EFFECTS OF MICRO CREDIT ON THE LIVELIHOOD OF RURAL HOUSEHOLDS IN ENUGU STATE NIGERIA

Abstract

Micro-credit has been identified as a sustainable and effective poverty reduction strategy that can be employed to reallocate resources to the rural active poor. The livelihood of rural dwellers is usually characterized by low potentials. It is however believed that their access to micro – credit may improve their livelihood outcomes such as income, well-being, reduced vulnerability, food security, access to social amenities, economic expansion and employment.  Also,  it  brings  additional  perspective  to  the  national  challenge  of  increasing  agricultural production through sustainable micro-credit schemes offered to the rural households. Paucity of information on sources  of  micro-credit  accessed  by  rural  households  in  Enugu  State  and  the  effects  on  their  livelihood outcomes necessitated this research. The broad objective of the study was therefore to examine the effects of micro-credit on the livelihood of rural dwellers in Enugu State, Nigeria. The specific objectives were to: (i) describe the livelihood and socio-economic characteristics of the rural households, (ii) describe the sources of micro-credit available  and accessible to the rural households, (iii) establish relationship between the socio- economic and livelihood characteristics of the rural households and their access to micro-credit   categories, (iv)  examine  the  volume  of  micro-credit  received  and  utilized  for  improvement  of  the  rural  households’ livelihood  outcomes  and (v) examine  the constraints  that  hinder  rural  households’  access  to  micro-credit facilities in Enugu State. The study was carried out in Enugu State, Nigeria. Sixty respondents were selected from each of the three agricultural development zones in the state making a total of 180 respondents. Primary data were collected using a structured questionnaire. Data generated were analyzed using descriptive statistics, multinomial  logit  model  and  factor  analysis.  It  was  found  out  that  a  greater  percentage  (31.7%)  of  the respondents were between 45 and 50 years of age while their computed means was 57 years. Male dominated the rural household heads (68%). Greater  percentage of 58.4% of the household heads were married while 8.3%,  25%  and  8.3%  were  single,  widowed  and  divorced  respectively.  Thirty-six  (36%)  had  secondary

education,  28%  had  primary,  19%  had  tertiary  while  10%  had  no  formal  education.  About  40%  of  the respondents  earned  below  N101,  000 per annum.  Majority  of the respondents  (763.7%)  were  engaged  in farming, trading 13.3% and services 10%. Micro credit was not available to about 30% of the rural households while 70% had access to various kinds of micro credit. Eighty (80%) of the accessed micro credit was short term, 16.7% medium term and 3.3% long term. Age, group membership and  farm size positively influenced access to the combined informal and formal micro credit categories while income level and savings negatively influenced access to the categories. Gender, marital status, household size, group membership and farm size positively influenced access to informal micro credit category while savings negatively influenced access to the category. About 70% of the respondents  accessed different  categories  of micro credit. About 58% of them invested the entire amount borrowed but 42% invested only part of the funds and diverted the rest. Among the borrowers, 81% perceived some  improvements  on their livelihoods and socio-economic  outcomes after they invested in economic ventures but 19% did not agree to that. Major constraints to micro credit access among the rural  households  include  inadequate  information,  lack of skills and infrastructure;  lack of cooperative membership and policy, poverty and illiteracy, and socio-personal. It was therefore recommended that: there was need to understand that the major source of livelihoods among the rural households is farming and thus, every rural livelihood programme should first address their farming welfare and; proactive regulatory micro credit acts capable of reaching out to the very active poor be enacted to ensure that government’s microcredit schemes are not hijacked by economic saboteurs.

CHAPTER ONE INTRODUCTION

1.1      Background of the Study

The declaration of the Millennium Summit to halve extreme poverty by 2015 may  not  be  fully  achieved  unless  sustainable  livelihoods  and  effective   poverty reduction   strategies   are   employed   to   reallocate   resources   to   the   rural   sector (International   Fund   for   Agricultural   Development,   2001).   This   rural   sector   is dominantly agrarian (Olukosi and Ogungbule, 1991), and reviving agriculture is only part of the answer to end poverty, which has to be accomplished by social changes that can  give  the  poor  a  greater  power  over  some  factors  militating  against  improved livelihoods and such changes may come through micro credit schemes organized either by the government and/or non-governmental agencies at all levels.

