INTEGRATING FINANCIAL SERVICES INTO
POVERTY REDUCTION STRATEGIES: -
Institutional Experience of Nigeria
CENTRAL BANK OF NIGERIA
AT THE WEST AFRICA SUB REGIONAL WORKSHOP
VENUE: BOLINGO HOTEL & TOWERS,
DATE: 13TH – 15TH SEPTEMBER 2005
INTEGRATING FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES:
THE NIGERIAN EXPERIENCE
Nigeria has a population of about 130 million people – nearly a quarter of the population of
Sub-Saharan Africa. The country covers a land area of 924,000 square kilometres, has over
200 ethnic groups and at least 500 indigenous languages and dialects. Three major tribes –
Igbo (East), Hausa (North), and Yoruba (West) dominate in the country.
Agriculture is the country’s dominant economic activity. Approximately 98 million hectares of
the nation’s total agricultural land is arable. Out of this, about 40.0 % have already been
cultivated. The United Nations Food and Agriculture Organization rates Nigeria’s farmland
from low to medium in productivity but notes that, if properly managed, most of this could have
medium to good productivity. However, despite the existence of two major rivers - the Niger
and Benue, agriculture in Nigeria is predominantly rain fed. While yams, cassava, rice, maize,
sorghum and millet constitute Nigeria’s main food crops; cocoa, oil palm produce and rubber
are among the nation’s exportable crops. These three export crops account for nearly 60.0 %
of the non-oil exports.
According to the World Bank (1996), the situation in Nigeria is a paradox as the poverty levels
within the country contradicts the nation’s abundant resources in terms of enormous
agricultural, gas and several untapped solid mineral resource endowments. According to
global economic reports, as at 2000, Nigeria alone, account for about a quarter of sub-
Saharan Africa’s poor. Since poverty does not discriminate along gender, religious or ethnic
lines, it therefore, requires a holistic approach if it is to be eradicated. It is a scourge that must
be checked if meaningful development is to take place in the country. The focus of any
poverty reduction strategy is the provision of clothing, shelter, food, water, good roads, etc.
which are very central to human existence and on which Nigeria has been rated low by
2.0 DIMENSIONS OF POVERTY IN NIGERIA
2.1 The Concept and Incidence of Poverty
Simply put, poverty is a state of deprivation. The term is used to describe the absence of or
limited access of human population to basic requirements of life. Poverty is hunger, lack of
shelter, being sick and not being able to see a doctor, not being able to go to school and not
knowing how to read. Poverty is not having a job, is fear of the future, living one day at a time,
losing a child to illness brought about by unclean water, powerlessness, lack of representation
and freedom. According to the World Bank’s Poverty Task Force report on Sub-Saharan
Africa, poverty and its effects is accentuated by certain factors namely, over-population, use
of poor/inadequate technology, low economic growth rate, inadequate access to employment
opportunities, credit, markets, low human capital endowment and destruction/degradation of
natural resources/environment. When estimating poverty worldwide, the same reference
poverty line has to be used, and expressed in a common unit across countries. Therefore, for
the purpose of global aggregation and comparison, the World Bank uses reference lines set at
$1 and $2 per day in 1993 Purchasing Power Parity (PPP) terms (where PPPs measure the
relative purchasing power of currencies across countries). Over 65 % of the population of
Nigeria lives below the poverty line and they are mainly agricultural producers characterized
by smallholdings, subsistence and traditional practices.
2.2 Poverty And The Nigerian Economy
Over the years, certain twists and turns in poverty and wealth took place in Nigeria. Below,
are some of the major developments:
The real per capita income and per capita private consumption of the nation rose
sharply between 1973 and 1974. This was followed by a dramatic increase in real
wages in the non-agricultural sector. At that time, poverty declined as welfare
improved sharply for many Nigerians.
The period 1974 to 1975 witnessed mixed fortunes in Nigeria. During the era, the
country’s average real per capita income continued to increase until 1980. Private
per capita consumption remained stable, real wages in agriculture remained constant
as from 1977 through 1980. However, real wages fell sharply in the non-agricultural
sector. As a result, social services though rapidly expanded did not manifest in
significant reduction in the number of Nigerians affected by the incidence of poverty.
Beginning from 1980, the state of welfare in the country deteriorated seriously. The
average per capita income as well as the per capita private consumption nose-dived.
Also, real wages in both the agricultural and non-agricultural sectors fell.
Consequently, poverty increased, as life expectancy at birth of 49 and infant mortality
of 96 per 1,000 Nigerians was recorded. The average calorific intake, which used to
be approximately 2,170 between 1975 and 1979 dropped to 2,100 between 1980 and
As from 1986, the country embarked on a broad-based economic policy reform. Per
capita household expenditures increased by 34.0 %, while poverty declined by 9.0 %.
Also, real wages in agriculture and non-agricultural sectors fluctuated but remained
low. As a result, welfare viewed from social indicators like life expectancy, literacy
level and infant mortality improved significantly while poverty broadly declined.
However, core poverty worsened by 1991.
2.3 Regional Perspective of Poverty in Nigeria
Poverty in Nigeria is largely a rural and peri-urban problem except in areas where rapid
expansion in fadama irrigation and commercial/cash crop farming takes place. Poverty
is also strongly influenced in the country by the level of education and the geographical
considerations. In 1992, 66.0 % of Nigerians that existed below the poverty line were
found to be rural settlers located in the northern agro climatic zone of the country. In this
part of the country, majority depends on subsistence agriculture characterized by slow
growth and environmental degradation. In this part of the country, majority depends on
subsistence agriculture characterized by slow growth and environmental degradation.
