CHAPTER ONE

INRODUCTION

1.1 BACKGROUND TO THE STUDY

Robust economic growth cannot be achieved without putting in place well focused

programmes to reduce poverty. This is through empowering people by increasing

their access to factors of production, especially credit. Microfinance is about

providing financial services to the poor who are traditionally not served by the

conventional financial institutions to meet the financial requirements of the small

and medium enterprises (SMES) and also expand the financial infrastructure of the

economy (CBN, 2005).

In Nigeria, the formal financial system provides services to about 35% of the

economically active population, while the remaining 65% are excluded from

access to financial services. The 65% are often served by the informal financial

sector through Non- Governmental Organizations (NGOs) micro financial

institutions, money lenders, friends, relatives and credit unions. The non-regulation

of the activities of these institution has serious implications for the Central Bank of

Nigeria's(CBN) ability to exercise one aspect of its mandate of promoting

monetary stability and sound financial system (CBN, 2005).

However, commercial Banks traditionally lend to medium and large enterprises

which are judged to be credit worthy. They avoid doing business with the poor and
their micro enterprises because the associated cost and risk are considered to be

relatively high. Microfinance institutions have therefore become the main source of

funding micro enterprises in Nigeria and other developing countries in achieving

sustainable economic growth (Anyanwu, 2004)

In the past, government has initiated series of micro-rural programs targeted at the

poor with overriding objective of making credit readily available to those who are

traditionally denied access to credit. Such credits the World over, are used for the

development of small and medium enterprises (SMEs) which had been described

as the springboard for achieving sustainable economic growth (CBN,2005).

In a developing economy like Nigeria, government has shown a great concern on

the importance of micro credit extension for the development of SMEs because of

the underlying socio-economic challenges plaguing the nation.

policies have failed to generate efficient self-sustaining impetus -needed to uplift

the country to the take-off stage of growth, the "creased emphasis on self-reliant

approach to sustainable growth and development and recognition that dynamic and

growing petty-business will contribute substantially to a wide range of

developmental objectives. Moreover, the full potential of the microfinance credit

schemes in the developmental process have not been realized owing a number of
deficiencies like lack of performance standard and the absence of regulatory

framework, among others (Anyanwu, 2004).

In the light of the these the central Bank of Nigeria (CBN) as part of its reform

agenda initiated microfinance Banks (MEBS) in 2005, a policy initiative aimed at

bringing credits to the doorstep of a large segment of the potentially productive

Nigerian population which otherwise would have little or no access to financial

services, also to promote synergy and mainstreaming of the informal sub-sector

into-the national financial system, enhance service delivery to micro small and

medium entrepreneurs and contribute to rural transformation iCBN,2005).

A microfinance policy which recognizes the existing informal institutions and

bring them within the supervisory purview of the Central Bank of Nigeria (CBN)

would not only enhance monetary stability, but also expand the financial capacity

of the nation's economy to meet the financial requirements of the poor and the low

income group in the society for investment in small and medium enterprises

SMEs). Such a policy would create a vibrant microfinance sub-sector that would

be adequately integrated into the mainstream of the national financial system and

provide the stimulus for sustainable economic growth and development. It would

also harmonize operating standards and provide a strategic platform for the

evolution of microfinance institutions, promote appropriate regulation, supervision

and adoption of best practices. In these circumstances, an appropriate policy has

becomes necessary to develop a long term sustainable microfinance sub-sector

towards achieving desired economic growth in Nigeria. The thrust of the research

work examined the impacts of microfinance credit schemes towards achieving

economic growth through micro businesses thereby creating job opportunities and

reducing poverty in the nation's economy.

1.2 STATEMENT OF THE PROBLEM

The microfinance scheme came about in order to bridge the gap of existing huge

unserved market created by- the failure of the conventional financial institutions,

and the desire to provide diversified, affordable and dependable financial services

to the active and productive poor in a timely and competitive manner that would

translate into the development of long-term sustainable entrepreneurial activities.

Though, in the last five years, their activities have expanded in terms of size,

branch expansion, staffing and the volume and value of savings, but it is clear that

much have not been achieved in terms of the volume and value of credits given out

to the needy as the larger percentage of the productive active poor are still unable

to get access to the credit scheme which hampers their productive capabilities and

so they remained unemployed.

However, as the scheme still finds it difficult to extend credits to the larger

proportion of the needy in the economy and the possibility that the little being

given out might not have been utilized for productive ventures, there is therefore, a

conflicting situation compared with the rationale behind the scheme and also how

this affects the quest for achieving sustainable economic growth in Nigeria. Hence,

this generates the basis for conducting this research study.

1.3 Objective of the Study

The objective of the study is to determine the impact of microfinance credit

schemes on the Nigeria's gross domestic product, as a proxy for the economic

growth

i. To examine the roles of microfinance banks to the development of

small and medium enterprises.

ii. To find out the contribution of microfinance banks to the

economic empowerment of the poor.

iii. To examine the extent at which microfinance banks have

extended credit facilities to the productive but poor Nigerians.

iii. To find out whether the credits being given out by microfinance

banks are being utilized for productive activities.

1.4 Research Question

The following research questions are raised to give direction to the research study.

To what extant does microfinance affect the gross domestic product as Nigeria?

1.5 Statement of the Hypothesis

Ho: Microfinance credit does not have a significant effect on gross domestic

product.

H1 Microfinance credit scheme has a significant effect on gross domestic

product.

1.6 SIGNIFICANCE OF THE STUDY

It is expected that the development of indicators for the assessment of the impact

of microfinance credit scheme towards achieving sustainable economic growth

from this study will be very useful to the nation's developmental process. This will

be possible by reviewing the existing policies or structures and consequently the

development of new policy measures that will bring about a more robust

microfinance sub-sector.

