IJAIYA, Muftau Adeniyi
Accounting & Finance
Senior Lecturer
Informal Micro Credit and Economic Activities in Rural
Nigeria: A Framework for Policy Analysis. In
Democracy and Development in Nigeria, Saliu, H.A.
et al. (eds.) 2: 172-191, (A Publication of Faculty of
Business and Social Sciences, University of Ilorin,
Ilorin).
Chapter 9
Informal Microcredit and Economic
Activities in Rural Areas: A Framework for
Policy Analysis
*Muftau A. Ijaiya
Introduction
AFRICA'S development challenges go deeper than
low income, falling trade shares, low savings and low
growth, but also include inequality and uneven access to
productive resources, social exclusion and insecurity
(Pitamber, 2003). However, more specific concern is
raised in Nigeria due to rural-urban disparities in
income, access to education, health-care services and
prevalence of ethnic or boundary conflicts, in
particular. The apparent dearth of productive
resources, most especially credit from the formal
financial sector for rural dwellers to improve their
welfare, has attracted significant attention. (Aryeetey,
1998).
The dearth of formal credit in rural areas arises from
low population densities, poor infrastructure, policy and
institutional problems, remote difficult terrain, and the
small value of individual savings and loan
transactions. Besides, the cost of providing
Ijaiya is of the Department of Accounting and Finance,
University of Ilorin, Ilorin.
172
services to rural areas is high, since the cost of opening
branches in villages and small towns is not justified by
the business that can be generated, and these are the
reasons why formal banks could not really purvey
microcredit (Garuba, 19SS; Akanji, 2001; World Bank,
1989).
The Nigerian Government has also designed various
programmes to deliver micro-credit in rural areas.
These programmes have individually and collectively
been unable to provide a sustainable micro-credit
delivery system in the rural areas because of their
inability to meet credit demand, sources of which
depend on government subvention which has been
very irregular in recent times (Okafor, 2000).
However, Yaron, Benjamin and Piprek (1997) posit
that rural communities, like their urban counterparts, have
a bankable demand for formal credit which they say
contributes significantly to their welfare by mitigating
the impact of seasonably and natural disaster on their
income. Puglielli (2002), however, argues that formal
finance. is customarily inaccessible to rural dwellers
in a form conducive to efficient productive investment;
or, worst still, credit is unavailable altogether.
He
posits that this credit starvation of rural areas is an
economic development tragedy.
Therefore, there is need for a financial institution,
different from the formal financial institution, that
would operate within the peculiarities of the rural
areas. In searching for alternatives to finance,
attention is increasingly being paid to informal and semiformal microcredit for meeting rural people's credit
demands to offer small loans which are suitable for
rural small businesses. More importantly, informal
micro-credit suits the needs of borrowers .in terms
of: their simplicity in the procedure of obtaining
credit; personal guarantee requirements in place of
collateral which
is consistent with the ability of
borrowers; the
173
absence of controls and restrictions on the use to which
loans can be put; the fact that loans can be granted at any
time, non-payment of interest and flexibility in terms of
payment and repayment (Mabogunje, 1980; Chipeta and
Mkandawire, 1991;. And Aryeetey, 1998).
Drawing from the above, this paper addresses the
following question: How significant is the role of the
informal microcredit to the economic activities of the
rural dwellers in Nigeria?
Conceptual Issues:
Microfinance
Rural Areas and Informal
Ledgerwood (1999 cited in Wilson, 2001) defines
microfinance as the provision of financial services that
may include credits, savings, insurance and payment
services intended to benefit low-income women and
men. Yaron, et al (1997) see it as communitymanaged credit-and-saving associations that are
established to improve members' access to financial
services. While Okafor (2000) defines microcredit as
a programme designed to provide financial support and
ancillary services to the very poor, Wilson (2001)
classifies microfinance into formal, semi-formal and
informal. Formal microfinance is defined as public and
private financial institutions that are most active in micro
and small-scale finance intermediation. These
institutions are not subject to central banking regulation
and supervision and they draw their clientele from their
local catchment areas and their minimum capital
requirement is significantly lower. Examples include
People's Bank of Nigeria, Grameen Bank in Indonesia,
Budan Kredit Kecamatan [BKK] in Indonesia, etc.
