EFFECTS OF MEMBERSHIP HOMOGENEITY ON THE PERFORMANCE OF AGRICULTURAL MICRO-CREDIT GROUPS IN ENUGU STATE NIGERIA

Abstract

The study was conducted  in nine Local Government  Areas selected  from   Enugu State. Six five micro Credit Groups from each Area were randomly selected. This gave a total of forty-five (45) micro-credit groups. This was done using multi-stage sampling techniques. Sources of data were primary and secondary. Structured questioners  were  used  to  interview  respondents  to  generate  primary  data  while secondary  data were sourced  from relevant  publications.  Descriptive  statistics  and Ordinary Least Square Econometric techniques were used in data analysis. Majority of the group members, 31.4% belong to the age bracket of 40 – 49 years (middle age). Majority of the groups, 40% were composed of 10–15 individuals. Majority of the respondents, 64.4% travel about 200 meters to attend meetings. Factors determining repayment were homogeneity in gender, occupation, distance and residency as well as social cohesion. Based on the findings,  it was recommended that micro credit groups should be homogenous  with respect to gender, members should  be encouraged  to attend group meetings which should be made to be regular in order to build strong social cohesion, and groups should be composed of individuals living close to each other in order to enjoy information advantage.

CHAPTER ONE INTRODUCTION

1.1      Background Information

Agriculture in Nigeria, a developing economy, has suffered serious setbacks due to: under capitalization, poor credit disbursement procedures, inadequacy of credit institutions to cater for the needs of the teaming population of farmers and poor loan repayment possibilities among farmers (Ugo 1973, Oshontongun 1973).

Micro credit is about providing services to the poor who are traditionally not served by the conventional financial institutions (Upton, 1997). Credit agencies are frequently  classified  into two  groups:  formal  and informal  (Upton,  1997).  Formal institutions include banks and co-operative credit unions, while the informal agencies include  non-governmental  organizations  (NGOs),  money  lenders,  friends,  relatives and micro credit unions.

The formal financial system in Nigeria traditionally lend to medium and large entrepreneurs,  which are judged to be creditworthy,  and who can provide tangible collateral. They avoid doing business with the micro entrepreneurs and their micro enterprises because the associated cost and risk due to inability to provide collateral are considered to be relatively high (Anyanwu, 2004).

Informal credit institutions are characterized by flexible small operations and they operate mostly in a circumscribed area or a specific niche of the market. They tend to deliver personal services very close to the location of the borrower. They also tend to be non-bureaucratic and much more flexible in respect of loan purpose interest rates,  collateral  requirements,  maturity  periods  and debt rescheduling  (Ghatak  and Guinnane, 1999).

Formal financial system in Nigeria despite the government intervention by providing  a  multiplicity  of  credit  institutions  over  the  years,  have  proven  to  be inefficient and costly in the provision of financial services to the micro entrepreneurs. However,  several  types  of  informal  institutions  have  efficiently  serviced  a  wide variety of micro credit entrepreneurs. Micro credit institutions are mainly, Self-Help- Group (SHGs) Rotating  Savings  and  Credit Associations  (ROSCAs)  and Savings/Thrift Co-operative societies (Olomola, 2000).

Micro credit is one of the major tools used to extend credit with a view to alleviating poverty of many entrepreneurs in low-income countries. In an era of global economic liberalization, micro credit is widely viewed as an intervention that address important deficiencies of financial markets in terms of serving specific needs of the poor, by providing them with credit without collateral (Stigliz and Weiss, 1981). The provision of micro credit services improves the latent capacity of the poor for entrepreneurship, which enables them to be more self-reliant, increase in employment opportunities, enhance household income and create wealth.

Many micro credit agencies have sought borrowers to work together in small peer groups and these peer groups are also required by the lenders to assume responsibility   for   the   repayment   of   their   members   loan   in   time   of   default, consequently, future credits to all member (Soren, 2002). The joint liability systems employed  by peer  groups  can improve  financial  sustainability,  by inducing  group members to use their mutual interest, familiarity and understanding in performing the following roles: screening of fellow borrowers to retain creditworthiness, monitoring their use of borrowed funds and pressuring them to repay as well as providing mutual insurance (Ghatak, 1999).

