CHAPTER TWO
LITERATURE REVIEW
2.1 Conceptual Review
2.1.1 The Evolution of the Nigerian Banking System
The banking operation began in Nigeria in 1892 under the control of the
expatriates and by 1945, some Nigerians and Africans have established their own
banks. The first era of consolidation ever recorded in Nigerian banking industry
was between 1959-1969 (Somoye, 2018). This was occasioned by bank failures
during 1953-1959 due mainly to liquidity of banks. Banks then do not have enough
liquid assets to meet up with customers’ demand. There was no well-organized
financial system with enough financial instruments to invest in. hence, banks
mainly invest in real assets which could not be easily be realized to cash without
loss of value in times of need. This prompted the federal government then, backed
by the World Bank report to institute the Loynes commission on September 1958
which established The Central Bank of Nigeria (CBN). The year 1959 was
remarkable in the Nigerian banking history not only because of the establishment
of the Central Bank of Nigeria (CBN), but that the treasury bill ordinance was
enacted which led to the issuance of the first treasury bills in April,1960 (Somoye,
2018).
The period (1959-1969) marked the establishment of formal money, capital
markets and portfolio management in Nigeria. In addition, the company act of
1968 was established. This period could be said to be the genesis of serious
banking regulation in Nigeria. With the CBN in operation, the paid-up capital was
set at N400,000 ($480,000) in 1958 (Bernanke, 2020). By January 2001, the
Nigerian banking sector was fully deregulated with the adoption of universal
banking system which merged merchant bank operation with commercial banks
system preparatory towards consolidation programme in 2004.
In the 90s, proliferation of banks, which also resulted to the failure of many of
them led to another recapitalization exercise that saw bank capital being increased
to N500milion and subsequently N2billion in 2004 with the institution of a 13-
point reform agenda aimed at addressing the fragile nature of the banking system,
stop the boom that characterized the banking sector and evolve a banking system
that not only could serve the Nigerian economy but also the regional economy
(Somoye, 2018). The agenda by the monetary authorities is also the agenda to
consolidate the Nigerian banks and make them capable of playing in international
financial system. However, there happens to be deliverance between the state of
the banking industry in Nigeria vis-à-vis the vision of the government and
regulatory authorities for the industry. This, in the main, was the reason for the
policy of mandatory consolidation which was not one to dialogue and its
components also seemed cast in concrete (Somoye, 2018).
In terms of number and minimum paid-up capital between 1952 and 1978, the
banking sector recorded forty-five (45) banks with varying minimum paid-up
capital and finally dropped to twenty-five (25) in 2006 with a big increase in
minimum paid-up capital from N2billion in January 2004 to N25billion in July
2004 (CBN, 2020).
Prior to major shift by the central bank of Nigeria (CBN), Nigerian banking
industry witnessed a steady increase in the number of distressed deposit-money
banks, i.e. those rated by the CBN as marginal or unsound. This created the ear that
the Nigerian banking sector could be heading towards systematic distress. The
marginal and unsound increase in number from seventeen (17) in 2001 to twenty-
three (23) in 2002 and 2003, and then twenty-seven in (27) in 2004 representing
thirty percent (30%) of the operating banks in the system. This figure rose to
seventeen percent (17%) only three years earlier. It can be argued that sudden
monetary policy shift was partially responsible for the increase in the number of
marginal and unsound banks in 2004. The corollary is that the institutions
concerned have had inherent and deep-seated weakness that the policy shift
exposes and no matter what they would have eventually become distressed.
Goldfield and Chandler (2017); and Somoye (2018) opined that any policy shift
must be consistent with market framework if the objective of the policy is to be
achieved. They decomposed the total lag between the need for policy and the final
effect of policy into four parts.
First, recognition effect, which refers to the elapsed time between the actual need
for a policy action and the realization that such a need, has occurred. Second, the
policy lag, which refers to the period of time it takes to produce a new policy after
the need for a change in policy must have been recognized (Odeniran & Udeaja,
2010). Third, outside lag, which is beyond the comprehension of policy, refers to
the period of time that elapses between the policy change and its effect in the
economy. This lag arises because individual decision makers in the economy will
take time to adjust to the new economic condition. Decision of this reform must
conform to monetary policy norms if it is to achieve its desired objective. Fourth,
cultural lag, which measures the banking culture responsiveness to policy change
in a predominantly poor banking habit population (Odeniran & Udeaja, 2010). In
the developing nation, banking culture is still primitive and any change that may
affect their culture takes a great deal of education. They concluded that the effect
of policy change which could have been distributed overtime and its impact felt
over jettisoned. Such omission may bring negative cost to the economy. For
instance, Goldfield and Chandler in 1981 stated that monetary policy though
affects the economy less directly, will have a longer outside lag and that monetary
policy tends to influence investment, and the lag in the physical process of building
plant and machinery are undoubtedly longer than the lags in producing consumer
goods. Therefore, the longer outside lag of monetary policy must be balanced
against the shorter policy lag in deciding the optimal policy mix.