Also, continued innovation and improvement of rural micro credit facilities can help to promote livelihood diversity. Micro credit facilities (MCFs) are  provided by both formal and informal institutions  but the formal providers  avoid  doing business with the rural people and their micro enterprises because the associated cost and risks are considered to be relatively higher.

The  unwillingness  or  inability  of  these  commercial  financial  institutions  to provide financial services to urban and rural poor, coupled with the unsustainability of government  sponsored  development  financial  schemes  contributed  to the growth  of private sector-led microfinance in Nigeria (Anyanwu, 2004).

About  94.4%  of  the  farmers  in  Nigeria  are  small  scale  when  judged  by international  standards  where all farms less than 10 hectares are classified  as  small scale (Olukosi and Ogungbile, 1991) and most small scale farms are owned by the rural people as sources of their livelihood. The major constraint to agricultural development is insufficiency  of credit  facilities  (Agu, 1998).  Apart from the  need  for credit for agricultural development, rural farmers may also require credit to meet non-agricultural expenses like food, shelter, clothes, education, litigation and traditional ceremonies and such credits do not increase the farmers’ income  or  help in repayment of the credit when  it  falls  due.  However,  for  outreach  and  repayment  of  micro  credit  to  be successful, farmers require that it should be adequate and be disbursed quickly when needed.

However,  Ditcher  (199) defined  micro credit as the extension  of very  small loans   to  those   in  poverty   designed   to  spur  entrepreneurship.   Micro   credit   is characterized  by individuals  who lack  collateral,  steady  employment  and verifiable

history of credit access and they cannot meet even the most minimal qualification to gain access  to formal  credits.  Micro  credit  is a part of micro-finance  which  is  the provision of wider range of financial services to the very poor (Ditcher  1999).   For Asgedom (2014), the Savings and Micro Credit Program of Eritrea was established to provide financial services to the poor and lower.  Access to credit has been recognized to be among the factors of production vital towards accelerating household and national economic  development  (Kangogo,  Lagat  and  Ithinji  2013).  However,  despite  their prevalence, small enterprises and most of the poor population in developing countries have very limited access to financial  services provided by the conventional financial institutions.    income  individuals  to  enhance  their  business  activities  and  alleviate poverty level.

Generally, credits are classified into short term, medium term and long term, based on the time of repayment. Short term credit is the type of credit available for only one season or production cycle, usually one year. Medium term credit on the other hand is  for  a  period  of  two  to  five  years  while  long  term  credit  is  generally  used  for permanent improvement on the farm. Ugwuanyi and Ugwuanyi (1999) opined that such long term credit may be amortized over a period of fifteen to twenty years. Although farmers generally have need for the three types of credit but in rural areas of developing countries like Nigeria, emphasis is placed on short and medium term credits of which the sources are classified into;

1.        The  institutional  or  formal  source  of  credit  including  government  lending agencies,  farmer  cooperative  banks,  commercial  banks,  NGOs,  multi-lateral agencies;

2.        The non-institutional  or informal source of credit including friends,  relatives, local money lenders (merchants), the Isuzu, age-grade.

Informal micro credit is provided by traditional groups that work together for the mutual benefits of their members and operate under different names such as  ‘esusu’ among  the  Yorubas  of  Western  Nigeria,  ‘etoto’  among  the  Igbos  in  the  East  and

‘adashi’  among  the  Hausas  (Anyanwu;  2004).  The  key  features  of  these  informal schemes  are  savings  and  credit  components,  informality  of  operations  and  higher interest  rates  in  relation  to  the  formal  sector.  He  further  noted  that  the  informal associations that operate traditional microfinance in various forms are found in all the rural  communities  in  Nigeria.  They  also  operate  in  the  urban  centers  but  size  of activities covered under the scheme has not been determined.

The non-traditional, formalized microfinance institutions (MFIs) are  operating side by side with the informal service providers but the link between the two has not been  harnessed  to  benefit  the  rural  communities  in  poverty  reduction  programes. International  organizations  are  coming  to  the  realization  that  Non-Governmental organizations  (NGOs)  are  veritable  and  effective  channels  to  ensure  programme implementation   and  effectiveness   particularly   in   poverty  projects  (Okunmadewa, 1998).

