Microcredit and household poverty status in rural Nigeria: experience from selected agencies in Ekiti State

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1 Int. J. Business and Emerging Markets, Vol. 2, No. 1, Microcredit and household poverty status in rural Nigeria: experience from selected agencies in Ekiti State I.B. Oluwatayo Department of Agricultural Economics and Extension Services, University of Ado-Ekiti, P.M.B. 5363, Ado-Ekiti, Ekiti State, Nigeria Abstract: There is no gainsaying the fact that microcredit has become a veritable tool amongst all the poverty alleviating schemes employed by various governments at both national and international levels. This is attributable to its accessibility and the non-inclusion of stringent measures required of credit acquisition from the formal financial institutions. Again, the less daunting formalities that usually keep the very poor away from harnessing credit facilities make it a good avenue for augmenting available cash to meet all necessary obligations by most households in rural areas. This study therefore tries to unravel how accessibility to microcredit has helped to cushion the effect of poverty in Ekiti State, Nigeria. Keywords: microcredit; well-being; informal financial institutions; development initiatives; Nigeria; emerging markets; business; international. Reference to this paper should be made as follows: Oluwatayo, I.B. (2010) Microcredit and household poverty status in rural Nigeria: experience from selected agencies in Ekiti State, Int. J. Business and Emerging Markets, Vol. 2, No. 1, pp Biographical notes: Isaac Busayo Oluwatayo is a Professor in the Department of Agricultural Economics and Extension Services, Faculty of Agricultural Sciences, University of Ado-Ekiti, Nigeria. He had his PhD in Agricultural Economics from the University of Ibadan, Nigeria. His research interest areas include poverty, food security, vulnerability and risk, gender issues, HIV/AIDS, climate change, microfinance and rural welfare. He has won grants both locally and internationally to conduct researches on a number of developmental issues having direct bearing on the lives of rural dwellers. He has also published widely in international journals and presented in international conferences. 1 Introduction The rising level of poverty has been the major concern of both national and international governments for the past two decades. In fact, most of the debates held at international fora revolve round this debilitating problem of poverty. Worse still, many of the attempts made to curtail the rising tempo of poverty have yielded little or no result hence the recent advances in microcredit studies. Microcredit programmes have been one of the Copyright 2010 Inderscience Enterprises Ltd.

2 78 I.B. Oluwatayo leading strategies in the overall movement to end poverty. The term microcredit is the extension of small loans to entrepreneurs too poor to qualify for formal bank loans. It has been used as a catalyst in many community development activities as an entry point in a community-organised programme or as an ingredient in a larger education or training exercise. Much of the current interest in microcredit stems from the micro-credit summit (held in February 1997), where microcredit was defined as an extension of small loans to very poor people for self- employment projects that generate income, allowing them to care for themselves and their families. The United Nations (UN) charter enjoins microcredit to promote higher standards of living, full employment and conditions of economic and social progress and development. Therefore, at the international scene, almost all international agencies are involved in varying degrees in this direction. In Nigeria, successive administrations have employed various poverty alleviation strategies through development programmes (Idachaba, 1995; World Bank, 1996a) such as the National Accelerated Food Production Programme (NAFPP), Directorate for Food, Roads and Rural Infrastructures (DFRRI), National Directorate of Employment (NDE), River Basin Development Authority (RBDA), Agricultural Development Projects (ADPs) National Fadama Development Project (NFDP) and National Land Development Authority (NALDA), to mention just a few. When the laudable objectives of the above programmes failed to address adequately these cancerous problems of poverty and food insecurity, microcredit support programme was introduced. However, the philosophy of Non Governmental Organisations (NGOs) involvement in microcredit programmes was to improve the lots of women in the areas of agriculture, health, and education etc. More so, its task in alleviating poverty includes; fight against child labour and child abuse, girls prostitution and forced or early marriages, street begging and hawking (Mohanty, 2006). These according to the philosophy of the programmes was aimed at empowering the women socially, culturally, economically and politically with a view to making them active in the process of developing the nation. Under the NGOs soft loans were provided for the rural households to establish cottage industries and improve post harvest conservation. To further underscore this, the NGOs resolve to use microcredit scheme as avenue for investment promotion and poverty alleviation programme that will stimulate appropriate economic activities across the land in order to raise the level of productivity and economic power of people, especially the vulnerable ones, through the establishment of cottage development projects in all the nooks and crannies of the country in the areas of farming, processing, machines and tools fabrication etc. NGOs have been making appreciable efforts towards alleviating poverty in the country, while some have closed down; some prospective ones are still in existence. These organisations have emerged as a key player in microcredit programmes. They serve as intermediary in various dimensions. Some of the laudable roles of these NGOs include; creating awareness on the importance of microcredit within the community as well as various national and international donor agencies develop resources and tools for communities and microcredit organisations to monitor progress and identify good practices create opportunities to learn about the principles and practices of microcredit through publications, workshops and seminars and training programmes.

