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ISSN: 2047-2528 Vol. 1 No. 4 [198-205]

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INFLUENCE OF LOAN DISBURSEMENT BY MICROFINANCE AND NON MICROFINANCE

INSTITUTIONS ON POVERTY ALLEVIATION IN NIGERIA

Jegede, Charles.A. Lecturer I

Department of Accounting and Finance,

Lagos State University, Ojo, Lagos, Nigeria.

E-mail: [email protected]

Akinlabi, Babatunde Hamed

Associate Lecturer

Department of Business Administration and Management,

Lagos State University External System, Ojo, Lagos, Nigeria.

E-mail: [email protected]

ABSTRACT

The empirical relationship between microfinance loan disbursement and poverty alleviation was tested among 80 members of microfinance and non microfinance institutions in Lagos. Purposeful sampling method was employed to select the sample. Three research hypotheses guided the study. A well structured questionnaire that was tested for reliability and validated was used as the instrument for the study. The results obtained were analyzed using percentages, chi-square test, F-test and T-test. The findings revealed that there was a significant difference between those people who used microfinance institutions and those who do not use them. There is a significant effect of microfinance institutions in alleviating poverty by increasing income and changing economic status of those who patronized them. The study concluded that microfinance institution is indeed a potent strategy of poverty reduction

and a viable tool for purveying credit to the poor. However, microfinance can be a more viable tool for sustainable poverty alleviation if more is done on programme outreach and depth than the present outreach.

INTRODUCTION

Throughout the world, poor people are excluded from formal financial system. Exclusion

ranges from partial exclusion in developed countries to full or nearly full exclusion in Less Developed Countries (LDCs). Absent access to formal financial services, the poor have

developed a wide variety of informal community based financial arrangement to meet their

financial needs. Microfinance is created to fill this gap (Irobi, 2008).

Microfinance pertain to the lending of small amount of capital to poor entrepreneurs in

order to create a mechanism to alleviate poverty by providing the poor and destitute with resources that are available to the wealthy and alert at a small scale. According to Anyanwu

(2004), microfinance bank is not just providing capital to the poor, but to also combat

poverty at an individual level, it also has a role at institutional level. It seeks to create

institutions that deliver financial services to the poor, who are continuously ignored by the

formal banking sector.

In Africa and other developing regions, microfinance institutions (MFIs) are regarded as the

main source of funding micro enterprises (Anyanwu, 2004). Formal credit and savings

institutions for the poor are also available around the globe providing customers who were

traditionally neglected by commercial banks a way to obtain financial services through

cooperative and development finance institutions. Suffice it to say that the unwillingness or

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inability of the formal financial institutions to provide financial services to the urban and rural poor, coupled with the unsustainability of government sponsored development

financial schemes contributed to the growth of private sector-led microfinance in Nigeria.

The gap filled by microfinance institution has become part of the formal financial system of

a country and so can access capital market to fund their lending portfolios, allowing them

to dramatically increase the number of poor people they can reach.

LITERATURE REVIEW AND THEORETICAL FRAMEWORK

In Africa there are many community-oriented policies and programmes which incorporate

different objectives related to economic development, national development, nation building

or simply development. For example, the operation feed yourself in Ghana, the special rural development programme in Kenya, the agricultural development projects (integrated rural

development projects), and the green revolution in Nigeria are well known inside and

outside Africa. Most of these policies and programmes were or are designed to improve the

socio-economic conditions of the rural population. Microfinance programme has been

viewed as a unique programme for the reduction of vulnerability, and hence the

achievement of the Millennium Developmental Goals (Adamu, 2007). Microfinance allows poor people to diversify and increase income sources, the essential path out of hunger.

Diversification makes people more resilient to external shocks.