According  to Ditcher  (1999),  the World Bank Sustainable  Banking  with  the Poor Project in mid-1996 estimated that there were more than 1,000 MFIs in over 100 countries  that provide  micro credit facilities  (MCFs) in each having a  minimum  of

1,000 members with three years of experience. In a survey of 206 MFIs, 73%  were NGOs,  13.6%  credit  Unions,  7.8%  banks  and  the  rest  savings  unions.  The  rural communities may access more MCFs from MFIs if MFIs obtain resources from donor agencies, which they loan to members at the rural  grassroots. For instance, external donor  funds  accounted  for  about  77%  of  their  funding  between  1992  and  1996 (Ogundipe, 1999). This was supported by  the report of Adetunmbi (1999) that over

80% of the aggregate loan funds available in the semi-formal micro credit institutions (MCIs) in Nigeria is from donor and governmental sources while 20% is self-imposed tariffs but he went further to doubt if these MCFs have created substantial livelihoods in the rural areas.

Historically,  livelihood thinking dates back to the works of Chambers  in  the mid-1980s (further developed by Chambers, Conway and others in early 1990s). Since then, a number of development agencies have adopted livelihood concepts and made efforts  to  begin  implementation.  For  chambers  and  Conway  (1999),  a  livelihood comprises  the capabilities,  assets (including both material and social  resources)  and activities required for a means of living. A livelihood is sustainable when it can cope and recover from stresses and shocks and maintain or enhance its capabilities and assets both now and in the future, while not undermining the natural resource base. In order to understand this concept better, the Department for International Development (DFID), building  on  the  works  of  practitioners   and  scholars,  developed   the  sustainable livelihood   framework   (SLF).   This   framework   is   an   analysis   tool,   useful   for understanding the many factors that affect a person’s livelihood and how those factors interact with each other. The SLF views livelihood as a system and provides a way to understand:

a.   The assets people draw upon including savings and credits,

b.   The strategies they develop to make a living,

c.   The context within which livelihood is developed

d.   And those factors that make livelihoods more or less vulnerable to shocks  and stresses.

Ellis (1998) opined  that livelihoods  are formed within social, economic  and political contexts. Institutions,  processes and policies such as markets, social  norms, land  ownership  policies  affect  our ability  to access  and utilize  micro  credits  for a favourable livelihood. He further argued that micro credit can be in cash or in-kind but emphasized that there are many advantages to using cash as a means of giving credit to create a sustainable livelihood. He noted that the use of  cash transfers the decision- making power to the individual who typically knows what he needs and when to buy it. Cash also reduces administrative costs. This argument has been consistently echoed by beneficiaries of cash grants (Harvey, 2007) Recently, the Nigerian government has shown some commitment in the success of micro credits through the traditional banking industry. They have begun to realize that lending  to the rural poor will improve  the livelihood  of  the rural people.  The government has also shown interest in improving household livelihood through micro credit  schemes,  policies  and  programmes  including  Agricultural  Credit  Guaranteed Scheme (ACGS), Family Economic Advancement Program (FEAP), Local Economic Empowerment  Program  (LEEMP),  National  Poverty Eradication  Program (NAPEP), Small and Medium Enterprise Equity Investment Scheme (SMEEIS).

1.2     Statement of the Problem

The  rationale  for  providing  micro  credit  facilities  (MCFs)  by  microfinance institutions (MFIs) both formal and informal, to the rural communities is to give small rural business entrepreneurs the opportunity to engage in sustainable livelihood project (Jason and kasia, 2008). According to Anyanwu (2004), the reasons may include the following: to improve the socio-economic conditions of the people, especially those in the rural areas through the provision of loan assistance, skill acquisition, reproductive health  care  services,  adult  literacy  and  girl  child  education;  to  build  community capacities  for  wealth   creation  among  enterprising  poor  people  and  to  promote sustainable livelihood by strengthening rural responsive banking methodology; and to eradicate   poverty   through   the   provision   of   micro   credit   and   skill   acquisition development  for  income  generation.  He  noted  that  Nigerians,  rich  and  poor,  are enterprising  and  industrious  but  the  rural  poor  who  account  for  over  half  of  the population  do not have good access to formal banking services and rely heavily  on formal  and  informal  MFI  products  such  as  micro  credits,  micro-insurance,  micro- savings, micro-training and micro-remittance services. Therefore, there is a high need to analyze the level of availability  and accessibility  of these  micro-finance  products among the rural households.

