Influence of Information Asymmetry on Microfinance Lending to Women in Oyo State, Nigeria: A Critical Examination.

Author:Tayo, Adesoji

1.0 Introduction

Poverty is a chronic problem being experienced by many countries of the world today. Its effect includes lack and deprivation of the basic necessities of life. In Nigeria, poverty has always existed ever before independence. In pre-colonial period, people exchange what they produced for what they needed through trade by barter. The ability to meet their basic needs was limited to the quantity of physical goods and services they can produce. Poverty has been a serious challenge to governments in Nigeria as successive governments have tried various methods, unsuccessfully, to cushion its effect. The oil boom of early 1973 to 1980 brought mixed blessings to Nigeria. It increased revenue of the government which translated to more infrastructural development, increase in wages especially in non-agricultural sectors and per capita income and change in consumption pattern from locally produced items to imported products. These had serious adverse consequences on the agricultural sector leading to a drastic fall in the contribution of agriculture to the Gross Domestic Product (GDP) thus, gradually, Nigeria became a net importer of food. Hence, when oil prices began to fall in the 1980s, the welfare system was affected, per capital income and private consumption dropped and real poverty manifested itself (Obisesan & Oyedele, 2015).

Poverty reduction becomes the most difficult challenge facing the developing countries of the world, Nigeria in particular, this is because the causes of poverty are ubiquitous and to solve the problem require a mix of interventions and programmes in an integrated manner. Statistical evidences show that poverty has been on the increase since 1960 in Nigeria. In 1960 the level of poverty was about 15%, by 1980, it increased to 28.0% and by 1985 it was 46.0%. Quoting the National Bureau of Statistics (2012), the level of poverty in Nigeria between 2004 and 2010, rose from 54.4%, to 69%. By 2011 relative poverty had risen to about 71.5% (National Bureau of Statistics NBS (2012).

Generally, it is difficult for the poor to access funding from the conventional banks because of the stringent requirements and information they are expected to provide. They do not have assets that could qualify as guarantee or collateral as required by the bank, neither are they so well educated to keep proper records for the banks to access their eligibility for a loan. It is for this reasons that the Grameen Bank scheme operated by the Nobel laureate, Professor Muhammad Yunus in Bangladesh from 1976 emerged as a prototype for the World of Microfinance. In order to enhance the flow of financial services to the poor, Nigeria along with other developing nations adopted microfinance as a tool for poverty reduction. Microfinance policy was released in the year 2005 by the Central Bank of Nigeria, existing Community banks were converted to Microfinance banks and establishment of new Microfinance banks were encouraged by the government. The intention is for the banks to cater for the financial needs of the poor populace both in the rural and urban areas of the country by lending in small chunks to them (Awojobi, 2013).

The Central Bank of Nigeria's Microfinance Policy, Regulatory and Supervisory Framework for Nigeria (2005) submitted that microfinance is a "means of providing financial services to the poor, who are traditionally not served by the conventional financial institutions." This lack makes it rather difficult for these set of people to attract any financial support from the formal financial sector in Nigeria as they are considered not to be trust worthy by the institutions in the financial sector. The institutions in the Nigerian financial sector therefore perceives huge risk in lending loans to these category of persons. Interestingly, despite the limitations of this group of people, the microfinance industry has been able to record better and incredible performances in repayment rate when compared to their peers in the conventional commercial banking sector.

The high flyers in the formal financial sector are the commercial banks. This class of banks find themselves in a quagmire when attempting to provide financial services to the poor because the poor more often than not do not possess the collateral required, they have little or no credit history and they require small loans which is mostly below the minimum levels of banks.

Women are a major force to reckon with in the informal economy of developing countries and their empowerment is one of the priorities of stakeholders the world over. The need for Microfinance in Nigeria is especially critical stemming from the fact that women hardly have access to loans in conventional banks because these women do not have collaterals unlike their male counterparts who by virtue of their jobs and involvement in various sectors of the economy are able to build enough physical assets that can be used as collateral.

Information asymmetry refers to a uneven distribution of material information which could have a bearing on decision making by both parties to a loan agreement (Laiboni, 2012). Ordinarily, when an entrepreneur for instance approaches a bank with his or her business plan in hand, the bank should try to scrutinize the information provided by the person who wishes to obtain the loan to the best of their abilities before disbursing the loan. This notwithstanding, such entrepreneur will always have a better understanding of the prospective returns and risks of the business than the bank issuing the loan. Asymmetric information creates problems in the banking sector both before the transaction is closed (adverse selection) and after the transaction has been closed (moral hazard).

Due to information asymmetry, lenders have a dilemma differentiating between good credit risks and bad credit risks and as a result usually demand a blanket premium over and above the existing rates so as to make up for the risk that can be possibly incurred from the inability to determine who indeed should be awarded the loans. Information asymmetry also has some moral implications because of the lender's lack of knowledge about the borrower's intended activities. Information asymmetry has the capability of stifling the chances people who genuinely wish to...

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