THE IMPACT OF MICRO CREDIT ON POVERTY ALLEVIATION IN NIGERIA
ABSTRACT
This research project sought to empirically examine the impact of microfinance institutions on poverty in Nigeria. To conduct this research, structured questionnaire was used. The questionnaire consisted of 25 questions which focused on the 4 areas of microfinance and poverty in Nigeria. The questionnaire consisted questions which could be answered in a dichotomous (yes/no) and in likert manner. The main purpose and intent behind designing the questionnaire in such a simple way was to make it easy for the selected samples to respond and thereby get a higher response to the questionnaire. To evaluate the impact of microfinance institutions on poverty level in Nigeria, a quantitative method was adopted. These methods include; percentage and chi-square analyses. The result shows that the contribution of micro credit has impacted on poverty reduction among the poor. This study shows that microfinance programmes have the potential to alleviate poverty especially in increasing level of income and reducing vulnerability. This will promote people economic capacity and bring sustainable development. It is, therefore, recommended that microfinance banks should improve accessibility of their services to poor by relaxing their terms and conditions on accessing services, especially loans. And MFIs should widen their market by introducing new products, such as house loans, agricultural loans, education loans and loans for initial capital. This will make borrowers access relevant loan products to meet appropriate objectives.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Poverty is the major problem in most developing economies. In these economies, it is argued that among others absence of access to credit is presumed to be the cause for the failure of the poor to come out of poverty. Meeting the gap between demand and supply of credit in the formal financial institutions frontier has been challenging (Von Pischke 1991). In fact, the gap is not aroused merely because of shortage of loan-able fund to the poor rather it arises because it is costly for the formal financial institutions to lend to the poor. Lending to the poor involves high transaction cost and risks associated with information asymmetries and moral hazards (Stiglitz and Weiss 1981). Nevertheless, in several developing economies governments have intervened, through introduction of microfinance institutions to minimize the gap then allow the poor access credits.
One of the main policy objectives for the establishment of microfinance banks in Nigeria was to assist small and medium scale enterprises in Nigeria in raising their productive capacity and level of employment generation, thus alleviating poverty and enhancing human capital development. According to Haque and Yamao (2009), poverty alleviation through microcredit is now well recognized all over the world as microcredit propagandists, governments, donors, development agencies and others have an increasing interest in using the microcredit medium to advance the course of poverty reduction as well as enhance human capital development. In a bid to utilize the benefits of microcredit in alleviating poverty and enhancing human capital development in Nigeria, the Central Bank of Nigeria (CBN) formulated the micro finance policy and framework in 2005. The December 2005 policy statement establishing Micro finance banks in Nigeria was laudable and well-intentioned as the microfinance industry was fast becoming the next “frontier” for the financial service industry to provide and promote the grant of microcredit.
According to the CBN policy and regulatory framework for microfinance banks in Nigeria, released in December 2005, and from the appraisal of existing microfinance oriented institutions in Nigeria, a major reason for establishing micro finance banks anchored on the facts produced by the baseline economic survey of small and medium scale enterprises in Nigeria conducted in 2004 which indicated that the 6,498 industries covered employed a little over one million workers. Considering the fact that about 18.5 million (28% of the available work force) Nigerians are unemployed, the employment objective/role of the SMEs is far from being realized. Based on the National Economic Empowerment and Development Strategy (NEEDS) objectives of empowerment of the poor and the private sector, the provision of needed financial services became imperative to enable them engage or expand their present scope of economic activities and generate employment. Delivery services as contained in the strategy would be remarkably enhanced through additional channels which the microfinance banking framework would provide as it would assist small and medium scale enterprises in Nigeria in raising their productive capacity and level of employment generation (CBN, 2005).
The impact of microfinance on poverty reduction has been measured in terms of several dimensions, such as improved income, employment and household expenditure, and reduced vulnerability to economic and social crises. These measurements have tended to focus on a specific geographic area, an institution or a small client group and are difficult to generalize or draw conclusions that reach across borders, income levels, gender or socio-economic status (Honohan, 2004). Meyer (2002) noted that financial sustainability and welfare impact of microcredit can also be appraised. Hulme (2000) argues that knowledge about the achievements of such microcredit initiatives remains only partial and is contested.
1.2 Statement of the Problem
Capital is one of the important tools for business enterprise. Without capital no business can run or flourish. In a country like Nigeria, problem of capital is very acute. In rural Nigeria, the only source of capital is village moneylenders, whose rate of interest is very high. So, microcredit is essential for their income generation. By providing poor people with credit for micro enterprise it can help them work their own way out of poverty. And by providing loans rather than grants the micro-credit provider can become sustainable by recycling resources over and over again.
Over the past few years, there has been an impressive increase in the number and volume of government programs that seek to encourage the unemployed, the young, welfare recipients and disadvantaged groups of the population to set up their own, very small business. Also, every known regime recognizes the importance of promoting micro enterprises as the basis of reducing poverty, and unemployment and promoting economic growth. As a result, several micro credit institutions were established to enhance the development of SMES. Such micro credit institutions include the Nigerian Bank for Commerce and Industry (NBCI), National Economic Reconstruction Fund (NERFUND), the People’s Bank of Nigeria (PBN), the Community Banks (CB), and the Nigerian Export and Import Bank (NEXIM), and the liberalization of the banking sector.
