The impact of microfinance on financial inclusion in Nigeria

Ogechi Adeola and Olaniyi Evans

Journal of Developing Areas, 2017, vol. 51, issue 4, 193-206

Abstract: Many attempts have been made throughout history to establish institutions for supplying credit to the poor. In Nigeria, strategies to increase the income of the poor have existed in the form of rotating contributory savings schemes (referred to as Esusu, Itutu, Adashi, Bambam and Ajo in different parts of the country). However, in recent years, microfinance has become a veritable institutional mechanism for enhancing credit access for low-income groups. With the increasing number of microfinance banks in Nigeria and the mounting drive for inclusive financial systems, therefore, it would be worthwhile to assess the impact of microfinance on financial inclusion in the country. To achieve this objective, this study uses the fully modified OLS (FMOLS) and the Dynamic OLS (DOLS) which were designed to provide optimal estimates of cointegrating regressions. The benefit of using the two approaches was to effectively assess the robustness of the parameter estimates to different specifications. This study, therefore, employs annual data of total commercial banks’ loans and advances, number of microfinance banks in Nigeria, and gross domestic product (GDP) as well as lending interest rates for the 1981–2014 period. The study found that microfinance and financial inclusion are linked by a set of long-run relationships. In the short run, the study found that microfinance has a positive but insignificant impact on financial inclusion, but in the long run, microfinance has a positive and statistically significant impact on the level of financial inclusion. The negative interest rate has a statistically significant impact on the level of financial inclusion both in the short and long run. Therefore, this study has established that microfinance, as well as interest rates, is a significant driver of financial inclusion in Nigeria. To increase financial inclusion in Nigeria, heightened drives for microfinance will be required. Microfinance represents a vehicle for the promotion of financial inclusion in Nigeria and should remain at the core of the pursuit of financial participation across all income levels.

Keywords: Microfinance; financial inclusion; interest rate; banks; FMOLS; DOLS (search for similar items in EconPapers)
JEL-codes: C32 E44 E52 G18 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:jda:journl:vol.51:year:2017:issue4:pp:193-206

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