CHAPTER ONE
1.0 INTRODUCTION
- BACKGROUND TO THE STUDY
The condition of the rural dwellers remained deplorable in spite of the federal government’s rural development programmes. Some researchers believe that government’s centralist approach to this was the main reason why the programmes did not achieve much of the desired results. A more participatory and decentralized approach, which paves the way for the active involvement of these rural dwellers in their development quest, was advocated. The success of the participatory and rural development was predicated on the fact that 70% of the nation’s population lives in the rural areas where potentials for agricultural production abound. Development of local arts, crafts and technology has also been described as a veritable means of laying a solid technological base for this country. These small scale industries are more labour intensive and hence generate more employment. Their capital ratio is very low. They seem better suited to the development of home grown technology. They are more suited to the next stage of industrialization with its emphasis on local production of myriad components for use by larger scale assembly type enterprises with each of such component being the special of one small scale enterprise providing potential vehicle for mass involvement in the development effort National Institute for Policy and Strategic Studies,(2006).
It is a known fact that developing economies all over the world strive to achieve industrial development. Nigeria, being a country with a developing economy is no exception. Over the years, the method of attaining this development has reduced attention on publicly owned large industries and focused more on privately owned small and medium scale enterprises (SMEs). This is because the SMEs are seen as a potent vehicle for the achievement of economic growth and development as they provide the best opportunity for job creation and rural development.
Microfinance banks are distinguished from other financial institutions in that they offer small advanced loans and or savings, there is also the absence of asset based collateral and simplicity in their operation (Madugu and Bzugu, 2012). Microfinance is very important in farm production and this fact cannot be overlooked in the sense that, it the bedrock upon which increased food production rests, which means adequate finance to improve on their production (Adebayo and Onu, 2009). It contributes to the farmers social welfare enhances production and sustainability of income. With capital, farmers source farm inputs with relative ease and hire labour where it exceeds the strength of the family to handle or carryout farm operations. CBN (2006) stated that, shortage of primary production credit was one of the major causes of declining agricultural production in Nigeria. The shortage was attributed to reluctance by the commercial banks to provide credit for real sector achievement in agricultural production, urban and semi-urban based nature and mode of operation of the banks, high cost of administration of agricultural loans and inability of farmers to provide the necessary collateral (CBN, 2006).
As a probable solution to the above problems and to enhance flow of financial services to Nigerian rural areas in agriculture sector, the government has in the past initiated a series of public-finance micro/rural credit programme and policies targeted at the poor and agricultural sector. Notable among such programmes were the rural banking programmes. Microfinance banks provide credit to the under banked sector of the economy and development of rural areas as well as the financial empowerment of those rural areas. While substantial progress has been made in this respect, there is still need for further improvement, with the expansion of the agricultural and SME in the rural communities, the financial need of these sectors is also increasing and there are significant opportunities for microfinance banks to deploy their funds in a remunerative manner (Ndanecho and Akum, 2009).
According to Acha (2012), one of Nigeria’s economic peculiarities is financial dualism. There is a formal financial sector made up of the ministry of finance, the Central Bank of Nigeria (CBN), banks, other financial institutions, Nigerian Stock Exchange (NSE), etc. Beside this formal sector exists an informal financial sector with people lending and borrowing directly from each other through methods like esusu, daily contributions and through cooperatives (Okpara,2002). The presence of a large informal finance sector in Nigeria had been blamed on several factors, some of which are; population concentration in rural areas most of which are unbanked, low literary level, loss of confidence in the banking system due to distress, elitist banking practices and absence of other financial institutions in the rural areas (Acha, 2007).
