This study takes a critical look at the access and impact of micro
finance banks on the entrepreneurial and economically active rural poor
in Nigeria using Edo State as a case study. The objective being to
determine if indeed they constitute the category of people targeted by
micro finance banks, if they have access to credits on a regular basis,
and indeed if the credits or other ancillary services received by them
have had any significant effect upon their livelihoods, homes and
standard of living. Revelations from our field survey indicated very
minimal impact of micro finance banks on the livelihood of
entrepreneurial and economically active rural poor. That is, the micro
finance banks have had very minimal presence in the rural communities;
they preferred to extend credits to non poor clients in the urban areas.
Some of the recommendations to increase impact of micro finance banks on
rural poor with particular reference to Edo State, in Nigeria, are more
efforts at increasing the number of micro finance banks and services in
the rural areas. Others include the provision of adequate
infrastructures such as functional roads and electricity in the rural
Keywords: Poverty Alleviation, Micro Finance Access and Impact,
Economically active rural poor, Regular Repayment Schedule.
Over the past decade, providers of micro finance have developed an
array of models for delivering financial services to the poor that meet
the dual criteria of sustainability and outreach. As programmes mature,
debates within and outside the industry have moved beyond questions of
scale and outreach to the question of whether micro finance can reduce
poverty (Sebstad and Cohen, 2001). While many people agree that micro
finance can make a great deal of difference in poor people's lives,
the jury is still out on the extent to which micro finance contributes
to poverty reduction. In Nigeria, limited research has been done on this
topic, while the few available have derived their conclusions and
recommendations from a systematic synthesis, of the results of the field
studies, and literature reviews conducted in other countries (see, e.g.,
Olaitan, 2005; Eluhaiwe, 2005; Ukeje, 2005; Abosede 2007 and Idolor,
2007 to cite only a few). In recent time, the question of the link
between micro finance and poverty has aroused much passion among
providers, promoters, and others involved in the micro finance field
(Rutherford, 2003). At one extreme, the "sustainability first"
camp believes that these services reach the poor through open access. At
the other extreme, the "poverty first" camp defends the
importance of targeting the poorer strata of the population to ensure
that they have access to micro finance services. Outside the industry,
micro finance has the reputation of being a tool that can pull people
out of poverty. Supported by convincing vignettes of poor people who
have "made it", micro finance has garnered wide appeal as a
development success (Sebstad and Cohen, 2001).
While the passion surrounding this issue remains intense, the
debates have grown to the point of acknowledging that the relationship
between micro finance and poverty reduction is not straightforward. Just
as the causes of poverty are complex, so is its reduction. As a result,
many people have come to recognize that micro finance alone is not a
magic wand to lift people out of poverty; as it is at best only one of
many factors that can contribute to poverty alleviation. Today, many
micro finance institutions in Nigeria subscribe to a mix of goals,
including sustainability, outreach to poor households, and poverty
reduction. However, a continuing challenge they face is how to deepen
and maintain outreach to poor households on a sustainable basis; as well
as significantly increase the impact of micro-financing on the lives and
activities of the economically active; especially rural poor. These
would require not only a careful analysis of the category of people
which micro finance institutions do and do not reach along the poverty
continuum, but also a detailed in-depth analysis of how access to
credits and other financial services have impacted positively on the
businesses, assets, households and lives of the economically active
rural poor, whose needs and interests micro finance institutions
purportedly claim to serve.
Another limitation of previous studies (in Nigeria) is that few
have considered client perspectives on impacts. Client perspectives are
critical for understanding household and individual economic goals and
how clients use financial services to pursue these goals. Client
perspectives (from studies conducted in many countries) reveal that
reducing exposure to risk is a major goal for households. Improved
understanding of these processes opens up the demand side of the micro
finance equation, which is critical for designing products and services
that meet clients' needs (Sebstad and Cohen, 2001). Against this
background, this study seeks to improve understanding of the access to
credits and other ancillary services on a regular basis, by the
entrepreneurial and economically active rural poor in Nigeria, with Edo
State as a case study. It is also aimed to determine the impacts of the
services rendered on the lives, businesses, assets and households of the
economically active rural poor and the continued sustainability of the
micro finance banking institutions' services in these critical
The paper begins in section one with an introductory and structural
outlay, while section two takes a look at conceptual issues to aid
general contextual understanding of the paper. Section three is a brief
exposition of historical investigation of microfinance and credit
provision in Nigeria, with research methodology and results from our
survey work forming section four. The last section is on vital
recommendations, further research questions and conclusions. Essentially
the paper is exploratory and the case studies are confined to Benin
City, Edo State of Nigeria. This does not however reduce the flavour and
value of the findings.
II. SOME CONCEPTUAL ISSUES
Concept of Micro Finance
Micro finance can be defined as a development tool used to create
access for the economically active poor to financial services at a
sustainably affordable price (CBN, 2005). Eluhaiwe (2005) opined that
micro finance is the provision of thrift, credit and other financial
services and products in very small amounts to the poor to enable them
to raise their income levels and improve their standard of living. Micro
finance has also been defined as the provision of very small loans that
are repaid within short period of time and is essentially used by low
income individuals and households who have few assets that can be used
as collateral (Ukeje, 2005).
Micro finance is basically a tool designed to improve the
capacities of the economically active poor to participate in the larger
economy. The economically active poor are either micro entrepreneurs who
operate in the informal sector (trading, farming, food catering,
craftsmanship and artisanship) or people earning wages. Such poor people
earn their living in either rural or urban areas; and the financial
services for which access is sought are mainly savings and loans
(Idolor, 2007). Micro finance is about providing financial services to
the poor who are traditionally not served by the conventional financial
Many features distinguish micro finance from other formal financial
products. Five of these are: the smallness of loans advanced or savings
collected, the absence of asset-based collateral, and simplicity of
operations (Kimotha, 2005). Others are its targets as the marginalized
group of borrowers, and its general employment of a group lending
approach (Igbinedion and Igbatayo, 2004). The group lending approach has
implication for the pressure that the members of the group bring to bear
on one another to ensure loan repayment, so that the group can continue
to enjoy borrowing or loan facilities.
In developing countries, a majority of the population do not have
access to financial services and thus constitute the group that micro
finance tries to reach. Nigeria, like any other developing country, is
saddled with the problem of rural urban migration, mass illiteracy, poor
infrastructures, poverty and low access to formal financial services.
Hence the need for the government's micro finance policy, aimed at
expanding the financial infrastructure of the country to meet the
financial requirements of the Small and Medium Enterprises (SMEs) as
well as the rural and urban poor. The policy has created a platform for
the establishment of Micro Finance Banks (MFBs) geared towards enhancing
the provision of diversified micro finance services on a short-term or
long-term and sustainable basis for the poor and low-income groups. It
would also help create a vibrant micro finance sub-sector that would be
adequately integrated into the mainstream of the national financial
system and provide the stimulus for poverty reduction, economic growth
and development (CBN, 2005). It also has the potential of not only
urban--rural but rural--rural migration as Nyberg and Rozelle (1999)
noted with respect to China.
