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 IIperiod, 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.
1.2 Statement of Problem
Evidence in Latin American, Asian and African countries show that savings mobilization is one of the key activities in building a sound financial system (Lamberte et al, 2006; Amel et al, 2004; Gonzalez-vego, 2003; Roberts and Hanning ,1998; Deaton,1992; Bencivensa and Smith, 1991; Braverman and Guasu, 1986; Begashaw, 1978). However, in developing countries, savings are often under mobilized. Two commonly cited underlying causes are: (1) prevalence of inappropriate saving products and poor services by depository institutions, (2) lack of confidence in the safety or liquidity of financial institutions by rural people (Sec, De Aghion and Morduch, 2005; Gonzauz-vega, 2003; Ghosh et al, 2000; Feder, 1993). Therefore, to effectively and efficiently mobilize savings, saving products appropriate for rural savers need to be developed and depository institutions need to improve their services to this category of the population. Also, the institutions need to win the confidence of the rural people by building easy and friendly saving and withdrawal procedures.
The core objectives of national integrated rural development plan (2000) for microfinance bank are: to ensure significant reduction of poverty and ultimately its eradication in the shortest possible time; mobilize and empower rural population to create wealth through increased agriculture , industrials and other productive activities; promote the expansion of the productive base of the rural economy through the creation of non-agricultural enterprises; provide access to extension services, input, credit and marketing services and to raise rural productivity in general. The integrated rural development plan identifies poverty reduction, mobilization of savings and financing agriculture as the three cardinal transmission channels through which micro financing will enhance rural economic growth and development.
In Nigeria, the government through its legislation seem to exacerbate the micro credit banking crises. For example, in 1990 the government established the community bank to promote banking habit among the rural people and accelerate rural development through financial intermediation. In 2005, the government through the central bank of Nigeria mandated the existing community banks to migrate to Microfinance Banks CBN (2005) (10) (Vanguard, 2011). The regulatory framework for microfinance banks changed the ownership structure of the community banks by allowing a single individual to own a microfinance bank. The regulation also increased the minimum share capital for microfinance banks to N20 million for unit bank and N2 billion for state bank. Such has the ability of creating unlevel playing ground between the poor and the rich. The reform targets economically active poor without effectively addressing the deluge of problems the defunct community banks encountered.
Moreover, the Nigerian deposit insurance corporation conducted a nationwide investigation in 2011 on all the microfinance banks in the country. The findings led to the complete closure of about 224 microfinance bank (Vanguard, 2011).The remote causes of such crises could be traced to the lagging supervision and liberal licensing of microfinance banks. This is because CBN was giving microfinance bank license without proper regulatory and supervisory requirement. This situation led to the proliferation of microfinance banks without complying to the regulatory issues like regular rendition of reports to Central Bank and keeping proper book of account.
This development triggered widespread criticisms on the microfinance model by depositors and customers of the affected microfinance banks. The Nigerian Deposit Insurance Corporation (NDIC) promised full protection for depositors and publishes regularly depositors that are yet to collect their claims. However the nature of microfinance clients makes the NDIC promise mere window dressing as some of them can not read nor write let alone have access to national dailies.
With such policy vacillation, the ability of micro finance banks in achieving the national integrated rural development plan in the Nigerian economy is not certain and so constitutes a very good research area. The essence of this study is to fill this research gap.
1.3 Objectives of the Study
The major objective of this study is to investigate the impact of microfinance on rural economic growth in Nigeria. To achieve this objective, the study strives to fulfill the following specific objectives.
- To examine the impact of microfinance activities on agricultural contribution to gross domestic product in Nigeria.
- To evaluate the impact of microfinance activities on rural savings in Nigeria.
- To assess the impact of microfinance activities on rural poverty in Nigeria
1.4 Research Questions
The following are the research questions which this study seeks to answer.
- To what extent has microfinance activities impacted positively and significantly on agricultural sector contribution to Nigeria’s gross domestic product.
- To what extent has microfinance activities impacted positively and significantly on rural savings in Nigeria.
- To what extent has microfinance activities impacted positively and significantly on rural poverty reduction in Nigerian.