Also, severe poverty exists among dwellers in the rural parts of the southern and middle
belt zones of the country. In these locations, poverty is characterized by poor linkages to
the urban sector, lack of access to productive input, environmental degradation, slow
agricultural growth, high population and poor infrastructural facilities. Education was one
of the factors underlining poverty in Nigeria. Households where the head had
no education were poorer than households where the head had a secondary school
education. Another factor affecting poverty in Nigeria is age. The older the head of the
household, the more likely it is for the family to be poor. This is because such heads
are most likely uneducated and also less energetic to do farming occupation and also
less likely to benefit from assistance from banks. In all areas, families headed by
mothers, infertile women, unmarried mothers and mothers with female children
suffer more from poverty.
2.4 The Extent of Poverty in Nigeria
Though richly endowed with human, agricultural, petroleum, gas and solid mineral
resources, the Gross Domestic Production (GDP) grew only by 2.31 % in 1998, 2.82 % in
1999 and 3.83 % in 2000. In addition, despite the abundance of the resources, the country
is heavily dependent on oil as its major source of export. By 1997, the oil and non-oil
exports contributions were 97.65 % and 1.64 % respectively.
Since the 80’s, there has been a worsening condition of living in the country. The attendant
high poverty incidence since two decades according to the Federal Office of Statistics (FOS)
indicates that by 1960, poverty covered about 15.0 % of the population of Nigeria. However,
by 1980, studies in Nigeria showed that the level of poverty had increased to 65.5% (see
Table 1). It was also revealed that the dampening effect introduced between 1985 and 1992
reversed the trend to some extent. In the period between 1980 and 1985, the level of
poverty went up to 46.3 % and then dropped by 3.6 % to 42.7 % by 1992.
Table 1 NIGERIA: TREND IN POVERTY LEVEL (1980 – 1996)
YEAR POVERTY LEVEL ESTIMATED TOTAL POPULATION POPULATION IN POVERTY
1980 28.1 65.0 17.7
1985 46.3 75.0 34.7
1992 42.7 91.5 39.2
1996 65.5 102.3 67.1
SOURCE: Federal Office of Statistics (National Bureau for Statistics), National Census Survey
As of 1992, only ten (10) states in Nigeria had more than half of their population in poverty.
By 1996, the situation worsened as all states of the Federation except Bayelsa State had
more than half of their population under poverty. By 1996, the incidence of poverty in
Nigeria was estimated at about 66.0 % from a total population of about 110 million. The
overall dependency ratio for the country jumped to 65.6 % (an increase of more than 50 %
above 1992 figures). At that time, performance of the country was put at 234 dependents
per 100 gainfully employed persons. In the rural areas, it was 286 dependants per 100
workers while in the urban centre, it was 219 dependants per 100 workers. Tables 1-9
shows further, the dimensions of poverty in Nigeria as discovered by the Central Bank of
Nigeria (CBN) Poverty Assessment Survey on Nigeria conducted in 1997 and statistics
collated by the National Bureau for Statistics.
Similarly, available records show that in 2001, Nigeria’s Human Development Index (HDI)
was about 40.0 % up from 33.0% in 1990. This placed the country among the 25 poorest
nations in the world. The rate of adult literacy which stood at 52.2% in 1990 improved to
57.2% in 2001 (see Table 11). In general, the level of poverty in Nigeria increased sharply
between 1980 and 1985 and between 1992 and 1996 when the level of incidence by 1996
peaked at 65.6, but which by 2004 dropped to 54.40. Also, according to the National
Bureau for Statistics (NBS), records, by 1999, life expectancy in Nigeria was 51 years.
Table11: Nigeria Social Statistics (1990-2001
Year GDP Per Capita Population Life Expectancy Infant Adult Literacy Human
(N’Billion) Growth Rate At Birth Mortality Rate (%) Development
1990 738.4 2.1 48 85 52.2 0.33
1991 1,049.10 2.1 49 87 54.0 0.33
1992 1,066.00 2.8 51 191 54.0 0.35
1993 1,069.00 2.8 52 191 55.0 0.39
1994 1,060.00 2.8 52 195 55.0 0.38
1995 1,063.00 2.8 52 195 57.0 0.38
1996 1,052.80 2.8 53 114 57.0 0.38
1997 1,056.10 2.8 54 114 57.0 0.38
1998 1,051.00 2.8 54 114 57.0 0.40
1999 1,075.90 2.8 54 75 57.0 0.40
2000 1,066.40 2.9 54 75 57.0 0.40
2001 1,062.50 2.9 54 75 57.2 0.40
Source: CBN Annual Reports
Notably, in contrast to other developing economies, the trend of poverty in Nigeria is very
disturbing. Nigeria which ranks in the same life expectancy and per capital total
consumption brackets with countries like Indonesia, Lesotho and Pakistan in the late 1970’s;
either stagnated or retrogressed all through the 90’s. These countries, by the late 90’s,
recorded life expectancies in the range of 60 – 65 years and per capita income between
$450 and $900.
2.5 Causes Of Poverty In Nigeria
The high rate of poverty in Nigeria could be attributed to several factors. Most of these
include macro economic distortions which resulted in the country’s sluggish economy.
Others include the negative effects of globalization which resulted in non-competitiveness of
Nigerian goods in the international markets. Also, bad governance and its attendant
misplaced priorities; few economic opportunities; conflict and violence; corruption; huge debt
burden; low productivity; high rate of population growth (see Figure 1) all the time
outstripping the rate of growth of output, and poor human resources were among others that
accounted for poverty in the country. The poor in Nigeria are normally those with bad
seasonal roads, a situation, which takes them away from marketing either to purchase
inputs or to dispose their outputs.
Fig. 1: Nigerian Demographic Evolution (1961-2003)
Source : Data FAOSTAT, year 2005 : http://faostat.fao.org/faostat/help-
Y-axis : Number of inhabitants in thousands.