2.1.2 Banking In Nigeria
As a result of the increased demand for customers’ deposit, Nigerian banks
especially the new generation banks have realized the imperative of good and
prompt customer service. Also due to the fact that some customers lost their
deposit in the erstwhile technically insolvent or distressed banks, customers have
now become wiser more discerning, alert and sophisticated with regards to
choosing where it is safe to put their money, and they would be served promptly,
preferably in a pleasant, courteous and friendly environment (Goldfield and
Chandler, 2017). Thus, they have started looking at the level of service and
professionalism before depositing their funds. Proximity to the bank is no longer
the issue. Safety and the level of service with regards to quality, speed and
efficiency has become the major imperative.
On the part of the banks, they have realized that one way in which they can provide
quality service is through the use of technology. Hence there is the growing rate of
adopting new technologies in Nigerian banking operations. Moreover, there is
growing evidence that customers have started associating quality of service in a
bank with the banks possession of online, real-time system (Odeniran & Udeaja,
2010). In fact, possession of a system is now judged to be the sine-qua-none of a
high-quality banking service in Nigeria. So, for a bank to be perceived as providing
high quality service, that bank needs to have an Information Technology system,
which it uses to deliver services to customers in a timelier, friendly and considerate
manner, at no extra cost to the customers (Somoye, 2018).
Despite the fact that many of the new generation banks base their marketing
strategy on the possession of supposedly online, real time systems, they find that
their systems are down for about 50% of time. Many customers feel cheated by this
reality and complain about the incessant downtimes. They were down at least half
the time, and that the national carrier, NITEL (Nigeria Telecommunications), is to
blame. Whilst the responsibility of NITEL cannot be denied. Many customers that
it is the responsibility of the affected banks to take care of these problems, and that
they should be given the nationwide, on-line, real time banking service they were
promised. Faced with the dilemma, many banks in the country are resorting to
alternative personal solution by using Very Small Aperture Terminal (VSAT)
satellite systems, for long-distance electronic communication. For short distances,
the MDS (Metropolitan Digital Services) system is often used. The problem here is
that all banks are trying to procure appropriate VSATS independent of one another.
In other words, there is no collaboration between the bank in sourcing this very
expensive technology and thereby providing a cost-effective solution to the
problem. It would also be fair to say that Nigerian banks are imbued with an.
overly competitive mind-set which tends to foreclose the benefits of synergy or
collaboration in solving most of their common problems.
2.1.3 Overview Of The Nigerian Banking System
The Nigerian banking system has witnessed tremendous transformation since the
arrival of the first ever bank in 1894 (which was bank of British West Africa
limited, now first bank of Nigeria plc). These transformation ranges from structure,
size, 22 numbers of participants as well as the basic thrust of their activities. The
enactment of the first ever banking ordinance in 1952 (which was before
independence in 1960) brought about some form of regulation. The ordinance
defined banking as a business being transacted in Nigeria by a company with
permission of the finance secretary after paying $12500.00 in cash out of an
authorized capital of N25000.00 for indigenous banks and $1000000.00 for
expatriate banks. These were the minimum capital requirement. Of the 185-
banking organization registered at that time, less than 10 survived.
