The Impact Of Micro Credit On Poverty Alleviation In Nigeria (A Case Study Of Lapo In Ogun State)
The study presented empirical findings on the impact of micro credit on poverty alleviation in Nigeria (a case study of LAPO in Ogun state). It also examined Microfinance as key to poverty alleviation and economic development. It assessed the extent to which Microfinance Institutions had successfully helped the poor to improve their standard of living and social status. The study employed descriptive statistics in order to make tentative predictions concerning outcome variable. This study establishes that Microfinance Programme have impacted the businesses and lives of the beneficiaries (Microfinance Clients) in several positive ways particularly in their economic circumstances. It also gave them access to essential life-enhancing facilities and services. It suggested that Microfinance Institutions in Nigeria should seek long- term capital from the Pensions and Insurance companies so that they can grant larger volumes of loans to greater number of their clients. They should also strive to put in place procedures, policies and products that would ensure gender responsiveness and equity. In order to enhance healthy competition among the Microfinance Institutions, there should be a mandatory policy for the Microfinance Institutions to publish their interest rates and other charges at frequent intervals. This would improve the levels of efficiency of the Microfinance Institutions.
Table Of Content
- Title Page
- Table of Content
- 1.1 Background To The Study
- 1.2 Statement Of The Research Problem
- 1.3 Research Questions
- 1.4 Objectives Of The Study
- 1.5 Statement Of Research Hypotheses
- 1.6 Significance Of The Study
2.0 Literature Review
- 2.1 Introduction
- 2.2 Microfinance: A Review Of Background, Operations And Structure/Models
- 2.3 Roles Of Microfinance In Micro, Small And Medium Enterprises (MSMEs)
- 2.4 Interventions Of Non-Governmental Organizations (NGOs)
- 2.5 Funding Sources For Microfinance Banks
3.0 Research Methodology
- 3.1 Research Design
- 3.2 Population And Sample Design
- 3.3 Sampling Technique
- 3.4 Data Collection And Source Of Data
- 3.5 Data Analysis
4.0 Results And Discussion
5.0 Summary Of Findings And Recommendations
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendations
1.1 Background To The Study
The study presents empirical findings on the impact of Microfinance (MF) on the welfare and poverty alleviation in Southwest Nigeria. As indicated in the literature, poverty is 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, 2001); 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.
From the historical literature, informal saving and credit unions have operated for centuries across 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 security 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 serve the poor and its architecture could be easily integrated into the financial system of the nation.
The other key issues of Microfinance are 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 children school 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 private sector investors. However, the following challenges, among others, face Microfinance institutions: They need to increase the scale of financial services to the poor; they need to reach out and seek the poor wherever they are and give them access to finance. The Grameen Bank of Bangladesh has set a good example in this direction by allowing credit and other services to cost less for the poor and train staff to be uniquely suitable to Microfinance business. The latter enhances efficiency and sustainability of the sector; and develops and tailors products to meet the needs of the clients – the poor. This study presents empirical findings on the impact of microfinance on welfare and poverty alleviation in Southwest Nigeria.
1.2 Statement Of The Research Problem
Before the 1970s, the Nigerian experience in Microfinance was limited to Self Help Groups, Rotating Savings and Credit Associations, Cooperative Unions Community, Savings Collectors and Local Money Lenders. They were all informal and largely unregulated. They were mainly Micro-Credit savings mechanisms. Their strengths were associated with good repayment records due to peer pressure and other cultural mechanisms. However, their weaknesses lay in low level access to capital and limited range due to informal non-structured frame work.
Between 1970 and 1990, there were several government initiatives in the form of Rural Banking Programme (RBP); Sectoral Allocation of credit by Central Bank; Agricultural Credit Guarantee Scheme (ACGS); Nigerian Agricultural and Co-operative Bank (NACB) and the National Directorate of Employment (NDE) etc. These efforts were largely incoherent, and mainly targeted towards enhancing subsidized credit in agriculture and a few other sectors of the economy. They were not sustainable as a result of poor repayment records and inefficient administrative structures.
In the 1990s, the Federal Government embarked on other initiatives, such as the Peoples Bank, (1990-2002), Community Banks, Nigerian Agricultural Insurance Corporation and National Poverty Eradication Programmes and the Family Economic Advancement Programme. These were focused on rural and community small-scale financing. They were all short lived and unsustainable as a result of poor government policies and corporate governance.
