THE IMPACT OF MICROFINANCE BANKS IN STIMULATING THE BANKING HABIT OF RURAL DWELLERS IN NIGERIA

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Microfinance banks (MFBs) are specialized financial institutions that provide financial services to low-income individuals, small business owners, and rural dwellers who are typically excluded from traditional banking services. These services include savings accounts (micro-savings), small loans (micro-credit), money transfers, insurance (micro-insurance), and financial literacy training. Microfinance banks operate on the principle that even very small amounts of savings and loans can have a significant impact on poverty reduction and economic empowerment. Unlike conventional banks, which focus on large customers with collateral and credit history, microfinance banks use alternative lending methodologies (group lending, progressive lending, character-based lending) and operate closer to rural communities (Armendáriz and Morduch, 2010). (Armendáriz and Morduch, 2010)

The concept of microfinance gained global recognition in the 1970s with the pioneering work of Professor Muhammad Yunus and the Grameen Bank in Bangladesh. Yunus demonstrated that poor rural women, who were considered “unbankable” by conventional banks, could repay loans reliably when given access to credit. The Grameen Bank model, which emphasized group lending, peer pressure, and regular repayment schedules, achieved repayment rates exceeding 95%. This success led to the proliferation of microfinance institutions (MFIs) across Asia, Africa, and Latin America. In 2006, Yunus and the Grameen Bank were awarded the Nobel Peace Prize for their work in poverty alleviation. The microfinance revolution demonstrated that banking the unbanked is not only socially beneficial but also financially sustainable (Yunus, 2007). (Yunus, 2007)

In Nigeria, the formal microfinance banking system was established by the Central Bank of Nigeria (CBN) through the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria in 2005. Prior to 2005, microfinance services were provided by informal mechanisms: rotating savings and credit associations (ROSCAs, known locally as esusu, ajo, adashi), money lenders, cooperative societies, and community banks. However, these informal mechanisms had limitations: limited reach, high interest rates (money lenders), lack of regulation, and limited deposit protection. The 2005 policy was a major reform that licensed microfinance banks as formal, regulated financial institutions. The policy objectives included: (1) making financial services accessible to the poor and low-income earners; (2) promoting savings mobilization; (3) providing credit to micro-enterprises; (4) creating employment; and (5) reducing poverty (CBN, 2005). (CBN, 2005)

Banking habit refers to the regular practice of using formal banking services, particularly savings accounts and deposit-taking. A person with a banking habit maintains a bank account, makes regular deposits, withdraws funds as needed, and uses other banking services (transfers, loans, etc.). Banking habit is important for several reasons: (1) it promotes financial inclusion (access to formal financial services); (2) it mobilizes savings for investment; (3) it provides a safe place to store money (reducing theft and loss); (4) it builds credit history for future loans; (5) it facilitates government payments (subsidies, pensions) and tax collection; and (6) it reduces reliance on informal, often predatory, financial services (Demirgüç-Kunt and Klapper, 2012). (Demirgüç-Kunt and Klapper, 2012)

Rural dwellers in Nigeria face significant barriers to accessing formal banking services. According to the Enhancing Financial Innovation and Access (EFInA) Access to Financial Services in Nigeria Survey (2020), only 32% of rural adults have access to formal financial services (bank accounts), compared to 64% of urban adults. The rural-urban gap in financial inclusion is substantial. The unbanked population in rural areas is estimated at over 40 million adults. Barriers to banking in rural areas include (EFInA, 2020). (EFInA, 2020)

• Physical distance: Bank branches are concentrated in urban areas; rural dwellers may travel hours to reach the nearest bank.
• Lack of documentation: Many rural dwellers lack formal identification (national ID, driver’s license, passport) required to open accounts.
• Low income: Rural dwellers often have irregular, low income; they believe they need “a lot of money” to open an account (perception barrier).
• Low financial literacy: Many rural dwellers do not understand how banks work, how to open an account, or how to use banking services.
• Lack of trust: Some rural dwellers distrust formal financial institutions due to past bank failures or lack of familiarity.
• High transaction costs: Transportation to urban branches, opportunity cost of time, and fees can be prohibitive.

Microfinance banks are strategically positioned to address these barriers. Unlike conventional banks, microfinance banks are required by the CBN to have branches in rural areas. Microfinance banks use simplified account opening procedures (sometimes accepting traditional identification or community attestation). They offer low minimum deposit requirements (as low as ₦100-₦500). They provide financial literacy training to new customers. They use local staff who speak local languages and understand local customs. They are embedded in the community, building trust through regular interaction (CBN, 2015). (CBN, 2015)

The impact of microfinance banks on stimulating banking habit among rural dwellers occurs through several mechanisms (Armendáriz and Morduch, 2010). (Armendáriz and Morduch, 2010)

Savings Mobilization: Microfinance banks provide safe, convenient savings facilities. Rural dwellers can deposit small amounts regularly, building a savings habit. Savings provide a buffer against emergencies (health shocks, crop failure) and enable lump-sum purchases (school fees, farming inputs). Studies have found that microfinance bank customers save more than non-customers.

