FINANCIAL INCLUSION AND POVERTY ALLEVIATION IN

NIGERIA

EGHOSA-OSAZUWA, Chioma Nnenna

B.Sc. (Economics), University of Abuja
PG2020/00951

Dissertation Submitted to the Department of Economics, Faculty of Social

Sciences, Rivers State University, Nkpolu-Oroworukwo, Port-Harcourt, in
Partial Fulfilment of the Requirements for the Award of a Master of Science
Degree (M.Sc.) in International Economics and Finance.

Supervisor: Dr. Araniyar C. Isukul

Dr. D. B. Ewubare

September 2022

CHAPTER 1
1
 INTRODUCTION

1.1 Background to the Study

Financial inclusion has been globally recognized among governments, researchers, and

economic observers as an important tool for poverty reduction, employment generation,

wealth creation and improving the welfare and standard of living of people and in turn

economic development. The concept has gained momentum in recent times because of its

now obvious impact on poverty alleviation which is key to the economic growth of the

country. This is due to the realization by the government that as more people enter the

financial system, the less the amount of money left outside the system, which can help to

boost investment in the economy (Abimbola, Olokoyo, Babalola and Farouk, 2018).

Umar (2019) opined that no economy can grow on the whole if large parts of its population

are not covered by the financial system as they are the real economic pillars. Martinez (2016)

also noted that access to financial services is a useful tool that the government can employ in

stimulating and accelerating economic growth with efficient distribution of available

resources, thereby leading to decreased capital cost and poverty alleviation. Historically, the

term financial inclusion came into limelight in the early 2000s, emanating from research

findings that emphasized poverty as a direct consequence of financial exclusion. The drive

for financial inclusion is aimed at ensuring that all adult members of the society have easy

access to a broad range of financial products, designed according to their needs and provided

at affordable costs. These products include payment, savings, credit, insurance, and pensions

(EFINA, 2018).

2
According to Dagogo and Isukul (2018) financial inclusion can be described as the use of

formal financial services and financial products that include but not limited to deposit of cash

or cheques, access to loanable funds, insurance, consumer protection, and payment systems.

Improvement of access to financial services is one element of financial inclusion, others

include risk mitigation, fostering financial stability and developing an efficient financial

structure that acts as a conduit to connects small scale businesses by ensuring they have

access to capital to grow their business through greater involvement in the financial system

(Dagogo and Isukul, 2018). Financial inclusion is also defined as the access to a host of

quality financial services and products, including savings, loans, insurance, and credit,

among others, by members of the public, especially the financially disadvantaged at an

affordable cost (Grant and Kagan, 2019).

Nigeria currently has a population of over 200 million with about 60% of this within the

adult population. However, the country only has 80 million total bank customers with only

25% of this confirmed on the bank ‘s verification system so far with strong indication that a

reasonable number of the yet to be verified customers are duplications (Central Bank of

Nigeria reports, 2021). This is an indication that the level of financial inclusion in Nigeria is

still very low. The bulk of the active bank customers are in the urban centers where economic

activities are booming. Rural communities continue to face financial exclusion with many of

their dwellers financially excluded (Ajide, 2014). This confirms that there is a relationship

between the level of financial inclusion and economic activities with respect to welfare of the

people in a community. In addition, there is evidence that people who are financially

included tend to be more productive, consume more and invest more. Because financial

3
inclusion has a great influence on economic and social impact, it has taken centre stage in the

deliberations of policy makers in the efforts to alleviate poverty (Abimbola, Olokoyo,

Babalola and Farouk, 2018).

In Nigeria however, Ogbeide and Igbinigie (2019) stated that the broad objectives of

financial inclusion for the poor are to address their needs through the formal financial

system, transform money lender dependent rural poor into a highly bankable group,

eliminate the high-cost interest regime, stop the resource drain from the poor, build up

diversified and multiple livelihoods and inculcate a strong savings culture among them. In

broader sense, extensive financial inclusion offers a wide range of services for achieving

holistic set of services for growth and development of the country. Also, financial inclusion

enables everyone to participate fully in the formal financial system which will ultimately

benefit individuals, the commercial enterprises that serve them, and the society at large.

Furthermore, financial inclusion provides an opportunity to the poor to secure better life for

themselves and for their family. Financial inclusion enables poor to make sustainable

improvements in their quality of life at the community level and faster growth and poverty

reduction at the national level (Oladele, Nteegah, Onuchuku and Robinson, 2021).

In furtherance, financial inclusion is capable of tackling poverty and inequality, and

improving the welfare and general standard of living of individuals. Financial inclusion can

also clearly play a role in reducing poverty and inequality, and the impacts thereof, by

helping people invest in the future, smooth their consumption, boost their welfare and

standard of living, and manage financial risks through the provision of suitable financial

services (Odeleye and Olusoji, 2016: DemirgucKunt, Klapper and Singer, 2017),

4
Furthermore, due to crucial role financial services and inclusion play in gathering and

allocating funds between lacking and excess monetary units, policy-makers, regulators and

banking sector have not reneged in instituting programs that would improve realization of

financial inclusion agenda and poverty alleviation in Nigeria. The key player behind this

strategy is that nations that are seeking or pursuing rigorous monetary inclusion intend to

accomplish high macro-economic performance especially poverty alleviation than ones with

lower financial inclusion rate (Uruakpa, Kalu and Ufomadu, 2019). Consequent upon these

actions, Nigeria government, Central Bank of Nigeria and Deposit Money Banks have over

these years, initiated, and implemented countless of programs geared toward improving

financial inclusion in the nation, thus stimulating investment, economic growth and reduce

poverty of the nation. Some of programs initiated by government and monetary sectors in

Nigeria over these years include: local banking aimed at facilitating bank habits among large

agro-based rural people; community formation and micro-finance banks, “e-banking

products, electronic payment system and cashless policy – ATMs, POS and mobile banking;

Non-interest banking involving Islamic banking; the National Economic Reconstruction

Fund (NERFUND) and Family Economic Advancement Programme (FEAP)” among others

(National Financial Strategy in Nigeria, 2018).

Empirically, the effect of financial inclusion on poverty alleviation has generated heated

debates among scholars who have produced diverse opinions and findings. For instance,

Chollom, Gyang and Innocent (2022) empirically evaluated effect of financial inclusion and

literacy on poverty reduction in Nigeria and found that financial inclusion and literacy has

significant effect on poverty reduction in Nigeria. In addition, Oladele, Nteegah, Onuchuku

5
and Robinson (2021) concluded that financial inclusion (access, availability, and cost of

financial services) has significant implications on poverty level both in short and long run in

Nigeria. In addition, Emeka and Justin (2021) empirically established that financial inclusion

reduces household poverty in Nigeria. Also, Abubakar, Muhammad and Onimisi (2020)

found that financial inclusion variables such as deposit money bank loan to rural areas,

deposit money bank rural branches and deposit money bank lending to deposit ratios show

positive effects on poverty reduction in Nigeria. Moreover, Soyemi, Haruna, and Olowofela

(2020) discovered that commercial bank branches, demand deposits from rural regions, and

loans to rural areas as proxies of financial inclusion have positive significant impact on

Human Development Index (HDI) in Nigeria in both short run and long run. Drawing from

the foregoing, this study seeks to empirically determine the effect of financial inclusion on

poverty alleviation in Nigeria.

1.2 Statement of the problem

The problem of poverty in Nigeria has over the years engaged the attention of the

international community, governmental and non-governmental agencies, including scholars.

Poverty in Nigeria is pervasive and chronic, engulfing a large proportion of the society. In

Nigeria also, human conditions have greatly deteriorated (particularly in the last decade) with

real disposable incomes dwindling and malnutrition rates on the increase (Uma & Eboh,

2020). Thus, one of the challenges faced by Nigeria is the inability to tackle the high rate of

poverty. The war on poverty in Nigeria is as old as the country itself. Successive

governments at different levels have spent huge sums of money on programmes and projects

to alleviate poverty. Thus, the worsening incidence of poverty necessitates continual

assessment of anti-poverty strategies and programmes (Tamuno, 2018). Indeed, the main
6
thrust of government policy and budget has been on poverty reduction in line with the United

Nation’s Millennium Development Goals (MDGs) which has as central theme the eradication

of extreme poverty in half by 2015 (Fiderikumo, Bredino and Adesuji, 2018). Nevertheless,

Nigeria is still much characterized by high rate of poverty both at the urban and rural areas.

Illiteracy is extremely high and capital formation is low. Consequently, financial inclusion

has become an explicit strategy for poverty reduction, accelerating economic growth and is

critical for achieving inclusive growth in a country. This is because absence of financial

inclusion forces the unbanked into non-formal banking sectors, characterized by high interest

rates and small amount of available funds. However, the expensiveness of access to financial

services by millions of adults across the country poses a serious challenge to the country’s

economic development and poverty alleviation process, and as such, majority of the

estimated 60 million financially excluded Nigerians lack knowledge of the services and

benefits derivable from accessing financial services.

Even though the economy has been reported to have grown at an average of 8.0% between

2017 and 2020, unemployment rate continues to increase, thereby making the economy

unstable in growth and therefore causing an increase in poverty. Also, many Nigerians are

still financially excluded as a result of major barriers preventing them from accessing

financial services, which include; lack of awareness, and also the fact that they face the issue

of stringent and restrictive documentation requirements by the financial institutions in the

country, and thus, the inability of the large portion of poor Nigerians to meet the basic

identification requirements while absence of functional unique identity management system

remain a fundamental obstacle for high financial inclusion rate to be achieved. As a result,

7
many Nigerians have continued to wallow in abject poverty while more than 50 percent live

on less than US$2 per day considering the large numbers (estimated 60 million) that are

financially excluded.

However, despite the importance of financial inclusion in poverty alleviation, there seem to

be no well-established conclusion or consensus regarding the direction and extent of the

effect of financial inclusion on poverty alleviation in Nigeria as previous related studies

generated conflicting results. In addition to this, none of the related studies on the subject

matter covered up to 2021. All these indicate existence of a research gap which this study

aims to bridge. In a bid to fill this gap, this study seeks to empirically analyze the effect of

financial inclusion on poverty alleviation in Nigeria over the period of 1985-2021. Thus,

inclusion of 2021 will make this study up to date compared to related studies.

1.3 Research Questions

The following research questions are raised to guide this study:

1. How does financial deepening index affect poverty alleviation in Nigeria?

2. What is the effect of number of rural branches of deposit money banks on poverty

alleviation in Nigeria?

3. How does deposit of rural branches of deposit money banks affect poverty

alleviation in Nigeria?

4. What is the effect of loan of rural branches of deposit money banks on poverty

alleviation in Nigeria?

8
1.4 Objectives of the study

The aim of this study is to examine the effect of financial inclusion on poverty alleviation in

Nigeria. Other specific objectives are to:

1. examine the effect of financial deepening index on poverty alleviation in Nigeria.

2. determine the effect of number of rural branches of deposit money banks on poverty

alleviation in Nigeria.

3. analyse the effect of deposit of rural branches of deposit money banks on poverty

alleviation in Nigeria.

4. ascertain the effect of loan of rural branches of deposit money banks on poverty

alleviation in Nigeria.

1.5 Statement of hypotheses

The following null hypotheses are formulated to guide this study:

H01: Financial deepening index does not significantly affect poverty alleviation in Nigeria.

H02: There is no significant effect of number of rural branches of deposit money banks on

poverty alleviation in Nigeria.

H03: Deposit of rural branches of deposit money banks has no significant effect on poverty

alleviation in Nigeria.

H04: Loan of rural branches of deposit money banks does not significantly affect poverty

alleviation in Nigeria.

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1.6 Significance of the study

The need to examine financial inclusion in Nigeria cannot be overemphasized. This is

because access to a well-functioning financial system in the country will lead to creating

equal opportunities and also enable socially and economically excluded Nigerians to

integrate into the economy, making the financial system ensure that it plays its role of

inclusive growth and poverty alleviation. Thus, a study nature is a step in the right direction

and it will significant in the following ways:

Academics/Body of Knowledge: Theoretically, this study has the potential of contributing

greatly to the growth of existing theories in social and management sciences particularly in

Economics by helping to enrich the body of knowledge through its reliable findings on the

effect of financial inclusion on poverty alleviation in Nigeria.

Government and Policy Makers: The findings of this study will be important to government

and policy makers in the formulation of macroeconomic policies that will encourage

financial inclusion and tackle those factors affecting financial inclusion in Nigeria.

Financial Institutions and Financial Regulators: This study will be beneficial to financial

institutions and financial regulators in making decisions on advanced financial inclusion

through access to and use of financial services.

Financial Institution Managers: This study will be important to financial institution managers

as it will give more insight into the factors that encourage financial inclusion, thus increase

their market share and financial performance.

General Public: This study will also provide detailed explanations on the need for financial

inclusion and the need to access financial services by educating individuals who are aware of

10
financial services in Nigeria but do not know what it means and its benefits to poverty

alleviation in the country.

Researchers and Students: Lastly, the findings will be valuable to future researchers and

students especially in the area of financial inclusion and poverty alleviation. This study will

specifically suggest areas for further research where future scholars and researchers can

expand knowledge frontier while at the same time serve as source of reference material.

1.7 Scope of the study

This study is set out to empirically examine the effect of financial inclusion on poverty

alleviation in Nigeria. The content scope of this study will focus on the proxies of financial

inclusion (financial deepening index, number of rural branches of banks, deposit of rural

branches of banks and loan of rural branches of banks) as well as the measures of poverty

alleviation (human development index). The study will cover a period of thirty-seven (37)

years that is, 1985 – 2021. This time scope is informed by the availability of the data that are

required and necessary to conduct a robust analysis in this study. These data will be sourced

from the Central Bank of Nigeria (CBN) Statistical Bulletin and World Bank Development

indicators.

1.8 Operational Definition of terms

This section clarifies some terms within the context of this research. These terms are as

follows:

Deposit of Rural Branches of Deposit Money Banks: This is a sum of money placed or

kept in a bank account of rural branches of banks, usually to gain interest. They include

savings deposit, fixed deposit and demand deposit.

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Economic Development: This is the sustained, concerted actions of policy makers and

communities that promote the standard of living and economic health of a specific area.

Economic development can also be referred to as the quantitative and qualitative changes in

the economy.

Economic Growth: This is the positive change in the level of production of goods and

services by a country over a certain period of time.

Financial Deepening Index: This is expressed as broad money supply to gross domestic

product.

Financial Exclusion: This is the unavailability of banking services to people with low or

non-income.

Financial Inclusion: This is the delivery of financial services at affordable costs to sections

of disadvantaged and low-income segments of society, in contrast to financial exclusion

where those services are not available or affordable.

Human Development Index: This was designed by United Nations as a metric to assess the

social and economic development levels as well as poverty rate of countries. It is a summary

measure of average achievement in key dimension of human development: a long and

healthy life, being knowledgeable and have a decent standard of living.

Loan of Rural Branches of Deposit Money Banks: This is a debt provided by rural

branches of deposit money banks to individual, organization, or entity at an interest rate.

Number of Rural Branches of Deposit Money Banks: This refers to the total number of

deposit money banks branches that are situated in the rural areas.

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Poverty: It is a condition where people's basic needs for food, clothing, and shelter are not

being met. Poverty is general scarcity, dearth, or the state of one who lacks a certain amount

of material possessions or money.

Poverty Alleviation: This is a term that describes the promotion of various measures,

both economic and humanitarian, that will permanently lift people out of poverty.

