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ANALYSIS OF THE EFFECTS OF MICRO FINANCE BANKS
ON POVERTY REDUCTION AND ECONOMIC GROWTH IN
NIGERIAN ECONOMY
SUNDAY C. NWITE Ph.D, ACII, ACIB, IRDI
SENIOR LECTURER
AND
DR. OGIJI F.O
DEPARTMENT OF BANKING AND FINANCE
EBONYI STATE UNIVERSITY – ABAKALIKI

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PHONE NO: 080-37743134
E-MAIL: nwitewhite2006@yahoo.com
ABSTRACT
Poverty has been a cankerworm and predicament which has deepen into the
marrows of Nigerian systems. This has over the years made it very difficult for
Nigerians to develop as a nation. Several attempt have been made by various
regimes in an attempt to alleviate poverty, little success have been made in
this direction. This work examined the various attempts by these regimes
using a historical research with the view of curbing or eradicating poverty. The
overall objective of this study is to evaluate the effect of micro finance banks
on poverty reduction and economic growth in Nigerian economy. Specifically,
the study tends to achieve the following objectives. To find out if 4 micro
finance policy have reduced the poverty level in Nigeria. A review of this policy
on poverty is caused by factors such as death, illness, accident, old age,
inadequate employment of the head of household or breadwinners. In rural

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African, these factors are the root causes of poverty while at the macro-level
poverty, a myriad of factors of organizational behaviour to political instability
economic mismanagement, infrastructural inadequacies and lack of
commitment to poverty reduction policies. The researcher recommends a total
commitment by the government to a comprehensive social security system
geared towards reducing both the micro and macro levels of poverty which is
currently been adopted by the present government.
INTRODUCTION

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Economic growth and poverty reduction through the empowerment of people
by increasing their access to factors of production, especially credit (loan) has
became a catalyst, for stimulating sustainable economic growth and poverty
reduction, with access to micro credit, the capacity of the poor
entrepreneurship would enable a teaming number of people engage in
economic activities, also became self-reliant, thereby increasing employment
opportunities, increasing household income and crediting wealth (CBN, 2005).
It is in relation of this great potential of micro finance that the Central Bank of
Nigeria (CBN) by virtues of the provision of section 28, sub (1) (B) of the CBN
Act 24 of 1991 (as amended) and in pursuance of the provision of section 50-
60 (a) of the bank and other financial institution Act, BOFIA 25 of 1991 (as
amended) were taking the initiative to create a platform for the establishment
of private sector driven micro finance banks (MFBs) as a strategy to make
impact in the economic development in Nigeria.
Therefore, the Central Bank of Nigeria (CBN) has put in a national micro
finance policy framework that would enhance the provision of diversified micro
finance services on a long term basis for the poor and low income earners with
a view to promoting synergy between micro finance bank and other
specialized institutions. The policy seek to improve the Central Bank of
Nigerian’s regulatory and supervisory roles in ensuring monitory stability,

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economic growth poverty reduction and liquidity appropriate machinery for
monitoring the activities of development partners in the micro finance sub-
sector in Nigeria.
Similarly, Sam Oni, director, Other Financial Institution Department (OFID) has
re-emphasized the need for effective supervision of Micro Finance Banks
(MFBs) in order to harness their potentials which tend towards offering a
tremendous scope for economic growth, poverty reduction, and employment
generation and rural transformation in emerging economy (Financial standard,
2007).
The importance of Nigerian micro finance banking system has been noted by
several researchers, including Okey (2007), IFAD (2010), Oni (2007) for the
crucial roles it plays in serving as a credit mobilization, deposit generation and
provision mechanism to people who have to been deprived loan or credit
extension by deposit money banks (commercial banks).
CONCEPT OF MICRO FINANCE BANKS
The Micro Finance Banks (MFBs) as a necessary veritable tool for enhancing
economic activities and promoting natural economic growth and reducing
poverty was associated with the promulgation of micro finance policy,
regulatory and supervisory framework for the establishment and operation of

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micro finance banks in Nigeria by Central Bank of Nigeria (CBN) on December
15.
The concept of micro finance is not new, saving and credit groups that have
operated for centuries includes the “Susus” of Ghana, “Chit funds” in India,
“Tanda” in Mexico, Arisan in Indonesia, “Cheetu” in Srilanka, and “Pasanaku”
in Botova, as well as numerous saving clubs found all over the world. Formal
credit and saving institutions for the past decades, providing customers above
traditionally neglected by deposit money banks (commercial banks) a way of
obtaining financial services through co-operative and development finance
institutions.
The micro finance practice in Nigeria is culturally rooted and dates back
several years. The traditional micro finance institution provides access to
credit for the rural and urban low income earners.
They are mainly of the informal self-keep groups or rotating saving and credit
association (ROSCAS), (CBN, 2005).
In government attempt to enhance flow of micro credit or loan to Nigeria rural
areas has in the past initiated a series of publically financed micro/rural credit
programmes and policies targeted at the poor and other institutional
arrangements which include:

