IMPACT OF MICROFINANCE ON RURAL ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study examines the impact of microfinance activities on rural economic growth in Nigeria for the period: 2000-2015; the introduction of microfinance banks is the inability of commercial banks to provide sufficient credit, savings and other financial services to the poor and so have taken up the challenges of the gap created by them;  the primary objective is to investigate the impact of microfinance on rural economic growth in Nigeria with the specific objective of examining and evaluating the impact on agricultural contribution to GDP, rural saving and poverty reduction; literature was reviewed along the line of conceptual framework, theoretical and empirical literature; methodology adopted used the ordinary least square (OLS) regression technique to estimate the hypotheses, values of aggregate loan and advances to aggregate deposit ratio was used as proxy for microfinance activities and adopted as the independent variable while the dependent variables include agricultural sector contributions to gross domestic product (GDP), rural savings (RS) and poverty index (PI); Data analysis considered three hypotheses and the result from the  study reveals that regression coefficient of microfinance activity is negative in explaining agricultural contribution to GDP and rural poverty but positive and significant in explaining rural savings in Nigeria; based on these findings, the study recommends that conscious effort showed be made by government to industrialize rural areas as a means of improving rural economic growth; microfinance institutions should be encouraged to lend to rural dwellers as a way of promoting rural saving habits in Nigeria while policies related to agricultural diversification should be intensified by government in combating the menace of poverty in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Over the past three decades, there has been growing awareness of the spatial dimension in the development of the rural areas especially in developing countries where rural communities have earlier experienced decades of neglect (Olawepo and Ariyo, 2011). There is therefore special interest in the accelerating processes of rural community transformation by various governments in the areas of poverty alleviation, provision of rural infrastructure such as health and medical facilities, electricity, pipe borne water. Schools; agricultural extension and in the development of micro finance establishments that will affect the lives of the rural investors and community organizations. Based on these and other strategies, the central bank of Nigeria (CBN) in 1990 established an economic policy that would encourage the extension of banking business to the rural area of the country in order to mobilize rural savings. This was aimed at development and fostering rural transformation (Ariyo, 2003 and Olawepo, 2004). The whole idea of rural banking stemmed from a realization of the abundant resources available in the rural areas, the need to channel these resources to production and make such business activities contribute to economic development shifted research focus and government policy to promoting rural banking habit. An increase in rural investment as a result of provision of loans and advances will gear up output level and this will in turn raise the consumption level and possibly improve accessibility to public good s and services within the rural environment (See Direvedi, 1980; Adedayo, 1983; Jenyo, 2002 and Olawepo 2004).

 

According to Smith and Yeboah, (2005), throughout most of the post World War II period, government across the developing world have intervened in rural financial markets in order promote income expansion and alleviate rural poverty. In many of these efforts especially during the 1950s, 1960s and 1970s, the authorities pursued the direct credit approach which is targeted at increasing production or adopting new technologies without external assistance in the form of credit since they were assumed to be too poor to save. But private banks could not lend on appropriate terms to this sector and thus farmers were forced into the hand of money lenders This Development lead to the establishment of government owned specialized institutions like Agricultural Credit Guarantee Scheme to provide subsidized credit to the target population.

 

 

By the early 1990s two general approaches to financial market reform had taken shape. The first was known as financial liberalization and the second the financial  system development Approach. The goal of rural financial market reform was to expand access to financial services and efficiency of financial intermediation Restrictive government polices was said to be the principal cause of the shallow, fragmented and inefficient financial systems plaguing many developing countries (Mckinnon 1973).

 

To enhance the efficiency of the financial system and to create more access to financial services for marginalized groups, the prescription was liberalize the financial system by eliminating restrictions on interest rates, mandatory sector credit allocations and credit ceilings (Pill and Pradhan, 1997; African Development Bank, 1994; and Aryeetey et al, 1997).

 

Today the task of taking the financial system and the entire economy to the next level is squarely placed on financial system strategy 2020. The blue print of financial system strategy is to reposition the country to one of twenty largest economies in the world. The objectives were articulated strategies to make Nigeria the financial hub of Africa, join the league of the top 20 economies and build financial institutions that are global players.

 

Above all, there can be no meaningful discussion of  Nigerian’s rural economy without due consideration of crucial role of not only Agriculture that has remained largest revenue earners for Nigerian living in rural area but also those engage in small scale business such as pottery, weaving, carving, tool making, trading hairdressers, photographers, welders , bakery, small and medium scale  enterprises’ have been fully recognized by government and development experts as the main engine of economic growth and a major factor in promoting the realization of FSS2020, improve standard  of living of rural populaces, bring local capital formation, achieve high level of productivity and capacity and act as principal catalyst  for achieving equitable and sustainable industrial diversification.