources.
Informal saving and credit unions have operated for centuries all over the world. In the Middle Ages, for example, the Italian monks had created the first official pawn shop (1462 AD) to counter usury practices. In 1515 Pope Leon X authorized pawn shops to charge interest to cover their operating costs. In the 1700s, Jonathan Swift initiated the Irish Loan Fund System, which provided small loans to poor farmers who had no securities. It is on record that the fund gave credit to about 20 per cent of all Irish households annually. In the 1800s, the concept of the financial cooperative was developed by Friedric Wilhelm in Germany. By 1865, the Cooperative movement had expanded rapidly within Germany and other European countries, North America and some developing countries (Bright, Helms, 2006). In early 1900s, adaptations of the models developed in the preceding century appeared in some parts of rural Latin America (Bright and Helms, 2006). Efforts to expand access to agricultural credit, in Bolivia for example were made unsuccessfully as the rate charged was too low and banks failed. By early 1950 – 1970, experimental programmes were on stream to extend small loans to groups of poor women to enable them invest in micro business. These experiments were initiated by the Grameen Bank of Bangladesh, ACCION International in Latin America and the Self-Employed Women’s Association Bank in India (Little, Field, Morduch and Hashemi, 2004).
The term Microcredit began to be replaced by microfinance in the early 1990. By that time the term had started to include savings, and other services such as insurance and money transfers (Basu et al, 2000).
Microfinance is the provision of financial services, such as loans, savings, insurance, money transfers, and payments facilities to low income groups. It could also be used for productive purposes such as investments, seeds or additional working capital for micro enterprises. On the other hand, it could be used to provide for immediate family expenditure on food, education, housing and health. Microfinance is an effective way for poor people to increase their economic activity and thus reduce poverty. It enables poor people to manage their limited financial resources, reduce the impact of economic shocks and increase their assets and income (Robinson, 2001).
Microfinance is no longer an experiment or a wish, it is a proven success. It has worked successfully in many parts of the World – Africa, Asia, Latin-America, Europe and North America. It is safe and profitable; indeed it is the oldest and most resilient financial system in history. The key issues in Microfinance include the realization that poor people need a variety of financial services, including loans, savings, money transfer and insurance which Microfinance provides. It is a powerful tool to fight poverty through building of assets and serving as an absorber against external ties and financial shocks. Microfinance involves building of financial sub-system which serves the poor and its architecture could be easily integrated into the financial system of the nation.
The other key issue of Microfinance is the fact that it can pay for itself and should do so if it is to reach a large number of poor people. Microfinance is not limited to only micro-credit; it is inclusive of other financial services, such as micro-insurance, money transfer and savings. Furthermore, donor funds are meant only to support and assist Microfinance institutions and not compete with them. In the developed world, leaders talk about the poor and how to alleviate poverty. One hears this often at political and conferences across Europe and other parts of the World. There are also talks of strategies of equitable trade, debt relief, subsidies and aid flows etc. It has become clear that the ultimate strategy for the World to meet the needs of the poor is through microfinance which gives them access to financial services to enable them make everyday decision on: payment of education fees; payment for food and shelter; meet health bills and meet unforeseen finance needs resulting from flood, fire, earthquake, etcetera. Microfinance may not be able to solve all the problems of the poor, but it certainly puts resources in their hands in order for them to live an enhanced standard of life. Microfinance has globally achieved great accomplishments over the last 30 years. It has shown that poor people can be viable customers and that microfinance can create strong institutions which focus on them. No doubt Microfinance has strongly attracted the interest of the private sector as is evidence d in the investments being made by that sector.
The micro finance policy was lunched 2005. The major thrust of the policy was to enable the poor and low income earners of the society escape poverty. It is meant to economically empower communities, households and individuals through a sustained well-coordinated prog of poverty eradication (Ugani and Dike 2013)
Microfinance has been successful in reducing the rate of poverty In Asia notably bangaladesh, Bolivia and peru (hulme1996). In Africa the story is mixed. Given the important role, microfinance plays in poverty reduction in the world, the study attempts an appraisal of its role in Nigeria.
1.2 Statement of the Research Problem
Despite the efforts of the government reduce to poverty and unemployment, the rate of poverty in Nigeria remains very high (Okafor, 2014). This situation reflects years of failure at different levels of the government. Microfinance institutions have being in Nigeria for 25 years with aim of addressing some market failures and proving financial services to low income groups but these efforts proved abortive due to mismanagement characterized by corruption.
Corruption it is sad, is the single largest problem of Nigeria which has placed the wealth of the country in the hands of a few and which by so doing has made employment a non-existing phenomenon and this led to the assertion that unemployment is the root cause of poverty. To reduce unemployment and poverty, the government once more in 1997 created FEAP (family economic advancement programme) to build cottage industries in over 100,000 communities I Nigeria. A laudable programme which was denied by corruption and failed before it was finally scraped by the government. The community banks which were also created suffered the same fate and failed due to lack of adequate capital, fund, management and poor regulatory framework.
Also, the problem observed is the inability of borrowers of microfinance bank to repay their loans as at when due. This is mostly attributed to the high rate of poverty in the country which makes borrowers divert loans into other areas such as feeding, payment of bills, school fees, hospital bills and other pressing issues instead of using it for the intended business purpose which would have in the long run created an avenue for the repayment of the loan and also provided for the pressing needs of the household.
Micro financing still has some important gaps to fill in order to achieve the desired credit delivery to the upcoming entrepreneurs, small scale enterprises and the active poor in order to boost the employment rate ameliorate poverty.
1.3 Objectives of the Study
The main objective of this study is to examine the impact of Microfinance on poverty alleviation in Nigeria. The specific objectives include the following:
- To examine the roles of microfinance towards the dispersion of credit among the working poor in Nigeria.
- To assess the extent to which microfinance institutions have successfully helped the poor to improve their standard of living.
- To assess the impact of microfinance on the growth of small and medium scale enterprises in Nigeria.
1.4 Statement of Research Hypotheses
The main and specific objectives of this study have been specified in the preceding section. The associated research hypotheses are as follow:
(a) Ho: MFBs have not been potent instruments in the dispersion of credit among the working poor in Nigeria
Hi: MFBs have been potent instruments in the mobilization and dispersion of credit among the working poor in Nigeria
(b) Ho: Microfinance Institutions have not successfully helped the poor to improve their standard of living.
Hi: Microfinance Institutions have successfully helped the poor to improve their standard of living.
(c) Ho: Microfinance Institutions have not impacted on the growth of small and medium scale enterprises in Nigeria
Hi: Microfinance Institutions have impacted on the growth of small and medium scale enterprises in Nigeria.
1.5 Significance of the Study
The significance of this study cannot be over emphasized. Poverty is pervasive in our society and attempts at alleviate it have not yielded the desired results. Therefore, it is necessary to review the severity of poverty in the country with a view to assessing how microfinance institutions could help to reduce the incidence. It is also necessary to understand how microfinance institutions could contribute to economic development of the nation, by enhancing the productive capabilities and welfare of a largely distressed/vulnerable segment of the society.
The study is also relevant for researchers who would like to carry out more studies on the subject. It is also relevant to policy makers, microfinance banks and clients of microfinance banks.
1.6 Scope and Limitation of the Study.
The study targets the customers of MFIs between the ages of 18 and 60 who are gainfully employed and can repay loans. It has been discovered that the ability of women to borrow, save and earn income has enhanced their confidence and they are more able to confront other systemic inequalities (Little Field, Morduch and Hashemi,2004). However, the study is limited to local Microfinance institutions and how they constitute effective strategies for poverty alleviation and economic development in Nigeria.