Credit Access: Microfinance banks provide small loans (micro-credit) to rural dwellers who lack collateral. Access to credit enables investment in income-generating activities (farming, trading, livestock, small businesses). Successful loan repayment builds credit history, enabling larger loans in the future. Credit customers are also more likely to maintain savings accounts.

Financial Literacy: Microfinance banks provide financial literacy training: budgeting, saving, borrowing, record keeping. Financial literacy increases confidence in using banking services and reduces the likelihood of default. Trained customers are more likely to develop banking habits.

Trust Building: Through regular interaction (weekly meetings, loan collection visits), microfinance bank staff build trust with rural customers. Trust reduces the psychological barrier to banking. Customers who trust their bank are more likely to recommend it to others (social contagion), expanding banking habits.

Agent Banking and Mobile Money: Some microfinance banks use agent banking (trained shopkeepers, fuel stations) to extend reach to villages without branches. Mobile money (USSD, apps) enables remote transactions. Technology reduces distance barriers.

The Nigerian government has recognized the importance of microfinance banks for financial inclusion. The National Financial Inclusion Strategy (NFIS) (revised 2018) set targets to reduce the adult exclusion rate from 40% (2010) to 20% by 2020 (revised to 2024). The NFIS emphasizes the role of microfinance banks, agent banking, and mobile money in reaching underserved populations (CBN, 2018). (CBN, 2018)

Despite the potential benefits, microfinance banks in Nigeria face significant challenges (Okoye, Okafor, and Nnamdi, 2020). (Okoye et al., 2020)

• Under-capitalization: Many microfinance banks are under-capitalized, limiting their ability to expand branches, hire staff, and lend.
• High operating costs: Rural branches are costly to operate (transportation, security, electricity).
• Loan default: Rural borrowers face income volatility (weather, crop failure, illness), leading to default.
• Regulatory burden: CBN regulatory requirements (capital adequacy, reporting) are costly for small MFBs.
• Competition: Microfinance banks compete with informal lenders (money lenders, ROSCAs), cooperatives, and commercial banks (which are now offering microfinance products).
• Lack of deposit insurance: Many rural dwellers are unaware of the Nigeria Deposit Insurance Corporation (NDIC) coverage (₦500,000 per depositor), leading to distrust.

The COVID-19 pandemic (2020-2021) affected microfinance banks and their rural customers. Lockdowns disrupted economic activity, leading to loan defaults. Microfinance banks faced liquidity pressures. However, the pandemic also accelerated digital adoption (mobile money, USSD), reducing the need for physical branches. The impact of COVID-19 on banking habits of rural dwellers is not well documented (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

Several theories explain the relationship between microfinance banks and banking habits. Financial intermediation theory (Gurley and Shaw, 1960) explains how financial institutions (including microfinance banks) channel savings from savers to borrowers, reducing transaction costs and information asymmetries. Financial inclusion theory (Demirgüç-Kunt and Klapper, 2012) explains how access to financial services reduces poverty and inequality. Social capital theory (Coleman, 1988) explains how trust, networks, and social norms influence financial behavior. Microfinance banks build social capital through group lending and community engagement, which stimulates banking habits. Theory of planned behavior (Ajzen, 1991) explains how attitudes, subjective norms, and perceived behavioral control influence financial behavior. Financial literacy training (provided by MFBs) changes attitudes and perceived control, stimulating banking habits (Ajzen, 1991; Coleman, 1988; Demirgüç-Kunt and Klapper, 2012; Gurley and Shaw, 1960). (Ajzen, 1991; Coleman, 1988; Demirgüç-Kunt and Klapper, 2012; Gurley and Shaw, 1960)

1.2 Statement of the Problem

Despite the establishment of microfinance banks in Nigeria since 2005 and the government’s National Financial Inclusion Strategy targets, banking habits among rural dwellers remain low. This problem manifests in several specific issues.

First, the rural-urban gap in financial inclusion remains wide. According to EFInA (2020), only 32% of rural adults have access to formal financial services (bank accounts), compared to 64% of urban adults. Rural dwellers constitute the majority of Nigeria’s unbanked population (estimated at over 40 million adults). This gap has persisted despite the presence of over 900 microfinance banks across the country. The persistence of the rural-urban gap suggests that microfinance banks are not fully achieving their financial inclusion mandate. (EFInA, 2020)

Second, savings mobilization in rural areas is low. Rural dwellers save primarily through informal mechanisms (cash at home, ROSCAs/esusu, livestock) rather than formal bank accounts. Cash at home is vulnerable to theft, fire, and pest damage. Informal savings do not build credit history or attract interest. Low formal savings mean that rural dwellers do not develop banking habits (regular deposits, account management). The role of microfinance banks in stimulating formal savings habits has not been adequately studied (Okoye et al., 2020). (Okoye et al., 2020)