The formal credit lending institutions always insist on collateral for the disbursement of loans. However, the German Bank experience demonstrated that collateral  requirement  should not be a limiting factor to accessing  credit by small holder  farmers.  Instead,  substitutes  such  as  group  lending  can  be  used  (Hossain,

1988).   Group   lending   involves   administration   of   credit   among   group   whose individuals  differ  in  character  and  reaction,  but  possess  a  common  interest  of benefiting   from  the  group  (Hulme  and  Mosley,   1996).  In  countries   such  as Bangladesh, Thailand and Malawi, where groups lending thrived very well, the key determinants of the success were homogeneity especially with respect to group social cohesion,  intra-group  risk  pooling  and repayment  performance  (Huppi  and  Feder, 1989).

The nature of membership composition is thus important for improved performance of groups, not only in terms of repayment, but also in terms of savings mobilization and building up social cohesion through attendance at regular meeting (Mkpado, 2006).

Group(s) tend to be more successful when members share one or several socio- economic conditions, and are therefore relatively homogenous. Devereux and Fishe (1993) wrote that in the formation of membership group, some members may misrepresent their economic status, claiming what they are not, thereby resulting in the formation of a group with non-homogenous members. Consequently, the potential for default or delinquency is high and the chance that the group will remain together over time becomes remote. Group homogeneity is therefore a group quality, highly valued by members themselves (Mahmud, 2001). Consequently, group homogeneity has the greatest potential for influencing outcome at the individual member level. This makes sense because the probability of members behaving in conformity with group objectives is likely to be greater in a homogenous group where individual members have similar interests and share similar problems.

1.2      Statement of the Problem

In   Nigeria,   Government   interventions   through   a   multiplicity   of   credit institutions  over  the  years  has  not  resulted  in  significant  improvement  in  rural financial intermediation. Loan able funds from government sources, have dwindled considerably.  The cost of borrowing  has increased  tremendously  and the financial outlay for business enterprises has multiplied several folds irrespective of the scale of operation due to inflation bites. The private sector, consequently is bracing up for the challenges  through the formation of finance groups (FGs) and the participation  of Non-Governmental Organizations (NGOs) including donor agencies (Olomola, 2002).

Over the years, government have attempted to circumvent the inadequacies of the informal sources of fund to small scale entrepreneurs, especially the farmers who are the  primary  producers  in every  economy,  by creating  certain  formal  financial institutions. Though these institutions have been blamed and accused of inefficiency in meeting up with   the demand of the small holders, some of the factors that has hindered the financial institutions from performing up to expectation, have been emphasized by Ohaka (2005),   in his observation he lamented over the attitude of local farmers to institutional credit as one of the factors. He remarked that they regard such credit as a share of the ‘National cake/Bounties”.

Organizations are recently placing much emphasis on the group approach in extending  credit  to the low-income  producers,  (Olomola,  2002).  Nevertheless,  the expectation that the approach will eliminate or mitigate the problems of loan delinquency/default has not materialized, and to date a large number of small scale entrepreneurs  have no access to credit. This raises the question  as to whether the existing finance group (FGs) holds some potential in terms of engendering improved repayment  performance. Specifically,  to what extent does this potential depend on homogeneity of micro credit groups?

The inability of some loan beneficiaries to repay their loan makes it impossible for the lenders to meet the demands of their clients that are genuinely in need. So for efficient working of the credit system it is important that default in repayment is as low as possible, because viability of the agencies is highly dependent on the amount of loan recovered. Thus the main aim of this research work, is focused on the performance of group members which is measured by group social cohesion, intra- group  risk pooling and loan repayment rate.