The period 1952 to July 2004 witnessed a lot of challenges and reforms, ranging
from indigenization (1976-1986), deregulation following the introduction of
structural adjustment Programme by the government (1986-1995), and guided
deregulation (1995-2004). Yet, the banking industry at that era was in the best of
states. On July 6, 2004, the Central Bank of Nigeria (CBN), under the leadership of
Professor Chukwurna Soludo, announced far-reaching reforms in the banking
system. The banking reforms embedded in the banking sector consolidated
exercise, is being carried out within the overview of guided deregulation through
some forms of financial liberalism. The key objective is to strengthen the financial
sector by making it the main driver of growth. Before now, the sector was laced
with so many anomalies induced largely by weak capital base. The main
components of the reforms are;
i. Minimum capital base of N25 billion (about $210 million) as against the
previous N2 billion (about $17 million) for all banks with full compliance by
December 31, 2005.
ii. Consolidation of banking institutions through mergers and acquisition.
iii. Adoption of risk-focused and rule-based regulatory framework.
iv. Automating the process for the rendition of returns by banks and other
financial institutions through the Enhanced Financial Analysis and Surveillance
System (EFASS).
v. Increased employment of capital and labour as a result of more branch
networks.
vi. A new vision for the financial system, known as Financial System Strategy
2020 (FSS, 2020). FSS is an initiative designed to make Nigeria Africa
financial hub and drive the country quest to be among the 20 most developed
economies in the world by the year 2020.
At present, Nigeria Gross Domestic Product growth of about 6.0% has been fueled
by the banking sector. All the 24 banks (Stanbic Bank limited and IBTC chartered
bank successfully merged in March, 2008) are sound and healthy judging by all
indices, (Annual Report of the Central Bank of Nigeria, 2007).
2.1.4 Concept of Micro Finance Banks
Microfinance banks (MFBs) have emerged as pivotal institutions in the global
financial landscape, particularly in developing nations like Nigeria. These banks
are tailored to provide financial services to the economically active poor, micro,
small, and medium enterprises (MSMEs) that are often excluded from traditional
banking systems (Nadarajan and Ponmurugan, 2018). The Central Bank of Nigeria
(CBN) defines a microfinance bank as any company licensed to offer microfinance
services, including savings, loans, domestic fund transfers, and other financial
services necessary for the economically active poor and MSMEs to conduct or
expand their businesses (CBN, 2020).
The concept of microfinance gained significant traction in the 1970s, with the
establishment of institutions like the Grameen Bank in Bangladesh by Muhammad
Yunus. Grameen Bank's model demonstrated that providing small loans to the poor
without collateral could lead to high repayment rates and uplift communities
economically (Connie, 2016). This success story inspired many countries,
including Nigeria, to adopt similar models to address poverty and financial
exclusion.
In Nigeria, the microfinance policy was introduced in 2005 to replace the
inefficient community banking system. The policy aimed to provide diversified,
affordable, and dependable financial services to the active poor in a timely and
competitive manner (Somoye, 2018). It also sought to enhance service delivery by
microfinance institutions to MSMEs, contribute to rural transformation by
mobilizing savings, and promote linkages between microfinance institutions and
other financial entities (Somoye, 2018).
Microfinance banks in Nigeria are categorized based on their operational scope and
capital requirements. As of April 2021, the CBN stipulated that Unit Tier 2 MFBs
operating in rural or unbanked areas require a minimum capital of ₦50 million,
Unit Tier 1 MFBs in urban areas need ₦200 million, State MFBs require ₦1
billion, and National MFBs must have ₦5 billion. These classifications ensure that
MFBs are adequately capitalized to serve their target markets effectively.
The services provided by MFBs are not limited to financial transactions. They also
offer non-financial services such as capacity building on record keeping and small
business management. These ancillary services are crucial in empowering clients
with the necessary skills to manage their businesses effectively, thereby increasing
the chances of loan repayment and business success.
Despite their significance, MFBs in Nigeria face several challenges. In June 2023,
the CBN revoked the licenses of 132 MFBs due to non-compliance with regulatory
requirements, mismanagement, and other issues. This action underscores the need
for robust regulatory frameworks and effective governance structures within MFBs
to ensure their sustainability and reliability.
The impact of microfinance on clients' livelihoods has been a subject of various
studies. For instance, a study in the Sunamganj District of Bangladesh revealed
that micro-credit led to increases in total income, expenditure, and investment
among borrowers. However, it also highlighted the need for longer loan durations
and lower interest rates to maximize benefits. These findings are relevant to
Nigeria, where similar socioeconomic conditions exist.
Globally, microfinance has been recognized as a tool for poverty alleviation and
economic development. It provides the poor with access to financial services,
enabling them to invest in income-generating activities, smooth consumption, and
manage risks. However, critics argue that microfinance alone cannot eradicate
poverty and that it should be complemented with other development initiatives.
