IMPACT OF MICROFINANCE ON RURAL ECONOMIC GROWTH IN NIGERIA

ABSTRACT
This study examines the impact of microfinance activities on rural economic growth in Nigeria for the period: 2000-2015; the introduction of microfinance banks is the inability of commercial banks to provide sufficient credit, savings and other financial services to the poor and so have taken up the challenges of the gap created by them;  the primary objective is to investigate the impact of microfinance on rural economic growth in Nigeria with the specific objective of examining and evaluating the impact on agricultural contribution to GDP, rural saving and poverty reduction; literature was reviewed along the line of conceptual framework, theoretical and empirical literature; methodology adopted used the ordinary least square (OLS) regression technique to estimate the hypotheses, values of aggregate loan and advances to aggregate deposit ratio was used as proxy for microfinance activities and adopted as the independent variable while the dependent variables include agricultural sector contributions to gross domestic product (GDP), rural savings (RS) and poverty index (PI); Data analysis considered three hypotheses and the result from the  study reveals that regression coefficient of microfinance activity is negative in explaining agricultural contribution to GDP and rural poverty but positive and significant in explaining rural savings in Nigeria; based on these findings, the study recommends that conscious effort showed be made by government to industrialize rural areas as a means of improving rural economic growth; microfinance institutions should be encouraged to lend to rural dwellers as a way of promoting rural saving habits in Nigeria while policies related to agricultural diversification should be intensified by government in combating the menace of poverty in Nigeria.
 
CHAPTER ONE
INTRODUCTION
1.1       Background of the Study
Over the past three decades, there has been growing awareness of the spatial dimension in the development of the rural areas especially in developing countries where rural communities have earlier experienced decades of neglect (Olawepo and Ariyo, 2011). There is therefore special interest in the accelerating processes of rural community transformation by various governments in the areas of poverty alleviation, provision of rural infrastructure such as health and medical facilities, electricity, pipe borne water. Schools; agricultural extension and in the development of micro finance establishments that will affect the lives of the rural investors and community organizations. Based on these and other strategies, the central bank of Nigeria (CBN) in 1990 established an economic policy that would encourage the extension of banking business to the rural area of the country in order to mobilize rural savings. This was aimed at development and fostering rural transformation (Ariyo, 2003 and Olawepo, 2004). The whole idea of rural banking stemmed from a realization of the abundant resources available in the rural areas, the need to channel these resources to production and make such business activities contribute to economic development shifted research focus and government policy to promoting rural banking habit. An increase in rural investment as a result of provision of loans and advances will gear up output level and this will in turn raise the consumption level and possibly improve accessibility to public good s and services within the rural environment (See Direvedi, 1980; Adedayo, 1983; Jenyo, 2002 and Olawepo 2004).
 
According to Smith and Yeboah, (2005), throughout most of the post World War II period, government across the developing world have intervened in rural financial markets in order promote income expansion and alleviate rural poverty. In many of these efforts especially during the 1950s, 1960s and 1970s, the authorities pursued the direct credit approach which is targeted at increasing production or adopting new technologies without external assistance in the form of credit since they were assumed to be too poor to save. But private banks could not lend on appropriate terms to this sector and thus farmers were forced into the hand of money lenders This Development lead to the establishment of government owned specialized institutions like Agricultural Credit Guarantee Scheme to provide subsidized credit to the target population.
 
 
By the early 1990s two general approaches to financial market reform had taken shape. The first was known as financial liberalization and the second the financial  system development Approach. The goal of rural financial market reform was to expand access to financial services and efficiency of financial intermediation Restrictive government polices was said to be the principal cause of the shallow, fragmented and inefficient financial systems plaguing many developing countries (Mckinnon 1973).
 
To enhance the efficiency of the financial system and to create more access to financial services for marginalized groups, the prescription was liberalize the financial system by eliminating restrictions on interest rates, mandatory sector credit allocations and credit ceilings (Pill and Pradhan, 1997; African Development Bank, 1994; and Aryeetey et al, 1997).
 
Today the task of taking the financial system and the entire economy to the next level is squarely placed on financial system strategy 2020. The blue print of financial system strategy is to reposition the country to one of twenty largest economies in the world. The objectives were articulated strategies to make Nigeria the financial hub of Africa, join the league of the top 20 economies and build financial institutions that are global players.
 
