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Assessment of Cooperative Societies Effectiveness in
Agricultural Credit Delivery in Ikpoba Okha Local Government
Area, Edo State, Nigeria
O. B. Izekor* and G. O. Alufohai
Department of Agricultural Economics and Extension Services, University of Benin, P.M.B 1154, Benin
City, Nigeria.
* Corresponding author’s email: [email protected]
(Received May 10, 2010; Accepted June 16, 2010)
ABSTRACT: The study is an assessment of the effectiveness of Cooperatives in Agricultural credit
delivery in Ikpoba- Okha
Local Government Area, Edo State, Nigeria. It identified the socio economic characteristics of the
cooperative societies assess
farmers’ access to cooperative loans, determine the arrival rate of loan requests and the service rate, idle
time and traffic intensity
of the cooperative societies in order to assess their overall effectiveness in credit delivery. Primary data
was sourced with the aid
of a well structured questionnaire. The information was analysed using descriptive statistics and Queue
model. The result showed
that Cooperatives received loan request, have overall approval rate of 99.16%, arrival rate of 43, service
rate of 43 per month
which resulted in a traffic intensity of 1.01 and Idle time of -0.01. Empirical results showed that, the
Cooperatives were effective
in Credit Delivery.
Keywords: Cooperative Societies, Credit delivery, Queue Model, Traffic intensity
Introduction
In developing countries as in the case of Nigeria, Agriculture dominates the nation’s economy. It has been
established that about 70 percent of Nigeria population is engaged in Agriculture (Obasi and Agu, 2000)
while 90
percent of Nigeria total food production comes from small farms and 60 percent of the country population
earn their
living from these small farms (Oluwatayo et al, 2008). The recent importation of food items into the
country to
make up for the shortfalls in food supply is a dangerous indication of dwindling farm productivity and a
warning
sign that if the nation continue with business as usual, the prospect of food security will be bleak for
millions of
people (Nweze, 2003). The fall in agricultural production could be attributed to inadequate infrastructure,
under
mechanisation and inadequate finance (Oshiokoya, 1987). According to Ojo (1998), one problem
confronting small
scale enterprise including that in agriculture is inadequate capital.
Inadequate finance has remained the most limiting problem of agricultural production. This is because
capital is
the most important input in agricultural production and its availability has remain a major problem to small
scale
farmers who account for the bulk of agricultural produce of the nation. In Nigeria, credit has long been
identified as
a major input in the development of the agricultural sector (Balogun, 1990). Credit is considered the
catalyst that
activates other factors of production and make under used capacities functional for increased production
(Ijere,
1998). It is a major factor necessary for technological transfer in traditional agriculture (Oyatoye, 1981).
Farm credit
Afr. J. Gen. Agric. Volume 6, No. 3 (2010)
140
can be obtained from either the formal source which include the banks and other government owned
institutions or
the informal sources which are self help group, money lender, cooperatives and non government
agencies (NGO).
According to Afolabi and Fagbero (1998), the informal source of credit is more popular among small scale
farmers which may be due to the relative ease in obtaining credit devoid of administrative delay, non
existence of
security or collateral, flexibility built into repayment which is against what is obtained in the formal
sources. Ojo et
al (1993), observed that the institutional lending system has failed to meet the objective for which they
were set up.
According to him only 15 percent of the trading bank credit to agriculture has been covered. The major
short
comings of their transactions he observed are due to the inaccessibility of these funds to rural farmers as
a result of
the bureaucratic procedures and high service cost, which are very difficult for the farmers to meet.
The situation have attracted the attention of Nigeria government and this has led the Federal Government
of
Nigeria to the creation of specialised institution such as the Nigerian Agricultural and Cooperative bank
(NACB)
which later translated into the Nigeria Agricultural Cooperative and Rural Development Bank
(N.A.C.R.B.D) to
cater for the credit need in the agricultural sector. However, Alufohai and Ahmadu (2005), studied its
queue
management and reported its ineffectiveness in credit delivery.
In spite of the importance of loan in agricultural production, its acquisition is fraught with a number of
problems.
The small scale farmers are forced to source for capital from relations, moneylenders and contribution
clubs. All of
these are known to be ineffective in providing capital for substantial increase in agricultural production.
The last
hope for the small scale farmers then lies with the cooperative societies (Ijere, 1981), the cooperative has
been
identified to be a better channel of credit delivery to farmer than the NGO’s in term of its ability to sustain
the loan
delivery function (Alufohai, 2006).
Cooperatives are defined as “an autonomous association of persons who unite voluntarily to meet their
common
economic and social needs and aspiration through a jointly owned and democratically controlled
enterprise (ICA,
1995). Cooperatives are established by like-minded persons to pursue mutually beneficial economic
interest.
