THE IMPACT OF MICROFINANCE BANK IN POVERTY REDUCTION


THE IMPACT OF MICROFINANCE BANK IN POVERTY REDUCTION

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ABSTRACT

This work examined the impact of microfinance bank in poverty reduction using Cosmopolitan microfinance bank as a case study. A cross sectional data was used to carry out this impact analysis. The ordinary least squares result revealed that savings is the only major determinant of income level in Port Harcourt community. Even though Cosmopolitan microfinance bank does not extend financial services as a result of high interest rates on borrowing and other impediments inherent in the activities of cosmopolitan microfinance bank, our regression result revealed that Cosmopolitan microfinance bank plays a significant role in poverty reduction in Port Harcourt.

CHAPTER ONE

1.1 BACKGROUND OF THE STUDY

Microfinance has gradually developed to be a worldwide movement, no longer being a subject matter of microfinance practitioners alone. Governments, donors, development agencies, banks, foundations, corporations, business communities, civil societies, researchers, universities, consultants, philanthropists and others are taking an increasing interest in it (Sale Huddin and Hukinil, 2004).

The increasing level of acceptance of microfinance among the various groups of stakeholders worldwide presents the following questions: is microfinance becoming popular because it is a good business to make money or is it a powerful tool to fight poverty or is it because of both (Annibale and Bob: 2006). Since the concept was born is Bangladesh almost three decades ago, microfinance has proved its values in many countries, as a weapon against poverty and hunger. It really can change people’s live for the better, especially the lives of those who need it most (Ashmawi ans El-fouadh: 2006) it has been evidenced worldwide that microfinance helps the poor to overcome poverty and not through charity. It is a financial system that serves the poor with financial services in a most effective and productive way.

The experience of many microfinance institutions so far strongly suggests that it is possible for the institutions to reach the goal of serving people in extreme poverty without having to sacrifice their profitability. This is mostly because microfinance is designed with the poor in mind, while at the same time being founded on market principles of competitiveness, pricing and sustainability. There is nothing wrong in earning money while serving the poor, as long as earning money does not become the prime or the only goal of microfinance providers. Microfinance institutions throughout the developing world are proving small loans to the poor for self-employment and providing to be sustainable enterprises in the fight against poverty (Daley – Harris: 2006).

The global picture regarding microfinance outreach is quite impressive from a mere 7.6million poorest families in 1997, the micro-credit of more than 92million clients by December 31, 2004, this number includes 66.6million families who were among the poorest when they started with a program (Adams and Ivatury: 2004): of these 66.6million poorest clients, 55.7million or 83.6% were served by the 52 largest individual institutions, all with 100,000 or more clients. Among these largest microfinance institutions, 79% is in Asia, 17% are in Africa and only 4% are in Latin America.

Robust economic growth cannot be achieved without putting in place well focused programmes to reduce poverty through empowering the people by increasing their access to factors of production, especially credit. The latent capacity of the poor for entrepreneurship would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant, increase employment opportunities, enhance household income and create wealth.

On January 1, 2001, Nigeria joined the ranks of developing nations adopting laws and policies to regulate the microfinance sector. Under the new microfinance policy of the Central Bank of Nigeria, community bank and microfinance institutions must increase their capital base from 5million naira (approximately 42,000 USD) to 20million naira (approximately 169,000 USD). The purpose of this policy is to create microfinance banks that are financially sound, stable, self-sustaining and integral to their communities with potential to attract more customers.

Microfinance is about proving financial services to the poor who are traditionally not served by the conventional financial services, the federal government through the Central Bank of Nigeria established community banks in every locality.

A reversal of that led to the establishment of microfinance banks to replace them, which is now better constituted and equipped to function. The Cosmopolitan microfinance bank is an example of one of these micro-financial services institutions committed to poverty reduction within its jurisdiction.

1.2 STATEMENT OF THE PROBLEM

In envisioning the future of microfinance, it is important to know the rationale for microfinance movement. Poverty focused microfinance came into existence as a private initiative growing almost unnoticed through process of learning by doing.

The global concern for the level of poverty in Africa is well known to all. Africa is have lest hit by the crippling problems of chronic hunger and malnutrition. The great concentration of poverty is sub-Saharan African which is also a matter of concern for all. Despite such disappointing facts, microfinance in Africa is growing. A broad range of diverse institutions offers financial services to low income clients in Africa. These include non-government organizations, non-bank financial institutions, co-operatives, credit unions rural banks, Rotating Savings and Credit Associations (ROSCA), postal financial institutions, and increasing number of commercial banks.

When the present administration came into office on the 29th May 1999, it paid attention to poverty reduction. During the regime preceding this administration, the World Bank tried to focus on poverty reduction in Nigeria and so commissioned a study on poverty assessment in Nigeria. The study not only profiled poverty but also established quantitatively the trend of poverty encroachment to development from 1980 to 1986. the study showed that poverty level in Nigeria has been extremely high, with about two thirds of the population living below poverty line (Akanji, 2008). Consequently, mainframe economic though established that to conquer poverty requires action at the local, National and global levels to expand poor people’s opportunities empower them and increase their security.

This study aims to establish the need to empower the poor, which has been estimated to be on the increase through the operation of microfinance banks as a strategy for poverty reduction. This study intends to address the following questions:

i What are the roles of microfinance banks on poverty reduction in Port Harcourt town?

ii How does Cosmopolitan microfinance bank extend financial services and credits to beneficiaries?

iii What are the impediments to micro-financial services faced by Cosmopolitan microfinance bank?

1.3 OBJECTIVES OF THE STUDY

The broad objective of this study is to estimate the role of microfinance banks on poverty alleviation with a special focus on Cosmopolitan microfinance bank. The specific objectives shall include:

i To determine the impacts of microfinance banks on poverty alleviation in Port Harcourt town.

ii To trace how Cosmopolitan microfinance bank extend micro-financial services to customers or recipients.

iii To evaluate the likely obstacles to micro-financial services faced by Cosmopolitan microfinance bank in the discharge of their duties.

1.4 HYPOTHESES

The research hypotheses of the study are:

1. Cosmopolitan microfinance bank play significant role in poverty reduction in Port Harcourt town.

2. Cosmopolitan microfinance bank extends financial services and credits to potential beneficiaries.

3. There is no impediment to the discharge of micro-financial services by Cosmopolitan microfinance bank.

1.5 IMPORTANCE AND RELEVANCE OF THE STUDY

Poverty is a hydra-headed social and economic problem facing Nigeria for nearly half a century with diverse and far reaching implications for current and future generations. Likewise, efforts at stemming the tide have also been crucial among policy makers and the concerned authorities.

Microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions. Three features distinguish microfinance from other formal financial products. These are:

i. The smallness of loans advanced and or savings collected.

ii. The absence of asset-based collateral and

iii. Simplicity of operations.

To this end this study is relevant and important to the extent that it explores the nature of micro-financial services available in microfinance banks. The study shall equally illuminate the derivable benefits from micro-financial services are well as acts as guide to scholars and commentators whose basic interest is in microfinance banks in Nigeria.

1.6 LIMITATION AND SCOPE OF THE STUDY

This study is limited to the roles of microfinance banks on poverty alleviation in Nigeria: a case study of Cosmopolitan microfinance bank. The analysis touched on both the focus point as well as national impacts.

In another vein, there were limitations encountered in the process of undertaking this study which include insufficient materials from the focus of the study as well as time limits that affected a better analysis of the issues being studied.

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