In Nigeria, the success of microfinance banks hinges on several factors, including
effective regulation, adequate capitalization, skilled management, and the ability to
adapt to the needs of the target population. The CBN's efforts to strengthen the
sector through revised guidelines and increased capital requirements are steps in
the right direction. However, continuous monitoring and support are necessary to
ensure that MFBs fulfill their mandate of promoting financial inclusion and
economic development.
Microfinance banks play a vital role in Nigeria's financial ecosystem by providing
services to the underserved and contributing to poverty reduction. While
challenges persist, with the right policies, oversight, and commitment, MFBs can
significantly impact the lives of millions, fostering inclusive growth and
development.
2.1.5 Financial Inclusion
A review of literature reveals that there is no universally accepted definition of
financial inclusion. Thus, definitions provided by various author and researchers
focused on different peculiarities such as country exigencies and geographies, the
level of social, economic and financial development and priorities of social
concerns, among others. Broadly, financial inclusion means access to finance and
financial services for all in a fair, transparent and equitable manner at an affordable
cost (Thingalaya, Moodithaya, & Shetty, 2020). In a more concise manner, it can
be defined as delivery of basic banking services at an affordable cost to all sections
of the society, especially the vast sections of disadvantaged and low-income
groups who tend to be excluded (Leeladhar, 2015). According to the Raghuram
Committee (2018), which is the Committee on Financial Inclusion in India,
financial inclusion is the process of ensuring access to financial services and timely
and adequate credit where needed by vulnerable groups such as the weaker
sections and low-income groups at an affordable cost. This definition focuses on
the vulnerable members of the society and ease of access to credit. Along the
similar lines, Chakravarty (2020) defined financial inclusion as extending the
benefits of banking to the have-nots. Simply put, it means that banks will offer a
basic account to anyone who wants to have one.
Mohan (2016) defined financial inclusion from the point of view of access,
fairness, equity and safety in a financial system. The study defined financial
inclusion as a coordinated effort by a national or sub-national government to
deepen financial services among many customers while providing appropriate low-
cost, fair and safe financial products and services or instruments. These services or
instruments may include: bank accounts, affordable credit, financial assets, savings
schemes, insurance products and services, payments and remittance facilities as
well as money advice from mainstream providers to all. Similar views have been
expressed by Thorat (2017) to whom financial inclusion means the provision of
affordable financial services (viz. access to payments and remittance facilities,
savings, loans and insurance services) by the formal financial system to those who
tend to be excluded. Bernanke (2020) adds a new dimension to the understanding
of the financial inclusion by saying that it requires substantial efforts in
understanding the needs of the customer, counseling, financial literacy, screening
and monitoring.
Dev (2020) in his definition broadens the scope of financial inclusion by
emphasizing the role of new institutional partners like microfinance institutions.
The study observed that financial inclusion should not only focus on financial
services like credit and savings, but also on an increase in productivity and
sustainability of vulnerable groups in the society. Arunachalam (2018) has also
expressed a similar view. The study focused on empowering vulnerable members
of the society and not merely granting them access to saving accounts in banks.
The study opined that financial inclusion should be about going beyond savings
bank accounts and consumption credit, to devising/delivering financial products
that can help in overcoming market imperfections and facilitate risk management
by (and for) the poor in the context of their fragile livelihoods and the vicious cycle
of poverty, often caused by structural weaknesses and other factors.
It is therefore obvious from the definitions of financial inclusion in this section that
availability and accessibility are two important aspects of financial inclusion. Other
aspects include:
i. Access to Financial Services:
a. Bank Accounts: Providing access to basic banking services such as savings
and checking accounts.
b. Credit: Availability of affordable and appropriate credit for personal and
business needs.
c. Insurance: Access to insurance products that protect against various risks.
d. Payment Systems: Availability of efficient and secure payment systems,
including mobile payments and remittances.
ii. Affordability: Financial services must be affordable to ensure that low-
income individuals can use them without financial strain.
iii. Quality and Suitability: Financial products and services must be designed to
meet the specific needs of different user segments, including the poor, rural
populations, and small businesses.
iv. Financial Literacy and Education: Promoting financial literacy to help
individuals understand financial products, manage their finances, and make
informed decisions.
v. Technology and Innovation: Leveraging technology to expand reach and
reduce costs, such as mobile banking, digital wallets, and fintech solutions.
vi. Regulatory Support: Governments and regulatory bodies play a crucial role
in creating an enabling environment for financial inclusion through supportive
policies and regulations.
