Abstract

This study examined the effect of microfinance banks on poverty alleviation with particular reference to Awka South L.G.A. micro finance banks are banks that engages in provision of loans, savings and other basic financial services to the poor. The vicious circle theory, marxist theory and power theory of poverty were reviewed in the study, while power theory of poverty was adopted as the theoretical framework. The sample size of the study was 200 participants selected through multi stage sampling technique which involves the simple random sampling technique, while purposive sampling technique was used for the selection of IDI participants. Questionnaire schedule and In-Depth interview guide were the instruments used for data collection. The findings from the questionnaires were analysed using the statistical package for social sciences (SPSS); qualitative data from the In-depth interviews were analyzed using manual content analysis, while the study hypotheses was tested using Chi-square () inferential statistic. The findings indicated that there is no significant association between income level of respondents and perception of micro-finance banks. Further finding from the study revealed that there is no significant association between income level of respondents and having-ever personally benefited from economic opportunities provided by micro-finance banks. The researcher recommended that there should be adequate supervision and regulation by the Central Bank of Nigeria so as to ensure the survival of microfinance banks. Micro finance banks should increase the duration of their clients’ asset loans, or spread the repayment over a longer period of time, or increase the moratorium. This will enable the clients to have greater use of the loan over a longer period for the acquisition of capital assets and technology. that engages in provision of loans, savings and other basic financial services to the poor. The vicious circle theory, marxist theory and power theory of poverty were reviewed in the study, while power theory of poverty was adopted as the theoretical framework. The sample size of the study was 200 participants selected through multi stage sampling technique which involves the simple random sampling technique, while purposive sampling technique was used for the selection of IDI participants. Questionnaire schedule and In-Depth interview guide were the instruments used for data collection. The findings from the questionnaires were analysed using the statistical package for social sciences (SPSS); qualitative data from the In-depth interviews were analyzed using manual content analysis, while the study hypotheses was tested using Chi-square () inferential statistic. The findings indicated that there is no significant association between income level of respondents and perception of micro-finance banks. Further finding from the study revealed that there is no significant association between income level of respondents and having-ever personally benefited from economic opportunities provided by micro-finance banks. The researcher recommended that there should be adequate supervision and regulation by the Central Bank of Nigeria so as to ensure the survival of microfinance banks. Micro finance banks should increase the duration of their clients’ asset loans, or spread the repayment over a longer period of time, or increase the moratorium. This will enable the clients to have greater use of the loan over a longer period for the acquisition of capital assets and technology.

CHAPTER ONE (EFFECT OF MICROFINANCE BANKS ON POVERTY ALLEVIATION WITH PARTICULAR REFERENCE TO AWKA SOUTH L.G.A.)

CHAPTER ONE

INTRODUCTION

• Background of the Study

The word “micro” literally means small and finance also mean investment or support; therefore microfinance can be defined literally as small investment or support. Microfinance can be defined as the practice of offering small, collateral free loans to member of co-operatives who otherwise would not have access to the capital necessary to begin small business or other income generating activities. (Littlefield, Morduch& Hashemi 2002). According to Sirajul (2007) the poorest of the world form the vast majority of those without access to health, basic education and majority of those without access to microfinance as well.

The concept of microfinance bank is not new, savings and credit groups that have operated for centuries include the “Susus” of Ghana, Chit funds in India, “Landas” in Mexico, “Arisan” in Indonesia, “Ajo’, “Esusu” in Nigeria, “Cheelu” in Sri Lanka, “Tontines” in West Africa and “Pasanaku” in Bolivia, as well as numerous saving clubs and burial societies found all over the world (Yahaya 2010). Microfinance is about providing financial services to the poor who are not served by the conventional financial institutions. This indicates that people live in poverty when they are denied an income sufficient for their material needs and when these circumstances exclude them from taking part in activities which are accepted part of daily life in that society. In Nigeria, poverty is pervasive with frightening depth and breath. It affects all geopolitical zones of the country. The poor in Nigeria like those elsewhere are powerless, voiceless, lack basics of life and are generally deprived. Poor people have insufficient income, lack access to basic services, have limited access to credit and shelter, they survive on menial jobs and can barely afford to send their children to school (Adeola, 2000). Bamisile (2006) reported that despite apparent success of microfinance banks and the efforts of supply led policies and financial liberation, there are still’ “important” gaps to be filled by this institutions in Nigeria. Anyanwu (2004) observed that microfinance banks have not been able to adequately address the gap in terms of credits, savings and other financial services required by the poor.

