IMPACT OF FINANCIAL INCLUSION ON POVERTY REDUCTION AMONG

SMALLHOLDER FARMERS IN SOUTH-WEST NIGERIA

1. INTRODUCTION

Poverty is a global problem, attracting the attention of scholars and countries. More than 70%
of rural households in Nigeria practised subsistence farming, and are living on less than $1.25
a day, an indication of poverty based on current poverty measurement by UN Department of
Economic and Social Affairs. Poverty refers to the inability of an individual to attain the
minimum standard of living. It can also be defined as a social condition characterized by
inadequate access to basic human needs (food and non – food) to the sustenance of
socially acceptable minimum standard of living in a given society. Some of these basic
determinants of well being include adequate food, shelter, portable water, Healthcare,
education, employment opportunities and security (Akintola and Yusuf; 2001). Ajakaiye
and Adeyeye (2000) conceptualize poverty as a function of education, health, child
mortality and other demographic variables. Poverty to them is the availability or otherwise
of the above parameters. In a nut shell poverty can be seen as a situation in which an
individual is unable because of economic, social, political and psychological
incapacitation, to provide himself and his family the barest basic necessities of life.
Poverty reduction has always been considered as one of the key tasks in the socio-economic
development strategies of the government. The government of Nigeria has implemented a
number of programs to reduce poverty, such as the policies of the Pre-SAP era, SAP era and
Post-Sap era described as essentially ad hoc included Operation Feed the Nation (OFN),
Free and Compulsory Primary Education (FCPE), Green Revolution, Low Cost
Housing, River Basin Development Authorities (RBDA), National Agricultural Land
Development Authority (NALDA), Agricultural Development Program (ADP),
Agricultural Credit Guarantee Scheme(ACGS), Strategic Grains Reserves Program
(SGRP), Rural Electrification Scheme (RES) Rural Banking Program (RBP), National
Poverty Eradication Program (NAPEP),National Economic Empowerment and Development
Strategy (NEEDS),Youth Empowerment Scheme(YES), Rural Infrastructural Development
Scheme(RIDS)(Garba, 2006; Omotola, 2008; Chukwuemeka, 2009). Most of these programs
were designed to take care of such objectives as employment generation, enhancing
agricultural input/output supplies and boosting income of farmers, and stemming the tide of
rural – urban migration, promoting cooperative societies, provision of infrastructural facilities
etc . Not excluding the National Poverty Reduction and Growth Strategy(NPRGS) recently
introduced to cater for welfare schemes including Government Enterprise and Empowerment
Programme, Conditional Cash Transfer, Farmer Money and Market Money. Despite some
significant degree of success made by some of these programs, most of them could not be
sustained. In fact, with time, many of them failed as a result of diversion from the original
focus.
It is a known fact that poverty reduction is a top goal in the socio-economic development
strategies of Nigerian government and this calls for adequate government intervention
through financial inclusion. Financial inclusion is a method for social inclusion that strives to
increase all members of an economy's access to, availability of, and use of the formal
financial system. It entails providing individuals and businesses with usable and cheap
financial goods and services that are supplied responsibly and sustainably. Financial inclusion
is the provision of financial services at a reasonable cost to individuals, especially the
disadvantaged and low-income people (Evans & Alenoghena, 2017; Mohseni-Cheraghlou,
2015). Financial inclusion can be seen of as a factor of financial development that focuses on
a greater majority of people having access to financial services rather than the strength or
depth of financial institutions These services include access to a bank account at a financial
institution, mobile payments, savings, credit and insurance products, and financial markets
(Allen et al., 2016; Demirgüç-Kunt & Klapper, 2012; Mohseni-Cheraghlou, 2015). Financial
inclusion system maximizes the availability, access and use of financial services, while
minimizing involuntary financial exclusion (Cámara & Tuesta, 2014). Without the
appropriate provision of financial services, individuals may turn to high-cost informal
financial sources such as loan brokers, rotating savings and credit associations(Esusu) etc.