3 Microcredit and household poverty status in rural Nigeria 79 The Nigerian economy is full of attempts at alleviating poverty especially among vulnerable groups based on ideas with large degrees of failure. Experience of Peoples Bank and Community Bank is still fresh. The failure experienced through these approaches derived from wrong perception by lenders of the unique framework of cooperatives due to poor financial management by some cooperatives, lack of understating of the status of NGOs by a large number of microcredit beneficiaries, among others (Ajakaiye, 1991; Kumuyi et al., 1992; World Bank, 1995). Poverty can be defined as the social condition characterised by the inadequacy of access to basic human needs for the maintenance of socially acceptable minimum standard of living by the majority in any given society. The world has been making increasing effort to combat it. Hence, eradication of poverty is a global commitment. Poverty is characterised by lack of purchasing power, exposure to risk, insufficient access to social and economic services and few opportunities for income generation. Poverty being multifaceted emanates from lack of access to endowment such as employment, education, heath care facilities, good food, water, proper sanitation, good infrastructural development. Other features of poverty are inadequate access to land and capital or credit, lack of access to markets for the goods and services and inadequate or non-involvement of the poor in the design of programmes on poverty alleviation and inadequate access to assistance by people in transitory poverty due to war, flood or drought. 2 Literature review Several factors have led to increased interest in microcredit schemes. For instance, there has been a growth in the recognition of the importance of microcredit at empowering people by increasing their access to all the factors of production, including credit (World Bank, 1996b; Graeme, 1997). Also, evidences support the theoretical assertion that microcredit assists the poor to escape from poverty (Odejide, 1997). Furthermore, microcredit is a compelling anti-poverty and development strategy because of its ability to stimulate savings and promote asset accumulation among the poor people. One of the important services that many micro-credit programmes offer their clients (both borrowers and non-borrowers) is a safe place to put their savings. Empirical and anecdotal evaluation of many microcredit programmes report conclusively that from clients perspective, learning to save and having a safe place to keep those savings, are principal benefits of the programme (Adeyeye, 2001). There are many advantages to saving; both to the borrower and the micro credit institution. Borrowers correctly see savings as a way to enhance family security. Savings also give borrowers a yardstick for measuring their economic progress and are often a source of pride to women who have their own working capital. Moreover, by providing borrowers with a growing stake in their peer-lending group, the accumulation of savings provides an incentive for borrowers to assist an efficient and transparent management of funds. In some microcredit systems, savings generated by the members of a peer lending group are lent out again to the group members, creating a second loan portfolio whose interest on income becomes an additional source of income to the borrower. For the microcredit lending institution, savings can provide an important source of additional collateral for meeting the shortfall of non-repayment, and for increasing the supply of available loan capital. Savings as a percentage of the total loan