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The National Directorate of Employment, the Nigeria Agriculture Insurance Co-
operation (NAIC) Family Economic Advancement Programme (FEAP), People
Banks of Nigeria (PBN), Community Banks (CBs) National Poverty
Programme (NAPEP) and a lot of others as if these institutional arrangement
were not yielding positive results on the purpose to in which they are meant for
the federal though the Central Bank of Nigeria (CBN) formulated and
promulgated microfinance policy, regulatory and supervisory framework on
December 2005 for the establishment and operation of micro finance banks as
a necessary veritable tools for enhancing economic activities and promoting
national economic growth and development as well as making financial
services available on a sustainable basis to the micro small and medium
enterprises (MSMEs) (Daily un, 2005).
st
To this effect, December 31 2007 was given as the financial dealer for
conversion of community banks to micro finance banks provide micro credit or
loan to economically active poor and low income household with financial,
services, such as credit (to held them engage in income generating activities
or expand or grow their small businesses), saving, micro leasing, micro
insurance and payment transfer. (Daily Champion, 2007).

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OBJECTIVES OF MICRO FINANCE BANKS
According to (CBN, 2005), this following contributed to the justification for the
establishment of micro finance banks, which is the objectives of its formation.
i. The existence of a huge un-served market: The size of the
un-served market by the existing financial institution is large. The
average banking density in Nigeria is one financial institution outlet to
32,700 inhabitations. In the rural areas, it is 1.57,000 that is less than
2% of rural households have access to financial services. (Nwite,
2004)
ii. Economic Empowerment of the Poor, Employment
Generation and Poverty Reduction: The base line economic
survey of Small and Mediums Industry (SMLs) in Nigeria conducted in
2004 indicated that the 6,498 industries covered currently employ a
little over one million workers. Considering the fact that about 18.5
million (28% of the available work force). Nigerians are unemployed,
the employment objective and role of the small and medium
industries (SMs) is far being reached. One of them have marks of the
National Economic Employment and Development Strategy (NEEDS)
is the employment of the poor and private sector through the
provision of the needed financial services to enable them engage in

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or expand their present scope of economic activities and generate
employment.
Delivery needed services as contained in the strategy would be
remarkable enhanced through additional channels which the micro
finance banks frame work would provide. It would also assist the
small and medium industries (SMLs) in providing their productive
capacity and level of employment generation.
iii. The Need for Increased Saving Opportunity: The total assets
of the 615 community banks which rendered their report, out of the
753 operating communities as at end December 2004 stood at N34.2
billion (CBN, 2005).
However, owing to the inadequacy of appropriate saving opportunities
and products, saving have continued to grow at a very low rate,
particularly in rural areas of Nigeria most people keep their resources
inn kind or simply under their pillows, such methods of keeping
savings are risky, low in terms of returns and under mine the
aggregate volume of resources that would be mobilized and
channeled to deficit areas of the economy. The micro finance policy
would provide the needed window of opportunities and promote the
development of appropriate (safe, less costly, covenant and easily

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accessible) saving products that would be attractive to total
customer’s level and improve the saving level in the economy.
iv. The interest of Local and International Communities in
Micro Financing: Many international investors have expressed
interest in investing in the micro finance sector. Thus the
establishment of micro finance sector framework for Nigerian would
provide opportunity for them to finance the economic activities of low
income groups and the pool.
v. Utilization of smeeis fund: As at December, 2004, only N8.5
billion (29.5%) of N28.8 billion small and Medium Enterprise Equity
Investment Scheme (SMEEIS) fund has utilized.
Moreover, 10% of the fund meant for micro credit had not been
utilized due to lack of an appropriate framework and confidence in the
existing institutions that would served the purpose.
This policy provides an appropriate vehicle that would enhance the
utilization of the fund.
THE CONCEPT OF ECONOMIC GROWTH