Third, microfinance banks face operational challenges that limit their impact. Many microfinance banks are under-capitalized, under-staffed, and lack technology (CBN, 2015). Rural branches are costly to operate (transportation, security, electricity). Loan default rates are high due to income volatility (weather, crop failure, illness). These challenges limit the ability of microfinance banks to expand their customer base and stimulate banking habits. The relationship between MFB operational capacity and banking habit stimulation is not well understood. (CBN, 2015)

Fourth, the impact of microfinance banks on specific dimensions of banking habit is not well quantified. Banking habit includes multiple dimensions: account ownership (percentage of rural dwellers with an account), frequency of deposits (monthly, weekly), average deposit size, use of other services (transfers, loans, insurance), and persistence (retention over time). Most studies examine account ownership only, ignoring other dimensions. This study examines multiple dimensions of banking habit (Okoye et al., 2020). (Okoye et al., 2020)

Fifth, the effectiveness of microfinance bank services (savings accounts, loans, financial literacy) in stimulating banking habit is not well understood. Do savings accounts alone stimulate banking habit? Do loans (credit) stimulate banking habit (customers who borrow also save)? Does financial literacy training increase banking habit? The relative effectiveness of different services is unknown. This study examines the impact of specific MFB services (Okoye et al., 2020). (Okoye et al., 2020)

Sixth, barriers to banking habit among rural dwellers are not well prioritized. Identified barriers include physical distance, lack of documentation, low income, low financial literacy, and lack of trust. However, the relative importance of these barriers is unknown. Which barriers should microfinance banks address first? This study examines the relative importance of barriers (EFInA, 2020). (EFInA, 2020)

Seventh, the COVID-19 pandemic has affected rural banking habits, but the impact is not well documented. Lockdowns disrupted economic activity, reducing deposits and increasing loan defaults. However, the pandemic also accelerated digital adoption (mobile money, USSD). The net impact on banking habits is unknown (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

Eighth, there is a significant gap in the empirical literature on the impact of microfinance banks on stimulating banking habits of rural dwellers in Nigeria. Most studies focus on microfinance and poverty reduction (loans for micro-enterprises). Few studies focus on savings mobilization and banking habits. Few studies use rigorous methods (pre-post comparison, treatment-control) to establish causality. Few studies examine the heterogeneity of impact across different rural populations (farmers, traders, women, youth). This study addresses these gaps (Okoye et al., 2020). (Okoye et al., 2020)

Therefore, the central problem this study seeks to address can be stated as: *Despite the establishment of microfinance banks in Nigeria since 2005, banking habits among rural dwellers remain low. The rural-urban gap persists; savings mobilization is low; microfinance banks face operational challenges; the impact on specific dimensions of banking habit is not quantified; the effectiveness of specific services is not understood; barriers are not prioritized; and COVID-19 impact is unknown. This study addresses these gaps by examining the impact of microfinance banks in stimulating the banking habit of rural dwellers in Nigeria.*

1.3 Aim of the Study

The aim of this study is to critically examine the impact of microfinance banks in stimulating the banking habit of rural dwellers in Nigeria, with a view to determining the extent of account ownership, savings frequency, deposit size, and use of other services; identifying the barriers to banking habit; assessing the effectiveness of specific MFB services (savings accounts, loans, financial literacy); and proposing evidence-based recommendations for improving microfinance bank outreach and impact.

1.4 Objectives of the Study

The specific objectives of this study are to:

1. Determine the extent of banking habit among rural dwellers in Nigeria, measured by: (a) account ownership (percentage with a formal account); (b) savings frequency (monthly, weekly); (c) average deposit size; (d) use of other services (transfers, loans, insurance); and (e) persistence (retention over time).
2. Identify the barriers to banking habit among rural dwellers: physical distance, lack of documentation, low income, low financial literacy, lack of trust, and transaction costs.
3. Compare the banking habits of rural dwellers who are customers of microfinance banks vs. those who are not (treatment-control comparison).
4. Assess the impact of specific microfinance bank services on banking habit: (a) savings accounts; (b) loans (micro-credit); (c) financial literacy training; and (d) agent banking/mobile money.
5. Determine the relative importance of barriers to banking habit (which barriers are most significant).
6. Assess the impact of microfinance bank characteristics (branch proximity, staff training, technology use) on banking habit outcomes.
7. Assess the impact of the COVID-19 pandemic on banking habits of rural dwellers (pre-COVID vs. during-COVID vs. post-COVID).
8. Propose evidence-based recommendations for microfinance banks, the CBN, and policymakers to improve banking habits among rural dwellers.