Micro Finance (Semi-Organized)
The concern of governments, national and international development
agencies to the economically active poor people paved a way for
semi-organized financial system with the buzz word micro finance and
self-help groups (SHGs) which have been emergent since the late
1980s--under this system a group of 10-20 poor people come together to
save money and finance their needs themselves. If the SHGs survive for
six to 12 months successfully after saving the required amount as per
the norms, then SHGs can be linked to formal commercial banks to get
loans. This is known as linkages between SHGs and the Bank. The model
was designed through a pilot project in the year 1990-1991 and proved to
be a very successful model (Swamy, 2009). There are other models of
micro credit delivery, including:
(a) Grameen Bank Model: The Grameen Bank Model started as an action
research project in 1976, when a Chittagong University team led by an
economics Professor Muhammad Yunus began to lend small amounts of money
to poor households in a few nearby villages. Borrowers were organized
into small 'peer monitoring' groups of four or five people
(soon becoming single sex groups, with a focus on women's groups)
that met weekly with other groups to make loan repayments. Demand for
credit grew rapidly and repayment rates were good, so the project was
able to secure loans for on-lending from the state-controlled Bangladesh
Bank and other commercial banks. In 1984, the Grameen Bank became a
government-regulated bank through a special government ordinance, and
remains the only body regulated in this way. It's model is more of
individual loaning. Five members form the group, and then seven to eight
groups form the centre and form the branch. The decision making in case
of Grameen bank is not decentralized and always facilitated by the Bank
employees. The Grameen bank model is basically a model of
"individual banking--Joint liability" model and has received
wide international appeal and popularity in numerous emerging economies,
as a veritable tool for developing small scale businesses and reducing
(b) Cluster/Federation Bank Model: In this model, the banks have
linkages with the Federation or Cluster of SHGs and can help reduce the
transaction cost substantially. Since they deal with a number of SHGs
through Federation/Cluster, the size of loan will be much higher which
will reduce the transaction cost. However, this model is yet to get
popularized and all the ones present or currently in existence is at
evolving stage only.
(c) Some other models mainly sponsored by governments like DWACRA
(Development of Women and Children in Rural Areas) and SGSY
(Swaranajayanthi Gram Swarojigari Yojana) are groups mainly animated by
government agencies. Under these models the amount in form of loan or
grant will be given to members of that group and in turn they distribute
the amount amongst themselves (Swamy, 2009). The model is currently
popular in major countries in the Asian and African continent and it is
as yet not yet known whether it will prove to be successful in Nigeria.
Micro Finance Products and Services
The concept of micro finance has for long been misconstrued as
micro-credit (small value loans to poor entrepreneurs). This poor
understanding has led to a restrictive focus by some micro finance
institutions which have not allowed them to have a wider array of
products and services (Okenyebuno, 2007). Morduch (1998), Woller,
Dunnford and Woodworth (1999), Kalpana (2004) and Osthoft (2005) agree
that micro-credit or small loans though used interchangeably with micro
finance, is simply one of the many components that constitute the larger
array of micro finance services. Broadly speaking, micro finance
products and services consist of small loans, savings, insurance,
business education and money transfers. It also involves the provision
of working capital, informal/formal appraisal of borrowers and
investments, collateral substitutes such as group guarantee or
compulsory savings; access to repeated and large loans, streamlined loan
disbursement, advice and monitoring procedures (Ledgerword, 1999;
Igbinedion and Igbatayo, 2004; Okenyebuno, 2007). In the views of
Kalpana (2004), micro finance services also encompass both financial and
social intermediation including group formation, and training in
financial literacy and management practices. Hulme and Mosley (1996)
have suggested that micro finance institutions should take cognizance of
the varying needs of various sections of the poor in their design of
financial services. In other words, in designing and implementing micro
finance services, there is the need to note that credit has different
implications for different segments of the poor and as such could create
additional risk for the very poor. It is therefore expedient for micro
finance institutions to diversify their hitherto relatively homogeneous
products and services in line with environmental peculiarities (Sebstad
and Cohen, 2001). Also, Brau and Woller (2004), Dunn (2002) Cohen (2002)
and Woller (2002) advocate client-focused services for micro finance
institution as a vital ingredient for effective service delivery and
impact on the lives, assets and households of the economically active
poor. It is therefore of necessity for MFBs (in Nigeria as in foreign
countries) to provide a basket of products and services to allow for
flexibility in meeting the diverse needs of poor clients. Smith (2002),
Edgcomb (2002) and Dumas (2001) agree on the need for MFIs/MFBs to have
all inclusive micro finance products. They also were of the opinion that
the micro finance institutions, which they surveyed, have experienced
statistically significant improvement in their performance as a result
of integration of non-financial services with financial services being
rendered to clients. In recent time, micro finance delivery mechanisms
(for services rendered in Nigeria, as in other parts of the world)
include, but not limited to, a combination of group - lending,
individual lending, dynamic incentives, regular repayment and collateral
substitutes (Okenyebuno, 2007).
Group lendings basically refers to a process Whereby prospective
clients of micro finance institutions form groups voluntarily for the
purpose of accessing loans. Lending is carried out in batches in such a
manner that the number of borrowers in a group at any point in time is
less than the number of non-borrowing members. The groups are usually
organized in such a way and manner that members meet at regular
intervals, and if a member defaults, then all other group members are
denied subsequent loans since all group members are held liable and
responsible even for loan repayments. In the words of Weiner (1995),
group lending consists of a variety of methodologies with central focus
on joint-liability for underwriting, monitoring and enforcement of loan
contracts. In group lending, the loan contracts take advantage of local
information and the "social assets" (in this case group
pressure) at the heart of local enforcement mechanisms (Morduch, 1998).
Group lending also relies on informal insurance relationships and
threats, such as isolation and physical retribution. It also combines
the features of formal banks with locally tested mechanisms in
traditional informal finance systems of rotating savings and credit
associations (ROSCAs) (Morduch, 1998; Besley and Coate, 1995). However,
all this social pressure is hardly evident in "individual
lending", which accounts for the relatively stringent controls and
conditions required to be met by prospective individual clients before
obtaining credits from micro finance banks.
Dynamic incentives, which have also been referred to as progressive
lending in Hulme and Mosley (1996) is simply the progressive increase in
loan size upon satisfactory repayment. The use of dynamic incentive as a
delivery mechanism helps to secure high repayment rates (Besley, 1994).
Johnson (2005) observes that most micro finance programmes strengthen
the incentives for good repayment behaviour by the promise of continuing
access to higher loan size so that institutional credit access does not
remain a one-shot injection. In this light, dynamic incentives serve as
an efficient strategy used to overcome information asymmetry due to the
repeated nature, and credible threat to withhold future lending in case
of default (Brau and Woller, 2004). However, the power of dynamic
incentives wanes in the presence of competition, hence the need for a
centralized credit rating agency as competition grows. Dynamic
incentives thrive in locations where mobility is relatively low and also
helps to develop good relationships with clients over time and to screen
out the worst prospects before expanding loan size (Okenyebuno, 2007).
Regular repayment schedules form a dynamic and integral discussion
of micro finance products and services. Regular repayment schedules
refer to a practice whereby micro finance clients agree to pay a
specified amount either weekly or monthly to off-set the loan taken. In
some cases, clients of a micro finance institution are required to start
repayment from the first week after borrowing to ensure that the clients
are not tempted to borrow more than they repay and that they
consequently limit the loan amount to what is within their capacity to
repay from earlier savings (Kalpana, 2004). A major appeal of regular
repayment is that it enables the micro finance institution to get hold
of cash flow before they are consumed or otherwise diverted for other
purposes (Rutherford, 2003). Regular repayment schedule also helps to
screen out undisciplined borrowers and give early warning to loan
officers and peer-group members about emerging problems. However, the
effectiveness of the regular repayment schedules is hindered where the
clients do not have diversified income streams. Jain and Moore (2003)
observe that the rigid regular repayment programme is a self-exclusion
programme not suited for clients engaged in enterprises or economic
activities with longer gestation period such as livestock or occupation
with limited cash flow to meet the regular obligations. In other words,
the rigid repayment restrict admission of clients engaged in high
turnover businesses, such as those engaged in petty trade, thereby
preventing some clients from enhancing the productivity of livelihoods
by limiting their choice of activities. As a result, they are unable to
acquire fixed assets and engage in long term investment as a result of
the limitation posed by rigid repayment programme. This position is also
maintained by Snodgrass and Sebstad (2002), who assert that clients of
micro finance institutions have experienced greater incidence of asset
liquidation than non-clients, as a result of inflexible repayment
Collateral substitutes are simply a mechanism in which borrowers
are required to undertake compulsory savings or to make contribution to
an "emergency fund" or engage in "forced savings".
The savings serve as insurance in case of default, death, disability or
any form of other unforeseen circumstances. It also in many cases serves
as partial collateral for any loan obtained by clients. Karlan and
Goldberg (2006) also opined that collateral substitutes could be
expanded further to include household assets which are valuable to the
borrower but are less than the value of the loan.