Researchers are of the opinion that under normal circumstance Cooperative play significant role in the
provision of
services that enhance agricultural development. Patrick (1995), described Cooperatives as a medium
through which
services like provision of farm input, farm implements, farm mechanisation, agricultural loans, agricultural
extension, members education, marketing of members farm produce and other economic activities and
services
rendered to members. Regular and optimal performance of these roles will accelerate the transformation
of
agriculture and rural economic development. Ijere (1981), further explains that, it is the cooperative that
embraces
all type of farmers and a well organised and supportive Cooperative is a pillar of strength for agriculture in
Nigeria.
Previous studies have shown that cooperative carry out the function of credit delivery to farmers but there
is
ample evidence that farmers face difficulties in obtaining credit and the problem of sourcing for capital still
lingers
on. The question therefore is, whether these cooperative are effective or not in credit delivery to farmers.
Do farmers
actually patronise them or is it that the cooperative are slack in rendering this service? If they do, are
there delay,
does queue exist, if there is, what is the arrival rate, service rate, idle time and traffic intensity.
In view of the foregoing, the study is designed to assess farmers’ access to loans from cooperative
societies,
identify the arrival rate of loan request of farmers that have access to loans from these cooperative
societies, the
service rate and idle time of the cooperative societies and the traffic intensity in order to assess the
overall
effectiveness of their queue system.
Materials and Methods
The study was conducted in Ikpoba-Okha Local Government Area of Edo State. The list of all registered
Cooperative Societies was obtained from the Ministry of Commerce and Industry from which all
Cooperatives
societies involved in credit delivery were purposively selected.
The data for the study were collected using a well structured questionnaire administered to respondents
who were
cooperative officials and involved in cooperative activities
Data obtained from the study were collated and analysed using simple descriptive statistics such as
means and
frequencies as well as the Queue Model as given by Olayemi & Onyenwaku (1999).
The Queue Theory:
A queue is a waiting line. It is an array of items waiting to be served. The queue model is usually
employed to
determine the effectiveness of the performance of an organisation (Olayemi & Onyenwaku, 1999). The
queue model
was used to access the arrival rate of loan request of farmers, the service rate, the idle rate and traffic
intensity of the
O. B. Izekor & G. O. Alufohai
141
cooperative societies. These were computed by the following formulae given by (Omotosho, 2002;
Alufohai and
Ahmadu, 2005).
Arrival rate = Number of arrival
Time
Service rate = Number served
Time
Traffic intensity = Arrival rate
Service rate
Idle time = 1 – Traffic intensity
For the purpose of the study, arrival rate depicts the number of loan request per month, the service rate
represents the number of application accepted, considered and loan actually provided. Idle time refers to
the period
when no application was attended to, even when they had been submitted.
Efficiency in queue management is achieved when the traffic intensity is unity that is arrival rate is equal
to service
rate. In this case no idle time (Idle time = 0).
Results and Discussion
(I) Socio economic characteristics of the cooperatives
The cooperative studied were all multipurpose cooperatives carrying out credit delivery as a function.
They were
within the age range of 5 – 18 years, with average membership strength of 315 as against an average
membership of
46 at their inception, showing that a large number of individual had joined the cooperatives after inception.
This
growth may be as a result of incentives received by member which motivated others to join.
(II) Access to Credit
The result (in Table 1) shows that an average of 475 loan application were received in 2001 and 471 were
approved giving an approval rate of 99.15%. 556 and 514 loan application was received while 550 and
511 were
approved for the year 2002 and 2003 respectively giving an approval rate of 98.90% and 99.42%.
In all, the cooperative societies received a total of 1545 loan application and approved 1532 within the
study
period of three year giving an overall approval rate of 99.16%. An indication that farmers had good access
to
cooperative loan and were aware of this function of the cooperative hence the request for loan.
Table 1: Average Number of Loan Application and Approval.
Year Ave. No. of application Ave. No. of approvals Approval rate
2001 475 471 99.15%
2002 556 550 98.90%
2003 514 511 99.42%
Total 1545 1532 99.16%
(III) Arrival Rate, Service Rate, Idle time and Traffic intensity
The results (in Table 2) of the study showed that the cooperative had an average arrival rate of 40 and
service rate
39 for the year 2001 depicting that an average of 40 loan request were received, 39 of them were
considered,
approved and loan disbursed. The year 2002 and 2003 had arrival rates of 46 and 43 and service rate 46
and 43
respectively, showing that all loan requested received were all considered, approved and disbursed
indicating that
the service rate was in accordance with its loan request. It also shows an improvement in the service
delivery from
the previous year. It is also observed that loans were actually disbursed to all loan request approved. This
further
reflects the performance of cooperatives in its credit delivery function.
