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IMPACT ASSESSMENT OF THE SMALL CREDIT FINANCE TO POVERTY ALLEVIATION IN THE RURAL SOCIETY IN NIGERIA

ACCOUNTING PROJECT TOPICS AND MATERIALS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Micro-finance is defined as a development tool that grants or provides financial services and products such as very small loans, savings, micro-leasing, micro-insurance and money transfer to assist the very or exceptionally poor in expanding or establishing their businesses. It is mostly used in developing economies where SMEs do not have access to other sources of financial assistance (Robinson, 2003). The informal financial institutions constitute; village banks, cooperative credit unions, state owned banks, and social venture capital funds to help the poor. These institutions are those that provide savings and credit services for small and medium size enterprises.

They mobilize rural savings and have simple and straight forward procedures that originate from local cultures and are easily understood by the population (Germinis, 1991). The development of micro-finance programs gained a worldwide acceptance and popularity since 1980s in providing financial services to the poor. It is one way of the antipoverty instrument of the development programs. Numerous institutions in many parts of the developing world have been providing micro-credit and recovering their loans. 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. Micro-finance is created to fill this gap (Irobi, 2008). Micro-finance 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, alert at a small scale.

According to Anyanwu (2004), micro-finance 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, micro-finance 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 institution. Suffice it to say that the unwillingness or 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 micro-finance in Nigeria. Many people in developing countries neither have their own bank accounts nor are they able to take out loans, transfer money or insure their families against risks such as illness, accident or death. In most cases, access to these financial services that are so central to sustainable development are either denied or made very difficult. Consequently, people frequently have no choice but to resort to local money lenders who charge higher rates of interest or use informal and therefore, insecure ways of performing transactions such as payments and money transfer. The role of Micro Finance institutions in poverty reduction in developing economies has been increasingly realized over the years. The international year of Micro Credit declared by the United Nations for 2005 emphasized the central role played by a healthy and stable financial sector in reducing poverty in developing countries.

Micro Credit is the lending side of micro finance (Rallens & Ghazenfa, 2005). It includes advancing small loans to the poor people usually without collateral. Micro Finance on the other hand is defined to include the entire spectrum of financial services for broad sectors of the population but particularly for the poor. It refers not only to small and micro loans, but also savings products, insurance, leasing and other money transfer services (Addai J. K, 2010). It is now common knowledge according to Egbe (2000) that the 1980s witnessed a rapid growth of commercial banking activities in many Nigerian rural communities where banking habits, culture, commitment and community development was poor if not nonexistent. It is instructive to note that during this period, community funds among rural dwellers were hardly gathered for financial inter-mediation in order to stimulate domestic economic activities. Suffice it to say that in rural communities, the rural business class hardly seeks formal institutional credits to improve their economic base. It would be observed that, despite the presumed developments in the Nigerian economy, the country is still largely being regarded as a developing country (Onyema, 2006). Before the emergence of formal micro-finance institutions, informal micro-finance activities flourished all over the country. Traditionally, micro-finance in Nigeria entails traditional informal practices such as local money lending, rotating credit and savings practices, credit from friends and relatives, government owned institutional arrangements, poverty reduction programmes etc (Lemo, 2006).

1.2 STATEMENT OF THE PROBLEM

This revealed the existence of a wide gap in the provision of financial services to a large number of the economically active poor and low income households in the rural communities. The effect of not addressing this situation appropriately would further accentuate poverty and slow down growth and development in this area. The Central Bank micro-finance policy of 2005 stated that the establishment of micro-finance banks has become imperative. Poor households are stuck in the vicious cycle of poverty; their resources are locked up in inefficiency, including their best resource which is their “labour”. There are a couple of reasons and one of them is financial liquidity constraints. For example, these poor peasants might have more family members willing to help in agricultural farming. But if they cannot afford improved crop varieties and better farm inputs, therefore, becomes inefficient and unproductive (Taiwo, June, 2012). Lack of access to credit is generally seen as one of the main reasons why many people in developing economies remain poor. Usually, the poor have no access to loans from the banking system because they do not have an acceptable collateral. Moreover, the costs of screening and monitoring the activities of the poor, and of enforcing their contracts, are too high for the banking sector. The only option left for the poor masses is the micro-finance institution.

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