Between 2000 to date, there have been other initiatives such as the merger of the Peoples Bank (PB), Family Economic Advancement Programmesme (FEAP), and NACB into the National Agricultural, Cooperative and Rural Development Bank (NACRDB). Then came the National Economic Empowerment and Development Strategy (NEEDS), and the launch of Microfinance Policy in 2005. These are more interactive initiatives resulting from wider consultations with stakeholders with the hope of better success than their predecessors.
The fact of the matter is that there are too many poor in South West Nigeria who require micro/small financial services such as Credit, Insurance, Money transfer etcetera in order to engage actively in productive activities and improve their standard of living. Paradoxically, governments across the world, particularly in Nigeria over the years, have not been able to adequately help the poor in spite of all the rhetorics and several failed poverty-alleviation project. Since the discovery that Microfinance can help the poor to access credit and other financial services that will ensure better life for them, a lot of works have been carried out. It is this new strategy that this research intends to explore to establish the developmental relationship between microfinance and poverty alleviation, taking a queue from jurisdictions of the world.
MFIs are recent phenomenon in the Nigerian economy. It came to light in 2005 when it replaced the Community Banks. Although many studies have examined the issue of poverty alleviation in Nigeria, not many of them have assessed the impact of micro credit on poverty alleviation. This study seeks to fill this gap.
1.3 Research Questions
The issues of poverty alleviation, economic development and Microfinance have become major policy discourse globally. To this extent the research work has generated a set of questions which include the following:
- To what extent has the MFBs served as instruments of credit mobilization and dispersion among the working poor in Nigeria?
- How can Microfinance really get the poor out of their poverty?
- How has Microfinance enhanced the growth of micro and small-scale enterprises in Nigeria?
1.4 Objectives Of The Study
The main objective of this study is to examine the impact of micro credit on poverty alleviation in Nigeria suing a case study of LAPO in Ogun State.
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.
1.5 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:
- 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
- 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.
- 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
1.6 Significance Of The Study
The significance of this study cannot be over emphasized. Poverty is pervasive in our economy and attempts to 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.
Summary Of Findings And Recommendations
Microfinance is a key strategy for poverty alleviation. Inadequate access to credit by the poor has been identified as one of the contributing factors to poverty. Microfinance’s achievements in poverty reduction have been celebrated worldwide. Since the last decade in Nigeria, Microfinance schemes have proved to be a successful adaptation to the domestic credit markets. Microfinance institutions have helped to relax the constraints on the poor’s access to productive capital, and consequently, contributed to break the various circles of poverty caused by low income and low investments.
This study examined the contributions of Microfinance institutions to poverty reduction in Southwest Nigeria, using both primary and secondary data collected from Microfinance institutions (MFIs) and randomly selected customers (micro, small and medium enterprises) of the same Institutions.
The study tries to contribute to the existing literature by investigating the impact of Microfinance on welfare and the success of micro, small and medium enterprises (MSMEs) and subsequent reduction in poverty. In analyzing the impact of MFIs on enterprise performance, the study posited economic relationship between enterprise performance and some relevant explanatory variables. The study employed different performance indicators such as levels of profit (LOP), employment (EMPL) and return on assets (ROA). Other explainable variables depicting enterprise characteristics of the Micro-entrepreneurs were also used. These include age of enterprise, the gender, the educational qualification, the business type, loan frequency, age of business, business location, loan amount, marital status and training before loan.
A total of 41 banks operating in Lagos and Ogun States, Southwest Nigeria were covered in the study. Twelve (12) of the banks sampled operate the unit model of MFB i.e. community-based
banks while 27 of the banks surveyed are state-wide banks which are permitted to operate in all parts of the state in which they are registered. Two out of the 41 banks surveyed, however, did not declare their scope of operations. The banks were randomly selected and 10% of the entrepreneurs-customers of the banks were selected through the stratified random sampling approach yielding 321 respondents.
