ABSTRACT
The study determined the effect of agricultural loans of microfinance bank on the grassroots economic development of Nigeria, using time series analysis spanning from 2012 - 2017. The data set were analysed using Ordinary Least Squares (OLS) simple regression technique. From the results, the study found significant relationship between microfinance bank agricultural loans volume, microfinance bank interest rate and microfinance bank investment on Gross Domestic Product in Nigeria. In But the need to address these issues such as agricultural funding led to the transformation of community banks to microfinance banks in 2005 (CBN, 2005). Reduced interest rate of microfinance banks leads to high loan volume which affect growth in SMEs and economic growth. Also increase in microfinance bank investment in turn increases Gross Domestic Product in Nigeria. Based on the findings, we recommend that (i) overemphasis on collateral should be reduced, so that great and small will have equal access to loans and should be made available to individuals at the right time. (ii) Credit risk management by the MFBs, setting the liquidity ratio by the Central Bank at levels that will not over-contract the ability of MFBs to extend loans and advances to microenterprises and, control of inflation by the relevant authorities should be properly addressed. (iii) Supply of loans and advances by the MFBs to enhance their contributions to economic growth and development of Nigeria should be increased including mobilization of more deposits, expansion of shareholders’ base and fund.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Table of Contents vi
Abstract v
CHAPTER ONE
INTRODUCTION 1
1.1 background
of the study 1
1.2 Statements of the Problem 5
1.3
Objectives of the study 6
1.4 Research
Question 6
1.5 Research
Hypothesis 6
1.6 Scope
of the Study 7
1.7
Significance of the study 7
1.8 Limitations of the Study 8
1.9 Definition of terms 8
CHAPTER TWO
REVIEW OF RELATED
LITERATURE 10
2.1
Conceptual Framework 10
2.1.1
Meaning of Agricultural Loans and Microfinance 10
2.1.2 Grass roots development 12
2.1.3 The Nigeria Micro Finance Banks (MFBs): Origin
and Benefits 17
2.1.4 Nigerian Commercial Banks and Microfinance 19
2.1.5 Microfinance and Poverty Alleviation 19
2.1.6 The Role of Microfinance Banks (MFBs) 21
2.2 Theoretical
Framework 22
2.2.1 Classical microfinance theory 22
2.2.2
School of thought Theory 24
2.3
Empirical Framework 25
CHAPTER THREE
RESEARCH METHODOLOGY 29
3.1
Research Design 29
3.2 Source
of Data 29
3.3
Population of the Study and Sample Size 29
3.4
Sample Size and Sampling Technique 29
3.5
Analytical Procedures and Variable Specifications 30
3.6
Analytical Technique 30
3.7
Test of Significance 31
3.7.1
Decision Criterion 32
CHAPTER FOUR
DATA PRESENTATION,
ANALYSIS AND DISCUSSION OF FINDINGS 33
4.1
Data Presentation 33
4.2
Test of Hypotheses 38
4.3
Discussions of Findings 39
CHAPTER
FIVE
SUMMARY
OF FINDINGS, CONCLUSION AND RECOMMENDATION 41
5.1
Summary of Findings 41
5.2
Conclusion 41
5.3
Recommendations 42
References
Appendix
CHAPTER ONE
INTRODUCTION
1.1 background of the study
Micro
financing is the provision of financial services to poor and low income
households without access to formal financial institutions (Conroy, 2011).
Microfinance is described also as banking for the poor. They are different from
commercial banks because, they have limited banking services directed primarily
to a designated catchments area or group. The major purpose of Micro Finance
Banks is to direct attention of purveying credit to low income group and Micro,
Small and Medium Enterprises (MSMEs). A major characteristic of small and
medium enterprises (SMEs) worldwide is that they are generally managed by their
owners either as sole proprietorship or partnership (OladejoMoruf, 2013).
According
to Rolando (2010), microfinance is a good way of supporting entrepreneurs. It
provides poor borrowers with access to sustainable livelihood through zero or
very low interest loans. However, Jegede (2011) observed that entrepreneurs
prefer personal saving and cooperative credits to microfinance banks and
commercial banks fund citing reasons of non accessibility, prohibitive
collaterals and high interest rates barriers. The dismal performance of the
conventional finance sectors triggered the avocations of micro financing by
policy makers, practitioners, and international organizations as a tool for
poverty reduction according to Mejeha and Nwachuckwu (2014).
According
to Weli, ChisonmaIbelema(2014),
individuals with high socio-economic status, also considered as the elite are
better positioned to exploit both persons and environments for their benefits,
as they have greater share of powers and control over resources. On the other
hand, the grass-root are those with less
power and fewer resources; they are the common or ordinary people, especially
as contrasted with the leadership; the society at a local level rather than at
the center of major political activity, and are mostly found in the
agricultural, rural, and sub-urban areas of a country (Dictionaty.com, 2014).
