THEORIES OF MICROFINANCE

            Microfinance Theory

The first wave of theoretical work on microfinance formulated by Greg Fischer and Maitreesh Ghatak focused exclusively on joint liability. The term joint liability can be interpreted in several ways which can be lumped under two categories. First, under explicit joint liability, when one borrower cannot repay her loan, group members are contractually required to repay in her stead. Such repayments can be enforced through the threat of common punishment, typically the denial of future credit to all members of the defaulting group or by drawing on a group savings fund that servers as collateral. Second, the perception of joint liability can be implicit, that is, borrowers believe that if a group member defaults, the whole group will become ineligible for future loans even if the lending contact does not specify this punishment. One form in which this can happen is if the microfinance organization itself chooses to fold its operations when faced with delinquency.

Ghatak and Guinnane (1999) review the key mechanisms proposed by various theories through which joint liability could improve repayment rates and the welfare of credit-constrained borrowers. These all have in common, the idea that joint liability can help alleviate the major problems facing lenders among which are screening, monitoring, auditing, and enforcement by utilizing the local  information and social capital that exist among borrowers. In particular, joint liability can do better than conventional banks for two reasons which are:

i)             Members of a close-knit community may have more information about one another i.e. each other’s types, action and states than outsider.

ii)          A bank has limited scope for financial sanctions against poor people who default on a loan, since by definition, they are poor. However, their neighbor’s may be able to impose powerful non-financial sanctions at low cost.

 

Broadly speaking, subsequent theoretical work on microfinance has gone off in other direction asides joint liability among which are “frequent repayment” and “sequential lending”.

Microfinance organizations often use high frequency repayment. Borrowers are typically required to repay their loans in regular installments, beginning soon after the loan is given out. This aspect of the repayment schedule is usually explained as inducing “fiscal discipline” among borrowers. Jain and Mansuri (2003) argue that an alternative rational for this loan repayment structure lies in the difficulty of monitoring borrower’s action. The potential for moral hazard leads microfinance institution to use innovative mechanisms such as regularly scheduled repayments which indirectly co-apt the better informed informal lenders. Conversely, this installment repayment structure allows informal lenders to survive. Furthermore, they show that this linkage cannot only expand the volume of informal lending but may also raise the interest rate in the informal sector.

 

Another mechanism often used by microfinance organizations is “sequential lending”. Loans are typically not given to all borrowers simultaneously. For example, in a two-member group, one member gets a loan only after the previous member has paid a number of her installments properly. This creates an additional stake for the member who comes in later to monitor the previous one. Indeed, with simultaneous lending, borrowers will under monitor but sequential lending avoids the problem. In his model, Row (2005) implicitly assumes that there is an escrow such that part of the first-round borrower’s revenue is taken away from her and returned to her only if the second-round borrower repays. This is a form of collateral creation which if practically feasible could indeed overcome one of the key underlying problems that generate credit constraints.

In conclusion, consider the interaction of joint liability and frequent payment. One potential cost of joint liability is that it might sometimes lead to default by the whole group because one borrower might not be able to pay-off her own loan (Besley and Coate, 1995). With frequent repayment and smaller repayment amount, this constraint would be relaxed.

 

2.3.2  Theory of Economic Development

The theory of economic development by Ranis is a theory taking the peculiar economic situation in developing country into account: unemployment and underemployment of resources (especially labour) and the dualistic economic structure (modern versus traditional sector). This theory is a classical theory because it uses the classical assumption of subsistence wage. Here it is understood that the development process is triggered by the transfer of surplus labour in the traditional sector to the modern sector to which some significant economic activities have already begun. The modern sector entrepreneurs can continue to pay the transferred workers a subsistence wage because of the unlimited supply of labour from the traditional sector. The profits and hence investment in the modern sector will continue to rise to fuel further economic growth in the modern sector. This process will continue until the surplus labour in the traditional sector is used up, a situation in which the workers in the traditional sector would also be paid in accordance with their marginal product rather than subsistence wage.

 

The existence of surplus labour gives rise to continuous capital accumulation in the modern sector because:

a)     Investment would not be eroded by rising wages as workers are continued to be paid subsistence wages and

b)    The Average Agricultural Surplus (AAS) in the traditional sector will be  channeled to the modern sector for even more supply of capital (e.g. new taxes imposed by the government or savings placed in banks by people in the traditional sector). It can be said that savings and investment are driving forces of economic development. The importance of technological change would be reduced to enhancing productivity in the modern sector for even greater profitability and to promote productivity in the traditional sector so that more labour would be available for transfer.