The World Bank (2004) defines semi-formal finance
institutions as those formally registered by banking
authorities but are subject to supervision by government
agencies where government supports them with funds,
technical assistance and policy guidance. Examples
of such institutions include credit unions, group lending
174
institutions, etc. Informal microfinauce, on the other
hand, is defined by Goodland, Onumah and Araadi
(1999) as an institution that comprises a multitude of
different institutions and activities, which together play
significant roles in many Sub-Saharan African
economies with high rate of poverty, and where
individuals, households and regions remain isolated from
the markets and from the mechanism for borrowing and
lending or insuring against risk. These institutions are
often created by the people themselves without any
external intervention and legal status. The major types of
informal microcredit institutions include Accumulated
Savings and Credit Associations [ASCRAs], Rotating
Savings and Credit Associations [ROSCAs], money
lenders, trade credits, self-help groups, personal loans
from friends, etc. (World Bank, 1989; Chipeta and
Mkandawire, 1991).
Parker and Nagarajan (2000) say that informal
microcredit are characterized by small loans; reduction
in cost of transactions; physical proximity to clients;
regular i'ace-to-face meeting with clients; prompt loan
collection procedure; and the use of peer lending system
through which clients cross-guarantee each other's loans,
among others. These characteristics make the informal
microcredit institution a uniquely high-potential,
vehicle for reaching and organizing rural communities
(see also Edgcomb and Barton, 1998). Discussing the
importance of informal microcredit, Steel and
Aryeetey (1994) assert that they help in mobilizing
savings in rural areas through their daily collection of
deposits, which are used for school fees, medical
expenses and working capital to restock supplies which
enable clients earn a stream of profits. Besides, the
amount mobilized is also important because it protects
rural people from incessant appeals from families and
friends.
Goodland, et al. (1999) posit that the savings facilities
provided enable households to. put aside precautionary
funds which they
175
use in times of problems such as death and diseases
like HIV/ AIDS, malaria fever, blindness, etc., and
permanent disability (see also Ledgerwood, Burand and
Brown, 2002). The World Bank (1989) observes that
informal microcredit institutions provide savings
opportunities for rural savers in countries where
community banks are ill-equipped to accept small
deposits of illiterate savers. While Goodland, et al.
(1999) opine that they also play an important role by
providing consumption credits to augment consumption
shortfalls; majority of rural people depend largely on
agriculture for their livelihood. The seasonal nature of
their resources leads to fluctuating labour and capital
demands, and to uneven production and income flows.
During these periods, informal microcredit provides
consumption credits needed to make up for the
temporary shortfalls. Besides, rural households also use
informal microcredits to increase income by investing
on non-farm sources as well as saving part of the credit
disbursed for the lean season (see also Morduch, 1998,
Rutherford 1999; and Zaman, 1999).
Dreze and Sen (1989) also say that informal microcredit
plays an important role in the achievement of livelihood
promotion and livelihood protection in rural areas.
Livelihood promotion is concerned with improving
standards of living principally through increased income
while livelihood protection is essentially social security
which maintains the living standards and income earned
through the informal micro-credit (see also Zellor, et al.
1997). Quereshi, et al. (1996) observe that access to
informal microcredit in rural Pakistan has enabled
farmers purchase agricultural inputs which have
improved their productivity. The World Bank (1989)
also asserts that the informal microcredits provided for
398 rural households in Niger Republic accounted for 84
per cent of total loans in these rural areas and was equal
to 17 per cent of the agricultural income of the farmers.
