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CHAPTER ONE

INTRODUCTION

1.0     BACKGROUND FO THE STUDY

Poverty is the major problem in most developing economies. In these economies, it is argued that among others absence of access to credit is presumed to be the cause for the failure of the poor to come out of poverty. Meeting the gap between demand and supply of credit in the formal financial institutions frontier has been challenging (Von Pischke 1991). In fact, the gap is not aroused merely because of shortage of loan-able fund to the poor rather it arises because it is costly for the formal financial institutions to lend to the poor. Lending to the poor involves high transaction cost and risks associated with information asymmetries and moral hazards (Stiglitz and Weiss 1981). Nevertheless, in several developing economies governments have intervened, through introduction of microfinance institutions to minimize the gap then allow the poor access credits.

One of the main policy objectives for the establishment of microfinance banks in Nigeria was to assist small and medium scale enterprises in Nigeria in raising their productive capacity and level of employment generation, thus alleviating poverty and enhancing human capital development. According to Haque and Yamao (2009), poverty alleviation through microcredit is now well recognized all over the world as microcredit propagandists, governments, donors, development agencies and others have an increasing interest in using the microcredit medium to advance the course of poverty reduction as well as enhance human capital development. In a bid to utilize the benefits of microcredit in alleviating poverty and enhancing human capital development in Nigeria, the Central Bank of Nigeria (CBN) formulated the micro finance policy and framework in 2005. The December 2005 policy statement establishing Micro finance banks in Nigeria was laudable and well-intentioned as the microfinance industry was fast becoming the next “frontier” for the financial service industry to provide and promote the grant of microcredit.

According to the CBN policy and regulatory framework for microfinance banks in Nigeria, released in December 2005, and from the appraisal of existing microfinance oriented institutions in Nigeria, a major reason for establishing micro finance banks anchored on the facts produced by the baseline economic survey of small and medium scale enterprises in Nigeria conducted in 2004 which indicated that the 6,498 industries covered employed a little over one million workers. Considering the fact that about 18.5 million (28% of the available work force) Nigerians are unemployed, the employment objective/role of the SMEs is far from being realized. Based on the National Economic Empowerment and Development Strategy (NEEDS) objectives of empowerment of the poor and the private sector, the provision of needed financial services became imperative to enable them engage or expand their present scope of economic activities and generate employment. Delivery services as contained in the strategy would be remarkably enhanced through additional channels which the microfinance banking framework would provide as it would assist small and medium scale enterprises in Nigeria in raising their productive capacity and level of employment generation (CBN, 2005).

The impact of microfinance on poverty reduction has been measured in terms of several dimensions, such as improved income, employment and household expenditure, and reduced vulnerability to economic and social crises. These measurements have tended to focus on a specific geographic area, an institution or a small client group and are difficult to generalize or draw conclusions that reach across borders, income levels, gender or socio-economic status (Honohan, 2004). Meyer (2002) noted that financial sustainability and welfare impact of microcredit can also be appraised. Hulme (2000) argues that knowledge about the 

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