The issue of poverty has been a major concern to many nations, particularly the developing countries. Poverty has been defined as a situation where a population or a section of the population is able to meet only its bare subsistence, the essentials of food, clothing and shelter, in order to maintain a minimum standard of living (Balogun, 1999). The World Development Report (WDR) from the World Bank (1990) notes that conditions could be described as poor if per capita income or consumption of the individual is below US $370 or very poor if it is below US $275 at any time period. Englama & Bamidele (1997) aptly summarized the definition of poverty, in both absolute and relative terms as a state where an individual is not able to cater adequately for his/her basic needs of food, clothing and shelter, meet social and economic obligations; lacks gainful employment, skills, assets and self-esteem; and has limited access to social and economic infrastructures. In other words, the poor lack basic infrastructure such as education, health, potable water, and sanitation, and as a result has limited chance of advancing his/her welfare to the limit of his/her limited access to social and economic infrastructures”. In other words, the poor lack capabilities.

Since the 1970s, and especially since the new wave of microfinance in the 1990s, microfinance has come to be seen as an important development policy and a poverty reduction tool. Some argue (e.g. Littlefield. 2003; World Savings Bank Institute 2010) as reported by Adjei, Arun & Hossain (2009) that microfinance is a key tool to achieve the Millennium Development Goals (MDGs). The assumption is that if one gives more microfinance to poor people, poverty will be reduced. But the evidence regarding such impact is challenging and controversial, partly due to the difficulties of reliable and affordable measurement, of fundability (Ashraf, Gine & Karla, 2008) the methodological challenge of proving causality (i.e. attribution), and because impacts are highly context-specific (Hulme 1997; Hulme 2000; Sebstad & Cohen 2000; Brau & Woller 2004; Makina & Malobola 2004:801). This provision of funds in form of credit and microloans empowers the poor to engage in productive economic activities which can help boost their income level and thus alleviate poverty in the economy. Shreinner (2001) defines microfinance as efforts to improve the access to loans and to savings services for poor people. It is currently being promoted as a key development strategy for promoting poverty reduction / eradication and economic empowerment.

It has the potential to effectively address material poverty, the physical deprivation of goods and services and the income to attain them by granting financial services to households who are not served by the formal banking sector. Microfinance is an effective development tool for promoting pro-poor growth and poverty reduction. Financial services enable poor and low income households to take advantage of economic opportunities, build assets, and reduce their vulnerability to external shocks that adversely affect their living standards. The credit policy for the poor involves many practical difficulties arising from operation followed by financial institutions and the economic characteristics and financing needs of low income households. For example, commercial banking institutions require that borrowers have a stable source of income out of which principal and interest can be paid back according to the agreed terms. However, the income of many self employed households is not stable. A huge number of micro loans are needed to serve the poor, but banking institutions prefer dealing with big loans in small numbers to minimize administration expenses. They also look for collateral with a clear title – which many low-income households do not have. In addition, bankers tend to consider low income households a bad risk imposing exceedingly high information monitoring costs on operation.

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 (Taiwo, 2012). Microfinance involves building of financial sub-system which serves the poor and its architecture could be easily integrated into the financial system of the nation. The other key issues about 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 (Robinson, 2001).

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, etc (Anyanwu, 2004). 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 (Basu, 2000).

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: The need to increase the scale of financial services to the poor; the 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. Therefore, this study assesses the effect of micro finance banks on poverty alleviation in Awka South Local Government Area, Anambra State.

• Statement of the 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 Programmes (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 (Taiwo, 2012).

