OPERATIONS OF MICROFINANCE BANKS ON THE NIGERIAN ECONOMIC GROWTH

OPERATIONS OF MICROFINANCE BANKS ON THE NIGERIAN ECONOMIC GROWTH

This study is aimed at examining the influence of the operations of microfinance banks on the Nigerian economic growth

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CHAPTER ONE

• Background of the Study

Microfinance banking and Economic stability have a form of connection that cannot be overemphasized. This is because the growth of an economy is dependent on the availability of liquidity (in terms of small credit niche) to small and medium scale enterprises. Over the years, microfinance has emerged as an effective strategy for enhancing economic growth across developing countries. Micro, small and medium enterprises are turning to Microfinance Institutions (MFIs) for an array of financial services. Economic development is about people and their welfare.

The World Bank (1993) categorized microfinance institutions as those institutions which “consists of agents and organizations engaged in relatively small financial transactions using specialized, character-based methodologies to serve low-income households, micro-enterprises, small farmers and others who lack access to the formal financial system”.

The operation of microfinance institutions dates back to the pre-independence period in Nigeria when traditional thrift saving system and activities of the traditional group networks served as proprietors of financial exchange led by traditional money lenders who could not handle the growing expansion and needs of people in rural communities. The failure of conventional banking in Nigeria to meet the socio-economic complexities (needs) of the rural communities that consequently experience rapid growth and changes as well as government desire to reach rural areas with development gave rise to the emergence of community banks (now microfinance banks) as a way of providing financial answers to the low-income earners or people to finance and improve their income-generating activities, i.e. productive activities. Microfinance banks can be seen as an economic growth method intended to advantage the low-income class of a given country like Nigeria, both rural and urban poor.

In December 2005, the Central Bank of Nigeria (CBN) introduced a Microfinance Policy Framework to enhance the access of micro-entrepreneurs and low-income households to financial services required to expand and modernize their operations in order to contribute to rapid economic growth.  In Nigeria, today and the world at large microfinance banking occupies a very strategic and important position in the improvement and development of the socio-economic well-being of the poor who are typically self-employed low-income entrepreneurs such as traders street vendors, small farmers, hairdressers, barbers, GSM commercial operators, artisans and a host of others.

Microfinance according to the Central Bank of Nigeria (2005) is about providing financial services to the poor who largely constitute the 65% excluded from access to financial services of conventional banks. Creation of employment (which is one of the operation/role of microfinance banks), help existing businesses to grow or diversify their activities, empower women and other disadvantaged groups and even encourage the growth of new businesses (Khander, 2003). A CBN study (2001) identified 160 registered Microfinance Institutions (MFIs) in Nigeria with aggregate savings worth N99.4 million and outstanding credit of N649.6 million, indicating huge business transactions in the sector (Anyanwu,2004).

Microfinance literally means building a finance system that effectively and efficiently serves the needs of the poor. Microfinance is described also as banking for the poor.

The major purpose of Micro Finance Banks is to direct the attention of purveying credit to low-income group and Micro, Small, and Medium Enterprises (MSMEs).  It is a powerful tool for fighting poverty in the world. This is true because when poor people have access to financial services, they can earn more, build their assets, and cushion themselves against external shocks as they arise (Drechsel et al., 2012).

Microfinance banks (MFBs) are therefore strategically positioned to expand the financial frontier and stimulate the exploitation and development of economic opportunities in the informal sector through the provision of traditional and even non-traditional banking services such as technical and managerial assistance, sale of output and input purchase financing, machinery and equipment leasing and community development financing. Microfinance is acknowledged as one of the prime strategies to achieve the Millennium Development Goals (MDGs).

In this study, we shall examine the operations of microfinance banks and Nigerian economic growth.

• Statement of Research Problem

Over time, inadequate supply of credit has been an important constraint on production in Nigeria and other developing countries where the majority of the population lack access to financial services from formal institutions, either for credit or for savings thereby impeding economic growth and development. CBN (2005) Microfinance Policy Framework maintains that Microfinance banks are aimed at the empowerment of the poor and the private sector, through the provision of needed financial services. This empowerment, it is hoped, will enable them to engage or expand their present scope of economic activities and generate employment. Thus, Jamil. (2008) opines that a large number of active poor in the rural areas is left unattended to by existing microfinance banks. The essence of this study is to ascertain whether the aim of establishing microfinance banks has been achieved and how it has helped in generating economic growth in Nigeria precisely and other developing countries since reducing poverty is a fundamental challenge in this era of globalization, to also know if there is a new resolution of the microfinance banks on how to operate or render services to empower the active poor in the rural areas that are left unattended and for entrepreneurs to gain access to credit delivery (which will go a long way to boost the economy of Nigeria).

• Aim and Objectives

The aim of this study is to examine the influence of the operations of microfinance banks on the Nigerian economic growth.