4 80 I.B. Oluwatayo portfolio also provides a convenient measurement of the programme rates of internal capitalisation and financial self-sufficiency. The linkage between microcredit programme and poverty can also be seen from its efficacy in increasing access to basic social services and enhancing the wellbeing of the very poor people. John Hatch; Founder, Foundation integral Canpesina summarised; Increased income earned by a low-credit mother translates into a chain of positive improvements to her family. This chain starts with her capacity to purchase more food. A better diet and improved nutrition stimulate better family health. Improved health results in greater resistance to disease, higher energy, greater capacity for work and learning, and thus enhanced productivity. As family nutrition and health are stabilised, incremental investments in the education of children are almost certain to follow. Closely behind education expenditure comes investment in home improvements. Finally, these outcomes are paralleled by a near-total transformation of the borrower s self-respect. Thus, a poor woman who is able to access micro-credit can also gain increased access to primary health care, safe water and sanitisation for her family, and family planning information and services. She is also more likely to enroll her children in school. In a UNICEF supported micro-credit programme in Vietnam, it was found that 97% of the daughters of the borrowers attended school, compared with only 73% of non-borrowers (Hahn and Mario, 1996). Micro-credit programmes also make significant contributions toward building civil institution, for as noted above, they improve the economic well-being of people and foster institutions that give them a greater opportunity to participate in their society. This is especially true of women, who have traditionally been excluded from participating roles, yet are particularly vital to the functioning of democratic societies. On the other hand, various approaches to poverty alleviation have been suggested in the literature. These include the economic growth strategy; basic needs fulfillment strategy and the rural development strategy. Economic growth strategy of poverty alleviation assumes that economic deprivation is at the root of poverty while non-economic causes of poverty like education, health etc. are secondary. Consequently, attention is focused on rapid economic growth (real per-capita gross domestic product), stability and declining unemployment or increasing employment. Attainment of these objectives requires the harmonisation of fiscal and monetary policies to achieve tickle-down effect to the poor. The theory has been criticised in the sense that there is nothing inherent in economic growth that automatically guarantee poverty alleviation (FOS, 1996). Moreover, economic growth is often untargeted to guarantee benefits to the poor in term of educational health and housing (Pfeffermann, 1991; Olayemi, 1995). Accordingly, the beneficiaries of the programme should be integrated into the rural development scheme to ensure suitability of the programme. The basic need fulfillment has to do with meeting the basic necessities of life i.e., food, clothing and shelter. The rural development approach argues for the total emancipation and empowerment of the rural sector as a disproportionate high percentage of the poor are located in the rural areas. In Nigeria, FOS/ World Bank (1999) study puts the incidence of poverty in the rural areas at 69.3% in It must be noted that food production is essentially a rural activity. The Rural development approach has much to recommend, given the prevalence of poverty in the sector and the fact that in most cases, rural sector usually loses out in poverty alleviation programme.

5 Microcredit and household poverty status in rural Nigeria 81 3 Research methodology 3.1 Study area The study area is Ekiti State. The state was created on October 1st 1996 and comprise five major administrative divisions i.e., Ekiti North, Ekiti West, Ekiti East, Ekiti South and Ekiti Central with 16 Local Government Areas (LGAs). The state lies between latitudes 6 20 and 8 10 North of the equator and between longitudes 4 20 and 5 40 East of the Greenwich Meridian. Ekiti State is landlocked and is, therefore, bounded in the North by Kwara and Kogi States, in the West by Osun-State; also in the East by Kogi State and in the south by Ondo State. The recently conducted 2006 census figure puts the population of the state at 2,737,186. It covers a total land area of 6, sq. km. The State is mainly an upland zone, rising above 250 m above sea level. Ekiti State economy is purely agrarian. The women are predominantly traders while the men engage in faming. 3.2 Data source and sampling technique Primary data were used in this study. Data were collected from respondents with the aid of well-structured questionnaire. The information obtained include; socioeconomic characteristics of respondents, monthly household income and expenditure from beneficiaries and non-beneficiaries of credit facilities. A multi-stage random sampling technique was used in this study. The first stage was the selection of five LGAs from the 16 LGAs in the state. This was followed by selecting two communities each from the selected LGAs. The third stage was the random selection of respondents based on probability proportionate to size and a total of 200 respondents were interviewed for the study. 3.3 Analytical techniques A number of analytical tools were employed in this study and these include; Descriptive statistics. Such as tables, frequencies, graphs, mean, median, mode and percentages were used for the analysis of socioeconomic characteristics of the respondents. Poverty measurement tool. The starting point of poverty analysis is the poverty line. It is usually based on consumption (expenditure) data. The proportion of population below the poverty line provides a quick indication of the scope of poverty problem. In this study, total expenditure was expressed in per-capita terms to adjust for household size by dividing each household s total monthly expenditure by household size. Total Household Monthly Expenditure Per-capita Household Expenditure (PCHHE) = Household Size Total Real Per-capita Expenditure for all Household Mean PCHHE = MPCHHE = Total number of Household