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 CHAPTER 2

LITERATURE REVIEW

2.1 Theoretical Framework

2.1.1 Systems Theory

Systems theory of financial inclusion was developed by Ozili in 2020. According to Ozili

(2020), financial inclusion outcomes are achieved through the existing sub-systems which

financial inclusion rely on, and that a greater financial inclusion will have positive benefits

for the systems it relies on. A notable change in a sub-system (one part of the system) can

significantly affect the expected financial inclusion outcome. For instance, imposing

regulations on economic agents and suppliers of financial services can align their interest

with that of the users of basic financial services, and can compel economic agents and

suppliers of financial services to offer affordable and quality financial services to users

within defined rules that protect users of financial services from exploitation and price

discrimination. In line with this theory, the rural communities will be financially included if

the financial regulatory authorities in Nigeria will increase the loan to deposit ratio of

commercial and Microfinance bank’s loan to rural populace (Amakor and Eneh, 2021). This

theory is related to this study in the sense that by imposing regulations on economic agents

and suppliers of financial services, they can align their interest with that of the users of basic

financial services. This will improve financial inclusion which will in turn lead to reduction

in poverty.

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2.1.2 Finance-Growth Theory

The theoretical thinking and debate on the finance–growth nexus can be traced back to the

work of Bagehot in 1873. The Finance–Growth theory advocates that financial development

creates a productive environment for growth through ‘supply leading’ or ‘demand-following’

effect. The theories also perceive the lack of access to finance as a critical factor responsible

for persistent income inequality as well as slower growth. Therefore, access to safe, easy and

affordable source of finance is recognized as a pre-condition for accelerating growth and

reducing income disparities and poverty which creates equal opportunities, enables

economically and socially excluded people to integrate better into the economy and actively

contribute to development and protect themselves against economic shocks (Serrao, Sequeira

and Hans, 2012).

Theoretical disagreements do exist about the role of financial systems in economic growth.

Some economists see the role as minor or negligible while others see it as significant. The

demand following view as supported argues that the financial system does not spur economic

growth; rather the financial system simply responds to development in the real sector since it

provides the catalyst through financial intermediation for productive activities to ensure

economic growth and development.

The relevance of this theory to this study is its emphasis on access to safe, easy and

affordable source of finance which is recognized as a pre-condition for accelerating growth

and reducing income disparities and poverty which creates equal opportunities, enables

economically and socially excluded people to integrate better into the economy and actively

15
contribute to development. Thus, by creating equal opportunities and enabling economically

and socially excluded people to integrate into the financial system, there will be

improvement in economic activities and reduction in poverty.

2.1.3 Financial Intermediation Theory

The theory on financial intermediation was developed from the 1960’s in the twentieth

century, the starting point being the work of Gurley and Shaw (1960). The theory, which

largely builds on the economics of imperfect information, was further developed in the 1970s

through the contributions of Akerlof (1970), Spence (1973) and Rothschild and Stiglitz

(1976). The modern theory of financial intermediation analyzes, mainly, the functions of

financial intermediation, the way in which the financial intermediation influences the

performance of banks and the economy as a whole and the effects of government policies on

the financial intermediaries. It highlights the role of financial intermediaries in economy, the

impact of regulations on financial intermediation, accentuating the role of the central bank in

the regulation, supervision and control of financial intermediaries (Andrieş, 2009). The

theory argues that financial intermediaries exist because they can reduce information and

transaction costs that arise from an information asymmetry between borrowers and lenders.

Financial intermediaries thus assist the efficient functioning of markets, and any factors that

affect the amount of credit channeled through financial intermediaries can have significant

macroeconomic effects.

Claus and Grimes (2003) clarified that there are two strands in the literature that formally

explain the existence of financial intermediaries. The first strand emphasizes financial

intermediaries’ provision of liquidity. The second strand focuses on financial intermediaries’

16
ability to transform the risk characteristics of assets. In both cases, financial intermediation

can reduce the cost of channeling funds between borrowers and lenders, leading to a more

efficient allocation of resources. Andrieş (2009) identified three key approaches to financial

intermediation. The studies regarding informational asymmetry approach especially the

problematic of relationships between bank and creditors, respectively bank and debtors. In

the relationship between bank and borrower the main aspect analyzed is the function of the

selection bank and the tracking of the granted loans, as well as the problematic of adverse

selection and moral hazard. In the relationship between bank and depositors (creditors) a

special attention is given to the factors that determine depositors to withdraw their money

before due date. The second approach for the financial intermediation is founded on the

argument of transaction cost. Unlike the first approach, this one does not contradict the

theory of perfect markets. This approach is based on the differences between the

technologies used by the participant. Thus, intermediaries are perceived as being a coalition

of individual creditors or debtors who exploit the scale economy at the level of transaction

technologies. The notion of transaction cost does not comprise just the costs regarding the

transfer costs for the amounts or of foreign exchange, but also those for research, evaluation

and monitoring thus the role of financial intermediaries is to transform the characteristics

(due date, liquidity, etc.) of assets, the so-called qualitative transformation of financial assets,

offering liquidity and opportunities for diversification of placements. The third approach of

financial intermediaries is based on the method of regulation of the monetary creation, of

saving and financing of economy (Andrieş, 2009).

17
This theory is significant to this study in the sense that improvement in financial

intermediation will lead to improvement in financial inclusion which will in turn lead to

poverty alleviation

2.1.4 Endogenous Growth Theory

Endogenous growth theory or new growth theory was developed by Romer in 1986.

According to Gokal and Hanif (2004) the endogenous growth theory holds that policy

measures can have an impact on the long-run growth rate of an economy. Endogenous

growth economists believe that improvements in productivity can be linked to a faster pace

of innovation (which can be brought about by industrial sector) and extra investment in

human capital. Endogenous growth theory describes economic growth which is generated by

factors within the production process, for example; economies of scale, increasing returns or

induced technological change; as opposed to outside (exogenous) factors such as the

increases in population. In endogenous growth theory, Gillman, Harris and Matyas (2002)

noted that the growth rate has depended on one variable: the rate of return on capital. The

endogenous growth literature has produced two distinct approaches on how to incorporate

human capital into models of economic growth. The first, which is due to Lucas, regards the

accumulation of human capital as the engine of growth. The second approach emphasizes the

role of innovation and adoption of new technologies in production. In the model formulated

by Lucas, human capital enters the production function similarly to the way in which

technology does in the Solow model, that is, in labour-augmenting form.

Lucas proposes the following production technology:

Yt = AKtβ (ut ht Lt)1-β h γ a,t

18
where Y, A, K and L are, once again, output, technology, capital, and labour, while u is the

fraction of an individual’s time allocated to work, h is the skill level or human capital of the

representative agent, and ha is the average human capital in the economy. The level of

technology, A, is assumed to be constant (so that it could in principle be dropped from the

expression or subsumed within the capital term). Population growth is taken as exogenous.

Setting aside the last term on the right-hand side for the moment, the most important

assumption of the model concerns the law of motion according to which the human capital

variable evolves over time. And because there are no diminishing returns to the acquisition of

skills, human capital can grow without bound, thereby generating endogenous growth. The

properties of the steady state in the Lucas model depend on whether there are external effects

of human capital, which is the case if γ ≠ 0. In that case, the term h in the production function

therefore affects output. And because there are no diminishing returns to the acquisition of

skills, human capital can grow without bound, thereby generating endogenous growth.

Edame and Okoro (2010) opined that endogenous growth theory assumes constant marginal

product of capital at the aggregate level, or at least that the limit of the marginal product of

capital does not tend towards zero. However, in many endogenous growth theories, this

assumption of perfect competition is relaxed, and some degree of monopoly is thought to

exist.

The relevance of this theory to this student is its emphasis on how human capital can grow

without bound, thereby generating endogenous growth. Thus, by creating equal opportunities

and enabling economically and socially excluded people to integrate into the financial

system, there will be increase in human capital development which will in turn lead to in

poverty.
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2.2 Conceptual Framework

2.2.1 Concept of Financial Inclusion

The traditional idea of financial inclusion is the provision of access to and usage of diverse,

convenient, affordable financial services. Access to and use of financial services is one of the

major drivers of economic growth and poverty alleviation. Financial inclusion today is

widely considered as a right to all citizens to social inclusion, better quality of life, and a tool

for strengthening the economic capacity and capabilities of the poor in a nation (Banco

Central do Brazil 2010). Financial inclusion connotes ensuring that the low income earners,

illiterates, people living in rural areas and the financially disadvantaged in the society all

have access to requisite financial services by bringing the services closer to them at an

affordable cost. This implies that the normal banking practices, requirements and

documentations for account-opening and loan accessing, collateral requirements, pricing of

loans and advances and service charges for routine banking services which serves as

barriers/constraints to the less-privileged will have to be relaxed in order to cater for their

banking needs. It also connotes the penetration of bank services both geographically and

demographically through the establishment of branches in rural areas.

According to Centre for Financial Inclusion (2010) financial inclusion is “a state in which all

who are financially included have access to a full suite of quality financial services, provided

at affordable prices, in a convenient manner, and with dignity for the clients. It is a state

where financial services are delivered by a range of providers; most of them private sector,

and reach everyone who can use them, including the poor, disabled, rural, and other excluded

populations”. The common concept of financial inclusion is the provision of contact to and

20
usage of different and affordable financial services. The use of and access to financial

services is one of the major drivers of economic growth. Financial inclusion covers

continuous, important, cost effective and relevant financial services for the poor population

(Odi and Ogonna, 2014). The Centre for Financial Inclusion (2013) states financial inclusion

as the state where people who can make use of the financial services have access to quality

financial services, given at affordable prices, in an appropriate manner and dignity for the

client. According to the Reserve Bank of India, financial inclusion is the process of

guarantying access to relevant resources and financial services needed by the low-income

group at an affordable price in a transparent manner by the mainstream institutional players

(Ogbeide and Igbinigie, 2019). From the definition of financial inclusion by the Rangarajan

Committee (2018), financial inclusion can be summarized to be the process by which

financial services (credit inclusive) are made available to people within the economic system

that are not privileged to these services due to low income and inaccessibility in a timely and

cost-effective manner.

Mohan (2006) also described the concept of financial inclusion as a situation where certain

segment of the populace access who hitherto lacked access to the financial system are

gradually integrated into it through the provision of low – cost, safe and fair financial

products and services from mainstream providers. Financial inclusion, according to

Abimbola, Emara and Pearlman (2018), is defined as having access to formal financial

services such as credit, savings, and insurance. Financial inclusion, according to Akhil

(2016), is defined as the provision of inexpensive financial services to the poor, whereas El

Said, Emara, and Pearlman (2020) defined it as household access to and usage of financial

21
products and services. According to Aribaba, Adedokun, Oladele, Ahmodu, and Olasehinde

(2020), financial inclusion can be defined as a process that allows disadvantaged

populations, such as low-income earners, to have access to financial services at a cheaper

cost during a specific period. Ajide (2014) described financial inclusion as the process of

delivering the financial system of a country to its people.

Sarma (2008) in her own study described it as the process of ensuring easy access, affordable

and convenient use of formal financial services. Aduda and Kalunda (2012) also regarded

financial inclusion as the process service provider adopt in making available various

financial services, at an affordable price, in a timely manner and accessible to all the

members of the society. Financial inclusion is a process, which means it is an ongoing

activity. It is obvious that all literatures although might describe it differently but have all

agreed that financial inclusion is the effort being made in on boarding people on to the

financial system by making financial services available to all especially the low income and

rural dwellers.

Leeladhar (2016) summarized financial inclusion as the process of delivering to low income

and disadvantaged groups banking services at an in a timely and affordably way. In

discussing the concept of financial inclusion, it is very important to also review the concept

of financial exclusion. This is because financial inclusion is the process of correcting

financial exclusion problems which entails factors that prevents individuals and other groups

from having access to the formal financial system. Mohan (2006) noted that financial

exclusion implies that some parts of the societal circle do not have access to safe fair and

affordable financial products and services from formal financial service providers. Kama and

22
Adigun (2013) also described financial exclusion as a situation where formal financial

products and services are inaccessible by individual, household or group. These individuals

and groups are said to be financially excluded and the process of bringing them within the

financial service net is what is understood to be financial inclusion. Financial exclusion can

be voluntary or involuntary. World Bank (2018) described voluntary exclusion as a situation

where the persons or firms decide based on their personal, cultural or religious belief not to

use financial services.

2.2.2 Financial Inclusion in Nigeria

Prior to the recent efforts to promote financial inclusion, the Nigerian economy was largely a

cash-based economy with significant proportion of the narrow money stock in the form of

currency outside the banking system. Although the average ratio of the currency outside the

banking sector (COBs) to narrow money supply (M1) trended downward from 61.1 per cent

in the 1960s to 44.3 per cent in the 1970s and later to 40.9 per cent in the 1980s, the value, in

nominal terms, was still high considering the growth in the level of narrow money in the

economy. The decline in the ratio was attributable to a combination of developments,

including increased literacy and government policies directed at encouraging financial sector

growth.

The CBN, during this period, initiated rural banking programme directing banks to open

branches in the rural areas, encouraging Nigerians to use financial institutions and products

more. The crisis in the banking industry during the 1990s eroded the confidence of the

populace in the industry. The problem was aggravated by the excessive spending of the

political class leading to the increase in the level of currency outside the banking system. The

23
ratio of currency outside the banking system moved up to 47.7 per cent by end of the 1990s.

To forestall the damaging effect of the banking industry distress in the 1990s, government

implemented various policies which not only involved economic reforms to improve the

general wellbeing of the populace in terms of employment and income earning capacity but

also included measures (particularly the bank consolidation programme of 2004) that

increased deepening of the financial sector. The stimulated use of the financial services

pushed down the ratio of currency outside the banking system to 38.2 per cent by the end of

2005.

As stated in the National Financial Inclusion Strategy document, Nigeria lags behind some of

its peer African countries with regards to the provision of financial services. In 2010, only

36% (which is roughly 31 million of an adult population of 84.7 million) were served by

formal financial services, compared to 68% in South Africa and 41% in Kenya. This goes a

long way to show that a vast segment of the population has not been included financially and

it stands as a challenge to human and economic growth and development. Financial inclusion

is most progressed in urban areas of Nigeria, especially in the southern parts of the country.

Northern Nigeria is disadvantaged because 68% of adults in the North East and North West

zones, respectively, are excluded. Rates of formal inclusion range from 49% in the South

West Region to only 19% in the North West Region. “Informally Included” are more in the

North Central region, where 23% of the adults have access to only informal services (NFIS,

2018). The NFIS Document also indicated that the vast majority (80.4%) of those who are

fully excluded from formal and informal financial services live in rural areas. Three potential

explanations are possible: First, the physical distance to bank branches in most rural areas is

24
long and this poses high cost for accessing financial services. Secondly, the lower economic

activity in rural areas limits the profitability of financial institutions. Thirdly, a commonly

lower degree of education and financial literacy in rural areas decreases the probability for

clients to makes use of financial products and services (NFIS, 2018).

2.2.3 Relevance of Financial Inclusion

The global financial inclusion average defined as the number of adults with access to

financial services is less than 50.0 per cent. The problem is more acute in the developing and

African countries, such that achieving a higher financial inclusion level has become a global

challenge (Ardic, Heimann and Nataliya, 2014). The global target has been to remove all the

barriers, including education, gender, age, irregular income, regulation, and geographical

locations that have together contributed to the dearth of access to financial services by

billions of adults all over the world. Sanusi (2011) had attributed the rise in poverty level in

Nigeria to the challenges of financial exclusion. According to him, achieving optimal level of

financial inclusion in Nigeria means empowering 70.0 per cent of the population living

below poverty level, and this would boost growth and development. Inclusion of this

segment of the society would generate multiple economic activities, cause growth in national

output and eventually reduce poverty. Theoretically, greater access to deposit facilities

enhances the ability of financial intermediaries to mobilize savings, while better access to

finance facilitates economic growth by increasing the ability of households to undertake

productive investments (Andrianaivo and Kpodar, 2017).