Afr. J. Gen. Agric. Volume 6, No. 3 (2010)
142
The result of the study showed a traffic intensity of 1.03 and idle time of -0.03 for the year 2001. The year
2002 and 2003 had traffic intensity of 1.00 and idle time of 0.00, which depicts efficiency in the queue
management
as efficiency is achieved when the traffic intensity is unity and idle time is equal to zero and an
improvement from
the previous year performance.
The study showed an overall average traffic intensity of 1.01 and an idle time of -0.01 which indicated that
the cooperatives had no idle time. This reflects good queue management and the effectiveness of the
cooperative
societies in consideration and delivery of all loan requested received.
Table 2: Arrival rate, Service rate, Idle time and Traffic Intensity.
Year Arrival Rate Service Rate Traffic intensity Idle time
2001 40 39 1.03 -0.03
2002 46 46 1.00 0.00
2003 43 43 1.00 0.00
Total
Average
129
43
128
43
3.03
1.01
-0.03
-0.01
Conclusion
The study showed high level of farmers’ access to agricultural loans from cooperative societies as well as
the
effectiveness of these cooperative societies in carrying out their credit delivery function. The cooperative
societies
had a high approval rate, service rate in accordance with the arrival rate resulting in low traffic intensity
and zero
idle time, a reflection of a good queue system management and the effectiveness of the cooperative
societies in
credit delivery.
Funding of agricultural programmes and the extending of credit to farmers should therefore be directed
through
cooperative societies because of their reliability and effectiveness in disbursing agricultural funds to
farmers.
References
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THE ROLE OF THE FINANCIAL SECTOR IN POVERTY REDUCTION
BY
J.O. ADERIBIGBE
Introduction
Poverty reduction has been receiving increasing global focus and the challenges are
becoming more daunting. It is, however, encouraging to note that research findings and
empirical evidence have shown that significant poverty reductions are possible and have,
indeed, occurred in many developing countries. In particular, it has been established that
growth and poverty reduction go hand- in-hand. For example, studies have revealed that
the absolute number of people living in poverty has dropped in all the developing
countries that have experienced sustained rapid economic growth over the past few
decades. The relevant question is, what type of policies can influence growth and poverty
reductions?
There is no doubt that the establishment of a stable macroeconomic environment is an
important precondition towards poverty reduction. Moreover, policies should be
designed to raise the level of investment in infrastructure and people in order to enhance
income generating capacities of the rural areas, which account for nearly 63 percent of
the world’s poor, with the proportion as high as 90 percent in China and Bangladesh and
between 65 and 90 percent in Sub-Saharan Africa, including Nigeria. Latin American
countries are perhaps the exceptions where poverty is concentrated in urban centres.
*J.O. Aderibigbe is the Director, Governor’s Office Department, Central Bank of
Nigeria.
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
The objective of this paper is to examine the role and challenges facing the financial
sector in providing the necessary financing on appropriate terms, volume and value, and
in a timelymanner. The paper is divided into six sections; following this introductory
part, the conceptual framework on the role of the financial sector in poverty reduction is
outlined. In section three the experience of the role of the financial sector in fighting
poverty is reviewed with specific emphasis on the role of banks in micro- credit delivery
in section four. Section five examines future challenges of the sector while I make my
concluding remarks in section six.
2. Conceptual Framework On The Role of The Financial Sector in
Poverty Reduction
The literature on the role of the financial sector in poverty reduction is scanty, although
there have been several case studies on how financial institutions in selected countries
have designed programmes or introduced products to specifically target the poor in the
society to enhance access to credit for productive activity and improvement in their
economic well-being. Over the past two decades new approaches known collectively as
MICRO FINANCE have emerged that apply sound economic principles in the provision
of financial services to low income customers. Examples abound in countries like
Bangladesh and Indonesia, which provide financial products that match the needs of lowincome
clients, using innovative collective monitoring to strengthen repayment
performance and charging interest rates that cover operational costs.
It is important to underline the fact that easy access to credit is more beneficial to this
category of borrowers than interest rate subsidy. Targeted public sector rural credit
programmes, especially if they are subsidized, benefit the non-poor far more than the
poor. The poor want credit that is available on acceptable terms and when they need it.
However, there is a general consensus in the literature that access to credit by the poor is
necessary but not sufficient to guarantee the success of micro-credit schemes.