Benefits of Financial Inclusion
i. Economic Growth: By providing access to credit and savings, financial inclusion
helps individuals and businesses invest in opportunities, leading to economic
growth.
i. Poverty Reduction: Access to financial services helps people manage risks,
smooth consumption, and invest in education and health, contributing to poverty
alleviation.
iii. Empowerment: Financial inclusion empowers marginalized groups, such as
women and rural populations, by providing them with the tools to improve their
economic situations.
iv. Financial Stability: A more inclusive financial system can contribute to
financial stability by broadening the customer base and distributing risks more
evenly.
Challenges to Financial Inclusion
i. Lack of Infrastructure: Inadequate physical and digital infrastructure,
especially in rural areas, hampers access to financial services.
ii. High Costs: High transaction costs and fees can be a barrier to accessing
financial services for low-income individuals.
iii. Limited Financial Literacy: A lack of understanding of financial products and
services prevents people from using them effectively.
iv. Regulatory Barriers: Inappropriate or overly stringent regulations can hinder
the expansion of financial services.
v. Cultural and Social Barriers: Cultural norms and social barriers can limit the
participation of certain groups, such as women, in the financial system.
Initiatives to Promote Financial Inclusion
i. Digital Financial Services (DFS): Mobile money and digital wallets provide
access to financial services without the need for traditional banking
infrastructure.
ii. Microfinance: Microfinance institutions provide small loans and financial
services to low-income individuals and small businesses.
iii. Financial Literacy Programs: Educational initiatives aimed at improving
financial knowledge and skills among underserved populations.
iv. Government Policies and Programs: Government interventions, such as social
welfare payments through bank accounts, can drive financial inclusion.
v. Public-Private Partnerships: Collaboration between governments, financial
institutions, and technology companies to develop and promote inclusive
financial products and services.
Financial inclusion is essential for creating equitable economic opportunities and
promoting sustainable development. It requires a multi-faceted approach involving
various stakeholders, including governments, financial institutions, and technology
providers.
2.2 Theoretical Review
2.2.1 Finance-Growth Theory
This study would take its foundational root in the finance-growth theory as its
theoretical framework. The Finance-Growth nexus can be traced back to the work
of Bagehot during 1870s and was advanced by the contributions of Schumpeter
(1934), Goldsmith (1969) and Shaw (1973). He hypothesized that financial
arrangement plays an acute part in manipulating an extended period of economic
growth rates. This assumption premised a kind of "supply-leading" association
between the financial sector and economic growth in that an efficient financial
sector uses the finite resources from surplus (excess) units to shortfall units;
consequently, enhancing the growth of other sectors in the economy (McKinnon,
1973).
This theory will be adopted for the theoretical framework in this study because of
the belief that financial development creates a dynamic productive environment for
growth through “supply leading” or “demand following” effect (Wakdok, 2018).
This theory also recognizes the lack of access to finance as a critical factor
responsible for persistent income inequality as well as sluggish growth (Nwansi &
Dibiah, 2023). Studies on financial development have identified four distinct areas
as the driving force of economic growth (Babajide et al., 2015). The main one is
the provision of a low-cost reliable means of payment to all, particularly the low-
income group. The second is the role financial intermediation plays in increasing
the volume of transaction and allocation of resources from the surplus unit to the
deficit unit of the economy and in the process improve resource distribution
(Odeniran & Udeaja, 2010). The third has to do with the risk management effect,
that the financial system provides by curtailing liquidity risks, thereby enabling the
financing of risky but more productive investments and innovations within the
economy (Greenwood & Jovanovic, 1990; Bencivenga & Smith, 1991) and lastly,
the financial sector provides information on possible investment and availability of
capital within the system, thereby ameliorating the effects of asymmetric
information (Ross, 2004).
Thus, the key points from this theory as relates to Nigeria are: government through
the CBN economic policies will help to encourage the formation of formal
financial institutions like deposit money banks and microfinance banks which will
in turn make financial products available abundantly at an affordable cost (Obayori
& George Anokwuru, 2020). Additionally, the effective availability and usage of
financial goods can contribute to the expansion and development of the economy
(Nnachi & Ositaufere, 2020). Therefore, it is acknowledged that having access to a
safe, simple, and affordable source of financing is a prerequisite for accelerating
economic development, reducing income inequality, and eradicating poverty
(Saranu et al., 2024). This creates equal opportunities, and enables those who are
economically and socially excluded to integrate better into the economy, actively
contribute to its growth, and protect themselves from economic shocks (Nwansi &
Dibiah, 2023). This theory is important to this study because it posits that if the
populace has easy access to financial services, through proper implementation of
financial inclusion, economic growth would be improved. Hence, the finance-
growth model is the theoretical framework upon which this study will evaluate the
effect of financial inclusion on economic growth in Nigeria.