In attempt to tackle this malaise, successive governments in the country, have failed due to
poor policy formulation, inability to sustain good programmes (policy discontinuity),
multiciplicity of institutions and agencies with overlapping functions, poor coordination and
3.0 GOVERNMENT POVERTY REDUCTION EFFORTS IN NIGERIA
3.1 Specific Programmes of the Federal Government
3.1.1 1970s to 1980s Programmes
In Nigeria, the problem of poverty has continued to crave the attention of the various tiers of
government for quite some time. As a result of the fact that most of the poor are in
agriculture and mainly in the rural areas, the strategies of government have placed due
emphasis on agriculture and the rural sector over the years. In the late seventies to the
early eighties, the government made it mandatory for banks operating in Nigeria to lend
prescribed %ages of their annual credit portfolios to the agricultural sector and at rates
prescribed by the Central Bank. In addition, it was mandatory for banks operating in the
country to open up rural branches with the sole aim of providing credit and other banking
services to the poor. In 1972, the Nigerian Agricultural Co-operative Bank was set up to
further complement lending to the sector along with the Agricultural Credit Guarantee
Scheme Fund (guarantees 75% net default payment of agricultural loans of banks) in 1977.
In line with the philosophy of promoting rural development, the Federal Government in 1989
established the Peoples’ Bank of Nigeria to provide loans to people engaged in small
businesses requiring small amounts of start up capital. In 1992, the Community Banking
Programme was launched as a way of promoting and enhancing economic activities in the
rural areas and by so doing raising their per capital income and standard of living.
Other policies/programmes designed to encourage economic activities in the rural areas and
in favour of the urban poor include the Directorate of Roads, Foods and Rural Infrastructure,
National Directorate of Employment, Better Life For Rural Women, Family Economic
Advancement Programme, Agricultural Development Projects and River basin and Rural
3.1.2 1990s to Date Programmes
The National Poverty Eradication Programme (NAPEP)
The government, recognizing the need for more result oriented approaches to poverty
alleviation has also embarked on a holistic approach to poverty alleviation in the nineties. In
1994, a broad-based Poverty Alleviation Development Committee (PAPDC) under the aegis
of National Planning Commission (NPC) was set up with a primary objective of advising the
government on the design, co-ordination and implementation of poverty alleviation
programmes. This culminated in the formation of an action strategy code-named Community
Action Programme for Poverty Alleviation (CAPPA) in 1996.
As at 31st December, 1998, there were sixteen poverty alleviation institutions in Nigeria. In
May 1999, the Federal Government, realizing the urgent need to tackle the scourge of
poverty, decisively streamlined and rationalized all the poverty alleviation institutions and
agencies. That resulted in the establishment of the National Poverty Eradication Council
(NAPEC) superintending over all multi-sector poverty reduction related activities of all the
relevant Federal Ministries, Parastatals and Agencies within the country. NAPEC is chaired
by Mr. President, with the Vice President as Vice Chairman and the Secretary to the
Government of the Federation as Secretary. NAPEC was in effect mandated to:
(i) Address the issues of employment generation, skill acquisition/improvement, wealth
generation and youth development;
(ii) Ensure the provision and maintenance of critical infrastructures through the use of
rural transport, water and communication programmes.
(iii) Provide core social and welfare services, including Special Education Programme,
Primary Healthcare Programme, Farmers Empowerment Programme and Social
Services Programme; and,
(iv) Tap the natural resources while maintaining adequate care for the environment. The
programmes under this include: Agricultural Resources Programme, Water
Resources Programme, Solid Minerals Resources Programme and Environmental
To facilitate the delivery of these programmes, NAPEC established structures at the Federal,
State and Local Government levels to increase greater participation of major stakeholders at
the grassroots. The secondary mandate of NAPEC is to implement scaled interventions in
critical areas that require urgent attention as periodically identified. In 2001, the National
Poverty Eradication Programme (NAPEP) was established to address the challenge of
poverty in Nigeria. The Programme serves as the secretariat of the National Poverty
Eradication Council (NAPEC).
The NAPEP implements policies on poverty eradication, as formulated by NAPEC, monitors
and co-ordinates all poverty reduction efforts at the federal, state and local government levels.
It has offices in every state and local government areas through out the Federation. The main
objective of NAPEP is to eradicate extreme poverty by the year 2010, generally in line with the
United Nations Millennium Development Goal (MDG). The main feature of NAPEP which
distinguishes it from previous programmes is its adoption of the bottom-up approach to
programme implementation and monitoring and it is not limited to the life span of any
particular government or administration in the country.
The National Economic Empowerment and Development Strategy (NEEDs)
The NEEDs programme was launched in March, 2004 as Nigeria’s home- grown Poverty
Reduction Strategy (PRSP). It is a medium term strategy (2003- 07) that derives from the
country’s long-term goals of poverty reduction, wealth creation, employment generation
and value re-orientation. It has Federal (National Economic Empowerment and
Development Strategy, NEEDs), State (State Economic Empowerment and Development
Strategy, SEEDS) and Local governments (Local Economic Empowerment and
Development Strategy, LEEDS) and other stakeholders linkages and aims at consolidating
on the achievements of the years 1999- 2003 to build a solid foundation for the attainment
of Nigeria’s long-term vision of becoming the largest and strongest African economy and a
key player in the world economy.
NEEDS is a people oriented programme that has the following poverty reduction hallmarks:
Ensuring and sustaining unfettered access to education for the total development of
Strengthening the preventive and curative primary health care services to improve
the health of Nigerians and reduce poverty,
Developing affordable houses for the masses through popularization of the use of
local raw materials and monetization of civil servants housing scheme,
Promoting a virile private sector as a way of generating employment for the
unemployed and youths,
Integrating women by enhancing their capacity to participate in economic, social,
political and cultural life of the country, and
Promoting agricultural productivity and access to portable waters supply.
The comprehensive document spells out the various policy targets and strategies of
implementation for enduring effect.
3.2 Central Bank of Nigeria Related Initiatives and Programmes
The CBN has been involved in various intervention programmes to improve access to needed
finance for the poor as far back as the early sixties. The interventions take the form of
collaborative programmes with the government, foreign development partners, companies
and other private entities to initiate and implement schemes, institutions and policies that
promote increased development financing activities.
