ANALYSIS OF THE EFFECTS OF MICRO FINANCE BANKS ON 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 FINANCEEBONYI STATE UNIVERSITY – ABAKALIKI

PHONE NO: 080-37743134E-MAIL: nwitewhite2006@yahoo.com

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ABSTRACTPoverty has been a cankerworm and predicament which has deepen into the marrows of Nigerian systems. This has over the years made it very difficult for Nigerians to develop as a nation. Several attempt have been made by various regimes in an attempt to alleviate poverty, little success have been made in this direction. This work examined the various attempts by these regimes using a historical research with the view of curbing or eradicating poverty. The overall objective of this study is to evaluate the effect of micro finance banks on poverty reduction and economic growth in Nigerian economy. Specifically, the study tends to achieve the following objectives. To find out if 4 micro finance policy have reduced the poverty level in Nigeria. A review of this policy on poverty is caused by factors such as death, illness, accident, old age, inadequate employment of the head of household or breadwinners. In rural African, these factors are the root causes of poverty while at the macro-level poverty, a myriad of factors of organizational behaviour to political instability economic mismanagement, infrastructural inadequacies and lack of commitment to poverty reduction policies. The researcher recommends a total commitment by the government to a comprehensive social security system geared towards reducing both the micro and macro levels of poverty which is currently been adopted by the present government.

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INTRODUCTION

Economic growth and poverty reduction through the empowerment

of people by increasing their access to factors of production,

especially credit (loan) has became a catalyst, for stimulating

sustainable economic growth and poverty reduction, with access to

micro credit, the capacity of the poor entrepreneurship would enable

a teaming number of people engage in economic activities, also

became self-reliant, thereby increasing employment opportunities,

increasing household income and crediting wealth (CBN, 2005).

It is in relation of this great potential of micro finance that the

Central Bank of Nigeria (CBN) by virtues of the provision of section

28, sub (1) (B) of the CBN Act 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 (as amended) were taking

the initiative to create a platform for the establishment of private

sector driven micro finance banks (MFBs) as a strategy to make

impact in the economic development in Nigeria.

Therefore, the Central Bank of Nigeria (CBN) has put in a national

micro finance policy framework that would enhance the provision of

diversified micro finance services on a long term basis for the poor

and low income earners with a view to promoting synergy between

micro finance bank and other specialized institutions. The policy

seek to improve the Central Bank of Nigerian’s regulatory and

supervisory roles in ensuring monitory stability, economic growth

poverty reduction and liquidity appropriate machinery for monitoring

the activities of development partners in the micro finance sub-

sector in Nigeria.

Similarly, Sam Oni, director, Other Financial Institution Department

(OFID) has re-emphasized the need for effective supervision of Micro

Finance Banks (MFBs) in order to harness their potentials which tend

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towards offering a tremendous scope for economic growth, poverty

reduction, and employment generation and rural transformation in

emerging economy (Financial standard, 2007).

The importance of Nigerian micro finance banking system has been

noted by several researchers, including Okey (2007), IFAD (2010),

Oni (2007) for the crucial roles it plays in serving as a credit

mobilization, deposit generation and provision mechanism to people

who have to been deprived loan or credit extension by deposit

money banks (commercial banks).

CONCEPT OF MICRO FINANCE BANKS

The Micro Finance Banks (MFBs) as a necessary veritable tool for

enhancing economic activities and promoting natural economic

growth and reducing poverty was associated with the promulgation

of micro finance policy, regulatory and supervisory framework for

the establishment and operation of micro finance banks in Nigeria by

Central Bank of Nigeria (CBN) on December 15.

The concept of micro finance is not new, saving and credit groups

that have operated 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. Formal credit and

saving institutions for the past decades, providing customers above

traditionally neglected by deposit money banks (commercial banks)

a way of obtaining financial services through co-operative and

development finance institutions.

The micro finance practice in Nigeria is culturally rooted and dates

back several years. The traditional micro finance institution provides

access to credit for the rural and urban low income earners.

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They are mainly of the informal self-keep groups or rotating saving

and credit association (ROSCAS), (CBN, 2005).

In government attempt to enhance flow of micro credit or loan to

Nigeria rural areas has in the past initiated a series of publically

financed micro/rural credit programmes and policies targeted at the

poor and other institutional arrangements which include:

The National Directorate of Employment, the Nigeria Agriculture

Insurance Co-operation (NAIC) Family Economic Advancement

Programme (FEAP), People Banks of Nigeria (PBN), Community

Banks (CBs) National Poverty Programme (NAPEP) and a lot of others

as if these institutional arrangement were not yielding positive

results on the purpose to in which they are meant for the federal

though the Central Bank of Nigeria (CBN) formulated and

promulgated microfinance policy, regulatory and supervisory

framework on December 2005 for the establishment and operation

of micro finance banks as a necessary veritable tools for enhancing

economic activities and promoting national economic growth and

development as well as making financial services available on a

sustainable basis to the micro small and medium enterprises

(MSMEs) (Daily un, 2005).

