CHAPTER ONE

INTRODUCTION

1.1Background of The Study

In the past two decades, microfinance programs have been considered by the development economists as one of the foremost strategies for poverty reduction. Although some researchers argue that Microfinance has not really succeeded in its role as grassroots economic developer in the sense that it has not been effective in reaching the poorest (Hulme& Mosley, 1977). But others opine that the programme is capable of bringing the poor into the lime light if properly implemented. This debate creates the gap for independent researchers to further examine the impact of Microfinance on poverty alleviation as donors and practitioners may be biased in their assessment. It is therefore believed that this study will contribute to literature and further make clarification.

Microfinance has its antecedent in Bangladesh with the commencement of Grameen Bank project in 1974. Grameen Bank, usually referred to as Rural Bank was started by Muhammad Yunus, a Professor of the University of Chittagong (Bangladesh) in 1976. The bank mainly targeted rural women for its credit programmes. It introduced group lending strategy called social security to make credit available to the poor, usually denied by traditional banks due to the lack of physical collateral. Group lending operates through the principle of joint liability whereby the members of the group monitor the loan disbursement and payment. Default of a member implicates other members and the later pay from the joint resources to avoid future denial of loan to other members. This system especially aims to empower women and give them the opportunity to participate in household decisions. With the latter’s success, several developed and developing countries adopted the concept of micro financing. For instance, on September 17 1987, AmanahIkhtiar Malaysia (AIM) was inaugurated with the main aim of reducing poverty and increasing income of Bumiputera and Malays in particular, through microcredit called Ikhtiar financing scheme for poor households in rural areas. It is also on record that the Microcredit Summit launched in 1997 the global campaign to expand the coverage of microfinance to 100 million of the world’s poorest micro entrepreneurs by 2005. Hence, the United Nations declared year 2005 as the International Year of Microcredit (El-Komi, 2010). During the past three decades in Nigeria, efforts have been made by the Government, Non-Governmental Organisations and International Organisationstoreduce poverty. To this end, the Nigerian government established several programmes to alleviate poverty.

In 1972, the National Accelerated Food Production Programme was inaugurated to boost the food production through an on lending fund from the Nigeria Agricultural and Cooperative Bank. In 1976, Operation Feed the Nation was established to provide extension services to farmers in the rural areas. While The Green revolution programme of 1979 was to put an end to food importation and encourage the production of more crops and fiber. Others are: The Directorate of Food Road and Rural Infrastructure (DFRRI) in 1986, The Community Banks of Nigeria, The Peoples Bank, The Family Economic Advancement Programme (FEAP), The Mass Mobilization for Self-Reliance (MAMSER), the Better Life Programme (BLP), The Family Support Programme (FSP) in 1993, The National Directorate of Employment (NDE), The Petroleum Special Trust Fund (PTF), The Mass Transit Programme(MTP), The Agency for Mass Literacy, National Economic Empowerment and Development Strategy (NEEDS); and the Microfinance Banks.

On this debate by examining the impact of microcredit on poverty alleviation using Cameroon one of the most populous black nation in the world as a case study. Poverty contributes to underdevelopment and its reduction leads to economic development. To be poor connotes deprivation from the basic necessities of life. In fact, poverty engenders inability to afford the minimum basic essentials like food, children education, good housing, healthcare and good clothing to mention few (Todaro& Smith, 2011). Suffice to say that the poor are being denied their share of the nation’s resources and other necessities that are generally available in the society for their comfort. Poverty is a worldwide socio-economic problem. Hence, its awareness is much more favored at the international level of finance and governance. For example, the World Bank, United Nations (UN) and International Monetary Fund (IMF) have developed various programmes and projects that would improve the life of the poor, ensure health improvement and sustainable growth and development (Ssewamala, et al ,2010).