The aims of these interventions are to:
• improve on bank lending to the agricultural sector;
• empower smallholders to engage in profitable economic activities;
• generate employment opportunities;
• alleviate and reduce poverty; and
• achieve national food security.
The major activities include the following:
• Management of the Agricultural Credit Guarantee Scheme Fund
• Coordination of the Small and Medium Industries Equity Investment Scheme
• Development and implementation of rural/microfinance policy.
3.2.1 The Agricultural Credit Guarantee Scheme
The Agricultural Credit Guarantee Scheme Fund (ACGSF) was established in 1977 with
initial authorised capital base of N100million, subscribed by the Federal Government of
Nigeria (FGN) and the Central Bank of Nigeria (CBN) in the ratio of 60:40, respectively.
The capital base has been increased over time and now stands at N3.0billion.
(i) The Guarantee Cover
Loans granted to the agricultural sector by banks (universal and community
The scheme pays 75 % of the net balance in the account of the clients in the
event of default.
Target clientele include individual farmers, co-operative societies and
The limits of lending are
o Individuals (1) N20,000.00 without tangible security
(2) N1,000,000.00 with tangible securities
o Co-operative societies and limited liability companies -N10.0million (with
(ii) National Performance: 1978 to 31st December 2004
A total of 397,422 loans amounting to N7.6billion was guaranteed while 278,104
loans amounting to N4.5billion was fully repaid. The repayment performance was
thus 69.98% by number and 59.72% by value of loans guaranteed.
(iii) Innovations Under the ACGSF
With the deregulation of the economy in 1996, banks became free to determine their
investment options and naturally agricultural lending and small holder project funding
suffered as many banks preferred less risky alternatives. Over the years, the CBN had
initiated products and innovations to encourage financial institutions to support
agricultural and other real sector lending despite deregulation and liberalization of the
financial sector. These innovations are as discussed below.
Self-Help Groups(SHGs) linkage With Banks
The SHGs was fashioned in 1992 as a mechanism for the promotion of savings
mobilization and credit delivery under the ACGS. Such a group would save in a bank
where it intends to take a loan and the savings would act as cash security for the loan.
Over time, savings culture is entrenched and capital is accumulated until it could fully or
partly support members’ operational activities. The CBN assists in the linkage of the
banks and the groups and in building their capacity for mutually beneficial business
The Trust Fund Model (TFM)
The Trust Fund Model (TFM) was conceived to reduce the risk which banks are exposed
to in their lending to uncollateralized agricultural borrowers. It involves the mediation of
any willing party that would want to pledge funds in the banks of its choice as cash
security for loans to certain clients supported by the party. Such parties include
governments, churches, NGOs, companies etc and lending are normally done to saving
Self-Help Groups (SHGs).
The steps involved in the adoption of the TFM include:
Decision by a state/local government or any other organization to
dedicate/commit some funds for the improvement of the living standards of its
people: improvement of agriculture, reduction of poverty and job creation.
Invitation by state/local government or any other organization to CBN and willing
partner banks (intermediary banks) to a preliminary meeting to discuss the
modalities of the Trust Fund Model.
Drafting, finalization and signing of a Memorandum of Understanding (MOU) on
Provision of evidence that the state/local government or any other organization
have deposited 25 % of the proposed client loan exposure in the intermediary
bank and that the prospective clients have been formed into non-politicized small
holder groups, linked to the bank and saved additional 25 % of the intended loan
amount. Total cash security then becomes 50%.
Application for loan from the intermediary bank by the groups.
Inspection of the projects, approval of the loan (usually two times the sum of the
government deposit and farmers savings) and application to the ACGSF for
Guarantees of 75% of the 50 % unsecured part of the loan package by the
Disbursement of loan.
The national performance of the TFM in terms of pledged funds are as follows:
Katsina State N 1,000,000,000.00
Kogi State N 180,000,000.00
Ondo State N 100,000,000.00
Kaduna State N 100,000,000.00
Jigawa State N 50,000,000.00
Benue State N 15,000,000.00
Nassarawa State N 10,000,000.00
In addition some Local Governments and oil companies such as Shell Petroleum
Development Company (SPDC), Agip Oil Company (AOC) and Total have pledged
funds in support of their farmers in their areas of operation.
Interest Drawback Programme (IDP)
The Interest Drawback Programme (IDP) was introduced with effect from the year 2003
lending season to assist borrowers under the ACGSF reduce their effective borrowing
rates. Under the IDP, farmers will borrow from lending banks at market-determined
rates but the Programme will provide interest rebate of a determined %age to them
where the loans are repaid as and at when due.
The IDP is funded jointly by the Federal Government of Nigeria and the Central Bank of
Nigeria in 60:40 shareholding ratio. The IDP has a capital of N2.0 billion, separate from
the ACGSF. The Central Bank has paid up its own 40% share of N800.00 million while
that of the Federal Government is being awaited.
Currently farmers who repay their loans as and at when due are entitled to a rebate of
40% of the interest which they paid on such loans. The detailed guidelines on this are
available on the CBN website and at the DFD office Sokoto. A total of 8,470 IDP
claims, valued N24.1 million has been settled by the department as at 31st March, 2005.
3.2.2 Small and Medium Enterprises Equity Investment Scheme (SMEEIS)
The Small and Medium Enterprises Equity Investment Scheme (SMEEIS) was initiated
in year 2001 by the Bankers’ Committee and provides that 10 (ten) % of the profit before
tax (PBT) be set aside by deposit money banks annually for investment as equity in
small and medium enterprises. The Scheme is part of the banking industry’s contribution
to government’s efforts towards stimulating economic growth, developing local
technology and generating employment.
For the purpose of this scheme, a small and medium enterprise is defined as any
enterprise with a maximum asset base of N200 million, excluding land and working
capital; with the number of staff employed by the enterprise not less than 10.
The activities that SMEEIS can support include agro-allied enterprises, information
technology and telecommunication, manufacturing, educational establishments,
services, tourism and leisure, solid minerals and construction.
