This study investigated the impact of micro finance operations on grass root development, by analyzing its effect on factors that define the major characteristic of the grass root which is poverty. It was identified from literature that low productivity and employment are the major causes of poverty, and all strategies that fail to address their increase cannot bring about development at the grass roots. Based on this assumptions as rooted in the micro finance classical theory, this study raised eighteen hypothesis which were tested through multiple regression analysis. Data was gathered from secondary sources of the Central Bank, World Bank Data base, and the National Bureau of statistics. Micro finance operations was proxied by Micro finance Banks (MFB) Micro- credit, Micro- deposits and size of the industry; while grass root development was proxied by rate of employment and aggregate productivity in sectors where the grass root is economically active. The results revealed that Micro- credit did not have any significant impact on employment or any of the sectors’ productivity, but had the potential of increasing employment, and productivity in agriculture. Micro- savings was found to have a significant but negative impact on productivity in agriculture. The results also showed that although it had no significant impact on the other sectors, yet it had the potential to increase productivity in the manufacturing and transport/commerce sectors of the economy. The size of the micro finance industry had a significant and positive impact on employment rate; but a negative yet significant impact on productivity in the real estate/ construction sector. The insignificant impact of micro finance operations and its rather negative impact on most of the sectors which was contrary to our a-priori expectations could be explained by the prevalent problems of funds diversion of MFB clients to consumption expenditures rather than investment, which most often brings them into a debt trap, and most often death of such enterprises. Therefore the study recommended that MFBs introduce and priorities as part of its services, training and informative sessions to educate its clients on the potentials of funds being invested into businesses; priorities its functioning of monitoring and corporate governance in cases of lending, and extend more of its credit facilities to the agricultural sector. It also recommended that the government enhance its provision of basic infrastructure to ease operational difficulties encountered by these firms.


⦁    Title Page

⦁    Declaration

⦁    Certification

⦁    Abstract

⦁    Acknowledgement

⦁    Table of Content

⦁    List of Tables

Chapter One: Introduction

1.1.    Background to the Study

1.2.    Statement of the problem

1.3.    Purpose of the study

1.4.    Research Questions

1.5.    Hypotheses

1.6.    Definition of terms

1.7.    Significance of the study

1.8.    Scope of the study

1.9.    Limitations to study

1.10.    Organization of the study

Chapter two: Literature Review

2.0.     Introduction

Chapter three: Research Methodology

3.1.    Research Design

3.2.    Population of Study

3.3.    Data collection

3.4.    Operational Measures of Variables

3.5.    Data analysis technique

3.6.    Test of Hypothesis

Chapter four: Presentation and Analysis of Data

Chapter five: Discussion, Conclusion, and Recommendation

5.1.    Discussion

5.2.    Conclusion

5.3.    Recommendations




Table 2.1 Ownership of informal enterprises by sector in Nigeria

Table 2. 2. Participatory distribution of Sectors for which MFBs give account of Micro-credit activities

Table 4.1: Descriptive statistics of percentage growth rate of Variables- Micro Finance Banks (MFB) operations and Grass root development (1992-2013).

Table A. 1: MFB operations and Development indices

Table A.2: MFB operations and development indices cntd.

Table A. 3: Regression analysis: Beta coefficient

Table A. 4: Coefficient of Determination (R-Squared)

Table A. 5: Z-test at 5% level of significance- critical value


Figure 2. 1 Ownership distribution of informal enterprises by sector in Nigeria

Figure 2.2: Ownership of informal enterprises by sector in Nigeriafor which MFBs give account of Micro-credit activities

Figure 4.1: Comparison of MFB average apportioning of credit to sectors and the sector’s aggregate productivity.



1.1.    Background to the Study

In every society no matter how advanced, the system stratifies different levels of power, resources, and status among inhabitants; determining distribution pattern of these benefits and control over the distribution process. At the bottom of the distribution process lies those considered as the grass-root of the society. According to Pilisuk, McAllister and Rothman (1996), individuals with high socio-economic status, also considered as the elite are better positioned to exploit both persons and environments for their benefits, as they have greater share of powers and control over resources. On the other hand, the grass-root  are those with less power and fewer resources; they are thecommonorordinarypeople,especiallyascontrastedwiththeleadership; thesocietyatalocallevelratherthanatthecenterofmajorpoliticalactivity, and are mostly found in theagricultural,rural, and sub-urbanareasofacountry (, 2014). Pilisuk, McAllister and Rothman (1996), described them as those who most often lack the most basic of human necessities for housing, employment, food, health-care, education, and a clean and safe environment.They are the ordinary citizens and in particular the poor.