Above all, there can be no meaningful discussion of  Nigerian’s rural economy without due consideration of crucial role of not only Agriculture that has remained largest revenue earners for Nigerian living in rural area but also those engage in small scale business such as pottery, weaving, carving, tool making, trading hairdressers, photographers, welders , bakery, small and medium scale  enterprises’ have been fully recognized by government and development experts as the main engine of economic growth and a major factor in promoting the realization of FSS2020, improve standard  of living of rural populaces, bring local capital formation, achieve high level of productivity and capacity and act as principal catalyst  for achieving equitable and sustainable industrial diversification.
 
1.2       Statement of Problem
Evidence in Latin American, Asian and African countries show that savings mobilization is one of the key activities in building a sound financial system (Lamberte et al, 2006; Amel et al, 2004; Gonzalez-vego, 2003; Roberts and Hanning ,1998; Deaton,1992; Bencivensa and Smith, 1991; Braverman and Guasu, 1986; Begashaw, 1978). However, in developing countries, savings are often under mobilized. Two commonly cited underlying causes are: (1) prevalence of inappropriate saving products and poor services by depository institutions, (2) lack of confidence in the safety or liquidity of financial institutions by rural people (Sec, De Aghion and Morduch, 2005; Gonzauz-vega, 2003; Ghosh et al, 2000; Feder, 1993). Therefore, to effectively and efficiently mobilize savings, saving products appropriate for rural savers need to be developed and depository institutions need to improve their services to this category of the population. Also, the institutions need to win the confidence of the rural people by building easy and friendly saving and withdrawal procedures.
 
The core objectives of national integrated rural development plan (2000) for microfinance bank are: to ensure significant reduction of poverty and ultimately its eradication in the shortest possible time; mobilize and empower rural population to create wealth through increased agriculture , industrials and other productive activities; promote the expansion of the productive base of the rural economy through the creation of non-agricultural enterprises; provide access to extension services, input, credit and marketing services and to raise rural productivity in general. The integrated rural development plan identifies poverty reduction, mobilization of savings and financing agriculture as the three cardinal transmission channels through which micro financing will enhance rural economic growth and development.
 
In Nigeria, the government through its legislation seem to exacerbate the micro credit banking crises. For example, in 1990 the government established the community bank to promote banking habit among the rural people and accelerate rural development through financial intermediation. In 2005, the government through the central bank of Nigeria mandated the existing community banks to migrate to Microfinance Banks CBN (2005) (10) (Vanguard, 2011). The regulatory framework for microfinance banks changed the ownership structure of the community banks by allowing a single individual to own a microfinance bank. The regulation also increased the minimum share capital for microfinance banks to N20 million for unit bank and N2 billion for state bank. Such has the ability of creating unlevel playing ground between the poor and the rich. The reform targets economically active poor without effectively addressing the deluge of problems the defunct community banks encountered.
 
Moreover, the Nigerian deposit insurance corporation conducted a nationwide investigation in 2011 on all the microfinance banks in the country. The findings led to the complete closure of about 224 microfinance bank (Vanguard, 2011). The remote causes of such crises could be traced to the lagging supervision and liberal licensing of microfinance banks. This is because CBN was giving microfinance bank license without proper regulatory and supervisory requirement. This situation led to the proliferation of microfinance banks without complying to the regulatory issues like regular rendition of reports to Central Bank and keeping proper book of account.
 
This development triggered widespread criticisms on the microfinance model by depositors and customers of the affected microfinance banks. The Nigerian Deposit Insurance Corporation (NDIC) promised full protection for depositors and publishes regularly depositors that are yet to collect their claims. However the nature of microfinance clients makes the NDIC promise mere window dressing as some of them can not read nor write let alone have access to national dailies.
 
With such policy vacillation, the ability of micro finance banks in achieving the national integrated rural development plan in the Nigerian economy is not certain and so constitutes a very good research area. The essence of this study is to fill this research gap.
 
1.3       Objectives of the Study
The major objective of this study is to investigate the impact of microfinance on rural economic growth in Nigeria. To achieve this objective, the study strives to fulfill the following specific objectives.

• To examine the impact of microfinance activities on agricultural contribution to gross domestic product in Nigeria.
• To evaluate the impact of microfinance activities on rural savings in Nigeria.
• To assess the impact of microfinance activities on rural poverty in Nigeria

 
1.4       Research Questions
The following are the research questions which this study seeks to answer.

• To what extent has microfinance activities impacted positively and significantly on agricultural sector contribution to Nigeria’s gross domestic product.
• To what extent has microfinance activities impacted positively and significantly on rural savings in Nigeria.
• To what extent has microfinance activities impacted positively and significantly on rural poverty reduction in Nigerian.