Specifically, financial inclusion connects people to banks with the consequential benefits.

Chong and Chan (2015) noted further that access to a well-functioning financial system, by

25
creating equal opportunities, enables socially and economically excluded people to integrate

into the economy and actively contribute to economic development. This ensures that the

financial system plays its role of inclusive growth which is one of the major challenges of

emerging and developing economies. Mohan (2006) noted that, once access to financial

services improves, inclusion affords several benefits to the consumer, regulator, and the

economy alike. The author noted that the establishment of an account relationship can pave

the way for the customer to avail the benefits of a variety of financial products, which are not

only standardized, but are also provided by institutions that are regulated and supervised by

credible regulators that ensures safety of investment. In addition, bank accounts can also be

used for multiple purposes, such as, making small value remittances at low cost and

purchases on credit (Mohan, 2006).

In summary, access to a bank account does provide the account holder not only a safer means

of keeping his/her fund but also provides access to use of other low cost and convenient

means of transaction. For the regulator, the transparency in the flow of transactions makes

monitoring and compliance easier, while for the economy, increased financial inclusion

makes capital accumulation easier and more transparent. Financial inclusion requires that

attention is given to human and institutional issues, such as quality of access, affordability of

products, provider sustainability, and outreach to the most excluded populations. Financial

inclusion guarantees improved ability of poor people to save, borrow, and make payments

throughout their lifetime. Apart from the regular form of financial intermediation, financial

inclusion takes care of:

a. Basic no frills banking account for making and receiving payments.

26
b. Savings products suited to the pattern of cash flows of a poor household.

c. Money transfer facilities; and

d. Insurance (life and non-life).

2.2.4 The State of Financial Inclusion in Nigeria

As stated in the National Financial Inclusion Strategy document, Nigeria lags when

compared to some of its peer African countries with regards to the provision of financial

services. In 2010, only 36% (which is roughly 31 million of an adult population of 84.7

million) were served by formal financial services, compared to 68% in South Africa and 41%

in Kenya. This goes a long way to show that a vast segment of the population has not been

included financially and it stands as a challenge to human and economic growth and

development.

Table 2.1: Current State of Financial Inclusion in Nigeria

Percentage (%) Total Number (Million)
Adult Population 100 84.7
Financially Served 53.7 45.5
Financially excluded 46.3 39.2
Formally Served (Included) 36.3 30.7
Informally Served (Included) 17.4 14.7
Banked 30.0 25.4
Other Formal Institutions 6.3 5.3
Source: CBN National Financial Inclusion Strategy Document, 2012

Banked: all adults who have access to or use a deposit money bank in addition to

having/using a traditional banking product, including ATM card, credit card, savings account,

current account, fixed deposit account, mortgage, overdraft, loan from a bank, or Islamic

banking product; including indirect access.

Formal other: all adults who have access to or use other formal institutions and financial

products not supplied by deposit money banks, including Insurance companies, Microfinance

27
banks, pension schemes or shares. It also includes remittances (through formal channels),

including indirect access.

Informal only: all adults who do not have any banked or formal other products but have

access to or use only informal services and products. This includes savings clubs/pools,

Esusu, Ajo, or moneylenders; as well as remittances (through informal channels such as via a

transport service or recharge card).

Financially excluded: adults not in the banked, formal other or informal only categories,

even though the person may be using or have access to any of the following: loan/gift from

friends or family and loan from employers, as well as remittances via a friend/family

member. Between 2008 and 2010, the percentage of “completely excluded” fell from 53% to

46%, while those served by the “informal sector” fell from 24% to 17%. At the same time,

“formal other” doubled from 3% to 6% and “formally banked” rose from 21% to 30%

(Central Bank of Niger, 2012).

A. Geographical Difference of Financial Inclusion in Nigeria

Financial Inclusion is most progressed in urban areas of Nigeria, especially in the southern

parts of the country. Northern Nigeria is disadvantaged because 68% of adults in the

Northeast and Northwest zones, respectively, are excluded. Rates of formal inclusion range

from 49% in the Southwest Region to only 19% in the Northwest Region. “Informally

Included” are more in the North Central region, where 23% of the adults have access to only

informal services (NFIS, 2012).

Table 2.2: Financial Inclusion in Nigeria by Region

Zone Formally Formal Informally Financially Total
Banked (%) Other (%) Served (%) Excluded (%)
North-West 13 6 13 68 100

28
North- Central (Inc. FCT) 27 6 23 44 100
South-West (inc. Lagos) 42 7 18 33 100
North-East 15 6 11 68 100
South-East 41 6 21 32 100
South-South 3 6 19 36 100
Source: CBN National Financial Inclusion Strategy Document, 2012

The NFIS Document also indicated that the vast majority (80.4%) of those who are fully

excluded from formal and informal financial services live in rural areas. Three potential

explanations are possible: First, the physical distance to bank branches in most rural areas is

long and this poses high cost for accessing financial services. Secondly, the lower economic

activity in rural areas limits the profitability of financial institutions. Thirdly, a commonly

lower degree of education and financial literacy in rural areas decreases the probability for

clients to makes use of financial products and services.

2.2.5 Strategies and Models to Achieve Adequate Financial Inclusion

Innovative financial inclusion refers to the delivery of financial services outside conventional

branches of financial institutions (banks and Microfinance institutions) by using information

and communications technologies and non-bank retail agents (including post offices) as well

as new institutional arrangements to reach those who are financially excluded. Besides

traditional banking services, this concept includes alternatives to informal payment services,

insurance products, savings schemes, etc (Lyman, 2018). Delivery mechanisms under such

financing system include both mobile phone-based systems and systems where information

and communications technologies, such as Point-Of-Sale (POS) device networks, are used to

transmit transaction details between the financial service provider, the retail agent, and the

customer in a branchless banking regime.

29
Noticeable reforms adopted by many developing countries in the last decade to open up the

financial sector to the hitherto financially excluded populace entails the use of interest rate

liberalization, the switch from other direct monetary instruments, recapitalization, closure of

some state-owned banks, and restructuring of commercial banks. The establishment in 1988

of the Agricultural Credit Support Scheme (ACSS) by the CBN was one of the early attempts

for creating access to loans for practicing farmers and agro-allied entrepreneurs are

encouraged to approach their banks for loan with large scale farmers allowed under the

scheme to apply directly to the banks in accordance with the stipulated guidelines (CBN

Special Report, 2021). The scheme affords financial assistance to farmers and agro-allied

entrepreneurs at a single-digit interest rate of 8.0 percent. For instance, banks grant loans to

qualified applicants at 14.0 percent interest rate who enjoy a rebate of 6.0 percent for prompt

repayment in subsequent applications thus reducing the effective rate of interest to be paid by

farmers to 8.0 percent and a means for influencing financial inclusion. Recent reform

attempts in the Nigeria case has also led to the repackaging of community banks into

microfinance institutions and the restructuring of commercial banks into universal and

regional categories.

The establishment of framework for mobile services in 2009 further marked a significant

watershed in financial inclusion policies in Nigeria. Subsequent policies such as the revised

microfinance bank policies and guidelines on noninterest window in 2011 culminated in the

National Financial Inclusion Strategy; Literacy Framework in 2012 and the recent Cashless

policies. Recently, a new regime for Tiered Know Your Customer, bank charges and

regulation of agent banking relation are part of policies designed to enhance the supply side

30
of financial services delivery. Literatures have further furnished us with numerous

suggestions on how to bridge the gap between the rural poor and financial inclusion. Some of

these suggestions presented in the form of models attempted to clearly identify the problems

of financial exclusion and strategies to be applied in order elevate the poor and unbanked to

full financial inclusion. One of such models is the Sustainable Financial Model by Porteous

(2014) which identified three basic propositions for creating a sustainable long-term

inclusion within an economy; namely customers’ needs proposition, business’ case

proposition and a compliant ecosystem.

Need Access to Financial

Access:
Need Social Development:
Government Grant  Micro credit/Financial
Employment scheme Insurance
Social Benefits  Multiple Product
[Health/Education] Delivery platform
 Banking transactions

Figure 2.1: Social Development Financial Inclusion Model

The base of the pyramid represents the larger portions of the society which is absolutely

excluded financially with little or no prospect for financial inclusion. To progress into the

under-banked bankable sphere, this group needs social development through government

grants, employment scheme, social benefits such as health, education, etc. Similarly, to move

into the financially included region, the unbanked bankable needs access to financial services

through banking transactions (deposits, savings, etc.), micro-credit/micro-finance, micro

insurance, and multiple product delivery platforms and suitable ecosystem support by the

31
government.

2.2.6 Recent Financial Sector Reforms and Financial Inclusion in Nigeria

Since 2005, the Nigerian financial services sector has witnessed increasing activities by both

the government and the regulatory authorities aimed at deliberately promoting policies that

are intended to grow financial inclusion. The Central Bank of Nigeria has been at the fore

front of encouraging and supporting products that are specifically targeted at the low income

and financially excluded, while the government focused more on both interventionist

financing arrangements and building institutions and frameworks that promotes financial

inclusion. However, the recent reforms include:

1. Financial System Strategy 2020 (FSS2020): One of the critical initiatives in this

direction was the incorporation of financial inclusion as one of the cardinal objectives of the

Nigerian Financial System 2020 (FSS 2020). The FSS 2020 represents a holistic and

strategic road map and framework for developing the Nigerian financial sector into a growth

catalyst that will enable Nigeria to be one of the twenty largest economies by 2020. The

Financial System Strategy (FSS2020) identified six stakeholders within the financial sector.

These were the providers of financial services, which are regarded as the suppliers in the

value-chain of financial inclusion. The group included the banking institutions, non-bank

financial institutions, insurance companies, capital market players, pension institutions, and

technology providers together with their regulatory bodies, all important to the process of

financial inclusion.

2. Microfinance Policy: All over the world, the micro finance model which involves

majorly the provision of financial services to the poor and low-income earners has been

32
identified as a potent instrument for promoting financial inclusion as well as poverty

alleviation. The government, in 2005 launched the National Microfinance Policy which

provided the supervisory and regulatory framework that will not only facilitate the growth of

privately-owned microfinance institutions but also permits and facilitate the participation of

mostly the third sector institutions, including market associations, cooperatives, non-

governmental organizations, self-help groups, in the microfinance model. These institutions

together remain the major vehicle for the inclusion of the large and many users of the

informal sector where the bulk of the unbanked exists. By the end-December 2012, following

the increased confidence and activities of the microfinance banks, the assets and liabilities of

the Micro Finance Banks had reached N190.7 billion from just N55.1 billion in 2006. The

loans and advances given by Micro Finance Banks also increased from a mere N16.0 billion

in 2006 to over N67.6 billion at end-December 2012. A review of the loan portfolio structure

showed that short-term loans, at end-December 2012, accounted for 89.7 per cent of the total.

This performance is an indication of the enormous influence the microfinance institutions

can have in the process of growing the financial inclusion level of the country. The

CBN/Government recently revised the microfinance policy to strengthen the institutions and

reposition them for enhanced service delivery by creating a more responsive sub-sector.

3. Non-Interest Banking: The Central Bank of Nigeria (CBN) introduced a new framework

for Non-Interest Financial Institutions (NIFIs) in June 2011 and had granted two preliminary

licenses as at end-December 2011. The CBN hoped that Islamic bank products would help

bring into the banking sector a large number of the country's population that had hitherto

steered away from the organized conventional financial services, due to their aversion to

interest and interest-based products. Introduction of non-interest financial services which

33
necessitates the addition of another component into corporate governance is expected to

enhance oversight and regulation. It would also help to attract Foreign Direct Investment

(FDI), especially from the Middle East and Southeast Asia where a lot of investors have

funds waiting to be invested in Shariah-compliant financial products as evidenced by the

exponential growth in international Sukuk with implications for stimulation of growth in the

real sector in the country. It was also projected that this specialized form of banking would

further deepen Nigeria's financial market.

4. E-banking Products, Electronic Payment System and Cashless Policy: The Central

Bank of Nigeria has in the recent times stepped-up the campaign for banks to invest heavily

in other low-cost branchless channels such as ATMs, Point of Sale (POS) etc. The number of

ATMs deployed by end of 2011 stood at 9,640, giving an average of 11 ATMs per 100,000

adults, compared with an average of 59 ATMs per 100,000 adults in South Africa, 13 ATMs

per 100,000 adults in Indonesia, 42 ATMs per 100,000 adults in Argentina, 120 ATMs per

100,000 adults in Brazil and 56 ATMs per 100,000 adults in Malaysia. Nigeria, however,

ranked higher than such other countries as Bangladesh with just 2 ATMs per 100,000 adults

and Pakistan 4 ATMs per 100,000 adults. Adopted to accelerate the use of modern electronic

payments channels, the cashless policy was implemented in pursuit of three major objectives.

These objectives include: to develop and modernize the payment system; reduce banking

cost to drive financial inclusion; and improve effectiveness of monetary policy. In other

words, the policy was expected to drive financial inclusion based on the implicit assumption

that reduced banking cost and more efficient payment system will encourage more people

and business to embrace the formal financial service platforms. A review of the level of

34
progress made so far on the CBN cashless project in Lagos indicate that the number of

deployed and active Point of Sale (POS) grew from 5,300 in June 2010 to 18,874 as at March

4, 2011. While this number has increased to around 100,000 between the end of 2011 and

first half of 2012, the numbers of deployed POS that are actively used have not grown same

way.

2.2.7 Issues and Challenges of Financial Inclusion

A major challenge in the financial inclusion process is how to ensure that the poor rural

dwellers are carried along considering the lack of financial sophistication among this

segment of the Nigerian society due to the general low level of financial literacy. Majority of

the estimated 40 million financially excluded Nigerians lack knowledge of the services and

benefits derivable from accessing financial services, while staff of the service providers often

display lack of adequate understanding of the services and so unable to educate effectively.

In fact, sub-optimal outcome from attempts to increase customer awareness is reflected in the

lack of appreciable progress in the literacy level of the populace. This has remained a major

impediment to the progress of the financial inclusion as a result process. Another major

challenge, especially from the part of growing saving is the inability of the populace to save

as a result of double-digit inflation in the economy, with its attendant effects on real interest

rate and continuous loss of money value. The disincentive negative real interest rates

obviously have made potential savers remain with other non-bank avenues for savings. There

is also the challenge of increasing poverty. Though the economy has been reported to have

grown at an average of 7.0 per cent between 2009 and 2011, unemployment rate continues to

increase while progress on many of the poverty reducing Millennium Development Goals

35
has been slow. The uncompetitive wage levels, particularly in the public sector where a large

number belong to the low cadre means that these groups are excluded financially. Though

their salaries are paid into the bank, but the personnel only visit the bank once in a month to

collect their salaries with little or nothing to save (World Bank, 2018). Empirically, despite

readiness and enthusiasm of the excluded be included, lack of awareness,

low-income/poverty and proximity are the major barriers that prevented people from

accessing services of banks, microfinance institutions and non-interest banks among other

formal channels (Tamuno, 2018).

2.2.8 Concept of Poverty

Poverty according to the World Bank (2018) is construed to be a deprivation in the personal

well-being of individuals or a group of people. It comprises people with the inability to attain

the necessary materials for living and survival resulting from their low incomes. Poverty is

also stated to include elements of poor health conditions, low rate of literacy, inaccessibility

to drinkable water and safe environment, lack of adequate security and lack of access to

lifechanging opportunities. Poverty is a condition of deprivation of basic necessities of life

which largely referred to housing, food and clothing. Housing is more than mere shelter

because it includes all the infrastructure and services that make housing functional and

livable, while food is more than mere filling the stomach with anything edible but nutritional

food. In the provision of food, sustainable agriculture becomes an inevitable pillar

(Olanrewaju, 2014).