It is also expected that the study will be instrumental to the constituted authorities

and the policy makers to put new strategies in place and formulate articulated

policies to make microfinance a driver or achieving economic growth.

Also, it is hoped that this research study will contribute immensely to the field of

knowledge. It will be very useful for further research study and reference to

scholars and students alike.

1.7 Scope of The Study

The research study examines the impact of microfinance credit scheme as an

instrument for achieving or measuring economic growth in Nigeria using relevant

available data. The study covers the period of fourteen years, from 2007 to 2020
 CHAPTER TWO

REVIEW OF RELATED LITERATURES

2.1 INTRODUCTION This

chapter thus reviews comprehensively the relevant and selected works of scholars

and other write-ups on the subject matter.

2.2 Overview of Microfinance Activities in Nigeria

Throughout the World, poor people are excluded from formal financial systems.

Exclusion ranges from partial exclusion in developed counties to full or

nearly full exclusion in less developed countries. Absent access to formal financial

services, the poor have developed a wide variety of informal, community based

financial arrangements to meet their financial needs. In addition, over the last two

decades, an increasing number of formal sector organizations on-government,

government and private) have been created for the purpose of meeting those same

needs. Microfinance is the term that has come to refer generally to such informal

and formal arrangements offering financial services to the poor (Brau and Woller,

2004).

Microfinance has existed, although mostly in the shadows and seen by casual

observers since the rise of formal financial systems, and indeed probably predated

them. It has only been within the last T.VO decades, however, that serious global
efforts have been made to formalize financial service provision to the poor. This

process began in earnest around the early to mid-1980s and has gathered an

impressive momentum {Morduch,2005).

Today there are thousands of MFIs providing financial services to an estimated

200-300 million of World's poor (christen et al, 2009). What began as a

grassroots movement motivated largely by a development paradigm is

evolving into a global industry informed increasingly by a finance/commercial

paradigm (Cohen, 2003)

The rise of microfinance industry represents a remarkable accomplishment taken

within historical context. It has overturned established ideas of the poor as

consumers of financial service, Bartered stereotypes of the poor as not bankable,

spawned a variety methodologies demonstrating that it is possible to provide

Cost-effective financial services to the poor and mobilized millions of dollars

of social investment for the poor (Mutua, et al. 1996).

It must be emphasized too that the animating motivation behind the microfinance

movement was poverty alleviation. Not only that, but microfinance offered the

potential to alleviate poverty while paying for self and perhaps even turning a

profit-"doing well by doing good. This potential, perhaps more than

anything, accounts for the emergences of microfinance on to the global stage

(Brau, et al 2004)

The practice of microfinance in Nigeria is culturally rooted and dates back several

centuries. The traditional microfinance institutions provide access to credit for the

rural and urban low-income earners. They are mainly of the informal self-help

groups (SHGS) or rotating saving and credit associations (ROSCAS) types. Other

providers of microfinance services include Savings Collectors and Co-operative

Societies. The informal financial institutions generally have limited each due

primarily to paucity of loanable funds. These groups provides savings and other

credit services to their members,

They operate under different names 'esusu' among the Yorubas of western Nigeria,

'etoto' for the Igbos in the East and 'adashi' in the north for the Hausas

(CBN,2005).The key features of these informal schemes are savings and credit

components, informality of operations and higher interest rates in relation to the

formal banking sector. These formal microfinance arrangements are found in rural

communities in Nigeria (Otu, et al, 2003).

In other to enhance the flow of financial services to Nigerian rural areas,

government has in the past initiated a series of publicly financed micro rural credit

programmes and targeted at the poor notable among such programmes were the
Rural Banking programme, Sectoral Allocation of credits, a Concessionary Interest

rate and the Agricultural Credit Guarantee Scheme (ACGS). Other institutional

arrangements were the establishment of the Nigerian -3- cultural and Co-operative

Bank Limited (NACB), the National Directorate of Employment (NDE), the

Nigerian Agricultural Insurance Corporation on (NAIC): the Peoples Bank of

Nigeria (PBN), the Community Banks (CBs) and the Family Economic

Advancement Programme (FEAP). In 2000, government merged the NACB with

the PBN and the FEAP to form the Nigerian Agricultural Cooperative and Rural

Development Bank Limited (NACRDB) to enhance the provision of finance to

agricultural sector. It also created the National Poverty eradication Programme

(NAPEP) with the mandate of providing social services to alleviate poverty

(Anyanwu, 2004).

Microfinance services, particularly, those sponsored by government, have adopted

the traditional supplied-led, substituted credit approach mainly directed to the

agricultural sector and non-farm activities, such as trading, tailoring, weaving,

blacksmithing, agro-processing and transportation. Although the services have -

resulted in an increased level of credit disbursement and gains in agricultural

production and other activities, the effects were short-lived due to the

unsustainable nature of the programmes (Anyanwu, 2004).

Since the 1980s, Non-Governmental Organizations (NGOs), have emerged in

Nigeria to champion the cause of the micro and rural entrepreneurs with a shift

from the supply-led approach to a demand driven strategy. The number of NGOs

involved in microfinance activities has increased significantly in recent times due

largely to the inability of the formal financial sector to provide the services needed

by the low-income groups and the poor and the declining support from

development partners amongst others. The NGOs are charity capital lending and

credit-only membership based institution. They are generally registered under the

Trusteeship Act1 as the sole package or part of their charity and social programmes

of poverty alleviation. The NGOs obtain their funds from grants, fees, interest on

loans and contributions from members.

However, they have limited outreach due largely, to unsustainable source of funds

(Okpara, 2004).

2.3 Concept of Economic Growth

Economic growth is one of the four macroeconomic goals of any society. The

other is price stability, full employment and a healthy balance of payments

position.