THE ROLE OF MICRO FINANCE BANKS TOWARDS THE DEVELOPMENT OF NIGERIA ECONOMY

Over the years, microfinance has emerged as an effective strategy for enhancing economic growth across developing countries. Micro, small and medium enterprises are turning to Microfinance Institutions (MFIs) for an array of financial services. Credit allocation is a powerful instrument to fight  poverty, increase productivity, output and enhance economic growth. Access to financial services enable poor households to move from everyday-for-survival to planning for the future, investing in better nutrition, their children’s education and health and empowering women socially (Ehigiamusoe, 2005).

 

Microfinance banking and Economic stability has a nexus that cannot be overemphasized. This is because the growth of economy is dependent on the availability of liquidity (in terms of small credit niche) to small and medium scale enterprises. Government has in the past initiated series of publicly-financed micro/rural credit schemes and policies targeted at rehabilitating the poor. Among the programmes of government aimed at reducing poverty were rural banking programmes, sector allocation of credits and concessionary interest rate which were executed through agricultural credit schemes represented mainly in the institutional arrangements of the Nigerian Agricultural and Cooperative Bank Limited.

According to Obasi (2015), “Microfinance banking is a micro credit support services of banking operations that is concerned with small unit fund collection, allocation, administering, and management, for socio-economic growth, poverty alleviation on benefiting societies and political tranquillity.” According to Dandana and Nwele (2011), “microfinance banking service that is well implemented play important role in modern society, as it provides micro credit loans to small and medium scale farmers and enterprises. It reduces poverty growth level and creates an enabling environment for social and political tranquillity. Because microfinance lending when properly managed benefits the poor rural farmers, small and medium scale enterprises, artisans, et cetera, it helps to aid economic growth of its beneficiaries and their society through poverty reduction. Microfinance programmes that are well channelled help to improve economy, so, if the principles and ethics of microfinance banking are followed in implementations in Nigeria, economy will grow and the poverty profile of Nigeria would reduce properly.

 Microfinance according to the Central Bank of Nigeria (2005) is about providing financial services to the poor who largely constitute the 65% excluded from access to financial services of conventional banks. More so, lack of access to credit has been identified as the reason behind the growing level of poverty in many developing countries. This further emphasizes the crucial role microfinance institutions play in economic growth especially in their service for unserved and underserved markets (economically active person in rural and urban areas) to help meet economic and development objectives which include to reduce poverty (considered as the most important). Create employment, help existing businesses to grow or diversify their activities, empower women and other disadvantaged groups and even encourage the growth of new businesses (Khander, 2003).

 In 2005, the Central Bank of Nigeria (CBN) formulated a new policy framework to enhance the access of financial services to micro-entrepreneurs and low income households who require such facilities (soft loans and investable funds) to expand and modernize their operations and their contribution to economic growth and development in Nigeria. The objective is in line with the institution’s policy in ensuring financial inclusion for all, such that financial services reach the poor whether in rural or urban communities as this would help improve their productivity level and also help contribute to the nation’s gross domestic product (GDP). 

In 2004, the Central Bank of Nigeria asserts that the emergence of microfinance institution has been largely due to the inability of the formal financial institutions to provide financial services to both the rural and urban poor. In view of the need for financial inclusion, both the government and non-governmental agencies have, over the years, implemented series of microfinance programmes and institutions as well as governmental agencies providing policy strategies needed to improve the productivity of micro, small and medium scale enterprises.

EFFECT OF MICROFINANCE BANK LOAN SCHEME ON THE ENTREPRENEURSHIP DEVELOPMENT IN NASARAWA LGA OF NASARAWA STATE

EFFECT OF MICROFINANCE BANK LOAN SCHEME ON THE ENTREPRENEURSHIP DEVELOPMENT IN NASARAWA LGA OF NASARAWA STATE

ABSTRACT

The study examined the effect of microfinance bank loan scheme on the entrepreneurship development in Nasarawa LGA of Nasarawa State. The specific objectives include; to find out the effect of microfinance bank loan scheme on the income of entrepreneurial activities in Nasarawa LGA, find out the extent at which microfinance bank loan scheme impact on the poverty of entrepreneurs in Nasarawa LGA and to find out the impact of microfinance bank loan scheme on operational pattern of entrepreneurship development in Nasarawa LGA. The researcher used primary data collection to gather information for analysis. Base on statistical test carried out using X,² hypothesis the study shows that microfinance loan scheme have a significant effects on entrepreneurship development in Nasarawa LGA of Nasarawa State. The study recommends that the microfinance institutions should put more effort in financing entrepreneurs and small and medium scale business in general and that the government should make laws and policies that improve the services of microfinance banks thereby removing the various problems militating against the effectiveness of microfinance banks in rural areas.

