ABSTRACT
The fight against extreme poverty has been at the front burner of global discourse for a very long time. Poverty is deemed as a state of deprivation but more specifically, where an individual or group has insufficient income for securing basic goods and services. Microfinance has been globally acknowledged as a vehicle that drives the poor out of extreme poverty zone. This study set out to examine the impact of microfinance banks activities on poverty alleviation in Nigeria. Annualized time series data for 20 years, covering the period 1993-2012, were collated from the Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS) and National Population Commission (NPC). Five hypotheses were tested with multiple linear regression technique. Poverty Index (PI), Employment Ratio (ER), and Standard of Living (RGDP-TP) were the dependent variables while microfinance banks’ activities and investments were adopted as the independent variables. Also, liquid liability (M2), interest rate and Federal Government capital expenditure were the controlled variables. The result was a mixed grill. For hypothesis one, microfinance banks’ activities do not have a significant positive impact on poverty alleviation in Nigeria, in hypothesis two, microfinance banks’ activities have a significant positive impact on employment generation in Nigeria and for hypothesis three, microfinance banks’ activities do not have a significant positive impact on standard of living in Nigeria. For hypothesis four, microfinance banks’ investments have a significant positive impact on poverty alleviation in Nigeria and in hypothesis five, microfinance banks’ activities do not have a significant positive impact on the Gross Domestic Product (GDP) in Nigeria. This suggests that the operation of microfinance banks’ activities in Nigeria needs a review. It is fairly flawed. This should bring the relevant authorities back to the drawing board. Recommendations were offered. Further study on this subject is highly encouraged
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Global poverty has been one of the most burning and unresolved issues in the human history. According to the World Bank Statistics (2005), there is almost 3 billion of world population living under US$2.5 per day. Within the group, around 1 billion live under $1 per day. Government and International Organisations have been cooperating to fight poverty in different parts of the world. Poverty can be absolute or relative. Absolute poverty can be reduced but can hardly be eradicated. In recent years, microfinance has been recognized as an effective tool to alleviate poverty (Rubana, 2008; Daley-Harris, 2002; Lalitha, 2008). Microfinance offers the poor the chance to access financial service such as credit and savings. Microfinance programs in countries like Bangladesh, Bolivia and Peru have yielded positive impacts on the poor. Such programmes have helped the afflicted poor, first, to smoothen their daily expenditure, stabilize their income flows and in the process enhance their overall welfare (Rubana, 2008; Khander, 2003; Khander & Pitt, 2002; Daley-Harris, 2002; Hiatt & Woodworth, 2006).
Though, the poor live under very miserable conditions they are generally economically active. They lack basic necessities of life: food, shelter, education and primary healthcare. They earn their livelihood by being self-employed as micro- entrepreneurs or by working in micro-enterprises (Egwuatu, 2008). Microfinance aims to bring financial services to poor people by providing access to small-scaled financial services, primary savings, credit and insurance to people involved in small or micro business activities such as farming, fishing, herding or micro-enterprises producing, recycling, repairing or selling goods (Lalitha, 2008).
Microfinance programmes are financially supported by governments and international organizations which mean that microfinance programmes depend on financial grants from donors and governments to great extent (Luong, 2010).
In recognition of the dehumanizing condition of the poor, the first of the seven United Nations Millennium Development Goals (MDGs) calls for the reduction of, by one- half (1/2) in the number of people living in extreme poverty and hunger by the year 2005, which was later shifted to 2015 (DFID, 2000).
Poverty has been defined variously. The Copenhagen Declaration on Social Development represents an initial concept in an attempt to reach a definition of poverty. That World Summit defined poverty as lack of access to social services, social exclusion from participation in decision making (Kankwenda, et. al., 2000).
Poverty, with respect to international definitions is either defined as the number of people living under one dollar per day or as people who can only take less than 2550 calories per day (adult) (Alam, 2005; Ziauddin, 1999; Gohar, 2000; & ADBP, 2005).
For more than 30 years microfinance has been portrayed as a key policy and programme intervention for poverty reduction and ‘button-up’ local economic and social development (Bateman, 2011).