176
Pitt, Khandker and Cartwright (2003) reiterate that many
of the informal microcredits in Bangladesh specifically
target women, based on their view that women are more
likely than men, to be credit-constrained, have
restricted access to the wage labour market, and have
an inequitable share of power in household decisionmaking. The Grameen Bank of Bangladesh is the best
known example of these informal microcredit
programmes, and over 90 per cent of its clients are
women. Pitt and Khandker (1998) find that the flow of
consumption expenditure increases by 18 'taka' for
every 100 'taka' borrowed by women, but by only 11
'taka' for every 100 'taka' borrowed by men.
Pitt, et al. (2003), also using a totally different
approach to parameter identification, find that
microcredits provide women with significantly improved
health and nutrition for both .boys and girls, while credits
provided for men have no significant effect. Bolnick and
Mitlin (1980) also report that informal microcredit
institutions provide members with housing loans. For
instance, the Grameen Bank in Bangladesh provided
over 330,000 housing loans to its saving scheme
members, while the Self-Employment Women
Association (SEWA) in India also provided housing loans
to their members. The Fundacion Carvajah in Latin
America also initiated a housing loan programme which
benefited their members substantially (see also
Anzorena, 1996, and Cruz, 1994).
Johnston (1986) defines a rural area as an area where
the inhabitants' livelihood depends on the exploitation
of the soil. Mabogunje (1980) says that it is not only an
aggregation of farming population but also the physical
manifestation of both the social relations of land, the
ecological, technological and organizational basis of its
utilization, that depict what a rural area is. For instance, in
a rural area, the land holding is small and owned by
family members. The area is usually built around
lineages with a compound comprising individual huts,
or
a
continuous
building
177
of many rooms. Areas around the compound are
manured with domestic refuse or animal droppings,
which are intensively cultivated and cropped every
year. Footpaths or tracks of various widths link the
farms to the villages and hamlets, and these, in turn, to
the population market towns. The World Bank (1989)
observes that majority of the population engaged in
fanning and other micro activities such as handicrafts,
trading, which the World Bank calls non-corporate
business. Rural areas in Nigeria account for about 54.9
per cent of the total population of the country (African
Development Bank, 2002). Discussing the importance
of rural areas, Afolabi and Osota (1999) assert that the
areas constitute a great reservoir of indigenous
technical knowledge, acquired through centuries of
concrete experience, and their contribution to national
economy include generating resources to feed
medium and large-scale enterprises; enhancing the
development of the entire nation, laying the
foundation for
sustainable self-reliance, and
guaranteeing optimum development of agro-based
industries.
Whynne-Hammond (1979) also opines that rural
areas' role is extremely important as contributors to the
nation's wealth. Their businesses serve as important
connecting points between the various sectors of the
economy where flexible product and service supply play
a crucial role in the commercial network of the country.
Economic activities are any kind of work people engage
in for the purpose of making profit: the economic
activities in the rural areas are farming and nonfarming activities. Fanning activities are the major
occupation of the rural people where grain crops such
as millet, maize, rice, etc., and root crops such as yams,
cocoyams, sweet potatoes, bulbs, cassava and fruits are
grown. Some of the rural people also engage in animal
husbandry such as the rearing of cattle, goals, sheep
and poultry. The non-farming Activities include
bandicrafts, tailoring, petty trading, black and
goldsmithery, etc. (Olaloku ct al, 1984).
178
Efforts at Microcredit Delivery to the Rural Areas in
Nigeria The government, private individuals and
community-based groups have designed some
microcredit programmes that have enhanced rural
dwellers' access to credit for increased productivity
and improvement in their economic status. For
instance, at the government level, between 1986 and
1999, several microcredit programmes were attempted at
purveying microcredits to the rural people. These
programmes include the Agricultural Development
Projects (ADPs), the Better Life for Rural Dwellers
(later renamed the Family Support Programme) and the
Directorate of Food, Roads and Rural Infrastmcture
(DFRRI). Other institutions that also purvey
microcredits were the Rural Banking Scheme (19771980), People's Bank (1987-1990) and Community
Banks (1990-date). In addition to the above is the Central
Bank of Nigeria (CBN) microcredit scheme tagged
the Agricultural Credit Guarantee Scheme (ACGS)
which came into existence in 1977 (Akanji, 2001).