The Asian Development Bank (2000:3), as shown in Table 1,
illustrates the connectivity between micro finance services and poverty
reduction, as well as the possible beneficial impact of those services.
The interest in micro finance as a development strategy is evident
from the support it has received from multilateral lending agencies,
bilateral donor agencies, developing and developed country governments,
non-government organisations (NOGs) and private banking institutions
(ADB, 2000:1). The United Nations is no exception and has undertaken
numerous projects to further develop microfinance in the African
context. They propose that microfinance initiatives will be successful
in Africa if based on four principles taken from international best
practices. The principles are: pool together peoples resources through
group organizing, rely and build upon what people know - tradition,
reinforce microfinance to empower the African private sector and strive
for efficiency (ADB, 2000:3).
Groups Targeted by Micro Finance Institutions/Banks
The question of who micro finance programmes should reach in terms
of the poverty level of clients' households is important for
several reasons. First, many micro finance programmes seek to reduce
poverty by targeting financial services to the poor either directly,
through means testing, or indirectly through products and services
designed to attract the poor. This is because, not all programmes seek
to reduce poverty by targeting poor clients. Some MFIs/MFBs seek to
reduce poverty indirectly by targeting non-poor clients who operate
enterprises that may employ poor people (Sebstad and Cohen, 2001; Hulme
and Mosley, 1996). Client targeting in this regard entails the extent of
outreach in terms of breadth and depth. While breadth connotes the
number of clients served, depth refers to the types or characteristics
of the clients (whether poor or non-poor).
Secondly, it is widely accepted that the poor are a heterogeneous
group and that the impact of micro finance varies across different
groups among the poor. The poverty level (usually measured by income)
and initial endowment (usually measured by assets) of clients and their
households are key factors that condition impacts (Hulme and Mosley
1996). Even if programmes have information on the number of poor people
they reach, few have detailed information on which groups among the poor
they service. Consequently there is very little insight into what their
needs are, what type of products and services are most appropriate, and
what types of impact might be expected (Sebstad and Cohen, 2001). If
reducing the severity of poverty is the goal, then the poverty level of
poor clients when they start out in a programme should be known.
Unfortunately such information is rarely ever collected (and is usually
only approximately derived from extensive interviews and field group
discussions (FGDs) in field surveys conducted by researchers). Also, if
reducing the incidence of poverty is the goal (that is, reducing the
proportion of people below the poverty line), then it is important to
know the breadth of outreach to poverty groups either already below or
at risk of falling below the poverty line.
A third and related issue concern an understanding of the nature of
poverty and how that nature affects clients. If well understood,
appropriate money management strategies, products and services can be
designed for different groups which ultimately support them by way of
reducing their vulnerability. However, one contentious issue which they
have to grapple with borders on who should constitute majority of micro
finance clients (i.e., women or men). While a large number of
theoretical literature lean towards accepting women as the target of
micro finance, some recent empirical evidence have abandoned the view of
female dominated clientele base. Proponents of female dominated
clientele base have pinned their argument on the premise that women are
less mobile and less susceptible to problems of moral hazard in credit
related issues, and that they are more likely to utilize the loans than
their male counterparts in productive ventures that improve the well
being of their families (Okenyebuno, 2007; Brau and Woller, 2004).
However, a contrary view is expressed by Morduch (1998) from a study
that did not provide convincing results to demonstrate that micro
finance programmes are more efficient where the borrowers are
predominantly women. In Sebstad and Cohen (2001) study on risk
management and poverty in some selected countries (Bangladesh, Bolivia,
Philippines and Uganda), they discovered from their synthesis study that
the impact of micro finance institutions/programmes was effectively high
and that those clients (male and female) who were targeted also qualify
as a part of the economically active poor or very vulnerable non-poor.
In the present study, we do not intend to wade into this controversy. We
choose rather to simply determine the impacts of micro finance banks on
both categories of customers served (both male and female), principally
or entirely in rural areas of Edo State, Nigeria.
Micro Financing and Rural Poverty Reduction
Poverty is basically a state where an individual or group has
insufficient income for securing basic goods and services. It is an
unacceptable human deprivation in terms of economic opportunity,
education, health, nutrition as well as lack of empowerment and security
(Ukeje, 2005; World Bank, 1995).
Some appreciable efforts have been made to conceptualize poverty in
the development literature for easy recognition in practical life.
Poverty has been categorized into two: absolute and relative
respectively (United Nations Economic and Social Commission, 2000).
Absolute poverty has been conceptualized as the inability of a person or
household or group to obtain or satisfy the most basic and elementary
requirements for human survival in terms of food, clothing, shelter,
health and transport. Others are education, recreation and interest to
participate in governmental decisions that affect the individual,
household or group directly or indirectly (Onokerhoraye, 1995; United
Nations Economic and Social Commission, 2000; Aliyu, 2003). Monetarily,
the absolute poor person or household or group is said to earn
"less than $1 (USD) a day" (United Nations Economic and Social
Relative poverty on the other hand, is defined as a condition in
which a person or household or group earns a per capita income of less
than one-third of the average per capita income of the country (World
Bank, 1997). The relative poor person's or household's or
group's income is measured on a comparative economic basis, hence
it is different from the absolute and rather holistic approach in the
Three different parts of poverty have been identified. These are
the poverty of money, poverty of access and poverty of power (United
Nations Economic and Social Commission, 2000; Agbonifoh and Asein,
2005). Poverty of money relates to 'inadequate access to the means
of asset or wealth acquisition .... (that is) the individual or
household does not earn enough income to meet the basic needs of life.
'This form of poverty may result from poor access to education,
lack of marketable skills ....' (Agbonifoh and Asein, 2005).
Poverty of access arises from an individual's or a group's
inability to enjoy certain basic infrastructures, especially because
group members do not have the means to access them. The poverty of power
manifests when the individual or group cannot influence government
decisions that affect him or the group either directly or indirectly
(United Nations Economic and Social Commission, 2000).
It would be observed that the above three parts of poverty can be
said to be interrelated. This is especially so as money underlies all of
them. With adequate access to money, there is generally a corresponding
access to infrastructures, power and so on. It is as well to emphasise
here that the concept of poverty is rather holistic as it embraces
issues such as education, recreation, participation in decision making
and money. These generally impact on many aspects of life. This is
largely the rationale why micro financing is very important as it
enables the poor to access more aspects of life for better fulfillment.
Poverty in Nigeria especially in rural areas, is widespread and
deep-seated. Swamy (1980) developed a measure of the poverty gap in
Nigeria. In the study, Nigeria was classified as a poor country with 76%
of its population falling below poverty range (or level 1-5) and 20% in
the middle income category (or level 6-10); with the remaining 4%
falling within the rich/high income category (or level 11 and above).
The worsening state of the national economy has caused the middle income
class to slide down to join the lower income group, and available social
indicators have confirmed the impending poverty situation on the lives
of the average Nigerian. For poverty reduction/alleviation programmes to
be effective and sustainable, they must reflect a systematic
understanding of the perception of the poor. The poor best understand
poverty and it is the poor who must escape from poverty (Odita and
Many factors have been identified for the persistence of poverty.
Notable among these are deficient governance which is subject to
arbitrary change, entrenched corruption and rent seeking elites, lack of
respect for human rights, weak institutions, inefficient bureaucracies,
lack of social cohesion and political will to undertake reforms. Others
include bad governance and economic policies, inflation, market
failures, capital flight, low savings (Loayza, et al., 2000) and
investments, and distorted incentives to the manufacturing sector; all
of which lower productivity and incomes, thus resulting in low levels of
economic growth which eventually leads to a high poverty rate (Ukeje,
2005; Idolor, 2007).