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Here, it is very important to make known the meaning of economic growth in
order to appreciate the effect of micro finance banks have made in the
economic growth in Nigeria, and as well highlight the relationship between
micro finance banks and economic growth and development in Nigeria.
The term economic growth has become more populate as difference
researcher have written on them.
According to Micro (1970) economic growth is a process whereby the real per
capital income of a country increases over a period of time.
Awoke, Ede, Oke and Lyiogwe (2005) defines economic growth as the
process by which the real per capital income increases over though changes
in quantity of productive factors.
While Okeke (1994) views economic growth as different stages involved in the
process of increasing the quantity of goods and services.
Black (1966) describes economic growth as an increase in the capacity of an
economy to produce goods and services compared from one period of time to
another. Consequently, economic growth under this content means a process
by which a nation’s wealth increases overtime.
ANALYSIS OF EFFECT OF MICRO FINANCE BANKS ON
ECONOMIC GROWTH IN NIGERIA

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The question of what effects has micro finance banks in enhancing
sustainable economic growth has been the subject of a substantial amount of
theorizing and empirical research. This has produced a general consensus on
the relevance of enhancing development and promotion of micro finance
banks as an anti-powerly tool in ensuring economic growth and developing the
country, (CBN, 2007).
Such emphasis has been deeply rooted upon the crucial and indispensable
role that financial institution can play in economic life.
Historically, economists have focused on banking activities Schumpeter (1934)
stress the critical important of the banking system in economic growth. He
argued that, the services provided by the banking system, are essential for
technological innovation and economic growth and highlight situations when
banks can actively encourage innovation and future economic growth hereby
actively identifying and funding productive investment.
However, the Harrod- Domar growth model had implicitly postulates a nexus
between capital stock k (finance) and National Income (development).
The model postulates that change in National income y depends linearly on
change in capital stock is finance out of domestic saving s in the close
economy version of the model, that is k=s. but domestic savings depends on
national income that is, s=sy, where s is the ratio of income

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The model of national income growth is thus given as follows;
∆y = b∆k
∆k = S = Sy
∆y sb
Here, economic growth and development will process at the rate at which the
society can mobilize domestic saving resources coupled with the productivity
of investment y.
In the same vein, another important economic growth nexus is the micro
finance banks approach focusing on the important of micro-finance banks in
augmenting economic development.
The importance of micro finance bank as a tool for development in developing
countries has increasingly receive attention from policy makes and
development parishioners since the pioneering work of meicinnon on “money
and capital in economic development in 1973” and show on “financial
deepening in economic development in 1973”. There is an overall
acknowledgement that financially sustainable micro finance banks with high
outreach have a greater likelihood a positive effect on poverty reduction
(economic welfare) because they guarantee sustainable access to credit for
the active poor. (Journal of Banking, 2007).

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In Nigeria, especially, quite a number of micro finance banks have spring u
st
after 31 December, 2007 as the deadline for the conversion for Community
Banks to Micro Finance Banks (MFBs), and the effects on the Nigeria
economic growth include the following:
 Inculcation of good banking habit
 Deposit generation and saving mobilization
 Reduction of poverty rate
 Empowerment of economically active poor
 Granting of loans and advances
 Development of service sector
Ying assumption here is that as the economic growth in terms of increased
output, the level of development also rises, as more and more people are able
to live above poverty line and have access to the several means of life
sustenance.
Unfortunately, due to data constraints, resulting from the non availability of
disaggregated data on relevant variables that can be used for a more
sophisticated techniques, causality relationship between loans and advances
of micro finance banks and growth of the critical sectors cannot be estimated.

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FRAMEWORK FOR THE SUPERVISION OF MICRO FINANCE
BANKS
CBN (2005) provides the framework for the supervision of micro finance as
follow:
i. Licensing and supervision of micro finance banks: The
licensing of micro financing banks shall be the responsibility of the
central bank of Nigeria. A licensed institution shall required to add
“MICRO FINANCE BANKS” after its NAMES ALL such name shall be
registered with the corporate affairs commission (CAC) in compliance
with the companies and Allied Matters Act CAMA 1990.
ii. Establishment of a National Micro Finance Committee: A
National Micro Finance Conductive Committee (NMFCC) shall be
constituted by the Central Bank of Nigeria (CBN) to provide direction
for the implementation and monitoring of this policy, membership of
the committee shall be determined from time to time by the CBN. The
Micro Finance support unit of the CBN shall serve as the secretariat
to the committee.
iii. Credit reference bureau: Peculiar characteristics of micro finance
practice, a credit reference client and aid decision making is
desirable. In this regard, the present credit risk management system