Participation of the poor in the whole process of identifying and managing communityCBN
ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
based projects that respond to the priority needs of the poor is considered essential. This
is critical to ensuring local commitments and sustainability. In fact, participation of the
poor in the whole process is an integral part of the UNDP micro-credit strategy, which
recognizes the social, cultural and financial considerations that are necessary for any
successful scheme. Recent experiments with community-based credit programmes in
which the poor actively participate in the making of lending decisions and, which are
subject to peer accountability, have been successful in reaching the target group at
reasonable cost.
Micro-credit support under the UNDP approach is anchored on a set of six key guiding
principles, strategies and approaches. First, is the adoption of people and communitycentred
participatory development approach in which the community and group
involvement and ownership is the basis for building a sustainable credit administration.
This is done through:
* Working preferably with groups that have been in existence for a period of time
with an established structure of governance and a savings culture through regular
contributions of members that are designed to support self- help initiatives of the
group or its members;
* Encouraging group- led initiatives with clear and simple business plans and group
lending as against lending to individuals;
* Ensuring high repayment performance and cost recovery by the use of peer
pressure and group solidarity;
* Mandatory contrib ution of up to 10-15% of the initial loan capital by the group,
etc.
The second strategy is to match the objectives of the scheme with the needs, culture,
values and aspirations of the group and community members while the third strategy
focuses on building real partnership among relevant government agencies, banks, NGOs,
community based organizations [CBOs], UNDP and group beneficiaries in credit
administration. The fourth strategy of the UNDP scheme recognizes the need for
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
government/donor collaboration with banks as well as capacity building support to NGOs
and CBOs that operate micro- finance institutions providing financial services to low
income borrowers. The fifth strategy relates to the accessibility of the financial services
that will be offered under the scheme while the final strategy is designed to achieve
financial and operating self-sufficiency. This This final strategy is aimed at:-
* Establishing appropriate interest rate in line with what is obtainable elsewhere in
the country.
* Ensuring high repayment rates of between 95-100%; and
* Encouraging savings mobilization and banking culture.
These strategies, if well articulated, usually guide the management of the scheme to
recognize that strong leadership vision and sound professional management as well as
commitment to poverty reduction, form the key to sustainable financial services.
Apart from the UNDP approach, the World Bank Group has also designed its own
strategy to facilitate the availability of financial services to the poor. The World Bank
through its financial sector network helps countries to strengthen their financial systems
to grow their economies, restructure and modernize institutions, and respond to savings
and financing needs of all people including the poor, by providing financing, policy
research and advice, as well as technical support on several areas of the financial sector,
including rural and micro-finance/small and medium enterprises [SMEs].
In the specific case of the rural and micro finance/SMEs, it has been observed that high
level of poverty combined with slow economic growth in the formal sector have forced a
large part of the developing world’s population into self employment and informal
activities. Thus, many of the World Bank Group’s client governments place a high
priority on developing their indigenous private sector to participate in and lead future
growth. A related and equally pressing issue is raising the ability of the self-employed
and rural poor to sustain the economic activities essential to their survival. A diversified
financial sector
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
capable of meeting the full range of demand for financial services, including informal and
small bus inesses, is thus, needed to facilitate this objective. The related current challenge
in small and medium scale enterprises [SMEs] development is to build on the success of
micro finance, establishing good practices for SME financing and for the provision of
non- financial services to SMEs.
A variety of financial institutions, worldwide, have found ways to make lending to the
poor sustainable and to build on the fact that even the poor self-employed repay their
loans seek savings opportunities. The challenge is to build capacity in the financial
sector drawing on lessons from international best practices in micro credit/small
enterprises and rural finance.
The objective of the World Bank group’s strategy is to increase access to financial
services of low- income households by addressing three principal areas:-
* Fundamental framework: the policy, legal and regulatory frameworks that allow
innovative financial institutions to develop and operate effectively;
* Institution building: exposure to and training in best practices that banks and
micro finance organizations need to expand their outreach and develop
sustainable operations, along with performance based support for capacity
building; and
Innovative approaches: leasing, lending and other products that the World Bank
Group can use to increase access to financial services.
1. The Nigerian Experience In Micro-Credit Financing
Successive governments in Nigeria have emphasized the need to address poverty
in the country. For this purpose, a number of policies and programmes
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
have been designed to meet the needs of the poor. Most of these programmes have
micro-credit components covering some specific sectors as well as multi-sectoral
interventions. These interventions have been rationalized on the grounds that because of
the high risks and costs associated with these sectors and groups, the private sector,
particularly the financial sector operators would not get involved in activities in these
sectors or those associated with the poor in the society. Some of these programmes
include: the Agricultural Development Programme (ADP), rural banking schemes and the
establishment of specialized institutions and programmes, such as the Nigeria
Agricultural and Cooperative Bank, Peoples Bank, Community Banks, the National
Economic Reconstruction Fund (NERFUND), National Directorate of Employment
(NDE), the Directorate of Food, Roads and Rural Infrastructure (DFFRI), Better Life for
Rural Women as well as the Family Economic Advancement Programmes [FEAP]. It is
important to note that non-governmental and community-based organizations have also
operated various forms of credit schemes in the rural and low-income urban areas
throughout the country.
