Analysis of the effects of micro finance banks on poverty re
1ANALYSIS OF THE EFFECTS OF MICRO FINANCE BANKSON POVERTY REDUCTION AND ECONOMIC GROWTH IN NIGERIAN ECONOMY SUNDAY C. NWITE Ph.D, ACII, ACIB, IRDI SENIOR LECTURER AND DR. OGIJI F.O DEPARTMENT OF BANKING AND FINANCE EBONYI STATE UNIVERSITY – ABAKALIKI
2 PHONE NO: 080-37743134 E-MAIL: firstname.lastname@example.org ABSTRACTPoverty has been a cankerworm and predicament which has deepen into themarrows of Nigerian systems. This has over the years made it very difficult forNigerians to develop as a nation. Several attempt have been made by variousregimes in an attempt to alleviate poverty, little success have been made inthis direction. This work examined the various attempts by these regimesusing a historical research with the view of curbing or eradicating poverty. Theoverall objective of this study is to evaluate the effect of micro finance bankson poverty reduction and economic growth in Nigerian economy. Specifically,the study tends to achieve the following objectives. To find out if 4 microfinance policy have reduced the poverty level in Nigeria. A review of this policyon poverty is caused by factors such as death, illness, accident, old age,inadequate employment of the head of household or breadwinners. In rural
3African, these factors are the root causes of poverty while at the macro-levelpoverty, a myriad of factors of organizational behaviour to political instabilityeconomic mismanagement, infrastructural inadequacies and lack ofcommitment to poverty reduction policies. The researcher recommends a totalcommitment by the government to a comprehensive social security systemgeared towards reducing both the micro and macro levels of poverty which iscurrently been adopted by the present government. INTRODUCTION
4Economic growth and poverty reduction through the empowerment of peopleby increasing their access to factors of production, especially credit (loan) hasbecame a catalyst, for stimulating sustainable economic growth and povertyreduction, with access to micro credit, the capacity of the poorentrepreneurship would enable a teaming number of people engage ineconomic activities, also became self-reliant, thereby increasing employmentopportunities, increasing household income and crediting wealth (CBN, 2005).It is in relation of this great potential of micro finance that the Central Bank ofNigeria (CBN) by virtues of the provision of section 28, sub (1) (B) of the CBNAct 24 of 1991 (as amended) and in pursuance of the provision of section 50-60 (a) of the bank and other financial institution Act, BOFIA 25 of 1991 (asamended) were taking the initiative to create a platform for the establishmentof private sector driven micro finance banks (MFBs) as a strategy to makeimpact in the economic development in Nigeria.Therefore, the Central Bank of Nigeria (CBN) has put in a national microfinance policy framework that would enhance the provision of diversified microfinance services on a long term basis for the poor and low income earners witha view to promoting synergy between micro finance bank and otherspecialized institutions. The policy seek to improve the Central Bank ofNigerian’s regulatory and supervisory roles in ensuring monitory stability,
5economic growth poverty reduction and liquidity appropriate machinery formonitoring the activities of development partners in the micro finance sub-sector in Nigeria.Similarly, Sam Oni, director, Other Financial Institution Department (OFID) hasre-emphasized the need for effective supervision of Micro Finance Banks(MFBs) in order to harness their potentials which tend towards offering atremendous scope for economic growth, poverty reduction, and employmentgeneration and rural transformation in emerging economy (Financial standard,2007).The importance of Nigerian micro finance banking system has been noted byseveral researchers, including Okey (2007), IFAD (2010), Oni (2007) for thecrucial roles it plays in serving as a credit mobilization, deposit generation andprovision mechanism to people who have to been deprived loan or creditextension by deposit money banks (commercial banks).CONCEPT OF MICRO FINANCE BANKSThe Micro Finance Banks (MFBs) as a necessary veritable tool for enhancingeconomic activities and promoting natural economic growth and reducingpoverty was associated with the promulgation of micro finance policy,regulatory and supervisory framework for the establishment and operation of