As opined by Sachs (2015) it is useful to distinguish among the three degrees of poverty, i.e.,

extreme (or absolute) poverty, moderate poverty, and relative poverty. Extreme poverty

36
means that households cannot meet basic needs for survival. They are chronically hungry;

unable to access healthcare, lack the amenities of safe drinking water and sanitation, cannot

afford education for some or all the children, and perhaps lacks rudimentary shelter and basic

articles of clothing. He further expands that unlike moderate and relative poverty, extreme

poverty occurs only in the developing world. He defined moderate poverty as generally

construed as a household income level below a given proportion of national income. The

relatively poor, in high-income countries, lack access to cultural goods, entertainment, and

recreation and to quality healthcare, education and other prerequisites for upward social

mobility. Thus, while an individual may have more than enough income to sustain life, if it is

very low compared to the rest of the community, the individual may be viewed as being in

poverty. As the society grows richer, so the income level defining poverty rises. One may see

poverty from the angle of permanence and transience. This dimension differentiates poverty

based on time duration on the one hand and distribution as to extensiveness or concentration

on the other hand.

2.2.9 Causes of Poverty

According to Taiwo and Agwu (2016) there are two broad schools of thought to causes of

poverty - Low economic growth and Market imperfections. The low economic growth is

associated with increased unemployment and underemployment when the income of those

affected may generally not be sufficient for them to maintain adequate standard of living.

Market imperfection on the other hand has to do with institutional distortions which would

not make for equal opportunity to productive assets. They include ignorance, culture, and

37
inequitable income distribution. The International Community has in recent years given

attention to the study of poverty in the Sub-Saharan African region with a view to identifying

the causes to provide appropriate solutions. The World Bank has done much work in this

area, with studies like "Taking Action for Poverty Reduction in Sub-Saharan Africa in 1996;

and The Social Impact of Adjustment Operations" in 1995 (World Bank, 2018).

The following have been identified as causes of poverty - Inadequate access to employment

opportunities; Inadequate physical assets; Inadequate access to the means of supporting rural

development in poor region; Inadequate access to markets for goods and services that the

poor can sell; Low endowment of human capital; Destruction of natural resources

endowment; Inadequate access to assistance for those living at the margin and those

victimized by transitory poverty because of drought, floods, pests and war; Inadequate

participation of the poor in the design of development programmes; Poor maintenance

culture or failure to retain and maintain existing structures, leading to deterioration in rural,

urban, and high way roads and township slums and drainages. They can be summarized

according to Taiwo and Agwu (2016) as follows:

1. The Stage of Economic and Social Development: A situation of economic

underdevelopment can be a hindrance to the capacity of a nation to formulate and implement

programmes and projects that would enhance real economic growth. In a situation like this,

poverty will tend to persist, because economic growth is the first necessary step to poverty

alleviation.

2. Low Productivity: Low productivity may be due to obsolescence of human skill or low

acquired skill resulting from low education, poor health, and physical incapacity. It could

38
also be because of inadequate access to productive assets and consequently unemployment or

underemployment. This causes poverty since the consuming unit is unable to earn enough

income to maintain adequate/decent living standard. Africans’ human and physical skills

have tended to deteriorate with the passage of time because of a combination of brain-drain

and falling educational facilities and funding.

3. Market Imperfections: Distortions in the employment market which introduce all forms

of discrimination and rigidities and prevent the advancement of people along the social and

economic ladder of progress, in the form of sex, age, color, race and tribe constitute market

imperfections. Also, the existence of an income distribution structure which is skewed in

favor of some classes in the society is a form of market imperfection that renders the less

favored class poor.

4. Physical or Environmental Degradation: A classic case of this cause of poverty is

readily seen in countries like Ethiopia, Sudan, and Somalia in Africa. Misuse or overuse of

land which results in deforestation, desert encroachment and blight in an excessive shifting

cultivation system of agriculture are destructive of endowed land resources, swelling the

population of the poor as well as deepening the incidence of poverty. It is the same effect that

oil spillage produces from mindless exploitation of crude oil.

5. Structural Shift in the Economy: Inadequate macro-economic management policies

usually result in an unwholesome shift in economic activity. Nigeria is a good example of

such a structural shift. Before the advent of crude oil, it was a well-balanced economy with

five principal export commodities, namely, cocoa, palm produce, rubber, groundnuts, and

cotton. The country's structural shift occurred when undue concentration was given to crude

oil to the neglect of agriculture which provides job for the rural poor. In the progress, the
39
economy became monoculture, while mass poverty became the lot of the rural sector, with

the consequent rural-urban drift which also swelled the number of the urban poor. The South-

East Asian countries (Malaysia and Indonesia) present good cases of efforts at preventing

undesirable structural shift.

6. Inadequate Commitment to Programme Implementation: Much of the policies and

programmes in the Development Plans of the 1970s and 1980s, in Nigeria for example, were

not faithfully implemented even when the country did not suffer lack of funds. This failure

contributed to deepening poverty. Specifically, the failure to implement the Structural

Adjustment Programme after 1990 worsened a lot of the poor, as this led to continued

workers' retrenchment and general economic hardship.

7. Corruption: The incidence of corruption has taken a frightening dimension such that

Nigeria is now internationally regarded as one of the most if not the most corrupt country in

the world. Nigeria is ranked 27, on a scale of 0 (highly corrupt) to 100 (very clean), on the

2014 Corruption Perception Index (CPI).

2.2.10 Poverty Alleviation

According to Okpoko and Ezeadichie (2013) poverty alleviation refers to sustained

improvements in the living conditions of a particular group of people. They posit that

poverty alleviation as a concept is closely related to development, which they described as

chance process characterized by increased productivity, equalization in the distribution of

social products and emergence of indigenous institutions whose relations with the outside

world are characterized by equity rather than by dependence or subordination. Poverty

alleviation can be referred to as sustained development. Since development is not seen as a

40
cluster of benefits, which a needy country simply acquires, but as an indigenous process that

should rely primarily on the strength and resources of the society concerned (Thirlwall,

2009).

The aim of any poverty alleviation of any government is to achieve lasting improvements in

the quality of life and not just short-term improvement that disappear at the end of the project

cycle. Poverty alleviation is therefore aimed at maintaining the natural resource base through

a process that adapts properly to the natural environment by making appropriate

improvement in the social values of the people (Paul, 2017). As mentioned by United

Nations, poverty is a phenomenon reflecting insufficient income for meeting the basic needs.

It is measured by estimating a “poverty line” – which is the per capita cost of satisfying basic

needs – and comparing it with the actual per capita income of households. Households whose

current income is below the poverty line are considered poor (UNCTAD, 2012). Thus,

measurement of poverty assumes that there exist predetermined and well-defined standards

of consumption named as "poverty lines” below which a person is deemed to be poor

(Ravallion, 2012).

The consideration for household or a person to be regarded as poor largely depends on the

method of setting the poverty line. Poverty lines are normally expressed as the per-capita

monetary requirements that an individual needs to pay for the purchase of a basic bundle of

goods and services. Identifying the poor as those with income (or consumption expenditure)

below the determined poverty line ensures clarity and brings efficiency and focus in policy

making and poverty evaluation. An unambiguous poverty line helps the policy makers in

evaluating the poverty conditions, allocation of resources for poverty eradication, and in

41
monitoring the success of various programmes and policies centering the poor. A clear

poverty line may enable designing nation-wide poverty profiles clearly across states, sectors

and among socio-economic groups. It will also enable checking the effectiveness of financial

inclusion plan (FIP) in Nigeria. Almost all poverty alleviation programs target a particular

section of the society and proper identification of poor is important. But the dilemma arises

as different people, institutions, countries, and school of thoughts define poverty lines

differently (Ravallion and Chen, 2018).

2.2.11 Measures of Poverty Alleviation

One of the important measures of poverty alleviation is Human Development Index (HDI).

Human Development Index is a statistic composite index of life expectancy, education (mean

years of schooling completed and expected years of schooling upon entering the education

system), and per capita income indicators, which are used to rank countries into four tiers of

human development. A country scores a higher HDI when the lifespan is higher, the

education level is higher, and the gross national income GNI (PPP) per capita is higher. It

was developed by Pakistani economist Mahbub ul Haq and was further used to measure a

country's development by the United Nations Development Programme (UNDP)'s Human

Development Report Office (Stanton, 2017). The HDI was created to emphasize that people

and their capabilities should be the ultimate criteria for assessing the development of a

country, not economic growth alone. The human development index can also be used to

question national policy choices, asking how two countries with the same level of GNI per

capita can end up with different human development outcomes. These contrasts can stimulate

debate about government policy priorities. The human development index is a summary

42
measure of average achievement in key dimensions of human development: a long and

healthy life, being knowledgeable and have a decent standard of living. The human

development index is the geometric mean of normalized indices for each of the three

dimensions. The health dimension is assessed by life expectancy at birth, the education

dimension is measured by mean of years of schooling for adults aged 25 years and more and

expected years of schooling for children of school entering age. The standard of living

dimension is measured by gross national income per capita. The human development index

uses the logarithm of income, to reflect the diminishing importance of income with

increasing GNI (Stanton, 2017).

The scores for the three human development index dimension indices are then aggregated

into a composite index using geometric mean. Refer to technical notes for more details.

Human development index is a statistical tool used to measure a country’s overall

achievement in its social and economic dimensions. The social and economic dimension of a

country are based on the following: health of the people, their level of education attainment

and their standard of living. Every year, united nation development program (UNDP) ranks

countries based on the HDI report released in their annual report. HDI is one of the best tools

to keep track of the level of development of a country, as it combines all major social and

economic indicators that are responsible for economic development. Since its launch in

1990, the human development index (HDI) has been an important marker of attempts to

broaden measures of progress. Human development index serves multiple functions for

academics and policymakers, as well as activists (Dickson, 2013).

2.3 Empirical Literature

43
Several scholars and researchers have reviewed the concept of financial inclusion and

poverty reduction/economic development. This section therefore reviews some of these

studies and the related ones in Nigeria and some other countries.

Chollom, Gyang and Innocent (2022) empirically evaluated effect of financial inclusion and

literacy on poverty reduction in Nigeria. The objective of study was to assess the relationship

between financial inclusion and literacy on poverty reduction in north central Nigeria. The

study adopted the structural equation modeling approach. Primary data were collected

through the administration of questionnaire. The data collected for this study was subjected

to data cleaning and was certified fit for analysis. The result of the analysis revealed that

financial literacy and financial inclusion has a significant effect on the poverty reduction in

North Central Nigeria. This study, therefore, recommended that building financial literacy

and their financial inclusion capabilities will improve personal financial management, which

in turn, will be manifested through better financial behavior and financial outcomes and

savings which will smoothen the development of the state through financial risk taking.

Consequently, the saving behavior, will also contribute to availability of investment fund at

household and national levels.

Oladele, Nteegah, Onuchuku and Robinson (2021) examined the effect of financial inclusion

on alleviate poverty in Nigeria. To achieve this purpose of the study, data on poverty rate as

dependent variable, deposit penetration, credit penetration, bank branch penetration, ratio of

domestic investment to GDP and interest rate as independent variables were sourced from

secondary sources and analyzed using the Autoregressive and Distributed lag (ARDL)

methodology. The result showed that: deposit penetration and bank branch penetration had

44
negative and significant impact on poverty level both in the short and long run hence

retarded poverty while credit penetration has mix effect on poverty in the short run but

positive and significant impact on poverty in the long run. Ratio of domestic investment to

GDP also exerted negative impact on poverty in the long run while interest rate has

insignificant and negative impact on poverty in the short run but positive and insignificant

effect on poverty in the long run. The result also showed that the variables in the poverty

equation adjust speedily to short run dynamics in poverty level. Given these results, the study

concluded that, financial inclusion (access, availability, and cost of financial services)

significant implications on poverty level both in short and long run in Nigeria over the period

of this study. Based on this conclusion, the study recommends: increase in deposit

mobilization through savings, domestic investment, and banks’ branches to create jobs and

reduce poverty in Nigeria.

Amakor and Eneh (2021) looked at the extent of the relationship between financial inclusion

of rural populations and poverty reduction in Nigeria from 1986 to 2019. The study use

secondary data from the Central Bank of Nigeria (CBN) statistical bulletin and Index Mundi.

Financial inclusion was proxied by commercial bank loans and advances (CBLA) to rural

communities and microfinance bank loans and advances (MFBLA) to rural communities,

while poverty reduction was proxied by unemployment rate, GDP per capita income, and the

Human Development Index (HDI). The hypotheses were put to the test using the Ordinary

Least Square Method. The data found that microfinance bank loans and advances have a

strong link with GDP per capita income and the Human Development Index (HDI) but had a

negative relationship with unemployment rate. The study concluded that microfinance bank

45
loans and advances (MFBLA) has increased the standard of living of the rural dwellers more

than commercial bank loans and advances (CBLA) except in the case of employment. The

study recommends that microfinance bank loans and advances (MFBLA) should be directed

to entrepreneurial development other than commercial activities.

Emeka and Justin (2021) determined the effect of financial inclusion on poverty reduction in

Nigeria. The study estimated two models using data from the World Bank's 2017 Global

Findex survey for Nigeria: A Logit model and an Instrumental variable model. The

dependent variable was a dummy variable labeled "poor," which was set to 1 if the

individual's "within economy income quintile" was in the bottom 40%, and 0 otherwise. The

explanatory variables included financial inclusion index constructed by the author, age of

respondents, educational level of respondents, gender, employment status, wage, government

transfers, pension, savings, and self-employment. The study established that financial

inclusion reduces household poverty in Nigeria even after controlling for endogeneity in the

explanatory variables.

Okonkwo and Nwant to (2021) looked at the impact of financial inclusion on economic

growth in Nigeria from 1992 to 2018, using financial inclusion variables such as currency

outside banking, currency in circulation, microfinance bank deposits, number of commercial

bank branches, commercial bank credit to the private sector, loans and deposits of rural

commercial bank branches, and nominal Gross Domestic Product (GDP). The Ordinary

Least Square and Grander Causality tests were used to evaluate the data. The results revealed

that loans extended by rural branches of commercial banks have a positive and significant

relationship and causal effect on economic growth in Nigeria, while deposits of rural

46
branches of commercial banks have causal effect on GDP in Nigeria and a positive

relationship though not significant.

Abubakar, Muhammad and Onimisi (2020) explored the short and long-run impacts of

financial inclusion on poverty reduction in Nigeria, using Autoregressive Distributive Lag

Model on a time series data spanning from 1985 to 2019, which were sourced from the

Central Bank of Nigeria Statistical Bulletin. The findings obtained from ARDL revealed the

long-run nexus between financial inclusion and poverty reduction. The short-run results

demonstrated that the lending deposit ratio has a negative and statistically significant effect

on poverty reduction in Nigeria whereas, loan to rural areas, bank branches, and lending to

deposit ratios show a positive effect on poverty reduction, but not statistically significant

except loan to rural area. Thus, the study recommended that monetary authority should

ensure that there are adequate bank branches and continuous granting of loan facilities to the

people to facilitate their businesses. Finally, the facility should be affordable to the low-

income earners, and easy distribution channel should be guaranteed.