2. PROBLEM STATEMENT
Ayensu, A.E.(2017) , studied the role of financial inclusion in reducing poverty in Sub-
Saharan Africa. The study investigates the level of financial inclusion in the region using a
representative sample of 40 nations from the region from 2010 to 2014. Sarma M.
(2012),Index of financial inclusion method was used to calculate the financial inclusion index
for the 40 nations studied. Additionally, the study explores the factors that influence financial
inclusion in Sub-Saharan Africa, as well as the impact of financial access on income poverty
reduction in the region. The findings that per capita income is the primary determinant of
financial inclusion in Sub-Saharan Africa and that involuntary financial exclusion may be
significantly influenced by insufficient household income and a high-risk profile.
Amadou, D. (2018), examined the effect of financial inclusion on poverty in Bolivia,
Bangladesh, Nigeria, and Mali. The study used a questionnaire to ascertain the causes of
poverty in these countries and to draw attention to the poor and vulnerable population's needs
and desires. The results of the comparative analysis and the descriptive analysis led to several
recommendations, including: for the agricultural sector to promote credit for the purchase of
agricultural machinery and inputs; for the population to be sensitized and encouraged to
subscribe to loans for agricultural activities; for the poor to be instilled with financial
education; and for financial institutions to finance agricultural activities.
Huong, T.T.(2022),studied the effect of financial inclusion on multidimensional poverty in
Vietman. The results show that financial inclusion has a positive impact on multidimensional
poverty reduction. Using financial products or services reduces the probability of households
falling into multidimensional poverty. Specifically, households having bank accounts, bank
savings, using debit cards, credit cards, or investing in stocks or bonds are less likely to fall
into multidimensional poverty state.
A number of prior empirical studies have identified the importance of financial inclusion to
multidimensional poverty reduction. However, most of these studies assess the effect of
financial inclusion on income poverty reduction(Emeka Eze and Justin.C. Alugbuo,2021).
How do we classify a household that lives on more than two dollars a day but still finds it
difficult to access these basic necessities?
Therefore, this study seeks to explore the impact of financial inclusion in terms of rural
household use of financial products and services on multidimensional poverty reduction in
South West, Nigeria. This study aims at mapping multidimensional poverty status of
smallholder farmers into four dimensions of well being: basic health, education, works and
shocks, and standard of living(on basis of infrastructural facilities). Huong, T.T.(2022),
studies did not account for works and shocks in estimation of multidimensional poverty
reduction in Vietnam. This empirical study seeks to account for this. In summary, there is a
need for an enhanced understanding of impact of financial inclusion on multidimensional
poverty among smallholder farmers in Southwest, Nigeria.
More specifically, the following research questions need to be addressed:
(1) What is the socio-economic characteristics of smallholder farmers in the Southwest
Nigeria?
(2) What are the determinants of financial inclusion among the smallholder farmers in the
study area?
(3) What is the impact of financial inclusion on multidimensional poverty among
smallholder farmers in the study area?

3. OBJECTIVES
The long term goal of the research is to ensure a comprehensive review of literatures,
develop a formalized financial inclusion system, and outline a conceptual framework for
multidimensional poverty reduction based on findings. Particularly, the study has the
following sub-objectives:
The broad objective of the study is to investigate the impact of financial inclusion on poverty
reduction among smallholder in southwestern Nigeria. The specific objectives were to
(1) To evaluate socio-economic characteristics of smallholder farmers in the Southwest
Nigeria
(2) To determine analyse the determinants of financial inclusion among the smallholder
farmers in the study area
(3) To analyse the impact of financial inclusion on multidimensional poverty among
smallholder farmers in the study area

The result of this study will have implications for the government in reducing poverty as well
as create more awareness on financial education among rural households in Nigeria.

4. JUSTIFICATION OF THE STUDY

Prior studies have documented the importance of financial inclusion to the reduction of
income-based poverty at the macro level perspective (Beck et al., 2007; Burgess & Pande,
2005).However, income is not a comprehensive measure of poverty, because it does not
reflect the lack of various basic human needs, especially those that cannot be bought with
money. In some cases, a person may not be poor in terms of income, but has difficulties
accessing basic health, education, information services etc. Therefore, it is necessary to
conduct a research on the impact of financial inclusion on various poverty dimensions among
rural households in Southwest, Nigeria.

5. EXPECTED CONTRIBUTION TO KNOWLEDGE

This study aims to enhance the current literature by investigating the impact of financial
inclusion using rural household level data on multidimensional poverty in Southwest,
Nigeria. The findings of the study will achieve the following:
(a) guide governments at all levels and monetary institutions in implementing policies
that encourage financial institutions to open branches in strategic rural regions and
develop financial products and services targeted specifically at the poor, thereby
alleviating multidimension poverty status of rural households .
(b) eliminate barriers to credit availability for self-employed individuals and micro, small
and medium-sized businesses
(c) incentivize financial institutions that fund self-owned firms and micro, small and
medium-sized firms.
(d) develop financial products that cater to individuals with varying religious beliefs and
faiths, creating appeal of financial services to a broader audience, thereby bringing
financial inclusion closer to the rural people.