The study of poverty and its alleviation are not new. Rather what are revisited are the

spatial differences in levels of poverty among real units. Poverty is a global phenomenon, which affects continents, nations and peoples differently. It afflicts people in various depths

and levels, at different times and phases of existence (Oyeyomi, 2003). The most common

way to measure poverty is based on income or consumption line. A person is considered

poor if his or her consumption level falls below 1USD per day, a level necessary to meet

basic needs. This minimum level is called the poverty line (The World Bank, 2002). The

Central Bank of Nigeria (1999) viewed poverty as “a state where an individual is not able to cater adequately for his or her basic needs of food, clothing and shelter; is unable to meet

social and economic obligations, lacks gainful employment, skills, assets and self-esteem;

and has limited access to social and economic infrastructure such as education, health,

portable water, and sanitation; and consequently, has limited chance of advancing his or

her welfare to the limit of his or her capabilities”. Narayan, Lont, and Otto (2000) systematically defined poverty when he said that “do not ask me what poverty is because

you have met it outside my house. Look at the house and count the number of holes. Look

at my utensils and the clothes that I am wearing. Look at everything and write what you

see. What you see is poverty”.

Micro-finance is a term used to refer to different methods for giving poor people access to financial services. Irobi (2008) defined microfinance as the provision of financial services

such credits (loans), savings, micro-leasing, micro-insurance, and payment transfers to

economically active poor and low income household to enable them engage in income

generating activities or expand/grow the small businesses. Microfinance is sectionally

defined as a financial intervention that focuses on the low-income group of a given society. The intervention primarily involves credit services and may also include savings, insurance

on credits and savings.

Furthermore, Robinson (2001) defined microfinance as the supply of loans, savings and

other basic financial services to the poor. Microfinance evolved as an economic development

approach intended to benefit the low-income part of a given society, both men and women (Irobi, 2008). According to World Bank (2007), the term refers to provision of financial

services (including saving and credit) to the poor. Micro-finance banks therefore are

institutions that are established to provide financial services to the poor. Microfinance

institutions can be non-governmental organizations, savings and loan cooperatives, loan

unions, government banks, commercial banks, or non-bank financial institutions

(Ledgerwood, 1997). The policy seeks to make financial services available on a sustainable basis to the economically active poor, low-income earners and micro, small and medium

enterprises through privately owned enterprises.


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The objective of microfinance according to Otero (1999) is not providing capital to the poor to combat poverty rather it seeks to create an institution that delivers financial services to

the poor who are ignored by the formal banking sector.

Earlier studies about micro-financing have evaluated whether micro-credit programs such

as popular in Nigeria reach the relatively poor and vulnerable in their operations. Recent

studies have shown evidence of positive impact as it relates to first six out of seven Millennium Goals. Adamu (2007), Irobi (2008), Wrigth (2000), Zaman (2000), McCulloch

and Baulch (2000), all subscribed to the believe that microfinance is an effective and

powerful tool for poverty reduction. For example, Amin, Rai, and Topai (2003) focus on the

ability of microfinance to reach the poor and affirmed that microfinance has served people

below and above the poverty line. Also, Hossain (1988), in his study on “Credit for the Alleviation of Rural Poverty in Bangladesh found that Grameen members who are poor and

landless have average household of 43 percent higher than marginal landowners.

The results of empirical evidence indicates that the poorest can benefit from microfinance

from both an economic and socio-economic well-being point-of-view, and that this can be

done without jeopardizing the financial sustainability of the Micro-financial institutions (Zaman, 2000; Robinson, 2001; Dahiru and Zubair,2008). For instance, Khandker (1998),

in several related studies using statistical method on assessment of impact of microfinance

among three Bangladesi programs found that every additional takas lend to a woman add

additional of 0.18 taka to annual household expenditure. Similarly, in an updated study

using panel data in Bangladesh, Khandker (2005), found that each additional 100 taka of credit to women increased total annual household expenditures by more than 20 taka.

These studies showed overwhelming benefit of increase in income and reduction of

vulnerability to poverty.