Recently, the Central Bank of Nigeria and Bankers’ Committee reviewed the SMEEIS
guidelines to accommodate the financing needs of micro entrepreneurs. To this effect 10
% of the SMEEIS Funds would be apportioned to micro entrepreneurs. The modalities
for participation of banks in micro/small holding enterprises are being worked out.
As at 31/6/05, the total fund set aside by banks stood at N31.0 billion out of which only
N8.5 billion or 27.4% had been invested.
3.2.3 National Micro-Finance Policy and Regulatory Guidelines
Critical to the assumption of private sector participation in poverty reduction in Nigeria is
the existence of an appropriate policy and regulatory framework for the provision of
needed financial services. The Nigerian financial infrastructure needs to be expanded to
enable the efficient provision of financial services to the poor, low-income groups and
micro-entrepreneurs. Serving such groups is necessary for three reasons. First, such
services create benefits to the poor through provision of greater employment
opportunities, reduction in poverty and vulnerability, self-empowerment, improved
educational and nutritional level of family members, and better access to goods and
services. Secondly, the micro-entrepreneurs constitute a target group to which micro-
finance institutions could provide profitable service. Thirdly, it provides better economic
opportunities for both clients and financial institutions that lead to growth and
development of the entire economy.
The CBN has already drafted a national policy that will boost activities of these
microfinance institutions. The policy is being considered by the Management of the CBN
and would be rolled out soon.
4 THE ROLE OF THE FORMAL NIGERIAN FINANCIAL SYSTEM IN
Financial systems, the world over, play fundamental roles in the development and growth of
the economy. A financial system is a collection of various markets, institutions and operators
that interact within an economy for the exchange of financial products, aided by physical
instruments or information on prices and volume, and activities of professionals. They deal
with financial assets and liabilities that have varying maturities and perform the function of
mobilizing of funds from surplus units of the economy to deficit units. In Nigeria, two broad
categorization exist namely, money and capital markets. The money market deals with
short term funds, usually of less than one year maturity while the capital market deals with
long-term transactions. They can be further subdivided into primary markets (raising new
funds) and secondary markets (sales of existing securities).
4.1 The Nigerian Money Market
The money market in Nigeria deals in short term financial assets that are close to money.
The money market assists in the mobilization of funds for domestic private and public
investment and transmitting monetary policy. It has undergone a lot of changes since
independence in 1960. For instance, prior to independence, the money market was
dominated by foreign owned banks whose activities focused on export/import trade
finance in favour of expatriate merchants. Banks as it were, maintained links with the
London Money Market where surplus funds were channeled to. Since independence, and
following the establishment of the Central Bank of Nigeria in 1959, there has been active
involvement of the regulatory authority in the development of the money market in Nigeria
and in line with domestic requirements.
The operators in the Nigerian money market are the financial institutions comprising the
Central Bank of Nigeria, deposit money banks, discount houses, the government, private
and public organizations and individuals/households. The main features are as follows:
Central Bank of Nigeria (CBN): Issues domestic currency, implements monetary policy,
acts as the bankers bank and financial adviser to the government.
Deposit Money Banks (DMBs): Serve as the intermediary between the Central Bank of
Nigeria and the general public in the transaction of banking products and monetary policy
instruments, provide financial services to individuals/households, corporate bodies and the
government and deal in foreign exchange transactions.
Discount Houses: Assist deposit money banks in liquidity management by facilitating
loan contracting (repayable at call), intermediating funds between the CBN and the DMBs
and providing short term markets for government securities.
Finance Companies: Deal mainly in consumer credit and other facilities for Local
Purchase Order (LPO), project financing, equipment leasing and debt factoring. They are
not allowed to mobilize public deposits and derive their funds from equity and borrowing.
Bureaux de Change: Established to enhance public access to foreign exchange through
buying and selling of foreign currency.
Community Banks: Unit banks that are owned and managed by the community, accept
deposits, provide credit and other micro banking and financial services.
Others: Mainly corporate bodies and individuals/households that provide working capital
and savings, respectively.
The activities of these operators in Nigeria are regulated by the Central Bank of Nigeria
(CBN), the Nigeria Deposit Insurance Corporation (NDIC) and the Federal Ministry of
4.2 The Nigerian Capital Market
The capital market in Nigeria provides long-term finance for investments that are critical
for the economic growth and development of the country. Accordingly, it is made up of
institutions and instruments that mobilize and allocate long-term savings in the economy.
In Nigeria, the capital market assists in the provision of funds to industries and
governments for fixed investment like buildings, plants and public infrastructure.
The operators in the Nigerian capital market include the stockbrokers/dealers, issuing
houses, registrars, the Nigerian Stock Exchange, trustees and underwritters. The main
features are as follows:
Stockbrokers/Dealers: They act as agents of the public in receiving and executing buy
or sell orders for shares according to the instruction of their clients.
Issuing Houses: A financial institution, non-dealing members of the Nigeria Stock
Exchange that prepares prospectus for the sale of new securities on behalf of
companies and government.
Registrars: Open registers and maintain the list of shareholders of companies on the
conclusion of subscription and allotment.
The Nigerian Stock Exchange: Self-regulatory organization that supervises the
activities of the formal capital market, provides a mechanism for mobilizing private and
public savings and making them available for productive purposes, means for trading in
new and existing securities, regulates the market and protects investors.
Trustee: A trustee holds and manages assets and debt securities on behalf of individual
or institutional investors and protecting their interest by ensuring adherence to the rules
governing the instrument.
Underwriters: The underwriters facilitate the success of offers by making a pledge to
make money available in the event of under subscription and is entitled to an agreed
commission at the point of agreement.
The regulators in the capital market include the Securities and Exchange commission,
Nigerian Stock Exchange, Central Bank of Nigeria and the Federal Ministry of Finance.