 
 
1.5       Research Hypotheses
In line with the objective of the study, the following hypotheses were formulated.
(1)  H_o:Microfinance banks activities do not have positive and significant impact on  agricultural sector contribution to Nigerian’s gross domestic product.
H_i:Microfinance banks activities have positive and significant impact on agricultural sector contribution to Nigerian’s gross domestic product.
 
(2) H_o: Microfinance banks activities do not have positive and significant impact on rural savings in Nigeria.
H_i: Microfinance banks activities have positive and significant impact on rural savings in Nigeria.
 
(3) H_o:Microfinance banks activities do not have positive and significant impact on rural poverty reduction in Nigeria.
H_i:Microfinance banks activities have positive and significant impact on rural poverty reduction in Nigeria.
 
1.6       Scope of the Study
The study will cover the period 2000-2015. The practice of microfinance in Nigeria is rooted in its culture and dates back several centuries. Thus, in 2000, the World Bank in a meeting with the Nigerian government regarding microfinance urged the central bank of Nigeria to develop an appropriate policy as well as regulatory and supervisory framework for the operations of microfinance institution.
 
Accordingly, the focus of this study is to verify the impact of microfinance institution activities on the enhancement of economic growth in Nigeria from 2000-2015 with the rural areas in mind.
 
1.7       Significance of the Study
The study will be significant to the following groups:
 

1. Government

Policy decisions are made on necessity, preliminary data and estimates that contain considerable desire to achieve its intended objectives. Thus, this study will assist government policy markers in formulating police that will impact on achieving better living standards on the rural populace of Nigerians.
 
Again, the focused of the Nigerian government microfinance policy is to make financial services accessible to a large segment of the population which otherwise would have little or no access to financial service. Therefore, the small and medium scale enterprises that have been suffering for a long time from poor funding will be bridged through microfinance loans.

2. Donor agencies, operators and Regulators in the Banking Industry

It will asset them in enunciating  policies that will not only positively impact on microfinance bank but also to remain relevant in the economy by performing such a function as mobilization of domestic savings.

3. Academic Significance
4. The study will contribute to the array and volume of literature written by different scholars in this area of finance.
5. The study will serve as a body of reserved knowledge to be referred to by researchers.

iii.        It will suggest ways of interest to academics based on empirical evidence of enhancing service delivery by microfinance institutions

1. It will trace the history of rural banking policies in Nigeria especially since the introduction of microfinance banking. For instance, on 15^th December 2005, the federal government through central bank issued a microfinance policy, supervisory and regulatory framework that allows for the establishment of microfinance bank that cater for the need of small scale business and low income groups: the policy provides for two categories of private sector driven microfinance institutions. Those that operate in a local government area capitalized to N20m and those licensed to operate in a state capitalized to the tune of N1billion.

4. Rural Dwellers

Rural dwellers consist primarily peasant farmers and Artisans such as bakery, convenience stores, hairdressers, welders, photographers and restaurant. The study will be significant to them as it is capable of contributing to the improvement of standard of living in terms of income, education, nutrition and health. Development practitioners, policy makers, and multilateral and bilateral lenders, however, recognize that providing efficient microfinance services for rural dwellers is important for a variety of reasons (CBN, 2006). Microfinance can be a critical element of an effective poverty reduction strategy, improved access and efficient provision of savings, credit, and insurance facilities in particular can enable the poor to smoothen their consumption, manage their risks better, build their assets gradually, develop their micro enterprises, enhance their income earning capacity and enjoy an improved quality of life.
 

5. Professionals

The study will be useful to them through promotion of sound microfinance practice by advocating professionalism, transparency and good governance in microfinance institutions.
 
As expert, they will guide the poor and low income earners to channel the microfinance loans to appropriate business, keep proper book of account and maintain financial discipline.
 
They will also be guided through acquisition of entrepreneurial skills such as marketing skill, human resources management, asset management financing and investment and management of family.
 

6. Economic Watchers and Interested Public

This study will be important to the general and interested public because                           it will help to explore option available from rural banking institution in accessing loans and advances thereby increasing their economic well being.
 

• Operational Definition of Terms

The following terms are defined in the context of this study
 

1. Micro-Finance Policy

This is a national document setting out regulatory and supervision framework for Nigeria.

2. Micro-Finance Bank

A Micro-finance bank should be construed to mean any company licensed to carry on the business of providing microfinance services such as savings, loans, domestic fund transfers that micro-enterprises need to expand the business as defined by the guidelines.

3. Micro-Finance Institution

This is an establishment designed to grant micro-credit to people to enable them develop small businesses.