Poverty reduction has continued to occupy a centre stage in the
development agenda of various nations all over the world. The strategies
have however been greatly dependent upon the perceived extent and level
of poverty, the vision for its reduction, and the available human and
material resources at the disposal of each country. One of the means for
poverty reduction that has however assumed universal acceptance and
adoption in many countries of the world is the provision of micro
finance services, particularly to the economically active poor. These
are based on the belief that such category of people only need financial
empowerment to realize their dreams and unleash their potentials.
III. BRIEF HISTORICAL EXPOSE ON MICRO FINANCE AND CREDIT PROVISION
The practice of micro finance in Nigeria is culturally rooted and
dates back several centuries. The traditional micro finance institutions
provide access to credit for the rural and urban, low-income earners.
They are mainly the informal self-help Groups (SHGs) or Rotating Savings
and Credit Associations (ROSCAs). Other providers of micro finance
services include savings collectors and co-operative societies. Some
informal names for these in Nigeria are "Osusu" in the
Western, "Itutu" in the Eastern and 'Adastu" in the
Northern parts of the country. This informal financial system generally
has limited outreach due primarily to paucity of loanable funds and risk
aversion fears by potential investors. Hence it could not make
appreciable impact on poverty reduction in the country.
The Nigerian government as far back as 1971 has identified poverty
as the bane of rural development in the country. Poverty was found to be
a rural phenomenon with 8.4 million of the then 10 million extremely
poor being from rural areas (World Bank, 1995). Of course, it is now
realized to be an urban phenomenon also, yet our focus is on the rural
poor. To enhance micro finance, government has in the past initiated a
series of publicly financed micro finance programmes targeted at the
rural and urban poor. Such programmes included Rural Banking Programme
(RBP) and the Nigerian Agricultural and Co-operative Bank (NACB),
Peoples Bank of Nigeria (PBN), Community Banks (CBs), Nigerian
Agricultural Insurance Corporation (NAIC), the family Economic
Advancement Programme (FEAP) and recently the National Poverty
Eradication Programme (NAPEP) (CBN, 2005). But they have not been
largely effective (see Imhanlahimi and Idolor, 2010).
In Nigeria, until 1990 when the community - banking scheme was
inaugurated, the government had relied much on micro finance provision
as a social service that should be based on a top-down
non-profit-oriented approach. But with the direction of government macro
economic policy towards privatisation and commercialization of services
since the Structural Adjustment Programme (SAP) introduced in 1986, the
obvious focus on credit provision and financial services provision to
the poor has been largely private sector driven (Ikeanyibe and
Imhanlahimi, 2007). As Ehigiamusoe (2006) maintains: "micro finance
is no longer the domain of charity, as Micro finance has emerged as a
thriving industry in the country.
Most of the traditional informal micro finance schemes in the
country operate on the basis of mutual trust and integrity. Despite this
important ingredient, it has a high risk of failure. The uncertainty and
risk surrounding the business environment often make repayment very
vulnerable. Robbers are also prone to attacking potential collectors of
the rotating scheme, as no banks exist in many of the rural areas for
onward deposition of the fund. In some cases too, the privately run
financial schemes have often been an opportunity for dupes to operate
and most of them are not experts in fund management such that they end
up using the deposit liabilities in running the scheme, thus being
unable to pay all depositors at the end of the day. There is also the
problem of paltriness of loan-able funds and timeliness, as financial
demands are not always met as and at when needed. Above all, most
informal financial schemes operate on a short-term basis. But, the needs
of the rural sector, which in most cases are agricultural investment,
require medium or long-term credits. Despite these weaknesses, the
informal structures have continued to be very significant in micro
financing in Nigeria as 65% of the economically active population that
do not have access to formal financial system are often served by the
informal sector (CBN, 2005; Ikeanyibe and Imhanlahimi, 2007). The need
for formal financial institutions to complement and transcend the
inadequacy of the informal sector is nevertheless, vital. The formal
financial institutions are the modernized institutions that operate
within the integrated mainstream of national financial system. They
include banks and other financial institutions that operate in
accordance with the governmental laws establishing and regulating their
activities. In Nigeria, these include many specialized and development
financial institutions, and even the universal banking institutions
(Ikeanyibe and Imhanlahimi, 2007).
The inability of the formal financial institutions to provide
financial services and intermediation to both the rural and urban poor,
coupled with the nonsustainability of government sponsored development
schemes, induced the growth of private sector--led micro finance in
Nigeria. However many of them began as non-governmental organisations
(NGOs) established for the purpose of eradicating poverty from the rural
and urban areas. They depended solely on aids and grants that came from
their foreign donors and sponsors. Also, the deregulation of
Nigeria's financial sector since 1986 influenced the rapid
emergence of non-bank financial institutions, including community banks
(CBs), which have been involved in micro financing in Nigeria. These are
the institutions or establishments that the government has in the
current policy upgraded or provided with an enabling environment to
transform into micro finance banks. At the same time, government is
actively encouraging more initiatives from the private sector in the
establishment of more micro finance banks under the new regulation and
the guidance of the CBN. Some of the following can be regarded as formal
structures and processes initiated by past successive administrations in
Nigeria to increase access to micro finance and credit provision in
(i) Direct financing and establishment of agricultural development
programmes such as Farm Settlement Schemes (FSS) and River Basin
Development Authorities (RBDA). The plantation scheme for instance, was
established by the colonial administration between 1950 - 60. The aim
was to boost the production of export crops like cocoa, palm produce,
rubber and timber. Other similar projects abound (Ikeanyibe and
(ii) The establishment of special financial institutions to provide
soft credit facilities to the farmers, large and small scale industries.
Some of these specialized financial institutions are the Nigerian
Industrial Development Bank (NIDB) established in 1964, the Nigerian
Agricultural and Cooperative Bank (NACB) established in 1973 and the
Federal Mortgage bank of Nigeria in 1977. These banks were not
specifically established to serve the credit needs of the rural
dwellers. But as development financial institutions, the rural dwellers
were not excluded from their operations. The NACB for instance was
designed to promote micro financing of agricultural project. Hence, the
rural area being agriculturally centered, naturally would have received
the greatest attention and benefits from the operations of this
specialized bank. The institutions were expected to provide sometimes
training and technical assistance to farmers and industrialists.
(iii) The formation of the National Association of Cooperative
Credit Unions of Nigeria Limited in 1970 with the objective of
mobilizing savings and disbursing credit to affiliates.
(iv) The establishment of the Small Scale Industries Credit Scheme
(SSICS) by the federal and various state governments. The scheme was
meant to provide financial assistance in form of matching grants to help
small scale industrialists. The sum of two hundred million Naira
(N200,000,000) was set aside for this programme in the Fourth National
Development Plan of 1981.
(v) The Rural Banking Scheme of 1977 which, following the Okigbo
panel recommendation stipulated that Commercial Banks should open up a
specified number of branches in the rural areas.
(vi) The establishment of the Post Office Savings Programme.
(vii) The establishment of Cooperative Banks by various states of
(viii) The establishment of the Peoples Bank of Nigeria (PBN).
(ix) The establishment of Community Banking Scheme in 1990.
(x) The establishment of the Family Economic Advancement Programme
(FEAP) in 1997.
(xi) The establishment of the Nigeria Agricultural Cooperation and
Rural Development Bank Ltd (NACRDB) by the merger of FEAP, NACB and PBN
in year 2000 by the Obasanjo Administration; and more recently.
(xii) The launching of the Micro Finance Policy, Regulatory and
Supervisory Framework for Nigeria, establishing the Micro Finance Bank
(MFB) Scheme on 16th December 2005.
These programmes do not exhaust the efforts made to initiate rural
development and poverty reduction in Nigeria, through credit provision.
Other development, employment generation and poverty alleviation
policies had some of their programmes also targeted in one way or the
other to micro finance services. Examples include the National
Directorate of Employment (NDE), and the on going National poverty
Eradication Programme of the present administration with a key objective
of providing financial services to alleviate poverty (Ikeanyibe and
Imhanlahimi, 2007). While the programmes have recorded some success, it
is still clearly seen that the rural and urban poor remain greatly
un-served by them; which necessitated the establishment of the micro
finance banks (MFBs) to bridge the existing gap(CBN,2005). One thing is
the establishment of the MFBs, the other is their impact on the rural
economically active poor, which is our interest in this research.