On the other hand, some authors have challenged the positive effects of microfinance on

poverty alleviation. For instance, Hulme and Mosley (1996) while acknowledging the role microfinance can play in helping to reduce poverty, concluded from their research on

microfinance that “most contemporary schemes are less effective than they might be”. They

stated that microfinance is not a panacea for poverty – alleviation and that in some cases

the poorest people have been made worse-off by microfinance. Also, Adamu (2007) observed

that microfinance institutions Nigeria have grown phenomenally, driven largely by expanding informal sector activities and the reluctance of commercial banks to fund

emerging microenterprises. However, the number of beneficiaries of microfinance

institutions is an insignificant proportion of the people in need of microfinance services. It

has been estimated that formal microfinance institutions only service less than one million

clients, in a country where over 70% of the country‟s population live below the poverty line

(Dahiru and Zubair, 2008). The results also suggested that micro-financing is unsuccessful at reaching the group most prone to destitution, the vulnerable poor.

The major challenges of microfinance in Nigeria include: communication gaps and

Inadequate awareness; insufficient support from governments; inadequate donor funding;

less attention on financial sustainability of MFIs; lack of adequate loan or equity capital to increase loan-able funds; high turnover of MFI staff; limited support for human and

institutional capacity building; illegal government and NGO operations that spoil the

market; and lack of standardized reporting and performance monitoring system for MFIs

(Irobi, 2008).

The theoretical frameworks for this study are economic and psychological theories. The economic theory argued that the success in any business venture, including microfinance,

is determined by the entrepreneurs‟ ability to deliver appropriate services and profitability

(Remenyi, 2006). The psychological theory on the other hand, argued that a species of

profit-making private venture that cares about the welfare of its customers can be

conceived. In other words, it is possible to develop capitalist enterprises that maximize

private profits subject to the fair interests of their customers (Mohammed, 1998).


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The importance of microfinance is to eradicate poverty which made the Federal Government of Nigeria to adopt it as the main source of poverty reduction in Nigeria and mandated the

CBN to develop appropriate policy and framework for the operations of MFIs. Despite this,

however, the number of beneficiaries of microfinance banks is an insignificant proportion of

the people in need of microfinance services. It has been estimated that formal microfinance

banks only service less than one million clients in a country where over 70% of the country

population of 140 million lives below poverty line (Irobi, 2008). It is therefore necessary to undertake an assessment of the extent to which microfinance has impacted on poverty

reduction in Nigeria. That is the overall objective of this paper.

Objectives of the study

(i) To examine the roles of Microfinance Institutions in reducing poverty;

(ii) To assess the level of Microfinance Bank operations in nation building through poverty

alleviation;

(iii) To recommend the effective and efficient ways of realization of the scheme objectives.

Research Questions

In order to achieve the above stated objectives, the following research questions are

advanced:

(i) Does microfinance significantly contribute to poverty reduction and improved standard

of living of people in Nigeria? (ii) Do the poor have access to microfinance funds and loans for the development of micro

enterprises in Nigeria as expected?

(iii) What are the prospects of microfinance in the reduction of poverty in Nigeria?

(iv) Does poverty reduction has any implication on sustainable development in Nigeria?

Formulation of hypothesis

The following null hypotheses are proposed and tested in the course of this study.

(i) There is no significance difference between people who use microfinance and those who

do not.

(ii) There is no significant effect of microfinance in poverty alleviation in the country, Nigeria.

(iii) There is no significant effect of microfinance activities on sustainable development.

METHODOLOGY

The method employed in this study is the descriptive survey method. The method is ideal because the study involved collecting data from rural communities members of

microfinance institutions (MFIs) with a view to determine whether or not microfinance

contribute to poverty reduction by increasing their income and welfare. The population

comprised 320 rural communities member of MFIs and non-members in Lagos State.

A preliminary investigation was carried out on the MFIs in the state. The investigation

revealed that Integrated Micro Finance Bank, Susu Micro Finance Bank and MIC

Microfinance Bank are the three topmost MFIs in term of outreach and spatial location.

Data were collected from a sample member of these MFIs to determine the relationship

between poverty (dependent variable) and microfinance (independent variable). For effective

coverage and lower cost, purposeful sampling technique was used to select a sample of 80 members that constituted our sample size.