Poverty assumes international discourse and challenge to the world body. Between February 2 and 4, 1997, a Micro- credit Summit was organized in Washington D.C. which was attended by over 2900 representing 1500 organizations from 137 countries. This Summit launched a nine-year campaign to reach 100 million of the world’s poorest families, especially the women of those families with credit for self- employment and with other financial and business services by 2005. (This has been extended to 2015.)
In the above summit, Clinton said: she was thrilled to see such a turnout which was one of the most important gatherings that could be had anywhere in the world. She believes that their efforts will make the campaign one of the great new chapters in human history that will allow millions of people to free themselves and their families from the vicious cycle of poverty (Grameen Bank 1997).
In his opening speech at the same Summit, Yunus (1997:25-26), of the Grameen Bank, said that the Summit was not a fund raising event but one that will inspire the world by putting together all the good news they have created during the past years.
He adds that the Summit wanted to build and will build capacity to end poverty in the world. He was of the opinion that poverty does not belong to a civilized human society but to the museums. He therefore concluded that the Summit was about creating a process which will send poverty to the museum and just as it took only sixty-five years after a twelve-second flight of the Wright Brothers for a man to go to the moon, fifty-five years after the Summit, “we’ll also go to our moon” (Grameen Bank 1997).
Annan (1997), was not quiet in recognizing the level of poverty in the world and in offering solution to it. According to him, “the stark reality is that most poor people in the world still lack access to sustainable financial services, whether savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from fully participation in the financial sector. Together we can and must build inclusive financial sectors that help people improve their lives” (Egwuatu 2008:9).
The World Bank devoted the “World Development Report 2000/2001: Attacking Poverty”, to the subject based on new evidences and a deeper understanding of the meaning and causes of poverty. The report argued that major reductions in world poverty are possible. It shows that economic development continues to be central to success in reducing poverty, but that poverty is also an outcome of economic, social and political processes that interact with and reinforce each other in ways that can ease or exacerbate the state of deprivation in which poor people live. Consequently, the report concluded that to conquer poverty requires actions at the local, national and global levels; to expand poor people’s opportunities, empower them and increase their security.
Poverty has been a serious cankerworm in Nigeria. The World Bank study of poverty reduction in Nigeria, not only profiled poverty but also established qualitatively the trend of poverty encroachment on the process of development from 1980-1996. The study showed that poverty level in Nigeria has been extremely high with about two- third of the population living below the poverty line in 1996. In absolute figures, the population in poverty continued to rise over the sixteen year period (i.e. 1980-1996). The estimated number rose from 18 million in 1980 to 35 million in 1985 to 39 million in 1992 and 67 million in 1996 and by the end of 1999, the estimated number of poor rose to 74.2 million (World Development Report 2000/2001).
Several efforts and programs have been made in the past by Nigerian government to cater for the poor most of which have proved ineffective. Nigeria is the seventh world largest exporter of crude oil, yet ranks 158 out of the 177 countries of the world in terms of quality of life (Yahaya, et. al., 2011). The Human Development Programme indicates that 70.8 per cent and 92.4 per cent of the Nigerian population live below US$1 and US$2 a day respectively (HDR 2007/2008).
Statistically, the formal financial sector such as commercial banks, provide services to about 35% of the economically active population, while the remaining 65 per cent who are mostly involved in micro, small and medium scale (MSMES) and who are generally regarded as the engine of growth for most world economies, remain un- served, and therefore excluded from access to financial services (CBN 2005).
The Central Bank of Nigeria (CBN) is worried that a large percentage of Nigerians are still excluded from financial services. It cited a study carried out on Enhancing Financial Innovation and Access (EFInA) in August 2010, which revealed that 39.2 million representing 46.3 percent of the adults in Nigeria were excluded from financial services. Out of the 53.7 percent that had access, only 36.3 percent derive their financial services from formal financial institutions, while 17.4 per cent exclusively patronized the informal sector. The result also revealed that Nigeria was lagging behind South Africa, Botswana, and Kenya with 26 percent, 33 percent and 32.7 percent in financial exclusion rate respectively (CBN 2011).
