Dj.project 222

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


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


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


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


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


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).


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.


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


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


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.


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.


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.


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?


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.


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.


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.


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.

Documents

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