6micro finance banks in Nigeria by Central Bank of Nigeria (CBN) on December15.The concept of micro finance is not new, saving and credit groups that haveoperated for centuries includes the “Susus” of Ghana, “Chit funds” in India,“Tanda” in Mexico, Arisan in Indonesia, “Cheetu” in Srilanka, and “Pasanaku”in Botova, as well as numerous saving clubs found all over the world. Formalcredit and saving institutions for the past decades, providing customers abovetraditionally neglected by deposit money banks (commercial banks) a way ofobtaining financial services through co-operative and development financeinstitutions.The micro finance practice in Nigeria is culturally rooted and dates backseveral years. The traditional micro finance institution provides access tocredit for the rural and urban low income earners.They are mainly of the informal self-keep groups or rotating saving and creditassociation (ROSCAS), (CBN, 2005).In government attempt to enhance flow of micro credit or loan to Nigeria ruralareas has in the past initiated a series of publically financed micro/rural creditprogrammes and policies targeted at the poor and other institutionalarrangements which include:
7The National Directorate of Employment, the Nigeria Agriculture Insurance Co-operation (NAIC) Family Economic Advancement Programme (FEAP), PeopleBanks of Nigeria (PBN), Community Banks (CBs) National PovertyProgramme (NAPEP) and a lot of others as if these institutional arrangementwere not yielding positive results on the purpose to in which they are meant forthe federal though the Central Bank of Nigeria (CBN) formulated andpromulgated microfinance policy, regulatory and supervisory framework onDecember 2005 for the establishment and operation of micro finance banks asa necessary veritable tools for enhancing economic activities and promotingnational economic growth and development as well as making financialservices available on a sustainable basis to the micro small and mediumenterprises (MSMEs) (Daily un, 2005). stTo this effect, December 31 2007 was given as the financial dealer forconversion of community banks to micro finance banks provide micro credit orloan to economically active poor and low income household with financial,services, such as credit (to held them engage in income generating activitiesor expand or grow their small businesses), saving, micro leasing, microinsurance and payment transfer. (Daily Champion, 2007).
8OBJECTIVES OF MICRO FINANCE BANKSAccording to (CBN, 2005), this following contributed to the justification for theestablishment of micro finance banks, which is the objectives of its formation. i. The existence of a huge un-served market: The size of the un-served market by the existing financial institution is large. The average banking density in Nigeria is one financial institution outlet to 32,700 inhabitations. In the rural areas, it is 1.57,000 that is less than 2% of rural households have access to financial services. (Nwite, 2004) ii. Economic Empowerment of the Poor, Employment Generation and Poverty Reduction: The base line economic survey of Small and Mediums Industry (SMLs) in Nigeria conducted in 2004 indicated that the 6,498 industries covered currently employ 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 and role of the small and medium industries (SMs) is far being reached. One of them have marks of the National Economic Employment and Development Strategy (NEEDS) is the employment of the poor and private sector through the provision of the needed financial services to enable them engage in
9 or expand their present scope of economic activities and generate employment. Delivery needed services as contained in the strategy would be remarkable enhanced through additional channels which the micro finance banks frame work would provide. It would also assist the small and medium industries (SMLs) in providing their productive capacity and level of employment generation.iii. The Need for Increased Saving Opportunity: The total assets of the 615 community banks which rendered their report, out of the 753 operating communities as at end December 2004 stood at N34.2 billion (CBN, 2005). However, owing to the inadequacy of appropriate saving opportunities and products, saving have continued to grow at a very low rate, particularly in rural areas of Nigeria most people keep their resources inn kind or simply under their pillows, such methods of keeping savings are risky, low in terms of returns and under mine the aggregate volume of resources that would be mobilized and channeled to deficit areas of the economy. The micro finance policy would provide the needed window of opportunities and promote the development of appropriate (safe, less costly, covenant and easily
10 accessible) saving products that would be attractive to total customer’s level and improve the saving level in the economy. iv. The interest of Local and International Communities in Micro Financing: Many international investors have expressed interest in investing in the micro finance sector. Thus the establishment of micro finance sector framework for Nigerian would provide opportunity for them to finance the economic activities of low income groups and the pool. v. Utilization of smeeis fund: As at December, 2004, only N8.5 billion (29.5%) of N28.8 billion small and Medium Enterprise Equity Investment Scheme (SMEEIS) fund has utilized. Moreover, 10% of the fund meant for micro credit had not been utilized due to lack of an appropriate framework and confidence in the existing institutions that would served the purpose. This policy provides an appropriate vehicle that would enhance the utilization of the fund.THE CONCEPT OF ECONOMIC GROWTH