Secondly,  following  the  contributions  of  some  micro  credit  schemes  and programmes in Nigeria, such as ACGS, FEAP, NAPEP and SMEEIS, there is an urgent need to have in place a research oriented policy guide and criteria that would be used to measure the effects of such schemes in the social, economic and demographic contexts. Though, Anyanwu (2004) adopted outreach and sustainability from CGAP (1996) as criteria for measuring the success of such  programmes in some economies but those criteria  lack  detailed  analyses  on  the  utilization  and  effect  of  MCFs  among  rural households.

However,  gender,  age  and  other  social  differences  may  significantly  affect access to livelihood assets within the households and other groups.  Rural dwellers are usually farmers that produce their own food, often have low  potential  land and over

70% of  all undernourished people live in rural areas (Muller, 2007). Ibeanu, Onuoha, Ezeugwu and Ayogu, (2010), also noted that agriculture is the main occupation of the rural  dwellers.  For  Onyekuru  and Eboh,  (2011),  rural  dwellers  in Enugu  State  are mainly farmers and artisans or paid workers, and relatively poor.

Sequel to the aforementioned problems, thorough investigations of micro credit availability, accessibility, outreach, sustainability and effects on the livelihoods of rural households in Enugu State need to be done. However, this study intends to answer the following  research questions:  (1) what are the  socio-economic  characteristics  of the rural households in Enugu State? (2) What are the sources and types of micro credits in the rural areas of Enugu  state?  (3)  How many of the active  poor among the rural households have good access to MCFs? What are the livelihoods’ characteristics and how their combinations improve livelihoods diversification?  (4) To what extent have the MCFs enabled  the rural households  to undertake economic  activities  capable of developing sustainable livelihoods in the study area?

1.3      Objectives of the Study

The  broad  objective  of  this  study  is  to analyze  the  effects  of  micro  credit facilities on rural livelihood among households in Enugu state, Nigeria.

The specific objectives of this study are:

i.         Describe the socio-economic and livelihood characteristics of rural households in Enugu state.

ii.    Describe the sources of micro credit available and accessible to rural households in the study area.

iii.    Establish relationship between socio-economic characteristics of rural households and their access to micro credit types.

iv.    Examine the volume of micro credits received and utilized for improvement  of rural households’ livelihood outcomes.

v.    Uncover  the  constraints  that  hinder  rural  households’  access  to  micro  credit facilities in Enugu state.

vi.    Use the findings in this study to recommend workable micro credit policies for

Nigeria.

1.4      Hypothesis of the Study

The following hypotheses were tested:

Ho: there is no significant  difference  between  informal  and formal types  of micro credit in the study area.

Ho:  there  is  no  significant  effect  of  micro  credit  on  the  rural  livelihood outcomes of the respondents.

Ho:  there  is no difference  in livelihood  outcomes  between  the micro  credit lenders and non-lenders.

1.5      Justification of the Study

Emphatically,  credit problems  have been extensively  discussed  and  literature reviewed by series of scholars but much study has not been narrowed  sensitively to micro credit availability, accessibility, utilization and effect among rural households of Enugu State. Recent findings indicate that the operations of  MFIs that provide both formal and informal micro credit facilities (MCFs) have  grown phenomenally  in the last ten years, driven largely by expanding informal sector activities and the reluctance of banks to fund the emerging micro enterprises but called for further research on micro

credit services provided by the MFIs which have neither been given any publicity nor captured explicitly in the official financial statistics (Anyanwu, 2004).

However,  this study aimed at proffering  solutions  to the problems  of  micro credit availability,  accessibility  and utilization  by grassroots  rural  communities.  The results will also help policy makers in deciding how MCFs delivery would be executed to boost agricultural production and enhance the living standard of the rural households through micro credit.

1.6 Limitations of the study

The major limitation of this study was time constraint. Within this  stipulated time limit, reliable field study was not feasible which would have ideally given a more in-depth view.

Other limitations encountered in the research include poor finance, language  barrier and  low  educational  background  in  the  rural  areas  which  made  interaction  very difficult.

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