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in the CBN shall be expended to serve the needs of the micro finance
sector.
iv. Rating agency: The Central Bank of Nigeria shall encourage the
establishment of private rating agencies for the sub-sector to rate
micro finance institutions, especially, those NGO/MFIs, which intend
to transform to micro finance banks.
v. Deposit insurance scheme: Since micro finance banks are
deposit taking institution, and in order to reinforce public confidence in
than micro finance banks shall qualify for deposit insurance scheme
of the Nigerian Deposit Insurance Corporation (NDIC).
vi. Management certification process: In order to bridge the
technical skills gap, especially among operators micro finance banks
of MFBs, the policy recognizes, the needs to up an appropriate micro
finance operational skills of the management team of MFBs. A
transition period of twenty four (24) months shall be allowed for the
take off of the programme with effect from the data of launching the
policy.
vii. Apex association of micro finance institutions: The
establishment of an apex association of micro finance institution to
promote uniform standards, transparency, good corporate practices

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and full discloses in the conduct of micro finance institution (bank)
businesses shall be encouraged.
viii. Establishment of micro finance development fund: In order
to promote the development of the sub-sector and provide for the
wholesale funding requirement of micro finance banks a micro
finance sector development fund shall be set up. The fund shall
provide necessary support for the development of the sub-sector in
terms of refinancing facility, capacity building and other promotional
activities.
The fund would be sourced from and through gift facilities from the
inter nature development financing institution as well as multilateral
and bilateral development institutions.
ix. Prudential requirement: The CBN reorganizes the peculiarities of
micro finance practices and shall accordingly put in place appropriate
regulatory and prudential requirement to guide the operation.
Methodology
The method of data analysis used in the analysis of the data collected in this
work include. Ordinary least square regression analysis, co-efficient of
determination, correlation co-effecting and t-test.

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Regression analysis
Regression analysis is a statistical tool which helps to credit one variable from
the other variable or variables Ogiji, (2002) the regression relationship can be
written as equations.
Y = B0+B1x1+B2x2 + e multiple regression
Where
Y = Dependent variables
B0 = Y interest
B1 = The scope of the line
X1 and X2 = Independent variables
e = The random term or unexplained variable between Y and X.
Co-Efficient of Determination
The co-efficient of determination is a measure of the amount of
correlation existing between y and x; it can be developed in terms of
the relative variation of the y-values around the regression line and
the corresponding variation of the mean of the y-variables
R2
F2 = Σbo y+b1 x y
Σ2y
Then, co-efficient of correlation become = r2
Here, the researcher used this to find out the degree of relationship
between Gross Domestic Product, growth rate and micro credit flow
and total deposits of micro-finance banks.
T-Test to determine the significant of the study.
This is used to determine how statistical the inclusion of the
independent variables are on the repression equation

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This formular is given as
t= r n-2
n- r2
The decision rule is, if the computed t-value is granted than the
critical t-value, the alternative hypothesis (H 1) will be accepted
otherwise rejected alternative (H0)
MODEL SPECIFICATION
The variable used for this research work include:
Gross Domestic Product (RGDP)
Micro Finance Bank Credit Follow = MCF > x1
Micro Finance Bank Total Deposit = MTD > x2
Therefore, Equation connecting Gross Domestic Product at current
Micro Credit and Total Deposit is thus:
Y = F (X1, X2)
That is, GDP = F(MCF, MFD)
Thus, the equation connecting G.D.P and MCF is written as:
Y = b1 x + b2 x2 --- (ii)
Which is multiple regression analysis
Year G.D.P (N MIILION) CREDIT FLOW (N
MILLION)

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2000 4,582,127.29 3,666.6
2001 4,725,086.00 1,314.6
2002 6,912,381.25 4,310.9
2003 8,487,031.57 9,954.0
2004 11,411,066.91 11,353.80
2005 14,572,239.12 17,632.07
2006 18,564,594.73 22,912.01
2007 20,657,317.67 31,867.08
2008 24,296,329.29 42,753.06
Source: (i) CBN (2006-2010) Statistical Bulletin (ii) Natural Bureau of Statistics
(iii) National Board for Community Banking System in Nigeria, an introduction,
Revised community Banks prospectus (iv) CBN (2010) Annual Report of
statement of account.
Year G.D.P (%) CREDIT
GROWTH FLOW (N
RATE MILLION)
2000 38.2 39.4
2001 3.1 -64.2
2002 46.3 228.1
2003 22.8 131.0
2004 34.5 14.1
2005 27.7 55.3
2006 27.4 29.9
2007 11.2 39.1
2008 17.6 34.2
Empirical Analysis of the relationship between G.D.P and credit Flow.