Economic growth refers to the increase overtime of an economy's capacity to

produce those goods and services needed to improve the wellbeing of the citizen in
increasing number and diversity. It is the steady process by which the productive

capacity of the economy is increased overtime to bring about rising levels of

national income (Todaro, 1982). However, economic growth becomes a

meaningful concept if it leads to an improvement in the wellbeing of the society

overtime and this can happen only if the rate of population growth lags behind that

economic growth overtime (Vaish,2003).

Economic growth should cause an improvement in the economic welfare of the

people of a country and should be accompanied by distribution of the national

product in favour of the poor. Thus, growth is a steady process of increasing the

productive capacity of the economy and hence of increasing national income,

being characterized by high rates of increase per capital output and total factor

productivity, especially labour productivity (Oyedeji, 2003).

It is usually necessary to invest the economy's resources in producing capital

goods, creating educational facilities and production of many other things which

are essential to raise the economy's productive capacity. The most important and

exclusive purpose behind economic growth is to increase the community welfare

(Anyanwu and Oaikhenan, 1995).

2.4 Review of Empirical Work on Microfinance

Review of Existing Literatures

A number of studies have been carried out on the impact of microfinance on

sustainable economic growth. Impact, academic interest that shows this is

evidenced by the fact that some academic journals have devoted special issues to

research establishing this linkage. Some scholars focused on the mechanism by

which poverty is reduced. Amin, Rai and Topa (2003) focused their study on the

ability of microfinance to reach the poor and the vulnerable. They focused their

research in such a manner because of concerns that microfinance is only serving

people slightly below or above the poverty line, however, the really poor and the

destitute are being systematically excluded.

By contrast, copestake, Halotra, and Johnson (2001) analysed the impact of

microfinance on firms and individuals well-being. Cospetake etal focused on

business performance and household income to establish a link between the

availability of microfinance and overall wellbeing of the poor. Evans and Adams

(1999) approached the microfinance question at a slightly different angle.

However, they seek to explain non-participation in the microfinance evolution

stating that while microfinance is used as a viable tool in fighting poverty, more

than seventy five percent of the poor choose not to participate for various reasons.

Also Ryne and Holt (1994) provide a metal-analysis of microfinance and focused

on woman empowerment, intending to show why various studies conflict in their

conclusions as to the impact of microfinance on woman empowerment. Park

(2001) evaluates the actual microfinance programmes using three key measures-

targeting, sustainability and overall impact.

In a related study by Olu (2009) on the topic, the impact of microfinance on

entrepreneurial development. He found that there is a significant effect of

microfinance activities in achieving economic growth but financial institutions

have not been adequately financing SMEs. Otero (2000) also concluded in his

study that, saying microfinance empowers the entrepreneurial spirits that exist

among small scale entrepreneurial is not an exaggeration that microfinance has the

ability to strengthen micro enterprises. However, according to Timmons and

Spinelli (2004), the most serious cause of impediment to growth and expansion of

small enterprise could be condensed into three categories: Lack of access to

finance, lack of vital business skills and unfavourable economic climate. All these

shows that credit facilities have the potential for improving the incidence of

survival among small enterprises towards achieving economic growth.

Another previous study is that of Watson and Everett (1999), they concluded that

the extent to which financial services are made available for small enterprises is

measures of the degree to which small firms can save and accumulate own capital

for further investment at firm level. This shows that financial services is an

important tool for mobilizing resources for more productive use particularly to the

vulnerable.
Review of literature on credit markets shows that small enterprises do not have the

same financial opportunities as large scale enterprise. Credit constraint is

experienced by small scale enterprises due to the reluctance of banks to lend

money to them, the wrong assumption that the risk associated with lending money

to small enterprises is high, the presence of asymmetric information and the

resulting adverse selection and moral hazard, the low expected return from small

amounts of loans provided the inability of small enterprise to provide precise

information about themselves, and their inability to raise adequate collateral for the

loans are the issues of concern (Stigilittz and Weiss, 1981; scholtens, 1999;

Rosmary, 2001; Karanamur, 2002).

Olaitan and Adeyemi (2008) in their article concluded that the metamorphosis of

community bank into microfinance bank in 2005 is laudable, but this effort was

frustrated by lack of managerial where withal, lack of supervision, mis-channelling

of credit facilities and bribery and corruption. They also observe that provision of

credit to the less privileged has been a wonderful instrument for achieving

economic growth in the World. Adeyemi (2008) however, documents that despite

decades of public provision and direction of provision of micro credit, policy

orientation and the entry of new players, the supply of microfinance in Nigeria is

still inadequate in relation to demand. This suggests that there is some inefficiency

in microfinance operations in Nigeria due to some institutional inadequacies such

as in efficient management and regulatory and supervisory loopholes. This

argument is supported by Okpara(2009).

Odoko (2008) argues that finance alone is not enough, that other complementary

strategies must be adopted if the goal of sustainable growth is to be realized in

Nigeria some of the factors are reviewed as the type and size of the project, the

credit history of the borrower, the prevailing economic conditions, the level of

competition in the industry the judicial processes in credit recovery. The researcher

is of the opinion that as much as other complementary strategies outlined by

Odoko are necessary, they are of secondary concern. It is when finance sources are

established for purpose of the poor that one can talk of appraisal and disbursement

technique. After all, the poor know what to do but securing funds to actualize their

vision turns to a nightmare fantasy.

On whether microfinance is a viable strategy for poverty alleviation relative to

other poverty alleviation policies, Adams and Vonpischke (1992) try to answer this

question directly by comparing modern microfinance institutions to the failed rural

credit agencies established by government in the 1970s and 1980s that not only did

nothing to advance poverty alleviation but also wasted billions of Naira of public

funds. After comparing the operational framework of modern

microfinance institutions to rural credit agencies, the authors concluded

that the modern MFL industry is destined for failure because of the

similarities between the two.