11Here, it is very important to make known the meaning of economic growth inorder to appreciate the effect of micro finance banks have made in theeconomic growth in Nigeria, and as well highlight the relationship betweenmicro finance banks and economic growth and development in Nigeria.The term economic growth has become more populate as differenceresearcher have written on them.According to Micro (1970) economic growth is a process whereby the real percapital income of a country increases over a period of time.Awoke, Ede, Oke and Lyiogwe (2005) defines economic growth as theprocess by which the real per capital income increases over though changesin quantity of productive factors.While Okeke (1994) views economic growth as different stages involved in theprocess of increasing the quantity of goods and services.Black (1966) describes economic growth as an increase in the capacity of aneconomy to produce goods and services compared from one period of time toanother. Consequently, economic growth under this content means a processby which a nation’s wealth increases overtime.ANALYSIS OF EFFECT OF MICRO FINANCE BANKS ONECONOMIC GROWTH IN NIGERIA
12The question of what effects has micro finance banks in enhancingsustainable economic growth has been the subject of a substantial amount oftheorizing and empirical research. This has produced a general consensus onthe relevance of enhancing development and promotion of micro financebanks as an anti-powerly tool in ensuring economic growth and developing thecountry, (CBN, 2007).Such emphasis has been deeply rooted upon the crucial and indispensablerole that financial institution can play in economic life.Historically, economists have focused on banking activities Schumpeter (1934)stress the critical important of the banking system in economic growth. Heargued that, the services provided by the banking system, are essential fortechnological innovation and economic growth and highlight situations whenbanks can actively encourage innovation and future economic growth herebyactively identifying and funding productive investment.However, the Harrod- Domar growth model had implicitly postulates a nexusbetween capital stock k (finance) and National Income (development).The model postulates that change in National income y depends linearly onchange in capital stock is finance out of domestic saving s in the closeeconomy version of the model, that is k=s. but domestic savings depends onnational income that is, s=sy, where s is the ratio of income
13The model of national income growth is thus given as follows;∆y = b∆k∆k = S = Sy∆y sbHere, economic growth and development will process at the rate at which thesociety can mobilize domestic saving resources coupled with the productivityof investment y.In the same vein, another important economic growth nexus is the microfinance banks approach focusing on the important of micro-finance banks inaugmenting economic development.The importance of micro finance bank as a tool for development in developingcountries has increasingly receive attention from policy makes anddevelopment parishioners since the pioneering work of meicinnon on “moneyand capital in economic development in 1973” and show on “financialdeepening in economic development in 1973”. There is an overallacknowledgement that financially sustainable micro finance banks with highoutreach have a greater likelihood a positive effect on poverty reduction(economic welfare) because they guarantee sustainable access to credit forthe active poor. (Journal of Banking, 2007).
14In Nigeria, especially, quite a number of micro finance banks have spring u stafter 31 December, 2007 as the deadline for the conversion for CommunityBanks to Micro Finance Banks (MFBs), and the effects on the Nigeriaeconomic growth include the following: Inculcation of good banking habit Deposit generation and saving mobilization Reduction of poverty rate Empowerment of economically active poor Granting of loans and advances Development of service sectorYing assumption here is that as the economic growth in terms of increasedoutput, the level of development also rises, as more and more people are ableto live above poverty line and have access to the several means of lifesustenance.Unfortunately, due to data constraints, resulting from the non availability ofdisaggregated data on relevant variables that can be used for a moresophisticated techniques, causality relationship between loans and advancesof micro finance banks and growth of the critical sectors cannot be estimated.