1.5 Research Questions

The following research questions guide this study:

1. What is the extent of banking habit among rural dwellers in Nigeria (account ownership, savings frequency, deposit size, use of other services, persistence)?
2. What are the barriers to banking habit among rural dwellers (physical distance, lack of documentation, low income, low financial literacy, lack of trust, transaction costs)?
3. Do rural dwellers who are customers of microfinance banks have significantly higher banking habits than those who are not?
4. What is the impact of specific microfinance bank services (savings accounts, loans, financial literacy training, agent banking/mobile money) on banking habit?
5. Which barriers to banking habit are most important (relative importance)?
6. How do microfinance bank characteristics (branch proximity, staff training, technology use) affect banking habit outcomes?
7. How did the COVID-19 pandemic affect banking habits of rural dwellers?
8. What recommendations can be proposed for improving banking habits among rural dwellers?

1.6 Research Hypotheses

Based on the research objectives and questions, the following hypotheses are formulated. Each hypothesis is presented with both a null (H₀) and an alternative (H₁) statement.

Hypothesis One (Microfinance Bank Customers vs. Non-Customers)

• H₀₁: There is no significant difference in banking habit (account ownership, savings frequency, deposit size) between rural dwellers who are customers of microfinance banks and those who are not.
• H₁₁: Rural dwellers who are customers of microfinance banks have significantly higher banking habits than those who are not.

Hypothesis Two (Savings Accounts and Banking Habit)

• H₀₂: The availability of microfinance bank savings accounts does not significantly affect the savings frequency of rural dwellers.
• H₁₂: The availability of microfinance bank savings accounts significantly increases the savings frequency of rural dwellers.

Hypothesis Three (Loans and Banking Habit)

• H₀₃: Access to microfinance bank loans does not significantly affect the banking habit (savings) of rural dwellers.
• H₁₃: Rural dwellers who have received microfinance bank loans have significantly higher savings deposits than those who have not.

Hypothesis Four (Financial Literacy Training and Banking Habit)

• H₀₄: Financial literacy training provided by microfinance banks does not significantly affect the banking habit of rural dwellers.
• H₁₄: Rural dwellers who have received financial literacy training have significantly higher banking habits than those who have not.

Hypothesis Five (Physical Distance and Banking Habit)

• H₀₅: There is no significant relationship between distance to the nearest microfinance bank branch and banking habit (account ownership, savings frequency).
• H₁₅: There is a significant negative relationship between distance to the nearest microfinance bank branch and banking habit (shorter distance associated with higher banking habit).

Hypothesis Six (Financial Literacy and Banking Habit)

• H₀₆: There is no significant relationship between financial literacy level and banking habit among rural dwellers.
• H₁₆: There is a significant positive relationship between financial literacy level and banking habit.

Hypothesis Seven (Trust and Banking Habit)

• H₀₇: There is no significant relationship between trust in microfinance banks and banking habit.
• H₁₇: There is a significant positive relationship between trust in microfinance banks and banking habit.

Hypothesis Eight (COVID-19 Impact)

• H₀₈: There is no significant difference in banking habit among rural dwellers before and during the COVID-19 pandemic.
• H₁₈: Banking habit among rural dwellers was significantly lower during the COVID-19 pandemic than before the pandemic.

1.7 Significance of the Study

This study holds significance for multiple stakeholders as follows:

For Microfinance Banks (MFBs):
The study provides empirical evidence on which services (savings accounts, loans, financial literacy, agent banking) are most effective in stimulating banking habits. MFBs can use this evidence to: (1) design products that meet rural customers’ needs; (2) allocate resources to the most effective services; (3) address the most significant barriers (distance, documentation, trust); (4) train staff on effective customer engagement; and (5) expand branch networks to underserved areas.

For the Central Bank of Nigeria (CBN) and Regulators:
The CBN is responsible for regulating microfinance banks and achieving financial inclusion targets. The study provides evidence on the effectiveness (or ineffectiveness) of the microfinance policy. The CBN can use this evidence to: (1) revise microfinance policies; (2) set capital adequacy requirements; (3) incentivize MFBs to operate in rural areas; (4) expand the National Financial Inclusion Strategy; and (5) target enforcement.

For the Nigeria Deposit Insurance Corporation (NDIC):
NDIC insures deposits up to ₦500,000 per depositor. The study provides evidence on depositor awareness of NDIC coverage. Low awareness may reduce trust and banking habit. NDIC can use this evidence to: (1) increase public awareness campaigns in rural areas; (2) simplify depositor education materials; and (3) coordinate with MFBs to display NDIC signage.

For the National Financial Inclusion Steering Committee:
The Committee oversees the implementation of the National Financial Inclusion Strategy. The study provides evidence on progress (or lack thereof) in rural areas. The Committee can use this evidence to: (1) revise targets; (2) allocate resources to the most effective interventions; and (3) hold MFBs accountable for rural outreach.

