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THE IMPACT OF MICROFINANCE ON WELFARE AND POVERTY ALLEVIATION IN SOUTHWEST NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study
The study presents empirical findings on the impact of Microfinance (MF) on the welfare and poverty alleviation in Southwest Nigeria. As indicated in the literature, poverty is number one problem in the world today as depicted by the following startling statistics: three billion people live below US$2 per day (World Bank, 2001); one and half billion people live below US$1 per day; 70-90 per cent of people in the developing world are poor; poverty is number one of the eight Millennium Development Goals (MDGs); and 75 per cent of the world poor are women. It seems as if all the strategies applied in the past to fight poverty have proved ineffective, but the world seems to have found a most promising strategy. From the historical literature, informal saving and credit unions have operated for centuries across the world. In the Middle Ages, for example, the Italian monks had created the first official pawn shop (1462 AD) to counter usury practices. In 1515 Pope Leon X authorized pawn shops to charge interest to cover their operating costs. In the 1700s, Jonathan Swift initiated the Irish Loan Fund System, which provided small loans to poor farmers who had no securities. It is on record that the fund gave credit to about 20 per cent of all Irish households annually. In the 1800s, the concept of the financial cooperative was developed by Friedric Wilhelm in Germany. By 1865, the Cooperative movement had expanded rapidly within Germany and other European countries, North America and some developing countries (Bright, Helms, 2006).
In early 1900s, adaptations of the models developed in the preceding century appeared in some parts of rural Latin America (Bright and Helms, 2006). Efforts to expand access to agricultural credit, in Bolivia for example were made unsuccessfully as the rate charged was too low and banks failed. By early 1950 – 1970, experimental programmes were on stream to extend small loans to groups of poor women to enable them invest in micro business. These experiments were initiated by the Grameen Bank of Bangladesh, ACCION International in Latin America and the Self-Employed Women‟s Association Bank in India (Little Field, Morduch and Hashemi, 2004). The term Microcredit began to be replaced by microfinance in the early 1990. By that time the term had started to include savings, and other services such as insurance and money transfers (Basu et al, 2000). Microfinance is the provision of financial services, such as loans, savings, insurance, money transfers, and payments facilities to low income groups. It could also be used for productive purposes such as investments, seeds or additional working capital for micro enterprises. On the other hand, it could be used to provide for immediate family expenditure on food, education, housing and health. Microfinance is an effective way for poor people to increase their economic security and thus reduce poverty. It enables poor people to manage their limited financial resources, reduce the impact of economic shocks and increase their assets and income (Robinson, 2001). Microfinance is no longer an experiment or a wish, it is a proven success. It has worked successfully in many parts of the World – Africa, Asia, Latin-America, Europe and North America. It is safe and profitable; indeed it is the oldest and most resilient financial system in history. The key issues in Microfinance include the realization that poor people need a variety of financial services, including loans, savings, money transfer and insurance which Microfinance provides. It is a powerful tool to fight poverty through building of assets and serving as an absorber against external ties and financial shocks. Microfinance involves building of financial sub-system which serve the poor and its architecture could be easily integrated into the financial system of the nation.
The other key issues of Microfinance are the fact that it can pay for itself and should do so if it is to reach a large number of poor people. Microfinance is not limited to only micro-credit; it is inclusive of other financial services, such as micro-insurance, money transfer and savings.
Furthermore, donor funds are meant only to support and assist Microfinance institutions and not compete with them. In the developed world, leaders talk about the poor and how to alleviate poverty. One hears this often at political and conferences across Europe and other parts of the World. There are also talks of strategies of equitable trade, debt relief, subsidies and aid flows etc. It has become clear that the ultimate strategy for the World to meet the needs of the poor is through microfinance which gives them access to financial services to enable them make everyday decision on: payment of children school fees; payment for food and shelter; meet health bills and meet unforeseen finance needs resulting from flood, fire, earthquake, etcetera. Microfinance may not be able to solve all the problems of the poor, but it certainly puts resources in their hands in order for them to live an enhanced standard of life. Microfinance has globally achieved great accomplishments over the last 30 years. It has shown that poor people can be viable customers and that microfinance can create strong institutions which focus on them. No doubt Microfinance has strongly attracted the interest of private sector investors. However, the following challenges, among others, face Microfinance institutions: They need to increase the scale of financial services to the poor; they need to reach out and seek the poor wherever they are and give them access to finance. The Grameen Bank of Bangladesh has set a good example in this direction by allowing credit and other services to cost less for the poor and train staff to be uniquely suitable to Microfinance business. The latter enhances efficiency and sustainability of the sector; and develops and tailors products to meet the needs of the clients – the poor. This study presents empirical findings on the impact of microfinance on welfare and poverty alleviation in Southwest Nigeria.