The fact of the matter is that there are too many poor in Awka South Local Government Area in Anambra state who require micro/small financial services such as Credit, Insurance, and Money transfer etc in order to engage actively in productive, trading and commercial 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 rhetoric’s and several failed poverty-alleviation project. Since the discovery that Microfinance can help the poor to access credit and other financial services that will enable them establish small and medium business (SMEs) and ensure better life for them, it is imperative for more research to be carried out to close the gap in knowledge. It is this new strategy that this research intends to explore to examine the relationship between microfinance and poverty alleviation, taking a cue from jurisdictions of the world. Micro Finance Bank’s (MFB) are recent phenomenon in the Nigerian economy. It came to light in 2005 when it replaced the Community Banks. Although several studies have examined the issue of poverty alleviation in Nigeria, not many of them have assessed the effect of MFBs on poverty alleviation. It is against this background that this research is poised to assess the effect of micro finance banks on poverty alleviation in Awka South Local Government Area.

• Research Questions

The study was designed to address the following questions;

1. What are the perceived effects of micro-finance banks on poverty alleviation in Awka South LGA?
2. How have micro-finance banks improved access of the poor to credit and micro loans in Awka South LGA?
3. How much do poor and low income households in Awka South LGA take advantage of financial services and economic opportunities provided by micro-finance banks?
4. How have micro finance banks enhanced the growth of micro and small scale enterprises in Awka South LGA?
5. What strategies are required to enhance the capability of Micro-Finance banks to alleviate poverty?
   • Objectives of the Study

The main objective of this study is to examine the effect of microfinance banks on poverty alleviation in Awka South Local Government. The specific objectives include the following:

1. To determine the perceived effects of micro-finance banks on poverty alleviation in Awka South LGA.
2. To examine how micro-finance banks have improved access of the poor to credit and micro loans in Awka South LGA.
3. To ascertain how much poor and low income households in Awka South LGA are able to take advantage of financial services and economic opportunities provided by micro-finance banks.
4. To assess how micro finance banks have enhanced the growth of micro and small scale enterprises in Awka South LGA.
5. To determine the strategies that are required to enhance the capability of Micro-Finance banks to alleviate poverty.
   • Significance of the Study

The significance of this study cannot be over emphasized. Theoretically, this study will provide available framework for comprehensive examination of the topic under study, which is the assessment of the effect of micro finance banks on poverty alleviation. The study will also add to existing literature on the effect of micro finance banks on poverty alleviation. This will be very useful to students and other researchers that will in future investigate or carry out further studies in this area of study.

Practically, this study will help government to review the severity of poverty in the country with a view to assessing how microfinance institutions could help to reduce the incidence. It will also help the government and other stakeholders concerned with poverty alleviation 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.

• Definition of Terms

Assess: This refers to a means of determining, estimating or judge the value of a situation.

Alleviation: This means the act of alleviating; relief or mitigation.

Capability: This refers to the power or ability to generate an outcome.

Credit: This can be referred to as a sum of money or valuables or consideration that an individual, group or other legal entity borrows from another individual, group or legal entity.

Economic Opportunity: This means chance for advancement, progress or profit pertaining to an economy.

Effect: This refers to result or outcome of a cause.

Enhance:  This means to augment or make something greater.

Empowerment: This refers to increasing the spiritual, political, social and economic strength of individuals and communities.

Financial Services: This is an act of being of assistance to someone in relations to finance.

Low Income Household: This refers to comparatively small money earned collectively by all persons who lives in a given house; a family. 

Microfinance: This is an economic development approach that involves providing financial services, through institutions, to low-income clients, where the market fails to provide appropriate services.

Micro-Credit: This is a component of microfinance and is the extension of small loans to entrepreneurs, who are too poor to qualify for traditional bank loans.

Micro Finance Banks (MFB): A microfinance bank is an organization, engaged in extending micro credit loans and other financial services to poor borrowers for income generating and self employment activities.

Micro-Loan: This refers to a relatively small sum of money that an individual borrows from a legal entity, with the condition that it be returned or repaid at a later date.

Perceive: This means to see, to be aware of, and to understand

Poverty: Poverty is a condition in which a person or community is deprived of the basic essentials and necessities for a minimum standard of living.

Poor: This refers to an individual with little or no possessions or money.

Programme: This refers to a set of structured activities.  

Strategy: This is a plan of action intended to accomplish a specific goal.