Akangbe, Olajide and Ajayi (2012), revealed that the Federal and State governments have recognized that for sustainable growth and development, the financial empowerment of the rural areas is vital, being the repository of the predominantly poor in society and in particular the SMEs. If this growth strategy is adopted and the latent entrepreneurial capabilities of this large segment of the people is sufficiently stimulated and sustained, then positive multipliers will be felt throughout the economy. To give effect to these aspirations, various policies including the micro finance policy of 2004 were instituted over time by the Federal Government of Nigeria to im-prove rural enterprise production capabilities (CBN, 2008; Olaitan, 2001). This has encouraged the proliferation of Microfinance Banks in rural areas since the year 2005 servicing the rural people with a similar goal of alleviating poverty. Several studies have investigated the effectiveness of microfinance banks from the point of view of the services rendered such as loans supplies and savings (Yahaya et al., 2011) or the attitude of business owners to such banks (Asikhia, 2009).
- STATEMENT OF THE PROBLEM
Nigeria consists of different classes of individuals, who are either enterprising or industrial low class that account for over half of the population who do not have access to formal banking services. Savings have continued to grow at a very low rate particularly in the rural areas of Nigeria. One of the problems brought to bear is the inability of rural dwellers to channel their savings into banks. Most rural people keep their resources under their pillows. This method of keeping savings is risky because it might be stolen, lost or wasted in extravagant spending. Moreover, returns which would have accrued to the depositors in form of interest are forfeited.
The contribution of government to alleviate poverty through the establishment of microfinance banks appears a little progress. Inspite of the establishment of microfinance banks, it was observed that most people are not able to obtain loan. This is attributed to a number of challenges such as the high level of interest rate, lack of collaterals required by the commercial banks before loans can be granted which necessitated the establishment of Microfinance to address these economic imbalances. If the banking industry continue to meet the demands of Nigerians especially the rural poor, this shows that there is a gap which need to be filled and this can be done through the contribution of government by establishing more microfinance banks in Nigeria to help in alleviation of poverty.
Another problem observed is the inability of prospective borrowers of most microfinance banks to repay their loans as at when due. This may be attributed to high rate of poverty in the country. The high rate of poverty is noticeable in such area such as unemployment, high rate of inflation, non-payment of salaries, mismanagement of loan granted to rural dwellers, infrastructural deficiencies, such as power, road network, etc. and all kinds of political, economic and bureaucratic bottlenecks.. Also Nigerian economy consists of individuals who feed from hand to mouth. The loans when granted are channeled to other areas such as feeding, payment of bills, school fees, hospital bills and others instead of using it for the intended business purpose.
In Nigeria poverty is pervasive with frightening depth and breath. It affects all geopolitical zones of the country. The poor in Nigeria like those elsewhere are powerless, voiceless, lack basics of live and are generally deprive. Poor people have insufficient income, lack access to basic services, have limited access to credit and shelter, they survive on menial jobs and can barely afford to send their children to school. Bamisile (2006) reported that despite apparent success of microfinance bank and the efforts of supply led policies and financial liberation, there are still’ “important” gaps to be filled by this institutions in Nigeria. Anyanwu (2004) observed that microfinance bank have not been able to adequately address the gap in terms of credits, savings and other financial services required by the poor.
- OBJECTIVES OF THE STUDY
The main objective of this study is to examine the role of microfinance banks in the development of rural communities in Nigeria. Other specific objectives include:
- To highlight the various contributing roles of microfinance banks in poverty reduction in Nigerian rural communities.
- To assess the impact of microfinance banks loans and advances on economic development of rural communities in Nigeria.
- To what extent has a microfinance banks enhanced savings habit in the Nigerian economy?
- What are the challenges of microfinance banking in Nigeria?
- RESEARCH QUESTIONS
In order to enable us determine the impact of microfinance banking in the development of rural communities, the following research questions are formulated:
- Has the establishment of microfinance banks made any impact in reducing poverty level in Nigerian rural communities?
- What impact has microfinance banks loans and advances had on economic development of rural communities in Nigeria?
- To what extent has a microfinance banks enhanced savings habit in the Nigerian economy?
- What are the challenges of microfinance banking in Nigeria?