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2 2
YEAR Y X Y X XY
2000 38.2 39.4 1,459.24 1,552.36 1,505.08
2001 3.1 -64.2 9.61 4,121.64 -199.02
2002 46.3 228.1 21,143.69 52,029.61 10,561.02
2003 22.8 131.0 5119.54 17,161.0 2,986.8
2004 34.5 14.1 1,190.25 198.81 486.45
2005 27.7 55.3 767.29 3,058.09 1,531.81
2006 27.4 29.9 750.74 894.01 819.29
2007 11.2 39.1 125.44 1,528.81 437.92
2008 17.6 34.2 309.76 1,169.64 601.92
2 2 2
Total Σy 228.8 Σx 506.9 Σy 7,275.88 Σx 81,713.97 Σx 18,731.25
x = Σx that is, mean of x
N
x = 506.9 = 56.3
9
y = Σy that is, mean of y
N
y = 228.8 = 25.4
9
Hence
Y = b o + b i xi
bo = y - bi x

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bi = n Σxy – (Σy) (Σx)
2 2
n Σx – (Σx)
bi = 9 (18,731.25– 228.8 (506.9)
2
9 (81,713.97 – 506.9)
bi = 168,581.25 – 115,978.72
732,425.73 - 314,608.81
bi = 52,602.53
420,816.92
bi = 0.125
Also;
bo = y - bi x
bo = 25.4 – (0.125) x 56.3
bo = 25.4 – 7.04
bo = 18.36
Thus, this regression equation for these various is given as Y = 18.36-0.125x.
By interpretation, the b1 coefficients mediate that for each N1billion increase.
In Gross Domestic Product (G.D.P) micro credit flow is predicted to increase
by 0.125 million.
Coefficient of determination
2
r = b0 Σy +b+b1 Σxy

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2
Σy
2
r = 18.36 (228.8) + 0.125 (18,731.25)
7,275.88
2
r = 4200.768+2341.5
7,275.88
2
r = 0.89992
Remark: This mean that 89.92% of the variation in the dependent variable can
be explained by the independent variables.
To ascertain the direction of the relationship between G.D.P and micro credit
flow, the correlation co-efficient will be used, which is given as r
Coefficient co-efficient
= r
= 0.8992
r = 0.9483
This also shows that a story positive relationship exist between x
and y.
Therefore, having as ascertained the direction of relationship, we
proceed to test the significant of the relationship using t-test since
n = a (Number of years in consideration)
t= r n-2
1- r2

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t = 0.9483 9-2
1-0.8992
t= 0.483x2.6457
0.3175
t= 2.5089
0.3175
t = 7.902
While critical t value = 2.365. we determine the critical value of t with degree of
freedom (tE) = n-2 (9-2=7), at 5% level of significance (x) = 0.05 (i.e 95% of
confidence)
Thus, computed t >critical value at 0,05 level of significant, giving two failed
test.
The decision rule states that if the computed t value fails in the area between
< 2.365, the Null hypothesis will be accepted. Therefore, we reject Null
Hypothesis (H0) and then conclude that there is significant relationship
between G.D.P and micro credit flow in Nigeria economy.
CONCLUSION

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It is necessary to understand that in order to improve the economic position of
a lot of the Nigeria populate in the rural and urban areas, it is important to
realized that sustainable growth in fund allocation to agriculture to enhance
productivity is not only desirable but it is good for the poor in era of poverty
alleviation programmes.
The study also identified the policy implication and explains the
recommendations for over coming impediments to effective performance of
the micro finance banks in playing the various developmental roles assigned
to it.
We can infer that the recommendations will only be useful and work in the
interest of the poor, if there is adequate co-ordination and collaboration
between the central bank of Nigeria, government and other stakeholders in the
financial sector.
RECOMMENDATIONS
Despite government interventions through general policy measure over the
years, the Nigeria micro finance banking system has not fully realize the

26. 26
potential role it can play in breaking the various cycle of poverty at the glass
root level and contributory towards the general economic development of the
country. In view of this, it is worthy to drain alternation to the likely
recommendations that cannel ensure effective performance of micro finance
banks in Nigeria. They include the following
i. Need for policy and regulation reforms: Here, concerted efforts
should be made by the government to put in place suitable legal and
policy environment for the development and evolution of rural financial
market. The problems of reported delay in clewing cheques through the
micro finance banks correspondent banks should as a matter of priority,
be addressed so as to enable than perform financial intermediation
function effectively.
ii. Investment in infrastructures: The government needs to make
significant investment in the provision of infrastructures. This to a large
extend would reduce the cost of production and enhance further
investment in the rural economy.
iii. Recruitment and training of staff: The recruitment of qualified and
skilled manpowered that would effectively manage the affairs of the banks
should be a matter of priority. The staff quality should be enhanced
through staff training and better cost effective training programmes.

27. 27
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