4.3 General Performance of Nigeria’s Financial System
Nigerian financial market has been noted to be one of the largest in Sub-Saharan Africa
with regard to diversity of institutions and instruments. However, the markets continue to
be dominated by deposit money banks and has been adjudged to be shallow when
compared with advanced and emerging economies.
In the money market, there has been an upward trend in the total value of instruments
transacted in the period 1960 to 2003. From N20.3 million at end-1960, the value of
traded instruments rose to N837.5 billion 2003. The major players in the money market
are the deposit money banks. The assets of the banks in relation to GDP grew
significantly from 18.8 % in 1970 to 34.1 % in 1980 and 65.9 % in 1986 showing
improved performance of the market. However, the distress that struck the banking
sector in the late 80s impaired this trend and the cumulative effect has not been
completely curtailed despite the recovery and the asset build up in the later years. The
net interest margin of the banking sector over the years have indicated declining
efficiency. For instance, the margin deteriorated from 1.8 % in 1999 to 1.9, 2.2 and 2.2
in 2000, 2001 and 2002, respectively. Similarly, return on assets of the banks declined
from 3.0 % in 2000 to 1.2 % and 0.8 % in 2001 and 2002, respectively, while return on
equity declined from 37.5 % in 2000 to 14.0 and 9.1 % in 2001 and 2002, respectively.
As for the capital market, the value of traded instruments in the Nigerian Stock Exchange
have continued to maintain an upward trend in nominal terms. This rose from N1.5
million in 1961 to N6.8 billion in 1986 and N 2,112 billion in 2004. Using the market
capitalization relative to GDP as a yardstick, the capital market operations have
improved over the years. The ratio stood at 9.82 % in 1986, 10.41 % in 1996, peaked at
29.41 % in 2003 and declined to 25.55 % in 2004 (Table 111).
The trend favourably compares with 18 % in Ghana in 2000 but adversely with the
record of 88.6 % in Egypt in 1996. Nevertheless, the privatization programme of
government would improve the position in years to come.
Table 111: Market Capitalization and Gross Domestic Product (1986-August 2005)
GDP AT CURRENT MARKET
YEAR MARKET CAPITALIZATION PRISES (2) AS %
N BILLION N BILLION
1986 6.79 69.15 9.82
1987 8.30 105.22 7.89
1988 10.02 139.09 7.20
1989 16.36 216.80 7.55
1990 16.36 267.55 8.65
1991 23.13 312.14 4.25
1992 13.27 532.61 8.91
1993 47.44 683.87 9.71
1994 66.37 899.86 20.04
1995 180.31 1933.21 14.78
1996 285.82 2707.72 10.41
1997 281.96 2801.97 9.37
1998 262.52 2708.43 11.07
1999 299.90 3194.02 14.98
2000 478.60 4537.64 14.60
2001 662.60 5178.15 14.23
2002 736.90 5454.15 24.86
2003 1356.00 7180.14 29.41
2004 2112.00 8264.96 25.55
Source: Securities and Exchange Commission
Other areas that Nigeria has registered success in the financial system include:(i)
introduction of new products & improved service delivery, (ii) enhanced payment
system, (iii) increased number of operating institutions, (iv) and (v) better monetary
4.4 Performance of the Nigerian Financial Sector in Poverty Alleviation
The formal financial sector would have been expected to play a private sector led
poverty reduction role in Nigeria. Banks appear well positioned to offer financial services
to ever-increasing numbers of micro-entrepreneurs. They have physical infrastructure,
financial resources, administrative and accounting systems to keep track of which a
large number of transactions, sound governance structures, cost-effectiveness and
profitability all of which would have given banks a special edge for micro-lending over the
informal sector in providing microfinance services. But the banks have continued to
favour the large accounts of an established clientele with 100 % collateral. Most bankers
have not regarded microfinance and poverty lending as a genuine option owing to three
o Too Risky: Bankers perceive small businesses and micro-enterprises as bad
credit risks. The perception is that small clients do not have stable, viable
businesses for which to borrow and from which to generate repayment.
Moreover, these potential clients lack traditional collateral to guarantee their
o Too Expensive: Bankers also believe that because micro-loans are small and
have short terms, bank operations will be inefficient and costly. It takes the same
amount of time and effort (if not more) to make a N50,000 loan as a N1,000,000
loan, but the return on the larger loan is much greater. So why make a small
o Socio-economic and Cultural Barriers: According to bankers, micro and small
enterprise clients have difficulty approaching a bank because they lack education
and do not possess business records to demonstrate cash flow.
In the period 1992 to 2003, the percentage of credit of commercial bank’s small scale
enterprises credit to total credit of the banks maintained a downward trend. The
percentage of the smallscale enterprises credit of the banks to total credit declined from
48.8% in 1992 to 8.32% in 2003 (see Table 1V).
Table 1V: Ratio of Loans to Small Scale Enterprises to Total Commercial Bank’s Credit
YEAR LOANS TO S.S.E TOTAL CREDIT (1) AS % OF (2)
N BILLION N BILLION
1992 20.4 41.8 48.80
1993 15.46 48.06 32.17
1994 20.55 92.62 22.19
1995 32.37 141.15 22.93
1996 42.3 169.24 24.99
1997 40.84 240.78 16.96
1998 42.82 277.9 15.41
1999 46.82 352.08 13.30
2000 44.54 508.3 8.76
2001 52.43 796.16 6.59
2002 74.18 896.56 8.27
2003 90.18 1084.86 8.31
Souce: CBN Statistical Bulletine, Volume 14, December, 2003
5.0 SUSTAINABLE MICROFINANCE FOR POVERTY REDUCTION IN
NIGERIA: MAINSTREAMING MICRO & RURAL FINANCE STRATEGY
Emphasis in the previous chapters have focused on the formal sector of the financial
market in Nigeria. The sector has only provided for the financial requirements of the
urban economy and has not played any appreciable role in poverty reduction, particularly
in rural areas. Poverty reduction strategy in Nigeria should not be left in the hands of
government lone. As a matter of fact, in the future to come, the role of government
would need be restricted to the creation of enabling environment, while the private sector
would be expected to assume more prominence in poverty alleviation strategies.