Aribaba, Adedokun, Oladele, Ahmodu and Olasehinde (2020) examined the effect of the

financial inclusion on poverty alleviation among the low-income earners in Nigerian between

the periods of (2004 – 2018), using ordinary least squares and error correction model. Loan

to Depositor Ratio (LDR), Loan to Rural Areas (LRA), Financial Deeping Indicators (FDI)

and Social Investment Loan (SIL) to SMEs were used to proxy financial inclusion while

Poverty Index (PI) and Per Capita Income (PCI) were used as a proxy for poverty alleviation.

The study shows that financial inclusion schemes play a significant role on poverty

alleviation among the low-income earners in Nigerian. It also reduces poverty level and

47
increases per capita income thereby enhance the standard of living through the new social

investment scheme.

Soyemi, Haruna, and Olowofela (2020) used the Fully Modified Ordinary Least Square

(FMOLS) and Grander Causality test to investigate financial inclusion as a catalyst for

attaining sustainable development in Nigeria from 2001 to 2016. The study found that in the

short run, there is a causal relationship between the number of commercial bank branches,

demand deposits from rural regions, and loans to rural areas and Human Development Index

(HDI), while in the long run, the explanatory variables have a positive significant impact on

Human Development Index (HDI) in Nigeria. The main conclusion was that financial

inclusion has an impact on Nigeria's long-term growth.

Musa, Joseph and Aliyu (2020) employed ARDL bounds testing technique to examine the

effect of financial inclusion on inclusive growth in Nigeria, using quarterly data from 2007-

2018. The empirical evidence revealed the presence of cointegration between financial

inclusion indicators (account ownership, access to bank, ATM and credit, loans to SMEs and

internet usage) and inclusive growth (poverty, household expenditure, employment, and per

capita income). The results demonstrate that, while increase in account ownership, and

access to bank and ATM raise poverty, and access to credit, loans to SMEs and internet usage

reduces employment and per capita income in the long-run, it was also discovered that access

to credit reduce poverty and increase household consumption, while account ownership and

access to bank increases employment and per capita income in the long-run. In the short-run:

lag of account ownership, access to ATM and credit, loan to SMEs and internet usage

reduces poverty; lag of household expenditure, account ownership, and access to ATM and

48
lag of internet usage increases household expenditure; lags of access to ATM and lags of

internet usage (and account ownership and access to the bank) increases employment

opportunities (and per capita income), and access to ATM and credit reduces employment

and per capita income respectively.

Harley, Adegoke and Adegbola (2017) used panel data analysis ranging from 2006 to 2015 to

investigate the role of financial inclusion in economic growth and poverty reduction in a

developing economy within a loglinear model specification framework. The result showed

that records of active ATM, bank branches and government expenditures selected from three

African countries are the most robust predictors for financial inclusion on poverty reduction

in a developing economy. The results further showed that one percent increase in the ratio of

active ATM will lead to about 0.0082 percent increase in the gross domestic product and a

reduction of poverty in developing economies like Nigeria. The study recommended that the

government should invest in infrastructural development that will enhance banking services

thereby reducing poverty in the country.

Folorunsho (2016) examined the effect of financial inclusion on poverty reduction in

Nigerian rural communities using data from 1996-2013. Data sourced from Central bank of

Nigeria (CBN), National Bureau of Statistics and World Bank data base were analyzed using

Autoregressive Distributed Lag Modeling (ARDL). Bound test results showed that there was

a long-run relationship among the variables. Both short and long run relationship confirmed

the importance of financial inclusion as a suitable strategy for poverty reduction in rural

communities. The finding of the study has a clear-cut policy implication. As the beneficial

effect of financial inclusion on rural poverty reduction is dampened or even cancelled out by

49
cost of borrowing and degree of financial openness, the policy package must consider the

risk of interest charged by banks and financial exposure or openness of rural communities in

Nigeria. This is because the levels of financial literacy are often low in rural areas.

Olaolu and Kemi (2015) provided empirical evidence of the relationship between financial

inclusion and poverty reduction in Nigeria. They used time series data which range from

1988 to 2011. The relevant data for the study were sourced from Central Bank of Nigeria

statistical bulletin as well as International Financial Statistics. The study used loans of rural

branches of banks and bank loans to SMEs as the measures of financial inclusion while per

capita income was used as the measure of poverty inclusion. The results showed that a 1 per

cent change in financial inclusion increases growth in the incomes of the poor in by almost

0.4 per cent – a significant impact. The study also found that loans of rural branches of banks

and bank loans to SMEs have positive and significant impact on per capita income. The

study concluded that financial inclusion contributes significantly to poverty reduction in

Nigeria.

Onaolapo (2015) examined the effects of financial inclusion on the economic growth of

Nigeria from 1982 to 2012. Data for the study were collected mainly from secondary sources

such as Statistical Bulletins of the Central Bank of Nigeria (C.B.N.), Federal Office of

Statistics (F.O.S.) and World Bank. Employed data consist of such bank parametric as

Branch Network, Loan to Rural Area, Demand Deposit, Liquidity Ratio, Capital adequacy,

and Gross Domestic Product. The overall results of the regression analysis show that

inclusive bank financial activities greatly influenced poverty reduction but marginally

determined national economic growth and financial intermediation through enhanced bank

50
branch networks, loan to rural areas, and loan to small scale enterprise given about 50%

relatedness between variables on either side of the equations.

Sahu (2013) did a study on commercial banks, financial inclusion, and economic growth in

India. The objectives of the study were to understand the status of India’s financial inclusion,

to estimate the financial inclusion index for various states in India and to study the

relationship between Financial Inclusion Index and Socio-economic Variables. It was found

that 72.7 percent of India’s 89.3 million farmer households were excluded from formal

sources of finance. The C-D ratios of foreign banks was 85.0 per cent, of regional rural banks

was 59.9 per cent and of private sector banks was 74.7 per cent which had increased in 2011

from their levels in the previous year (72.9 per cent, 58.3 per cent and 72.7 per cent

respectively). No state in India belonged to high IFI group. The two states namely

Chandigarh and Delhi belonged to medium IFI, and rest of the states had low IFI values.

Sahu (2013) established that access to financial services was very dismal in the country and

there was a pressing need to make banking and financial services available to every part of

the country.

Oruo (2013) examined the relationship between financial inclusion and GDP growth in

Kenya. The objective of the study was to determine the relationship between financial

inclusion and economic growth in Kenya. The study adopted a descriptive research design

which is concerned with what, where and how of a phenomenon, hence more emphasis was

placed on building a profile on that phenomenon. The study used secondary data collected

from various sources including Kenya National Bureau of Statistics while data and the

Central Bank of Kenya. The study period was 2002/2003-2011/2012 financial periods. This

51
study found that economic growth in Kenya has a strong positive relationship with financial

inclusion in Kenya. Economic growth has a strong positive relationship with branch

networks and a weak positive relationship with the number of mobile money users/accounts.

Ibeachu (2010) carried out a comparative analysis of financial inclusion using a case study of

Nigeria and the United Kingdom. In his study he used a deductive approach, to measure the

financial inclusion, accessibility, and the quality of bank service in Nigeria by analyzing

responses from the survey questionnaires administered. The study states the drive of

financial inclusion and bank outreaching as a strategic move of financial providers (banks) to

seek out strategic customers. It shows financial inclusion as a growth strategy for banking

institutions. With the use of questionnaires administration and several other data collection

methods, the research compared the results from Nigeria and the UK. This was to generally

assess the expansion of financial inclusion of Nigerian from benchmarking a more highly

included economy. From his findings he concluded that financial inclusion was more market

driven in terms of consumer behavior and customer satisfaction when offering financial

services.

Oyewo (2010) studied the link between financial system development, financial inclusion,

and economic development in Nigeria. Correlation and regression analyses were applied to

explore relationships among relevant economic variables that captured financial inclusion

and economic development for a 16-year period of 1992 to 2007. Model appropriateness,

fitness and error-freeness analyses were conducted using Durbin Watson test for

autocorrelation and the white test for heteroskedasticity. The research found out that financial

52
inclusion has a positive impact on economic development. The study recommended that

more financial institutions should be established in rural areas.

2.3.1 Financial Deepening Index and Poverty Alleviation

Aribaba, Adedokun, Oladele, Babatunde, Ahmodu and Olassehinde (2020) explored the

effect of the financial deepening on poverty alleviation among the low-income earners in

Nigerian between the periods of (2004 – 2019). The study employed a causal-comparative

research design. Annual data were gathered from the Apex Bank in Nigeria and the World

Bank Indicators statistical bulletin 2019, online edition. The statistical methods used are

ordinary least squares (OLS) and error correction model (ECM). The Augmented Dickey-

Fuller (ADF) tests were piloted to investigate the stationary properties through time-series

test. The null hypothesis was tested at 5% level of significance. The study showed that fin

financial deepening plays a significant effect on poverty alleviation among the low-income

earners in Nigerian. It also reduces poverty level and increases per capita income thereby

enhance the standard of living through the new social investment scheme. The study

recommended that the apex bank should review their policies to suit the needs of the low-

income earners and subsidize the interest rates to facilitate easy accessibility of financial

services of her citizenry, increase income generation and promote economic growth thereby

reduce poverty level and enhance the citizen standard of living.

Omar and Inaba (2020) investigated the impact of financial deepening on reducing poverty

and income inequality, and the determinants and conditional effects thereof in 116

developing countries. The analysis is carried out using an unbalanced annual panel data for

the period of 2004–2016. For this purpose, the study constructed a novel index of financial

53
inclusion using a broad set of financial sector outreach indicators, finding that per capita

income, ratio of internet users, age dependency ratio, inflation, and income inequality

significantly influence the level of financial deepening in developing countries. Furthermore,

the results provide robust evidence that financial deepening significantly reduces poverty

rates and income inequality in developing countries. The findings are in favor of further

promoting access to and usage of formal financial services by marginalized segments of the

population in order to maximize society’s overall welfare.

2.3.2 Number of Rural Branches of Deposit Money Banks and Poverty Alleviation

Onyele and Onyele (2020) estimated the effect of number of rural branches of deposit money

banks on poverty reduction in Nigeria from 1992 to 2018 using the Autoregressive

Distributed Lag (ARDL) approach to regression analysis. With a VAR lag order selection of

two, the ARDL bounds test revealed that the poverty rate and number of rural branches of

deposit money banks were bound by a long-run relationship. The long-run estimates

suggested that the number of rural branches of deposit money banks caused poverty

reduction in the long-run. On the other hand, the short-run estimates indicated that the

number of rural branches of deposit money banks were unable to ensure poverty reduction

within a short period, though all the variables exhibited significant coefficients within one

year. These findings imply that the ability of number of rural branches of deposit money

banks to reduce poverty takes a long period.

Ezeanyeji, Stanley, Obi and Frank (2020) investigated the nexus between number of rural

branches of deposit money banks, poverty alleviation and Nigeria’s economic growth from

the period of 1992 to 2018. Specifically, it seeks to probe the actual effect of microfinance

54
bank loans on economic growth and employment creation in Nigeria. Augmented Dickey-

Fuller (ADF) test, ARDL bounds cointegration test, and the short-run diagnostics and

stability for ARDL Model were employed in the analysis. The research findings admitted

that, number of rural branches of deposit money banks do not significantly contribution to

poverty alleviation in Nigeria. Also, it established that microfinance banks’ loan advances do

not significantly affect growth of GDP in Nigeria. Again, number of rural branches of deposit

money banks has significantly negative contribute to employment opportunities in Nigeria.

The implication of the first finding is that, may be attributed to difficulties enshrined in

operating environment which make the realization of their objectives cumbersome. Based on

the research findings of this study, for effective loan and advances, deposit money banks

should increase their branches channel very high proportion of their credits to the productive

and real sectors of the economy for valuable impact of their operations on Nigeria’s

economic growth.

2.3.3 Deposit of Rural Branches of Deposit Money Banks and Poverty Alleviation

Ogbeide and Igbinigie (2019) examined the impact of deposit of rural branches of deposit

money banks on poverty alleviation in Nigeria using time series data for the period 2002 to

2015. The data were sourced from the World Bank indicators, 2016. The study employed the

ordinary least squares multivariate regression technique. Deposit of rural branches of deposit

money banks is found to exert significant impact on per capita income, reduces poverty level

and improves standard of living. Specifically, the result shows that deposit of rural branches

of deposit money banks exert positive impact on per capita income, increase standard of

living and contributes to poverty alleviation. Depositors with commercial banks per 1000

55
adults exerted a negative effect on poverty alleviation and are not statistically significant

under the reference period. Borrowers from commercial banks per 1000 adults are found to

increase per capita income and by extension poverty alleviation and are not statistically

significant. The finding also revealed that number of automated teller machines enhanced

financial inclusion, income generation and poverty alleviation and was not statistically

significant. The study recommended that the Central Bank of Nigeria needs to come up with

effective monetary policies that can influence financial inclusion and alleviation of poverty.

This will encourage accessibility to financial services at affordable cost for poverty

alleviation purposes.

Akeem, Felicia, Opeyemi and Elemide (2018) examined the roles of deposit of rural

branches of deposit money banks institutions and the use of various mobile initiatives such

as mobile banking, mobile money, agent banking etc. as financial inclusion tools to stimulate

poverty reduction. Time series analysis on data obtained from secondary sources between the

periods of 1992 and 2016 were adopted and the study covered financial inclusion as it relates

to deposit of rural branches of deposit money banks in Nigeria. The study found out that

majority of the “unbanked” in Nigeria are low-income people who do not have access to

financial services and information on financial inclusion. While few are timid on the need to

use a bank, many of them are willing to use banking services and believe the availability of

these services will help improve their economic condition. The study therefore recommended

that the banks should be encouraged to continue to take advantage of all the financial

inclusion policies of the government in mobilizing funds from the informal sector into the

banking system. This can be best done by increasing the number of customers within the

56
financial system as a tool for encouraging financial inclusion and stimulating the economy

and thereby reducing poverty in the country.

2.3.4 Loan of Rural Branches of Deposit Money Banks and Poverty Alleviation

Olawuni (2020) investigated the effects of loan of rural branches of deposit money banks on

poverty reduction: the moderating effects of microfinance. Data collection technique

employed was self-administered questionnaire. The questionnaires were administered to a

total of 384 to the respondents that are microfinance banks customers from the three

senatorial districts in Kebbi State, Nigeria by using simple random sampling procedures. In

analyzing the relationship among the variables, a Partial Least Square (PLS)-Structural

Equation Modelling (SEM) technique was adopted. The findings of the study revealed that

there is a significant relationship between the financial inclusion and poverty reduction. The

results further revealed that microfinance positively moderate the relationship between the

variables under studies. The study recommended that the financial inclusion should be more

robust in the rural areas and to make microfinance a more effective means of poverty

reduction other services such as, education loan, technological support loan, skills training,

and housing appliance loan should be included in microfinance services.

Nwafor and Yomi (2018) focused on the relationship between loan of rural branches of

deposit money banks and economic growth in Nigeria. Two hypotheses were formulated,

corresponding data (spanning from 2001 to 2016) were obtained and tested using Two-staged

Least Squares Regression Method. Findings revealed that loan of rural branches of deposit

money banks has significant impact on economic growth in Nigeria and that financial

industry intermediation have not influenced financial inclusion in terms of loan of rural

57
branches of deposit money banks within the period under review. It was recommended that

Nigerian banks should develop financial products to reach the financially excluded regions

of the country as this will increase GDP per capital of Nigeria and consequently economic

growth.

2.4 Evaluation of Literature Reviewed

This chapter focused on the review of related literature on the effects of financial inclusion

on poverty alleviation in Nigeria. The review was done theoretically, conceptually, and

empirically. Specifically, this chapter began with review of theories on which the study is

anchored. The reviewed theories include Systems theory, Financial Intermediation theory,

Finance-Growth Theory and Endogenous Growth theory. This was followed by review of

various concepts such as: concept of financial inclusion, overview of financial inclusion in

Nigeria, relevance of financial inclusion, the state of financial inclusion in Nigeria, strategies,

and models to achieve adequate financial inclusion, recent financial sector reforms and

financial inclusion in Nigeria, issues and challenges of financial inclusion, concept of

poverty, causes of poverty, poverty alleviation as well as measures of poverty alleviation.

