The Impact Of Microfinance Bank In Poverty Reduction
Poverty reduction is a function of many factors which include funding by microfinance banks. The effort to transform innovations into economic goods certainly would require reasonable level of funding which appears elusive due to global economic recession. Accessing credit from conventional money deposit banks has proved irrational due to its attendant cost, hence the need for micro financing which is deliberate initiative to enhance the performance and sustenance of poverty reduction. This study therefore investigated the impact of microfinance banks in poverty reduction with a survey of two hundred sampled population. Data collected with a well-structured questionnaire was analysed with descriptive statistics while hypothesis formulated was tested with correlation analysis.
1.1 Background of the Study
A robust economic growth cannot be achieved without putting in place well focused programme to reduce poverty through empowering the people by increasing their access to factors of production.
The latent capacity of the poor for entrepreneurship would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant, increase employment opportunities, enhance household income and create wealth. Micro-financing has existed for years before the introduction of conventional banking in Nigeria and the later part of nineteenth century. (Ekot, 2008)
The traditional Nigerian society has a system of group savings and assistance to one another. The practice was that a group of people who had needs for some form of capital or lump sum to execute a particular project which they could not raise adequate savings on their own, usually come together to form a savings group. The group may be named after the leader who is usually the initiator of the venture. The traditional microfinance institutions provideaccess to credit for the rural and urban low-income earners. These are mainly the informal self-help groups such as Isusu,women association like one obtainable during popular August meetings,Umu-ada progressive women association. Other providers of microfinance services include savings collectors and co-operatives.
(CBN brief, 2005)
The unwillingness and inability of the formal financial institutions is to provide financial services to the urban and rural poor, coupled with unsustainability of government sponsored development financial schemes, contributed to the increase in number of private sector led micro finance in Nigeria. Thus, before the emergence of microfinance institutions, informal microfinance activities flourished all over the country. The Central Bank of
Nigeria (CBN) as at end of December 2009 gave an approval to 840 microfinance banks to begin operation in the country. (CBN briefs, 2008-2009).
Microfinance banking is about providing financial services to the economically active poor and low income household, who are traditionally not served by the conventional financial institutions.
These services include credit savings, micro-leasing, micro-insurance and payment transfers to enable them engage in income generating activities. (Asemota, 2002)
However, the microfinance policy launched on 15th December 2005 defined the framework for the delivery of these financial services on a sustainable basis to the micro, small and medium enterprises (MSMES) through privately owned microfinance banks.
The Non-governmental Organizations or Microfinance institutions (NGO-MFIS) are also expected to transform to microfinance banks. (Dinye, 2006) Existing Community banks and NGO-MFIS that want to convert and transform respectively to a microfinance bank but do not have the required minimum capital base can increase the share capital by capital injection, merger and acquisition. These would not only enhance monetary stability but also expand the financial infrastructural development of the country to meet the national financial system and provide stimulus for growth and development (Benson, 1985). It would also harmonize operating standards and provide a strategic platform for the evolution of microfinance institution, promote appropriate regulation, supervision and adoption of best practices. The establishment of microfinance banks has become imperative to serve the following purposes:
Improve, diversified and create a dependable financial service to the active poor, low-income earners in a timely and competitive manner that would enable them to undertake and develop long-term, sustainable entrepreneurial activities, mobilize savings for intermediation, create employment opportunities and increase the productivity of active poor and income earners in the country. Thus increasing their individual household income and capacity standard of living, enhance organized and systematic but focused participation of the poor in the social-economic development and resource allocation process. It will also provide veritable avenues for the administration of the micro credit programme of government and high net worth individual on non-resource basis. This policy ensures that state government shall delegate an amount of not less than 10% of their annual budgets for on-lending activities of microfinance banks in favour of their residents and render payment services such as salaries, pension for various tiers of government (Luck,2011).
1.2 Statement of the Problem
Nigeria consists of different classes of individuals, who are either enterprising or industrial low class that account for over half of the population who do not have access to formal banking services. Savings have continued to grow at a very low rate particularly in the rural areas of Nigeria. One of the problems brought to bear is the inability of rural dwellers to channel their savings into banks. Most rural people keep their resources under their pillows. Thismethod of keeping savings is risky because it might be stolen, lost or wasted in extravagant spending. Moreover, returns which would have accrued to the depositors in form of interest are forfeited.