These initiatives have, however, recorded limited success in reducing poverty. The
problem with most of the government’s micro-credit schemes is that, they were in many
instances incompatible with the existing traditional savings and loans schemes operated
by the local communities and are usually politicized. This may explain why most of the
government-sponsored schemes did not achieve their primary objectives, including the
reduction of poverty. It should, however, be acknowledged that many community-based
organizations succeeded in meeting their set targets as well as achieving more favourable
repayment rates on their scheme.
With particular reference to the financial sector, prior to the adoption of the Structural
Adjustment Programme (SAP) in 1986, the Central Bank of Nigeria’s monetary policy
guideline made it mandatory for all commercial banks to open rural branches under the
Rural Banking Scheme, to facilitate savings mobilization and extension of bank credit to
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
the public. Moreover, commercial banks were mandated to extend a specified proportion
of their total loans and advances to agriculture as well as small and medium scale
enterprises.
These directives were expected to positively impact directly on the lives of rural dwellers
and the poor in society by providing food and employment. In compliance with the
directives on the Rural Banking Scheme, in appreciable number of rural bank branches
were opened, which helped in promoting rural savings and expanding bank credit to the
rural communities, albeit to a lesser extent.
Development Finance Institutions (DFIs)
Similarly, a number of development banks were established and their programmes
targeted at the poor segment of the society. Most notable among the programmes
designed to facilitate economic growth and development, and indirectly reduce poverty in
Nigeria was the Nigerian Agricultural and Cooperative Bank (NACB), which was
established to lend to agriculture, including to small-scale farmers, using cooperative
societies as a channel of loan disbursement and repayment. The CBN contributed 40
percent of equities to NACB and stipulated that shortfall in commercial and merchant
bank lending be transferred to the Bank for on- lending to the agricultural sector.
Under the Agricultural Credit Guarantee Scheme Fund (ACGSF), which represents
another aspect of the micro-credit scheme, the CBN has made a notable impact in
touching the lives of the poor segment of the society, who have directly benefited from
the scheme. Between 1978 and 2000, guaranteed loans worth N2,768,716.90 million
were granted for the development of the agricultural sector of the economy, which
directly benefited the poor in the society (see table 1). Theestablishment of the Nigeria
Bank for Commerce and Industries (NBCI) was inspired by the need to provide
institutional financing to small borrowers engaged in commercial and industrial
production but were not eligible to borrow from the Nigerian Industrial Development
Bank (NIDB), which was established to cater for the need of bigger borrowers. The
various development finance institutions made reasonable impact on the growth of the
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
economy, although in some cases performances were below expectation. The probable
reason why the efforts made in the financial sector to boost the economy and reduce the
plight of the poor in the society during the period yielded marginal success was that the
schemes lacked focus and were not properly targeted on the poor.
Peoples Banks of Nigeria.
Following the introduction of the SAP and the liberalization of the financial sector, a
significant number of banks, became distressed while many of the healthy ones closed
down their rural branches. Most of the rural dwellers lost the opportunity of saving as
well as other privileges which these rural branches offered. To compound the problem
almost all the development finance institutions whose programmes had, hitherto, helped
to improve the lots of the poor started to experience distress. The Federal Government
consequently established the People’s Bank of Nigeria to target the poor at both the rural
and urban areas: both rural and urban branches were opened to mobilize savings and
advance credit to the poor. Between 1990 and 2000, Federal Government’s subvention to
the People’s Bank of Nigeria amounted to N1,869.3 million while total credit advanced
to the poor amounted to N3,490.5 million (see table 2).
Community Banks
During the same period, community banks were licensed to operate both in the rural and
urban areas to complement the activities and programmes of people’s Bank of Nigeria.
Unlike the people’s Bank, the community banks were community-based and entirely
funded by the communities themselves, groups of people or cooperative societies. The
community banks mobilized rural savings and granted credit to the communities where
they are based. This helped to improve the lots of the poor by providing them loans and
employment. For a period of 11 years (1991-2000), community banks gave out loans and
advances amounting to #14,621 million, out of which agriculture and forestry got
#4,083.90 million or 27.9 per cent, while manufacture and food processing got #1,656.60
million or 11.3 per cent (see table 3).
