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1.1 Background to the Study
The World Bank devoted the “World Development Report 2000/2001: Attacking Poverty”, to the subject based on new evidences and a deeper understanding of the meaning and causes of poverty. The report argued that major reductions in world poverty are possible. It shows that economic development continues to be central to success in reducing poverty, but that poverty is also an outcome of economic, social and political processes that interact with and reinforce each other in ways that can ease or exacerbate the state of deprivation in which poor people live. Consequently, the report concluded that to conquer poverty requires actions at the local, national and global levels; to expand poor people’s opportunities, empower them and increase their security. Empowerment of the poor becomes a major issue and using microfinance as a major strategy of poverty reduction becomes imperative in an effort to enhance financial inclusion goal of the government and to drastically improve access to financial products and services.
Over the years, micro finance has emerged as an effective strategy for enhancing economic development across developing countries. Micro, small and medium enterprises are turning to Microfinance Institutions (MFIs) for an array of financial services. Credit allocation is a powerful instrument to fight poverty, increase productivity, output and enhance economic development. Access to financial services enable poor households to move from every dayforsurvival to planning for the future, investing in better nutrition, their children’s education and health and empowering women socially (Ehigiamusoe, 2008). With the advent of Grammen Bank and other such programs microcredit obtained a new identity, a new meaning and a place in development literature. It is no more a mere concept; it is now a worldwide movement. Microfinance is acknowledged as one of the prime strategies to achieve the Millennium Development Goals (MDGs).
Economic development cannot be achieved without putting in place well focused policies and programmees to reduce unemployment and poverty through empowering the people by increasing their access to factors of production, especially credit facilities. The latent capacity of the poor entrepreneurship would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and to be more self-reliant, increase employment opportunities, enhance household, individual income, and create wealth. Microfinance is about providing financial services to the poor who are traditionally have no access to the conventional financial institutions. The main feature of microfinance include, the smallness of loans advanced, the absence of asset – based collateral and simplicity of operations. A microfinance policy framework which recognizes the existing informal institutions and brings them within the supervisory purview of the Central Bank ofNigeria (CBN) would not only enhance monetary stability, but also expand the financial infrastructure of the country to meet the financial requirement of the micro, small and Medium Enterprises (MSMEs). Such a policy would harmonize operating standards and provide a strategic platform for the evolution of microfinance institution, promote appropriate regulation, supervision and adoption of best practices.
Poverty reduction has been an important development challenge over decades. Though, the poor live under very miserable conditions they are generally economically active. They lack basic necessities of life: food, shelter, education and primary healthcare. They earn their livelihood by being self-employed as micro entrepreneurs or by working in micro-enterprises (Egwuatu, 2008). Microfinance aims to bring financial services to poor people by providing access to small-scaled financial services, primary savings, credit and insurance to people involved in small or micro business activities such as farming, fishing, herding or micro-enterprises producing, recycling, repairing or selling goods (Lalitha, 2008).
1.2 Statement of the Problem
National Population Commission reported estimated Nigeria population to 191,603,826 as at 8th June 2017. Bajwa (2002), stated that more than half of Nigeria’s population have no access to formal banking services. This cannot be disputed based on the large number of credit and thrift societies, age grade clubs, etc. in rural areas. Savings have continued to grow at a very low rate particularly in the rural areas of Nigeria. One of the problems brought to bear is the inability of rural dwellers to channel their savings into banks. Most rural dwellerskeep their resources under pillow. This method of keeping savings is risky because it might be stolen, lost or wasted in extravagant spending and can easily be consumed in the event of fire outbreak. Moreover, returns which would have accrued to the depositors in form of interest are forfeited. The contribution of government to increase productivity, eradicate unemployment and poverty reduction through the establishment of microfinance banks appears to show a little progress. Despite the establishment of microfinance banks to meet rural population financial demand, it is still marred with a lot of inhibiting factors making accessibility of loans practically impossible. This is attributed to a number of challenges such as the high level of interest rate, lack of collaterals required by the commercial banks before loans can be granted which necessitated the establishment of Microfinance to address these economic imbalances. Due to the developing nature of Nigeria, it difficult for deposit money banks to meet the demands of Nigerians especially the rural poor, this shows that there is a gap which need to be filled and this can be done through establishment of microfinance institutions in order to bring financial products and services almost at the door step of the rural dwellers to help fight the menace of poverty.
Another problem observed is the inability of prospective borrowers of most microfinance banks to repay their loans as at when due. This may be attributed to high rate of poor economic development in the country. The high rate of uneven development is noticeable in such areas such as unemployment, high rate of inflation, non-payment of salaries, mismanagement of loans granted to rural dwellers, infrastructural deficiencies, such as power, road network, etc. and all kinds of political, economic and bureaucratic bottlenecks. Also Nigerian economy consists of individuals who feed from hand to mouth. The loans when granted are channeled to other areas such as feeding, payment of bills, school fees, hospital bills and others instead of using it for the intended business purpose. Microfinance banks are established to fill the gap created by the failure of the formal financial sector to improve the socio-economic condition of the poor in income generation. Many researchers, development workers and institutions hailed the microfinance policy as a potential solution to promote her economic in which standard of living is one of the indicators (Yunus, 2003). Thus; embarking on a study of this nature at this current period via using an up-to-date data is necessary to contribute to the existing literature on the microfinance bank and economic development nexus in Nigeria. In conclusion, there are so many problems and challenges that hinder the functionality of micro finance banks in carrying out their major role of improving economic growth and development in Nigeria. These problems includes: poor attitude of Nigerians towards Micro Finance Banks, Insufficient support from the regulators and government, there are many economic gap and inadequate awareness among the masses, Undue competition rather than cooperation from the mega bank and undue malpractices by microfinance bank operations.
