The role of microfinance banks in the alleviation of poverty in nigeria

Project Abstract

Microfinance banks play a crucial role in poverty alleviation in Nigeria by providing financial services to the unbanked population, particularly in rural areas. This study examines the impact of microfinance banks on poverty reduction in Nigeria. The research employs a mixed-method approach, combining quantitative analysis of data from microfinance institutions with qualitative interviews with borrowers and stakeholders. The findings indicate that microfinance banks have a positive effect on poverty alleviation in Nigeria. By offering small loans, savings accounts, and other financial services to low-income individuals and small businesses, microfinance banks empower clients to generate income, create employment opportunities, and improve their living standards. Furthermore, the study reveals that microfinance institutions also contribute to financial inclusion by reaching underserved populations who are unable to access traditional banking services. Despite these positive outcomes, challenges exist in the microfinance sector in Nigeria. Issues such as high interest rates, limited outreach to remote areas, and inadequate financial education hinder the full potential of microfinance banks in alleviating poverty. To address these challenges, the study recommends policy interventions that promote financial literacy programs, reduce interest rates, and enhance the regulatory framework for microfinance institutions. Overall, the research underscores the significant role of microfinance banks in poverty reduction efforts in Nigeria. By providing financial services tailored to the needs of the poor and marginalized communities, microfinance institutions contribute to inclusive economic growth and social development. The study highlights the need for continued support and investment in the microfinance sector to maximize its impact on poverty alleviation and sustainable development in Nigeria.