Lastly, twenty-five different empirical studies that are related to the effect of financial

inclusion on poverty alleviation in Nigeria were reviewed.

However, despite the importance of financial inclusion in poverty alleviation, the empirical

studies reviewed showed that there seem to be no well-established conclusion or consensus

regarding the direction and extent of the effect of financial inclusion on poverty alleviation in

Nigeria as previous related studies generated conflicting results. In addition to this, none of

the related studies on the subject matter covered up to 2021. All these indicate existence of a

58
research gap which this study aims to bridge. In a bid to fill this gap, this study seeks to

empirically analyze the effect of financial inclusion on poverty alleviation in Nigeria over the

period of 1985-2021. Thus, inclusion of 2021 will make this study to be more up to date than

related studies.

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 CHAPTER 3

METHODOLOGY

3.1 Research Design

Research design is a plan that describes how, when and where data are to be collected and

analyzed (Beaumont, 2009). A research design, according to Onwumere (2005) is also a kind

of blueprint that guides the researcher in his or her investigation and analyses. The research

design to be adopted in this study is ex-post facto research design. The research design to be

adopted for this research is the ex-post facto research design. Kerlinger and Rint (2006)

observed that an ex post facto investigation seeks to reveal possible relationships by

observing an existing condition or situation and searching back in time for plausible

contributing factors. Ex-post facto research design is therefore deemed appropriate for the

study because the study is non-experimental and seeks to investigate causal relationship

between the dependent variable (poverty alleviation) and independent variable (financial

inclusion) of the study, making use of already existing data which cannot be controlled or

manipulated. The inability of the researcher to control these events or manipulate these

variables is one of major attributes of ex-post facto research design.

3.2 Model Specification

This section develops and specifies the model to be adopted to empirically determine the

effect of financial inclusion on poverty alleviation in Nigeria. Theoretically, the analytical

framework of this study is hinged on Endogenous growth model led by Romer (1986) which

recognized the critical role of financial services in the growth process and poverty alleviation

via human capital development. In furtherance, to achieve the objectives of this study and to

60
help improve the efficiency of the economic estimates, multiple regression model will be

adopted in this study while the model will be adopted from the work of Nwafor and Yomi

(2020) with slight modifications in order to incorporate all the variables of this study in line

with the broad aim and specific objectives of this study. The general form of multiple

regression model is specified as follows:

Y = β0 + β1X1 + β2X2 + … + βnXn + u (3.1)

Where;

Y = the dependent variable, poverty alleviation indicator.

X1...Xn = the independent variables representing financial inclusion indicators

β0 = the intercept, that is, the value of the dependent variable y, when the independent

variable X assumes a value of zero.

β1… βn = coefficients of the independent variable or the slope; that is, the rate at which a

change in the independent variable affects the behavior of the dependent variable.

This model is further disaggregated below:

Functional Model

Thus, our model is functionally, mathematically, and econometrically specified as follows:

The functional form of the model is specified as follows:

HDI = f (FDID, NRBB, DRBB, DRBB) (3.2)

Mathematical Model:

Equation (3.2) is transformed into a mathematical model as follows:

HDIt = β0 + β1FDIDt + β2NRBBt + β3DRBBt + β4DRBBt (3.3)

Econometric Model:

Equation (3.3) is transformed into an econometric model as follows:

61
HDIt = β0 + β1FDIDt + β2NRBBt + β3DRBBt + β4DRBBt + μt (3.4)

Where:

HDI = Human Development Index

FDID = Financial Deepening Index

NRBB = Number of Rural Branches of Deposit Money Banks

DRBB = Deposit of Rural Branches of Deposit Money Banks

LRBB = Loan of Rural Branches of Deposit Money Banks

β0 = Regression Intercept

β1 = elasticity or coefficient of Financial Deepening Index

β 2 = elasticity or coefficient of Number of Rural Branches of Deposit Money Banks

β3 = elasticity or coefficient of Deposit of Rural Branches of Deposit Money Banks

β4 = elasticity or coefficient of Loan of Rural Branches of Deposit Money Banks

t = time subscript

μt = disturbance term which is a random (stochastic) variable that has well defined

probabilistic properties.

3.2.1 A Priori Expectation

The a priori expectation is to be based on whether the parameter conforms to economic

postulations (theory) or not. The a priori results relates to the expectation or relationship

between variables in the model. The expected nature of relationship among all the variables

involved in this study (a priori expectation) is summarized in table 3.1 below:

62
Table 3.1: A Priori Expectation
VARIABLES PARAMETERS EXPECTED SIGN CONCLUSION
Financial Deepening Index β1 Positive (+) β1 > 0

Number of Rural Branches of β2 Positive (+) β2 > 0

Deposit Money Banks
Deposit of Rural Branches of β3 Positive (+) β3 > 0
Deposit Money Banks
Loan of Rural Branches of β4 Positive (+) β4 > 0
Deposit Money Banks
Source: Researcher Idea in Line with Economic Theory.

From table 3.1 above, the expected relationships are stated as follows:

a. There should be a positive relationship between financial deepening index and human

development index in Nigeria.

b. There should be a positive relationship between number of rural branches of deposit

money banks and human development index in Nigeria.

c. There should be a positive relationship between deposit of rural branches of deposit

money banks and human development index in Nigeria.

d. There should be a positive relationship between loan of rural branches of deposit

money banks and human development index in Nigeria.

3.2.2 Variable Description

Operationally, the variables of this study are classified as dependent (explained) variable and

independent (explanatory):

Dependent (Explained) Variable

For this study, the dependent (explained) variable is poverty alleviation. However, poverty

alleviation is measured by human development index:

63
Human Development Index (Dependent Variable): This was designed by United Nations

as a metric to assess the social and economic development levels as well as poverty rate of

countries. It is a summary measure of average achievement in key dimension of human

development: a long and healthy life, being knowledgeable and have a decent standard of

living.

Independent (Explanatory) Variables

For this study, the independent (explanatory) variable is financial inclusion. Financial

inclusion is proxied by financial deepening index, number of rural branches of deposit

money banks, deposit of rural branches of deposit money banks and loan of rural branches of

deposit money banks:

Financial Deepening Index: This is expressed as broad money supply to gross domestic

product.

Number of Rural Branches of Deposit Money Banks: This refers to the total number of

deposit money bank branches that are situated in the rural areas.

Deposit of Rural Branches of Deposit Money Banks: This is a sum of money placed or

kept in the bank account of rural branches of deposit money banks, usually to gain interest.

They include: savings deposit, fixed deposit and demand deposit.

Loan of Rural Branches of Deposit Money Banks: This is a debt provided by rural

branches of deposit money banks to individual, organization or entity at an interest rate.

3.3 Data Collection Methods and Sources

Data in social, administrative and management science research can be obtained through a

variety of techniques adopted by researcher depending on the objective of the study and the

64
volume of resources at the researcher’s disposal. For the purpose of this study, annual time

series data will be used. These data will be obtained from Central Bank of Nigeria (CBN)

statistical bulletin and World Bank Development Indicators. These sources of data are

considered reliable and dependable. In evaluating this study also, the study will cover the

period from 1985 to 2021 indicating thirty-seven (37) years sample observations. The

justification for the use of secondary data is because the data have been verified and

scrutinized by the relevant authorities and their availability. Specifically, the secondary data

to be used in this study will include the following:

Data on human development index from 1985 to 2021.

Data on financial deepening index from 1985 to 2021.

Data on number of rural branches of deposit money banks from 1985 to 2021.

Data on deposit of rural branches of deposit money banks from 1985 to 2021.

Data on loan of rural branches of deposit money banks from 1985 to 2021.

3.4 Pre-Estimation Test

The pre-estimation tests that will be carried out in this study are as follow:

Unit Root Test: In order to avoid spurious result, Hakeem, Abbas and Hussein (2018) stated

that it is essential to conduct stationarity test (unit root test) on all the incorporated variables.

This will enable the researcher ascertain whether the mean value and variance of these

variables do not vary over time. To this end, unit root test involves testing the order of

integration of the individual series under consideration. Thus, a variable is considered to be

integrated of a particular order if the Augmented Dickey-Fuller (ADF) critical value is

greater than the variable critical value at 1%, 5% and 10%. Augmented Dickey-Fuller test

65
relies on rejecting a null hypothesis of unit root (the series are non-stationary) in favor of the

alternative hypotheses of stationarity. The ADF test involves estimating the following

regression:

P
∆ X t=c+ ( δ−1 ) X t−1 + ∑ δ i ∆ X t −i + ϵ t (3.5)
i=1

With linear time trend, the regression model of the augmented Dickey Fuller (ADF) test is

thus;

P
∆ X t=c+ ωt+ ( δ−1 ) X t−1 + ∑ δ i ∆ X t −i+ ϵ t (3.6)
i=1

Where:

Xt = underlying variables

t = time trend

δ i, c and ω = coefficients to be estimated

p = lag length

∆ = First difference notation

ϵ t = error term

If δ = 0, then the series is a non-stationary series.

Cointegration Test: Johansen’s cointegration procedure will be used to determine whether

the two variables are co-integrated in this study. A lack of co-integration suggests that such

variables have no long-run relationship. Cointegration will be conducted based on the test

proposed by Johansen (1998). To determine the number of co-integration vectors, Johansen

(1998) and Johansen and Juselius (1990) suggested two statistic tests, the first one is the
66
trace test and the second is max-Eigen test. The trace statistics uses the equation below to test

the null hypothesis of r =r ¿ < k against the alternate of r =k .

n
ψ trace (r )=−P ∑ log ( 1−ψ j ) (3.7)
j=r +1

The maximum eigenvalue test estimates the following equation:

ψ max ⁡(r ,r +1) =−P log (1−ψ r +1 ¿ )(3.8)¿

Where;

P = denote the usable observation.

r = represent the number of separate series that is to be analyzed.

ψ = denote estimated Eigen values.

3.5 Data Analysis Technique

The secondary data sourced for the purpose of this study will be analyzed and interpreted

using regression analysis. However, the Ordinary Least Squares method would be used to

estimate the parameters of the regression model. The adoption of this technique would be

based on the premise that the Ordinary Least Square is assumed to be the Best Linear

Unbiased Estimator. It also has minimum variance. To achieve this, the data extracted from

corporate annual financial report/statement of the Central Bank of Nigeria (CBN) statistical

bulletin and World Bank Development Indicators for the period 1985-2021 will be arranged

in excel spreadsheet and exported to Econometric Views (E-Views) 12 statistical package for

proper analysis. However, if the all the variables are stationary at levels, Ordinary Least

Square regression technique shall be adopted. If the variables have mixture of stationary at

67
levels and stationary at first difference, Autoregressive Distributed Lag (ARDL) technique

shall be adopted. However, if all the variables are stationary at first difference, Vector Error

Correction Model shall be adopted.

3.6 Post Estimation Tests

The study shall conduct the following post estimation tests:

Normality Test: Jarque-Bera statistic will be used in this study to test if the residual deviates

from the normal or if the data are a representation of the population. The method tests the

null hypothesis that the residual is normally distributed against the alternative that it is not

distributed.

Serial Correlation Test: Breush-Godfrey test for serial correlation which was attributed to

Breush (1978) and Godfrey (1978) will form basis for examining whether the residuals are

serially independent or not. This test will be carried out at 5 percent significant level.

Heteroscedasticity Test: The study will check for the satisfaction of the Gauss-Markov

theorem by carrying out a heteroscedasticity test using the Lagrange Multiplier method

prescribed.

Stability Test: The study will employ both the cumulative sum (CUSUM) and cumulative

sum (CUSUM) of squares to test whether the implicit assumption that the coefficients of our

regression model are constant through time holds true. This will afford us vital information

on the structural stability of our model and if the coefficients assume varying values during

certain time events.

68
 CHAPTER 4

DATA PRESENTATION AND ANALYSIS

The focus of this chapter is to analyze the time series data sourced and discuss the findings in

the light of the objectives, research questions and the hypotheses.

4.1 Data Presentation

This section presents the data employed for the analysis, for the purpose of clarity. This

includes the values of each of the variables used in the study for the thirty-seven-year period

i.e., from 1985 to 2021. The data as sourced from Central Bank of Nigeria (CBN) statistical

bulletin and World Bank Development indicators as presented in table 4.1 below:

69
Table 4.1: Yearly Data on the Research Variables (1985-2021)
YEAR HDI FDID NRBB DRBB LRBB

1985 0.461 11.87 451 0.31 0.11

1986 0.461 12.02 481 0.87 0.37

1987 0.460 11.27 529 1.23 0.49

1988 0.460 12.15 602 1.38 0.66

1989 0.459 11.06 756 5.72 3.72

1990 0.459 9.59 765 8.36 4.73

1991 0.459 12.78 765 10.58 5.96

1992 0.459 12.26 774 4.61 1.90

1993 0.458 13.15 775 19.54 10.91

1994 0.458 13.02 763 4.86 1.60

1995 0.459 9.32 701 8.81 8.66

1996 0.459 8.46 675 12.44 4.41

1997 0.459 9.35 675 19.05 11.16

1998 0.460 10.16 714 18.51 11.85

1999 0.461 11.47 714 15.86 7.50

2000 0.463 12.44 722 20.64 11.15

2001 0.465 15.41 722 16.88 12.34

2002 0.468 13.09 722 14.86 8.94

2003 0.445 14.41 722 20.55 11.25

2004 0.463 11.76 722 64.49 34.12

2005 0.466 11.41 765 18.46 16.11

2006 0.477 12.50 765 3.12 24.27

2007 0.481 14.79 779 3.08 27.26

2008 0.487 21.63 795 13.41 46.52

2009 0.492 22.29 795 3.30 15.59

2010 0.500 20.01 802 0.02 16.56

2011 0.507 19.82 814 0.02 19.98

70
 2012 0.514 21.35 820 0.02 22.58

2013 0.521 23.14 828 0.02 739.92

2014 0.525 22.65 832 0.48 988.59

2015 0.527 21.94 832 90.37 29.17

2016 0.534 23.65 845 87.93 43.78

2017 0.525 24.90 845 185.34 530.99

2018 0.534 23.07 859 308.85 200.07

2019 0.539 23.52 888 354.86 202.59

2020 0.522 23.36 912 351.50 107.52

2021 0.543 22.90 950 427.45 119.85

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

KEY: Human Development Index; FDID = Financial Deepening Index, NRBB = Number of Rural
Branches of Deposit Money Banks, DRBB = Deposit of rural branches of deposit money banks LRBB =
Loan of Rural Branches of Deposit Money Banks

4.2 Data Analysis

4.2.1 Descriptive Statistical Analysis

Table 4.1 presents the descriptive statistics of the data for this study as follows:

Table 4.2: Descriptive Statistics

HDI FDID NRBB DRBB LRBB

Mean 0.483514 15.89108 753.4054 57.23730 89.27514

Median 0.465000 13.09000 765.0000 12.44000 12.34000

Maximum 0.543000 24.90000 950.0000 427.4500 988.5900

Minimum 0.445000 8.460000 451.0000 0.020000 0.110000

Std. Dev. 0.030606 5.428050 106.1824 113.5919 212.7241

Skewness 0.707347 0.379165 -1.060406 2.249750 3.153519

Kurtosis 1.880475 1.481045 4.468423 6.618085 12.16895

71
Jarque-Bera 5.017652 4.443528 10.25842 51.39306 190.9329

Probability 0.081364 0.108418 0.005921 0.000000 0.000000

Sum 17.89000 587.9700 27876.00 2117.780 3303.180

Sum Sq. Dev. 0.033723 1060.694 405888.9 464511.9 1629056.

