Effective financing and the national crisis of poverty

from Business Day

BLESSING ANARO

A 2004 survey reveal that 54 percent of Nigerians still live in poverty although down from about 70 percent less than a decade ago in spite of significant growth in GDP over the past five years.

But the problem might just be hinged on poor or no access to finance. Chukwuma Soludo, governor of the Central Bank of Nigeria (CBN) notes that banking services are available to about 40 percent of the population, whereas more than 70 percent of the poor do not have access to formal finance.

He further revealed that total bank credit is about 30 percent of GDP and that Nigeria has a highly unequal income distribution profile with about eight percent of those that have access to financial services owning about 90 percent of the available deposits.

Experts have shown that there is strong correlation between output and credit. Literatures by King and Levine, 1993, Levine and Zervos, 1998, Rajan and Zingales, 1998, among others said there is a link between finance sector development (FSD), and economic growth and poverty reduction.

Calomiris and Mason (2003) estimated an elasticity of real state income growth to bank loan supply growth of 45 percent where a one standard deviation decrease in loan growth over three years (17.9 percent) reduces output growth over three years by about seven percentage points.

If you are still in doubt about the level of poverty of Nigeria, a few revelations would be useful. For instance, while Nigeria's per capita income is barely $1,000; that of United States of America is about $32,000; South Africa over $5,300.

At current population growth rate, if GDP grows at 13 percent per annum, it will be in 2033 that Nigeria achieves today's per capita income of South Africa, said Soludo, and at current six percent growth, it will be in 2065.

To make matters worse, one out of two Nigerians live in poverty and that poverty is already becoming Dynastic, as children of the poor are likely to become poor due to widening gap in access to quality education and size of family, Soludo further explains.

Another dangerous aspect of the situation in Nigeria is that with urbanization rate at 5.3 percent, it is one of fastest in world, with urban youth unemployment at about 20 percent. This is a time bomb, waiting to explode, said Soludo.

Soludo went ahead to show how poverty had eaten deep into the fabrics of the economy.
For one, he said in the household size in 2004, single member households had 12.6 percent poverty incidence, while in the a household of between two and four members
Has a poverty incidence of 39.3 percent; 5-9 member households, 57.9 percent; 10- 20 member households, 73 percent; and above 20 member households, 90.7 percent.

On education, households headed by those without education had 68.7 percent poverty; those with primary education have 48.7 percent poverty; secondary, 44.3 percent; and post secondary, 26 percent.

On occupation, those dominant in agriculture and forestry have poverty incidence pf 67 percent and those in rural Areas contributed 65 percent to poverty in 2004, among others.

But a reasonable level of finance could reverse the situation Soludo hinted, saying banks play intermediation role by way of deposit taking/lending
Others, he said include resource allocation - from surplus units to deficit units, the financial system facilitates risk sharing, spreads/reduces risk faced by economic agent, the financial system generates wealth in the economy, and it facilitates the exchange of goods and services.

He said, "finance is the 'poverty trap breaker'--- allowing the poor to access education, health, investment, etc more than current income can allow….".
The question is that how does finance matter? Soludo explains that recent evidence Nigerian banking sector prove this.

For instance, asset base grew by approx. 277 percent between 2003 and 2007, about 11 banks have over $1 billion in Tier 1 capital, by end February, 2008, microfinance banks - 716 and more to come, branch Expansion outside Nigeria - 16 in Africa of which 9 are new branches; five outside Africa, and share of banks in NSE most capitalized companies rose substantially - 30 percent (2003); 65 percent (2007).

On past attempts made by stakeholders, these include Small & Medium Enterprises Equity Investment Scheme (SMEEIS) was a voluntary initiative in 1999 by the Bankers Committee through CBN's moral suasion, to assist in providing finance to the small enterprises

About N40 billion was raised but as at end 2007, only 60 percent had been utilised in 523 projects nationwide.

The location of projects was skewed in favour of urban area (Lagos/Ogun and Cross River [Tinapa] got 70 percent of projects.

He said 12 states had no SMEEIS projects at all, and that even with full deployment, SMEEIS impact is projected at 0.018% of the nation's GDP.