In developing countries like Nigeria, majority of their population fall under this description in contrast with what obtains in developed countries like America, where very few persons fall into this category. Therefore, the challenge for most developing countries has been the need to reduce the percentage of persons that fall into this category through grass root development. According to the US- ADF (1998), grassroots development is promotion in people’s well-being and empowering of persons and groups such that they can expand and make their own choices and bring about change. It centers on poverty alleviation and socio- economic empowerment of poor and vulnerable.Various measures have been employed including reforms in government and political structure (like, creation of districts and Local Governments); introduction of several government policies and programs like provision of public goods at the grass-root by the various tiers of government and their parastatals, and involvement of public-private partnership projects. According to Amsden (2011) the problem has been that these remedies to reduce poverty at the grass-root do not address the causes of poverty which is unemployment. Grass-roots poverty alleviation measures in Africa have been exclusively designed and targeted to make job-seekers more capable (healthy, educated, mobile), although no jobs are available. She further stated that poverty persists from low productivity which gives room for lack of employment; and to create employment requires capital investments to expand entrepreneurial opportunities and increase productive jobs. Going by Schumpeter’s theory, development can only be achieved when financial institutions are present to act as catalysts in the system. They function to provide financial resources through intermediation in form of capital accumulation for innovative entrepreneurs to invest, taking advantage of opportunities and thereby creating a whole cycle of increased productivity and employment which leads to development. Unfortunately, due to peculiar characteristics of individuals and entrepreneurs at the grass root, these ones have been faced with financial exclusion from the formal financial sector. In a bid to provide these desirable services to the grass roots, micro financingwascreated formally and has evolved informally in other to boost the productive capacity of these impoverished persons.Micro-finance means small-scale transactions of credit and savings, and it sometimes offers skill-based training to augment productivity or organizational support and consciousness-raising training to empower the poor  (Khander, 2003). Therefore, it is to a largeextent, meant to meet the needs of the ‘active poor’- small, medium, and micro-scale producers and businesses, and the vulnerable populace like women.This expectation has drawn much debate. Proponents insist that microfinance reduces poverty through increased productivity, higher employment and higher incomes; while critics argue that it rather drives poor households into a debt trap as money from loans are often spent on consumption instead of being used for productive investments, and therefore does not improved income or standard of living - health or education (Baidoo, 2014).Khander (2003) in same light hypothesized that since micro finance supports mainly informal activities that often have low market demand, aggregate poverty impact of microfinance in an economy would be unsustainable, low or non-existent in most developing countries. Most studies investigating impact of micro financing on development have often used survey designs that only showed their short run relationship as they use cross-sectional survey, and therefore fail to measure its sustainable impact where it exists. Posner, cited in Nicholas (2011) found that microfinance success had been more of a case-by-case truth than a universal one. Most studies on micro finance impact have more often looked at the individual or small group level (case-by –case), only a hand full have assessed if these claimed successes at the grass roots have such desired impact at the aggregate level. In Nigeria, micro financing has existed informally for decades, but was formally introduced under the regulation of the Central Bank from 1992. This study seeks to add to the body of knowledge in finance by investigating theaggregate impact micro finance may have on grass-root development in Nigeria over time, considering the root causes of poverty being low productivity and employment.

1.2.    Statement of the problem

Over time, Nigeria like most developing countries has struggled with the issues of extreme poverty at its grassroots. Several steps have been taken in direction of poverty alleviation and development, one of such is formal micro-financing.Micro finance banking was adopted by the Nigerian government as one of its ‘bottom-up’ approaches to development- targeting the grassroots, as recommended by international bodies like the World Bank and evident in aiding poverty reduction in places like India. A Policy Regulatory and Supervisory Framework for micro finance banking was introduced in 2005 by the Central Bank of Nigeria (CBN) to further strengthen the potentials of the industry and aid government in using them as a tool to effect development.This policywas later revised in 2011, to target at the recognition of existing informal financial institutions and bringing them within the supervisory purview of the CBN creating a platform for the regulation and supervision of microfinance banks.Since its formal introduction into the Nigerian banking systems debates have been on about its efficacy as a tool for necessary sustainable development at the grassroots. As at this year, 2014, the World Bank ranked Nigeria as third country with the largest number of poor people, and advised on the need to complement development efforts to enhance growth with policies that allocate more resources to the extreme poor like transfer(Omoh, 2014).  Gong by the World Bank development Indicators (2013), 70% of Nigerians still live below $2 per day and are therefore poor; and this index rather increased by 2.4% between 2004 to 2010, even though the number of Micro finance banks increased by 6.4% within the same period. Babajide in 2011 from her grass root study as obtains in most studies claimed that micro financing significantly impacted positively on the individual entrepreneur’s development in Nigeria. Given these facts, the core problem here concentrates on questioning the efficacy of micro finance banking as a potent tool for effecting sustainable grass root development in Nigeria, such that it reflects on aggregate indices. This study investigates this problem empirically.

1.3.    Purpose of the study

The objective of this study is to estimate the aggregate impact of micro-finance on grassroots development. Based on this the specific purpose is:

a.    To ascertain the effect of micro financing on productivity in sectors where the grass root is economically active.

b.    To identify the effect of micro financing on employment.