6 82 I.B. Oluwatayo The relative poverty line was constructed based on the MPCHHE of the sampled respondents for each household group. Hence, Core poor, Moderately poor and Non-poor were defined as; Core poor < 1 / 3 MPCHHE Moderately poor < 2 / 3 MPCHHE Non-Poor 2 / 3 MPCHHE. Probit regression model Y = α0 + βs Xs + εi where; Y: Poverty status of households (Poor = 1, 0 otherwise) α 0 : Constant term β s : Parameters to be estimated X s = (X 1 X 8 ): Vectors of (non- stochastic) explanatory variables which are defined below X 1 : Age (Years) X 2 : Gender (Male = 1, Female = 0) X 3 : Marital status (Married = 1, 0 otherwise) X 4 : Household size X 5 : Years of formal education of household head X 6 : Primary occupation (Farming = 1, 0 otherwise) X 7 : Access to credit facility (Yes = 1, 0 otherwise) X 8 : Asset (Naira) ε i : Error term. 4 Presentation of results and discussion 4.1 Socioeconomic characteristics of respondents This section discusses and interprets households socioeconomic characteristics age, gender, marital status, educational levels, household size, and income distribution of respondents. 4.2 Age distribution of respondents Table 1 presents the distribution of respondents by age. It shows that respondents with age less than 30 years have a percentage of 33.0%, 17.5% are in the age group of years, 25.0% are in the age group of years, 13.0% are in the age group of years and 11.5% in the age group greater than 60 years. This shows that majority are in their active year. This reveals that 75.5% of the respondents are within the age of years, indicating that majority are in the working class age group.

7 Microcredit and household poverty status in rural Nigeria 83 Table 1 Age distribution of respondents Age Frequency Percentage > Gender of respondents With regards to gender of surveyed respondents, 48% of respondents are female, while 52% of respondents are male. The distribution shows that there are more male-headed households than their female-headed counterparts in the study area. This is further depicted in Table 2. Table 2 Gender distribution of respondents Gender Frequency Percentage Female Male Total Marital status of respondents Going by the distribution in Table 3, about 36.5% of the surveyed respondents are single, 47.0 are married, 9.5% are widowed and only 7.0% are widowed. This analysis indicates that majority of respondents are married. Table 3 Distribution of respondents by marital status Marital status Frequency Percentage Single Married Widowed Widower Educational level of respondents The distribution in Table 4 represents respondents educational qualification. It is observer that 9.0% had primary education 18.5% had secondary education,

8 84 I.B. Oluwatayo 22.5% ha Ordinary National Diploma (OND), 30.5% had Higher National Diploma (HND) and above. Therefore, those with National Certificate of Education (NCE) had the highest frequency. This generally show that majority of the respondents has tertiary education. Table 4 Distribution of respondents by educational status Educational level Frequency Percentage Primary school Secondary school NCE OND Others Household size of respondents The distribution of respondents by household size is shown in Table 5. From the table, about 33.5% of the surveyed respondents have household size of less than three members, 55.5% have household size of between 3 5, 9.5% have between 6 8 and 1.5% have above eight household members. National and microstudies confirms that larger household size is associated with greater incidence of poverty, as measured by low household consumption or income per-capita. Table 5 Distribution of respondents by household size Household size Frequency Percentage < > Primary occupation of respondents As depicted in Table 6, it is revealed that 20.0% of respondents are farmers, 21.0% are traders, 23.5% are civil servants, 18.5% are artisans, 10.0% are private-salaried workers and 7.0% are engaged in other occupation. This distribution shows the relative importance of farming to other occupations in the study area.

