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The study was conducted in nine Local Government Areas selected from Enugu State. Six five micro Credit Groups from each Area were randomly selected. This gave a total of forty-five (45) micro-credit groups. This was done using multi-stage sampling techniques. Sources of data were primary and secondary. Structured questioners were used to interview respondents to generate primary data while secondary data were sourced from relevant publications. Descriptive statistics and Ordinary Least Square Econometric techniques were used in data analysis. Majority of the group members, 31.4% belong to the age bracket of 40 – 49 years (middle age). Majority of the groups, 40% were composed of 10–15 individuals. Majority of the respondents, 64.4% travel about 200 meters to attend meetings. Factors determining repayment were homogeneity in gender, occupation, distance and residency as well as social cohesion. Based on the findings, it was recommended that micro credit groups should be homogenous with respect to gender, members should be encouraged to attend group meetings which should be made to be regular in order to build strong social cohesion, and groups should be composed of individuals living close to each other in order to enjoy information advantage.
1.1 Background Information
Agriculture in Nigeria, a developing economy, has suffered serious setbacks due to: under capitalization, poor credit disbursement procedures, inadequacy of credit institutions to cater for the needs of the teaming population of farmers and poor loan repayment possibilities among farmers (Ugo 1973, Oshontongun 1973).
Micro credit is about providing services to the poor who are traditionally not served by the conventional financial institutions (Upton, 1997). Credit agencies are frequently classified into two groups: formal and informal (Upton, 1997). Formal institutions include banks and co-operative credit unions, while the informal agencies include non-governmental organizations (NGOs), money lenders, friends, relatives and micro credit unions.
The formal financial system in Nigeria traditionally lend to medium and large entrepreneurs, which are judged to be creditworthy, and who can provide tangible collateral. They avoid doing business with the micro entrepreneurs and their micro enterprises because the associated cost and risk due to inability to provide collateral are considered to be relatively high (Anyanwu, 2004).
Informal credit institutions are characterized by flexible small operations and they operate mostly in a circumscribed area or a specific niche of the market. They tend to deliver personal services very close to the location of the borrower. They also tend to be non-bureaucratic and much more flexible in respect of loan purpose interest rates, collateral requirements, maturity periods and debt rescheduling (Ghatak and Guinnane, 1999).
Formal financial system in Nigeria despite the government intervention by providing a multiplicity of credit institutions over the years, have proven to be inefficient and costly in the provision of financial services to the micro entrepreneurs. However, several types of informal institutions have efficiently serviced a wide variety of micro credit entrepreneurs. Micro credit institutions are mainly, Self-Help-Group (SHGs) Rotating Savings and Credit Associations (ROSCAs) and Savings/Thrift Co-operative societies (Olomola, 2000).
Micro credit is one of the major tools used to extend credit with a view to
alleviating poverty of many entrepreneurs in low-income countries. In an era of global
economic liberalization, micro credit is widely viewed as an intervention that address
important deficiencies of financial markets in terms of serving specific needs of the
poor, by providing them with credit without collateral (Stigliz and Weiss, 1981). The
provision of micro credit services improves the latent capacity of the poor for
entrepreneurship, which enables them to be more self-reliant, increase in employment
opportunities, enhance household income and create wealth.
Many micro credit agencies have sought borrowers to work together in small peer groups and these peer groups are also required by the lenders to assume responsibility for the repayment of their members loan in time of default, consequently, future credits to all member (Soren, 2002). The joint liability systems employed by peer groups can improve financial sustainability, by inducing group members to use their mutual interest, familiarity and understanding in performing the following roles: screening of fellow borrowers to retain creditworthiness, monitoring their use of borrowed funds and pressuring them to repay as well as providing mutual insurance (Ghatak, 1999).
The formal credit lending institutions always insist on collateral for the disbursement of loans. However, the German Bank experience demonstrated that collateral requirement should not be a limiting factor to accessing credit by small holder farmers. Instead, substitutes such as group lending can be used (Hossain, 1988). Group lending involves administration of credit among group whose individuals differ in character and reaction, but possess a common interest of benefiting from the group (Hulme and Mosley, 1996). In countries such as Bangladesh, Thailand and Malawi, where groups lending thrived very well, the key determinants of the success were homogeneity especially with respect to group social cohesion, intra-group risk pooling and repayment performance (Huppi and Feder, 1989).
The nature of membership composition is thus important for improved performance of groups, not only in terms of repayment, but also in terms of savings mobilization and building up social cohesion through attendance at regular meeting (Mkpado, 2006).
Group(s) tend to be more successful when members share one or several socio-
economic conditions, and are therefore relatively homogenous. Devereux and Fishe
(1993) wrote that in the formation of membership group, some members may
misrepresent their economic status, claiming what they are not, thereby resulting in
the formation of a group with non-homogenous members. Consequently, the potential
for default or delinquency is high and the chance that the group will remain together
over time becomes remote. Group homogeneity is therefore a group quality, highly
valued by members themselves (Mahmud, 2001). Consequently, group homogeneity
has the greatest potential for influencing outcome at the individual member level. This
makes sense because the probability of members behaving in conformity with group
objectives is likely to be greater in a homogenous group where individual members
have similar interests and share similar problems.
1.2 Statement of the Problem
In Nigeria, Government interventions through a multiplicity of credit institutions over the years has not resulted in significant improvement in rural financial intermediation. Loan able funds from government sources, have dwindled considerably. The cost of borrowing has increased tremendously and the financial outlay for business enterprises has multiplied several folds irrespective of the scale of operation due to inflation bites. The private sector, consequently is bracing up for the challenges through the formation of finance groups (FGs) and the participation of Non-Governmental Organizations (NGOs) including donor agencies (Olomola, 2002).
Over the years, government have attempted to circumvent the inadequacies of the informal sources of fund to small scale entrepreneurs, especially the farmers who are the primary producers in every economy, by creating certain formal financial institutions. Though these institutions have been blamed and accused of inefficiency in meeting up with the demand of the small holders, some of the factors that has hindered the financial institutions from performing up to expectation, have been emphasized by Ohaka (2005), in his observation he lamented over the attitude of local farmers to institutional credit as one of the factors. He remarked that they regard such credit as a share of the ‘National cake/Bounties”.
Organizations are recently placing much emphasis on the group approach in
extending credit to the low-income producers, (Olomola, 2002). Nevertheless, the
expectation that the approach will eliminate or mitigate the problems of loan
delinquency/default has not materialized, and to date a large number of small scale
entrepreneurs have no access to credit. This raises the question as to whether the
existing finance group (FGs) holds some potential in terms of engendering improved
repayment performance. Specifically, to what extent does this potential depend on
homogeneity of micro credit groups?
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