6. LITERATURE REVIEW
Nigeria recently topped South Africa to become the largest economy in Africa (Naidoo,
2020) and one of the fastest-growing economies in the world, despite the prevailing recession
(Oxfam International, 2017). Still, the country is characterized by a sheer inability to translate
this economic progress into meaningful development. All poverty reduction programs remain
utterly unresponsive to economic growth (World Bank, 2016). Beyond rhetoric, the poverty
rate in the country can best be understood in terms of accurate figures, with 40.1% (82.9
million) of the total population classified as poor (National Bureau of Statistics [NBS], 2020).
The paradox here, therefore, is that even as the country’s economy improves, the poverty rate
soars.
Hornby, (2001) sees the concept of poverty simply as a state of being poor or a state of
social, economic and political inferiority. On his part, Miller (1977) defines poverty in terms
of individual or family insufficiency of assets, income and public service. He went further to
state that poverty is also lack of certain capabilities, such as being able to participate with
dignity in society. The capabilities are absolute, but the commodities needed are relative.
Mencher, (1977) says that poverty is a condition of having an income incompatible
with a society’s national objectives. It is a condition of having an income in the lowest fifth
of the income distribution. However, according to the World Bank’s World Development
Indicators (WDI), using a US$1.25 absolute poverty line, 63% of Nigerians
were classified as poor in 2004, and 67% in 2010. The country also performed poorly in most
non-income outcome indicators. For example, in 2004, 58% of Nigerians had access to water,
48% to electricity, and 31% to improved sanitation, while in 2010, 63% had access to water
and 29% to improved sanitation2.
Poverty is multi-facet. It is characterized by lack of purchasing power exposure to risk,
insufficient assess to social and economic services and few opportunities for income
generation. (Guardian,1995).In Nigeria, most poverty studies are based on
income/expenditure outcomes. They utilize what is termed in the literature as a money metric
approach. They come from few official sources – the National Bureau of Statistics, the
United Nation Development Program (UNDP) and World Bank (WB). A limited number of
poverty studies in Nigeria use a combination of income and non-income outcomes, called
the multidimensional approach, including the UNDP’s Human Development Index (HDI)
and Multidimensional Poverty Index (MPI). These available estimates could be criticized on
the following grounds. Firstly, they provide estimates only at the macro level and therefore
have limited use for comparisons at the micro level. Second, dimensions as well as categories
within each dimension that enter into the poverty basket are weighted equally.
A few other studies on Nigeria apply a multidimensional approach to measure poverty,
including Ajakaiye et al. (2014), Oyekale et al. (2009), and Adetola and Olufemi (2012).
They each applied different approaches to measuring poverty in the multidimensional context
- the first-order dominance approach, the fuzzy sets approach and the Alkire and Foster
counting approach. They also differ in their objectives. Ajakaiye et al. focus on the country as
a whole, while the other two are specific – Oyekale et al. focus on the profile of rural
households and Adetola and Olufemi, on child poverty.
Recognizing the importance of financial inclusion to poverty reduction, the Central Bank of
Nigeria developed strategies to drive financial inclusion in the country during the just
concluded International Financial Inclusion Conference(IFIC’22). These strategies include
the following: agent banking operations, financial literacy programs, consumer protection
council, implementation of MSME funds, credit enhancement schemes and mobile money
operations.
Recent studies have addressed the importance of financial inclusion to multidimensional
poverty reduction, such as Yang and Fu (2019), Churchill and Marisetty (2020), and Álvarez-
Gamboa et al. (2021). However, they are still quite few, and there are still certain limitations
to these studies. Specifically, Yang and Fu (2019) examine the role of FI on multidimensional
poverty in rural China only in terms of access to financial inclusion. Churchill and Marisetty
(2020) investigate the role of financial inclusion in India on three dimensions; including
access to banking services, access to loans and access to insurance. This study also considers
only three aspects of multidimensional poverty, which are health, education, and living
standards. Other aspects of multidimensional poverty such as access to information, clean
water, works and shocks and sanitation have not been taken into account. Álvarez-Gamboa et
al. (2021) examine the influence of financial inclusion from a macro perspective based on the
level of access and usage of financial products on Ecuador’s multidimensional poverty
reduction. Thus, there is still little evidence on the impact of financial inclusion in terms of
the use of financial products and services on multidimensional poverty reduction at the rural
household level.

7. RESEARCH METHODOLOGY
This study seeks to estimate the impact of financial inclusion on multidimensional of poverty
among smallholder farmers in Southwest, Nigeria. The study will use likert scale
questionnaire to collect primary data from two states in Southwest,Nigeria.
To assess the impact of financial inclusion on multidimensional poverty in the study area, a
descriptive statistics of the variables for the whole sample and for multidimensionally poor
and non-poor households will be computed and Generalized Least Square Model with the
dependent variable being multidimensional poor households (MPH) will be used to analyse
the data.
The independent variables reflecting financial inclusion include five variables, representing
three aspects of financial inclusion: 1) Financial services (households with a bank account ,
households with bank savings , and households using an ATM card ; 2) Credit (Households
using credit facilities ; 3) Participating in financial markets (Households with assets such as
stocks or bonds).
The control variables to be in the model include variables reflecting the characteristics of the
household or household head: the household area of residence, household size , access to
production and business information, gender of the household head , age of the household
head , marital status of the household head and education of the household head .
The instrumental variable to be used in the model is the variable representing whether a
household has a plot of land or a house other than its current residence.
The Multidimensional Poverty Index(MPI) will be estimated using four dimensions in each
of the two selected states: education, medical services, living standards and works and
shocks. This will serve as a guide in comparing the MPI and evaluate gender differences in
the two states.
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