IV. EMPIRICAL LITERATURE ON IMPACT EVALUATION OF MICROFINANCE
Argument's in favour of microfinance being a mechanism for
reducing poverty has been made and there is strong opinion that the
productive base of the poor will improve if given access to credit which
will in turn enhance income growth (Montgomery and Weiss, 2005). In
general, access to credit by the poor will improve their social
networks, serve as cushion against unforeseen events (risk management)
and enhance consumption smoothing. In other words, the availability of
credit will help the poor to meet 'promotional' (income
creating) and protectional (consumption smoothing) purposes. The
transformation and emerging trends in the micro finance industry have
brought to bear the need to ascertain if the original poverty focus of
MFIs is still being maintained. Thus, it has become imperative and of
great policy interest to answer the question of the impact of MFIs on
the poor (particularly the core poor). Hence, there is the need to
assess both the depth and breath of outreach of MFIs programme, the
impact of access to microfinance services on the welfare of clients and
the costs of achieving the impact. Several tools are available to
measure different forms of impact and several empirical studies have
been undertaken in this direction using a mixture of qualitative and
quantitative econometric tools. In the Asian region, the impact studies
have been carried out by Hulme and Mosley (1996); MkNelley et al.
(1996), Khandker (1998), Pitt and Coleman (1999), Chen and Snodgraes
(2001), Coleman (2004); Park and Ren (2001), Duong and Izumida (2002),
Amin et al. (2003); Gertler et al. (2003), and Khandker (2003). In
the Latin America region, the logit, longitudinal model have been
undertaken by Hulme and Mosley (1996), Mosley (2001), Dunn and Arbuckle
(2001) and MKNelly and Dunford (1999). All through the empirical
literature, the procedures adopted have been a mix of both qualitative
and quantitative methods of analysis.
Adapted from Montgomery and Weiss (2005), as shown in Table 2 is a
summary of some of the recent empirical works in the area of
microfinance and its impacts upon the economically active poor in some
regions of the world.
The studies shown in Table 1, have produced mixed results as to
what the impact of microfinance is relative to the up-liftment of the
welfare of the microfinance clients. Brau and woller (2004) therefore
opines that making comparisons across impact studies is greatly
complicated by the contextual heterogeneity of programmes assessed and
the diversity of empirical methodologies employed. Hulme (2000) in
reviewing the different methodological options for undertaking impact
assessments advice that a mix of different methods is required to attain
an optimal impact assessment mechanism.
Skoufias et al. (2004) observe that despite a plethora of
microfinance projects around the world and related impact studies, much
debate remains as to the benefits for poor participants and the economy
from further expansion of microcredit. Montgomery and Weiss (2005)
stress that the pace of research do not match the enthusiasm for
microfinance programmes. They argue that most of the existing researches
focus on only one aspect of the tripod objectives (critical triangle) of
outreach, impact and cost-effectiveness and as such the adoption of
appropriate statistical methodology become difficult. Hulme (2000)
states that "knowledge about the achievement of microfinance
remains only partial and is contested". To Swain (2004), proper and
scientifically robust impact assessment and statistical evaluations have
been limited due to the view that evaluations are a waste of time and
money and a diversion from running the programmes themselves.
As noted by Brau and Woller (2004), the specific impacts of micro
finance are hard to pin down and even harder to still measure. These
authors suggest that impact assessment require the adoption of research
methodologies capable of isolating specific effects out of a complicated
web of causal and mediating factors and high decibels of random
environmental noise, as well as attaching specific units of measurement
to tangible and intangible impacts that may or may not lend themselves
to precise definition or measurement. Coleman (1999), and Karlan (2001)
advised researchers to guard against the drawbacks of past impact
studies which include use of invalid control group (inappropriate
counter factual), biased sampling, and mis-estimation of programme
benefits and costs.
V. RESEARCH METHODOLOGY
In early 2010, 1,000 copies of a questionnaire specifically
designed for this study were distributed to artisans, crafts men and
women market men and women, and peasant farmers in selected local
government areas in Edo State of Nigeria. Our field team visited them in
their small shops, farms, markets, villages, hamlets, and areas where
they cluster together for businesses. Other areas included specific
locations in the villages and camps where there is a preponderance of
such categories of economically active poor people. At the end of the
exercise, 900 questionnaires were retrieved of which 850 was
sufficiently usable, giving us a completion rate of 85 per cent.
This sampling procedure has been described as non-probability
purposive sampling technique (Agbadudu and Ogunrin, 2006). In
non-probability sampling, elements of a population are not deliberately
given equal or known chance of being included in a sample because there
is no known or documented universe. In other words, non-probability
sampling does not guarantee randomness (Nachmais and Nachmais, 1982).
Non-probability purposive sampling technique describes the process of
choosing sample elements while being guided by assumptions of what
typical elements are; elements which are most likely to provide a
researcher with information required (Asika, 1991). Our procedure could
also be described as purposive or convenience sampling techniques.
The questionnaire was tested for content (face) validity before it
was administered. In this vein, six senior colleagues (all of them of
senior lecturer and professorial cadre) were requested to assess the
questionnaire for adequate coverage of relevant dimensions of the
research objectives. After their various suggestions, the final
questionnaire which was applied for this study consisted of questions
that are not categorized explicitly into sections. We perceived that not
categorizing the questions would impute informality to the exercise thus
enhancing the completion rate. The questions do not follow a rigidly
logical sequence either. It is our hope that the absence of a rigid
order would eliminate the problem of response set; that is, the tendency
to answer all questions in a specific direction regardless of the
content of each question (Agbadudu and Ogunrin, 2006; Yomere and
Also we conducted focus group discussions (FGDs) and individual
in-depth interviews to enable respondents to freely express their
personal opinion on the research topic. This was particularly helpful in
deriving answers from our respondents, many of whom were illiterate and
who naturally would not have been able to complete our questionnaires
without assistance. As previously stated in this paper (passim), the
focus of our study is on the rural economically active poor individuals
who are entrepreneurial and challenged by the extreme vagaries of life.
This is with the aim of determining if indeed they constitute the
category of people targeted by micro finance banks, if they have access
to credits on a regular basis; and indeed if the credits and other
ancillary services received by them have had any significant effect upon
their livelihoods, homes, standard of living and assets.
In referring to clients or persons by poverty level, field
researchers have agreed on three groups: vulnerable non poor, poor and
extreme/absolute poor. Vulnerable non poor clients or persons are those
above the poverty line but who are still vulnerable to slipping into
poverty. They also earn above $1 USD a day. Poor clients or persons are
those below the poverty line and who earn $1 USD a day, while the
extreme/absolute poor earn less than $1 USD a day. This is shown in
[FIGURE 1 OMITTED]
In Nigeria many people live on unmonetised and unquantifiable
resources. Examples are situations where people in the rural areas go
into the forest or jungle to gather materials which are used to cook
freely with little or no cost or financial implications to them.
Therefore the researchers though recognizing that there are many
commodities in the rural areas which may be possibly obtained without
money, still have categorized such groups of people as constituting a
part of the extreme/ absolute poor who just manage to eke a living.
The research used a mix of qualitative and quantitative methods.
The questions in the questionnaire were analysed in tabular form with
the aid of simple percentages, bar graphs and pie charts. This enabled
us to simplify the problem of comparison and also show the qualitative
characteristics in numerical form. We present below the responses of
some of the core research questions asked in the questionnaire.
Of the respondents, 490 were males while 360 were females. Of the
respondents 254 fell within the highest age bracket "above 40
years". 133 respondents fell within the lowest age bracket
"less than 30 years". The modal age bracket turned out to be
>40 years while the respondents which fell within the age brackets of
30-35 and 3640 were 220 and 243 respectively. The respondents all hailed
from Edo State Nigeria (being our case study). A total of 29 had
tertiary education, 123 secondary school education, 336 primary school
education while the remain 332 had no education whatsoever and were
illiterates. Also 605 respondents earned an average daily income of
<1 USD, 164 earned just 1 USD while the remaining "81
respondents earned >1 USD (see Table 3).