1.2 Statement of the Research Problem
Before the 1970s, the Nigerian experience in Microfinance was limited to Self Help Groups, Rotating Savings and Credit Associations, Cooperative Unions Community, Savings Collectors and Local Money Lenders. They were all informal and largely unregulated. They were mainly Micro-Credit savings mechanisms. Their strengths were associated with good repayment records due to peer pressure and other cultural mechanisms. However, their weaknesses lay in low level access to capital and limited range due to informal non-structured frame work. Between 1970 and 1990, there were several government initiatives in the form of Rural Banking Programme (RBP); Sectoral Allocation of credit by Central Bank; Agricultural Credit Guarantee Scheme (ACGS); Nigerian Agricultural and Co-operative Bank (NACB) and the National Directorate of Employment (NDE) etc. These efforts were largely incoherent, and mainly targeted towards enhancing subsidized credit in agriculture and a few other sectors of the economy. They were not sustainable as a result of poor repayment records and inefficient administrative structures. In the 1990s, the Federal Government embarked on other initiatives, such as the Peoples Bank, (1990-2002), Community Banks, Nigerian Agricultural Insurance Corporation and National Poverty Eradication Programmes and the Family Economic Advancement Programme. These were focused on rural and community small-scale financing. They were all short lived and unsustainable as a result of poor government policies and corporate governance.
Between 2000 to date, there have been other initiatives such as the merger of the Peoples Bank (PB), Family Economic Advancement Programmesme (FEAP), and NACB into the National Agricultural, Cooperative and Rural Development Bank (NACRDB). Then came the National Economic Empowerment and Development Strategy (NEEDS), and the launch of Microfinance Policy in 2005. These are more interactive initiatives resulting from wider consultations with stakeholders with the hope of better success than their predecessors.
The fact of the matter is that there are too many poor in SouthWest Nigeria who require micro/small financial services such as Credit, Insurance, Money transfer etcetera in order to engage actively in productive activities and improve their standard of living. Paradoxically, governments across the world, particularly in Nigeria over the years, have not been able to adequately help the poor in spite of all the rhetorics and several failed poverty-alleviation project. Since the discovery that Microfinance can help the poor to access credit and other financial services that will ensure better life for them, a lot of works have been carried out. It is this new strategy that this research intends to explore to establish the developmental relationship between microfinance and poverty alleviation, taking a queue from jurisdictions of the world. MFIs are recent phenomenon in the Nigerian economy. It came to light in 2005 when it replaced the Community Banks. Although many studies have examined the issue of poverty alleviation in Nigeria, not many of them have assessed the impact of MFIs on poverty alleviation. This study seeks to fill this gap.
1.3 Research Questions.
The issues of poverty alleviation, economic development and Microfinance have become major policy discourse globally. To this extent the research work has generated a set of questions which include the following:
i. To what extent has the MFBs served as instruments of credit mobilization and dispersion among the working poor in Nigeria?
ii. How can Microfinance really get the poor out of their poverty?
iii. How has Microfinance enhanced the growth of micro and small scale enterprises in Nigeria?
These are the research questions which the study attempts to provide answers.
1.4 Objectives of the Study
The main objective of this study is to examine the impact of Microfinance on the welfare of the poor and poverty alleviation in Nigeria. The specific objectives include the following:
1. To examine the roles of microfinance towards the dispersion of credit among the working poor in Nigeria.
2. To assess the extent to which microfinance institutions have successfully helped the poor to improve their standard of living.