Project Overview

<p> </p><div><div><p><strong>INTRODUCTION</strong></p><p><strong>1.1:</strong>&nbsp; &nbsp; &nbsp;<strong>BACKGROND OF THE STUDY</strong></p><p>A robust economic growth cannot be achieved without putting in place well focused programme to reduce poverty through empowering the people by increasing their access to factors of production.</p><p>The latent capacity of the poor for entrepreneurship would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant, increase employment opportunities, enhance household income and create wealth. Micro-financing has existed for years before the introduction of conventional banking in Nigeria and the later part of nineteenth century. (Ekot, 2008)</p><p>The traditional Nigerian society has a system of group savings and assistance to one another. The practice was that a group of people who had needs for some form of capital or lump sum to execute a particular project which they could not raise adequate savings on their own, usually come together to form a savings group. The group may be named after the leader who is usually the initiator of the venture. The traditional microfinance institutions provide</p><p>11</p></div><div><p>access to credit for the rural and urban low-income earners. These are mainly the informal self-help groups such as <em>Isusu,women</em>&nbsp;association like one obtainable during popular August meetings,</p><p><em>Umu</em>–<em>ada progressive </em>women association. Other providers of microfinance services include savings collectors and co-operatives.</p><p>(CBN brief, 2005)</p><p>The unwillingness and inability of the formal financial institutions is to provide financial services to the urban and rural poor, coupled with unsustainability of government sponsored development financial schemes, contributed to the increase in number of private sector led micro finance in Nigeria. Thus, before the emergence of microfinance institutions, informal microfinance activities flourished all over the country. The Central Bank of</p><p>Nigeria (CBN) as at end of December 2009 gave an approval to 840 microfinance banks to begin operation in the country. (CBN briefs, 2008-2009)</p><p>Microfinance banking is about providing financial services to the economically active poor and low income household, who are traditionally not served by the conventional financial institutions.</p><p>These services include credit savings, micro-leasing, micro-insurance and payment transfers to enable them engage in income generating activities. (Asemota, 2002)</p><p>12</p></div><div><p>However, the microfinance policy launched on 15th December 2005 defined the framework for the delivery of these financial services on a sustainable basis to the micro, small and medium enterprises (MSMES) through privately owned microfinance banks.</p><p>The Non-governmental Organizations or Microfinance institutions</p><p>(NGO-MFIS) are also expected to transform to microfinance banks. (Dinye, 2006)</p><p>Existing Community banks and NGO-MFIS that want to convert and transform respectively to a microfinance bank but do not have the required minimum capital base can increase the share capital by capital injection, merger and acquisition. These would not only enhance monetary stability but also expand the financial infrastructural development of the country to meet the national financial system and provide stimulus for growth and development</p><p>(Benson, 1985). It would also harmonize operating standards and provide a strategic platform for the evolution of microfinance institution, promote appropriate regulation, supervision and adoption of best practices. The establishment of microfinance banks has become imperative to serve the following purposes:</p><p>Improve, diversified and create a dependable financial service to the active poor, low-income earners in a timely and competitive manner that would enable them to undertake and develop long-</p><p>13</p></div><div><p>term, sustainable entrepreneurial activities, mobilize savings for intermediation, create employment opportunities and increase the productivity of active poor and income earners in the country. Thus increasing their individual household income and capacity standard of living, enhance organized and systematic but focused participation of the poor in the social-economic development and resource allocation process. It will also provide veritable avenues for the administration of the micro credit programme of government and high net worth individual on non-resource basis. This policy ensures that state government shall delegate an amount of not less than 10% of their annual budgets for on-lending activities of microfinance banks in favour of their residents and render payment services such as salaries, pension for various tiers of government (Luck,2011).</p><p><strong>1.2:</strong>&nbsp; &nbsp; &nbsp;<strong>STATEMENT OF PROBLEM</strong></p><p>Nigeria consists of different classes of individuals, who are either enterprising or industrial low class that account for over half of the population who do not have access to formal banking services. Savings have continued to grow at a very low rate particularly in the rural areas of Nigeria. One of the problems brought to bear is the inability of rural dwellers to channel their savings into banks. Most rural people keep their resources under their pillows. This</p><p>14</p></div><div><p>method of keeping savings is risky because it might be stolen, lost or wasted in extravagant spending. Moreover, returns which would have accrued to the depositors in form of interest are forfeited.</p><p>The contribution of government to alleviate poverty through the establishment of microfinance banks appears a little progress. Inspite of the establishment of microfinance banks, it was observed that most people are not able to obtain loan. This is attributed to a number of challenges such as the high level of interest rate, lack of collaterals required by the commercial banks before loans can be granted which necessitated the establishment of Microfinance to address these economic imbalances. If the banking industry continue to meet the demands of Nigerians especially the rural poor, this shows that there is a gap which need to be filled and this can be done through the contribution of government by establishing more microfinance banks in Nigeria to help in alleviation of poverty.</p><p>Another problem observed is the inability of prospective borrowers of most microfinance banks to repay their loans as at when due. This may be attributed to high rate of poverty in the country. The high rate of poverty is noticeable in such area such as unemployment, high rate of inflation, non-payment of salaries, mismanagement of loan granted to rural dwellers, infrastructural</p><p>15</p></div><div><p>deficiencies, such as power, road network, etc. and all kinds of political, economic and bureaucratic bottlenecks.. Also Nigerian economy consists of individuals who feed from hand to mouth. The loans when granted are channeled to other areas such as feeding, payment of bills, school fees, hospital bills and others instead of using it for the intended business purpose.</p><p><strong>1.3:</strong>&nbsp; &nbsp; &nbsp;<strong>OBJECTIVES OF THE STUDY</strong></p><p>The broad objective of this study is to find out the role of microfinance banks as a palliative in the alleviation of poverty in</p><p>Nigeria. They are as follows:</p><p>1. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; To find out the rate at which rural dwellers deposit their money in microfinance banks rather than putting it under pillows.</p><p>2. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; To find the contribution of government in alleviation of poverty through the establishment of microfinance banks.</p><p>3. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; To find out the rate at which rural dwellers are able to repay their loans.</p><p><strong>1.4:</strong>&nbsp; &nbsp; &nbsp;<strong>RESEARCH HYPOTHESIS</strong></p><p>The following hypotheses have been developed around which this</p><p>research would revolve:</p><p>16</p></div><div><p>H0: &nbsp; &nbsp; The rate at which rural dwellers deposit money in microfinance bank is low than they keep under their pillows.</p><p>H1: &nbsp; &nbsp; The rate at which rural dwellers deposit money in microfinance banks is high than they keep under their pillows.</p><p>H0: &nbsp; &nbsp; The government has not assisted microfinance meet the needs of rural dwellers and communities.</p><p>H1: &nbsp; &nbsp; The government has assisted microfinance meet the needs of rural dwellers and communities</p><p>H0: Microfinance borrowers react negatively towards loan repayment. H1: Microfinance borrowers react positively towards loan repayment.</p><p><strong>1.5:</strong>&nbsp; &nbsp; &nbsp;<strong>RESEARCH QUESTIONS</strong></p><p>1. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; What is the rate at which rural dwellers deposit their money in microfinance banks rather than putting it under their pillow?</p><p>2. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; What is the contribution of government in alleviation of poverty through the establishment of microfinance banks in Nigeria?</p><p>3. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Why do most Microfinance borrowers react negatively towards loan repayment?</p><p><strong>1.6 : SIGNIFICANCE OF THE STUDY</strong></p><p>This study will benefit the following groups:</p><p>a. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Government; The findings of this study will be useful to</p><p>government in that it will help them to know the importance of</p><p>17</p></div><div><p>MFI thereby knowing ways of improving the quality of their services. The result of the study will also bring out the areas that need improvement and make suggestions for improving on them.</p><p>b. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Owners; It will also be useful to those planning to open</p><p>Microfinance banks to know the usefulness of microfinance banks as catalyst or stimulus for poverty alleviation in rural settings as way of developing rural banking.</p><p>c. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Scholars; Students also will find it very useful in some research work on project issues by boosting their knowledge about microfinance banks in the alleviation of poverty. Those who need referencing material materials on role of micro financing in alleviating poverty will find this study useful.</p><p><strong>1.7 : SCOPE OF THE STUDY</strong></p><p>The research on the role of microfinance banks in poverty alleviation which requires a thorough analysis of the Oha</p><p>Microfinance Bank, Ogui Road branch in Enugu State.</p><p><strong>1.8:</strong>&nbsp; &nbsp; &nbsp;<strong>LIMITATIONS OF THE STUDY</strong></p><p>In the course of this research work, the researcher encountered different problems such as:</p><p><strong>1. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; </strong>Inadequate finance: As a student, financial difficulties limit the</p><p>researcher from studying the activities of all banks and also limit</p><p>18</p></div><p>the volume of data collection; e.g. the funds available will not be</p><p>enough in transporting and facts findings.</p><p><strong>2. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; </strong>Time constraint: There was no time to conduct an enormous research.</p><p><strong>3. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; </strong>Inability to get access to some Microfinance banks to get more information about their records and some other useful information about the work also limit the research data collections.</p><p><strong>4. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; </strong>Environmental constraint: The environment in which the research work was written restricted the researcher from going out and so the researcher was faced with the problems of how to reach out the field of research and coordinate activities as planned.</p></div><h3></h3><br> <br><p></p>