1.3 Objectives of the Study
The broad objective of the study is to examine the relationship between micro finance bank’s activities and economic development in Nigeria. The specific objectives are:
1.4 Research Questions:
2 How significant is the relationship between microfinance banks activitiesandemployment rate in Nigeria?
1.5 Research Hypotheses:
1.6 Scope and Limitations of the Study
This research work centers on the microfinance banks and economic development in Nigeria 1996 – 2016. The choice of 1996 as base year is because the Decree No. 46 of 1992 created Community Banks most of which transformed to Microfinance bank following the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria, launched by the Central Bank of Nigeria (CBN) in December 2005. Microfinance providers are made up of informal and formal types. The informal providers have limited outreach due to paucity of loanable funds. They also lack statistical records. The formal groups are mainly the microfinance banks made up of the transformed community banks and scaled up NGOs microfinance institutions. For analytical purposes, this study will concentrate on microfinance banks because of the availability of data.
1.7 Significance of the Study
This study will be relevant to the following:
The Government: The study will assist the government in making policy that border on micro financing. Effective and operational microfinance policy will contribute to the substance of the economy.
The Microfinance Institutions: Although Microfinance banks are not charity organizations, this study will assist them to market their services more efficiently, effectively and above all, sustainably.
Microfinance clients: The study will show how the poor will be pulled up above the poverty line with life wire of microfinance credit and other financial services.
Central Bank of Nigeria: As financial regulator, the study will provide more insight into the problems of microfinance institutions. It will enable it offer structured and regular workshops for microfinance providers especially the microfinance banks. It will help the CBN beam its searchlight on the operations of these microfinance banks to avoid loss of depositors’ funds.
Students/Academic Scholars: Future researchers on the subject matter will find a reservoir of literature bank from this study for further improvement and development of the subject matter.
1.8 Operational Definition of Terms
Economic Development: This is terms of progress towards reducing of incidence of poverty, unemployment and income inequalities and for those whose living standard has been rising. This approach seek ways and means of improving their condition
Economic Growth: The growth rate of the gross domestic product, accomplished by changes, i.e. changes in structure of the economic in the country social structure and its political structure
Micro-credit: This is the provision of small amount of loans to the poor that enable them to open or expand an existing income-generating activity, and thus supposedly begin their escape from poverty.
Micro-savings: Setting aside, periodically, small amount of money and depositing it with an institution for safe-keeping.
Microfinance activities: This is the provision of small units of financial services to low income clients who are usually excluded from formal financial system.
Poverty: This is a condition in which a person is deprived of or lacks the essentials for a minimum standard of well-being. A state of being without, often associated with need; hardship and lack of resources across a wide range of circumstances.
Microfinance Banks Credit: Credit granted to micro, small and medium scale entrepreneurs to enable them take off new enterprises or to expand the existing ones.
Poverty reduction: Poverty reduction is the reduction in the incidence of poverty and therefore the poverty index via engagement of or creation of labour for a source of livelihood. It could be self-engagement or offering of services to an enterprise in exchange of wages or salaries.
Microfinance Bank Investment. This is the investment in fixed assets and long term investments of microfinance banks.
Employment rate: This is the rate at which the population in Government parastatals, private and other establishments engaged in activities like agriculture, fishing, manufacturing, services, public administration, health and social works in other to improve their standard of living thereby promoting economic development.. It could be regular, casual, unpaid or self-generated.
Standard of living: Standard of Living refers to the level of wealth, comfort, material goods and necessities available to a certain socio-economic class in a certain geographic area. It is closely related to the quality of life.
Poverty index: Poverty has multi-dimensional nature as well as dynamic nature. It is defined according to individual’s perception working at different circumstances. The poverty index used in this study draws from the National Bureau of Statistics (NBS) and the Central Bank of Nigeria (CBN). The NBS provided 24 proxies that are responsible for poverty in Nigeria.
Manufacturing capacity utilization: Manufacturing capacity utilization rate measures the proportion of potential economic output that is actually realized. Displayed as a percentage, capacity utilization levels give insight into the overall slack that is in the economy or a firm at a given point in time.
Microfinance banks total loans and advances: This is the total credits extended to its customer over an agreed period of time. It comprises both debts and funds owned by the customer and bank.
Microfinance banks total investments:Micro finance total investments is a fixed or time deposit account which is an investment vehicle for consumers. It can also be known as certificates of deposit (CD).
Microfinance banks total deposits: Microfinance total Bank deposits consist of money placed into microfinance bank for safekeeping. These deposits are made to deposit accounts such as savings accounts, checking accounts and money market accounts.