CHAPTER ONE

INTRODUCTION

1. Background to the study

Empowering the poor and small scale enterprises economically and liberating them from poverty is the major reasons for the establishment of micro finance institutions. According to Ehigiamusoe (2005), access to Sustainable access to microfinance operations helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering women socially to make the choices that best serve their needs.

Microfinance activities encompasses the provision of financial services to poor and low income people who are normally excluded from traditional financial systems as they are considered uncomfortable due to lack of collateral, steady employment and a verifiable credit including market women (Egyir, 2010). The situation that envisions the poor and low income people of having permanent access to an appropriate range of financial services that include credit, savings, and insurance and fund transfers is the core business of microfinance (Westover, 2008).

Microfinance does not only mean providing poor families with small loans to help them engage in productive activities or grow their small businesses, but over time, microfinance operations has come to provide a broader range of services such as credit, savings, insurance, money transfer facilities for all. This is because developers have come to realize that the poor who lack access to traditional formal financial institutions require a variety of financial products to help them grow their businesses, support their households and to engender sustainable livelihoods (Hagen, 2004).

Entrepreneur tend to operate in an environment with low investment, low potential growth, cheap and home-based premises and endure harassment on issues concerning licensing (Stevenson and Onge, 2005). Researches support the fact that entrepreneurs, mostly in developing countries, do not have easy access to credit for their entrepreneurial activity; likewise, women entrepreneurs tend to have little or no education and often lack confidence (Gakure, 2003). This has necessitated a research of this kind in order to assess the effect of microfinance bank loan scheme on the entrepreneurship development in Nasarawa LGA of Nasarawa State.

1. Statement of the Problem

Despite the crucial role of women entrepreneurs in the economic development of their families and countries; it is, however, discovered that women entrepreneurs have low business performance compared to their male counterparts (Akanji, 2006; Gakure, 2003); and this is caused by lack of access to finance. The microfinance banks from studies have proved to be the only recognized institution strategically positioned to eradicate poverty. Berg (2001) argues that, most of the businesses in developing countries lack access to basic financial services that would help them manage their assets and generate income. Studies finds that participation in microcredit programs results in economic and socio empowerment (Mayoux, 2001), most entrepreneurs in microfinance institutions fall under informal sector with most of them involved in small business to earn income to support their families. In developing country like Nigeria, entrepreneurship play a major role in household production (Mayoux, 1995; Ledgerwood, 1999; Pitt and Khandker, 1998). These are researches conducted on the impact of microfinance on the development of women entrepreneurs, however, the situation is different in Nigeria and none of these researchers provided sufficient justification for the effect of microfinance bank on entrepreneur thus there is need for this study to assess the effects of microfinance bank loan scheme on entrepreneurship development in Nasarawa LGA of Nasarawa State.

1. Objectives of the Study

The main objective of this study is to assess the effects of microfinance bank loan scheme on entrepreneurship development in Nasarawa LGA of Nasarawa State

The specific objectives will include;

1. To find out the effect of microfinance bank loan scheme on the income of entrepreneurial activities in Nasarawa LGA.
2. To find out the extent at which microfinance bank loan scheme impact on the poverty of entrepreneurs in Nasarawa LGA
3. To find out the impact of microfinance bank loan scheme on operational pattern of entrepreneurship development in Nasarawa LGA

1. Research Questions

The following research questions will guide the researcher towards achieving the set objectives of the study:

1. What effect do micro-finance bank loan scheme have on the income of entrepreneur activities in Nasarawa LGA?
2. Do micro-finance bank loan scheme impact on the poverty of entrepreneurs in Nasarawa LGA
3. What effect do micro-finance bank loan scheme have on the operational pattern of women entrepreneur in the study area

1. Statement of Hypotheses

Ho: Micro-finance bank loan scheme does not have significant effect on the income of entrepreneur in Nasarawa LGA.