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
4. Micro-Credit Delivery By Commercial and Merchant Banks in Nigeria
Commercial and Merchant banks have been contributing to micro credit delivery in
Nigeria by providing loans and advances to small and medium scale enterprises.
However, they have not been able to address the needs of the rural poor, specifically
because the traditional banking service provided by these banks and other formal
financial institutions were not tailored to meet the needs of micro-enterprises as profitable
entities. This may explain why in recent times, the share of their total credit to SMEs has
declined drastically. The reason for this apathy to cater for the poor may result from the
fact that the poor often cannot provid e conventional collateral and the preference by
banks to make large loans to avoid high cost of administering a large number of small
loans. This has in turn created a gap in mobilizing savings from and advancing credit to
low income earners. The financial institutions needed to fill this gap are either
unavailable or inexperienced to cover the needs of the poor as similar institutions have
done in India, Indonesia, Mexico, etc. The few that are available are constrained by
socio-political factors, policy inconsistency and weak regulatory framework. The
consequence is that they have been prevented from growing and developing financially
sustainable operations. Poor infrastructure has also hindered productive activities in the
rural areas.
All things considered, there is no doubt that the financial sector has played an important
role in the provision of micro-credit and, thus, the reduction of poverty in Nigeria by
providing subsidized credit to both the agricultural and small scale industrial sectors.
These have helped to generate employment and output growth rate as well as improve per
capita income in the rural communities. However, the contributions fall below the
minimum required to reduce poverty on a sustainable basis. If the strategies adopted by
the UNDP and World Bank, enumerated in section 2, are used as the standard
measurement of micro finance in Nigeria, we may conclude that unsustainable financial
services have been the major problem in Nigeria’s micro-credit administration.
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
5. Future Challenges for the Financial Sector in Poverty Reduction
There is no doubt that micro finance plays an important role in the reduction of
poverty in many developing countries that have experienced fast economic growth in
Southeast Asia. The creativity and contributions if a large number of the poor who may
not be formally employed are captured through the community based micro-finance
strategies in those countries. Micro- finance activities, where well organized, are highly
dynamic with strong profit margins and significant growth potential. There is, however,
a number of problems associated with small unit enterprises sponsored under this microfinancing
scheme. Such problems include: - lack of access to credit by the poor in the
society, limited managerial and technical skills, which hinders the prospect of the
scheme, and lack of information about marketing their products. The constraints listed
above are some of the inherent problems in micro financing, which the financial sector
would need to address.
Given the potential of micro- finance to alleviate poverty and stimulate economic growth
in a poor developing country, it is necessary to develop a viable and responsive financial
services strategy for the poor in Nigeria. One active way that has been used to attract
commercial banks to low-income clients in some countries is through the use of financial
intermediaries operating closer to the target clients. If there is strong emphasis on
savings mobilization, micro-finance would effectively bring help to the low income
people to increase and stabilize their income and assets. In this regard, the role of the
financial sector in savings mobilization cannot be over-emphasized.
The absence of financial institutions in most rural communities in Nigeria has made the
CBN’s drive to enhance the cultivation of savings culture or habit among our rural
populace ineffective. The rural communities and in particular, the low income group in
the society have their own traditional machinery for mobilizing savings, and sometimes
it would be beneficial to build on such tradition in operating these schemes. If the formal
financial sector can tap into these traditional entities and be prepared to pay the
appropriate interest rates, it would have succeeded in fulfilling its role as financial
CBN ECONOMIC & FINANCIAL REVIEW, VOL. 39 N0. 4
Intermediaries and, thus, facilitate access to banking and other financial devices by the
poor.
The recent initiative by banks to set aside 10 percent of their profits before tax for
equity participation in small and medium scale industries is noteworthy, but would not
likely fully address the financing problems of the rural sector. The main issue that needs
to be vigorously addressed is how to mobilize savings for micro finance. The poor in the
society have demonstrated tremendous capacity to use their limited access to financial
services to improve themselves and what they need is an empowerment to do so. This
can be done by developing a sound, innovative, autonomous and responsive financial
intermediaries that are located very close to the target areas. Such financial
intermediaries should be able to:
Mobilize savings from rural communities and low income earners.
Liaise with external bodies [e.g. government agencies,, UN/international
agencies, commercial banks, etc.] to obtain funds;
Provide other formal products and lending services targeted at the client;
Provide social banking and other technical services to the poor such as project
and business plan preparation, capacity building and providing market
information;
Coordinate loan recovery efforts and manage funds received from community
groups using banks ; and
Generate and manage a set of information system for record keeping, monitoring
and evaluation.