Equally, there would be the need for strategic partnerships between the private and
public sector in addressing poverty related matters.
In Nigeria a comprehensive policy framework that promotes micro finance intermediation
is considered very key to complementing government direct efforts through its agencies
as it would empower the private sector to contribute its part.
5.1 Key Issues for In Poverty Oriented Micro-Finance Practice
For microfinance to grow, develop and reduce poverty, some appropriate structures that
the country would focus on in the future include the following:
(i) Adequate Capitalization requirements of the Microfinance Institutions
The institutions carrying out micro finance services will need to be well capitalized to
meet the requirements of regulators and to form risk assets. The requirements for
capital would be based on scope of business, area of coverage (national, provincial and
district) and competitiveness.
(ii) Linkage of Rural/Microfinance Banks to Development Finance
There would be adequate integration of the micro finance institutions into the
mainstream financial market. This could be achieved through fostering linkages between
commercial/development banks, specialized institutions and rural/microfinance banks to
enable the latter source for wholesale funds and refinancing facilities. In Nigeria, the
universal banks have the liquidity and funds that could service micro clients but lack the
requisite skill and branch network possessed by the MFIs.
iii) Establishment of an Effective Credit Bureau
Due to the peculiar characteristics of microfinance practice, there would be provisions for
credit bureaux which provide information on microfinance clients and aid decision
making. One of the risks that should be avoided by the MFIs is the mistake of multiple
lending- a borrower taking money from several institutions and, at times, taking money
from one institution to pay another. Proper information sharing will forestall such sharp
(iv) Micro Finance Capacity Building Programmes
Micro finance practice being new in many countries pose serious challenges to both the
regulators and operators in the area of capacity building. In order to bridge the technical
skill gap, especially among directors of the micro finance institutions, an appropriate
capacity building machinery would be set up. This might involve setting up an institution
that would define standards in terms of skills and competences for micro-finance
managers and provide high quality training materials and programmes as a prerequisite
(v) Reformation of Government Owned Development Banks into Viable
The failure of government owned banks such as agricultural and other development
banks has led to calls for different types of reforms. For example, the government of
Indonesia divested 40% of its ownership and commercialized the operations of the Bank
Rakyat Indonesia (BRI), while the Land Bank of the Philippines was also commercialized
and repositioned to provide wholesale funding for microfinance oriented banks. The
restructured institutions now do better than when they were owned by and fully
controlled by the government. Nigeria would look at the possibility of private/public
partnership, privatization or commercialization options to reposition development finance
institutions to effectively deliver their mandates.
(vi) Technical Cooperation Initiatives
There would be deliberate efforts to promote institutional arrangements and collaboration
among public and private sectors institutions, microfinance apex institutions, local
communities, NGOs and donor agencies in the pursuit of microfinance sector
development. Donor agencies play very active roles in the provision of training and
capacity building for the practioners and their activities will be coordinated and
(vii) Specific Finance Window for Rural /Microfinance Banks
Countries with serious commitment to micro finance development must actively support
the expansion of microfinance by issuing regulations that recognize microfinance as a
specialized banking service, create licensing window for microfinance specific banks and
incentives for the banking system to go into microfinance. This is already provided for in
the Nigerian national policy.
(viii) Promotion and Advocacy
Micro-finance issues should be championed by continuous advocacy that features the
adoption of market-oriented financial and credit policies, interest rates on
loans and deposits,
termination of government and other subsidized programmes,
termination of direct lending by government agencies implementing
agricultural credit programme, and
greater role of the private sector in the provision of financial services.
(ix) Promotion and Encouragement of Non Governmental Organizations
It has been said in the course of this report that the task of tackling poverty alleviation is
enormous and that it need be attacked from various dimensions. In particular, the
proportion of private sector involvement will have to increase in the future from technical
and financial perspectives. One of the ways of achieving these twin objectives is the use
of NGOs. These are voluntary non profit organization set up by concerned individuals
to assist in addressing certain problems that have been identified in the society. In
many societies NGOs have not been heard of while in others they lack the material and
human resources to be reckoned with in the general scheme of things.
Poverty alleviation programme should as much as possible devote substantial resources
to prospective encouragement and propagation of credible NGOs. There should
also be an apex organization to streamline, supervise and guide their activities. They
could be used as vehicles for reaching the poor with resources and other needs.
5.2 Complimentary Strategies/Principles that Support Microfinance for Effective
This paper recognizes that exhausting the needed strategies, approaches and steps is
beyond its scope. Nevertheless, the following are some of the suggestions that it feels
will prove worthwhile in tackling the problem of poverty through provision of microfinance
(i) Public Education on the existence and the evil of poverty
There is need for a full-scale public enlightenment on the prevalence, the extent and the
effects and evil of poverty in every country. The poor themselves will need this
enlightenment to make them to feel that there is a concern from outside to help them out
of the problem. On the part of the rich, this campaign is very necessary. Many of them
have not really known the extent of suffering and agony passed through by the poor.
This is not surprising, as they are far from the poor by virtue of occupation, dwelling and
day to day life. Making them to know poverty exist is necessary as a first step in
eliciting their sympathy and further cooperation and involvement in poverty alleviation
To effectively achieve the objective of such a campaign will require using various
methods. The poor themselves could be reached by radio in local languages, printed
materials in local languages and through joint meetings at local levels. The rich could
be reached through advertisement in newspapers, radio announcement, television and
holding of various fora on poverty in which highly placed people and members of
government cabinets in various countries will compulsorily attend on regular basis.
(ii) Involvement of the poor in poverty alleviation programme
The condition of the poor is not such as have made them unreasonable. It is only that
they lack empowerment. In the past, there has been the mistaken believe that the poor
don't know their needs and the mistake of modeling poverty alleviation strategies from
the top. As a result of this, such programmes often lack necessary rural content,
disposition and element that are very essential to success. An effective and efficient
poverty alleviation strategy will need to start by involving the poor themselves in identi-
fying what and what should be done for them. Such will require that public sector or
other poverty alleviation personnel are well trained in the area of rural sociology,
psychology, politics, economics etc. as these are essential to positive interaction with the
poor and also in identifying economical viable initiatives.
