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AN ASSESSMENT OF MICROFINANCE AS A TOOL FOR POVERTY REDUCTION AND SOCIAL CAPITAL FORMATION: EVIDENCE ON NIGERIA

Dr. Ben E. Aigbokhan

Ambrose Alli University, Nigeria

Abel E. Asemota

Ambrose Alli University, Ekpoma, Nigeria

ABSTRACT

There has been consensus in the development literature that the poor have inadequate access to credit from the formal financial sector. This is because the sector rates the poor as risky borrowers on account of their lack of suitable collateral. This has, therefore, provided the rationale for the policy stance of promoting the microfinance sector to enhance increased access to credit by the poor. Microfinance is expected to alleviate poverty through increased household incomes. Household incomes are expected to increase because of the removal of credit constraints which enables poor households with little or no savings to acquire production inputs, including technology, and to start up micro and small-scale enterprises. It is also believed that microfinance would lead to increased women empowerment.

There is no consensus on the impact of microfinance on the welfare of poor households. While some argue that microfinance has a positive and significant impact on welfare outcomes, others argue that there is no significant positive impact and that at times the impact is adverse. This paper seeks to contribute to this debate. It does this through investigation of the impact of microfinance on household poverty status.

The paper used cross-sectional data to assess the relationship between household poverty status on the one hand and their socio-economic characteristics and microfinance access on the other. Stratified random sampling design was used to generate a sample of 500 household from Edo and Delta States of Nigeria who are clients to Lift Above Poverty (LAPO) microfinance scheme.

Logit regression model is used to estimate relationship between microfinance and household demographic variables and household poverty status. Results show that selected microfinance variables, namely, loan cycle, cumulative loan, volume of last loan taken, experience with LAPO, and Education all have positive significant impact on clients’ poverty status.

This evidence thus contributes support to the "positive impact" side of the debate, as well as provides some guide as to what should be the direction of policy reform to enhance the performance of the microfinance sector in Nigeria, particularly at a time the Central Bank of Nigeria is introducing policy reforms for the sector.

JEL Codes: G21