The study examined the nature and significance of Microfinance banks‟ services to customers paying particular attention to the MFIs‟ basic intermediation functions of funds mobilization, credit allocation and distribution among respondents. The volume and determinants of loan demand were also investigated. The study also explored the economic analysis of of loan demand using the linear probability model. The study further examined the influence of Microfinance on personal welfare of respondents.
The advocation of microfinancing was triggered by the insensitivity of the conventional formal finance sector. The essence was to reach the overwhelming population of the poor and to assist in the drive to alleviate poverty. The microfinance movement has captured the imagination of academics, policymakers, and practitioners. It has demonstrated possibilities for lending to poor households and has transformed discussions on poverty alleviation to realism. The last twenty years have seen significant advances in the provision of financial services to improve economic development and eradication of poverty. This includes providing the financial means to access credit, and start small businesses, with the potential to enhance community, local and national development. It has been proven that when microfinance is properly harnessed and supported, it can scale-up beyond the micro-level as a sustainable part of the process of economic empowerment by which the poor can lift themselves out of poverty.
Microfinance should not be seen as a universal remedy for poverty and related development challenges, but rather as an important tool in the mission of poverty alleviation. Poverty is a multidimensional problem, embedded in a complex and interconnected political, economic, cultural, and ecological system. Owing to poverty’s large scope and multiplicity of actors, there is no single guaranteed approach to its eradication. As a result, solutions are as multifaceted as the causes. Problems and solutions are not isolated phenomena, but occur within an interconnected system in which actors and actions have reciprocal consequences. As microfinance becomes more widely accepted and moves into the mainstream, the supply of financial services to the poor will likewise increase, improving efficiency and outreach, while lowering costs. This, in turn, can have a multiplier effect on people’s standard of living. Perhaps the greatest contribution of microfinance is that it empowers people, by providing them with confidence, self-esteem, and the financial means to play a larger role in their development. The potential of microfinance far exceeds the micro-level, scaling-up to address macro-problems associated with poverty eradication.
The major findings noted earlier showed that the determinants of loan demand are the type of businesses which the entrepreneurs engage in, and the level of education attained by the entrepreneurs. Male gender has higher propensity to demand for loan. The results also show that MFIs: (i) increase entrepreneurial activities through loan granted, utilized for business development, (ii) raise income of MFI clients, (iii) increase consumption of all durable commodities, (iv) increase children education, (v) enhance acquisition of land/asset and, (v) enhance social welfare in the community. These findings suggest that microfinance is one of the successful critical interventions for empowering the poor people.
In conclusion, the study has established that microfinance programmes have impacted the businesses and lives of the beneficiaries in several positive ways, particularly in their economic circumstances and access to essential life-enhancing facilities and services. The study has also shown that the number of years a client opened account with MFI, religion, place of business location and self employment are not determinants of loan demand. More research is needed in the area of impact assessments so as to inform the designers of programmes on measures that will ensure maximum benefits both to the MFIs and their clients.
Among other benefits of microfinance, the following are key:
- In a country where poverty is prevalent like Nigeria, government can use MFIs as a tool for poverty alleviation.
- MFIs can foster employment generation through development of entrepreneurial activities in particular for the poor.
- In countries with formal financial markets like we have in Nigeria, MFI can be used as a way to reach the huge un-served markets which mainly consists of the poor.
5.3.1. For Microfinance Banks
Higher education, having been found to increase the income of the MFI clients: The MFIs clients should therefore, be encouraged by the MFIs to improve on their current level of education by engaging in adult education or life-long learning as this will have the potency to increase their level of income;
MFBs should seek long term capital from the Pensions and Insurance Companies in the country. This will enable them grant larger volume of loan and to greater number of people who will improve their outreach level;
MFIs should ensure and strive to put in place procedures, policies and products that will enhance the participation of both men and women in their various programmes in order to achieve gender responsiveness and equity; and
The MFIs should design appropriate products that are flexible enough to meet the different needs of the poor for both production and consumption purposes.
5.4.2 For Government
- Government should urgently tackle the problems of infrastructural development and maintenance. These include electricity, water and efficient transportation system which impact greatly on the standard of living of the people;
- There should be provision of incentives by government to sustain MFIs in order to further extend their services to the rural areas;
- Capacity building of MFIs in Nigeria should be mandatory so as to develop appropriate policies that will enhance sustainability and stability
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