15FRAMEWORK FOR THE SUPERVISION OF MICRO FINANCEBANKSCBN (2005) provides the framework for the supervision of micro finance asfollow: i. Licensing and supervision of micro finance banks: The licensing of micro financing banks shall be the responsibility of the central bank of Nigeria. A licensed institution shall required to add “MICRO FINANCE BANKS” after its NAMES ALL such name shall be registered with the corporate affairs commission (CAC) in compliance with the companies and Allied Matters Act CAMA 1990. ii. Establishment of a National Micro Finance Committee: A National Micro Finance Conductive Committee (NMFCC) shall be constituted by the Central Bank of Nigeria (CBN) to provide direction for the implementation and monitoring of this policy, membership of the committee shall be determined from time to time by the CBN. The Micro Finance support unit of the CBN shall serve as the secretariat to the committee. iii. Credit reference bureau: Peculiar characteristics of micro finance practice, a credit reference client and aid decision making is desirable. In this regard, the present credit risk management system
16 in the CBN shall be expended to serve the needs of the micro finance sector.iv. Rating agency: The Central Bank of Nigeria shall encourage the establishment of private rating agencies for the sub-sector to rate micro finance institutions, especially, those NGO/MFIs, which intend to transform to micro finance banks.v. Deposit insurance scheme: Since micro finance banks are deposit taking institution, and in order to reinforce public confidence in than micro finance banks shall qualify for deposit insurance scheme of the Nigerian Deposit Insurance Corporation (NDIC).vi. Management certification process: In order to bridge the technical skills gap, especially among operators micro finance banks of MFBs, the policy recognizes, the needs to up an appropriate micro finance operational skills of the management team of MFBs. A transition period of twenty four (24) months shall be allowed for the take off of the programme with effect from the data of launching the policy.vii. Apex association of micro finance institutions: The establishment of an apex association of micro finance institution to promote uniform standards, transparency, good corporate practices
17 and full discloses in the conduct of micro finance institution (bank) businesses shall be encouraged. viii. Establishment of micro finance development fund: In order to promote the development of the sub-sector and provide for the wholesale funding requirement of micro finance banks a micro finance sector development fund shall be set up. The fund shall provide necessary support for the development of the sub-sector in terms of refinancing facility, capacity building and other promotional activities. The fund would be sourced from and through gift facilities from the inter nature development financing institution as well as multilateral and bilateral development institutions. ix. Prudential requirement: The CBN reorganizes the peculiarities of micro finance practices and shall accordingly put in place appropriate regulatory and prudential requirement to guide the operation.MethodologyThe method of data analysis used in the analysis of the data collected in thiswork include. Ordinary least square regression analysis, co-efficient ofdetermination, correlation co-effecting and t-test.
18Regression analysisRegression analysis is a statistical tool which helps to credit one variable fromthe other variable or variables Ogiji, (2002) the regression relationship can bewritten as equations.Y = B0+B1x1+B2x2 + e multiple regressionWhereY = Dependent variablesB0 = Y interestB1 = The scope of the lineX1 and X2 = Independent variablese = The random term or unexplained variable between Y and X.Co-Efficient of DeterminationThe co-efficient of determination is a measure of the amount ofcorrelation existing between y and x; it can be developed in terms ofthe relative variation of the y-values around the regression line andthe corresponding variation of the mean of the y-variablesR2F2 = Σbo y+b1 x yΣ2yThen, co-efficient of correlation become = r2Here, the researcher used this to find out the degree of relationshipbetween Gross Domestic Product, growth rate and micro credit flowand total deposits of micro-finance banks.T-Test to determine the significant of the study.This is used to determine how statistical the inclusion of theindependent variables are on the repression equation
19This formular is given ast= r n-2 n- r2The decision rule is, if the computed t-value is granted than thecritical t-value, the alternative hypothesis (H 1) will be acceptedotherwise rejected alternative (H0)MODEL SPECIFICATIONThe variable used for this research work include:Gross Domestic Product (RGDP)Micro Finance Bank Credit Follow = MCF > x1Micro Finance Bank Total Deposit = MTD > x2Therefore, Equation connecting Gross Domestic Product at currentMicro Credit and Total Deposit is thus:Y = F (X1, X2)That is, GDP = F(MCF, MFD)Thus, the equation connecting G.D.P and MCF is written as:Y = b1 x + b2 x2 --- (ii)Which is multiple regression analysisYear G.D.P (N MIILION) CREDIT FLOW (N MILLION)
202000 4,582,127.29 3,666.62001 4,725,086.00 1,314.62002 6,912,381.25 4,310.92003 8,487,031.57 9,954.02004 11,411,066.91 11,353.802005 14,572,239.12 17,632.072006 18,564,594.73 22,912.012007 20,657,317.67 31,867.082008 24,296,329.29 42,753.06Source: (i) CBN (2006-2010) Statistical Bulletin (ii) Natural Bureau of Statistics(iii) National Board for Community Banking System in Nigeria, an introduction,Revised community Banks prospectus (iv) CBN (2010) Annual Report ofstatement of account.Year G.D.P (%) CREDIT GROWTH FLOW (N RATE MILLION)2000 38.2 39.42001 3.1 -64.22002 46.3 228.12003 22.8 131.02004 34.5 14.12005 27.7 55.32006 27.4 29.92007 11.2 39.12008 17.6 34.2Empirical Analysis of the relationship between G.D.P and credit Flow.