In partial support of Adams and Vonpischke, Buckley (1997 seeks to provoke

critical reflection on the uncritical enthusiasm that lies behind much proselytizing

of microfinance. Buckley discussed field 5,-nmary data from Nigeria, Ghana and

Kenya and concludes that fundamental structural changes in socio economic

conditions and a deeper understanding of informal sector behaviour are needed for

microfinance to prove effective.

Schreiner (1999), Sanders (2002) and Bhat (1999) also provide support for the

argument that microfinance may not be an effective poverty alleviation policy for

sustainable economic growth. Shreiner analyzes some micro enterprise

programmes and finds that although some programmes can move some people

from welfare to self-employed, it only works one percent of the time. Additionally,

he shows that those who are successful in the transition have above average assets,

education, experiences and skills. Sanders test the impact of microfinance

development programmes and call into question their effectiveness as anti poverty

strategy. Meanwhile, Bhat finds that the evidence for the impact of microfinance

programmes is mixed. Finally, schreiner and Woller (2003) compared evidence

about the effectiveness of microfinance programmes in developing countries and

the United Sates. They concluded that micro enterprises development is much

more difficult in the US than in developing countries and they suggest some ways

to address the challenges of micro enterprises development

In contrast to the arguments of Adams and Vonpischke, Woller et al (1999) argued

that the current micro finance movement is very afferent from the failed rural

credit agencies of the 1990s and 1980s hereby making direct comparison between

the two invalid. They listed several reasons why the prospects for success are

better today than before. Additionally, Woller and Woodworth (2001) argue that to

date, top down micro economic poverty alleviation and development policies -3,6

likewise experienced significant failures. Consequently, they argued that

microfinance constitutes a potentially viable bottom-up policy option in lieu of or,

preferably as a complement to effective macroeconomic poverty alleviation and

economic growth policies.

In support of Woller and Woodworth, Weijland (1999) analyzed a sample of over

4000 rural clusters and concluded that hyper poor but clustered groups can serve as

a seabed for industrial development other studies reach more ambiguous

conclusions about the effectiveness of microfinance as a policy tool for achieving

growth and development.

Justification for Microfinance policy

From the appraisal of existing microfinance-oriented institutions in Nigeria, the

following facts have become evident (CBN, 2011):

Weak Institutional Capacity

The prolonged sub-optimal performance of many erstwhile community banks,

microfinance and development finance institutions is due to incompetent

management, weak internal controls and lack of deposit insurance schemes. Other

factors are poor corporate governance, lack of well-defined operations, restrictive

regulatory and supervisory requirements, among others.

Absence of Technological Platform

The absence of appropriate network platform for information communication

technology (ICT) to drive down cost and achieve economies of scale is a major

impediment to profitable operations.

Weak Capital Base

The weak capital base of existing microfinance institutions could not adequately

provide cushion for the risk of lending to micro clients.

The Existence of a Huge Un-Served Market

The size of the un-served market by the existing financial institutions is large.

EFInA, in its Access to Finance Survey in Nigeria r 2008, alluded to the fact that
79 per cent of the total population in Nigeria is unbanked out of which 86 per cent

are rural dwellers. Also in 2005, the aggregate microcredit facilities in Nigeria

accounted for about 0.2 per cent of Gross Domestic Product (GDP) and less than

one per cent of total credit to the economy. This revealed the existence of a huge

gap in the provision of financial services to a large number of the economically

active poor and low income households. The effect of not addressing this situation

appropriately would further accentuate poverty and slow down growth and

development. Poor Banking Culture and Low level of Financial Literacy

The primary aim of the microfinance initiative includes promoting inclusive

financial system which entails creating sustained financial awareness. Therefore,

the target clients for change are those people that equate microfinance with micro-

credit and see banks and other-fund providers not as partners in business, but mere

sources of loans and advances.

Economic Empowerment of the Poor

Globally, micro, small and medium enterprises (MSMEs) are known to contribute

to poverty alleviation through their employment generating potentials. In Nigeria,

however, the employment generation potentials of small businesses have been

seriously constrained by lack of access to finance, either to start, expand or

modernize their present scope of economic activities. Delivering on employment

generation and poverty alleviation by MSMEs, would require multiple channels of

financial services, which an improved Microfinance framework should provide.

The Need for Increased Savings Opportunity

Poor people can and do save, contrary to generally held notions. However, owing

to the inadequacy of appropriate savings opportunities and products, savings have

continued to grow at a very low rate, particularly in the rural areas of Nigeria. The

microfinance policy provides the window of opportunity and promotes the

development of appropriate (safe, less costly and easily accessible) savings

products that would be attractive to rural clients and improve the savings level in

the economy.

The Increasing Interest of Local and International Investors in Microfinance

Many local and international investors have expressed interest in investing in the

country's microfinance sub-sector. Thus, the establishment of a Microfinance

Policy Framework for Nigeria provides an opportunity for them to participate in

financing the economic activities of low income households and the economically

active poor.

Urban Bias in Banking Services

Most of the existing banks are located in urban centers, and several attempts in the

past at encouraging them to open branches in the rural areas did not produce the
desired results. With a high proportion of the Nigerian population still living in the

rural areas, it has become imperative to develop an institutional framework to

reach the hitherto un-served population with banking service.

The Microfinance Policy Target

The targets of the microfinance policy are as follows:

Firstly, to cover the majority of the poor but economically active population by

2024 thereby creating millions of jobs and reducing poverty.

Secondly, to increase the share of micro-credit as percentage of total credit to the

economy from 0.9% in 2005 to at least 20% in 2024 and the share of micro credit

as percentage of GDP from 0.2% in 2005 ;o at least 5% in 2024.

