IMPACT OF MICRO CREDIT ON POVERTY ALLEVIATION IN NIGERIA
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IMPACT OF MICRO CREDIT ON POVERTY ALLEVIATION IN NIGERIA
Chapter one
INTRODUCTION
1.1 Background for the Study
Poverty is a big issue in most developing economies. In these economies, it is argued that, among other things, the poor’s inability to escape poverty is due to a lack of access to finance. Meeting the demand-supply gap for lending in formal financial institutions has proven difficult (Von Pischke 1991).
In truth, the gap is caused not only by a lack of loanable funds for the poor, but also by the high cost of lending to the poor by formal financial institutions. Lending to the impoverished entails substantial transaction costs and risks due to information asymmetries and moral hazards (Stiglitz and Weiss 1981).
Nonetheless, in numerous emerging economies, governments have interfered by establishing microfinance institutions to close the gap and allow the poor to obtain loans.
One of the primary policy goals for the founding of microfinance banks in Nigeria was to aid small and medium-sized firms in increasing their productive capacity and employment generation, hence reducing poverty and promoting human capital development.
According to Haque and Yamao (2009), poverty alleviation through microcredit is now widely recognised around the world, with microcredit propagandists, governments, donors, development agencies, and others increasingly interested in using the microcredit medium to advance the course of poverty reduction while also enhancing human capital development.
In order to capitalise on the benefits of microcredit in reducing poverty and improving human capital development in Nigeria, the Central Bank of Nigeria (CBN) developed the micro finance policy and framework in 2005.
The December 2005 policy statement creating microfinance banks in Nigeria was commendable and well-intentioned, as the microfinance industry was quickly becoming the next “frontier” for the financial service industry in terms of providing and promoting microcredit grants.
According to the CBN policy and regulatory framework for microfinance banks in Nigeria, released in December 2005, and an appraisal of existing microfinance-oriented institutions in Nigeria, a major reason for establishing microfinance banks was based on the findings of the baseline economic survey of small and medium-sized enterprises in Nigeria conducted in 2004, which revealed that the 6,498 industries covered employed slightly more than one million workers.
Given that around 18.5 million Nigerians (28% of the available labour force) are unemployed, the employment objective/role of SMEs is far from being realised. Based on the National Economic Empowerment and Development Strategy (NEEDS) objectives of empowering the poor and the private sector, the provision of necessary financial services has become critical to enabling people to engage in or extend their current range of economic activities and generate employment.
Delivery services as outlined in the strategy would be significantly enhanced by additional channels provided by the microfinance banking framework, which would assist small and medium-sized enterprises in Nigeria in increasing their productive capacity and level of employment generation (CBN, 2005).
Microfinance’s impact on poverty reduction has been measured in a variety of ways, including increased income, employment, and household consumption, as well as decreased vulnerability to economic and social disasters.
These assessments have tended to focus on a single geographic location, an institution, or a small client group, making it difficult to generalise or draw conclusions that span borders, income levels, gender, or socioeconomic position (Honohan, 2004).
Meyer (2002) stated that the financial sustainability and welfare impact of microcredit can also be assessed. According to Hulme (2000), knowledge of the achievements of such microcredit schemes is incomplete and controversial.
1.2 Statement of the Problem
Capital is a vital instrument for business enterprises. Without capital, no firm can survive or thrive. The capital problem is particularly acute in countries such as Nigeria. In rural Nigeria, village moneylenders are the only source of financing, and their interest rates are quite high. So microcredit is critical for their revenue growth.
Giving poor individuals financing for microenterprises can help them earn their way out of poverty. Furthermore, by offering loans rather than grants, the microcredit provider can become self-sustaining by recycling resources on an ongoing basis.
Over the last several years, there has been a significant growth in the number and volume of government programmes designed to encourage the unemployed, young people, welfare recipients, and other disadvantaged sectors of the population to start their own, very small businesses.
Furthermore, every known regime recognises the necessity of fostering microenterprises as a means of decreasing poverty and unemployment while promoting economic growth. As a result, multiple microcredit organisations were founded to help SMEs grow.
Microcredit institutions include the Nigerian Bank for Commerce and Industry (NBCI), the National Economic Reconstruction Fund (NERFUND), the People’s Bank of Nigeria (PBN), Community Banks (CB), and the Nigerian Export and Import Bank (NEXIM), as well as banking sector liberalisation.
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