3. To assess the impact of microfinance on the growth of small and medium scale enterprises in Nigeria.
1.5 Statement of Research Hypotheses
The main and specific objectives of this study have been specified in the preceding section. The associated research hypotheses are as follow: (a) Ho: MFBs have not been potent instruments in the dispersion of credit among the working poor in Nigeria Hi: MFBs have been potent instruments in the mobilization and dispersion of credit among the working poor in Nigeria (b) Ho: Microfinance Institutions have not successfully helped the poor to improve their standard of living. Hi: Microfinance Institutions have successfully helped the poor to improve their standard of living. (c) Ho: Microfinance Institutions have not impacted on the growth of small and medium scale enterprises in Nigeria Hi: Microfinance Institutions have impacted on the growth of small and medium scale enterprises in Nigeria
1.6 Significance of the Study
The significance of this study cannot be over emphasized. Poverty is pervasive in our economy and attempts to alleviate it have not yielded the desired results. Therefore, it is necessary to review the severity of poverty in the country with a view to assessing how microfinance institutions could help to reduce the incidence. It is also necessary to understand how microfinance institutions could contribute to economic development of the nation, by enhancing the productive capabilities and welfare of a largely distressed/vulnerable segment of the society.
1.7 Scope of the Study
The study examined the impact of microfinance institutions on poverty alleviation among the entrepreneurs of SMEs in Nigeria. It used cross-sectional data collected from selected respondents in selected areas of both the Lagos and Ogun States of Nigeria respectively. The study highlighted how certain countries such as India, Bangladesh, Nepal, Bolivia and the Philippines have used microfinance strategy to alleviate poverty. The cross-sectional data obtained from questionnaires administered enabled the researcher to assess the impact and effectiveness of microfinance institutions alleviating poverty in Nigeria. It is known that children and women are among the poorest of the earth. The study targets the customers of MFIs between the ages of 18 and 60 who are gainfully employed and can repay loans. It has been discovered that the ability of women to borrow, save and earn income has enhanced their confidence and they are more able to confront other systemic inequalities (Little Field, Morduch and Hashemi, 2004). Therefore, this study examined the impact of Microfinance on women and other vulnerable groups particularly. In Indonesia, for example, women customers of Bank of Rakayat (Microfinance) partake more in family decisions on children education, use of contraceptives, etc. than women with little or no access to finance.
This study is not unaware of the role of international donors to the Microfinance sector and how it can boost domestic growth. However, the study is limited to local Microfinance institutions and how they constitute effective strategies for poverty alleviation and economic development.

1.8 Outline of the Thesis
The study is divided into five parts. Chapter One presents the background to the study, the objectives of the study, the statement of the research problem, research questions, the hypotheses to be tested, the significance of the study, the scope and limitation of the study. Chapter two reviews the existing literature on Microfinance, Poverty and strategy to alleviate poverty in developed and developing countries. It also reviewed the historical background of Microfinance, the method of operation, the roles of Microfinance in the success of micro, small and medium enterprises, the challenges confronting Microfinance Institutions and the global perspective of Microfinance. Chapter three examines the theoretical framework and methodology adopted for the study in terms of the model specification, methods of estimation, data collection and instrument, data description, study population and sample size. Chapter four presents the data analysis and interpretation of results. The descriptive analysis results and the regression results are presented in qualitative form and were fully discussed so that meaningful conclusion could be drawn. In this chapter formulated hypotheses are to establish the relationship which exists among the variables. Chapter five which is the last part deals with the summary of the study, conclusion, recommendations for policy, and contributions to knowledge and suggestions for further research.
1.9 Method of Data Collection and Analysis
This section of the study details the various data collected and how the data were analyzed. This study relied on the use of primary data collected directly from respondents to the structured questionnaires and interviews. The questionnaire method was used in this study and administered by well trained interviewers in the study area which is Lagos and Ogun States of Nigeria.

The data analysis for this study was by the use of descriptive statistics such as frequency distributions, means, per centages and cross tabulations between the variables identified. The multiple regression analysis was employed to make tentative predictions concerning the outcome of variables. The outputs of the analysis were presented in tables and figures. The statistical tool used was the Statistical Package for the Social Sciences (SPSS).