To this effect, December 31st 2007 was given as the financial dealer

for conversion of community banks to micro finance banks provide

micro credit or loan to economically active poor and low income

household with financial, services, such as credit (to held them

engage in income generating activities or expand or grow their small

businesses), saving, micro leasing, micro insurance and payment

transfer. (Daily Champion, 2007).

OBJECTIVES OF MICRO FINANCE BANKS

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According to (CBN, 2005), this following contributed to the

justification for the establishment 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 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.

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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 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

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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

Here, it is very important to make known the meaning of economic

growth in order to appreciate the effect of micro finance banks have

made in the economic growth in Nigeria, and as well highlight the

relationship between micro finance banks and economic growth and

development in Nigeria.

The term economic growth has become more populate as difference

researcher have written on them.

According to Micro (1970) economic growth is a process whereby the

real per capital income of a country increases over a period of time.

Awoke, Ede, Oke and Lyiogwe (2005) defines economic growth as

the process by which the real per capital income increases over

though changes in quantity of productive factors.

While Okeke (1994) views economic growth as different stages

involved in the process of increasing the quantity of goods and

services.

Black (1966) describes economic growth as an increase in the

capacity of an economy to produce goods and services compared

from one period of time to another. Consequently, economic growth

under this content means a process by which a nation’s wealth

increases overtime.

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ANALYSIS OF EFFECT OF MICRO FINANCE BANKS ON

ECONOMIC GROWTH IN NIGERIA

The question of what effects has micro finance banks in enhancing

sustainable economic growth has been the subject of a substantial

amount of theorizing and empirical research. This has produced a

general consensus on the relevance of enhancing development and

promotion of micro finance banks as an anti-powerly tool in ensuring

economic growth and developing the country, (CBN, 2007).

Such emphasis has been deeply rooted upon the crucial and

indispensable role 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. He argued that, the services provided

by the banking system, are essential for technological innovation

and economic growth and highlight situations when banks can

actively encourage innovation and future economic growth hereby

actively identifying and funding productive investment.

However, the Harrod- Domar growth model had implicitly postulates

a nexus between capital stock k (finance) and National Income

(development).

The model postulates that change in National income y depends

linearly on change in capital stock is finance out of domestic saving

s in the close economy version of the model, that is k=s. but

domestic savings depends on national income that is, s=sy, where s

is the ratio of income

The model of national income growth is thus given as follows;

∆y = b∆k

∆k = S = Sy

∆y sb

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Here, economic growth and development will process at the rate at

which the society can mobilize domestic saving resources coupled

with the productivity of investment y.

In the same vein, another important economic growth nexus is the

micro finance banks approach focusing on the important of micro-

finance banks in augmenting economic development.

The importance of micro finance bank as a tool for development in

developing countries has increasingly receive attention from policy

makes and development parishioners since the pioneering work of

meicinnon on “money and capital in economic development in

1973” and show on “financial deepening in economic development

in 1973”. There is an overall acknowledgement that financially

sustainable micro finance banks with high outreach have a greater

likelihood a positive effect on poverty reduction (economic welfare)

because they guarantee sustainable access to credit for the active

poor. (Journal of Banking, 2007).

In Nigeria, especially, quite a number of micro finance banks have

spring u after 31st December, 2007 as the deadline for the

conversion for Community Banks to Micro Finance Banks (MFBs), and

the effects on the Nigeria economic 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 sector

Ying assumption here is that as the economic growth in terms of

increased output, the level of development also rises, as more and

more people are able to live above poverty line and have access to

the several means of life sustenance.

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Unfortunately, due to data constraints, resulting from the non

availability of disaggregated data on relevant variables that can be

used for a more sophisticated techniques, causality relationship

between loans and advances of micro finance banks and growth of

the critical sectors cannot be estimated.

FRAMEWORK FOR THE SUPERVISION OF MICRO FINANCE

BANKS

CBN (2005) provides the framework for the supervision of micro

finance as follow:

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 in the CBN shall be expended to serve

the needs of the micro finance sector.

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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 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.

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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.

Methodology

The method of data analysis used in the analysis of the data

collected in this work include. Ordinary least square regression

analysis, co-efficient of determination, correlation co-effecting and t-

test.

Regression analysis

Regression analysis is a statistical tool which helps to credit one

variable from the other variable or variables Ogiji, (2002) the

regression relationship can be written as equations.

Y = B0+B1x1+B2x2 + e multiple regression

Where

Y = Dependent variables

B0 = Y interest

B1 = The scope of the line

X1 and X2 = Independent variables

e = The random term or unexplained variable between Y and X.