From table 3 it is evident that a great majority of our respondents
had no more than primary school education with approximately 40% of them
without any form of education whatsoever. Also most of the respondents
fell within the active youthful and working class segments of the
population. Most of them (605) as shown in table 4 earn <1 USD; with
164 respondents earning just 1 USD. Our findings indeed reveal that only
81 of the respondents earn > 1 USD as daily income which further
shows the level of poverty in the rural communities in Nigeria. Surely
they would enjoy a better and higher standard of living if they are able
to gain access to small amounts of credits with which to elk a living
from at friendly and affordable terms.
Furthermore, from table 5, it is shown that all the respondents had
a trade and set of skill which could be used to earn a living in the
rural communities. For instance a total of 122 were artisans, 164 were
craftsmen and women, 300 were market men and women with the remaining
264 practicing one form of peasant farming or the other. The modal
occupation for male respondents was also found to be peasant farming
while those of female respondents was trading in the rural market
places. This findings corresponds with the findings in much of the micro
finance and development empirical literature (see Cohen, 2002; Prahalad,
2004; Sebstad and Cohen, 2001; Ukeje, 2005; Idolor, 2010 and Imhanlahimi
and Idolor, 2010 to cite only a few). It is however disheartening that
significant numbers of rural dwellers lack basic primary education in
Nigeria, which to a large extent suggest that they may not
intellectually be able to learn new and innovative methods of doing
things beyond the existing culturally rooted techniques. For a fast
moving world, these practices are limiting and could mean stagnation
thus further entrenching the poverty levels in the rural areas.
Table 6 indicates that only 6.82% of the respondents answered in
the affirmative to the question on access to micro finance bank
services/programmes, with the remaining 93.18% of the respondents
returning the opinion that they have not had access to any form of micro
finance bank services. Further information derived from our focus group
discussions and in-depth interviews revealed that many of the
respondents had tried to obtain micro finance services from the micro
finance banks without success. Many of them complained about the
distance of the micro finance banks or cash centres from their local
rural communities. For instance, many of the micro finance banks had
only one branch/headquarter (Imhanlahimi and Idolor, 2010) which are
usually located at the local government headquarters; that may be
located as far as 16 kilometres or more from the villages where they
dwell. This creates a problem for many of the rural poor who may not be
able to afford the expensive cost of transportation.
[FIGURE 2 OMITTED]
From figure 2, it is observed that the respondents who answered in
the affirmative to the question on the nature or types of MFB services
received, majorlly had access to advisory (12%) and savings (7%). Other
services included loans/credits (8%), investments (5%), training (3%)
and insurance services (2%). In total all those who received one form of
service or the other constituted 37% of the respondents with the
remaining 63% of our respondents returning the opinion that they have
not had access to any form of micro finance bank services. The low
proportion of respondents who had access to these primary services
speaks volume of the low capital base of the micro finance institutions
in Nigeria and suggest clearly that their impact upon the livelihood of
the rural poor could be indeed very low.
Furthermore, figure 3 shows that 65% of our respondents, who
answered in the affirmative to the question on adequacy and regularity
of services by MFBs were of the opinion that the services provided are
irregular and inadequate, while 25% of the respondents indicated that
the services received were irregular but adequate. Also 7% saw their
services as very irregular and inadequate while the remaining 3% of
respondents expressed satisfaction. Further revelation from our field
survey through personal interviews, indicated that majority of the
respondents obtained micro finance services from the existing informal
micro finance schemes in their rural communities. They also indicated
that they had no choice but to utilize the informal schemes as the
conventional micro finance banks are too distant from the localities
where they dwell. It was also revealed that the informal schemes were
exploitative and often collapsed whenever the founder dies. These
informal schemes are in every village or quarter or hamlet in the
various local government areas and they also have meeting points where
the members regularly met to review the operations and performance of
the informal schemes.
It seems as though it is the profit maximization criterium that
makes MFBs not to establish branches or cash centres in the rural areas;
as they seem to be more interested in clients with higher turnovers, who
operate in the urban areas. Furthermore, majority of the rural dwellers
live on less than one US dollar a day and even on non-quantifiable
resources and would thus have an improved standard of living if those
that are entrepreneurial are able to gain access to credit facilities on
a continuous basis, favourable terms, and interest rates as well.
The study basically discovered that MFBs are failing in this
regards as the rural sector basically seems to have been abandoned by
them with a very low presence in the rural areas. They would do well in
achieving their mandate of helping to positively improve the standard of
living of the economically active poor by focusing their services more
on the rural poor, who constitute a significant proportion of the poor
people in Nigeria, than on the wealthy or vulnerable non poor clients in
Our findings from our field survey basically contradicts similar
studies carried out in other countries where the existing MFIs had a
significant impact on the livelihood of the benefiting clients. Also in
such studies the category of people targeted (most especially in the
rural areas) ostensibly qualified to be part of the economically active
poor (see Sebstad and Cohen, 2001), this does not seem to be the case in
Flowing from our findings, the first recommendation we make is that
lending to the very poor can be financially viable for micro finance
banks/institutions if they successfully convert the poor into customers
while at the same time empowering the poor. This they can do by
identifying and supporting initiatives designed to improve the
capacities of the poorest of the poor to participate in the larger
economy. The poor do pay for the services rendered to them and as such
should be viewed as consumers rather than passive beneficiaries. With
this idea engrained as a core belief, it becomes more easy for the micro
finance banks/institutions to focus their resources and creative
thinking toward innovatively serving the poor who constitute the bottom
of the economic pyramid.
Micro finance even in the formal sector, for many developing
countries, has a long history characterized by its non-sustainable
donor--led model. The primary focus of micro finance institutions (MFIs)
has been access to credit, which has proved to be a very capital
intensive process. The other aspects of banking, namely, savings, has
been primarily ignored by MFIs. Also, the majority of its lending occurs
to segments who do not qualify for the bottom of the pyramid (BOP) or
poorest of the poor. Despite these hindrances to sustainability, MFIs
remain vitally important as a financial gateway to the poor. Access to
credit and participation in trustworthy financial institutions are two
of the most important steps in securing basic services of everyday life.
The poor need these services to save small amounts in a secure manner,
to invest in their business or home, to cover large expenditures, and to
ensure against risk (Prahalad, 2004).
Poor households around the world have demonstrated their ability to
use and pay for financial services through long standing informal
agreements such as savings clubs, rotating savings and credit
associations and mutual insurance societies. In every country, there
exists numerous ways in which the poor can access credit through
informal and semi-formal institutions. The poor, in the absence of
formal institutions, often must resort to the informal sector, which is
characterized by monopolistic practices and exorbitant interest rates.
Informal systems are usually inefficient and even exploitative due to
their monopoly power; and the interest rates charged are hardly ever
fixed. In many countries of the world banking with the poor is
undergoing a paradigm shift. It is no longer viewed as a mere social
obligation but as a financially viable venture as well. Additionally, by
serving the poorest of the poor efficiently, the emerging micro finance
banks would very easily be able to position themselves as a socially
responsible corporate citizen. This would be looked on highly by
customers and prospective investors (Idolor, 2010). Infrastructures,
such as good road network, electricity, portable water, functional
schools, and health centres, should be provided especially in the rural
areas in Nigeria. These would encourage urban-rural migration, or
rural-rural migration as is currently being experienced in China with
the establishment of rural industries (Nyberg and Rozelle, 1999).
Finally, the following recommendations adapted from Sebstad and
Cohen (2001), we believe is also crucial in increasing the ability of
MFBs in delivering vital services to the economically active rural poor
in Nigeria, and will thus help in increasing impact.