In
both developed and under-developing countries, there are unserved or
underserved enterprises and households, ranging from the ultra-poor, who may
not be economically active, to small growing enterprises that provide
employment in their communities. This portion constitutes the demand side for
microfinance services. Often the supply side does not offer a corresponding
continuum services. Microfinance Banks (MFBs) need to supply services that fill
the gaps and integrate the unserved groups into the market.
The
goal of MFBs as grassroots development organizations is to service the
financial needs of unsaved or underserved markets as a means of meeting
development objectives generally include one or more of the following:
i.
To reduce poverty
ii.
To empower women or other disadvantaged
population groups
iii.
To create employment opportunities
iv.
To help existing businesses grow or
diversity their activities
v.
To encourage the development of new
businesses
In
a World Bank study of lending for small and microenterprise projects, three
objectives were most frequently cited (Webster, Riopelle, and Chidzero 2012).
i.
To create employment and income
opportunities through the creation and expansion of microenterprise
ii.
To increase the productivity and incomes
of vulnerable groups, especially women and the poor
iii.
To reduce rural families' dependence on
drought-prone crops through diversification of their income-generating
activities.
In developing countries like Nigeria, majority of
their population fall under this description in contrast with what obtains in
developed countries like America, where very few persons fall into this
category. Therefore, the challenge for most developing countries has been the
need to reduce the percentage of persons that fall into this category through
grass root development. According to the US- ADF (1998), grassroots development
is promotion in people’s well-being and empowering of persons and groups such
that they can expand and make their own choices and bring about change. It
centers on poverty alleviation and socio- economic empowerment of poor and
vulnerable. Various measures have been employed including reforms in government
and political structure (like, creation of districts and Local Governments);
introduction of several government policies and programs like provision of
public goods at the grass-root by the various tiers of government and their
parastatals, and involvement of public-private partnership projects.
According to Amsden (2011) the problem has been that
these remedies to reduce poverty at the grass-root do not address the causes of
poverty which is unemployment. Grass-roots poverty alleviation measures in
Africa have been exclusively designed and targeted to make job-seekers more
capable (healthy, educated, mobile), although no jobs are available. She
further stated that poverty persists from low productivity which gives room for
lack of employment; and to create employment requires capital investments to
expand entrepreneurial opportunities and increase productive jobs. Going by
Schumpeter’s theory, development can only be achieved when financial
institutions are present to act as catalysts in the system. They function to
provide financial resources through intermediation in form of capital
accumulation for innovative entrepreneurs to invest, taking advantage of
opportunities and thereby creating a whole cycle of increased productivity and
employment which leads to development. Unfortunately, due to peculiar
characteristics of individuals and entrepreneurs at the grass root, these ones
have been faced with financial exclusion from the formal financial sector.
In a bid to provide these desirable services to the grassroots,
micro financing was created formally and has evolved informally in other to
boost the productive capacity of these impoverished persons. Micro-finance
means small-scale transactions of credit and savings, and it sometimes offers
skill-based training to augment productivity or organizational support and
consciousness-raising training to empower the poor (Khander, 2013). Therefore, it is to a large
extent, meant to meet the needs of the ‘active poor’- small, medium, and
micro-scale producers and businesses, and the vulnerable populace like women.
This expectation has drawn much debate. Proponents insist that microfinance
reduces poverty through increased productivity, higher employment and higher
incomes; while critics argue that it rather drives poor households into a debt
trap as money from loans are often spent on consumption instead of being used
for productive investments, and therefore does not improved income or standard
of living - health or education (Baidoo, 2014).
Nigerian
economy development is characterized by pronounced poverty, unemployment and
inequality in distribution of income (such as agricultural loans) and social
amenities particularly at the grassroots level (John N. Aliu, Love Arugu& Justina NjidekaOtaokpukpu, 2015).
The need to address these issues such as agricultural funding led to the
transformation of community banks to microfinance banks in 2005 (CBN, 2005).
The growing awareness of the potentials of microfinance institutions has
effectively put the issue of microfinance on the political agenda of Nigeria. This study therefore, seeks to add to the body of
knowledge in finance by investigating the aggregate impact agricultural loans
of microfinance banks may have on grass-root development in Nigeria over time,
considering the root causes of poverty being low productivity and employment.
1.2 Statements
of the Problem
In the light of promoting and enhancing economic
growth of the economy, the Federal Government of Nigeria (FGN), have made
available credit institutions, especially microfinance banks, in other to
impact positively on the level of economic growth in Nigeria. Also monetary,
fiscal, industrial and developmental policy measures at the macro level have
been adopted to facilitate and support agriculture and entrepreneurs. At the
micro level, specific financing arrangements are being made to boost economic
growth in Nigeria.