1.4.    Research Questions

To achieve the set out general and specific objectives of this study, this research intends to provide empirical answers to the following questions:

1.    In what ways has micro-financing increased productivity in sectors where the grass root is economically active?

2.    In what ways has micro financing impacted on employment?

1.5.    Hypotheses

To provide answers to our research questions and achieve our study objectives, this study raised 15 hypothesisfor the first research question, and 3 others for the research question above. Therefore we hypothesize thus:

H01: Micro-credit has no significant impact on productivity in the agricultural sector of Nigeria.

H02: Micro-savings has no significant impact on productivity in the agricultural sector of Nigeria.

H03: Size of the micro-finance industry has no significant relationship with productivity in the agricultural sector of Nigeria.

H04: Micro-credit has no significant impact on productivity in the mining sector of Nigeria.

H05: Micro-savings has no significant impact on productivity in the mining sector of Nigeria.

H06: Size of the micro-finance industry has no significant relationship with productivity in the mining sector of Nigeria.

H07: Micro-credit has no significant impact on productivity in the manufacturing sector of Nigeria.

H08: Micro-savings has no significant impact on productivity in the manufacturing sector of Nigeria.

H09: Size of the micro-finance industry has no significant relationship with productivity in the manufacturing sector of Nigeria.

H010: Micro-credit has no significant impact on productivity in the Real Estate/ Construction sector of Nigeria.

H011: Micro-savings has no significant impact on productivity in the Real Estate/ Construction sector of Nigeria.

H012: Size of the micro-finance industry has no significant relationship with productivity in the Real Estate/ Construction sector of Nigeria.

H013: Micro-credit has no significant impact on productivity in the Transport/ Commerce sector of Nigeria.

H014: Micro-savings has no significant impact on productivity in the Transport/ Commerce of Nigeria.

H015: Size of the micro-finance industry has no significant relationship with productivity in the Transport/ Commerce sector of Nigeria.

H016: There is no significant relationship between micro-credit and employment in Nigeria.

H017: There is no significant relationship between micro-deposits and employment in Nigeria.

H018: There is no significant relationship between size of the micro finance industry and employment in Nigeria.

1.6.    Definition of terms

Micro Finance:is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services.

Micro- financing: is the act of providing financial services to the poor who do not qualify for conventional bank services, like savings and credit extension.

Micro- credit: this is that aspect of micro-financing that deals with extending micro- debt funds (money available for a person to borrow) to micro- finance institution customers, usually at a cost (interest payment) for a specific time frame.

Productivity: refers to output of a sector, and in this case the increase or decrease in the volume of output.

Employment: This is having and occupation for which the person is paid, otherwise known as work or job engagement. This could be self-employment (a person works solely on his business activities to generate enough funds to pay himself), or being employed by another person or organization and paid for services rendered to them.

Income: refers to all financial inflows accruing to a unit (individual or group). In this case, we are referring to all financial receipts accruing to the household, which could be reflected by its total expenditure or receipts.

Poverty: this is a state of not having enough money to take care of basic needs such as food, clothing, and housing.

Aggregate development: collective or sum value of an economic growth indices; in this case, at the national level.

1.7.    Significance of the study

With the grassroots constituting approximately 70% of Nigerian’s population (Poverty headcount ratio at $1.25 a day (% of population), NBS, 2012), the results of this study will educate the Nigerian government and populace (especially the active poor) on the efficacy or irrelevance of micro-financing in the economic development process. The findings wouldalso instruct policy makers on areas where micro-financing can impact on grassroots development, and suggest policy/ strategy adjustments such that aggregate developmental goals can be achieved.

1.8.    Scope of the study

This study is carried out in Nigeria, and therefore geographically restricted to the area. The Central bank of Nigeria only began to give specific account of Micro-finance activities from 1992, and reliable records necessary to cover all variables and give balanced data are available up to 2013 for now; therefore this study covers a twenty- one year period of 1992 to 2009; and is geographically restricted to Nigeria. The study is restricted to examine the relationship between micro-finance operations and aggregate grassroots development indices in Nigeria within this given time frame.

1.9.    Limitations to study

Analyzing development could take several dimensions, but most of the data that reflect development especially at the grass root are  either incomplete, irregular or not up to date in Nigeria, therefore this study centered on two groups of indices, as these were data that where readily available and up to date. Of the two groups of indices, data on employment by sector was not included in the study, as their computation at the national level begun in 2004, which falls short of our study period.

1.10.    Organization of the study

To effectively carry out this study, this paper is dividedinto 5 sections. Section one is the introduction. Section two of this study is the literature review,which is made up of the theoretical framework and review of empirical literature. The former work discusses theories that relate to finance and development; while the second part reviews findings from empirical studies on the subject matter.  The third part of the study suggests the methodology used in the study, while the fourth section presents our data for the study, analyzes it and interprets the results of our tests. The final section, which is five, discusses the findings of our study, draws conclusion and makes recommendations accordingly.




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