Factors That Constrain Households’ Access To Credit In Nigeria And Impact Of Credit On Household Welfare

ABSTRACT

This study investigates the factors that constrain households’ access to credit in Nigeria and impact of credit on household welfare. The Nigerian Living Standard Survey was used for this study.  The study employed discrete econometric model such as the Probit and Tobit models estimated using the method of maximum likelihood to ascertain the determinants of credit access by households in Nigeria. The method of Ordinary Least Squares regression method was applied in determining the impact of Access to Credit on household welfare in Nigeria. Our results show that access to credit has positive impact on household welfare. Households that live in urban area have more chances of accessing credit facilities in Nigeria than those that live in rural areas. Savings have positive impact on access to credit in Nigeria. Occupation group and Age in years are positively related to access to credit in Nigeria. Education level of the households has positive impact on access to credit in Nigeria. Insufficient income, insufficient collateral, inappropriate purpose and others have negative impacts on access to credit. 

CHAPTER ONE

INTRODUCTION         

1.1        BACKGROUND OF THE STUDY

Access to credit has been identified as one of the key factors required to accelerate growth and improve welfare in developing countries. There is need to intensify efforts in making credit accessible to households, since such strategy will liberate greater percentage of the population from  poverty, encourage savings, and improve investment in physical and human capital which promotes economic growth. The latent capacity of the poor for entrepreneurship would be significantly enhanced through the provision of credit facilities to enable them engage in economic activities and be more self-reliant; increase employment opportunities, and create wealth (CBN, 2005). Researchers and policymakers agree that poor rural households in developing countries lack adequate access to credit (CBN, 2003). This lack of adequate access to credit is in turn believed to have significant negative consequences for various aggregate and household-level outcomes, such as technology adoption, agricultural productivity, food security, nutrition, health, and overall household welfare (Diagne and Zeller, 2011). Improved access to credit will help poor rural households engage in more productive income-generating activities that will raise their living standards.

Access to credit has the capacity to transform the poor through acquiring productive capital, which improve their capacity to generate income, savings and investment for better welfare (Beck and Demirguc-Kunt, 2005). Credit is required to finance working capital and investment in fixed capital, particularly among households too poor to accumulate much saving (Ghosh, Mookherjee and Ray, 1999).  Credit is an important instrument for smoothing consumption, in a context where incomes typically experience large seasonal fluctuations. Incomplete market and imperfect information is considered in literature as a serious challenge for the functioning of the credit market in developing economies like Nigeria (Stiglitz and Weiss, 1981). The small scale businesses and poor households are constrained to credit access because formal financial institutions in developing countries are characterized by persistent market imperfections, arising  from problems linked with adverse selection, moral hazard and enforcement of credit contract. Credit market imperfections have serious implications for the economies of most developing countries especially Nigeria. These impacts limit households’ investment in both physical and human capital. If parents cannot borrow to finance their children’s education, health and other welfare needs, chances is that they could be trapped in the vicious circle of poverty ,hence compromising the potentials of future leaders. Credit constraints may result in behavioral adaptations that only work to keep people in poverty. Poor rural households in developing countries lack adequate access to credit. Many development professionals believe that this lack of credit has negative consequences for poor people’s agricultural productivity, food security, health, and overall household welfare (Khandker and Faragee 2003).

Consequent upon the failure of formal financial institutions (commercial banks) to make credit accessible to households and the inefficiency of government sponsored development financial schemes; micro financing was adopted by most developing countries. Microfinance movement was born out of the idea to create new banks that will make credits available to households and SMEs, in recognition that traditional commercial banks have no interest in lending to poor rural households because of their lack of viable collateral and the high transaction costs associated with the small loans (Armendariz and Morduch 2005). Microfinance is generally an umbrella term that refers to the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to poor and low-income households and their micro-enterprises (Isern et al., 2009).

1.2        STATEMENT OF PROBLEM

The high level of inequality and poverty in Nigeria might debar her from attaining the Vision

2020 and the Millennium Development Goals (MDGs). With a population of 140 million people, 55% of which are living below the poverty line (NLSS, 2004), Nigeria is not on track to meet the first Millennium Development Goal (MDG) since greater percentage of her population are poor.

The United Nations placed Nigeria the 13th poorest nation in the world with about 70% of the population living on one dollar per day (UN, 2005). About 55 percent of Nigeria’s population of

140 million lives below the poverty line and the percentage of the population with access to formal financial services are among the lowest of African countries (Fuchs and Radwan, 2009).