2.2.2 Theory of Planned Behavior (TPB)
Early studies mainly focus on theory of planned behavior as identified by Fishbein
and Ajzen in 1975. Theory of reason action is based on the fundamental variables
of attitude and subjective norm. The two variables are seen to have a positive effect
on individuals' behavioral intentions, which positively induce individuals' actual
action. Attitude is an individual's positive or negative evaluation of self-
performance of a particular behavior. The concept is the degree to which
performance of the behavior is positively or negatively valued. Subjective norm is
an individual's perception about particular behavior, which is influenced by the
judgment of significant others (e.g., parents, spouse, friends, teachers). Behavioral
intention is an indication of an individual's readiness to perform a given behavior
and it is assumed to be immediate antecedent of behavior. However, the basic
hypothesis of theory of reason action states that the occurrence of behavior is based
on volitional control of one's willpower (Fishbein & Ajzen, 1975). Thus, the
behavior occurs mostly from one's willing. Thus, Ajzen in 1985 modifies theory of
reason action and further proposes the Theory of Planned Behavior (TPB). Theory
of Planned Behavior (TPB) is founded on the three factors as perceived behavioral
control, attitude, and subjective norms. Hence, behavioral intention is influenced
by perceived behavioral control, attitude, and subjective norms. Actual behavior is,
in turn, determined by behavioral intention. Among all, perceived behavioral
control refers to individual's perceived ease or difficulty of performing the
particular behaviors. In recent years, the use of internet has been widespread and
has been more diversified. Studies on theory of planned behavior applying on
electronic commerce have increased.
2.2.3 Theory of Reasoned Action
This theory was formulated in 1975 by Fishbein and Ajzen has been used
extensively in marketing research. Theory of reasoned action has been applied to
explain the behaviour beyond the acceptance of technology and includes four
general concepts: behavioural attitudes, subjective norms, intention to use and
actual use. It argues that individuals evaluate the consequences of a particular
behaviour and create intentions to act that are consistent with their evaluations.
More specifically, theory of reasoned action states that individuals’ behaviour can
be predicted from their intentions, which can be predicted from their attitudes and
subjective norms. Following the chain of prediction further back, attitudes can be
predicted from an individual's beliefs about the consequences of the behaviour.
Subjective norms can be predicted by knowing how significant other individuals
think the behaviour should or should not be done. A particularly helpful aspect of
theory of reasoned action from a technology perspective is its assertion that any
other factors that influence behaviour do so only indirectly by influencing attitude
and subjective norms. Such variables would include, amongst others things, the
system design characteristics, user characteristics (including cognitive styles and
other personality variables) and task characteristics.
Hence, theory of reasoned action is quite appropriate in the context of predicting
the behaviour of using multimedia technology. Although theory of reasoned action,
is a very general theory and as such does not specify what specific beliefs would be
pertinent in a particular situation. Nevertheless, the inclusion of subjective norm
represents an important variable, which is not even included in more popular
models.
2.3 Empirical Review
Abdulmalik & Umar (2024) investigated the effect of financial inclusion on
economic development in Nigeria, with the aim of analysing the interplay between
the two variables through a review of relevant literature and empirical evidence.
They found a nuanced understanding of the multifaceted relationship between
financial inclusion and economic growth, shedding light on both the positive and
negative aspects. Using data from to 1981-2022 and employing the ARDL Bound
Test, it was revealed that a short- and long-run relationship exists between
financial inclusion and economic growth in Nigeria measured using gross domestic
product per capita. This finding corresponds with Onwukanjo, et al (2024). They
examined the impact of financial inclusion on the Nigerian economic growth for
the period 1980-2019 with the aid of vector error correction model (VECM)
approach. Their results raveled a bidirectional nature of causality relationship
between the variables in the model during the period of the study. Their empirical
results support that one percent increase in the financial inclusion proxy by;
deposit from the rural areas (DRA), loan to rural areas (LRA), account owners of
any type (AA) and electronic money banking/payment system (EMB) at lag (-2)
will leads to [38%(DRA)-2), 92%(LRA)-2), 59%(AA)-2) and 03%(EMB)-2)]
increases on Per capita income (PCI) respectively in Nigeria. However, the use of
GDP per capita as a measure of economic development and growth is questionable.