Thirdly, to promote the participation of at least two third of states and local

governments in micro-credit financing by 2015.

Fourth, to eliminate gender disparity by improving women's access to financial

services by 5% annually and lastly, to increase the number of linkages among

universal banks, development banks, specialized finance institutions and

microfinance banks by 10% annually. Ownership of Microfinance Banks

Microfinance banks can be established by individuals, groups of individual,

community development associations, private corporate entities or foreign

investors. Significant ownership diversification is encouraged to enhance good

corporate governance of licensed microfinance banks (MFBs). Universal banks

that intend to set up any of the two categories of MFB as subsidiaries are required

to deposit the appropriate minimum paid up capital and meet the prescribed

prudential requirements and if, in the view of the regulatory authorities, have also

satisfied all the requirements stipulated in the guidelines. No individual, groups of

individuals, their proxies or corporate entities, and/or their subsidiaries will

establish more than one MFB under different or distinguish name.

Justification for the Capital Requirements

The then capital base of N5 million for community banks has become too low for

effective financial intermediation. Indeed, to set up a community bank, at least N5

million is required for basic infrastructure, leaving zero or negative balance for

banking operations. From a survey of community banks, an operating fund of N50

million is about the minimum capital (own capital and deposits) a community bank

needs to provide effective banking services to its clients. However, it is recognized

that since many community banks are based in rural areas, their promoters may not

be able to effectively raise N50 billion as shareholder's funds for the unit

microfinance banks. The banks are expected to engage in aggressive mobilization

of savings from micro depositors to shore up their operating funds.

A state coverage microfinance bank that would operate branches is expected to

take off with funds sufficient to operate a full branch in at least two thirds of the

local government areas in that state. Hence, a minimum paid up capital of N

1billion is required to obtain the license to operate a state coverage microfinance

bank. Expansion to another state is subject to the provision of N1 billion minimum

shareholders' funds unimpaired by losses and after opening branches in at least two

thirds of the Local Government Areas of the state it is currently licensed to operate

in, and if in the view of the regulatory authorities, it has satisfied all the

requirements stipulated in the guidelines.

The experience of other countries shed light on the level of capitalization required

for microfinance banks. In most countries, the level of capitalization depends on

the geographical coverage of the banks and for some countries, even for a

particular scope of coverage (district or province), the population and volume of

business in the area further determine the level of capitalization. The capitalization

requirements in other countries were also considered in arriving at the

capitalization levels for the two categories of microfinance banks (CBN, 2010).

Participation of Existing Financial Institutions in Microfinance Activities

Universal banks
Universal banks that are already engaging in microfinance services either as an

activity or product and do not wish to set up a subsidiary, is required to set up a

department/unit for such services and will be subjected to the provisions of

microfinance bank regulatory and supervisory guidelines.

Community Banks

All licensed community banks prior to the approval of the microfinance policy are

transformed to microfinance banks licensed to operate as a unit bank on meeting

the prescribed new capital and other conversion requirements within a period of

24months from the date of approval of the microfinance policy. A community bank

can apply to convert to a microfinance bank licensed to operate in a state if it meets

the specified and other conversion requirements.

Non-Government Organization-Microfinance Institutions (NGO-MF)

The microfinance policy recognizes the existence of credit only, membership-

based microfinance institution which are not required to come under the

supervisory purview of the central bank of Nigeria (CBN) such institutions are to

engage in the provision of micro-credits to their targeted population and not to

mobilize deposits from general public. These NGO-MFIs are required to forward

periodic returns on their activities to the CBN. NGO-MFIs that wish to obtain the

operating license of a microfinance bank are required to meet the specific

provisions as stipulated in the regulatory and supervisory guidelines. NGO-MFIs

which intend to operate a microfinance bank can either incorporate a subsidiary

microfinance bank while still carrying but its BGO operations or fully convert into

an MFB.

Supervision of Microfinance Banks

Licensing and Supervision

The licensing of microfinance banks is the responsibility of the Central Bank of

Nigeria (CBN). All licensed institutions are required to add "microfinance bank"

after its name. All such names are to be registered with the Corporate Affairs

Commission (CAC) in compliance with the Companies and Allied Matters Act

(CAMA) 1990. Establishment of a National Microfinance Consultative Committee

A national microfinance consultative committee (NMFCC) was constituted by the

Central Bank of Nigeria (CBN) to give direction for the implementation and

monitoring of microfinance from time to time by the CBN. The microfinance

support unit serves as the secretariat to the committee.

Credit Reference Bureau

Due to the peculiar characteristics of microfinance practice, a credit reference

bureau which provides information on microfinance clients and aid decision

making is desirable. In this regard, the credit risk management system in the CBN

is expanded to serve the needs of the microfinance sector. Rating Agency

The Central Bank of Nigeria (CBN) also encourages the establishment of private

rating agencies for the sub-sector to rate microfinance institutions, especially those

NGO-MFIs which intend to transform to microfinance banks.

Deposit Insurance Scheme

Since microfinance banks are deposit taking institutions and in order to re-in force

public confidence in them MFBs are qualified for deposit insurance scheme of the

Nigerian Deposit Insurance Corporation (NDIC).

Management Certification Process

In order to bridge the technical skill gap, especially among operators of MFBs, the

microfinance policy recognized the need to set up an appropriate capacity building

programme for microfinance banks. To this end, the CBN put in place an MFB

management certification process to enhance the acquisition of appropriate

microfinance operational skills of the management teams of microfinance banks.