These institutions have provided microcredit to the
rural people to improve their economic activities. For
instance, community banks gave loans and advances
worth N14.621 million between 1999 and 2000 to
agriculture, food processing and trading (Aderibigbe,
2001; Okafor, 2000) while the Agricultural Credit
Guarantee Scheme (ACGS) guaranteed loans worth N27,
687,169 million for the development of agriculture in
the country. On the part of the People's Bank, the bank
granted loans and advances worth N3.490 billion to the
rural people. (Phillips, 1991; Okafor, 2000; Aderibigbe,
2001 and Akanji, 2001). However, these formal
microfinance institutions have suffered from a
number of the volume of funds they could supply was
limited, arid it was impossible for these lending
institutions to meet the demands of their clients. Okafor
(2000) notes that the fundamental source of
179
this problem is the absence of autonomous sources of
funds for the institutions. , These institutions,
especially those owned by the government, depend
largely on government subvention, which has become
very erratic these days. Besides, most of the credit
systems are tailored towards meeting the needs of the
elite rather than the poor, and this makes it easy for the
wealthy household to annex the benefits of the
institutions. Also, the fact that the poor cannot provide
the collateral demanded by banks continues to make
microcredit delivery to rural dwellers elusive
(Olashore, 1979; Aderibigbe 2001; and Akanji, 2001).
Okafor (2000) also reiterates that community and rural
banks are avoiding credit delivery to productive
activities in rural areas by siphoning local savings for
portfolio investment outside the rural areas.
From the foregoing, therefore, it can be deduced that
the formal' financial institutions have not been able to
provide a reliable independent credit delivery system
in the rural areas because, despite the huge amount
invested in the formal financial institutions, it has
proved to be irrelevant and cannot meet the economic
needs of the areas. Furthermore, there is a breach of
mutual trust between the formal financial institutions and
the rural dwellers because the savings mobilized in these
areas are used to support credit delivery operations to
choice customers in urban areas. Therefore, there is need
for a financial institution that would operate within the
peculiarities of the rural areas. That financial institution
is the informal finance institution like the informal
microcredit, the institutions whose formation must be
based on the concept of social capital that emphasizes
mutual trust.
Analytical Framework on the Impact of
Informal Microcredit on the Economic Activities
of Rural Dwellers in Nigeria
The analytical frameworks that discuss issues relating to finance
are usually based on trust, and these are better
discussed under
180
the social capital theory. For instance, financial
intermediation depends upon trust between the
borrower and the lender that contracts will be honoured
(Bennett, 1996a:3). The basis for that trust depends on
two crucial elements: the applicant's reputation as a
person of honour and the availability of collateral against
which claims can be made in case of default. The first
two elements -reputation and character - were assessed
based on the lender's intimate knowledge of the
borrower, or on the witness of other reliable persons
and a documented history of the borrower's behaviour.
But these are the two elements that are lacking between
the formal financial institutions and the rural
dwellers. The consequence of these barriers are what the
formal lender perceives would make administrative
costs of gathering information and processing
application for the rural people to be too costly
compared to the small size of the loans and their
expected profit. These barriers made the formal
financial institutions to abandon the delivery of
microcredit to the rural dwellers. Therefore,
something needs to be created to overcome, these
barriers so as to improve the economic activities of the
rural dwellers. That something is a financial institution
that is based on social capital (Edgcombe and Barton,
1998; and Goodland, et al. 2001).
According to Narayan (1999), Bebbington and Carroll
(2001:1), Collier (1998), Gugerty and Kremer (2000),
Knack (1999), Krishna and Uphoff (1999) and
Woolcook and Narayan (2000:226), social capital is
the norms and social relations embedded in the social
structures of the society that enable people to co-ordinate
action collectively in order to achieve desired goals (sec
also Ijaiya, 2002). According to Putnam (1995:3),
social capitals are those features of a social
organization such as networks, norms and trust that
facilitate co-ordination and co-operation of mutual
benefits, which enhance the benefits of investment in
physical and human capital (Bennett 1991:1).
