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CHAPTER ONE

INTRODUCTION

Background to the Study

There has been growing interest in accelerating processes of rural community transformation by various governments in Nigeria especially in the areas of poverty alleviation, provision of rural infrastructure such as health and medical facilities, electricity, pipe borne water, schools, agricultural extension and in the development of micro finance establishments that will affect positively the lives of the rural investors and community organizations. Based on this concept the Central Bank of Nigeria (CBN) in 1990 established an economic policy that would encourage the extension of banking business to the rural area of the country in order to mobilize rural savings. Thus, microfinance emerged as a noble substitute for informal credit system in operation in the rural areas and to serve as an effective and powerful instrument for poverty reduction among people, who are economically active but financially constrained and vulnerable in various countries.

Despite its increasing roles, microfinance institutions are faced with a lot of challenges which include diversion of loan to non-productive uses, high rate of default in loan repayment, lack of infrastructure and problem of illiteracy among the rural populace. The Nigeria’s estimate of unreachable client of microfinance reaches 40 million and Microfinance institutions in Nigeria have not been able to adequately address the gap in terms of credit, savings and other financial services required by the micro entrepreneurs and over 80 million people of Nigeria’s active population (CBN, 2004).

The dominant microfinance institutions are concentrated in the southern Nigeria to the detriment of poor majority in the predominantly Muslim north. The incidence of poverty in the Northern region is high compared to southern region. It was estimated to be 71% in North West, 72% in North East and 67% in North central while the corresponding figure in the south is 43% in south west, 23% in south East and 35% in southsouth. These numbers are what led to the conclusion that high level of poverty is essentially a Northern phenomenon (Soludo, 2007). As a result the questions have been to what extent do microfinance activities impacts on the targeted section of the population. The chief occupation in the rural areas is agriculture and agro-allied industries. Therefore the major objective of the study is to investigate the impact of microfinance on rural economic growth in Nigeria. The specific objectives are to determine the impact of microfinance activities on agricultural sector contribution to Nigerian gross domestic product (GDP) and on rural savings.

The impact of the Rural Banking Scheme on economic development is substantial. By extending financial services to rural areas, this initiative facilitates economic growth through increased access to capital for small-scale enterprises, agricultural development, and community projects. It empowers local entrepreneurs, enhances financial inclusion, and stimulates economic activities in

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