Past public efforts at redressing the inadequate supply of financial services to the poor in Nigeria included the government support to cooperatives which began with the promulgation of the Cooperative Societies Ordinance in 1936; the establishment of the Nigeria Agricultural and Cooperative Bank (NACB) in 1973, the setting up of the Agricultural Credit Guarantee Scheme Fund (ACGSF) in 1978; the rural banking programme (RBP); the supervised credit schemes (SCS) of various governments under which funds from the state governments were given as loans to the poor for small-scale enterprises; the Peoples’ Bank in 1989; the licensing of Community
Banks in 1990s. Other initiatives included the CBN directives to commercial banks on lending to the poor, including lending a proportion of their rural deposits to the rural enterprises; various initiatives on the funding of small and medium scale enterprises (SMEs). Family Economic Advancement Programme (FEAP) and National Poverty Eradication Programme (NAPEP).
Earlier forms of Microfinance initiatives in Nigeria included: Self-help groups (SHGs), rotating savings and credit associations (ROSCAs) commonly known as esusu (Yorubas), etoto (Igbos), and adashi (Hausas) (CBN, 2000).
All these efforts were pepped up with the launching of the Microfinance Guidelines in 2005 of the CBN as revised on 29th April 2011. A number of pertinent questions obviously arise. Why did all these developments fail to achieve their purpose? Will the CBN Microfinance Regulatory Framework of 2011 suffer the fate of the predecessors? All these questions and more define the challenge of this study.
Empowerment of the poor becomes a major issue and using microfinance as a major strategy of poverty alleviation becomes imperative.
1.2 Statement of the Problem
Various initiatives have been put in place in Nigeria aimed at ameliorating poverty and unemployment. But most of these on the contrary, rather than alleviating poverty, seem to have exacerbated it. In 1978, the Operation Feed the Nation was inaugurated. This was to encourage the youth to take to farming. The Better Life for Rural Women Programme and the Family Economic Advancement Programme (FEAP) were gender sensitive programmes aimed at lifting poor women from the shackles of poverty. The Rural Banking Programme was aimed at extending banking services to the rural poor and mobilizing idle savings in the rural communities. Certain percentage of the bank advances was to be extended to the host rural communities. The Agricultural Credit Guarantee Scheme (ACGS) was also inaugurated. Other institutional arrangements included the establishment of the Nigerian and Co-operative Bank Limited (NACB), the National Directorate of Employment (NDE), the Nigerian Agricultural Insurance Corporation (NAIC), the Peoples Bank of Nigeria (PBN) and even the Community Banks (CBs).
According to Pham and Lensink (2008), microfinance has been identified as an important instrument for poverty alleviation in developing countries. Policy makers as well as academics pay a lot of attention to the role of microfinance in poverty alleviation. In many developing countries, microfinance programmes have been introduced. Well known examples are the Grameen Bank in Bangladesh, Banco Sol in Bolivia and Bank Rakyat in Indonesia. Between 1997 and December 2005, the number of people who received credit from microfinance institutions worldwide, rose from 13.5 million to 113.3 million (84 percent of them being women). The number of microfinance institutions increased from 618 to 3,133 during the same period (Daley- Haris, 2006).
The attention for microfinance and its role in reducing poverty was further increased when the UN declared the year 2005 to be the international year of Micro-credit, and when Mohammad Yunus, the founder of the Grameen Bank, received the Nobel Peace Prize in 2006. According to the Nobel Committee, microfinance can help people to break out of poverty (Pham and Lensink 2008). The proclamation of 2005 as the year of micro-credit by the UN has led to several world conferences which have referred to it as the ‘frontrunner in poverty alleviation strategies’ (Lard and Barres, 2007).
Many authors argue that micro-credit can help to substantially reduce poverty (Morduch, Hashemi and Littlefield, 2003, Dunford, 2006). Some other commentators have however expressed doubt that micro-credit can contribute to a substantial reduction in poverty. While some argue that microfinance does not reach the poorest of the poor (Sunlly, 2004), others are of the opinion that the poorest are deliberately excluded from microfinance programmes (Simanowilz and Walter, 2002). Some others argue that microfinance programmes lead to high transaction costs since most microfinance schemes have regular group meetings (Aghion and Morduch, 2000; Murray and Lynch, 2003).