1. Match Products to Clients' Needs
One challenge facing most MFBs in Nigeria, relates to developing
financial products, services, and delivery mechanisms that meet the
financial needs of a wider spectrum of households. To expand and deepen
outreach and impact, the microfinance field is challenged to develop
products that respond to the needs of clients from poorer households in
the country. Product development could involve both improving the terms
and conditions of existing products and developing new products. To
date, the microfinance product market has been relatively homogenous.
Although some variation in loan sizes exists, differences in interest
rates and other terms and conditions often are small.
2. Match Repayment Amounts and Cycles to Clients' Needs
For poorer households, the risk of taking a loan could be reduced
if repayment amounts and cycles corresponded to income flows and the
repayment capacity of borrowers. For poorer households, smaller and more
frequent installments stretched out over a longer repayment period may
be more appropriate. Matching the variable nature of clients multiple
income streams with appropriate repayments amounts and cycles may
improve a client's capacity to repay and borrow over the long term
and thereby reduce the risk of borrowing for them, as well as reduce the
risk of lending for the MFB.
3. Match Loan Size to Clients' Needs
Another issue for poorer borrowers is appropriate loan size. For
example, some group systems automatically increase loan size for all
members after each cycle, regardless of their needs or repayment
capacity. The pressure of large loan repayment can force them to leave
programs. Poorer borrowers need flexible and timely products with
small-size, manageable repayments. For better-off households, larger
loan sizes could enable them to take advantage of investment
opportunities with potentially higher returns. From the standpoint of
sustain-ability, the lower costs generally associated with delivering
larger loans, the potential for good repayment rates, and the
possibilities for this client group to cross-subsidize poorer groups
should make them attractive to MFBs.
4. Increase Services to Vulnerable Non-poor Households
Expanding the outreach of microfinance services to vulnerable
non-poor households is important from the perspective of poverty impact.
As seen in this research, economic stress events and shocks can push
this group below the poverty line and increase the number of poor
households. To the extent that some clients from vulnerable non-poor
households are in a better position to take risks and invest in
employment-generating enterprises, financial support may have potential
for secondary employment effects.
5. Examine Financial Flows and Repayment Cycles
For all groups, more attention to client preferences in relation to
loan size, repayment cycles, flexible loan products, and transaction
costs in the design of products and delivery mechanisms could further
improve program outreach and retention by reducing the risk of borrowing
for clients. This challenge means looking more closely at the match
between household financial and investment flows and loan and repayment
6. Broaden the Range of Products and Services
A crucial challenge facing MFBs is broadening the range of products
and services offered by them, such as introducing new financial products
or services that support client-defined pathways out of poverty. Across
the field studies (sampled), improved Housing and education are
perceived as pathways out of poverty for the poor, suggesting the
potential for developing housing and education loans or savings
products. With housing viewed by the poor as a productive investment and
one of the few appreciating assets they can acquire, client demand for
housing loans is high. With both the size of school fees and their
timing and frequency predictable, financial vehicles, either savings or
credit,' should be useful for responding to this financial need.
7. Increase Product Flexibility
To help clients manage and recover from losses associated with
unanticipated crises or economic stress events after they occur, MFBs
are challenged to provide more flexible loan and savings products. For
example, emergency loans could play an important role in helping clients
recover lost stock, make repairs on premises or equipment, start a new
business activity, or cover health bills. Emergency loans could help
clients recover from such events more quickly as they continue to pay
their loans and stay in programs. By avoiding the use of negative coping
mechanisms, such as selling off productive assets or taking children out
of school, and maintaining access to credit, clients reduce their
vulnerability to future risks.
The key to success for emergency loan products is their timeliness.
The money must be readily available when clients need it. For clients
who are in the middle of a loan cycle, emergency loans may enable them
to continue to repay their loans and stay in programs when they face an
unanticipated crisis, for non-clients, these types of loans could be an
important enticement to enter a program. While the capacity of borrowers
to carry debt needs to be weighed carefully, emergency loans are proving
themselves effective in crisis situations, big and small. Demand for
this type of facility is strong in other African countries such as Mali,
Uganda, Egypt, Morocco and South Africa; and there is no reason to
believe that this is not the case with Nigeria.
8. Provide Insurance Products
To help clients mitigate anticipated, but unpredictable, risks,
MFBs are challenged to provide products and services beyond credit. A
great majority of the empirical literature studied suggests a potential
role for insurance products to help clients cope with frequent,
idiosyncratic risks such as ill health or death of a family income
earner. All are potentially insurable risks. Some MFBs and credit unions
include loan insurance, usually as a fee. While loan insurance protects
the MFB, it does little to protect clients from emergencies that lead to
default. Providing these services is not easy. Yet for MFBs, the direct
or indirect provision of insurance services to protect clients against
these risks is a win-win proposition for both MFBs and their clients,
9. Increase Individual Savings Opportunities
Finally, the findings suggest a role for more accessible and
private savings that are not linked to borrowing and that can be used to
deal with anticipated and unanticipated risks and day-to-day economic
stresses. Again, it is important that such financial products be
structured to reflect the financial and investment cycles of the client
and to be accessible when they are needed.
Access to financial services has been proven to be a powerful tool
to help fight poverty. The impact is greatest especially for the poor
people when they have access to a broad range of financial services with
which they can invest in income generating and asset building activities
to meet basic needs such as health, education and nutrition. The ability
to manage assets helps poor people to gain control of their own future
and make greater contribution to national development.
Nigeria like any other developing country is saddled with the
problem of rural-urban migration, mass illiteracy, poor infrastructural
facilities, poverty and low access to formal financial services. This
requires a vibrant micro finance initiative aimed at expanding the
financial infrastructure of the country to meet the financial
requirements of the Micro, Small and Medium Enterprises (MSMES) as well
as the need of the rural and urban poor. For the country's
economically active poor to rise above their current poverty level, the
micro finance banks must be seen to be up and doing as this is the only
way they can achieve their mandate and true purpose of their existence.
To date, the objective of microenterprise development has driven
much of the microfinance field. While microenterprises are an important
source of income for many poor households, they are only one part of
their overall livelihood systems. Microfinance is more than credit, and
as shown in this research, microfinance can play an important role
beyond enterprise development in supporting the livelihoods of the poor.
The concept of livelihood is a broader concept than that of enterprise
development. It considers a mix of resources, activities, and
capabilities that enable individuals and households to pursue their
economic goals. In reality, resources within households are fungible,
and it is important to recognise that clients will use microfinance
services for a variety of purposes. Clients use microfinance not only to
invest in enterprises, but also to build household assets, smooth
income, and help manage their cash flow. By providing chunks of money
when it is needed, microfinance can help clients reduce their
vulnerability, expand their options, and graduate from a reactive mode
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Microfinance Poverty Reduction Nexus
Financial Service Results
Savings Facilities of More financial savings
microfinance institutions Income from savings
(MFIs) Greater capacity for self-investments
Capacity to invest in better
technology Enable consumption
smoothening Enhance ability
to face external shocks Reduce
need to borrow from money
lenders at high interest rates
Enable purchase of productive
assets Reduce distress selling
of assets Improve allocation of
resources Increase economic growth
Credit Facilities Enable taking advantage of
profitable investment opportunities
Lead to adoption of better technology
Enable expansion of microenterprises
Diversification of economic activities
Enable consumption smoothening
Promote risk taking
Reduce reliance on expensive
Enhance ability to face external
shocks Improve profitability of
investments Reduce distress selling
of assets Increase economic growth
Insurance Service More savings in financial assets
Reduce risks and potential losses
Reduce distress selling of assets
Reduce impact of external shocks
Payments/Money Facilitate trade and
Transfer Services investments
Financial Service Impact on poverty
Savings Facilities of Reduce household
microfinance institutions vulnerability to risks/
(MFIs) external shocks Less
volatility in household
Severity of poverty is
Reduce social exclusion
Credit Facilities Higher income
More diversified income
Less volatile income
Less volatility in
Better education for
Severity of poverty is
Reduce social exclusion
Insurance Service Greater income
Less volatility in
Payments/Money Greater income
Transfer Services Higher consumption
Source: Asian Development Bank (ADB), (2000). Finance for the poor.