Observations 37 37 37 37 37

Source: Researcher’s Computation, 2022.

Note: HDI = Human Development Index; FDID = Financial Deepening Index, NRBB = Number of Rural
Branches of Deposit Money Banks, DRBB = Deposit of rural branches of deposit money banks LRBB =
Loan of Rural Branches of Deposit Money Banks

Table 4.2 shows that there are thirty-seven (37) observations for all the variables over a

period of thirty-seven years from 1985 to 2021 with one explained variable, which is Human

Development Index and four explanatory variables, which are financial deepening index,

number of rural branches of deposit money banks, deposit of rural branches of deposit

money banks and loan of rural branches of deposit money banks. From Table 4.2, the

average Human Development Index from 1985 to 2021 is 0.483514. This is shown by the

mean value of Human Development Index for the thirty-seven-year period of the study. The

maximum value for Human Development Index is 0.543 while the minimum value of

Human Development Index is 0.445. The standard deviation of Human Development Index

which indicates the spread of the variable around its mean is 0.0306. This indicates that

Human Development Index does not cluster around its mean value and as a result, its

deviation from the mean is moderately high.

In addition, Table 4.2 showed that the average financial deepening index which is one of the

proxies of financial inclusion from 1985 to 2021 is 15.89108. This is shown by the mean

72
value of financial deepening index for the thirty seven-year period of this study. The

maximum value for financial deepening index is 24.9 while the minimum value of financial

deepening index is 8.46. The standard deviation of financial deepening index which indicates

the spread of the variable around its mean is 5.428. This indicates that financial deepening

index clusters around its mean value and as a result, its deviation from the mean is low.

In furtherance, Table 4.2 showed that the average number of rural branches of deposit money

banks which is one of the proxies of financial inclusion from 1985 to 2021 is 753.4054. This

is shown by the mean value of number of rural branches of deposit money banks for the

thirty seven-year period of this study. The maximum value for number of rural branches of

deposit money banks is 950.0 while the minimum value of number of rural branches of

deposit money banks is 451.0. The standard deviation of number of rural branches of deposit

money banks which indicates the spread of the variable around its mean is 106.1824. This

indicates that number of rural branches of deposit money banks does not cluster around its

mean value and as a result, its deviation from the mean is high.

Moreover, Table 4.2 showed that the average deposit of rural branches of deposit money

banks which is one of the proxies of financial inclusion from 1985 to 2021 is 57.2373. This

is shown by the mean value for deposit of rural branches of deposit money banks for the

thirty seven-year period of this study. The maximum value for deposit of rural branches of

deposit money banks is 427.45 while the minimum value of deposit of rural branches of

deposit money banks is 0.020. The standard deviation of deposit of rural branches of deposit

money banks which indicates the spread of the variable around its mean is 113.5919. This

73
indicates that deposit of rural branches of deposit money banks does not cluster around its

mean value and as a result, its deviation from the mean is high.

Lastly, Table 4.2 showed that the average loan of rural branches of deposit money banks

which is one of the proxies of financial inclusion from 1985 to 2021 is 289.27514. This is

shown by the mean value of loan of rural branches of deposit money banks for the thirty

seven-year period of this study. The maximum value for loan of rural branches of deposit

money banks is 988.59 while the minimum value of loan of rural branches of deposit money

banks is 0.11. The standard deviation of loan of rural branches of deposit money banks which

indicates the spread of the variable around its mean is 9212.7241. This indicates that loan of

rural branches of deposit money banks does not cluster around its mean value and as a result,

its deviation from the mean is high.

74
4.2.2 Trend Analysis
The second analytical procedure for this study is trend analysis. This is aimed at analyzing

the past trends in the variables of the study:

Figure 4.1: Trend Analysis Human Development Index, Financial deepening index, Number of
Rural Branches of Deposit Money Banks, Deposit of Rural Branches of Deposit Money Banks and
Loan of Rural Branches of Deposit Money Banks

The trend analysis as presented in Figure 4.1 revealed that Human Development Index,

financial deepening index, number of rural branches of deposit money banks, deposit of rural

branches of deposit money banks and loan of rural branches of deposit money banks

demonstrated a very high level of variations and inconsistencies. This is shown by

75
inconsistent upward and downward movements in the graphs representing these variables

over the study period (1985 – 2021).

4.3 Pre-Estimation Test

4.3.1 Unit Root Test

The first stage of econometric analysis is to assess the stationarity properties of the variables.

Augmented Dickey-Fuller (ADF) type of unit root test was conducted in this study to help

avoid “spurious” or “nonsense” regression results. The results of Augmented Dickey-Fuller

(ADF) unit root tests are presented in Table 4.3:

Table 4.3: Augmented Dickey-Fuller (ADF) Test Results

ADF at Levels ADF at First Difference
Variables ADF 5% Critical Decision ADF 5% Critical Decision Order of
Statistic Value Statistic Value Integration
HDI 0.866721 -2.948404 Not Stationary -8.028566 -2.948404 Stationary I(1)

FDID -0.768014 -2.945842 Not Stationary -5.439651 -2.948404 Stationary I(1)

NRBB -2.480722 -2.945842 Not Stationary -3.568628 -2.948404 Stationary I(1)

DRBB 2.704017 -2.945842 Not Stationary -3.961760 -2.948404 Stationary I(1)

LRBB 4.576933 -2.971853 Stationary - - - I(0)

Source: Researcher’s Computation, 2022.

Note: (i) * implies stationarity at 5% level of significance; (ii) Decisions are based on absolute
values.

The results of the Augmented Dickey Fuller (ADF) unit root test at levels reported in Table

4.3 showed that only loan of rural branches of deposit money banks was stationary at the 5

percent level of significance. This is because in absolute terms, the Augmented Dickey Fuller

(ADF) test statistic for loan of rural branches of deposit money banks is less than its

associated critical value. Thus, the null hypothesis of unit root of loan of rural branches of

76
deposit money banks was rejected at this level. In other words, loan of rural branches of

deposit money banks was stationary at order zero [i.e., I(0)]. On the other hand, Human

Development Index, Financial deepening index, Number of rural branches of deposit money

banks, deposit of rural branches of deposit money banks and loan of rural branches of

deposit money banks were not stationary at the 5 percent level of significance. This is

because in absolute terms the Augmented Dickey Fuller (ADF) test statistics for these

variables are less than their associated critical values. Thus, the null hypothesis of unit root in

each of the variables cannot be rejected at levels. In other words, all the four variables were

not stationary at order zero. The evidence of non-stationarity in Human Development Index,

Financial deepening index, Number of rural branches of deposit money banks, deposit of

rural branches of deposit money banks and loan of rural branches of deposit money banks

necessitated the differencing of the series to check if they can become stationary upon first

differencing.

However, the results of the Augmented Dickey Fuller (ADF) unit root test at first difference

reported in Table 4.3 also showed that Human Development Index, Financial deepening

index, Number of rural branches of deposit money banks and deposit of rural branches of

deposit money banks were stationary at order one [i.e., I(1)]. This implies that they attained

stability by first differencing. It also shows that the null hypothesis of presence of unit root

was rejected after first differencing for Human Development Index, financial deepening

index, number of rural branches of deposit money banks and deposit of rural branches of

deposit money banks. Based on the Augmented Dickey Fuller (ADF) unit root test therefore,

while one of the time series was stationary at level i.e. integrated of order zero, others only

77
became stationary after first differencing i.e. integrated of order one. It can therefore be

inferred that a mixed order of integration is evident among the time series in the model.

4.3.2 VAR Lag Length Criteria

In order to select the appropriate lag order for this study, the optimal lag order selection

criteria were applied. The lag selection criteria result is presented in Table 4.4:

Table 4.4: VAR Lag Length Criteria Result

Lag LogL LR FPE AIC SC HQ

0 -90.53914 NA 8.17e-05 4.776957 4.988067 4.853288

1 42.92011 226.8807 3.65e-07 -0.646005 0.620654 -0.188021

2 65.58968 32.87088 4.36e-07 -0.529484 1.792725 0.310154

3 89.20652 28.34021 5.50e-07 -0.460326 2.917433 0.760965*

4 115.5270 25.00447* 7.28e-07* -0.526351* 3.906957* 1.076593

Source: Researcher’s Computation, 2022.

The VAR lag order selection criteria result in Table 4.4 showed that most of the criteria

selected lag four (4) as the optimal lag length. Based on this result, optimal lag order of four

(4) is selected for this study as it remains the most suitable lag order.

4.3.3 ARDL Bound Cointegration Test

Bound testing technique was used to test for cointegration because of a mixture of variables

of order I(0) and I(1). However, the result of the ARDL Bounds Cointegration Test for this

study is reported in Table 4.5:

78
Table 4.5: ARDL Bounds Cointegration Test Result
Selected Model: ARDL (4, 1, 0, 1, 4)
Test Statistic Value K
F-statistic 5.02* 4
Critical Value Bounds
Significance Lower Bound [I(0)] Upper Bound [I(1)]
5% 2.67 3.38
Source: Researcher’s Computation, 2022.
Note: * implies that F-statistic is greater than upper bound 5% critical value and long run exists
between the variables in the model.

The result of ARDL Bounds Test presented in Table 4.5 showed that the F-statistic (5.02) is

greater than the lower bound (2.67) and upper bound (3.38) at 5% level of significance.

Hence, there is sufficient statistical evidence to reject the null hypothesis of no co-integration

at 5% level of significance and conclude that there exists a long run relationship or

cointegration between the variables. Specifically, it can be concluded based on the ARDL

Bounds cointegration test that there is a long-run relationship among Human Development

Index, financial deepening index, number of rural branches of deposit money banks, deposit

of rural branches of deposit money banks and loan of rural branches of deposit money banks.

The confirmation of long run dynamics among the variables gives credence for the

estimation of the extent of the relationship by proceeding to estimate the ARDL short-run

model, ARDL long-run form and ARDL error correction for Human Development Index

model.

79
4.4 Autoregressive Distributed Lag (ARDL) Estimation

4.4.1 ARDL Long-Run Dynamics

In this section, the study estimates the long run effect of financial deepening index, number

of rural branches of deposit money banks, deposit of rural branches of deposit money banks

and loan of rural branches of deposit money banks on Human Development Index in Nigeria.

The long run estimations are conducted using the Autoregressive Distributed Lag (ARDL)

technique. In the selected long run ARDL (4, 1, 0, 1, 4) model, the maximum lag length was

set out by using Akaike Info Criterion (AIC). However, the normalized short run coefficient

estimates are reported in Table 4.6:

Table 4.6: Autoregressive Distributive Lag (ARDL) Long Run Dynamics Result
Dependent Variable: HDI
Selected Model: ARDL (4, 1, 0, 1, 4)

Independent Coefficient Std. Error t-Statistic Prob

Variables (Parameter
(Regressors) estimates)

FDID 1.616605 0.301059 5.369725 0.0000

NRBB 0.001721 0.107379 0.016022 0.7971
DRBB 1.318266 0.323238 4.078314 0.0005
LRBB 0.815453 0.215233 3.788705 0.0010
C 4.173884 1.090941 3.825947 0.0008
Source: Researcher’s Computation, 2022.
Note: ** and * implies statistical significance of the coefficient at 1% and 5% respectively.

Financial Deepening Index (FDID) and Human Development Index (HDI)

From the ARDL long run estimate result in Table 4.6, financial deepening index has a

positive coefficient value of 1.616605. This implies that financial deepening index has a

positive effect on Human Development Index. Hence, a unit increase in financial deepening

80
index will lead to 1.616605 unit increase in Human Development Index while a unit decrease

in financial deepening index will lead to 1.616605 unit decrease in Human Development

Index. Also, the p-value (i.e., 0.0000) of the coefficient of financial deepening index which is

less than 0.05 indicates that financial deepening index has a significant effect on Human

Development Index. It can therefore be concluded that financial deepening index has a

positive and significant effect on Human Development Index in Nigeria in the long run.

Number of Rural Branches of Deposit Money Banks (NRBB) and Human Development

Index (HDI)

From the ARDL long run estimate result in Table 4.6, number of rural branches of deposit

money banks has a positive coefficient value of 0.001721. This implies that number of rural

branches of deposit money banks has a positive effect on Human Development Index.

Hence, a unit increase in number of rural branches of deposit money banks will lead to

0.001721 unit increase in Human Development Index while a unit decrease in number of

rural branches of deposit money banks will lead to 0.001721 unit decrease in Human

Development Index. Also, the p-value (i.e., 0.7971) of the coefficient of number of rural

branches of deposit money banks which is greater than 0.05 indicates that number of rural

branches of deposit money banks has a non-significant effect on Human Development Index.

It can therefore be concluded that number of rural branches of deposit money banks has a

positive and non-significant effect on Human Development Index in Nigeria in the long run.

81
Deposit of Rural Branches of Deposit Money Banks (DRBB) and Human Development

Index (HDI)

From the ARDL long run estimate result in Table 4.6, deposit of rural branches of deposit

money banks has a positive coefficient value of 1.318266. This implies that deposit of rural

branches of deposit money banks has a positive effect on Human Development Index.

Hence, a unit increase in deposit of rural branches of deposit money banks will lead to

1.318266 unit increase in Human Development Index while a unit decrease in deposit of

rural branches of deposit money banks will lead to 1.318266 unit decrease in Human

Development Index. Also, the p-value (i.e., 0.0005) of the coefficient of deposit of rural

branches of deposit money banks which is less than 0.05 indicates that deposit of rural

branches of deposit money banks has a significant effect on Human Development Index. It

can therefore be concluded that deposit of rural branches of deposit money banks has a

positive and significant effect on Human Development Index in Nigeria in the long run.

Loan of Rural Branches of Deposit Money Banks (LRBB) and Human Development

Index (HDI)

From the ARDL long run estimate result in Table 4.6, loan of rural branches of deposit

money banks has a positive coefficient value of 0.815453. This implies that loan of rural

branches of deposit money banks has a positive effect on Human Development Index.

Hence, a unit increase in loan of rural branches of deposit money banks will lead to 0.815453

unit increase in Human Development Index while a unit decrease in loan of rural branches of

deposit money banks will lead to 0.815453 unit decrease in Human Development Index.

Also, the p-value (i.e., 0.0010) of the coefficient of loan of rural branches of deposit money

82
banks which is less than 0.05 indicates that loan of rural branches of deposit money banks

has a significant effect on Human Development Index. It can therefore be concluded that

loan of rural branches of deposit money banks has a positive and significant effect on Human

Development Index in Nigeria in the long run.

4.4.2 ARDL Short Run Dynamics

Having performed the long run estimation of the Human Development Index model, it

therefore becomes necessary and important to determine the correction of short run

disequilibrium to long run equilibrium. To achieve this, the Error Correction Mechanism

(ECM) was conducted and the results are reported in table 4.7.