Microfinance banks are established to fill the gap created by the failure of the formal financial sector to improve the socio-economic condition of the poor in income generation. Many researchers, development workers and institutions hailed the microfinance policy as a potential solution to alleviation of poverty in which standard of living is one of the indicators (Yunus, 2003).
There are still important gaps to be filled by microfinance institutions in Nigeria. The microfinance banks have not been able to address the gap in terms of credit delivery, savings and other financial services required by the small scale enterprises like barbing salons, hair dressing salons, block making outlets, sachet water making industries, etc. (Abiola and Salami, 2011).
The CBN (2005:7) claims that “many international investors have expressed interest in investing in the microfinance sector. Thus, the establishment of a microfinance framework for Nigeria would provide an opportunity for them to finance the economic activities of low income groups and the poor”. The microfinance policy would provide the needed window of opportunity and promote the development of appropriate (safe, less costly, convenient and easily accessible) savings products that would be attractive to rural clients and improve the savings level in the economy.
Will the new microfinance policy, regulatory and supervisory framework bring the needed Eldora do to the Nigerian economy or will it toe the path of the past initiatives? Are there loopholes inborn in the policy that does not favour its efficacy in providing the needed solution?
The need to prevent this framework from suffering the fate of the predecessors adds to the main challenge (lacuna) to be addressed by this study.
1.3 Objectives of the Study:
The specific objectives were:
1) To examine the impact of Microfinance banks’ activities on poverty alleviation in
Nigeria.
2) To investigate the impact of microfinance banks’ activities on employment creation in Nigeria.
3) To establish the impact of microfinance banks’ activities on the standard of living in Nigeria.
4) To evaluate the impact of microfinance banks’ investments on poverty alleviation in Nigeria.
5) To establish the impact of microfinance banks’ activities on Gross Domestic
Product in Nigeria.
1.4 Research Questions:
1. To what extent have Microfinance banks’ activities facilitated the alleviation of poverty in Nigeria?
2. To what extent do Microfinance banks’ activities impact on employment creation in Nigeria?
3. To what extent do Microfinance banks’ activities impact on the standard of living in Nigeria?
4. How far do Microfinance banks’ investments impact on poverty alleviation in
Nigeria?
5. To what extent do Microfinance banks’ activities impact on the Gross Domestic
Product (GDP) in Nigeria?
1.5 Research Hypothesis:
a. Ho1: Microfinance banks’ activities do not have a significant positive impact on poverty alleviation in Nigeria.
b. Ho2: Microfinance banks’ activities do not have a significant positive impact on employment generation in Nigeria.
c. Ho3: Microfinance banks’ activities do not have a significant positive impact on standard of living in Nigeria.
d. Ho4: Microfinance banks’ investments do not have a significant positive impact on poverty alleviation in Nigeria.
e. Ho5: Microfinance banks’ activities do not have a significant positive impact on the Gross Domestic Product (GDP) in Nigeria.
1.6 Scope of the Study
Though the Microfinance gospel has gained deep root in the Asian countries, this study stressed more on Nigeria. The period of study covered 1993 – 2012. The
choice of 1993 as base year is because the Decree No. 46 of 1992 created Community Banks most of which transformed to Microfinance bank following the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria, launched by the Central Bank of Nigeria (CBN) in December 2005. Microfinance providers are made up of informal and formal types. The informal providers have limited outreach due to paucity of loanable funds. They also lack statistical records. The formal groups are mainly the microfinance banks made up of the transformed community banks and scaled up NGOs microfinance institutions.
For analytical purposes, this study will concentrate on microfinance banks because of the availability of data.
1.7 Significance of the Study
This study will be relevant to the following:
The Government. The study will assist the government in making policy that border on microfinancing. Effective and operational microfinance policy will contribute to the sustaince of the economy.
The Microfinance Institutions. Microfinance has moved from the realm of charity to commercialization. The study will assist the MFIs market their services more efficiently, effectively and above all, sustainably.
Microfinance clients. The study will show how the poor will be pulled up above the poverty line with life wire of microfinance credit and other financial services.
NGOs. The NGOs will be encouraged to move out from donor funded organization to equity funded. To be a going-concern, they should be sustainable. This study will help them achieve this by identifying measures to scale up to microfinance banks.