- FORMULATION HYPOTHESES
HYPOTHESIS ONE
H0: There is no significant relationship between microfinance banks loans and advances and economic development of rural communities in Nigeria.
H1: There is a significant relationship between microfinance banks loans and advances and economic development of rural communities in Nigeria.
HYPOTHESIS TWO
H0: The rate at which rural dwellers deposit money in microfinance bank is low than they keep under their pillows.
H1: The rate at which rural dwellers deposit money in microfinance banks is high than they keep under their pillows.
HYPOTHESIS THREE
H0: The government has not assisted microfinance banks in meeting the needs of rural dwellers and communities.
H1: The government has assisted microfinance banks in meeting the needs of rural dwellers and communities.
- SCOPE OF THE STUDY
The research on the role of microfinance banks in the development of agriculture and in rural areas through analysis of the Seedvest microfinance bank, Dugbe, Ibadan.
1.7 SIGNIFICANCE OF THE STUDY
The significance of this study cannot be overemphasized, considering the fact that rapid development of the SMEs sector will contribute immensely to the development of any nation. A major barrier to this rapid development is the dearth of both debt and equity financing. Accessing finance has been identified as a key element for SMEs to succeed in their drive to build productive capacity, to compete, to create jobs and to contribute to poverty alleviation in developing countries. Thus, this study is significant to the extent that itdetermines the contributions that MFBs have had on the SMEs.
Furthermore, this study is of immense benefit to government as it would aid in the fine tuning of policies that are intended to boost the SME sector through Micro Banking. The study also adds to the existing body of knowledge available to students and other researchers.
1.8 JUSTIFICATION OF THE STUDY
This research work would form an avenue for providing information for both present and potential small scale enterprises because of the various avenues available to them for developing their human and material resources for over well being of the national economy. It will also find solutions to curb the challenges facing financing of small scale business enterprises.
- DEFINITION OF RELEVANT TERMINOLOGY
Micro Enterprise: A firm, whose total cost including working capital but excluding cost of land is not more than ten million naira (N10,000,000) and/or with a labour size of not more than thirty (30) full-time workers and/or a turnover of less than two million naira (N2,000,000) only.
Small Enterprise: An enterprise whose total cost including working capital but excluding cost of land is between ten million naira (N10,000,000) and one hundred million naira (N100,000,000) and/or a workforce between eleven (11) and seventy (70) full-time staff and/or with a turnover of not more than ten million naira (N10,000,000) in a year.
Medium Enterprise: A company with total cost including working capital but excluding cost of land of more than one hundred million naira (N100,000,000) but less than three hundred million naira (N300,000,000) and/or a staff strength of between seventy-one (71) and two hundred (200) full-time workers and/or with an annual turnover of not more than twenty million naira (N20,000,000) only.
SMEs: Small and Medium Enterprises are those firms, which satisfy the definitions given above.
SMEDAN: Small and Medium Enterprises Development Agency of Nigeria
CBN: Central Bank of Nigeria, the apex bank in Nigeria, which supervises other banks
ENTREPRENEURS: Although is a common term but remains one of the most difficult concept to define, to Peter Drunker, an entrepreneur “is the only one who always search for change, respond to it and exploits it as an opportunity”.
Finance: Is a broad term that describes two related activities: the study of how money is managed and the actual process of acquiring needed funds.
ECONOMY: Economy is the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated. This is also known as an economic system.
AGRICULTURE: is the cultivation of animals, plants and fungi for food, fiber, biofuel, medicinal plants and other products used to sustain and enhance human life.
SHORT-TERM: input financing at the beginning of the crop year (seeds, fertilizers, pesticides),additional labor, feed, storage facilitates, processing, etc.
MEDIUM AND LONG TERM: equipment for intensification, commercialization (transportation),storage (buildings), perennial crops (investment, renewal, maintenance), (re)constitution ofherds, land purchase.
FAMILY NEEDS: personal, durable goods, housing.
NON-FINANCIAL SERVICES:monitoring demand, technical assistance and extension.
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