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study
The study presents empirical findings on the impact of Microfinance (MF) on the welfare and poverty alleviation in Southwest Nigeria. As indicated in the literature, poverty is number one problem in the world today as depicted by the following startling statistics: three billion people live below US$2 per day (World Bank, 2001); one and half billion people live below US$1 per day; 70-90 per cent of people in the developing world are poor; poverty is number one of the eight Millennium Development Goals (MDGs); and 75 per cent of the world poor are women. It seems as if all the strategies applied in the past to fight poverty have proved ineffective, but the world seems to have found a most promising strategy. From the historical literature, informal saving and credit unions have operated for centuries across the world. In the Middle Ages, for example, the Italian monks had created the first official pawn shop (1462 AD) to counter usury practices. In 1515 Pope Leon X authorized pawn shops to charge interest to cover their operating costs. In the 1700s, Jonathan Swift initiated the Irish Loan Fund System, which provided small loans to poor farmers who had no securities. It is on record that the fund gave credit to about 20 per cent of all Irish households annually. In the 1800s, the concept of the financial cooperative was developed by Friedric Wilhelm in Germany. By 1865, the Cooperative movement had expanded rapidly within Germany and other European countries, North America and some developing countries (Bright, Helms, 2006).
In early 1900s, adaptations of the models developed in the preceding century appeared in some parts of rural Latin America (Bright and Helms, 2006). Efforts to expand access to agricultural credit, in Bolivia for example were made unsuccessfully as the rate charged was too low and banks failed. By early 1950 – 1970, experimental programmes were on stream to extend small loans to groups of poor women to enable them invest in micro business. These experiments were initiated by the Grameen Bank of Bangladesh, ACCION International in Latin America and the Self-Employed Women‟s Association Bank in India (Little Field, Morduch and Hashemi, 2004). The term Microcredit began to be replaced by microfinance in the early 1990. By that time the term had started to include savings, and other services such as insurance and money transfers (Basu et al, 2000). Microfinance is the provision of financial services, such as loans, savings, insurance, money transfers, and payments facilities to low income groups. It could also be used for productive purposes such as investments, seeds or additional working capital for micro enterprises. On the other hand, it could be used to provide for immediate family expenditure on food, education, housing and health. Microfinance is an effective way for poor people to increase their economic security and thus reduce poverty. It enables poor people to manage their limited financial resources, reduce the impact of economic shocks and increase their assets and income (Robinson, 2001). Microfinance is no longer an experiment or a wish, it is a proven success. It has worked successfully in many parts of the World – Africa, Asia, Latin-America, Europe and North America. It is safe and profitable; indeed it is the oldest and most resilient financial system in history. The key issues in Microfinance include the realization that poor people need a variety of financial services, including loans, savings, money transfer and insurance which Microfinance provides. It is a powerful tool to fight poverty through building of assets and serving as an absorber against external ties and financial shocks. Microfinance involves building of financial sub-system which serve the poor and its architecture could be easily integrated into the financial system of the nation.
The other key issues of Microfinance are the fact that it can pay for itself and should do so if it is to reach a large number of poor people. Microfinance is not limited to only micro-credit; it is inclusive of other financial services, such as micro-insurance, money transfer and savings.
Furthermore, donor funds are meant only to support and assist Microfinance institutions and not compete with them. In the developed world, leaders talk about the poor and how to alleviate poverty. One hears this often at political and conferences across Europe and other parts of the World. There are also talks of strategies of equitable trade, debt relief, subsidies and aid flows etc. It has become clear that the ultimate strategy for the World to meet the needs of the poor is through microfinance which gives them access to financial services to enable them make everyday decision on: payment of children school fees; payment for food and shelter; meet health bills and meet unforeseen finance needs resulting from flood, fire, earthquake, etcetera. Microfinance may not be able to solve all the problems of the poor, but it certainly puts resources in their hands in order for them to live an enhanced standard of life. Microfinance has globally achieved great accomplishments over the last 30 years. It has shown that poor people can be viable customers and that microfinance can create strong institutions which focus on them. No doubt Microfinance has strongly attracted the interest of private sector investors. However, the following challenges, among others, face Microfinance institutions: They need to increase the scale of financial services to the poor; they need to reach out and seek the poor wherever they are and give them access to finance. The Grameen Bank of Bangladesh has set a good example in this direction by allowing credit and other services to cost less for the poor and train staff to be uniquely suitable to Microfinance business. The latter enhances efficiency and sustainability of the sector; and develops and tailors products to meet the needs of the clients – the poor. This study presents empirical findings on the impact of microfinance on welfare and poverty alleviation in Southwest Nigeria.