Apex Association of Micro finance Institutions

Establishment of a Microfinance Development Fund In order to promote the

development of the sub-sector and provide for the wholesale funding

requirements of microfinance banks, a microfinance sector development fund

was set up. The fund is providing necessary support for the development of the

sub-sector in terms of refinancing facility, capacity building and other promotional

activities. The fund would be sourced from government and through soft

facilities from the international development financing institutions, as well as

multilateral and bilateral development institutions.

Prudential Requirements

The CBN recognized the peculiarities of microfinance practice and is accordingly

putting in place appropriate regulatory and prudential requirements to guide the

operations and activities of the microfinance banks.

Disclosure of Sources of Funds

Licensed microfinance banks are required to disclose their sources of funds in

compliance with the money laundering prohibition Act 2004.

Corporate Governance for Microfinance Banks

The Board of Directors of MFBs is primarily responsible for the corporate

governance of the microfinance banks. To ensure good governance of the banks,

the Board of Directors are responsible for establishing strategic objectives, policies

and procedures that would guide and direct the activities of the banks and the
means to attain same as well as the mechanism for monitoring Managements

performance. Thus, while management of the day-to-day affairs of the banks is the

responsibility for monitoring and overseeing management's actions. Consequently,

the licensed MFBs are expected to operate under a diversified and professional

board of directors.

2.4 Goals and Objective of Microfinance Banks

The establishment of micro finance banks has become imperative to serve the

following purposes:

First, to provide diversified, affordable and dependable financial services to the

economically active poor, in a timely and competitive manner, that would enable

them to undertake and develop long-term sustainable entrepreneurial activities.

Second, mobilizing saving for intermediation.

Third, creating employment opportunities and increase the productivity of the poor

in the country, thereby increasing their individual household income and uplifting

their standard of living Fourth, to enhance organized, systematic and focused

participation of the poor in the socio-economic development and resource

allocation process.

Fifth, to provide veritable avenues for the administration of the micro credit

programmes of government and high net worth individuals on a non- recourse case
basis. In particular, the policy ensures that state governments dedicate an amount

of not less than 1 % of their annual budgets for the on-lending activities of

microfinance banks in favour of their residents; and lastly, to render payment

services, such as salaries and pensions for various tiers of government.

The specific objectives of microfinance policy are the following:

Firstly, to make financial services accessible to a large segment of the potentially

productive Nigerian population which otherwise would have little or no access to

financial services.

Secondly, to promote synergy and mainstreaming of the informal sub-sector into

the national financial system.

Thirdly, to contribute to rural transformation; and also, to promote linkage

programmes between universal/development banks, specialized institutions

and microfinance banks.

2.5 Roles of Microfinance

The following are some of the significant roles playing by microfinance

in the human society (Anyanwu, 2006) First, microfinance or micro-credit is the

most effective poverty alleviation intervention tool worldwide.

Secondly, it helps in enhancing the mobilization of rural savings for productive

investments.

Thirdly, it brings about economic growth and improved income distribution

among the populace.

Fourth, it is a tool to improve the latent capacity of the poor and the low-income

group for entrepreneurship and skill development.

Fifth, through the medium of micro finance, people are made to create job

opportunities and become self-reliant.

Sixth, it also helps in asset accumulation and wealth creation in an economy.

Also, microfinance aids the increase in individual household income and thus

resulting in increased access to education and health care service for the poor and

low-income group. Lastly, it helps in financial deepening of an economic

2.6 Prospects and Challenges of Microfinance in Nigeria

Nigerians, the rich and the poor are enterprising and industrious. But the poor who

account for over half of the population do not have access to formal banking

services and rely heavily on formal and informal microfinance institutions for

credit Nigeria's large population, over 140 million people requires the production

of goods and services on daily basis and funding is required for the production.
There is therefore huge demand for financial services and the micro finance banks

have a prominent role to play.

The microfinance institutions operations are therefore expanding but they have

limited financial resources.

The new microfinance policy by the CBN that lead to the establishment of

microfinance banks in Nigeria is a step taken in the right direction. Also, the

SMEEIS Funds and the Development Finance Institutions (DPI) have been

identified as potential sources of long-term funding for microfinance institutions'

operations. In addition, deposit money banks are beginning to develop interest in

microfinance funding (Anyanwu, 2004)

Given the unfolding commercial viability of the sector, the future of the industry is

therefore very bright in Nigeria.

According to Ana (2009) and Akindutire (2008), the expanding microfinance sub-

sector in Nigeria faces enormous challenges.

The first challenge is for the microfinance institutions to reach a greater number of

the poor. The CBN survey indicated that their client base was about 900,000 in

2008 and there are indications that they may not be above 3 million in 2010. This

is too small for a country that has over 60million people that require microfinance

services.
Second, funding of real sector activities, especially agricultural and manufacturing

production need to be promoted by the microfinance institutions as these sectors

provide the foundation for sustainable growth and development. As at 2008, only

about 14.1% and 3.5% of the total microfinance funding went to these sectors

respectively, while the bulk 78.4% funded commerce.

Also, the issue of sustainability is crucial to the continuous operation of the

microfinance institutions. Emphasis should be laid on aggressive saving

mobilization, source long-term bank funding, negotiate funding arrangements with

the Development Financial Institutions (DPI) and reduce dependence on grants.

Another challenge or problem of micro-credit is the political influence. This occurs

where influential politicians seek licensee for microfinance institutions purposely

for themselves, their political constituents or their family members, people who

ordinarily are unqualified to operate such institutions.

It can also take this dimension when politicians with vested interest arranged for a

bailout of poorly performing micro finance institution that should have allowed to

fail. This kind of undue influence can become especially dangerous at this stage of

developing the micro-credit sub-sector.

Very poor buy in by the Nigerian elites and middle class is another challenge. This

has made it impossible for the microfinance institutions to raise the required capital
to engage in meaningful microfinance business. The elites and middle class also

shun microfinance banks as they would not place funds or transact their businesses

through the MFBs.

