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IMPACT OF MICROFINANCE BANKS ACTIVITIES ON POVERTY ALLEVIATION IN NIGERIA 1993 – 2012

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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).

Semiformal     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.

SelfHelp 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’.



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IMPACT OF MICROFINANCE BANKS ACTIVITIES ON POVERTY ALLEVIATION IN NIGERIA 1993 – 2012

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