1.2 Statement of the Research Problem
Before the 1970s, the Nigerian experience in Microfinance was limited to Self Help Groups, Rotating Savings and Credit Associations, Cooperative Unions Community, Savings Collectors and Local Money Lenders. They were all informal and largely unregulated. They were mainly Micro-Credit savings mechanisms. Their strengths were associated with good repayment records due to peer pressure and other cultural mechanisms. However, their weaknesses lay in low level access to capital and limited range due to informal non-structured frame work. Between 1970 and 1990, there were several government initiatives in the form of Rural Banking Programme (RBP); Sectoral Allocation of credit by Central Bank; Agricultural Credit Guarantee Scheme (ACGS); Nigerian Agricultural and Co-operative Bank (NACB) and the National Directorate of Employment (NDE) etc. These efforts were largely incoherent, and mainly targeted towards enhancing subsidized credit in agriculture and a few other sectors of the economy. They were not sustainable as a result of poor repayment records and inefficient administrative structures. In the 1990s, the Federal Government embarked on other initiatives, such as the Peoples Bank, (1990-2002), Community Banks, Nigerian Agricultural Insurance Corporation and National Poverty Eradication Programmes and the Family Economic Advancement Programme. These were focused on rural and community small-scale financing. They were all short lived and unsustainable as a result of poor government policies and corporate governance.
Between 2000 to date, there have been other initiatives such as the merger of the Peoples Bank (PB), Family Economic Advancement Programmesme (FEAP), and NACB into the National Agricultural, Cooperative and Rural Development Bank (NACRDB). Then came the National Economic Empowerment and Development Strategy (NEEDS), and the launch of Microfinance Policy in 2005. These are more interactive initiatives resulting from wider consultations with stakeholders with the hope of better success than their predecessors.
The fact of the matter is that there are too many poor in SouthWest Nigeria who require micro/small financial services such as Credit, Insurance, Money transfer etcetera in order to engage actively in productive activities and improve their standard of living. Paradoxically, governments across the world, particularly in Nigeria over the years, have not been able to adequately help the poor in spite of all the rhetorics and several failed poverty-alleviation project. Since the discovery that Microfinance can help the poor to access credit and other financial services that will ensure better life for them, a lot of works have been carried out. It is this new strategy that this research intends to explore to establish the developmental relationship between microfinance and poverty alleviation, taking a queue from jurisdictions of the world. MFIs are recent phenomenon in the Nigerian economy. It came to light in 2005 when it replaced the Community Banks. Although many studies have examined the issue of poverty alleviation in Nigeria, not many of them have assessed the impact of MFIs on poverty alleviation. This study seeks to fill this gap.
1.3 Research Questions.
The issues of poverty alleviation, economic development and Microfinance have become major policy discourse globally. To this extent the research work has generated a set of questions which include the following:
i. To what extent has the MFBs served as instruments of credit mobilization and dispersion among the working poor in Nigeria?
ii. How can Microfinance really get the poor out of their poverty?
iii. How has Microfinance enhanced the growth of micro and small scale enterprises in Nigeria?
These are the research questions which the study attempts to provide answers.
1.4 Objectives of the Study
The main objective of this study is to examine the impact of Microfinance on the welfare of the poor and poverty alleviation in Nigeria. The specific objectives include the following:
1. To examine the roles of microfinance towards the dispersion of credit among the working poor in Nigeria.
2. To assess the extent to which microfinance institutions have successfully helped the poor to improve their standard of living.