181
Funkiyama (undated) (cited in Edgcomb and Barton,
1998) further defines networks, norms and trust as
"local clubs, temple, associations, work groups and
other forms of association beyond the family and
kinship groups', and large, publicly owned
corporations. This made Grotaert (1999:4-10) to opine
that social capital is relevant at macro, mcso and micro
levels. Social capital at the macro level includes large
and public institutions like government, with the rule
of law, civil and political liberties, etc. At meso and
micro levels, social capital can take place at local clubs,
work groups, and other forms of association beyond the
family and kinship groups. Therefore, social capital
refers to the networks and norms that govern
interactions among individuals, households and
communities. Ostrome (1994) cited in (World Bank
,1999) observes that networks are social capital in the
form of rudimentary "insurance companies" or 'banking
institutions' for the people lacking fundamental assets
like collateral for loans. Such people, he argues, may
draw on their social capital as a substitute.
Discussing the importance of social capital, Bennett
(1996b:2) says that social capital is important because
both civil and commercial associations which reach
beyond the family depend on - and foster on - traditions
of collaboration and a certain level of trust between
members of society. This level of trust allows the
society to reduce what economists call the transaction
cost of doing business in that society.
The World Bank (1999:91) also opines that access to social
capital turns out to be indispensable to successful
“entrepreneurs” in order to improve their living conditions
through their own efforts. The lack of social capital, the
absence of connectedness and relationships with the formal
financial institutions, have been identified as the root
problems of the rural people. For these people, the slightest
worsening of their situations, whether as a
182
result of sickness or a deteriorating economy, may plunge them
into crisis from which they may never recover. Therefore, they
need a source of finance through which the people can relate to
others in the society and through which members can develop a
substitute for the collateral they lack. This would enable them have
access to credit that would improve their economic activities. For
instance, the guarantee mechanism, a major characteristic of the
informal microcredit, introduces shared liability and pressure from
social groups which serve as a replacement for the formal finance
security and business appraisals. This guarantee mechanism
slashes administrative cost of the informal lender since they gather
information about borrowers. This enables informal lenders to
shift the cost of loan processing and loan approval tasks to the
people. Also, shared liability and the promise of repeat loans in
increasing amount are recognized as key factors in motivating
repayments (Ryne and Otero, 1994).
In effect, a village bank or a savings and credit co-operative creates
an "information asset" for the people. That information asset is
first and foremost the collective endorsement-of character that
each member of the group provides for the other, which is accepted
by the financial intermediary in lieu of other assets. Secondly,
the knowledge that each member has knowledge of each other's
economic activities (and household situations) which support an
accurate assessment of ability to pay is another information asset.
Ostrom (1994, 1997) cited in World Bank (1999) also says that
social capital prevents the deterioration of common pool
resources or ensures members' contributions to the maintenance
of local infrastructure. Thus, a change in economic conditions
has to be accompanied by investments in economic activities that
stabilize and prolong the regulator)' function of the existing social
capital. To allow the functioning of the existing social capital, the
participation of the people in the whole process of identifying
and managing community-based projects to the needs of the people
183
is considered essential. It is critical to ensuring local
commitments and sustainability. Apart from the fact that such
social capital would enable people to build assets, it will also
improve their consumption pattern and general economic
activities.
However, even if societies are rich in social capital, i.e., have a
well-functioning mechanism for mutual co-operation, there is still
no guarantee that banks or other formal financial institutions will
recognize, co-operate, or work with groups of marginalized men
and women. Edgcomb and Barton (1998:5) say there is need for
transformation within the groups. This transformation involves
using the groups to expand access to social services (like health,
adult literacy, and family planning) and production of support
services like agricultural extension, trade, etc., if needed. The
second step is financial intermediation, involving training of
members to participate in management, accounting, and basic
financial management, which help groups to establish good record
and audit systems to "keep score." This grouping will enable the
rural dwellers to benefit more from the social services, using the
informal microcredit in their reach to improve their economic
activities (see also Goldberg, 1988).