There is need, therefore, to establish intermediary financial institutions to build
sound and responsive banking services to the poor by improving their access to capital
loan funds and technical assistance. To this end, micro-finance networks should be
encouraged at the national level to provide the appropriate infrastructure for exchange of
experience, performance standards and institutional development support. There is also
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the need for a mechanism to encourage linkages between the intermediary finance and
institutions, commercial banks, development banks, etc. We need to evolve a
comprehensive guideline for the monitoring and evaluation of micro-credit activities,
which will integrate various approaches in such a manner as to reflect the cultural, social
and economic needs of the people, taking cognizance of the past experiences.
In addition to the above proposals, the monetary authorities can contribute
significantly to reducing poverty in Nigeria through improvements in the macroeconomic
environment and ensuring the soundness and stability of the financial system. With
regard to the macro economic policy environment, the CBN has an important role by
ensuring that price stability remains its primary policy objective. This is important
because in a macroeconomic environment characterized by high inflation and exchange
rate instability, it is the poor that are the most vulnerable group in the society that suffer
most and bear the brunt of the instability. This is because they do not hold or have access
to assets that they could use as hedges. Thus, monetary policy that guarantees medium to
long-term price stability would protect the poor, facilitate economic growth and, hence,
indirectly contribute to reducing poverty in the country.
A sound, stable and efficient financial sector is necessary for the attainment of the
main macroeconomic objectives, including sustainable output and employment growth.
An efficient financial sector improves the demand for money and, therefore, the process
of physical capital accumulation, which promotes economic growth, a prerequisite for
poverty reduction. Furthermore, interest rates that are positive in real terms would
contribute to enhancing financial savings, viable investments and efficiency in resource
allocation. In the special case of the low income and poor groups, a low interest rate
regime could be beneficial to them, but only in an environment of low and stable
inflation, which reinforces the need for price stability as the main objective of monetary
policy. Thus, the financial sector has a major role to play in poverty reduction by
bringing down interest rates to affordable levels for the poor.
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6. Conclusion:
The paper addressed the economic dimension of poverty reduction, particularly
the role of the financial sector in the reduction of poverty in Nigeria. It noted that both
the Government and the financial sector have made efforts in micro-credit financing,
which is a major constraint to the fight against poverty in Nigeria because, the poor do
not have access to credit facilities. However, these efforts have yielded very little
tangible results due to the strategies adopted in these micro-credit financing schemes.
Although, the paper considers access to credit very necessary for a successful microcredit
scheme, it, however, stresses the need for the participation of those involved in the
whole process of identifying and managing community- based projects, which respond to
their needs. In other words, there is the need to pursue vigorously a sustainable humancentered
development strategy capable of achieving a structural transformation of the
economy. And efforts should be made to accent to job creation strategies and adopt an
integrated approach to poverty reduction. It, therefore, advocates the adoption of UNDP
strategies, which involve the adoption of people and community-centered participatory
development approach, access to the financial services that will be offered under the
scheme, building real partnership among relevant government agencies, banks, NGOs,
community-based organizations, etc, and achieving financial and operating self
sufficiency. The paper also stressed the need to develop viable and responsive financial
services for the poor in Nigeria. It suggests attracting commercial banks to low income
clients through the use of financial intermediaries operating closer to the target clients
and noted that if there is a strong emphasis on savings mobilization, micro-finance is very
effective in bringing help to the low income people to increase and stabilize their income
and assets. Finally, the paper underscored the importance of the macroeconomic
environment in any programme to alleviate poverty in Nigeria. In this regard, it
underlined the role of CBN in pursuing price stability as the main objective of monetary
policy as well as ensuring the soundness, stability and efficient functioning of the
financial system and the benefits of a low interest rates regime to the most vulnerable
groups in the society.
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MICRO-FINANCE AS A STRATEGY OF POVERTY REDUCTION
Section 1.0
The present administration decided for best-reasons to give attention to poverty
reduction:
Poverty assessment study (1980-1996) Commissioned by World Bank indicated
that about 2/3 of population were below the poverty line in 1996.
Since then poverty had risen to an estimated poverty level of 70.6% in 1999 from
65.6% in 1996.
The movement in the per capita household expenditure (pce) had been declining
indicating poverty level, but rose by 10.8% in 1999 due to improved workers
remuneration and the new taxable income bands to enhance purchasing power of
the citizenry.
The paper is structured into 5 sections with section 1 being the introduction,
section 2 conceptual framework and country experiences. Section 3, efforts put in
place in Nigeria and the multilateral institutions, section 4 offers the microfinance
models and principles supporting the model for Nigeria. Section 5
concludes the paper
SECTION 2.0
Conceptual Framework
Conceptually understanding how to alleviate poverty is central to development
economies.
