MICROFINANCE PAPER WRAP-UP: Strategies for Effective Loan Delivery to Small-Scale Enterprises in Rural Nigeria, by Benjamin Okpukpara

Written by Benjamin Okpukpara, published in the Journal of Development and Agricultural Economics Vol. 1(2), pp. 041-048, May, 2009, housed at Academic Journals.org, 8 pages, available at:
http://www.academicjournals.org/JDAE/PDF/Pdf2009/May/Okpukpara.pdf

This work studies the determinants of micro business loan acquisition for rural entrepreneurs in Nigeria. In Nigeria, only 35 percent of the “economically active” population has access to formal credit [1]. In order to increase access to formal credit to rural areas, the government has enacted various microcredit programs specifically targeting the rural poor. However, according to the author, most of these programs have fallen short of their goals due to “poor targeting” and a “lack of organized ways of administering loan to the rural enterprises” [2,4]. Therefore, this study attempts to ascertain which strategies can overcome the problem of low access to microfinance services.

The study took place in the poor, rural states of Abia and Anambra. A total of 136 micro-enterprises from these states were selected at random and surveyed. Entreprenuers were asked questions relating to what factors determine whether or not they obtain a loan. Additionally, survey information was collected from 20 informal financial institutions and 14 formal financial institutions. From the data, the most important determinants of loan provision were found. Lastly, the author uses this information to make suggestions on policy implications.

Of the 136 enterprises, 34 were able to obtain loans, 27 of these from informal financial institutions. However, not all enterprises attempted to obtain loans. Of those who did, 55 percent of formal loan applications were accepted, and 94 percent of informal loan applications were accepted. According to entrepreneurs surveyed, informal institutions do not generally require asset collateral, and they do not have a bureaucratic application process, thus making their loans easier to obtain than those from formal institutions. However, those surveyed claimed that both formal and informal loans are more easily obtained when the applicant has a good loan repayment record, when there is more competition between institutions, and, in what appears to be a contradiction, when the interest rate is higher. In the case of interest rates, higher rates often equate to greater loan access because borrowers are willing to lend to more, perhaps “riskier” clients when the interest rate is higher. Additionally, it is important to note that interest rate changes did not greatly effect the desire of entrepreneurs to obtain a loan.

On the supply side, institutions rely heavily, in order of average importance, on information about loan history, the type of enterprise, experience, gender (males preferred), and collateral to determine loan provision. A strong repayment history has done well to predict reliability for future repayment. Therefore, it was, on average, the most highly valued indicator of credit-worthiness by financial institutions [5,6]. Agricultural enterprises were found to have a lower likelihood of receiving credit than other types of enterprises. This is important because most rural enterprises in Nigeria are agricultural. Financial institutions cited uncertainty and risk in agriculture as the reason for this discrimination. In both agricultural and non-agricultural enterprises, entrepreneurs with a higher level of experience were more likely to obtain loans. The reasoning behind this is self-explanatory. It was also the case that men were more likely than women to receive loans. This can be explained by a range of factors from “lack of assets to traditional and customary factors in African institutions.” Lastly, possession of a fixed asset on the part of an applicant made them more likely to receive a loan, but the relationship was relatively weak. Formal institutions did, however, generally require fixed assets as collateral, but informal institutions often did not.

The author uses this information to make recommendations in terms of policy that could be put forth by the government, non-governmental organizations (NGOs), or even financial institutions themselves. He recommends business training as a way of increasing productivity as well as helping to build repayment history. He also sees microinsurance as important as a way to minimize the risk involved in agricultural enterprise. Finally, to remedy gender discrimination, the author suggests that lenders institute quotas to make sure that a certain percentage of their loans go to female borrowers. This would encourage not only acceptance of female applicants, but could also catalyze a proactive effort to seek out female entrepreneurs.

Benjamin Okpukpara is a researcher and lecturer at the University of Nigeria in Nsukka, Nigeria [7]. His areas of interest include “child schooling, child labour, natural resource management, poverty, gender issues and microfinance” [7]. Most of his work takes place in Sub-Saharan Africa [7]. He is a Research Fellow at the Centre For Rural Development And Cooperatives [7,8]. This organization is the rural poverty research center of the Lal Bahadur Shastri National Academy of Administration (LBSNNA), an organization dedicated to “[promoting] good governance, by providing quality training for building a professional and responsive civil service” [8,9].

By Christopher Maggio, Research Assistant

Bibliography:
[1] Central Bank of Nigeria (CBN) (2005). Micro Finace Policy, Regulatory and Supervisory Framework for Nigeria, Abuja, Nigeria CBN: http://www.cenbank.org/out/Publications/guidelines/dfd/2006/microfinance…
[2] Okpukpara BC (2006). Determinants of and Strategies for Rural Financial Savings Mobilization by Female-Headed Households in Anambra State, Nigeria. J. Rural Dev. 25(3) 2006. (not available online)
[3] Mead D, Liedholm C (1998). The dynamics of Micro and Small Enterprises in Developing Countries, in: World Development 26: 61-74.: http://ideas.repec.org/a/eee/wdevel/v26y1998i1p61-74.html
[4] Adams DW, Delbert A, Fitchett (eds) (1992). Informal Finance in Low-Income Countries. Boulder: Westview Press.
[5] Amimo O, Larson D, Bittencourt M, Graham D (2003). “The Potential for Financial Savings in Rural Mozambican Households” Contributed Paper prepared for presentation at the 25th International Conference of Agricultural Economists International Association of Agricultural Economists (IAAE) 16-22 August 2003 Durban, South Africa.: http://ideas.repec.org/p/ags/iaae03/25921.html
[6] Feder GR, Just RE, Zilberman D (1985). “Adoption of agricultural innovations in developing countries: A survey”, Econ. Dev. Cultural Change 33: 255-298.: http://ideas.repec.org/a/ucp/ecdecc/v33y1985i2p255-98.html
[7] Benjamin Okpukpara on Global Development Network: http://www.gdnet.org/cms.php?id=researcher_details&researcher_id=544
[8] Centre For Rural Development And Cooperatives: http://www.lbsnaa.ernet.in/lbsnaa/research/ccrd.htm
[9] LBSNNA: http://www.lbsnaa.ernet.in/lbsnaa/index.jsp#

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