Microfinance Development Strategy. Manila: ADB
Findings from the Empirical Literature on the Impact of Microfinance
in selected Regions of the World
Study Coverage Methodology
Hulme and Indonesia (BKK, Borrowers and controls
Mosley(1996) KURK, B RI), India samples, before and after
(Grameen, BR AC,
TRDEP), Sri lanka
MkNelly et al. Thailand (village Non-participants in non-
(1996) banks-credit with program villages used as
Pitt and Bangladesh (BRAC, Double difference
Khandlers BRDB, Grameen Bank) estimation between
(1998) eligible and non-
eligible households and
programs with and without
Estimations are conducted
separately for male and
Coleman (1999) Thailand (village Double difference
banks) comparison between
and between villages in
which program introduced
and villages were not yet
Chen and India (SEWA bank) Control group from same
Snodgrass ~N geographical areas
Coleman (2004) Thailand (village Double difference
banks) estimation between
participants and nose-
participants and villages
with and without
Park and Ren China (NGOs, (1) Probit estimation of
(2001) government programs, participation and
mixed NGO- eligibility for each type
government programs) of program; (2) OLS and
IV estimation of impact
of micro credit on
Duong and Vietnam (VBA 84% of Tobit estimation of (1)
Izumida (2002) total lending), VBP, participation in rural
PCFs, commercial credit market; (2)
banks, public funds) behaviour of lenders
and (3) weighted least
square estimation for
impact on output supply.
Kaboski and Thailand (production Two staged LS and MLE
Townsend (2002) credit groups, rice test of microfinance
banks, women groups, impact on asset growth,
buffalo banks) probability of reduction
in consumption in bad
years, probability of
becoming money lender,
probability of starting
business and probability
of changing job. Separate
estimation according to
type of MFI and policies
Amin et al. Bangladesh (Grameen Nonparametric test of
(2003) bank, BRAC, ASA) stochastic dominance of
consumption of members and
likelihood test of micro
credit membership on
consumption and household
Gertler et al. Indonesia (Bank (1) Basic consumption
(2003) Rakyat Indonesia, smoothing test
Bank Kredit Desa, on household's ability to
commercial banks) perform daily living
activities (ADL Index)
(2) State dependence
job, savings) (3) Test of
geographical proximity to
financial institutions on
Khandker (2003) Bangladesh (BRAC, (1) Fixed effect Tobit
BRDB, Grameen bank) estimation of borrowing
dependent on land
education endowments of
households. (2) Panel
data fixed effects IV
estimation to define
long-term impact of
microfinance borrowing on
landasset and poverty
(moderate and extreme)
Hulme and Bolivia, BancoSol Borrowing and control
Mosley (1996) samples, before and
assessment of incomes.
Mosley (2001) Bolivia, BancoSol, Borrowers and control
ProMujer, PRODEM and samples, before and
SARTAWA after. Time series data
for BancoSol only; for
assessment of incomes.
Banegas et al. Ecuador, Banco Logit model. Control
(2002) Solidario and group selected from
Bolivia, Caja de los households working in the
Andes same sector but with no
loans from other
Dunn and Peru, Mibanco Longitudinal study using
Arbuckle 'analysis of covariance'
(2001) methodology; control
group based on non-
participants with similar
participants. Focus on
MkNelly and Bolivia, Credit with Longitudinal study of
Dunford (1999) Education program comparison with baseline
for nutritional data.
Control group of
communities who would be
offered same program two
Hulme and Growth of incomes of borrowers
Mosley(1996) always exceeds that of control group.
Increase in borrowers income larger
for better-off borrowers.
MkNelly et al. Positive benefits, but no statistical
(1996) tests for differences reported.
Pitt and Positive impact of program
Khandlers participation on total weekly
(1998) expenditure per capita, women's
labor supply. Strong effect of female
participation in Grameen Bank on
schooling of girls. Credit programs
can change village attitudes and
other village characteristics.
Coleman (1999) No evidence of program impact.
Village bank membership has no
impact on asset or income variables.
Chen and Average income increase rises for
Snodgrass bank's clients in comparison with
(2001) control group. Little overall change
in incidence of poverty, but
substantial movement above and
below poverty line.
Coleman (2004) Programs are not reaching the poor
as much as they reach relatively
wealthy people. Impact is larger on
richer than on rank-and-file
Park and Ren In NGO and mixed programs the
(2001) very rich even if eligible (for mixed
programs) are excluded from
participation. In the government
program the rich are both eligible
and more likely to participate. Impact
estimation finds evidence of positive
impact of micro credit on income.
Duong and The poor have difficulties inaccessing
Izumida (2002) credit facilities: livestock and farming
land are determinants of
household participation; reputation
and amount of credit applied for to MFI
are determinants of credit
rationing by lenders.
Impact estimation showed positive
correlation between credit and output.
Kaboski and Production credit groups and women
Townsend (2002) groups combined with training and
savings have positive impact on asset
growth, although rice banks and
buffalo banks have negative impacts.
Emergency services, training and
savings help to smooth responses to
income shock. Women groups help to
reduce reliance on money lenders
Amin et al. Members are poorer than nonmembers.
(2003) Programs are more successful at
reaching vulnerable. Poor vulnerable
are effectively excluded from
Gertler et al. Significantly positively correlation
(2003) between household's consumption
and measure of health.
Wealthier household are better
insured against illness.
Households that live far from
financing institutions suffer more from
sudden reduction in consumption
Khandker (2003) Households who are poor in
landholding and formal education tend
to participate more. Microfmance helps
to reduce extreme poverty (18
percentage points as compared
with 8.5 percentage points over 7
years). Welfare impact is also positive
for all households, including non
participants, as there are spillover
Hulme and Growth of incomes of borrowers
Mosley (1996) always exceeds that of control group.
Absolute increase in borrower's income
larger for better-off borrowers.
Mosley (2001) Growth of incomes and assets of
borrowers always exceeds that of
control group. Increase in borrowers
income larger for better-off borrowers.
No evidence of impact on `extreme
Banegas et al. Being a client of a program is
(2002) associated with rising incomes.
Dunn and Micro-enterprises of participants are
Arbuckle found to have substantial increases in
(2001) net income, assets and employments
relative to those of non-participants.
Positive impact on poverty reduction
with incomes in participating
households rising relative to others.
They are also more likely to sell assets
in face of a shock than control
MkNelly and No evidence of improvements in
Dunford (1999) household food security or nutritional
status of client's children relative to the
Source: Adapted from Montgomery, H. and J. Weiss (2005). "Great
Expectations: Microfinance and Poverty Reduction in Asia and Latin
American, ADB Institute Research Paper Series No. 63.
Respondents Sex. Age Distribution and Level of Education
Age distribution (years) Level of Education
Sex <30 30-35 36-40 >40 Nil Total Nil
Male 490 77 130 140 143 0 490 75
Female 360 56 90 103 111 0 360 257
Total 850 133 220 243 254 0 850 332
Level of Education
Sex Primary Secon- Tertiary
Male 315 77 23
Female 51 46 6
Total 336 123 29
Source: Field Work
Respondents Average Daily Income in United States Dollars
Sex <1 USD 1 USD >1 USD Nil response
Male 490 315 107 68 00
Female 360 290 57 13
Total 850 605 164 81 0
Source: Field Work
Breakdown of Respondents Occupational Category
Sex Artisans Crafts men and
Male 490 97 107
Female 360 25 57
Total 850 122 164
Sex Market men and Peasant farmers
Male 89 19767
Total 300 264
Source: Field Work
Respondents Responses to Questions Bordering on Access to
Micro Finance Service
Option Frequency Percentage
Yes 58 6.82
No 792 93.18
Total 850 100
Source: Field Work.
Figure 3: Extent to which the Services Rendered to Rural Poor by
MFBs are Adequate and Regular
Regular and Adequate 3
Irregular but Adequate 25
Irregular and Inadequate 65
Very Irregular and
Note: Table made from bar graph.