Information Asymmetry between microfinance banks and Poor women in Oyo State, Nigeria: A Critical Examination.

Author:Tayo, Adesoji
 
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  1. 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).

    Nigeria like any other developing country is facing the problems of poverty, Nigeria's case is peculiar given the country's natural endowment in agriculture, mineral resources, crude oil, human capital and friendly climatic conditions. World Bank (2009&2010) estimated that over 70 percent of Nigerians are classified as poor, and half of this number lives in absolute poverty. Indeed, part of the experience in rural development in Nigeria has clearly shown that efforts at expanding the economic base of the rural areas almost always fail because of scarcity of and restrictive access to loanable funds (Ijere, 1992; Tanko, 2007).

    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).

    Microfinance as a tool for poverty alleviation can better be understood when it is considered in the context of the definitions given to it by practitioners. 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 as they are considered not to be credit worthy. 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 dominant institutions in the formal financial sector are the commercial banks. This category of banks do encounter difficulties when attempting to provide financial services to the poor because the poor lack collateral, they have little or no credit history and they require small loans which is mostly below banks' minimum levels. Also giving loans to the poor carries large transactions costs because small loans will be distributed over a large number of people as compared to lower transaction costs when providing few but large loans to borrowers in the business world (Conroy, 2003). Conroy further said that attempts by the formal banks to meet the needs of the poor had recorded poor results.

    Women dominate the informal economy in developing countries and their empowerment is one of the priorities of stakeholders throughout the world. Microfinance is particularly crucial in Nigeria knowing that women hardly have access to loans in conventional banks because these women do not have collateral such as land to obtain loans from the banks unlike the men who work in the formal sector and can build enough physical assets that can be used as collateral. Though microfinance is established to care for the financial needs of the poor and women especially, there is still the problem of access. Most poor lack the requisite information they need to be able to participate. This was succinctly stated by Hillary Clinton, the former US secretary of State at the 2011 Asian-Pacific Economic Cooperation Summit, "We need to correct the problem of information asymmetry by making sure that women are informed about opportunities for trade and orienting technical assistance programs so they serve women as well as men."

    Information asymmetry refers to an uneven distribution of material information which could be influential in 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 tend to have a hard time differentiating between good credit risks and bad credit risks and demand a blanket premium over and above the existing rates to make up for the risk emerging from the inability to determine who indeed should be lent to. Information asymmetry also causes moral hazard because of the lender's lack of knowledge about the borrower's activities. Information asymmetry could jeopardize the chances well-meaning people who genuinely wish to obtain loans from banks for the execution of just ventures have at getting such loans. This in turn could keep such persons in a state of perpetual poverty and misery. This study therefore focused on a critical examination of Information Asymmetry between microfinance banks and Poor women in Oyo State, Nigeria.

  2. Theoretical Framework

    2.1 Psychological Theory of Microfinance

    Psychological theory of microfinance, as advocated by Dr. Muhammad Yunus (1998) promotes the idea of capitalism that is driven by social awareness. He posited that it is possible to develop capitalist enterprises that maximize profits subject to the interests of the customers. He opined that...

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