The contribution of government to alleviate poverty through the establishment of microfinance banks appears a little progress. Inspite of the establishment of microfinance banks, it was observed that most people are not able to obtain loan. This is attributed to a number of challenges such as the high level of interest rate, lack of collaterals required by the commercial banks before loans can be granted which necessitated the establishment of Microfinance to address these economic imbalances. If the banking industry continue to meet the demands of Nigerians especially the rural poor, this shows that there is a gap which need to be filled and this can be done through the contribution of government by establishing more microfinance banks in Nigeria to help in alleviation of poverty.
Another problem observed is the inability of prospective borrowers of most microfinance banks to repay their loans as at when due. This may be attributed to high rate of poverty in the country. The high rate of poverty is noticeable in such area such as unemployment, high rate of inflation, non-payment of salaries, mismanagement of loan granted to rural dwellers, infrastructuraldeficiencies, such as power, road network, etc. and all kinds of political, economic and bureaucratic bottlenecks.. Also Nigerian economy consists of individuals who feed from hand to mouth. The loans when granted are channeled to other areas such as feeding, payment of bills, school fees, hospital bills and others instead of using it for the intended business purpose.
1.3 Objectives of the Study
The broad objective of this study is to find out the impact of microfinance banks in the alleviation of poverty in
Nigeria. They are as follows:
- To find out the rate at which rural dwellers deposit their money in microfinance banks rather than putting it under pillows.
- To find the contribution of government in alleviation of poverty through the establishment of microfinance banks.
- To find out the rate at which rural dwellers are able to repay their loans.
1.4 Research Hypothesis
The following hypotheses have been developed around which thisresearch would revolve:
- H0: there is no positive relationship between Micro-credit and improved living standards of recipient of these micro credits in Nigeria
H1: there is a positive relationship between Micro-credit and improved living standards of recipient of these micro credits in Nigeria
- H0: Microfinance borrowers react negatively towards loan repayment.
H3: Microfinance borrowers react positively towards loan repayment.
1.5 Significance of the Study
This study will benefit the following groups:
The findings of this study will be useful tothe Government in that it will help them to know the importance ofMFI thereby knowing ways of improving the quality of their services. The result of the study will also bring out the areas that need improvement and make suggestions for improving on them.
It will also be useful to those planning to open Microfinance banks to know the usefulness of microfinance banks as catalyst or stimulus for poverty alleviation in rural settings as way of developing rural banking.
Students also will find it very useful in some research work on project issues by boosting their knowledge about microfinance banks in the alleviation of poverty. Those who need referencing material materials on role of micro financing in alleviating poverty will find this study useful.
1.6 Scope of the Study
The research on the impact of microfinance banks in poverty reduction which requires a thorough analysis of the Oha Microfinance Bank, Ogui Road branch in Enugu State.
1.7 Limitations of the Study
In the course of this research work, the researcher encountered different problems such as:
- Inadequate finance: As a student, financial difficulties limit the researcher from studying the activities of all banks and also limit the volume of data collection; e.g. the funds available will not be enough in transporting and facts findings.
- Time constraint: There was no time to conduct an enormous research.
- Inability to get access to some Microfinance banks to get more information about their records and some other useful information about the work also limit the research data collections.
- Environmental constraint: The environment in which the research work was written restricted the researcher from going out and so the researcher was faced with the problems of how to reach out the field of research and coordinate activities as planned.
1.8 Definition of Terms
Microfinance Banks are licensed financial institutions meant to serve the un-served, but economically active clients in the rural and peri-urban areas by providing diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, which would enable them to undertake and develop long-term, sustainable entrepreneurial activities and mobilize savings for intermediation (CBN, 2005).
Microfinance Institutions are organizations whose activities consist wholly or in significant part, of the provision of financial services to micro entrepreneurs.
By definition microfinance is described as the provision of appropriate financial services to significant numbers of low income, economically active people with an end objective to alleviate poverty (Ledger wood, 1998).
