Determinants of Micro Credit Growths in Nigeria 1980-2014

Abstract

(ProQuest: ... denotes formulae omitted.)1. IntroductionBefore the popularity of microfinance over the world, successive governments in Nigeria had been instituting policies to financially assist the informal sector. This was with a view to providing the credits required for productive activities by small and medium-sized enterprises (SMEs). Prominent among these was the establishment of development financial institutions such as the Nigerian Industrial Development Bank (NIDB), Nigerian Agricultural and Cooperatives Bank (NACB) and Peoples' Bank of Nigeria to cater for the finance needs of different economic sectors. Commercial banks also opened rural branches to provide banking services to SMEs in rural areas, most especially in the 1980's.In addition, community banks were established in 1992 to empower SMEs in rural areas and by the year 2001, 160 registered community banks, with aggregate savings of N99.4 million and outstanding credits of N649.6 million, were recorded (Anyanwu, 2004). Later in 2005, directives were given to all the banks to transform into microfinance institutions (MFIs). As a result of this, the number of MFIs in Nigeria grew sporadically to 707, with attendant surge in the number of beneficiaries and credits by 2007 (Soludo, 2008).Data on the micro credits granted by deposit money banks (DMBs) and MFIs, over the years 1980-2014, suggested an increased accessibility. This is because the credits improved, nominally, from N0.203 billion in 1981 to N20.536 billion in 1992, N86.679 billion in 2002 and N99.855 billion in 2014 (CBN, 2015). Despite this, the proportion of the credits to total credits granted by DMBs nosedived from 25.82 percent in 1996 to 9.48 percent in 2000, 1.06 percent in 2006 and to 0.3 percent in 2014. The unwillingness of the banks to lend to informal sector, the costs associated with fund raising and lending to SMEs, regulations, and prevailing interest rates were some of the factors identified as being responsible for this in the literature. Many studies also explored the effect of borrowing firms' characteristics on micro credits accessibility.DMBs that dominated the financial system in Nigeria prefer lending to blue chips companies, because to them, SMEs were not attractive and providing them credits was not justified, in terms of costs and risk (Atanda, 2010). The banks had also been granting lesser credits than the deposits mobilized from customers in order to expand their liquidity positions (CBN, 2005). In fact, non-interest income represented over 72 percent of the Nigerian banks' total income (Oshikoya, 2015). This was an indication that the banks generated more income from other sources (e.g. treasury bills, bonds and foreign exchange transactions) than granting credits and we do not know the extent to which this had affected micro credits growth.It has been established that firm size, exchange rates and money supply played crucial role in lending behaviour of banks (Aisen & Franken, 2010; Baltaci & Ayaydin, 2014 and Akinlo & Oni, 2015). Also, high cost of obtaining funds from other banks (inter-banks rates) was a major consideration in the ability of the Nigerian banks to lend at a low rate of interest (Jubrin, et al, 2015). If banks can obtain funds at low rates, it can be expected that they will lend at low rates. This means that SMEs that used banks' credits did so because capital was scarce and the investments they embarked on that were characterised by high turnover, though with high level of variability in returns (Peacock, 2000).A body of literature had established that finance helps economies to grow (Love, 2003; Levine, 2005 and Beck, et al, 2011). However, low significant effect of micro credits on economic growth in Nigeria, over the period 1992-2014, was found by Atanda (2015). All these naturally raised the question of how to financially support the informal sector for it to contribute towards economic development of the country. …