Nigeria suffers from high levels of poverty and it is widespread particularly in rural areas. Poverty and unemployment incidence has risen over the years. Statistics from the Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS) reveal that from a low incidence of about 15% in 1960, poverty incidence rose to 70% by 2000 but declined to 54.4% in 2004, and rose to 69.0% in 2010. The Nigerian Human Development Index (HDI) of 0.448 ranks 159th among 177 nations in 2006, 157 out of 187 in 2010 and 156 out 187 in 2011, portrays the country as one of the poorest in the world (UNDP, 2006; IMF, 2005; NBS, 2011).  In 2005, the CBN estimated that approximately 35 percent of the economically active population had access to formal financial services, of which less than two percent of rural low-income people had access to formal financial services.

Comparing Access to finance in Nigeria with other selected countries.

The ICA study also compared the level of financial inclusiveness across selected African countries Source: ICA Report (2008)

As depicted in the above chart; Investment climate assessment (ICA) study, 2008 considered financial constraints in Nigeria, based on cost of finance and difficulty in accessing finance and related to similar studies in selected countries such as  Brazil, China, Indonesia, South Africa, and India.  Percentage of firms reporting access to finance and cost of debt as a problem is used for the analysis. In Brazil 75percent and 60 percent of firms respectively were denied access to finance due to cost of finance and other constraints in 2003. Less than 30 percent of firms in Countries like Indonesia in 2003, India in 2005, South Africa in 2003, and China in 2005.  For Nigeria, the percentage of firms that were denied access to finance for the aforementioned reasons is 55percent and 40 percent respectively. Hence Brazil has the highest percentage of firms that were denied access to finance due to cost of finance and other constraints (Isen et al 2009).

The ICA study also compared the level of financial inclusiveness across selected African countries.

Source: ICA Report (2008).

Where formal B is formal sector Banked, formal O is formal sector others, informal is informal sector, and fin Excl is financially excluded. In comparison to Kenya, South Africa and Tanzania, Nigeria has the second highest percentage of people who are financially excluded from the banking system.  Given Nigeria’s population, the number of financially excluded people in absolute terms is higher than any other African country.

However, poor households and SMEs are constrained from accessing formal credit in Nigeria and such has serious implication on welfare and economic growth of this country. About 74% of the Nigerian population has never been banked, while only 7% of adults have a loan. Only 5 percent of firms have a loan, despite the fact that 80 percent of SMEs seek financing. These numbers place Nigeria among the bottom ranking developing countries for access to credit (Isern et al., 2009).

After the deposit money banks capitalization, the banks were relatively liquid during the mission in September 2008. Based on international experience, high levels of liquidity often translate into increased retail lending, with consumer lending and mortgage lending leading the way. This has not been the case in Nigeria, as consumer loans are the smallest loan sector, with only around 5 percent of assets in mortgages and auto loans (Isern et al., 2009).

From the above problems the following Research questions are developed.          

• what factors determine the supply of credit to households in Nigeria?
• What are the impacts of credit access on households’ welfare in Nigeria?

1.3        OBJECTIVE OF THE STUDY

The core objective of the study is to investigate the level of household access to formal credit and its impact on their welfare in Nigeria. Specifically, the study aims to achieve the following goals:

(A). Analyze households socioeconomic characteristics that determine access to credit in Nigeria.

(B). Determine the effect of access to credit on household’s welfare outcomes such as income, expenditure and food security in Nigeria.

1.4        STATEMENT OF HYPOTHESIS

The study will be guided by the following research hypothesis:

(I). Household socioeconomic characteristics do not affect access to credit in Nigeria.

(II). Access to credit does not significantly impact on household’s welfare attributes such as income, expenditure and food security in Nigeria.

1.5     RELEVANCE OF THE STUDY

Access to credits is one of the core factors considered in determining the level of inequality and poverty especially in developing countries. Improved access to credit will help poor rural households engage in more productive income-generating activities that will improve their living standards. The Nigerian Vision 2020 and the Millennium Development Goals seems like an illusion as a result of high level of inequality and poverty in Nigeria.

The enhanced bank credit access will promote the growth of microenterprises thereby creating employment opportunities, increasing household incomes, and contributing to poverty reduction in line with the vision 2020.

Given the various socio-economic problems associated with credit constraints it becomes pertinent to investigate the factors responsible for inaccessibility of formal credit among households. Such study will provide useful empirical information to the Government and policy makers, which will guide them in formulating robust financial reforms taking cognizance of socio-economic and welfare implication of credit constraint.

1.6        SCOPE OF THE STUDY

The study is limited to households’ data collected during the Nigeria National living standard survey 2004.

Pages:  76

Category: Project

Format:  Word & PDF               

Chapters: 1-5                                          

Source: Imsuinfo

Material contains Table of Content, Abstract and References.