AN ASSESSMENT OF THE PERFORMANCE OF MICRO FINANCING BANK IN POVERTY REDUCTION IN NIGERIA

AN ASSESSMENT OF THE PERFORMANCE OF MICRO FINANCING BANK IN POVERTY REDUCTION IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1         Background to the study

Microfinance Bank (MFB) has evolved as an inclusive economic development approach intended to benefit especially the poor and low-income, particularly those in the rural areas where poverty appears to be entrenched and is deep rooted. This approach is intended first to alleviate poverty in the short run and eradicate it to a large extent in the long-run as provided for in the Millennium Development Goals (MDGs) and Vision 20-2020 documents of the Federal Government of Nigeria.

MFB refers to the provision of financial services to low-income clients or economic active, including the self-employed and low-income earners in both urban and rural areas. These clients are often traders, street vendors, small scale farmers, service providers (hair dressers, rich Shaw drivers, etc), artisans and small producers such as black smiths and seamstresses-entrepreneurs. These groups of people enjoy small credit lines ranging from N5,000.00 to N200,000.00 Some MFBs provide insurance and payment service in addition to financial and social international such as group formation, development of self-confidence, financial literacy and management capabilities (Von Pischke, 1991).

To Von Pischke (1991), MFB is not just banking, it is a development tool. Activities usually involve: Non collateral loans typically for working capital, informal appraisal of borrowers and investments, collateral substitutes, such as group guarantees or compulsory savings, access to loans based on repayment performance, streamlined loan disbursement, monitoring and secured saving products.

Authors like Anyanwu (2004), Akinboyo (2007) and Snow (2004 indicate that the operations of MFBs have grown phenomenally in the last decade in Nigeria, driven largely by expanding informal sector activities and the reluctance of conventional banks to serve the emerging micro enterprises. The studies also revealed that the sub sector faces a lot of challenges which include sustainability of government sponsored development financial schemes and policy framework required to regulate and standardize its operation, accessing medium to long term sustainable commercial sources of fund, increase mobilization of savings, and shifting a good proportion of credit portfolio to the promotion of real sector activities, especially in agriculture and manufacturing. These challenges contributed to the growth of private in Nigeria (Anyanwu, 2004). The core objectives of MFB therefore are to:

i.         Help very poor households meet basic needs and protect them against risks.

ii.       Improve household economic welfare and enterprise stability or growth.

iii.      Empower women, thus promoting gender-equity and improving household well-being.

iv.      Eliminate economic dualism by integrating the rural poor economy into the urban rich economy.

v.        Mobilize savings for intermediation and create employment opportunities.

vi.      Provide financial literacy and information for the uneducated and unskilled industry.

Even though the number of poor and low income people that gain access to microfinance services in Nigeria have grown between 25% and 30% annually over the past four years (CBN, 2009), the demand for the services is largely unmet. Estimate of the global demand ranges from 400 million to 500 million households of which only around 30 million are reported to have access to sustainable microfinance services (Snow, 2007). In Nigeria, 60% of the population is said to be under-banked and are prospective customers of the microfinance institutions (Dijk, 2010). This and other reasons have given rise to the sporadic growth of MFBs in Nigeria.

To achieve a robust economic development, the government initiated well-focused programs to finance microenterprises on a sustainable basis. These were intended to increase their access to credit and other financial service and as such create wealth for the less privilege in the economy and reduce poverty. Some of the programs included: Directorate of food, Roads and Rural Infrastructure (DFRRI), Better life Rural Women, Family Support Programme, Family Economic Advancement Programme (FEAP), National Directorate of Employment (NDE), National Poverty Eradication Programme (NAPEP), People’s Bank Community Bank and now the Microfinance Bank (Akinboyo, 2007).

The operations of MFBs, in Nigeria have growth phenomenally in the recent past. There is however fear that the number of beneficiaries of MFBs operators in an insignificant proportion of over 60 people that are in need of microfinance services (Anyanwu, 2004). Even where they are operated the practice and result appears never in consonance with the propounded theories. There is thus, a palpable fear in the midst of so many identified short comings in the operations for the present rural development intervention effort in MFBs that achieving its obligations is still a mirage. The on-going Central Bank of Nigeria intervention in the operations of 224 microfinance banks is a further confirmation that achieving the goal of microfinance banks in Nigeria is still a desire very far from reality.

1.2        Statement of the Problem

Financial services are the backbone of everyday economic activities. To stimulate economic development, one of the essential conditions is a functional financial system. Poor people need basic financial services to manage the little money they have and depend on for day to day life. From the least developed to emerging and developed economies, leaders, opinionates, policy formulators and development professionals are promoting microfinance institutions as poverty alleviation tools. It is been discovered as sustainable development formula for the under banked and rural economy. The urban active poor and low-income are also benefiting immensely from the concept which makes it an inclusive finance.