The major tool of this study was a questionnaire titled “Strategic Impact of Microfinance on

Poverty Reduction in Nigeria” (SIMPRNQ). The terms and statements embodied in the

questionnaire were related to the objectives and hypothesis of the study. The questionnaire

had two sections: Section A contained background information of the respondents while Section B was to measure perception of respondent on effectiveness of microfinance on

poverty reduction in Nigeria, rating Strongly Agree 4; Agree 3; Disagree 2; Strongly Disagree 1.


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A reliability test was carried out on respondents in other microfinance banks which were not part of the study using test-retest methods. The scores obtained from the

administration of the questionnaire were corrected, using Pearson product moment

correlation coefficient was 0.78. The high correlation value attested to the reliability of the

instrument.

Out of the 80 copies the questionnaire administered, 68 were returned and used for analysis.

Data collected from questionnaire were a analyzed. Summarized, and interpreted

accordingly with the aid of descriptive statistical techniques such as total score and simple

percentage. Chi-square was used to measure the discrepancies exiting between the observed and expected frequency and to proof the level of significance in testing stated

hypotheses. Regression analysis and Analysis of variance (ANOVA) were computed with the

help of statistical package for social science (SPSS). The trend, and pattern and relationship

among data were identifies and interpreted.

TESTING OF HYPOTHESES AND INTERPRETATION OF RESULTS

The results were compiled based on the hypotheses that guided the study. The three

hypotheses stated for the study were tested at 0.05 significant levels.

Hypothesis 1: There is no significant difference in the number of entrepreneurs who used microfinance institutions and those who do not.

Table 1: X2 summary of adoption and non-adoption of Microfinance Institutions

Source: field survey, 2011.

Chi-square allows testing the statistical significance of differences in a classification system

(one-way classification) or the relationship between two classification systems (two-way). To

perform this chi-square test, one must already have the data classified in a frequency table

(this test is not performed on the raw data). A frequency table shows the number of cases

that belong simultaneously to two or more distinct categories as presented under “N”

column. In this study, adoption and non-adoption of microfinance institutions classification of participants revealed a significant difference among the entrepreneurs that used

microfinance and those who do not use microfinance at X2 =31.117 with 1 degree of

freedom and 0.05 significant level. It implies that most people chose microfinance

institutions (48) 83.8% and non-adoption of microfinance institutions (11) 16.2%.

Hypothesis one is rejected.

Hypothesis 2: There is no significant effect of microfinance institutions on poverty

alleviation.

Table 2: Model summary of the simple Regression for Poverty Alleviation

Model R R Square Adjusted R

Square

Std error of the

estimate

1 .812 .69 .57 157.4336

a) Predictions: (Constant microfinance institutions)

To test the second hypothesis, simple regression analysis was used to regress the independent variable against dependent variable used in determining dependent variable.

Table 2 above indicates the model summary of the simple regression equation that

Variable N Df X2 p-value

Adoption of microfinance

institution

57 1 31.117 <0.05

Non adoption of microfinance institution 11


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predicted poverty alleviation. The explanation of the values presented is given in the table below.

Table 3: summary of Analysis of Variance for Poverty Alleviation

a) Predictors : ( constant microfinance institutions activities)

Source: field survey, 2011.

The model summary table provides useful information about regression analysis. First, the

„simple R‟ column is the correlation between the actually observed independent variable and the predicted dependent variable (i.e. predicted by the regression equation). „R square‟ is the

square of R and is also known as the „coefficient of determination‟. It states the proportion

(percentage) of the (sample) variable in the dependent variable that can be attributed to the

independent variable(s). In this study 69% of the variations in poverty alleviation among

members could be accounted for by the microfinance institutions. The adjusted R square

refers to the best estimate of R square for the population from which the sample was drawn. Finally, the „standard error of estimate‟ indicates that, on average, observed

entrepreneurial productivity deviate from the predicted regression line by a score of

177.4436. The hypothesis two which stated that” there is no significant effect of

microfinance institutions poverty alleviation was rejected at R=.819, R2=.69, F (1.48)

=.26.34; ρ<.05. This implies that there is a significant effect of microfinance institutions on poverty alleviation.

