DRIVING INCLUSIVE GROWTH THROUGH RURAL FINANCIAL INTERMEDIATION: A STUDY OF THE MICROFINANCE MODEL IN NIGERIA

 

Lawrence Uchenna OKOYE ¹*, Alexander Ehimare OMANKHANLEN², Ado AHMED³, Amanosi OJO⁴

¹Dr. Covenant University Ota, NIGERIA, lawrence.okoye@covenantuniversity.edu.ng

² Dr. Covenant University Ota, NIGERIA, alexander.omankhanlen@covenantuniversity.edu.ng

³ Dr. Abubakar Tafawa Balewa University, Bauchi, NIGERIA, adohmd@yahoo.com

⁴ Ms. Covenant University Ota, NIGERIA, amanosi.ojo@stu.cu.edu.ng

*Corresponding Author

 

Abstract

The microfinance banking model was formally introduced in Nigeria in December 2005 to drive inclusive participation of all economic units towards achieving rapid economic growth. The policy thrust of this banking model was to improve access of micro entrepreneurs and low income households to microcredit and other financial services necessary for the expansion and modernization of their operations. The rationale for a paradigm shift from conventional to the microfinance model for integrating this segment of the economic strata into mainstream economy is the uniqueness of their operations which include smallness of loans and savings, de-emphasis on collateral as a condition for credit delivery, and the simple nature of their operations. The study was designed to estimate growth implications of the intermediation activities of microfinance banks in Nigeria between 1992 and 2016. Data were collected from the statistical bulletin, a publication of the Central Bank of Nigeria. Model estimation was based on the technique of the autoregressive distributed lag (ARDL). Traditional intermediation functions of microfinance banks (deposit mobilization and credit creation) were adopted as explanatory variables while inflation and asset base were introduced as controlled variables. The results show that microfinance banks’ deposits play active role in economic growth in Nigeria. This is an indication that microfinance banks are effectively mobilizing rural deposits, an activity that helps to track rural commercial transactions thereby enhancing tax collection by the government and in the process growing the national income. The result further shows that microfinance banks’ loans and advances did not support economic growth within the context of our study. Poor credit administration and management may largely account for the negative impact of MFBs loans on growth by turning these institutions into conduits for channeling deposits in non-bankable business proposals. It was further observed that lagged values of GDP significantly promote output growth in the present period. There is also evidence that investment in microfinance bank assets was an impediment to growth during the period under review, an indication of heavy investments in unproductive assets. Finally, growth was also shown to be enhanced by the general price level. Based on the above findings, we conclude that rural financial intermediation, an essential component of financial inclusion, is significant for enhanced economic growth. This paper advocates prudent allocation and efficient management of microfinance banks’ loans and advances as well as asset investments in order to optimize the benefits of financial inclusion.