Moreover, government insincerity also poses challenge. At the inception of the

microfinance banking in Nigeria, the Federal Government made all believe that

they were going to launch a micro fund of N50 billion to be passed through

microfinance banks in what is referred to internationally as "poverty approach to

microfinance banks". This widely publicized utterance by the government did two

basic damages to microfinance banks namely:

(1) People who were not sufficiently tooled to micro banking obtained licenses and

(ii) The general public perceived the funds obtained from micro banks as

government cakes.

Undue competition from commercial banks has shown that their involvement in

micro banking has more damaging effects than quality results they came into

microfinance banking purely to position themselves to corner the promised micro

funds at both federal and state levels, to ensure that international microfinance

funds that come into Nigeria rest with them and to circumvent the flow out of the

boxed SME funds in their banks.

It has also been observed that the crying dishonesty of typical Nigerian is a big

challenge to microfinance. Indians and Bangladeshians would weep to see how

dishonest even the poor Nigerians are. The borrower, whether poorest of the poor

or the small scale entrepreneur has shown that they cannot be trusted.

Despite all challenges aforementioned, microfinance remains a vital tool to

achieving sustainable economic growth in Nigeria though all hands must be on

deck.

2.7 Overview of the Economic Growth in Nigeria

Since 2008, the government has begun to show the political will to implement the

market-oriented reforms such as the modernization, restructure of the banking

system and the strengthening of the microfinance sub-sector, curbing inflation by

blocking excessive wage demands, and resolving regional disputes {IMF report,

2011). GDP has also risen strongly in 2007 to 2010 because of increased oil

exports and high global crude prices in 2010 (IMF report, 2010).

The on-going economic reform programmes is an attempt to put the economy on a

recovery path with minimal inflation.

Microfinance institutions are regarded as major contributor to the developing

economy like that of Nigeria because of its role in providing entrepreneurial

development in the economy (Ojo, 2009). However one of the goals of micro

credit policy and entrepreneurship routed by successful Nigerian government has

been reduction of unemployment and poverty alleviation, a cordial thrust in public

policy for the achievement of indigenous entrepreneurship. Through the provision

of long term loans and equity capital by banks for enterprises (Egwuatu. 2008).

Many newly developed and developing countries have therefore made credit

delivery an endurable strategy in both industrial and agricultural development of

their economy. This has recorded a significant contribution to the Gross Domestic

Product (GDP) of countries such as Indonesia and India (Akindutire, 2008).

It is also not an exaggeration to say that microfinance institutions World over and

precisely in Nigeria are identified to be one of the key players in the financial

industry that is positively affecting individuals, business organizations and the

economy at large through the services they offer and the functions the perform in

the economy. Impact, microfinance credits have positive relationship with the

Nigerian economy represented by the expanded GDP (Ojo, 2009).

Finally, it is expected that the current reforms put in place by the Federal

Government through its regulatory authority, microfinance institutions in

Nigeria will be able to compete favourably in the global market and gainfully

affects our dearest economy.

2.8 Theoretical Framework

The theoretical framework adopted for the foundation of this study to examine

microfinance and economic growth is the schumpeter (1911)theory of finance and

growth which can also be derived from the neoclassical growth model by

incorporating financial development in to the simple model (Easterly and Levine

1994); Elbadawa and Ndulu, 1994; king and Levine, 1993). Thus from the sample

production function, financial development variables are included as the shift

parameter in addition to the usual factors of production to form the unrestricted

neoclassical growth model.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION
 This chapter discussed the basic research methods used, the methods of data

collection, the population design and sampling, the technique of data analysis, the

justification for the methods and techniques and lastly the summary of the chapter.

3.2 research Design

For the purpose of this research study, correlational research methods are used. So

as to know the relationship between microfinance credit and economic growth.

3.3 Method of Data Collection

The method used in collecting data for the purpose of this research study is purely

secondary, This includes data sourced from Central Bank of Nigeria (CBN)

bulletins, published statistical information, documentary reports, journals,

magazines and seminar papers.

3.4 Population and Sample

The population of this study constitutes the aggregate value of microfinance credit

given out by all the existing 904 microfinance banks in Nigeria. Since the

aggregate value of microfinance credit is used, there is therefore no room for

scientific generation of sample size.

3.5 Techniques of Data Analysis

Tables are used as one of the techniques of data analysis for the study.

Simple regression model is also used. Gross Domestic Product (GDP) which is the

dependent variable is regressed on the independent variable in the equation which

is the aggregate value of microfinance.

Further statistical analysis is also carried out on the regression result which

includes coefficient of correlation r, that measures the extent of relationship

between the two variables. Also, the coefficient of determination r2 which

measures the percentage (proportion) of variation in the dependent variable that

can be attributed to the independent variable.

Thus, given that:

MFC = Microfinance Credit

GDP = Gross Domestic Product

3.6 Justifications of the Methods and Techniques

Correlational designs are used so as to know the relationship between microfinance

credit and economic growth.

The researcher has also made use of the secondary source of data because it

provides detailed and readily available information that assists and most useful in

the course of the study. Also, regression model is used since researcher's finding or

study involves variables and so regression helps in describing the actual

relationship between the variables in question that also extends to the

determination of the extent of the relationship. Tables have also been used in order

to simplify data presentation and clarification.

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 INTRODUCTION

Data collected in order to ascertain the effect of microfinance credit on

economic growth are presented and analyzed and then observations and findings

from therein are discussed.

4.2. Descriptive Statistics for the Variables under Study

Descriptive statistic tool used in this segment are tables to facilitate easy

understanding of the variables.

 Pearson correlation and simple linear regression are also used for the analysis

of data. The coefficient of the two variables.