21 2 2YEAR Y X Y X XY2000 38.2 39.4 1,459.24 1,552.36 1,505.082001 3.1 -64.2 9.61 4,121.64 -199.022002 46.3 228.1 21,143.69 52,029.61 10,561.022003 22.8 131.0 5119.54 17,161.0 2,986.82004 34.5 14.1 1,190.25 198.81 486.452005 27.7 55.3 767.29 3,058.09 1,531.812006 27.4 29.9 750.74 894.01 819.292007 11.2 39.1 125.44 1,528.81 437.922008 17.6 34.2 309.76 1,169.64 601.92 2 2 2Total Σy 228.8 Σx 506.9 Σy 7,275.88 Σx 81,713.97 Σx 18,731.25x = Σx that is, mean of x Nx = 506.9 = 56.3 9y = Σy that is, mean of y Ny = 228.8 = 25.4 9HenceY = b o + b i xibo = y - bi x
22bi = n Σxy – (Σy) (Σx) 2 2 n Σx – (Σx)bi = 9 (18,731.25– 228.8 (506.9) 2 9 (81,713.97 – 506.9)bi = 168,581.25 – 115,978.72 732,425.73 - 314,608.81bi = 52,602.53 420,816.92bi = 0.125Also;bo = y - bi xbo = 25.4 – (0.125) x 56.3bo = 25.4 – 7.04bo = 18.36Thus, this regression equation for these various is given as Y = 18.36-0.125x.By interpretation, the b1 coefficients mediate that for each N1billion increase.In Gross Domestic Product (G.D.P) micro credit flow is predicted to increaseby 0.125 million.Coefficient of determination 2r = b0 Σy +b+b1 Σxy
23 2 Σy 2r = 18.36 (228.8) + 0.125 (18,731.25) 7,275.88 2r = 4200.768+2341.5 7,275.88 2r = 0.89992Remark: This mean that 89.92% of the variation in the dependent variable canbe explained by the independent variables.To ascertain the direction of the relationship between G.D.P and micro creditflow, the correlation co-efficient will be used, which is given as rCoefficient co-efficient= r= 0.8992r = 0.9483This also shows that a story positive relationship exist between xand y.Therefore, having as ascertained the direction of relationship, weproceed to test the significant of the relationship using t-test sincen = a (Number of years in consideration)t= r n-2 1- r2
24t = 0.9483 9-2 1-0.8992t= 0.483x2.6457 0.3175t= 2.5089 0.3175t = 7.902While critical t value = 2.365. we determine the critical value of t with degree offreedom (tE) = n-2 (9-2=7), at 5% level of significance (x) = 0.05 (i.e 95% ofconfidence)Thus, computed t >critical value at 0,05 level of significant, giving two failedtest.The decision rule states that if the computed t value fails in the area between< 2.365, the Null hypothesis will be accepted. Therefore, we reject NullHypothesis (H0) and then conclude that there is significant relationshipbetween G.D.P and micro credit flow in Nigeria economy. CONCLUSION
25It is necessary to understand that in order to improve the economic position ofa lot of the Nigeria populate in the rural and urban areas, it is important torealized that sustainable growth in fund allocation to agriculture to enhanceproductivity is not only desirable but it is good for the poor in era of povertyalleviation programmes.The study also identified the policy implication and explains therecommendations for over coming impediments to effective performance ofthe micro finance banks in playing the various developmental roles assignedto it.We can infer that the recommendations will only be useful and work in theinterest of the poor, if there is adequate co-ordination and collaborationbetween the central bank of Nigeria, government and other stakeholders in thefinancial sector. RECOMMENDATIONSDespite government interventions through general policy measure over theyears, the Nigeria micro finance banking system has not fully realize the
26potential role it can play in breaking the various cycle of poverty at the glassroot level and contributory towards the general economic development of thecountry. In view of this, it is worthy to drain alternation to the likelyrecommendations that cannel ensure effective performance of micro financebanks in Nigeria. They include the following i. Need for policy and regulation reforms: Here, concerted efforts should be made by the government to put in place suitable legal and policy environment for the development and evolution of rural financial market. The problems of reported delay in clewing cheques through the micro finance banks correspondent banks should as a matter of priority, be addressed so as to enable than perform financial intermediation function effectively. ii. Investment in infrastructures: The government needs to make significant investment in the provision of infrastructures. This to a large extend would reduce the cost of production and enhance further investment in the rural economy.iii. Recruitment and training of staff: The recruitment of qualified and skilled manpowered that would effectively manage the affairs of the banks should be a matter of priority. The staff quality should be enhanced through staff training and better cost effective training programmes.
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