However, Bennett (1996b) maintains that successful informal
microcredit efforts (particularly those working through groups)
should seek to create sustainable access to financial services for
micro entrepreneurs, create locally controlled systems that will
bridge the gap between formal financial institutions and the people
(Berenbach and Guzman, 1992). These systems should also"
include institutions that work together to deliver and regulate
social and financial intermediation services to the people. In some
instances, it could be an institution that consists of one
organization that delivers both types of services., with the clients
organized into some form of groups with varying degrees of
184
autonomy and control, to regulate social interactions effectively
(see also World Bank, 1999). That institution is the informal
financial institution that formed the basis of our analytical
framework of determining its role in the growth of economic
activities in rural Nigeria. Figure 1 depicts the analytical framework
to show the interaction of the rural dwellers with the informal
microcredit institutions.
It is important to note that the success of this framework in
achieving its goals depends on the following assumptions:
(i)
that the informal microcredit will not use
concessional interest rate (often negative in real
terms);
(ii)
that the informal microcredit will not favour only
agriculture but all rural economic activities, which
include non-farming activities;
(iii)
that the informal microcredit will not ignore or oppress
the creation of saving deposits, i.e., will provide saving
with real returns;
(iv)
that the informal microcredit will not implement costly
and inefficient service deliver)' mechanism;
(v)
that the informal microcredit will favour long-term loan
that would allow rural dwellers to invest in long-term
productive activities.
The framework, as depicted by the diagram, shows the link between
the informal micro-credit and the economic activities (measured
in terms of the volume realized). Put differently, the framework
shows how the informal microcredit, through credit facilities,
savings facilities, insurance facilities, leasing facilities, warehouse
receipt facilities, housing facilities, combating diseases like
malaria, fever, blindness, HIV/AIDS, etc., relief materials,
including contingencies and provision of social services, could
improve the economic activities of the rural dwellers.
185
The framework also indicates a feedback loop from the gains
through the role of the informal microcredit by rural dwellers to
the boost in their economic activities. This feedback is necessary
if the activities of the informal microfinance are to be sustained.
It is assumed that as the rural dwellers income improves, they
would return the amount borrowed and also save part of their
earnings in the informal microcredit programmes to keep the
process moving. This process applies to all categories of
individuals that benefit from the programmes as they would also
return the amounts borrowed and also save part of their earnings
to enhance the sustainability of the programme. This process will
allow others to take loans from the pools, thus boosting the
economic activities of all the rural dwellers. Therefore, the
schematic flow is established and maintained, to make a continuous
process of the operation of the microcredit and improvement in
the economic activities of the rural dwellers possible.
Functions of the Informal
Microfinance Institutions
*
*
*
*
Credit facilities
Savings facilities
Insurance facilities
Leasing facilities
Informal Microfinance
* Housing facilities
Inslutitions (Types)
* Warehouse Receipt
facilities
* Rotating Savings and Cred its * Combat diseases 
Associations (ROSCAS •* Secure donor fund
*
Distribution of relief
known as "esusu"
materials, including
* Money lenders
contingencies
* Trade creditors
*
Social services
* Self-help groups
* Friends and relations
Fig. 1: A Schematic Link between the Informal Microfinance
Institutions and Economic Activities
186
Outcome of
Economic Activities
* Income generation
* Asset accumulation
* Job creation
Conclusion
The insufficient delivery of microcredit to rural areas in Nigeria
has been traced partly to the inability of the formal financial
institutions to deliver microcredit because of the problems
enumerated earlier. These shortcomings from the formal financial
institutions are increasing, as rural areas are involved in agriculture,
trading and other small enterprises which represent about 75 per
cent of the rural economic activities in Nigeria. Therefore,
providing an analytical framework that is based on the role of
informal microcredit to the rural areas becomes necessary, as this
would improve the delivery of informal microcredit to the rural
areas, which accommodate more than 70 per cent of the total
population of Nigeria.
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