Donors (both foreign and local). The study will help donors to identify more effective ways of channeling their donations to the needy and avoid the hijack of their donations by the bureaucracy. The study will encourage them to provide ‘fish hooks’ rather than ‘fish’ to the poor.
CBN. As financial regulator, the study will provide more insight into the problems of microfinance institutions. It will enable it offer structured and regular workshops for microfinance providers especially the microfinance banks. It will help the CBN beam its searchlight on the operations of these microfinance banks to avoid loss of depositors’ funds.
Future researchers on the subject matter will find a reservoir of literature bank from this study for further improvement and development of the subject matter.
1.8 Operational Definition of Terms
Micro-credit. This is the provision of small amount of loans to the poor that enable them to open or expand an existing income-generating activity, and thus supposedly begin their escape from poverty.
Micro-savings. Setting aside, periodically, small amount of money and depositing it with an institution for safe-keeping.
Micro-insurance. Contributing small amount of premium towards the cover of an insurable interest.
Microfinance. Usually conceived of as the provision of small units of financial services to low income clients who are usually excluded from formal financial system.
Poverty. This is a condition in which a person is deprived of or lacks the essentials for a minimum standard of well-being. A state of being without, often associated with need; hardship and lack of resources across a wide range of circumstances. Two types are identifiable, viz: absolute poverty and relative poverty. Absolute poverty are people earning one US dollar a day; while relative poverty are those whose resources are so limited as to exclude them from the minimum acceptable way of life in the member state in which they live.
Microfinance Banks Credit. Credit granted to micro, small and medium scale entrepreneurs. This is to enable them take off new enterprises or to expand the
existing ones. The aim is to enable them smoothen their expenditure and embark on a journey of escaping from poverty. The CBN annually provides the total of such credit.
Poverty Alleviation. Incidence and causes of poverty have been identified by the Nigerian Bureau of Statistics (NBS). The Bureau has proxied poverty level by poverty index which it publishes annually. Poverty alleviation is therefore the root that will reduce the incidence of poverty and therefore the poverty index. One such root is the granting of Microfinance banks credit to the poor.
Employment. Engagement of or creation of labour for a source of livelihood. It could be self engagement or offering of services to an enterprise in exchange of wages or salaries. When more people are in this bracket, the level of employment is said to be high and vice versa. The NBS yearly provides the percentage of unemployment with the reverse, as the percentage of employed.
Microfinance Bank Investment. The Regulatory and Supervisory Framework for Microfinance Banks in Nigeria requires all MFBs to maintain not less than 5% of their deposit liabilities in Treasury Bills (TBs). This is compulsory investment. The prudential requirements allow the MFBs to involve in fixed assets/long term investments.
Empowerment. Enhancement. Upliftment. Enablement to attain a higher status, usually social and economic. Empowerment corresponds to processes by which vulnerable individuals are endowed with power. It allows equality of development.
Formal financial sector. Mainly banks (commercial and microfinance).
Semi–formal financial sector. Non-Governmental Organisations (NGOs). Organisations that exist not for profit but to extend charity to the less privileged. They are normally supported by donors. Other forms of semi formal financial sector include:
Self-help groups (SHGs), rotating savings and credit associations (ROSCAs)
commonly known as esusu, etoto and adashi in various Nigerian languages.
Self–Help Groups (SHGs). A group of people who have common denominator (e.g. religion, trade, locality) and who periodically contribute money. The money need not be equal. At the end of the agreed period, the total contributions by each individual, less agreed administrative charges is paid back to him/her.
Rotating Savings and Credit Associations (ROSCAs). Also a group of people with common denominator who contribute money periodically. Here, the contributions are equal per person. In rotation, the members take the entire amount contributed on each occasion. They will all do so until every member has his/her own turn.
Informal financial sectors. Made up of the money lenders. They are there to maximize profit such that they are looked upon as ‘sharks’.
This material content is developed to serve as a GUIDE for students to conduct academic research
IMPACT OF MICROFINANCE BANKS ACTIVITIES ON POVERTY ALLEVIATION IN NIGERIA 1993 – 2012
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