(iii) Emphasis on viability and sustainability
For any poverty alleviation initiative to last, emphasis should be placed on empowering
the poor not from the angle of charity and subsidy but from the angle of economic
principles. Policies and programmes should enable the poor to have access to training
on rudimentary investment criteria and decisions. For instance they should be able to
have information on alternative investment activities, the returns and the profitability of
each and using this as basis for choice on their part.
Provision of credit should be on purely commercial and economic criteria while they
should be supported with necessary training and capacity for better management,
efficiency, output and returns.
(iv) Data collection, Preparation and presentation
In the past, poverty alleviation have been combated in a vacuum. Each country should
embark on taking a census of the poor with emphasis on age, qualification, family size,
occupation, income, and residence, amongst others. This could be done and sorted with
the aid of computers for various tiers of government. The aim of this is to enable
government and private persons involved in poverty alleviation to know the enormity of
the problem from an empirical perspective and also appreciate the volume of resources
that will be required to face the problem, so that necessary provisions could be made.
Secondly, it will form a benchmark on which to measure success or failure of poverty
alleviation initiatives in the future.
(v) Target setting
Attempting to conmbat poverty without targeting is like embarking on a journey without
any specific destination in mind. Target setting will provide the vision that is necessary
to drive persons and resources in the proper direction. Such target should spell out the
number of people to be reached, their location, the volume of financial resources that will
be committed, the expected impact on beneficiaries etc. In setting targets, there should
be scheduling for a period of say 5 years and specifications of what each of the promoter
(public and private sector) will do in the initiative, when and how this will be done from
5.3 Possible areas on which emphasis should be based
The following areas of emphasis are suggested:
(i) Improved Access to Productive Assets
Like in urban economies, the poor require productive assets to embark on profitable
investments. For this reason, land tenure and tenancy should be arranged to improve
their easy access to land. Also drinking water in a cost-effective and safe form should
be made available to them. In addition, there is need for better health, nutrition,
education, particularly of the womenfolk.
(ii) Technological development and Replication
It is a well known fact that over 70% of the worlds poor live in the rural areas. Between
1965-1990, improved agricultural technology and water use really assisted millions of
people out of poverty. However progress in this direction slowed down later with the
effect that some large part of the poor were unreached. In the new era, there is need
for development of technological packages that are evolved with the cooperation of the
beneficiaries. Development of high yielding varieties, better agricultural practices should
be carried to the farmers from conceptualization to the final stage. By so doing the
incidence of resistance will be greatly minimized.
(iii) Information on inputs and output markets
The ability to prepare, analyze and appraise projects and take decisions are based on
the availability of necessary information on where input could be got and where output
could be sold and at what prices. Information is also needed on where financial
resources or assistance could be got and at what Interest. All these are essential in
making decisions. For these reasons, the poor should be availed the opportunity of
relevant information through pamphlets and computerized information system located at
central points that could be shared among various rural areas.
(iv) The Part of Women
In many societies the women contribute more to the economy than men. They are not
only an essential focus in the interest of each nation but in the interest of
their economies. In many societies their contribution are not noticeable owing to cultural
and religious limitations and this is not in the best interest of society. In fact, one can
safely say that the world can never make any meaningful impact in reducing poverty if
adequate attention is not given to women. Because of the peculiar problems and
limitations which they face, they could be overshadowed by menfolk if a general
approach is employed. For this reason poverty alleviation initiatives should have
specific designs that are tailored to the women alone. This will also require the
employment of women in service delivery, particularly in society where it is a taboo for
men to get near the women.
6.0 CONCLUSION AND RECOMMENDATION
This paper has examined the reality and enormity of the poverty incidence in Nigeria.
Poverty is both a rural, peri-urban and urban phenomenon and the country has been
rated very low by international organizations on various human development indices, a
situation which has continued to pose serious concern to the government, the citizens
and international development agencies and donors. Government has embarked on
various programmes mainly targeted at the rural poor, agricultural producers and women
in the past. However these efforts have lacked co-ordination and consolidation and this
has dimmed the prospects of creating any impressive impact on the poor.
Globally, provision of financial services is regarded as a key factor in poverty alleviation
issues. The Nigerian financial system which is dominated by the formal sector has
continued to receive attention from government, monetary authorities and international
monetary organizations. These take care of the financial requirements of the rich and
the urban sector. In the future years to come, the informal sector would need to receive
more and more attention to enable it do better, what it knows how to do best. The
participation of the private sector is equally important in any poverty reductions strategy.
The Central Bank of Nigeria, and in fact the country at large believes that now is the time
to put appropriate policy in place to guide the activities of the informal sector, promote
their development and create the environment for concerted stakeholder action in the
interest of the poor people of the Nigerian nation. The needed policy has been drafted
and will soon be rolled out as a step in this direction. It is expected that other African
nations will follow the same step so that the financial system provides even attention for
the needs of the rich and the poor. In so doing development would be found to proceed
more evenly, fairly and equitably.
In the future years to come the issue of poverty could give serious setbacks if not
addressed particularly in countries where the rate of growth of population exceeds the
growth in the gross domestic product. With the publicity given to the need to alleviate
poverty over the years and the momentum gathered so far in facing this challenge, there
is hope that the problem of poverty alleviation will not only continue to secure the
attention of public and private sector but will also attract necessary resources from them.
In this paper various suggestions areas of emphasis and mechanisms have
been defined. The effectiveness of these will depend on adherence to issues raised and
accountability on the part of the government and interventionist agencies. In the African
sub-region, there is particularly the need for sub-regional and national visions on holistic
approach to regard poverty alleviation of which microfinance should be a key part.
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