ABSTRACT
The Autoregressive Distributed Lag (ARDL) model is used in this study's data analysis to examine the effect of microfinance on the growth of the Nigerian economy. E-views 10 is used to evaluate hypotheses based on secondary data obtained from the World Development Indicators and the Central Bank of Nigeria statistical bulletin. The analysis includes the years 2012 through 2022. The study discovers a strong correlation between the GDP and MFSAVs, or microfinance savings. A decrease in microfinance savings has a negative impact on GDP, as shown by the negative connection with a coefficient of -0.0685 and a p-value of 0.0447. In contrast, a positive association is shown with a coefficient of 0.0448 and a p-value of 0.0229, indicating a positive impact on GDP from increased microfinance loans.
However, as shown by a coefficient of 0.008 and a p-value of 0.705, the study does not discover solid evidence to demonstrate a significant influence of microfinance investments on GDP. These findings emphasize the various impacts of microfinance savings and investments on GDP and offer important new insights into the intricate connection between microfinance and economic growth in Nigeria. To fully grasp and utilize the potential of microfinance in promoting economic growth in Nigeria, more analysis and policy considerations are required.
CHAPTER ONE
1.1 BACKGROUND TO THE STUDY
Microfinance is a known means of financing small-scale enterprises such as local traders, E-commerce retail stores, skill service providers, retailers and wholesalers of consumer goods, farmers, and marketers of agricultural products. Asset financing such as the provision of high-priced land and building, machinery and plants, and raw materials, and poverty reduction in the areas of funding for start-ups, ventures, and youth empowerment in Nigeria and all over the world. It is provided by both conventional Microfinance banking institutions such as Microfinance banks, chambers of commerce, licensed Electronic financial services providers such as Fair money, and there are non-conventional banking systems that provide microcredits to a second party through Personal Savings, Trade associations, Age grade, Social clubs, workers cooperative societies, apprenticeships, and others. (Mengesha & Tanase, 2021).
Micro means small, while finance means the act of sourcing for funds, raising find, and utilizing funds whether for personal or commercial use. Microfinance is provided to those who are low-income earners or unemployed and who are in a continuous cycle of poverty. The average Nigerian earn $2 daily and still attempt to save, and carry on project to improve their general well-being. (Kagan, 2022) Having been exempted from the big financial service, microfinance focused on the excluded in society including women and unemployed youths. ( Murad & Idewele, 2017).
The background of the study on the impact of microfinance on the Nigerian economy is rooted in the need to address poverty and financial exclusion in the country. Despite being one of the largest economies in Africa, Nigeria continues to struggle with widespread poverty, particularly among low-income individuals and small businesses.( ines & Asma, 2013). Microfinance emerged as a solution to provide access to financial services, such as loans and savings accounts, to these marginalized groups. The growth of the microfinance sector in Nigeria over the past few decades has made it a subject of interest for researchers, policymakers, and development practitioners seeking to understand its impact on the economy and the lives of those it serves.
Dean Jonathan swift introduced microlending to Irish citizens in the 1720s as a means to help impoverished citizens. The legislative Parliament saw the effectiveness and signed it into the bill to encourage private financing. (Hollis & Sweetman, 1996). In India, Grameen bank Bangladesh made microlending known in 976 to assist farmers to increase their yield (chakra et al 2022). Microfinance, in the opinion of Murad and Idewele (2017), refers to a system designed to effectively and efficiently meet the needs of the underprivileged. It was established with the poor and low-income earners in mind to assist them to engage in commercial ventures that would earn them returns for repayment of their debt, savings, and investment.
The representation of Nigeria's population (world population review, 2023) According to the United Nations 2022, the Nigerian population is 216.7 million people as of November 2022. While the National bureau of statistics confirmed that 63% of people in Nigeria are living below the poverty line. The Gross National income in 2021 was $2100 with a life expectancy of 61.33 years. The Adult population is approximately 109,810,327 (18 and above) and the percentage of rural dwellers is 47.25%.
Background to Economic growth
The historical context of Nigeria's economy plays a significant role in shaping its growth prospects. Pre-independence, the country's economy was primarily agrarian, relying on commodities like cocoa, palm oil, and rubber for exports. Post-independence, Nigeria's economy underwent a transformation, with the discovery of oil reserves in the 1970s. The oil boom led to a shift in economic focus, leading to increased revenue but also contributing to overdependence on the oil sector. The Guardian News (2022).