9 Microcredit and household poverty status in rural Nigeria 85 Table 6 Distribution of respondents by primary occupation Primary occupation Frequency Percentage Farming Trading Civil services Artisans Private salaried job Microcredit agencies patronised by respondents Going by the distribution in Table 7, it shows that respondents patronise seven major microcredit agencies in the study area. About 15.0% of respondents patronise NAPEP, 5.0% go to NDE, 10.5% seek credit from NPFS, 4.5% patronise ADP, 43.5% go to EKCPRA, 4.5% obtain loan from UNICEF, 6.0% collect loan from NACRDB, 11.0% seek for loan from other sources. This distribution generally reveals the importance of EKCPRA (a state-owned microcredit agency providing loan for over one-third of the respondents) in the study area. This could be attributed to its proximity to the beneficiaries and because it is community driven. Table 7 Microcredit agencies patronised by respondents Poverty Alleviation Programme Frequency Percentage National Poverty Eradication Programme (NAPEP) National Directorate of Employment (NDE) National Programme on Food Security (NPFS) Agricultural Development Project (ADP) Ekiti State Community Poverty Eradication Agency (EKCPRA) United Nations Children Emergency Fund (UNICEF) Nigerian Agricultural Cooperatives and Rural Development Bank (NACRDB) Others Reason(s) for patronising the microcredit agencies As shown by the distribution in Table 8, different reasons were adduced by respondents for patronising the microcredit agencies. 61% indicated that they patronise these agencies to have more savings, 51.5% indicated to obtain credit, 12.5% patronise these agencies to socialise, 59.0% indicated that they patronise the agencies to improve their standard of living, 48.5% visit these agencies to ensure that their household is food secured while about 25.5% gave other reasons for patronising these agencies. From the distribution, it is very clear about two third of the respondents patronise these agencies for savings and generally to improve their living conditions.

10 86 I.B. Oluwatayo Table 8 Respondents reasons for patronising the microcredit agencies Reason Frequency Percentage Have more savings Yes No Obtain credit facilities Yes No Socialise Yes No Increases standard of Yes Living and welfare of No The household Food security Yes No Others Yes No Assessment of respondents status before and after patronising the microcredit agencies An assessment of the respondents status before and after patronising the microcredit agencies revealed that there is a significant improvement in the standard of living of the respondents going by the responses from the respondents. For instance, in Table 9, 24.5% indicated that their standard of living was good before they patronise the microcredit agencies while after patronising these agencies about 68.5 indicted that their standard of living was good. In other words, there was an increase in the number of respondents for each of the criteria used in assessing the living condition of the respondents. Table 9 Assessment of standard of living of respondents Before After Assessment Frequency Percentage Frequency Percentage Good Poor Moderately poor No changes

11 Microcredit and household poverty status in rural Nigeria Determinants of poverty status among respondents The probit result in Table 10 shows the effect of socioeconomic characteristics and microcredit accessibility on poverty status of the households. Age has a positive coefficient indicating that the higher the age of the respondents, the higher their poverty level. Thus, respondents at their productive age will experience less incidence of poverty than very old ones. Income of respondents has a negative coefficient. This means that the higher the income of respondents, the lower their level of poverty. Thus respondents who earn high income are less prone to poverty. Martial status of respondents has a negative coefficient thus implying that married respondents are less prone to poverty than single, divorced or widowed respondents. This is attributed to the possibility of married respondents assisting each other especially in times of income shortfalls. The table further revealed that primary occupation has a positive coefficient. This is an indication that farming households experience higher level of poverty than those engaged in other occupation. Also, gender of respondents has a negative coefficient. This means that female-headed households experienced higher poverty level than their male-headed counterparts. It was also found out that household size has a positive coefficient. This means that households with large size experience higher level of poverty than those with small-sized households. Thus, the income per-capita of respondents with large household size will be lower than that of those with small-sized households. Again, respondents years of formal education has a negative coefficient with their poverty level. This implies that respondents with the lower educational attainment are poorer than those with high educational attainment. This is because education enhances the earning potentials of rural dwellers and easy adoption of technology which can boost their productivity and eventually translate to increased returns. Table 10 Probit regression showing determinants of poverty status among respondents Coefficient Constant (0.0623) Age (X 1 ) * (0.6108) Gender (X 2 ) (1.1189) Marital status (X 3 ) (0.4551) Household size (X 4 ) ** ( ) Years of formal education (X 5 ) *** (0.1949) Primary occupation (X 6 ) (0.1433)