Records have shown that about half of the world’s population (about three billion people) lives on income of less than two dollars a day (Goel& Rishi, 2012). It is also disheartening that one child out of five living in these poor communities does not live to see his or her fifth birthday! No wonder that the United Nations declared Millennium Development Goals (MDGs) in September 2000 to ensure global development. The major policy thrust of this program is to make life more meaningful to the poor and downtrodden. In essence, reduction of poverty and hunger constitute the basic root of all other problem issues focused on MDGs (Kalirajan& Singh,2009). Ironically,in Sub-Saharan Africa which is considered as the World’s poorest region, the concept of poverty is relatively understudied and has attracted less attention in academic literature (Ssewamala, et al, 2010). To this effect, little efforts have been made to critically analyse the impact of microfinance programmes on poverty reduction, particularly in Sub-Saharan Africa. This paper examines the contributions of microfinance towards the poverty reduction. It has been argued that the impoverished poor exist because of lack of access to finance which can engender their capability to develop their entrepreneurship skill and establish their enterprises. Developing finance that will be accessible to the poor would enhance their productivity and capability to procure assets and necessary facilities that can encourage productive investment. This will therefore reduce poverty as it is clear that the poor does not lack initiative but only constrained by finance (Johnson, Susan and Ben Rogaly). It has also been asserted that the major constraint of the poor is lack of adequate capital from financial institutions because of high risk of inadequate collateral. This constraint hampers growth, increases the poverty level and leads to slow economic development. Provision of microcredit to the poor will therefore improve the financial capital that will increase their productivity, reduce unemployment, enhance income and savings; and eventually reduce poverty and inequality (Yunus, Muhammad 1999).

Impoverished people, carrying out very small businesses, can improve their standard of living through the proper use of financial services designed specifically for them. Savings mechanisms allow them to conveniently and safely accumulate surplus funds to create financial stability, while credit services allow them to expand their enterprises and improve earnings,

(Navajas,S.M. Schreiner, et al 1998) The provision of these crucial, specialized services to “small-scale rural farmers and business people” and how to ensure the effectiveness and sustainability of the services is what this study is all about. Although the idea of micro-credit had long existed among the rural people and more so urban communities in Developing Countries (for instance in West Africa), there has been no organized form of a microfinance system that embraces ‘best practices’ until recently. A most common form of microfinance practice which had existed among small business operators in most developing countries like Ghana, Uganda, Bangladesh, and many more is the Rotating Savings and Credit Associations (commonly called RoSCA). The main objective here is to make a lump sum available to members to be able to make bulk purchase of the goods they trade in and durable households. The emphasis of this study, however, is on institutionalized microfinance system.The micro finance movement has changed perceptions towards helping the poor in both developed and less developed countries of the world. Widespread poverty with all the problems that come with it is the greatest challenge of our time. One of the identified constraints facing the poor is lack of access to formal sector funds to enable them take advantage of economic opportunities (ElKomi, M. S. (2010).

The devastating social and economic impact of poverty has necessitated research into ways of reducing it, especially in developing countries. In 2000, the world leaders adopted the Millennium Development Goal (MDG) to fight extreme poverty in its multi-dimensions (MDGs, 2006). Policy makers, donors and non-governmental organizations (NGOs) have galvanized efforts to alleviate the grave impact of poverty and improve the poor’s well-being. Remarkable progress was made in reducing extreme poverty and reaching the corresponding MDG target well ahead of its 2015 deadline. The poverty rate in developing countries dropped from around 47 percent in 1990 to 14 percent in 2015. In spite of cutting down the extreme poverty rate, major challenges remained. Progress made was uneven across countries and regions and did not translate to progress for non-income goals such as health and education. Millions of people still suffered in 2015 from the multiple dimensions of poverty; about 800 million people, mainly from sub-Saharan Africa, still lived in extreme poverty, more than 160 million children under the age of five suffered from inadequate height to age as a result of undernourishment, around 57 million children did not go to primary schools, and over 50 percent of the global workers still suffered from poor work conditions.

Over the last few decades, microfinance has been increasingly adopted as a poverty-fighting tool. It started as a simple idea by the ‘Father of Microcredit’, Muhammad Yunus, who won the Nobel Peace Prize in 2006, to provide small loans to the poor (Muhammad Yunus, 2011). In the1990s, the Neoliberals transformed Yunus’s subsidized model into a privatized for-profit model, and adopted it as a modern ‘self-help’ development tool for alleviating poverty(Bateman, 2013). The Neoliberal predictions of the positive impact of microfinance are based on the assumption that providing credit to the poor creates employment, generates income and results in increased spending on household welfare. As such, microfinance promises to lead a bottom-up process of sustainable economic and social development, absolving governments from their responsibilities to reduce poverty through state interventions, social welfare programs, welfare redistribution and provision of quality public services for all (Bateman &Chang, 2012). While microfinance institutions (MFIs) expanded over the years, so did the debate about the contribution of microfinance to the reduction of world poverty. Some studies conclude that microfinance has produced certain successes in poverty reduction. Other studies argue that microfinance has not had that much of an impact on the poor and additional studies look into how over-borrowing in microfinance can result in greater long term poverty. In Palestine, more than a quarter of the West Bank and Gaza’s population live in poverty (PCBS, 2012).The persistence of poverty in Palestine despite the substantial efforts claimed by poverty alleviation programs including microfinance necessitates questioning the effectiveness of these programs in helping the poor.