Economic growth is a fundamental concept in economics that refers to the increase in a country's production of goods and services over time. It is crucial for improving the standard of living, reducing poverty, and fostering overall development. Understanding the background to economic growth involves examining various factors and determinants that contribute to a nation's economic progress. Ayal, et al (1998).
Population growth is one of the key determinants of economic growth. A growing population can stimulate economic expansion by increasing the size of the labor force, which in turn leads to higher productivity and greater output. However, unchecked population growth can also strain resources and infrastructure, potentially hampering economic development. Zukowska-Gagelmann, K., (2002)
Foreign direct investment (FDI) is another crucial factor that influences economic growth. FDI occurs when foreign entities invest in domestic businesses or assets, bringing in capital, technology, and managerial expertise. This infusion of resources can boost productivity, create jobs, and promote technological advancements, positively impacting economic growth. De Mello, L.R. (1997).
Interest rates play a critical role in determining the level of economic activity. Central banks often use interest rates as a tool to control inflation and stimulate or cool down economic growth. Lower interest rates encourage borrowing and investment, which can spur economic expansion, while higher interest rates can slow down borrowing and dampen economic activity. Solow, R.M. (1956).
Exports are a significant driver of economic growth for many countries. Selling goods and services to foreign markets generates revenue, creates jobs, and fosters innovation. A robust export sector can lead to a favorable trade balance, contributing positively to a nation's overall economic growth. Pakistan Institute of Development Economics, ( 2006).
Private and public investments are essential for economic growth. Private investments involve businesses and individuals investing in capital assets such as machinery, technology, and infrastructure. These investments can lead to increased productivity and output. On the other hand, public investments by governments in infrastructure, education, and healthcare can also have a significant impact on economic growth by providing essential public goods and improving the overall business environment. Faruque Ahamed(2022).
Government Policies:
Government policies play a crucial role in determining economic growth. Nigeria has experienced periods of economic reforms and policy shifts aimed at addressing various challenges. The paper examines the impact of policies on trade, investment, fiscal management, and the business environment. Baizhu & Feng (1996).
LINKAGE BETWEEN MICROFINANCE AND ECONOMIC GROWTH
Microfinance is the provision of financial services to low-income people or small businesses that are often not eligible for standard banking services, such as loans, savings accounts, and insurance. Microfinance's main objective is to reduce poverty and encourage economic growth by giving underprivileged people the tools they need to generate money and improve their overall financial stability.
The following methods shed light on the probable relationship between microfinance and economic expansion:
1. Access to Capital: Microfinance makes financing available to those without credit histories or collateral, allowing them to invest in income-producing ventures like small enterprises. The enhanced productivity, business expansion, and job creation that can result from this access to money all contribute to economic growth.
2. Innovation and entrepreneurship are fostered through microfinance, which enables people whose access to capital could otherwise limit their ability to pursue these activities. Individuals may be able to launch or grow microenterprises with the help of small loans, which encourages creativity and variety of economic activity at the local level.
3. Income Generation: By enabling people to invest in their enterprises, microfinance helps borrowers earn more money. In addition to raising the borrowers' standard of life, increased disposable income also increases consumer demand, which strengthens regional economies.
4. Poverty Alleviation: Reducing poverty is one of the main objectives of microfinance. Borrowers are better able to meet essential demands like those for housing, food, and healthcare when they earn more money and stabilize their financial situations. The quality of life and the human capital can both increase as a result of this reduction in poverty.
5. Financial Inclusion: Populations previously shut out of the official banking system are now able to access financial services because to microfinance. This inclusion increases financial resiliency, encourages saving, and acts as a safety net in the event of economic shocks, lowering vulnerability and promoting overall economic stability.
6. Women's Empowerment: Microfinance favors women more than males because they frequently experience higher financial hardships and less access to resources. Women's growing participation in economic activities is facilitated by financial services, which boosts economic growth and development.
7. Multiplier effect: Increased economic activity results in more job creation, income distribution, and local spending, which can have a multiplier effect on local communities when capital is injected through microfinance projects.
8. Community Development: Since microfinance organizations frequently work with local communities, they encourage development on a local scale. Borrowers' investments may benefit infrastructure, healthcare, and education, which will boost the overall economy.
Depending on elements including the macroeconomic situation, cultural norms, and the regulatory environment, microfinance may or may not be helpful in fostering economic growth.
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