Unfortunately, records indicate that the performance of SMES in Nigeria has not justified the establishment of this plethora of micro-credit institutions. The sector has stagnated and remains relatively small in terms of its contribution to GDP or to gainful employment, poverty alleviation rural development etc. activity mix in the sector is also quite limited- dominated by import dependent processes and factors. The impact of these micro credit programmes on poverty reduction and creation of entrepreneurial ability among the micro enterprises is a perplexing question. This is because, in the opinion of some eminent economists, it has not created entrepreneurship development in Nigeria (ogunjiuba et al, 2004). In theory, access to credit is supposed to enhance households’ ability to manage scarce resources more effectively and protection against risk and provision for the future. It is on basis of this assertion that many governments and donor agencies emphasizedevelopment of programs directed particularly to owners of micro-enterprises (Webster, 1991).
The assessment of the impact of microcredit on poverty alleviation in Nigeria is very scarce, if non-existent. It is important to know whether the basic objective of establishing microfinance banks in Nigeria can be achieved. The questions of interest then are; how has the microfinance banks improved the standard of living? Can loans given out actually assist in poverty alleviation in the country? Are the poor given utmost priority in credit allocation? This study fills this gap and provides recommendations for way forward.
1.3 Objectives of the Study
The major objective of this study is to examine the impact of micro credit on poverty alleviation in Nigeria.
Te specific objectives of the study are to;
a- Evaluate the performance of microcredit on poverty alleviation in Nigeria in Nigeria.
b- Appraise various government policies targeted at alleviating poverty
c- identify challenges faced by microfinance banks in giving loans to small and medium scale enterprises; and,
d- Based on empirical findings suggest the way forward for the reducing poverty through the use of microfinance banks in Nigeria.
1.4 Research Hypothesis
The hypotheses to be tested in this study are;
H0: Microcredit has no significant effect on poverty reduction in Nigeria
H1: Microcredit has a significant effect on poverty reduction in Nigeria
1.5 Methodology
· Sources and instrument of Data Collection
Data will be drawn from administering structured questionnaires which will be administered to beneficiaries of microcredit drawn in the Lagos metropolis. The questionnaire shall be close-ended aimed at helping respondents provide answers that will be tailored to providing answers that will be further analyzed.
· Method of Data Analysis
The data collected shall be analyzed using simple percentages. Simple percentage has the advantages of clearly indicating the weight in absolute terms. This method is chosen due to its simplicity and clarity to interested parties who may not have adequate knowledge with more complex analytical tools. Also, to test whether microcredit impacts on poverty level, chi-square is used.
1. 6 Relevance of the Study
Issues regarding the impact of micro credit on micro enterprises have received increased attention in the literature. However, there is scanty work of this type in Nigeria, especially, in the area of evaluating the impact of micro credit on micro enterprises and poverty reduction in the period of global financial crisis and banking reform. It is; therefore, hope that this study will fill the gap by providing information on the effect of credit on micro enterprises in Nigeria. The research work will lead to a clear understanding of the role of other macro economic and social factors in determining the success of micro enterprises in Nigeria. It is hoped that findings from this study will be very useful to policy makers, investors, researchers, corporate managers, and other stakeholders in an effort to shape micro credit institutions in Nigeria. The result of the study will provide insight to further future research into this field of study and would be useful for the policy makers in repositioning the existing microfinance institutions to achieving robust industrial sector and economic growth in Nigeria.
Also, with widespread poverty and several efforts of most developing nations’ government to tackle poverty, it is indeed necessary to see how these nations succeed. Since the traditional banks operations appears not to cater for the needs of the poor in the economy, it becomes interesting to see how micro finance banks can achieve this feat with their involvement in granting microcredit. In most developing economy like Nigeria, the poverty level is high this has led to low standard of living of the citizenry, reduced average life span and high infant mortality rate. It is obvious that a reduction in pervading poverty rate will indirectly increase standard of living, increased life span of the average citizen and a reduction in infant mortality rate.
1.7 Scope and Limitations of the Study
The study will center on the operations of Micro finance Bank in Nigeria and the extent and microcredit impacts on poverty alleviation in Nigeria. The case study area for the study is Lagos state. Also, attention is given to manufacturing firms. One of the limitations of this study is time and cost. The available time is short for the writer to cover large number of small and medium scale. Also, cost in term of finance could be very high.
1.8 Organization of the Study
This research is divided into five chapters. Following this chapter is chapter two which focuses on literature review. Chapter three will deal with theoretical framework and research methodology. Chapter four is based on empirical analysis. And Chapter five is based on summary of findings, recommendations and conclusion.
1.9 Definitions of Terms
Microfinance: Microfinance is an economic development approach that involves providing financial services, through institutions, to low-income clients, where the market fails to provide appropriate services. The services provided by the Microfinance Institutions (MFIs) include credit saving and insurance services. Many microfinance institutions also provide social intermediation services such as training and education, organizational support, health and skills in line with their development objectives.
Micro-credit: Micro-credit is the extension of small loans to entrepreneurs, who are too poor to qualify for traditional bank loans. Especially in developing countries, micro-credit enables very poor people to engage in self-employment projects that generate income, thus allowing them to improve the standard of living for themselves and their families.
Micro finance Institutions (MFIs): A microfinance institution is an organization, engaged in extending micro credit loans and other financial services to poor borrowers for income generating and self employment activities.