Homogeneity of groups has been shown as an important element of high repayment  rates (Devereux and Fishe, 1993). Using the example  of small farmers Development Programme in Nepal, they suggested that groups homogeneity helps to reduce the potential for cross-subsidizing between groups. They further noted that if groups are organized with non-homogeneity members, then the potential for default/delinquency will be high and the chances that the group will remain together over time will be low. Studies of homogeneity still report different facts on effects of homogeneity on performance. For instance, Okeke (2006) reported that homogeneity in age and genders have not affected loan repayment in South eastern Nigeria.

However, the importance of homogeneity in explaining the results of collective action   probably   differs   according   to   the   factor(s)   under   consideration.   Some researchers  also  question  whether  the success  of group  based  credit  repayment  is actually, due to homogeneity in membership or to the other features of the group (Jain,

1996).  Consequently,  the  study  aims  at  establishing  or  refuting  the  position  of membership of homogeneity on the performance of micro credit groups.

1.3      Objectives of the Study

The  broad  objective  of the  study  is to  examine  the  effects  of  membership homogeneity on the performance of Agricultural micro credit groups in Enugu State of Nigeria.

The specific objectives are to:

i.     describe  the  socio-economic  characteristics  of  the  groups  with  respect  to age, gender, literacy, occupation, ethnicity and residency

ii.        describe the characteristics of the groups on the basis of  homogeneity  or otherwise heterogeneity.

iii.     determine the effects of membership homogeneity on social cohesion,

iv.     determine  the  effects  of  membership  homogeneity  on  intra-group  risk pooling;

v.     determine the effects of membership homogeneity on loan payment;

vi.     analyse the effects of social cohesion and intra-group risk pooling on loan repayment.

vii.     identify    the    various    problems    of    agricultural    micro    credit    group administration in the state; and

viii.     make recommendations based on results.

1.4      Study Hypothesis

The null hypotheses to be tested are;

i    Membership homogeneity has no significant effect on social cohesion.

ii   Membership  homogeneity  has  no  significant  effect  on  intra-group  risk pooling.

iii  Membership homogeneity has no significant effect on loan repayment.

iv  Social cohesion and intra-group risk pooling have no significant effect on loan repayment.

1.5      Justification of the Study

The nature of membership composition is crucial for improved performance of groups, not only in terms of homogeneity, but also in terms of inherent social capital,

which can be of great benefit to both lenders and borrowers (Olomola, 2002). It is therefore   possible   to   employ   the   concept   of   social   capital   to   enhance   the understanding  of  the  performance  of  the  micro  credit  groups  on  the  basis  of the available social homogeneous characteristics.

The capacity to enforce rules in groups where members are homogenous is higher, than in groups with membership heterogeneity (Olomola, 2002). Such characteristics which can enhance trust building include regularity of operations, religion, membership of the same community, belonging to the same ethnic group, cultural affinity, common neighbourhood and consanguinity. These factors can strengthen the social cohesion and moral bands required for effective enforcement of the loan contractual agreement.

A high degree of connection is appropriate to lead to better peer monitoring and lower faults rate. Groups with such characteristics  can be said to posses high endowment  of  social  integration  which  constitutes  an  important  source  of  social capital, which enhances their access to micro credit.

The more homogeneous the group members are the more intensive the social ties and the trust within the groups, and the higher is the groups endowment of social capital (Woolcock, 1998). Consequently, the need for the study of the effect of membership homogeneity on social   cohesion, intra-group risk pooling and loan repayment  among  agricultural  micro  credit  groups  in  Enugu  state  of  Nigeria,  to examine  the effect and nature of membership  composition  which is important  for effective performance of groups.

This  study  will  be  of  benefit  to  both  the  federal  and  state  ministries  of agriculture and also to the Federal and state Governments in the formulation of credit policies and programmes that is group oriented as it will encourage finance and policy makers in formulating policies on how to improve access and repayment of loan in the study area. The study will also present a plat form for groups formation for improved performance.  Other  groups  to  benefit  are  the  (NGOs),  and  private  participants  in micro credit business.

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