These are servies rendered by microfinance banks and these icludes; provision of cheap or low interest loan, savings, and advisory services, training services, micro insurance and microcredit.
Microcredit is commonly defined in terms of loan amount as a percentage of average per capita income. In the context of Nigeria, with a GDP per capita of N42,000 (about $300) in 2003, loans up to N50,000 (around $350) will be regarded as micro loans (UNDP, 2009 as cited in Dunn, 2012).
Productivity is an overall measure of the ability to produce a good or service. More specifically, productivity is the measure of how specified resources are managed to accomplish timely objectives as stated in terms of quantity and quality.
Summary Conclusion and Recommendation
It is pertinent to note that this research was aimed at finding out the positive impacts of micro finance banks to the Nigerian economy, thus the topic “the impact of micro finance banks in poverty reduction”.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges associated with micro finance banks in Nigeria.
From the analysis of the study, H0 was rejected and H1 as the computed x2 is more than the critical value or vice versa. Thus, the computed x2 (23.67) is greater that the critical value of (12.59), thus, we accept the alternative hypothesis H1. This shows that micro-credit availability has a positive impact on living standards of recipient of these micro credits in Nigeria. The reason for this assertion is that when people with micro enterprises have access to credit, they are able to expand their businesses, employ more people and also not only improve their living standards, but also, improve the living standards of people they employ. Also, the credit they obtain imposes on them responsibilities of repayment which forces them to save and thus, forms part of accumulated capital.
The implication of this decision is that there are difficulties encountered by the poor or low income earners in obtaining loans from micro credit institutions. This maybe as a result of these microfinance banks not having confidence on these low income earners in repaying back the loan collected; or these low income earners not being able to meet the requirements of these microfinance banks in getting a loan, etc.
Finally, the result obtained from the study revealed that the levels of awareness of Government micro credit institutions among the low income earners are really quite low. This shows that the federal government of Nigeria is not doing enough on the awareness of its microfinance programmes to the poor. This is evident in the Nigerian economy as most rural areas in the economy don’t have enough effective microfinance institutions operating in those areas. When most poverty stricken persons want to apply for loans and advances from these microfinance institutions, they have to travel far distances to urban centers to apply for such loans and advances.
This study has established that microfinance is indeed a strategy of poverty reduction. The scheme of microfinance has been found to be an effective instrument for lifting the poor above the level of poverty by providing them with increased self-employment opportunities and making them credit worthy. It is a progressive strategy for Nigeria to have developed strong linked information by merging the formal, semiformal and informal institutions that have in the past purveyed credit to the poor under one umbrella, NACRDB. With some effort, substantial progress can be made in taking MFIs to the next orbit of significance and sustainability. There is a need for designing financial sustainable models that increase outreach and scale upoperations for the poor in Nigeria. People residing in the villages are still unaware of banking policies and credit system, so NGO should communicate to them and share their view with villagers. Banks should convert and build up professional system into social banking system for the poor. The Federal Government and State Governments should also provide support for capacity building initiatives and ensure transparency and enhanced credibility through disclosures. As financial inclusion agenda is becoming a global pursuit, Nigeria would need to explore strategies that are working in other countries and adopt them in a concerted manner.
The point here is that since micro finance has a greater potential of alleviating poverty by promoting the economic activities of the poor, engendering employment of resources, raising their income levels, the right approach should be pursued. The Government should ensure that the targeted population is reached, there should be adequate sensitization, the model of operation should be divorced from all political interests whatsoever and the government should put the right machinery in place to ensure proper regulation/ control. Specifically, the following recommendations are important:
- Focus of micro finance programmes in poor communities for it to be meaningful;
- Having a comprehensive inventory of successful micro finance institutions so that priority can be given to those who have set the pace for the needed support.
- A massive information / educational drive on the importance of micro finance in fighting widespread poverty should be launched in the country, for, as the saying goes, “knowledge is power”. If the poor are to ever come out for their poverty, they need to be adequately informed and given the chance to demonstrate their risk taking abilities and create wealth for themselves.
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