Academic journal article The Journal of Developing Areas

The Impact of Microfinance on Financial Inclusion in Nigeria

Academic journal article The Journal of Developing Areas

The Impact of Microfinance on Financial Inclusion in Nigeria

Article excerpt

(ProQuest: ... denotes formulae omitted.)


"Along with the three other pillars of development - democracy, education and infrastructures - microfmance is increasingly considered a key instrument in implementing effective and sustainable strategies in the fight against poverty" - Jacques Attali, President of Positive Planet

Efforts to deliver affordable credit to low-income borrowers are not new. Many attempts have been made throughout history to establish institutions for supplying credit to the poor. Clear and longstanding examples are discouragement of usury and Islamic prohibitions of interest. Sharia prohibits the acceptance of interest for loans of money (known as usury, or riba). Historically, these prohibitions have been used to different degrees in Muslim countries and communities to prohibit non-Islamic practices. In the late 20th century, a number of Islamic banks applied these same principles to private commercial institutions within Muslim communities (Rammal & Zurbruegg, 2007). Likewise, in Nigeria, strategies to increase the income of the poor have existed in the form of rotating contributory savings schemes (referred to as Esusu, Itutu, Adashi, Bambam and Ajo in different parts of the country) common among market traders. The reluctance of formal finance institutions to grant credit has, over time, meant that the poor have turned to direct borrowings from friends and relations, self-help groups, accumulating credit and savings associations, and credit associations (Akpan, 2009; Okpara, 2010). However, existing studies suggest that such moneylender credit is costly. Robinson (2001) and Banerjee (2004) found that "moneylender interest rates go from 4% per month (60% annual, 50% or so real) to simply astronomical rates such as 5% per day and above. In the countries where microcredit has had the greatest success, such as Bangladesh, Bolivia, India, and Indonesia, interest rates are significantly lower than 30% per year" (cited in Chakrabarti & Sanyal, 2015, p. 2). Nevertheless, microfinance has many benefits (See Figure 1) and has become a veritable institutional mechanism for enhancing credit access for low-income groups.

Topmost among these advantages is that microfinance serves as a vehicle for financial inclusion. Figure 2 shows how microfinance serves as a bridge for poor and lowincome households to achieve financial inclusion. Microfinance products such as credit, savings, and insurance encourage more people to become included in the financial system.

Financial inclusion benefits the economy (Mohan, 2006), reduces income inequality, increases availability of funding for efficient intermediation and allocation (Shankar, 2013), and promotes start-up enterprises which contribute to the process of creative destruction (Schumpeter, 1942). Financial access in the form of loans, savings accounts, and insurance products can be said to be prerequisites for growing economies and their poor. Currently, the poor must resort to microfinance banks since formal financial institutions are disinclined to lend to low-income people (Murdoch 1999; Collins et al. 2009). As argued by Hariharan and Marktanner (2012, cited in Ene & Inemesit, 2015, p. 144) "the lack of financial inclusion is a multifaceted socio-economic phenomenon that results from various factors such as geography, culture, history, religion, socio-economic inequality, structure of the economy and economic policy." In a developing country such as Nigeria, these and other factors serve as barriers to financial inclusion, as shown in Figure 3. Supply-side factors include physical barriers, non-availability of suitable financial products, and non-eligibility due to documentation issues. On the demand side are financial capability and financial literacy.

These barriers to financial inclusion in Nigeria have resulted in extremely worrying statistics with regard to financial access: About 36.9 million adults (39. …

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