For Rural Dwellers:
Rural dwellers are the ultimate beneficiaries of improved banking habits. The study provides evidence on the benefits of banking (safety, interest, credit access, financial literacy). Rural dwellers can use this evidence to: (1) open accounts; (2) save regularly; (3) apply for loans; (4) attend financial literacy training; and (5) use agent banking/mobile money.

For International Development Partners (World Bank, DFID, IFAD, UNCDF):
Development partners support financial inclusion in Nigeria. The study provides evidence on the effectiveness of microfinance banks in stimulating banking habits. Development partners can use this evidence to: (1) design financial inclusion programs; (2) target rural areas; (3) allocate funding to the most effective interventions; and (4) evaluate the impact of past programs.

For Academics and Researchers:
This study contributes to the literature on microfinance and financial inclusion in several ways. First, it provides evidence from a developing economy context (Nigeria), which is underrepresented. Second, it focuses on banking habits (savings) rather than credit (most microfinance research focuses on credit). Third, it examines multiple dimensions of banking habit. Fourth, it identifies barriers and their relative importance. Fifth, it includes COVID-19 impact. The study provides a foundation for future research.

For the Nigerian Economy:
Improved banking habits among rural dwellers increase savings mobilization, which provides funds for investment (loans). Increased savings also reduce reliance on informal, often predatory, financial services. Financial inclusion promotes rural development, poverty reduction, and economic growth. By identifying how microfinance banks can stimulate banking habits, this study contributes to financial inclusion and economic development.

1.8 Scope of the Study

The scope of this study is defined by the following parameters:

Content Scope: The study focuses on the impact of microfinance banks in stimulating the banking habit of rural dwellers in Nigeria. Specifically, it examines: (1) banking habit dimensions (account ownership, savings frequency, deposit size, use of other services, persistence); (2) barriers to banking habit (physical distance, lack of documentation, low income, low financial literacy, lack of trust, transaction costs); (3) MFB services (savings accounts, loans, financial literacy training, agent banking/mobile money); (4) MFB characteristics (branch proximity, staff training, technology use); (5) COVID-19 impact; and (6) policy recommendations. The study does not examine microfinance banks’ financial performance (profitability) or loan default rates except as they affect banking habits.

Geographic Scope: The study is conducted in rural areas of Enugu State, Nigeria. Enugu State is selected because it has a mix of agricultural and trading rural communities, and has several microfinance bank branches. Rural areas are defined as local government areas (LGAs) with predominantly agricultural economy, low population density, and absence of commercial bank branches. Findings may be generalizable to other rural areas in Nigeria (South-East, South-South, South-West, North-Central, North-East, North-West), but caution is warranted.

Organizational Scope: The study covers rural dwellers (adults aged 18 and above) who are potential customers of microfinance banks. The study includes both customers of microfinance banks and non-customers (control group). The study excludes urban dwellers, non-adults (under 18), and customers of commercial banks only (unless they also use MFBs).

Sample Scope: The study uses a multi-stage sampling procedure: (1) selection of rural LGAs in Enugu State; (2) selection of rural communities within each LGA; (3) selection of households within each community; and (4) selection of adult respondents within each household. The target sample size is 400 rural dwellers (200 customers of MFBs, 200 non-customers).

Time Scope: The study covers a 5-year period from 2019 to 2023, encompassing pre-COVID (2019), COVID-19 pandemic (2020-2021), and post-pandemic recovery (2022-2023). The study includes retrospective questions about banking habits before, during, and after COVID-19 to assess changes.

Data Sources: The study uses primary data from: (1) structured questionnaire for rural dwellers (banking habits, barriers, demographics); (2) focus group discussions (FGDs) with rural dwellers (qualitative insights); (3) key informant interviews with microfinance bank managers (operations, challenges); and (4) secondary data from CBN, EFInA, NDIC, and MFB annual reports.

1.9 Definition of Terms

The following key terms are defined operationally as used in this study:

Term	Definition
Microfinance Bank (MFB)	A specialized financial institution licensed by the Central Bank of Nigeria to provide financial services (savings, loans, transfers, insurance) to low-income individuals, small business owners, and rural dwellers.
Banking Habit	The regular practice of using formal banking services, particularly savings accounts and deposit-taking. Measured by account ownership (yes/no), savings frequency (monthly, weekly), average deposit size (₦), use of other services (transfers, loans, insurance), and persistence (retention over time).
Rural Dweller	An adult (aged 18 and above) residing in a rural area, defined as a local government area (LGA) with predominantly agricultural economy, low population density, and absence of commercial bank branches.
Financial Inclusion	The process of ensuring that individuals and businesses have access to useful and affordable financial products and services that meet their needs (transactions, payments, savings, credit, insurance) delivered in a responsible and sustainable way.
Savings Mobilization	The process of collecting small savings from rural dwellers through formal financial institutions (microfinance banks).
Agent Banking	The use of third-party agents (shopkeepers, fuel stations, post offices) to provide banking services (deposits, withdrawals, transfers) in areas without bank branches.
Mobile Money	Financial transactions (deposits, withdrawals, transfers, payments) conducted using a mobile phone (USSD, app, SIM toolkit).
Financial Literacy	The knowledge and understanding of financial concepts (saving, borrowing, budgeting, interest rates) and the ability to use that knowledge to make effective financial decisions.
Rotating Savings and Credit Association (ROSCA)	An informal savings mechanism where a group of individuals contribute a fixed amount regularly, and the total is given to one member each rotation (known locally as esusu, ajo, adashi).
National Financial Inclusion Strategy (NFIS)	A government strategy (revised 2018) setting targets for reducing the adult exclusion rate and increasing access to financial services in Nigeria.
Enhancing Financial Innovation and Access (EFInA)	A financial sector development organization that conducts research (Access to Financial Services in Nigeria survey) and promotes financial inclusion.
Nigeria Deposit Insurance Corporation (NDIC)	The government agency that insures deposits in licensed banks (including microfinance banks) up to ₦500,000 per depositor.
Unbanked	Adults who do not have a formal bank account (neither with a commercial bank nor a microfinance bank).

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter presents a comprehensive review of literature relevant to the impact of microfinance banks in stimulating the banking habit of rural dwellers in Nigeria. The review is organized into five main sections. First, the conceptual framework section defines and explains the key constructs: microfinance banks, banking habit, rural dwellers, financial inclusion, savings mobilization, and barriers to banking. Second, the theoretical framework section examines the theories that underpin the relationship between microfinance banks and banking habits, including financial intermediation theory, financial inclusion theory, social capital theory, and the theory of planned behavior. Third, the empirical review section synthesizes findings from previous studies on microfinance and banking habits globally and in Nigeria. Fourth, the regulatory framework section examines the Nigerian context, including the CBN Microfinance Policy, the National Financial Inclusion Strategy, and the role of NDIC. Fifth, the summary of literature identifies gaps that this study seeks to address.

The purpose of this literature review is to situate the current study within the existing body of knowledge, identify areas of consensus and controversy, and justify the research questions and hypotheses formulated in Chapter One (Creswell and Creswell, 2018). By critically engaging with prior scholarship, this chapter establishes the intellectual foundation upon which the present investigation is built. (Creswell and Creswell, 2018)

2.2 Conceptual Framework

2.2.1 The Concept of Microfinance Banks

Microfinance banks (MFBs) are specialized financial institutions that provide financial services to low-income individuals, small business owners, and rural dwellers who are typically excluded from traditional banking services. Services include savings accounts (micro-savings), small loans (micro-credit), money transfers, insurance (micro-insurance), and financial literacy training. Microfinance banks operate on the principle that even very small amounts of savings and loans can have a significant impact on poverty reduction and economic empowerment. Unlike conventional banks, which focus on large customers with collateral and credit history, microfinance banks use alternative lending methodologies (group lending, progressive lending, character-based lending) and operate closer to rural communities (Armendáriz and Morduch, 2010). (Armendáriz and Morduch, 2010)

In Nigeria, microfinance banks are licensed and regulated by the Central Bank of Nigeria (CBN) under the Microfinance Policy, Regulatory and Supervisory Framework for Nigeria (2005, revised 2015). The policy classifies microfinance banks into three categories (CBN, 2015). (CBN, 2015)

• Unit Microfinance Bank: Operates at a single location within a local government area. Minimum capital requirement: ₦50 million (for new licenses).
• State Microfinance Bank: Operates within a single state but can have multiple branches. Minimum capital requirement: ₦100 million.
• National Microfinance Bank: Operates across multiple states. Minimum capital requirement: ₦2 billion.

As of 2023, Nigeria had over 900 licensed microfinance banks, with the majority being unit and state MFBs. However, many MFBs are under-capitalized and operate in urban rather than rural areas, which limits their impact on rural banking habits (CBN, 2021). (CBN, 2021)

2.2.2 The Concept of Banking Habit

Banking habit refers to the regular practice of using formal banking services, particularly savings accounts and deposit-taking. A person with a banking habit maintains a bank account, makes regular deposits, withdraws funds as needed, and uses other banking services (transfers, loans, insurance). Banking habit is important for several reasons (Demirgüç-Kunt and Klapper, 2012). (Demirgüç-Kunt and Klapper, 2012)

• Safety: Formal bank accounts are safer than cash at home (protected from theft, fire, pests).
• Interest: Savings accounts earn interest (though interest rates may be low, it is better than zero).
• Credit history: Regular savings build credit history, enabling access to loans in the future.
• Government payments: Bank accounts are required for government payments (subsidies, pensions, social transfers).
• Tax collection: Bank accounts facilitate tax collection.
• Financial planning: Bank statements help with budgeting and financial planning.