H₁: Micro-finance bank loan scheme has significant effect on the income of entrepreneur in Nasarawa LGA.

1. Scope and Limitations of the Study

The scope of the study shall cover the effects of microfinance bank loan scheme on entrepreneurship development in Nasarawa LGA. However, owing to shortage of literature and financial data, raw data shall be generated from selected small business operators in Nasarawa LGA.

The researcher encountered problems at the time of carrying out this research. The following limitations are inherent in the study:

1. Time: Since there is no time set aside for writing this project, researcher has to combine the writing of the project with her normal academic and other commitment in the academic environment.
2. Finance: Finance hinder the researcher from expanding the scope of this study beyond Nasarawa LGA as this will involve more money which is not at the disposal of the researcher.
3. Lack of adequate materials: Arising from inadequate reading materials and uncooperative attitude of a few respondents.

1. Significance of the Study

Given the fact that literature on effects of microfinance bank loan scheme on entrepreneurship development in Nasarawa LGA, the importance of this study is that it adds to the literature, and can also provide a basis for further research. As such, the study will contribute to recent debates on the roles of social capital and economic empowerment on Nigerian entrepreneurs and other small and scale medium business.

The findings of this study will benefit the Government of Nigeria and its agencies, Microfinance banks, and entrepreneurs. Moreover study revealed the importance of such institutions and furthers the understanding of its importance to society. Understanding its importance, the government will also be able to provide support services and strategies to enforce the micro-finance industry in order to reach the economically active entrepreneurs in Nasarawa LGA and the country at large.

Furthermore, it is expected that this study will be beneficial to MFIs, policymakers, small and medium enterprises operators and the community at large. It is further expected that the study will explore and recommends potential areas that MFIs needs to put more efforts when delivering their services. On the other hand, policymakers will also benefit in the sense that, the findings will provide informed suggestions on how policies can be improved.

1. Historical Background Of Nasarawa Microfinance Bank

Nasarawa Microfinance Bank Limited formerly known as Nasarawa Community was incorporated in Nigeria under the Companies and Allied Matter Act as a Private Limited Liability Company on the 8th March 1993 with RC No: 217845.

Nasarawa Microfinance Bank is located at  17, Umaru Makama Dogo Road, Nassarawa, Nasarawa LGA of Nasarawa state with sole aim of providing financial services effectively and sustainably to women, youth, and MSMEs in the community and beyond through the motivated human and requisite material resources so as to improve their standard of living.

The Nasarawa Microfinance presently operates from three location with corporate head office at N0 17 Umaru Makama Dogo Road, Nasarawa Local Government area of Nasarawa State and Lafia branch office at Block K1 shop No. 1 Lafia Modern Market and Toto branch office located at Opposite Central Pilot Primary School, Toto Abaji Road, Nasarawa State.

The bank presently offers several services among which accounts and loans services

Types of accounts services offered by the bank

1. Personal savings account
2. Individual current account
3. Fixed deposit account
4. Weekly / daily adashi saving account
5. Target Savings Account
6. Remittance account
7. Infant orphans savings account

Types of loan services offered by the bank

1. Microcredit loan
2. No worries loan
3. Assets acquisition loan
4. LPO finance loan
5. Joint venture loan
6. Lets go to farm loan
7. Self help loan
8. Adashi microcredit loan
9. Staff loans

1.9       Definition of Key Terms

Small Scale Business: Small and medium scale business as used in this project refers to any form of business which is private own and operated with a small number of employees, relatively low volume of sales and small capital based (Akanji, 2006)..

Microfinance: Microfinanceare small-scale financial services which are primarily credit and savings provided to entrepreneurs or rural dwellers such petty traders which is targeted at improving their businesses thus enhancing social economic wellbeing (Marguerite, 2001).

Entrepreneur: An entrepreneur is a person who sets up a business with the aim to make a profit. In the concept of this study, entrepreneurs are women who engaged in petty trades such as sales of food stuff, vegetables, clothes, provision store etc (Baba, 2013)

Microfinance Bank (MFBs):  Microfinance are financial institutions licensed to carry on the business of providing microfinance services such as savings, loan, domestic funds transfer, and other financial services that are needed by the active poor, micro, small and medium enterprises to conduct or expand their businesses (Marguerite, 2001). Micro- credit: In the light of this study, micro-credits are loans given out small and medium scale business especially women entrepreneurs to development and improvement their business (Hagen, 2004).