Since the 1990s, poverty alleviation has taken priority at both the national and international levels. Poverty alleviation tops the chart of the millennium development goals agreed at the UN and millennium summit in September 2000. Micro finance is regarded as a powerful tool in the alleviation of poverty. The optimism over the role and the movement of as a poverty alleviation tool is increasingly becoming stronger evidenced by the microcredit summit campaign in 1997 to reduce the number of people living below the poverty line with an income of less than $1(approximately 500frs) per day and open access for 100million poorest families by 2015 for employment and the declaration of the year 2005 as the international microcredit year.

Since the upsurge of micro finance, it has caught the attention of many governments, NGOs, aid donors as an effective tool for poverty alleviation. However, in Cameroon, there has always existed a controversial view point on whether micro finance is actually a poverty alleviation tool or a business scenario today, within the network of microfinance institutions, cooperatives, and some common initiative groups carrying out savings and credits, it is estimated there are about 1.5million accounts. This number is significant when compared to the almost same level of accounts registered in the commercial banking sector (MINFI 2008). However, access to financial services in Cameroon is deemed very low compared to other parts of Africa particularly when compared to the rest of developing countries. The situation is made worst as most MFIs limit their branch network in urban areas living out the rural areas which harbors about 87% of the poor population Many have agreed that microfinance has helped to reduce the number of poor people in Cameroon especially those who did not have access to the commercial banks services have atleast been able to get access to the MFIs. This research work however is focused on the manner in which microfinance can reduce or alleviate poverty focusing on the microfinance activities of cooperatives credit unions in the country. The rural poor need access to micro-saving facilities in order that they can deposit money when they have it after carrying out small business activities like farming and trading and withdraw it in times of need. A deposit account can help the rural poor to obtain micro insurance, giving a sense e of security, and it can help them to take out a loan in the form of microcredit to finance their small businesses. Credit facilities are generally not extended to the rural poor, even for highly productive activities, because they have few or no assets to offer as collateral. Unless the poor can borrow, they are likely to remain trapped in poverty. (IFAD 2004).

1.2 Statement of the Problem

There are controversial issues in literatures regarding to the impacts of micro finance on poor section of the people. In some of these literatures, microfinance has brought positive impact to the life of clients, boost the ability of poor individuals to improve their conditions and have taken advantage of increased earnings to improve their consumption level, health and build assets (Murdoch and Haley, 2001). However, other studies have shown that microfinance is said to play insignificant role towards poverty reduction. Regarding this, some argue that microcredit may not be the most useful financial service for the majority of the poor people (Chowdhury, 2009).

There remains a question mark on the fact that micro finance services help reduce or alleviate poverty because micro finance institutions are focused on making high profits thereby charging higher rates of interest to its clients thereby scaring this client from using micro finance services, the high interest rates makes it difficult for those below the poverty line to benefit from this because they are either fighting for household consumption or increasing their income level and so most of those benefiting from micro-credit services are those  above the poverty line. Access to credit can contribute to a long-lasting income and an improvement of the social and economic situation of women (Sarumathi and Mohan, 2011).

All these issues have raised concerns towards investigating the effects of microfinance services on poverty. In the course of this investigation, we have to answer the following research questions;

1.2.1. Research questions

1.2.2 Main research question

What is the role of micro financial services on poverty status in the Bamenda Municipality?

1.2.3 Specific research questions

1. What is the effect of micro-credit by microfinance institutions on poverty status in the Bamenda municipality?
2. What is the effect of member savings services on poverty alleviation in the Bamenda municipality?

1.2.4 Research objectives

1.2.5 Main objective

The main of the study was to examine the effect of micro financial services on poverty alleviation in the Bamenda municipality.

1.2.6 Specific objectives

The specific objectives are to;

1. Examine the effect of micro-credit by micro finance institutions on poverty status in the Bamenda municipality
2. Assess the effects of member savings services on poverty status in the Bamenda municipality