Banking habit is multi-dimensional. This study measures banking habit using five indicators (Armendáriz and Morduch, 2010). (Armendáriz and Morduch, 2010)

Account ownership: Whether the rural dweller has a formal bank account (with a microfinance bank or commercial bank). Binary variable (yes/no).

Savings frequency: How often the rural dweller makes deposits (weekly, monthly, irregularly). Measured on an ordinal scale.

Average deposit size: The average amount deposited per transaction (in Naira). Measured on a continuous scale.

Use of other services: Whether the rural dweller uses transfers, loans, insurance, or other services. Binary variable (yes/no).

Persistence: Whether the rural dweller has maintained the account for at least 12 months (retention). Binary variable (yes/no).

2.2.3 Barriers to Banking Habit Among Rural Dwellers

Rural dwellers face significant barriers to accessing formal banking services. The Enhancing Financial Innovation and Access (EFInA) Access to Financial Services in Nigeria Survey (2020) identifies the following barriers (EFInA, 2020). (EFInA, 2020)

Physical distance: Bank branches are concentrated in urban areas; rural dwellers may travel hours to reach the nearest bank. Distance increases transaction costs (transportation, time).

Lack of documentation: Many rural dwellers lack formal identification (national ID, driver’s license, passport, voter’s card) required to open accounts under Know-Your-Customer (KYC) regulations.

Low income: Rural dwellers often have irregular, low income. They may believe they need “a lot of money” to open an account (perception barrier). Minimum deposit requirements (even small amounts) may be prohibitive.

Low financial literacy: Many rural dwellers do not understand how banks work, how to open an account, or how to use banking services. They may not understand interest rates, fees, or the benefits of saving.

Lack of trust: Some rural dwellers distrust formal financial institutions due to past bank failures (e.g., the 1990s community bank failures, 2008-2009 banking crisis), lack of familiarity, or negative experiences with informal lenders.

Transaction costs: Fees for account maintenance, withdrawals, transfers, and SMS alerts can be prohibitive for low-income rural dwellers. Transportation to branches also incurs costs.

Language and literacy barriers: Banking forms and communication are often in English; rural dwellers may prefer local languages (Igbo, Yoruba, Hausa). Illiterate customers may be unable to read forms or account statements.

Gender barriers: Women may face additional barriers: lack of independent income, lack of documentation (ID in husband’s name), cultural restrictions on women interacting with male bank staff.

2.2.4 Microfinance Bank Services for Stimulating Banking Habit

Microfinance banks offer several services designed to stimulate banking habits among rural dwellers (CBN, 2015). (CBN, 2015)

Savings Accounts (Micro-savings): Microfinance banks offer savings accounts with low minimum deposit requirements (as low as ₦100-₦500). Some accounts have no minimum balance. Regular savings (daily, weekly, monthly) are encouraged. Mobile savings agents collect deposits from customers’ homes or workplaces.

Micro-credit (Loans): Microfinance banks provide small loans (₦10,000-₦500,000) to rural dwellers who lack collateral. Loan methodologies include: group lending (joint liability), progressive lending (smaller loans first, larger loans later), and character-based lending (no collateral, based on reputation). Successful loan repayment builds credit history and encourages savings.

Financial Literacy Training: Microfinance banks provide training on: budgeting, saving, borrowing, record keeping, and avoiding over-indebtedness. Training increases financial literacy, confidence, and banking habits. It also reduces default rates.

Agent Banking: Microfinance banks use trained agents (shopkeepers, fuel stations, post offices) to provide basic banking services (deposits, withdrawals, transfers) in villages without branches. Agent banking reduces distance barriers.

Mobile Money (USSD, Apps): Microfinance banks offer mobile money services, enabling customers to deposit, withdraw, and transfer funds using mobile phones (without internet). USSD codes (*xxx#) work on any phone, even basic phones. Mobile money reduces distance barriers and transaction costs.

Targeted Products for Specific Groups: Some MFBs offer products for specific groups: women-only accounts, youth accounts, farmer savings accounts (linked to harvest cycles), and livestock savings accounts.

2.3 Theoretical Framework

This section presents the theories that provide the conceptual lens for understanding the impact of microfinance banks in stimulating banking habits among rural dwellers. Four theories are discussed: financial intermediation theory, financial inclusion theory, social capital theory, and the theory of planned behavior.