There is need to probe into the subject performing econometric analysis with the
use of economic growth rate and checking if same relationship can be observed.
Saranu, et al (2024) investigated the impact of financial inclusion on economic
growth in Nigeria. The study established credit to the private sector is positively
related to economic growth and is statistically significant, However, ATM
transactions have a positive and statistically insignificant relationship with
economic growth in Nigeria. Nwansi & Dibiah (2023) also examined the
relationship between financial inclusion and economic growth in Nigeria using the
Ordinary Least Square multiple regression to analyze the data obtained from
secondary sources for the period 1991-2021. The findings revealed that combined
effect of ratio of broad money to GDP, credit to private sector to GDP, aggregate
loan-to deposit ratio and liquidity ratio of commercial banks influenced economic
growth in Nigeria. In addition to using GDP as a proxy for growth, using credit to
private sector as a major measure of inclusion by these studies is flawed. The
nominal value of credit to private sector could keep increasing with all the funds
channeled to the conglomerates and rural communities as well as small businesses
can be excluded. The deposits and loans of rural branches of commercial banks
which are major variables to explain inclusion was not captured in this study. This
is a major gap that this research aims to fill.
Ofeimun (2020) examined the effect of microfinance banks’ financial inclusion
strategies on economic growth of Nigeria the period 2009 –2018. The study
adopted the ordinary least square (OLS) regression technique which reported that
micro loan disbursed, loan to SMEs have a significant positive effect on economic
growth in Nigeria. Moreover, the study finds that bank deposit has a negative but
insignificant relationship with economic growth. The study therefore concluded
that financial inclusion strategies through microfinance banks have a great effect in
stimulating the economy.
Emeka and Udom (2019) investigate the impact of Microfinance in promoting
financial inclusion in Nigeria from 1990 and 2014. A unit root test was con ducted
to establish the stationary of the adopted series to avoid spurious regression results.
The findings indicate that all the explanatory variables were jointly significant in
explaining the dependent variable. It was recommended that microfinance banks
should operate majorly in local communities as a way of promoting financial
inclusion among the rural dwellers.
Ajinaja and Odeyale (2018) examine Microfinance and the challenge of fi nancial
inclusion for SMEs development in Nigeria. The needed data was col lected
primarily through the use of questionnaire. The result of the finding reveals among
many others that there is a negative significant relationship between loan to small
enterprises and loan to rural areas in Nigeria in the period under study. It was
therefore recommended that more micro finance institutions should operate at rural
communities as a way of addressing the problem of financial exclusion the rural
dwellers are confronted with.
Anyanwu, Ananwude and Nnoje (2018) studied the impact of microfinance banks’
products in rural communities on women empowerment in Nigeria using
a descriptive survey design to investigate the objectives of the study.
They applied Pearson correlation and regression estimations and from the
estimation, they found a positive and significant relationship between women
empowerment and microfinance banks’ products: rent savings, child education,
and new born and daily savings account.
Adeola and Evans (2017) investigated the impact of microfinance on financial
inclusion in the Nigeria for the period 1981–2014adopting the fully modified OLS
(FMOLS) and the Dynamic OLS (DOLS). The study used indicators such as total
commercial banks’ loans and advances, number of microfinance banks in
Nigeria to represent microfinance banks and financial inclusion. In the short run,
the study found that microfinance has a positive but insignificant impact on
financial inclusion, but in the long run, microfinance has a positive and statistically
significant impact on the level of financial inclusion. Therefore, the result of the
study has established that microfinance, as well as interest rates, is a significant
driver of financial inclusion in Nigeria and recommended that to increase financial
inclusion in Nigeria, heightened drives for microfinance will be required.
Apere (2016) investigates the impact of microfinance banks on economic growth
in Nigeria over the period of 1992-2013 by employing the Augmented Dickey-
Fuller Unit Root Test, cointegration test, error correction model (ECM) and the
parsimonious test. The results of the study indicates that microfinance bank loans
and domestic investment significantly and positively affect the growth of Nigeria’s
economy based on the magnitude and the level of significance of the coefficient
and p-value and, there is a long-run relationship between microfinance bank loans,
investment and economic growth in Nigeria.