The specific objectives of this study are;

1. To determine the influence of Microfinance Bank loans on Gross Domestic Product in Nigeria.
2. To investigate the effect of Microfinance Bank Investment on Gross Domestic Product in Nigeria.

• Research Questions

The questions for which answers are sought from this research are as follows;

1. To what extent do Microfinance Bank loans influence Gross Domestic Product in Nigeria?
2. To what has Microfinance Bank Investments affect Gross Domestic Product in Nigeria?

• Research Hypothesis

The following null hypothesis stated in their respective null form was tested in the study;

H₀₁:   There is no significant relationship between Microfinance Bank loans and Gross Domestic Product in Nigeria.

H₀₂:   There is no significant relationship between Microfinance Bank Investment and Gross Domestic Product in Nigeria.

• Significance of the study

This study will be useful/significance to:

Practitioners such as monetary authorities, policymakers, government, academics, and the general public.

To Government and Monetary Authorities, the findings of this study will help them see the effectiveness of monetary policy and microfinance bank policy in the management of the Nigerian economy in terms of credit demand and supply to the public and SMEs which have a spillover effect on Nigeria economic growth.

To Stakeholders in the Microfinance Banking Sector, this research work will give them guidelines on how to improve their services so as to enhance growth in the economy.

To Microfinance Bank Managers this research study will serve as a guide for them in managing their investment more effectively by adopting appropriate policies and strategies that will take cognizance of risks peculiar to the microfinance bank in the Nigerian banking sector.

To Scholars this research work will further serve as a guide for scholars by providing insights for future research on the topic and related field for policymakers who are willing to improve on it.

To Researchers and Student of Management Sciences, this research study will enhance their knowledge on the relevance of microfinance banks and their operations/services to economic growth and thus stimulate their interest in this area.

• Scope of the study

Content Scope: This study focuses on microfinance banks’ operations and economic growth in Nigeria using data over the period of 1993 to 2017. The choice of this period is based on the fact that most of the reforms initiated by the Federal Government of Nigeria through the instrumentality of the apex bank (The Central Bank of Nigeria) in the microfinance banks took place during this era. The secondary data (time-series data) generated from the central bank of Nigeria statistical bulletin will be relied on. Though time-series data, in most cases, are not errored free, besides, the researcher is not unaware of the conflicting nature and the inconsistency of most of the secondary data from different data collecting agencies in developing countries, including Nigeria.

Geographical Scope: This study is a Nigerian study; within the territorial boundary of Nigeria that focuses on the operations of all microfinance banks and how it affects (negatively or positively) the Nigeria Economic Growth. The study will enlighten my audience on the operations (investment, loan administration, and deposit/savings) of microfinance banks in Nigeria and give room for comparison.

• Limitation of the study

This study is limited to the secondary data (time-series data) used whose validity and reliability the researcher is not certain. Also in the course of carrying out this study, the data may be affected by some economic activities in the economy that wasn’t considered by the researcher. However, much effort is made to overcome the limitations and thereby provide comprehensive research that can aid decision making by various users. In a nutshell, one cannot guarantee a 100% accuracy of the information with a view to be used, its measurement, as well as the method of data analysis; as it may affect the robustness of the study.

However, the above limitations notwithstanding, the researcher is optimistic that the present study will be adequate to serve the purpose for which it is intended.

• Definition of Terms

The words which are commonly used in this work are;

 Microfinance: It is also called “microcredit”, it’s a type of banking service that is provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services like small loans, etc. The Services/operations are designed to be more affordable to poor and socially marginalized customers and to help them become self-sufficient.

Microfinance loan: It’s one of the operations/services that is rendered by microfinance banks where an individual, group, or other legal entity borrows money with the condition that it be returned or repaid at a later date sometimes with interest.

Microfinance investment: It’s also another service or operation carried out by the microfinance institutions. Here, a placement of capital is made with the expectation of deriving income or profit from its use.

Economic growth: It is an increase in the capacity, value, size of an economy to produce goods and services, compared from one period of time to another.

Financial Institution: these are the structures through which funds are created and allocated to the competing ends in the economy.

• Organization of the Study

The topic of this research which is “Microfinance Banks Operations and Nigeria Economic Growth” is divided into five chapters and organized as follows:

Chapter one forms the introduction part; this is where the main theme is given. It comprises of the background of the study, the statement of the problem, the aim, and objective of the study, the Research questions, Hypothesis of the study, Significance of the study, limitations of the study and definition of terms. Chapter two is the literature review of the operations of microfinance banks and Nigeria’s economic growth which comprises the conceptual issues/framework, theoretical background, empirical literature review, and the gap in the literature. Chapter three forms the research methodology which includes research designed, sampling procedure, data collection, and data analysis techniques. Chapter four talks about data presentation, data analysis, and discussions. Chapter five is the summary, conclusion, and recommendation of the study.