As stated above, in Nigeria, several ranges of novel mechanisms were developed at different times to provide financial aid to the rural poor especially micro credit schemes (Akinboyo, 2007). It was discovered that most of these programs could not last long enough to achieve desired results.

In this dispensation, over 821 microfinance banks were licensed by CBN to provide the total mix that will bring to the door steps of the hitherto unbankables financial services (CBN, 2009). The effects of MFBs on poverty reduction in Nigeria is yet to be ascertained as more than 57% of Nigeria are still living below the poverty line (UNDP, 2007). Several posers come to mind at this juncture: will there be another agony of yet a defunct scheme? Can MFBs create opportunities? Redistribute income? And cause provision of basic human needs by creating financial independence for targeted population? It is at least 6 years that the law for the bank was made and it has witnessed ups and downs, prompting the questions people are asking. The available literature on microfinance bank has not bothered to review the effects of the scheme on poverty reduction in Nigeria. This work is set out to fill such gaps in literature by assessing the effects of MFBs on poverty reduction in Nigeria.

TABLE OF CONTENTS

Cover page   -        -        -        -        -        -        -        -        i

Declaration  -        -        -        -        -        -        -        -        ii

Certification          -        -        -        -        -        -        -        -        iii

Dedication   -        -        -        -        -        -        -        -        iv

Acknowledgement            -        -        -        -        -        -        v

Abstract       -        -        -        -        -        -        -        -        -        xi

Table of contents             -        -        -        -        -        -        vii     

List of tables          -        -        -        -        -        -        -        -        x

CHAPTER ONE: INTRODUCTION

1.1         Background of the study  -        -        -        -        -        1

1.2         Statement of the problem -        -        -        -        -        6

1.3         Objectives of the study    -        -        -        -        -        8

1.4         Research questions                   -        -        -        -        -        8

1.5         Research hypotheses       -        -        -        -        -        9

1.6         Significance of the Study -        -        -        -        -        9

1.7         Scope of the study  -        -        -        -        -        -        10

1.8         Organization of the study -        -        -        -        -        10

CHAPTER TWO: LITERATURE REVIEW

2.1     Introduction -        -        -        -        -        -        -        12

2.2     An overview of microfinance bank in Nigeria -        12

2.3     Social capital and informal finance groups    -        24

2.4     Microfinance as a rural development and              

poverty reduction intervention   -        -        -        -        28

2.5     Development finance institutions and

microfinance in Nigeria   -        -        -        -        -        32

2.6     Microfinance poverty alleviation in Nigeria    -        -        35

2.7     Microfinance bank policy, regulatory and

supervisory framework    -        -        -        -        -        41

2.8     Microfinance bank as an institution

development opportunity -        -        -        -        -        46

2.9     Microfinance bank and inclusive finance      -        -        49

2.10   Review of Empirical Studies      -        -        -        -        54

CHAPTER THREE: METHODOLOGY

3.1     Introduction -        -        -        -        -        -        -        61

3.2     Research Design    -        -        -        -        -        -        61

3.3     Population of the Study    -        -        -        -        -        62

3.4     Sample size of the Study  -        -        -        -        -        62

3.5     Sources of Data Collection         -        -        -        -        62

3.6     Data Analysis Techniques         -        -        -        -        -        63

3.7     Model Specification         -        -        -        -        -        -        64

3.8     Limitations of the methodology -        -        -        -        66

CHAPTER FOUR: DATA PRESENTATION, RESULT AND DISCUSSION

4.1     Introduction          -        -        -        -        -        -        -        68

4.2     Data Presentation and Analysis -        -        -        -        69

4.3     Test of Hypotheses -        -        -        -        -        -        80

4.4     Discussion and Interpretation of Results       -        -        82     

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1     Introduction -        -        -        -        -        -        -        86     

5.2     Summary of Findings      -        -        -        -        -        86     

5.3     Conclusion   -        -        -        -        -        -        -        87

5.4     Recommendations of the Study  -        -        -        -        88

5.5     Limitations of the Study  -        -        -        -        -        90

5.6     Suggestion for Future Research -        -        -        91

Bibliography -        -        -        -        -        -        -        92

Appendices  -        -        -        -        -        -        -        97

TOPIC: AN ASSESSMENT OF THE PERFORMANCE OF MICRO FINANCING BANK IN POVERTY REDUCTION IN NIGERIA

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