Ene and Inemesit, (2015) empirically analyzed the impact of microfinance in
promoting financial inclusion in Nigeria between 1990 and 2014 using OLS
regression technique. The results of the regression analysis showed that minimum
deposit amount have a positive and significant relationship with saving. They
observed that access to microfinance minimum deposit amount has significant
impact on savings account opened by rural dwellers. Microfinance interest rate
was however found to have a negative and insignificant relationship with the
rural dwellers loans and advances. The study recommended that government
should ensure the establishment of microfinance branches close to the rural area
who are currently not being served by the formal financial sector.
2.4 History and Finance of LAPO Microfinance Bank Ltd
2.4.1 Brief History of LAPO Microfinance Bank Ltd
LAPO Microfinance Bank Ltd has its roots in the Lift Above Poverty
Organization, founded in Nigeria in 1987 by Dr. Godwin Ehigiamusoe as a
grassroots NGO to empower rural poor and especially women through credit. The
organization took on formal microfinance activities in the early 1990s, combining
loans with social‐development programs for health and gender equality. With
Nigeria’s microfinance reforms, LAPO converted to a licensed bank: it registered
as a microfinance bank in 2007 and received a national operating license from the
Central Bank in 2010. Over the decades it grew dramatically; by 2013 it had
roughly 327 branches across 26 states and was serving about 1.1 million clients
(over 90% women), and by 2020 it was recognized as Nigeria’s largest
microfinance institution with around four million customers. LAPO MFB offers a
wide range of products targeting low‐income entrepreneurs, including group and
enterprise loans, agricultural financing, savings accounts, fixed deposits and
microinsurance. In recent years the bank has embraced digital banking and
broadened its market: it originated ₦237 billion in loans in 2024 and is rolling out
a new mobile‐banking app (launched in early 2025) to serve younger and tech‐
savvy customers beyond its traditional core base. The bank’s impact has also been
publicly acknowledged through numerous awards: at the 2024/2025 Development
Bank of Nigeria Service Awards, for example, LAPO MFB was honored as the
“Highest Impact” microfinance bank on MSMEs nationwide and on women‐owned
MSMEs in Nigeria, and in 2023 Nigeria’s Industrial Training Fund named it Best
Human Resources Institution for investment in staff development. These
achievements, together with its sustained grassroots mission, mark LAPO’s
evolution from a poverty‐focused NGO to a leading institution in Nigeria’s
microfinance sector.
2.4.2 Services Offered By LAPO Microfinance Bank Ltd
LAPO Microfinance Bank offers a broad suite of financial products and services
tailored to low-income households and small businesses. According to an African
Development Bank report, LAPO’s product portfolio includes various credit
facilities (group loans, agricultural loans, enterprise/SME loans), as well as savings
and term deposit accounts. The bank also provides microinsurance schemes to help
protect its clients against common risks. In recent years LAPO has expanded into
digital channels: it launched a mobile banking app (scheduled in early 2025) that
enables customers to apply for loans (from as little as ₦20,000), pay bills, make
transfers, track expenses, and open fixed deposits on their smartphones.
Additionally, LAPO has deployed an agent banking network (through local retail
agents and POS terminals) to offer basic banking access – cash-in/cash-out and
payment services – in underserved and remote communities. As of 2025 the bank
served around six million customers, and it continues to blend its traditional
microfinance offerings with new digital platforms and reward programs to deepen
financial inclusion.
Savings and Deposit Accounts: Standard savings accounts and fixed-term
deposits for clients to save securely.
Loan and Credit Products: Microfinance loans for individuals and groups,
including small-business/SME loans, agricultural loans, enterprise loans, and
other credit facilities.
Microinsurance: Affordable insurance products (e.g. life or health
microinsurance) bundled with financial services to protect poor clients from
health and livelihood risks.
Digital Banking Services: Internet and mobile banking via the LAPO MfB
app, supporting loan applications, bill payments, money transfers, transaction
alerts, expense tracking, and opening of fixed deposits.
Agency/Point-of-Sale (POS) Banking: An agent banking network providing
cash-in/cash-out services, payments, and basic teller services through
authorized local agents, extending access to unbanked areas.
Micro-Leasing: Leasing services for micro and small enterprises to finance
equipment or inventory (offered through related subsidiaries).
These services reflect LAPO Microfinance Bank Ltd mission of financial inclusion
by combining its traditional microcredit and savings programs with modern
innovations in digital banking and outreach channels.