12 88 I.B. Oluwatayo Table 10 Probit regression showing determinants of poverty status among respondents (continued) Coefficient Credit assess (X 7 ) *** (0.1402) Asset (X 8 ) (0.0105) Standard errors are in parenthesis. *Coefficient significant at 10%. **Coefficient significant at 5%. ***Coefficients significant at 1%. Log likelihood = Prob. > chi 2 = Source: Author s Computation from Survey Data (2007) 5 Summary, conclusion and recommendations 5.1 Summary of major findings The study focused on the effect of microcredit on poverty status of rural households in Ekiti-State, Nigeria. In general, the findings of this study reveal that: Respondents in the study area are predominantly farmers representing about 48.0% of the total respondents. Also, it was realised that majority of the respondents are low income earners, operating on a subsistence level but lack credit facilities to expand their scale of production. Households educational level is high because quite a sizeable number of them are educated up to tertiary level. The probit regression results reveal that age, household size, education and accessibility to credit facility are major determinants of poverty status among respondents in the study area. The significant levels of these variables are 5, 10, 1 and 5% respectively. While age and household size are positively related with respondents poverty status, households educational level and accessibility to credit are negatively related to it. 5.2 Conclusion and recommendations For effective poverty alleviation among the poor in Ekiti State and Nigeria in general, microcredit programme is a veritable option at achieving this. This is because it helps borrowers out of poverty. Success achieved in using microcredit as an instrument for poverty alleviation will, however, depend on proper choice of the type of income generating activities undertaken, accessibility to social amenities by the borrowers,

13 Microcredit and household poverty status in rural Nigeria 89 and a thorough understanding of socioeconomic characteristics of the poor among others. Based on these findings, the following recommendations are made; Microcredit scheme should not only be left in the hands of formal financial institutions since this discourages poor households from harnessing the benefits inherent there. The scheme should be properly monitored via a sound and efficient organisational structure so as not to derail the goal and objective of channeling funds meant to alleviate poverty among the citizenry. Effort should be intensified at capacity building of respondents through education. This is because households with formal education were less prone to poverty hence they are less dependent on microcredit schemes. Campaign and sensitisation on family planning should also be given priority so as to ensure moderation of family size. References Adeyeye, V.A. (2001) Microcredit Sourced through Cooperatives and Rural Poverty (Draft), Nigerian Economic Society (NES), Nigeria. Ajakaiye, M.B. (1991) Small farmer credit delivery though cooperatives: the NACB experience, NACB Digest, Vol. 3, No. 4, pp Federal Office of Statistics (FOS) (1996) Poverty and Welfare in Nigeria, FOS, Abuja, Nigeria. Graeme, B. (1997) Microfinance in Africa: Is it either the problem or the solution?, World Development, Vol. 25, No. 7. Hahn, S. and Mario, G. (1996) Midterm evaluation, Microenterprise Development Project, No , Chemonico {for USAID/ EL Salvador}. Idachaba, F.S. (1995) Food for all Nigerians: Is there Hope?, Alumni Lecture, University of Ibadan, 11th August, Ibadan, Nigeria. Kumuyi, J. et al. (1992) A Socioeconomic Study of People s Bank of Nigeria, Technical Report Submitted to Friedrich Ebeit Foundation of Germany, Lagos. Microcredit Summit Report (1997) Proceedings of the 1997 Microcredit Conference, New York. Mohanty, M. (2006) Microcredit, NGOs and Poverty Alleviation, The Hindu, New Delhi, India, November 15. Odejide, A.F. (1997) Breaking the Vicious Cycle of Poverty among Women in Developing Countries: The Case of Microcredit in: Poverty Alleviation in Nigeria, Nigerian Economic Society. Olayemi, J.K. (1995) A survey of approaches to poverty alleviation, A paper presented at the National Workshop on Integration of Poverty Alleviation Strategies into the plans and programme of Nigeria, Sponsored by the World Bank and organized by NCEMA, 27 November 1 December. Pfeffermann, G.P. (1991) Poverty Alleviation in Politics and Policy Making in Developing Countries, in Meier, G.M. (Ed.): xxxx, An International Center for Economic Growth Publication ICS Press, San Francisco, pp World Bank (1995) Nigeria: Poverty Assessment, Abuja, Nigeria {Draft}.

14 90 I.B. Oluwatayo World Bank (1996a) Nigeria: poverty in the Midst of Plenty, The Challenge of Growth with Inclusion: A World Bank Poverty Assessment, 31 May, Report No UNI. World Bank (1996b) The Informal Sector and Microfinance Institutions in West Africa, Webster, L. and Fidler, P. (Eds.), Regional and Sectoral Studies. World Bank (1999) Poverty and the Agriculture Sector in Nigeria, World Bank Country Office, Abuja, Nigeria.