Table 4.7: Autoregressive Distributive Lag (ARDL) Error Correction Result

Dependent Variable: HDI

Selected Model: ARDL (4, 1, 0, 1, 4)
Independent Coefficient Std. Error t-Statistic Prob
Variables (Parameter
(Regressors) Estimates)
D(HDI(-1) 0.156502
D(HDI(-2) 0.488514 0.096714 3.121450 0.0054
-0.470211 0.031696 -5.006557 0.0000
D(HDI(-3)
0.020381 0.047455 0.643015 0.5275
D(FDID)
0.096307 0.023396 2.029449 0.0432
D(DRBB) 0.090861 3.883673 0.0007
0.009584
D(LRBB) 0.017115 0.009485 1.785756 0.0863
D(LRBB(-1)) 0.060834 0.009861 6.413461 0.0000
D(LRBB(-2)) 0.055700 0.031951 5.648339 0.0000
D(LRBB(-3)) 0.008678 0.099396 0.271594 0.7887
CointEq(-1)* -0.404753 -4.072128 0.0003
2
Adjusted R = 0.772727; Durbin-Watson stat = 2.174848
Source: Researcher’s Computation, 2022.
Note: ** and * implies statistical significance of the coefficient at 1% and 5% respectively.

83
The short run estimations were conducted using the Autoregressive Distributed Lag (ARDL)

technique. Thus, the results of the ARDL Error Correction are reported in Table 4.7. The

result shows that financial deepening index has a positive coefficient value of 0.096307. This

implies that financial deepening index has a positive effect on Human Development Index.

Hence, a unit increase in financial deepening index will lead to 0.096307 unit increase in

Human Development Index while a unit decrease in financial deepening index will lead to

0.096307 unit decrease in Human Development Index. Also, the p-value (i.e., 0.0432) of the

coefficient of financial deepening index which is less than 0.05 indicates that financial

deepening index has a significant effect on Human Development Index. It can therefore be

concluded that financial deepening index has a positive and significant effect on Human

Development Index in Nigeria in the short run.

Also, the result shows that deposit of rural branches of deposit money banks has a positive

coefficient value of 0.090861. This implies that deposit of rural branches of deposit money

banks has a positive effect on Human Development Index. Hence, a unit increase in deposit

of rural branches of deposit money banks will lead to 0.090861 unit increase in Human

Development Index while a unit decrease in deposit of rural branches of deposit money

banks will lead to 0.090861 unit decrease in Human Development Index. Also, the p-value

(i.e., 0.0007) of the coefficient of deposit of rural branches of deposit money banks which is

less than 0.05 indicates that deposit of rural branches of deposit money banks has a

significant effect on Human Development Index. It can therefore be concluded that deposit

of rural branches of deposit money banks has a positive and significant effect on Human

Development Index in Nigeria in the short run.

84
In addition, the result shows that at lag one, loan of rural branches of deposit money banks

has a positive coefficient value of 0.060834. This implies that loan of rural branches of

deposit money banks at the first lag has a positive effect on Human Development Index.

Hence, a unit increase in loan of rural branches of deposit money banks will lead to 0.060834

unit increase in Human Development Index while a unit decrease in loan of rural branches of

deposit money banks will lead to 0.060834 unit decrease in Human Development Index.

Also, the p-value (i.e., 0.0000) of the coefficient of loan of rural branches of deposit money

banks which is less than 0.05 indicates that loan of rural branches of deposit money banks

has a significant effect on Human Development Index. It can therefore be concluded that

loan of rural branches of deposit money banks has a Positive but significant effect on Human

Development Index in Nigeria in the short run.

However, the error correction term indicates the speed adjustment to restore equilibrium in

the dynamic model. The error correction mechanism coefficient shows how quickly variables

converge to equilibrium and it should have a statistically significant coefficient with a

negative sign. Thus, the error correction coefficient estimated at CointEq(-1) is highly

significant (0.0003) and positive (-0.404753) as expected. This implies a very high speed of

adjustment to equilibrium. The highly significant error correction term further confirms the

existence of a stable long-run relationship among all the research variables with their various

significant lags. Specifically, the coefficient of CointEq(-1) which is -0.404753 indicates that

deviation from the long-term growth rate in Human Development Index is corrected by 40%

in the following year.

85
In furtherance, the adjusted R-Square of 0.772727 indicates that about seventy-seven (77)

percent of the total variation in Human Development Index is explained by systematic

changes in financial deepening index, number of rural branches of deposit money banks,

deposit of rural branches of deposit money banks and loan of rural branches of deposit

money banks while the remaining twenty-three (23) percent of the variation is explained by

other factors not included in the model. Lastly, the Durbin-Watson stat statistics of 1.828

shows that the model is free from the problem of autocorrelation.

In summary, it can be observed that both the short run and long run results yielded the same

sign for the variables which signifies consistency in the effects of the

independent/explanatory variables (Financial deepening index, Number of rural branches of

deposit money banks, deposit of rural branches of deposit money banks and loan of rural

branches of deposit money banks) on the dependent/explained variable (Human

Development Index in Nigeria) in the short run and long run.

4.5 Post-Estimation Tests

To ensure the reliability of the model and further ascertain that the estimated model is

adequate for adoption and policy formulation, both residual and stability post-estimation

tests were conducted on the Human Development Index model as follows.

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4.5.1 Normality Test

Source: Researcher’s Computation, 2022.

Figure 4.2: Normality Test Result

Normality test was conducted to verify if the error term is normally distributed. The null

hypothesis states that the residuals are normal distributed at 5% level of significance. To

evaluate this hypothesis, Jarque-Bera statistics was used. The result in Figure 4.6 above

shows that Jarque-Bera statistic is 0.177215 and the probability is 0.915205. However, since

the probability value (0.915205) of Jarque-Bera statistic is greater than 5%, we do not reject

the null hypothesis and conclude that the residuals are normally distributed at 5% level of

significance.

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 4.5.2 Serial Correlation Test

Table 4.8: Breusch-Godfrey Serial Correlation LM Test Result

Test F-Statistic P-value Null Hypothesis Decision

Breusch-Godfrey Serial 1.242362 0.3067 H0: No serial correlation Do not reject H0

Correlation LM Test
Source: Researcher’s Computation, 2022.

The results in Table 4.8 above shows that F-statistic is 1.242362 and the probability value is

0.3067. However, since the probability value ( 0.3067) of the F-statistic is greater than 5

percent, we do not reject the null hypothesis and conclude that the residuals are not serially

correlated. That is, the estimated model is not suffering from serial autocorrelation problem.

4.5.3 Heteroskedasticity Test

Table 4.9: Breusch-Pagan-Godfrey Heteroskedasticity Test Result

Test F-Statistic P-value Null Hypothesis Decision

Breusch-Pagan-Godfrey 0.610963 0.6890 H0: Homoscedasticity Do not reject H0

Heteroskedasticity Test
Source: Researcher’s Computation, 2022.

The result in Table 4.9 above shows that F-statistic is 0.610963 and the probability value is

0.7621. However, since the probability value (0.6890) of the F-statistic is greater than 5

percent, we do not reject the null hypothesis and conclude that the variance of the residuals is

homoscedastic over the period covered in this study. This implies that the estimated model is

free from the problem of heteroskedasticity.

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 4.5.4 Ramsey RESET Test

Table 4.10: Ramsey RESET Test Result

Test F-Statistic P-value Null Hypothesis Decision

Ramsey RESET test 0.024518 0.7776 H0: The model is correctly Do not reject H0
specified
Source: Researcher’s Computation, 2022.

The results in Table 4.11 above show that F-statistic is 0.024518 and the probability value is

0.7776. However, since the probability value (0.7776) of the F-statistic is greater than 5

percent, we do not reject the null hypothesis and conclude that the model is correctly

specified. This suggests that the variables included in the model are adequate and sufficient.

4.5.5 Stability Tests

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 Figure 4.3: Stability CUSUM Test

Figure 4.4: CUSUMSQ Test

The cumulative sum of recursive residuals (CUSUM) and cumulative sum of squares of

recursive residual (CUSUMSQ) test results as shown in figure 4.3 and Figure 4.4 above

portray the plots of CUSUM and CUSUMQ test statistics as resting neatly within the

boundaries at 5% significant level. Neither the CUSUM nor CUSUM of squares plots across

the 5 percent critical line. Hence, this confirms the stability and absence of any instability of

the long-run coefficient of financial inclusion variables in the Human Development Index

model over the sample period.

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4.6 Discussion of Findings

This study empirically analyzed the relevant quarterly data sourced with respect to the effect

of financial inclusion on poverty alleviation in Nigeria from 1985 to 2021. The time series

data used for the study were sourced from Central Bank of Nigeria (CBN) statistical bulletin

and World Bank Development indicators. The study adopts descriptive statistical technique,

Unit root test, ARDL Bounds Cointegration test and Autoregressive Distributed Lag (ARDL)

as the data analysis techniques. Thus, the findings of the study are discussed in this section as

follow:

Financial Deepening Index and Human Development Index

Evidences that emerged from the study showed that financial deepening index has a positive

and significant effect on Human Development Index in Nigeria in both short run and long

run. This implies that increase in financial deepening index will lead to significant increase

in Human Development Index in Nigeria in the short run and long run. This finding is in

agreement with the finding of Aribaba, Adedokun, Oladele, Babatunde, Ahmodu and

Olassehinde (2020) who found that financial deepening plays a significant effect on poverty

alleviation among the low-income earners in Nigeria. It also reduces poverty level and

increases per capita income thereby enhancing the standard of living through the new social

investment schemes.

Number of Rural Branches of Deposit Money Banks (NRBB) and Human Development

Index

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The results of the study showed that number of rural branches of deposit money banks has a

positive and insignificant effect on Human Development Index in Nigeria in both short run

and long run. This implies that increase in number of rural branches of deposit money banks

will lead to insignificant increase in Human Development Index in Nigeria in the short run

and long run. This finding is in agreement with the finding of Onyele and Onyele (2020) who

found that the number of rural branches of deposit money banks caused poverty reduction in

the long-run. On the other hand, the short-run estimates indicated that the number of rural

branches of deposit money banks were unable to ensure poverty reduction within a short

period, though all the variables exhibited significant coefficients within one year.

Deposit of Rural Branches of Deposit Money Banks and Human Development Index

Evidence that emerged from the results of the study shows that deposits of rural branches of

deposit money banks has a positive and significant effect on Human Development Index in

Nigeria in both short run and long run. This implies that increase in deposit of rural branches

of deposit money banks will lead to significant increase in Human Development Index in

Nigeria in the short run and long run. This result is supported by the result of Ogbeide and

Igbinigie (2019) which stated that deposit of rural branches of deposit money banks exert

positive impact on per capita income, increased standard of living and contributes to poverty

alleviation.

Loan of Rural Branches of Deposit Money Banks and Human Development Index

The results of this study showed that loan of rural branches of deposit money banks has a

positive and significant effect on Human Development Index in Nigeria in both short run and

long run. This implies that increase in loan of rural branches of deposit money banks will

92
lead to significant increase in Human Development Index in Nigeria in the short run and long

run. This result is in tandem with the result of Olawuni (2020) which stated that there is a

significant relationship between the financial inclusion and poverty reduction.

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 CHAPTER 5

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

The main objective of this research is to empirically examine the effect of financial inclusion

on poverty alleviation in Nigeria from 1985 to 2021. The research questions, objectives of

the study, statement of hypotheses, significance of the study, scope of the study, and

organization of the study were discussed in chapter one. Relevant theoretical, conceptual and

empirical literatures were reviewed in chapter two. In chapter three of the study, the

methodology was explained in details. Specifically, the study analysed the effect of the four

components of financial inclusion (financial deepening index, number of rural branches of

deposit money banks, deposit of rural branches of deposit money banks and loan of rural

branches of deposit money banks) on the measure of poverty alleviation (Human

Development Index). In order to achieve the objective of study, relevant annual time series

data needed were sourced from Central Bank of Nigeria (CBN) statistical bulletin and World

Bank Development indicators. The data obtained were tested in order to establish the

stationarity of the time series data using both Unit root and the Augmented Dickey-Fuller

(ADF) test. ARDL Bounds Cointegration test was used to established if the time series

variables in the model were cointegrated or have long run relationship. Lastly, the study

employed Autoregressive Distributed Lag Model (ARDL) to investigate the long-run and the

short-run parameters among the variables. Data analysis was facilitated by E-views 12

statistical package. The results emanating from this study are as follows:

94
 i. Financial deepening index has a positive and significant effect on Human

Development Index in Nigeria in both short run and long run.

ii. Number of rural branches of deposit money banks has a positive and non-significant

effect on Human Development Index in Nigeria in both short run and long run.

iii. Deposit of rural branches of deposit money banks has a positive and significant effect

on Human Development Index in Nigeria in both short run and long run.

iv. Loan of rural branches of deposit money banks has a positive and significant effect on

Human Development Index in Nigeria in both short run and long run

v. Long-run relationship exists among Human Development Index, Financial deepening

index, Number of rural branches of deposit money banks, deposit of rural branches of

deposit money banks and loan of rural branches of deposit money banks.

vi. Seventy-seven percent (77%) of changes in Human Development Index is well

accounted for by systematic changes in financial deepening index, Number of rural

branches of deposit money banks, deposit of rural branches of deposit money banks

and loan of rural branches of deposit money banks.

vii. Overall parameters of the model are statistically significant. This further means that

financial deepening index, number of rural branches of deposit money banks, deposit

of rural branches of deposit money banks and loan of rural branches of deposit money

banks have joint significant effects on Human Development Index in Nigeria in the

short run

viii. Both the short run and long run results yielded the same sign for the variables which

signifies consistency in the effects of the independent/explanatory variables (financial

deepening index, number of rural branches of deposit money banks, deposit of rural
95
 branches of deposit money banks and loan of rural branches of deposit money banks)

on the dependent/explained variable (Human Development Index in Nigeria.

5.2 Conclusion

This study determined the effect of financial inclusion on poverty alleviation in Nigeria.

Theoretically, the study found that financial inclusion enables everyone to participate fully in

the formal financial system which will benefit individuals, the commercial enterprises that

serve them, and the society at large. Furthermore, financial inclusion enables the poor to

make sustainable improvements in their quality of life at the community level and aid faster

growth and poverty reduction at the national level. However, the empirical results of the

study showed that financial deepening index, number of rural branches of deposit money

banks, deposit of rural branches of deposit money banks and loan of rural branches of

deposit money banks have joint significant effect on Human Development Index in Nigeria.

Based on these findings, the study concludes that financial inclusion plays a significant role

in alleviating poverty in Nigeria.

5.3 Recommendations

Based on the above findings and conclusions, the following are recommendation are made:

1. More financial institutions should be established through branch or Agent network

expansion in rural areas.

2. Financial education is also recommended to enlighten the public (most especially, the

rural area dwellers) on the benefits of a financial system.

96
3. There is a need to create deposit and borrowing windows at affordable cost to the poor

and to the low income group erstwhile tagged the ‘unbankable’ as this will contribute

to financial inclusion in Nigeria.

4. Loans to rural areas should receive considerable attention by relevant authorities in

order to effect strongly and positively on the standard of living of the rural dwellers

and on the economic growth in Nigeria.

5. Government should tactically influence finance institutions branches to be close to

rural areas and make their products and services accessible to a large segment of the

potentially productive Nigerian population who are currently not being served by the

formal financial sector. This will result in increase in individual household income,

thereby enhancing the family’s access to better diet, improved shelter, education and

health care.

5.4 Suggestion for Future Studies

This study can be improved upon by future researchers in the following ways:

1. Replicating this specific study and doing it using other forms of proxies of financial

inclusion would be a good approach to finding more evidence for or against the four

questions that were proposed.

2. Further research can be done using quarterly data instead of using annual time series

data.

3. There is need for future researchers to enquire the effect of financial inclusion on the

growth of the Nigerian economy.

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5.5 Contributions to Knowledge

This study has added to the existing stock of knowledge and filled the gap that exists in

academic literature. Through its findings and conclusion, the study has contributed to stock

of knowledge by extending the scope of the study beyond the scope covered by the previous

studies, modifying existing models and updating literature in the area of financial inclusion

and poverty alleviation in Nigeria.

98
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