Programs that provide credit and build human capital try to eliminate the causes
of poverty.
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Timothy Besley (1997) two disparate approaches to poverty program design:
(i) Technocratic (Economist), and (ii) Institutional.
Technocratic approach associated with economist and targeting poor (directing
resources to people with the greatest need).
Institutional approach (non-economist) social/welfare which have failed due to
incompetence / corruption. / diversion.
The gulf between the two is the role of NGOs.
The Transfers Concept
The most commonly accepted model of transfers is the cost-minimizing approach
of transfers to the poor.
The model view society as composed of those who make transfers (the rich) and
those who receive them (the poor).
Transfers can perform two distinct roles – first as collateral and second as a way
of improving the operation of credit markets.
Country experiences
There are various breakthroughs in the last decade that have made micro-finance
program an imperative to alleviating poverty.
First and most important is the longstanding and fundamental assumptions about
the bank ability of the poor. This has been overturned based on well-documented
experiences in banking with the poor in a selection of developing countries.
Second, a shift in thinking within the effort of credit delivery and savings to the
poor to include low- income customers in the national financial systems (including
non-bank financial institutions). What are the implications?
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Third is the development of new lending technologies that are effective (using full
cost interest rates and high loan repayment rates).
Micro- finance institutions have become financially sustainable (full financial
sustainability is reached when administrative, loan loss, inflation and financial
costs are covered entirely by revenues).
New focus on mobilizing savings among the poor (for sustainable operations).
Some Micro-Finance Models
There are basically formed and informal models of purveying micro-credit to the
poor.
Informal Model
Informal Model is built around group concept. The model had been largely
successful, groups with commitment, Voluntary and Cohesive. (I) The Grammen
Bank experience in Bangladesh. (ii) NGOs, (iii) Esusu
Formal Model
The formal micro-finance model is built around formal financial institutions. The
model largely unsuccessful. The reasons were:
Limited knowledge of the poor:
No closer relationship between the formal and informal institutions.
Credit need of the poor small and per client costs are high and expensive to reach
groups of client.
Linkage Model
The framework for linking informal to the formal formed the basis for the
breakthrough and paradigm shift.
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Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB)
Ghana framework registered collectors association in the bank (What are the
obstacles and successes?).
The linkage should be enhanced by designing policy to overcome the observed
obstacles such as distrust, inadequate knowledge about informal agents and
prejudice – creating risky environment for formal banks linking up with informal
micro-credit activities.
Donors Model
UNDPs
The Ekpuk (family) model
Section 3
Efforts At Micro-Credit Delivery to the poor
Several programs since early 1970 and strongly from 1986 ADPs, NDE, Better
Life for Rural Dwellers, Family Support, DFRRI, Rural Banking ACGSF.
Problems - most not relevant, urban structured from the standpoint of the
realities of (who is the poor?) – understanding the poor
Lending procedure tortuous process
Bilateral/Multilateral Institutions Efforts
Assisting countries to understand the poverty situation in developing economies .
Provide Poverty Assessment Study as Strategy for debt concession HIPC
initiative .
Core Principles (country-driven, result-oriented comprehensive, partnership
oriented).
Key processing for Effective poverty Reduction Program
Develop a comprehensive understanding of poverty and its determinants.
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Choose the mix of public actions that have the highest impact on poverty
reduction.
Select and track outcome indicators using appropriate framework.
Section 4
Micro-Finance Model for Nigeria Poverty Alleviation Strategy
From the Concept of Transfers (using fiscal operation) realistically the
government should pursue a progressive micro- finance model.
Assist the totality of the needs of those groups that will participate.
Serve as seed capital
Finance start ups
Linked institutional framework
Operations concentrated in rural areas and focus on micro-enterprises.
Ensure working capital loans
Do not include restrictions .
Allow for guarantee that matches their capacities such as personal guarantees and
peer pressure.
Prioritize the process using the information on poverty assessment.
Principles For Effective Micro-Finance Institutions
Simplify services
Offer small initial loans
Offer short term loans
Localize services, focus on scale
Shorten turn around time
Motivate repayment
Recognize that the poor do save
Charge full-cost interest rates.
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Section 5
Conclusions
Looking ahead to the future of micro-finance programs in Nigeria several
conclusions could be drawn.
Significant room for improvement within the current programs using the
established principles and best practices.
The unique condition the country is in now to finance transfers through budgetary
allocation – the treasury.
Micro- finance could be run by other financial institutions in spite of the merger
NACRDB.
Training is key to effective/efficient program.
Political stability flows from having more stakeholders participate in the resource
endowment of the country for growth and sustainable development.