The aggregate microfinance credit (independent variable) and the Gross

Domestic Product (dependent variable) for 14years (I.e from 2007 to 2020) are

presented below.

Table 4.1: 14 years values of independent variable (MFC) and dependent

variable (GDP).

Years MFC(Millions ₦) GDP(Millions ₦)

2007 4461.47 43837.39

2008 7252.16 46802.76

2009 8720.17 50564.26

2010 7545.77 55469.35

2011 7136.48 58180.35

2012 8008.02 60670.05

2013 9750.17 63942.85

2014 12128.56 67977.46

2015 12273.51 69780..69

2016 15000.99 68652.43

2017 14848.11 69205.69

2018 14598.56 70536.35

2019 16949.32 72094.09

2020 19807.98 70800.54

Source: Central Bank of Nigeria (CBN) Statistical Bulletin (2020).

The result as obtained via the use of SPSS is presented in the table below:

Table 4.2: Relationship between microfinance credit and Gross Domestic Product

R R² Adjusted R² B Significance F t

0.890 0.792 0.775 0.890 0.000 49.357 7.025

Source: SPSS 16.0 regression results computed from table 4.1 above.

The regression results indicate a significant correlation between microfinance credit and Gross Domestic
Product (since computed R>0.875 based on the rule of thumb). The adjusted coefficient of
determination (R²)is computed as 77.5% which reveal the overall fitness of the regression model. This
means that 77.5% of the variations in the Gross Domestic Product are explained by the microfinance
credit. The beta (B) value of 89.0% indicated that for every #1 of microfinance credit, there will be 89.0k
increase in the Gross Domestic Product. This significant relationship implies that as the
microfinance credit increase so also the Gross Domestic Product increases and this actually leads to
growth in economy.

4.3. Hypothesis Testing.

Earlier in this study, two hypothesis were formulated which are subjected to test so that statistical
inferences can be drawn. The results from the application of techniques of data analysis are used in the
acceptance or rejection of the study's hypothesis. The hypothesis are as fallow

Ho: microfinance credit have no significant effect in achieving sustainable economic growth in Nigeria.

Hi microfinance credit have significant effect in achieving sustainable economic growth in Nigeria.
From the regression results in table 4.2 above, the computed significant level is 0.000. This result is very
far below 0.05 level of significance and this provides an evidence to conclude that microfinance credit
has a significant effect in achieving sustainable economic growth in Nigeria. Therefore, the null
hypothesis is rejected and the alternative hypothesis accepted.

4.4 Discussion of Research Findings

In this section, the findings of the study are discussed. Hence, the statistical findings obtained from this
research are now used to provide answers to the fallowing research questions.

i. Does microfinance schemes have any effect in achieving economic growth in Nigeria?

ii. What roles are the microfinance banks playing towards the development of small and medium
enterprises?
iii. How much have the microfinance credit contributed to the economic empowerment of the poor
and the low-income groups?

iv. To what extent have the microfinance banks extend credit facilities to the potentially productive but
poor Nigerians?

v. Are the credits given out being utilized for productive activities?

Does microfinance schemes have any effect in achieving economic growth in Nigeria?

From the outcome of this research study, it is clear that microfinance scheme has a significant effect
towards achieving economic growth in Nigeria. The result in
table 4.2above lends credence to this as it shows a strong relationship between microfinance credit and
Gross Domestic Product. This agrees with finding of Ojo(2009) on the topic: effect of microfinance on
economic growth: The case of Nigeria that of Okpara(2010).

What role are the microfinance banks playing towards the development of small and medium
enterprises?

CBN (2005) said the importance of microfinance to entrepreneurial development made it adopt it as the
main source of financing entrepreneurship in Nigeria.

Therefore, it can be concluded that microfinance banks has been given out credit facilities to finance
entrepreneurial activities which causes an increase in economic activities in the economy. Although,
finance is still considered as one of major hindrances to the development of small and medium
enterprises because larger percentage of the citizenry have no access to finance yet.

However, microfinance banks are sustainable to the development of small and medium enterprises in
Nigeria but still faces a lot of challenges that need to be tackled for it to live up to its full expectations.
Some of these challenge are: very poor buying in by Nigerian elites and middle class, government
insincerity, undue competition from commercial banks, lack of support from regulators dearth of
collateral security particularly micron insurances, crying dishonesty of typical Nigerians, lack of
managerial wherewithal, lack of supervision, midchannelling of credit facilities, bribery and corruption
among others. This is also in line with the finding of Ana (2009).

How much has the microfinance credit contributed to the economic empowerment of the poor and
low-income groups?

Part of the achievements of microfinance credits is the financing of entrepreneurial development and
consequently the reduction of poverty in the economy. Certain percentage among the poor has been
empowered through microfinance credits.

Again, much has not been achieved considering the large percentage of the poor, alas; the one being
given out has impacted positively on the economy.
To what extent have the microfinance banks extended credits to the potentially productive but poor
Nigerians?

The findings from this study shows that much has not been achieved in this regard. Large number of
economically active Nigerians still lack access to microfinance banks credit . This is because they
believed it was a business that would enable them a mass more wealth particularly with the government
pronouncements that #50 billion shall be put into poverty alleviation through the microfinance banks
Ana (2009). Microfinance banks has also been hijacked by money bags and politicians, competing with
commercial banks for corporate accounts and accounts of government parastatals instead of targeting
an Akara sellers, recharge cards sellers or Okada riders Akindutire (2008).

Are the credits given out being utilized for productive?

As reflected in the result of the research, credits being given out by the microfinance institutions have
been utilized for productive ventures and this causes increase in economic activities in the economy.
The significant relationship between microfinance credit and GDP that causes economic growth vividly
explain this as shown in table 4.2 above, where the significance level is 0.000