3. To assess the impact of microfinance on the growth of small and medium scale enterprises in Nigeria.
1.5 Statement of Research Hypotheses
The main and specific objectives of this study have been specified in the preceding section. The associated research hypotheses are as follow: (a) Ho: MFBs have not been potent instruments in the dispersion of credit among the working poor in Nigeria Hi: MFBs have been potent instruments in the mobilization and dispersion of credit among the working poor in Nigeria (b) Ho: Microfinance Institutions have not successfully helped the poor to improve their standard of living. Hi: Microfinance Institutions have successfully helped the poor to improve their standard of living. (c) Ho: Microfinance Institutions have not impacted on the growth of small and medium scale enterprises in Nigeria Hi: Microfinance Institutions have impacted on the growth of small and medium scale enterprises in Nigeria
1.6 Significance of the Study
The significance of this study cannot be over emphasized. Poverty is pervasive in our economy and attempts to alleviate it have not yielded the desired results. Therefore, it is necessary to review the severity of poverty in the country with a view to assessing how microfinance institutions could help to reduce the incidence. It is also necessary to understand how microfinance institutions could contribute to economic development of the nation, by enhancing the productive capabilities and welfare of a largely distressed/vulnerable segment of the society.
1.7 Scope of the Study
The study examined the impact of microfinance institutions on poverty alleviation among the entrepreneurs of SMEs in Nigeria. It used cross-sectional data collected from selected respondents in selected areas of both the Lagos and Ogun States of Nigeria respectively. The study highlighted how certain countries such as India, Bangladesh, Nepal, Bolivia and the Philippines have used microfinance strategy to alleviate poverty. The cross-sectional data obtained from questionnaires administered enabled the researcher to assess the impact and effectiveness of microfinance institutions alleviating poverty in Nigeria. It is known that children and women are among the poorest of the earth. The study targets the customers of MFIs between the ages of 18 and 60 who are gainfully employed and can repay loans. It has been discovered that the ability of women to borrow, save and earn income has enhanced their confidence and they are more able to confront other systemic inequalities (Little Field, Morduch and Hashemi, 2004). Therefore, this study examined the impact of Microfinance on women and other vulnerable groups particularly. In Indonesia, for example, women customers of Bank of Rakayat (Microfinance) partake more in family decisions on children education, use of contraceptives, etc. than women with little or no access to finance.
This study is not unaware of the role of international donors to the Microfinance sector and how it can boost domestic growth. However, the study is limited to local Microfinance institutions and how they constitute effective strategies for poverty alleviation and economic development.

1.8 Outline of the Thesis
The study is divided into five parts. Chapter One presents the background to the study, the objectives of the study, the statement of the research problem, research questions, the hypotheses to be tested, the significance of the study, the scope and limitation of the study. Chapter two reviews the existing literature on Microfinance, Poverty and strategy to alleviate poverty in developed and developing countries. It also reviewed the historical background of Microfinance, the method of operation, the roles of Microfinance in the success of micro, small and medium enterprises, the challenges confronting Microfinance Institutions and the global perspective of Microfinance. Chapter three examines the theoretical framework and methodology adopted for the study in terms of the model specification, methods of estimation, data collection and instrument, data description, study population and sample size. Chapter four presents the data analysis and interpretation of results. The descriptive analysis results and the regression results are presented in qualitative form and were fully discussed so that meaningful conclusion could be drawn. In this chapter formulated hypotheses are to establish the relationship which exists among the variables. Chapter five which is the last part deals with the summary of the study, conclusion, recommendations for policy, and contributions to knowledge and suggestions for further research.
1.9 Method of Data Collection and Analysis
This section of the study details the various data collected and how the data were analyzed. This study relied on the use of primary data collected directly from respondents to the structured questionnaires and interviews. The questionnaire method was used in this study and administered by well trained interviewers in the study area which is Lagos and Ogun States of Nigeria.

The data analysis for this study was by the use of descriptive statistics such as frequency distributions, means, per centages and cross tabulations between the variables identified. The multiple regression analysis was employed to make tentative predictions concerning the outcome of variables. The outputs of the analysis were presented in tables and figures. The statistical tool used was the Statistical Package for the Social Sciences (SPSS).

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