Co-Efficient of Determination

The co-efficient of determination is a measure of the amount of

correlation existing between y and x; it can be developed in terms of

the relative variation of the y-values around the regression line and

the corresponding variation of the mean of the y-variables

R2

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F2 = Σbo y+b1 x y

Σ2y

Then, co-efficient of correlation become = r2

Here, the researcher used this to find out the degree of relationship

between Gross Domestic Product, growth rate and micro credit flow

and 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 the

independent variables are on the repression equation

This formular is given as

t= r n-2

n- r2

The decision rule is, if the computed t-value is granted than the

critical t-value, the alternative hypothesis (H1) will be accepted

otherwise rejected alternative (H0)

MODEL SPECIFICATION

The variable used for this research work include:

Gross Domestic Product (RGDP)

Micro Finance Bank Credit Follow = MCF > x1

Micro Finance Bank Total Deposit = MTD > x2

Therefore, Equation connecting Gross Domestic Product at current

Micro 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 analysis

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Year G.D.P (N MIILION) CREDIT FLOW (N

MILLION)

200020012002200320042005200620072008

4,582,127.294,725,086.006,912,381.258,487,031.5711,411,066.9114,572,239.1218,564,594.7320,657,317.6724,296,329.29

3,666.61,314.64,310.99,954.011,353.8017,632.0722,912.0131,867.0842,753.06

Source: (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 of statement of account.

Year G.D.P (%) GROWTH RATE

CREDIT FLOW (N MILLION)

200020012002200320042005200620072008

38.23.146.322.834.527.727.411.217.6

39.4-64.2228.1131.014.155.329.939.134.2

Empirical Analysis of the relationship between G.D.P and credit Flow.

YEAR Y X Y2 X2 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 1,528.81 437.92

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2008 17.6 34.2 309.76 1,169.64 601.92Total Σy

228.8Σx 506.9

Σy2 7,275.88 Σx281,713.97

Σx218,731.25

x = Σx that is, mean of xN

x = 506.9 = 56.39

y = Σy that is, mean of yN

y = 228.8 = 25.49

HenceY = bo + bi xi

bo = y - bi x

bi = n Σxy – (Σy) (Σx)

n Σx2 – (Σx) 2

bi = 9 (18,731.25– 228.8 (506.9)

9 (81,713.97 – 506.9) 2

bi = 168,581.25 – 115,978.72

732,425.73 - 314,608.81

bi = 52,602.53

420,816.92

bi = 0.125

Also;

bo = y - bi x

bo = 25.4 – (0.125) x 56.3bo = 25.4 – 7.04bo = 18.36

Thus, this regression equation for these various is given as Y =

18.36-0.125x.

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By interpretation, the b1 coefficients mediate that for each N1billion

increase. In Gross Domestic Product (G.D.P) micro credit flow is

predicted to increase by 0.125 million.

Coefficient of determination

r2 = b0 Σy +b+b1 Σxy

Σy 2

r2 = 18.36 (228.8) + 0.125 (18,731.25)

7,275.88

r2 = 4200.768+2341.5

7,275.88

r2 = 0.89992

Remark: This mean that 89.92% of the variation in the dependent

variable can be explained by the independent variables.

To ascertain the direction of the relationship between G.D.P and

micro credit flow, the correlation co-efficient will be used, which is

given as r

Coefficient co-efficient

= r

= 0.8992

r = 0.9483

This also shows that a story positive relationship exist between x

and y.

Therefore, having as ascertained the direction of relationship, we

proceed to test the significant of the relationship using t-test since

n = a (Number of years in consideration)

t = r n-2

1- r2

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t = 0.9483 9-2

1-0.8992

t = 0.483x2.6457

0.3175

t = 2.5089

0.3175

t = 7.902

While critical t value = 2.365. we determine the critical value of t

with degree of freedom (tE) = n-2 (9-2=7), at 5% level of

significance (x) = 0.05 (i.e 95% of confidence)

Thus, computed t >critical value at 0,05 level of significant, giving

two failed test.

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 Null Hypothesis (H0) and then conclude that there is

significant relationship between G.D.P and micro credit flow in

Nigeria economy.

CONCLUSION

It is necessary to understand that in order to improve the economic

position of a lot of the Nigeria populate in the rural and urban areas,

it is important to realized that sustainable growth in fund allocation

to agriculture to enhance productivity is not only desirable but it is

good for the poor in era of poverty alleviation programmes.

The study also identified the policy implication and explains the

recommendations for over coming impediments to effective

performance of the micro finance banks in playing the various

developmental roles assigned to it.

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We can infer that the recommendations will only be useful and work

in the interest of the poor, if there is adequate co-ordination and

collaboration between the central bank of Nigeria, government and

other stakeholders in the financial sector.

RECOMMENDATIONS

Despite government interventions through general policy measure

over the years, the Nigeria micro finance banking system has not

fully realize the potential role it can play in breaking the various

cycle of poverty at the glass root level and contributory towards the

general economic development of the country. In view of this, it is

worthy to drain alternation to the likely recommendations that

cannel ensure effective performance of micro finance banks 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.

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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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