Hypothesis 3: There is no significant effect of microfinance institutions on sustainable

development.

Table 4: Model Summary of this Simple Regression for Sustainable Development

Model R R Square Adjusted R

square

Std. Error of

the Estimate

1 .513 .406 .369 4.1327

a) Predictor : ( constant microfinance institutions activities)

Source: Field Survey, 2011.

To test the third hypothesis, simple regression analysis was used to regress the

independent variable against dependent variable used in determining dependent variable.

Table 4 above indicates the model summary of the simple regression equation that predicted sustainable development. The explanation of the value presented is given in table

5 below.

Table 5: Summary of Analysis of Variance for Sustainable Development

Model. Variations Sum of Df. ,Mean F Sig.

Squares Square

1 Regression 1728.18 1 1728.18 20.13 0.02

Residual 2842 57 46 I

Total 4570.18 68

b) Predictors: (Constant microfinance institutions activities)

Source: Field Survey, 2011

Model variations Sum of

square

Df Mean

square

F Sig.

1 Regression 762 1 762 26.34 0.05

Residual 1946 56 38

total 2708 57


ISSN: 2047-2528 Vol. 1 No. 4 [198-205]


The model summary table provides useful information about the regression analysis. First, the 'simple R' column is the correlation between the actually observed independent

variables and the predicted dependent variable (i.e., predicted by the regression equation).

'R square' is the square of R and is also known as the 'coefficient of determination'. It states

the proportion (percentage) of the (sample) variation in the dependent variable that can be

attributed to the independent variable(s). In this study, 40.6 % of the variations in,

sustainable development could be accounted for by the microfinance institutions. The 'adjusted R square' refers to the best estimate of R square for the population from which the

sample was drawn. Finally, the 'standard error of estimate' indicates that, on average,

observed sustainable development deviate from the predicted regression line by a score of

4.1327. The hypothesis three which stated that" there is no significant effect of

microfinance institutions activities in predicting sustainable development was rejected at R=.516, R²= .406, F (1, 66) =20.13; p<.05. This implies that there is a significant effect of

microfinance institutions on sustainable development.

DISCUSSION OF FINDINGS

The findings of the study showed that a significant difference among the entrepreneurs that used microfinance and those who do not use microfinance. It implies that most people

chose microfinance institutions (48) 83.8% and non-adoption of microfinance institutions.

This study shows that there is a significant effect of microfinance institutions on poverty

alleviation. In fact, the study shows that microfinance has affected the life of the poor in a

positive ways such as significant improvement in employment status, increased incomes, ability to invest more capital into the business by the entrepreneurs and ability to expand

their enterprise. These agree with the findings of Remenyi and Quinones (2000), Khandker

(2001) and Robinson (2001).

Also, it was discovered that there is a significant effect of microfinance institutions activities

in predicting sustainable development in Nigeria. The results of effect of microfinance institutions activities in predicting sustainable development was significant at R=.516, R²=

.406, F (1, 66) =20.13; p<.05. This means that the more microfinance institutions activities

the greater the level of development and consequent economic growth.

CONCLUSION

In conclusion this study show that microfinance programmes have the potential to alleviate

poverty especially in increasing level of income and reducing vulnerability. This will promote

people economic capacity and bring sustainable development.

RECOMMENDATIONS

Based on the findings of this study the following recommendations are made possible.

(a) Microfinance can be a more viable strategy for sustainable poverty alleviation if more is

to be done on programme outreach and depth. The programme needs to accommodate

the poor in the country. (b) The government should provide enabling environment for the microfinance programme

by ensuring political stability, a stable macro-economic environment and low inflation

rates.

(c) In order to have a sustainable microfinance intervention, the government should also

keep infrastructures in place that link more remote areas to market.

(d) Finally, erring staff of microfinance banks should be prosecuted in the court of law and penalized.

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