A Policy Regulatory and Supervisory Framework for
micro finance banking was introduced in 2005 by the Central Bank of Nigeria
(CBN) to further strengthen the micro units in agriculture,
transport, commerce and industry, textile, dying tanning, vulcanizing,
blacksmithing, health, entertainment and other needs of micro financing to aid government in using them as a tool to effect
development (Olumide, 2011).Since its formal introduction into the Nigerian
banking systems debates have been on about its efficacy as a tool for necessary
sustainable development at the grassroots.
As at 2014, the World Bank ranked Nigeria as third
country with the largest number of poor people, and advised on the need to complement
development efforts to enhance growth with policies that allocate more
resources to the extreme poor like transfer (Omoh, 2014). Gong by the World Bank
development Indicators (2014), 70% of Nigerians still live below $2 per day and
are therefore poor; and this index rather increased by 2.4% between 2004 to
2017, even though the number of Micro finance banks increased by 11.4% within
the same period.
Babajide
in 2011 from her grassroots study as obtains in most studies claimed that micro
financing significantly impacted positively on the individual entrepreneur’s
development in Nigeria. Given these facts, the core problem here concentrates
on questioning the efficacy of agricultural loans of microfinance banks as a
potent tool for effecting sustainable grass root development in Nigeria, such
that it reflects on aggregate indices.
1.3
Objectives of the study
The
main objective of this study is to determine the effect of agricultural loans
of microfinance bank on the grassroots economic development of Nigeria, with
the specific objectives as:
i.
To ascertain the volume of agricultural
loans of microfinance bank on the grassroots economic development of Nigeria.
ii.
To the examine effect of microfinance bank
interest rate on the grassroots economic development of Nigeria
iii.
To determine the impact of microfinance
banks agricultural loan investments on the grassroots economic development of
Nigeria
1.4 Research Question
The
study attempts to answer the following research questions;
a. To
what extent has the volume of agricultural loans of microfinance bank
influences grassroots economic development of Nigeria?
b. How
has microfinance bank interest rate affect grassroots economic development of
Nigeria?
c. Does
microfinance banks agricultural loan investments affect grassroots economic
development of Nigeria?
1.5 Research Hypothesis
Ho1:
There is no positive and significant relationship
between the volume of agricultural loans of
microfinance bank and grassroots economic development of Nigeria
Ho2:
There is no positive and significant relationship
between microfinance bank interest rate and
grassroots economic development of Nigeria
Ho3:
There is no positive and significant relationship
between microfinance banks agricultural loan
investments and grassroots economic development of Nigeria
1.6 Scope of the Study
This
study is carried out in Nigeria, and therefore geographically restricted to the
area. The Central bank of Nigeria only began to give specific account of certain
Micro-finance bank activities from 2006, and reliable records necessary to
cover all variables and give balanced data are available up to 2016 for now;
therefore this study covers ten year period of 2006 to 2016; and is
geographically restricted to Nigeria and selected microfinance banks. The study
is restricted to examine the effect of agricultural loans of microfinance bank
on the grassroots economic development of Nigeria.
1.7 Significance of the study
With the grassroots constituting approximately 70% of
Nigerian’s population (Poverty headcount ratio at $1.25 a day (% of
population), NBS, 2012), the results of this study will educate the Nigerian
government and populace (especially the active poor) on the efficacy or
irrelevance of micro-financing in the economic development process. The
findings would also instruct policy makers on areas where micro-financing can
impact on grassroots development, and suggest policy/ strategy adjustments such
that aggregate developmental goals can be achieved.
1.7 Limitations of the Study
This
study may be limited by the following constraints;
i.
Time factor: in view of enormity of work
involved, the time frame will pose a threat, but the researcher will be able to
manage the available time effectively.
ii.
Financial constraints: there were a lot of
unavoidable expenses with limited financial resources to meet them. However,
the researcher will be able to meet the expenses through effective budgeting
and planning.
1.8 Definition of terms
Micro
Finance: is a source
of financial services for
entrepreneurs and small businesses lacking access to banking and
related services.
Micro-
financing: is the act of
providing financial services to the poor who do not qualify for conventional
bank services, like savings and credit extension.
Micro-
credit: this is that
aspect of micro-financing that deals with extending micro- debt funds (money
available for a person to borrow) to micro- finance institution customers,
usually at a cost (interest payment) for a specific time frame.
Productivity: refers to output of a sector, and in this case the
increase or decrease in the volume of output.
Employment: This is having and occupation for which the person is
paid, otherwise known as work or job engagement. This could be self-employment
(a person works solely on his business activities to generate enough funds to
pay himself), or being employed by another person or organization and paid for
services rendered to them.
Income: refers to all financial inflows accruing to a unit
(individual or group). In this case, we are referring to all financial receipts
accruing to the household, which could be reflected by its total expenditure or
receipts.
Poverty: this is a state of not having enough money to take
care of basic needs such as food, clothing, and housing.
Aggregate development: collective or sum value of an
economic growth indices; in this case, at the national level.
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