2.3.1 Financial Intermediation Theory

Financial intermediation theory, developed by Gurley and Shaw (1960) and extended by Diamond (1984), explains the role of financial institutions (banks) in channeling savings from savers to borrowers. Financial intermediaries reduce transaction costs (search, negotiation, enforcement) and information asymmetries (adverse selection, moral hazard) between savers and borrowers. In the absence of financial intermediaries, savers would have to find borrowers directly (costly), and borrowers would have to find lenders directly (costly) (Gurley and Shaw, 1960). (Gurley and Shaw, 1960)

In the context of microfinance banks, financial intermediation theory suggests that MFBs reduce the transaction costs and information asymmetries that prevent rural dwellers from saving. Rural dwellers have small, irregular savings; the transaction cost of depositing small amounts in a distant bank is prohibitive. Microfinance banks reduce transaction costs by: (1) locating branches closer to rural dwellers; (2) using agent banking (deposits collected from homes); (3) using mobile money (remote deposits); and (4) aggregating small savings into larger pools. Financial intermediation theory predicts that microfinance banks that reduce transaction costs will stimulate banking habits (savings) (Gurley and Shaw, 1960). (Gurley and Shaw, 1960)

2.3.2 Financial Inclusion Theory

Financial inclusion theory, articulated by Demirgüç-Kunt and Klapper (2012) and the World Bank, argues that access to formal financial services (savings, credit, payments, insurance) reduces poverty and inequality, promotes economic growth, and enhances financial stability. Financial inclusion is measured by the percentage of adults with an account at a formal financial institution (Global Findex Database). Barriers to financial inclusion include physical distance, lack of documentation, low income, low financial literacy, and lack of trust (Demirgüç-Kunt and Klapper, 2012). (Demirgüç-Kunt and Klapper, 2012)

In the context of microfinance banks, financial inclusion theory suggests that MFBs are the primary vehicle for achieving financial inclusion in rural areas. MFBs are specifically designed to serve the unbanked: low-income individuals, rural dwellers, women, and micro-entrepreneurs. The CBN’s Microfinance Policy (2005, 2015) explicitly aims to promote financial inclusion. Financial inclusion theory predicts that the presence of microfinance banks in rural areas increases account ownership, savings, and other banking habits. The theory also predicts that reducing barriers (distance, documentation, cost) increases financial inclusion (Demirgüç-Kunt and Klapper, 2012). (Demirgüç-Kunt and Klapper, 2012)

2.3.3 Social Capital Theory

Social capital theory, developed by Coleman (1988) and Putnam (1993), argues that social networks, trust, norms, and reciprocity facilitate cooperation and collective action. Social capital reduces transaction costs and information asymmetries. In financial contexts, social capital enables group lending (joint liability), peer monitoring, and information sharing. Social capital also builds trust in financial institutions (Coleman, 1988). (Coleman, 1988)

In the context of microfinance banks, social capital theory explains the success of group lending methodologies. The Grameen Bank model uses small groups (5 members) who are jointly liable for each other’s loans. Peer pressure ensures repayment. Social capital also explains how trust is built between microfinance banks and rural dwellers. MFB staff who are embedded in the community, speak local languages, and understand local customs build trust. Trust reduces the psychological barrier to banking, stimulating banking habits. Social capital theory predicts that microfinance banks that build social capital (trust, networks) will have higher customer retention and higher banking habits (Coleman, 1988). (Coleman, 1988)

2.3.4 Theory of Planned Behavior

The theory of planned behavior (TPB), developed by Ajzen (1991), explains how attitudes, subjective norms, and perceived behavioral control influence behavioral intentions and actual behavior. According to TPB, behavior is determined by intention, which is determined by: (1) attitude (positive or negative evaluation of the behavior); (2) subjective norm (perceived social pressure to perform or not perform the behavior); and (3) perceived behavioral control (perceived ease or difficulty of performing the behavior) (Ajzen, 1991). (Ajzen, 1991)

In the context of banking habits among rural dwellers, TPB suggests that banking behavior (opening an account, saving regularly) is determined by: (1) attitude (does the rural dweller believe that banking is beneficial?); (2) subjective norm (do friends, family, and community members approve of banking?); and (3) perceived behavioral control (does the rural dweller believe they can open an account, meet minimum deposit requirements, and understand banking procedures?). Microfinance banks can influence attitudes through financial literacy training (showing the benefits of saving). They can influence subjective norms by building social capital (community approval of banking). They can influence perceived behavioral control by simplifying procedures (low minimum deposits, agent banking, mobile money). TPB predicts that microfinance banks that address attitudes, norms, and control will stimulate banking habits (Ajzen, 1991). (Ajzen, 1991)

2.4 Empirical Review

This section reviews empirical studies that have examined the impact of microfinance banks on banking habits and financial inclusion. The review is organized thematically: global studies, African studies, Nigerian studies, and studies on barriers and solutions.

2.4.1 Global Studies

In a study of 100 countries using the Global Findex Database (2011-2017), Demirgüç-Kunt and Klapper (2012) examined the determinants of account ownership. They found that account ownership was positively associated with: (1) higher income; (2) higher education; (3) urban residence; (4) formal employment; and (5) mobile phone ownership. Account ownership was negatively associated with distance to the nearest bank branch. The study concluded that physical access (branch proximity) is a key determinant of banking habits. (Demirgüç-Kunt and Klapper, 2012)

In a study of 200 microfinance institutions across 10 countries (Bangladesh, India, Pakistan, Philippines, Indonesia, Mexico, Peru, Bolivia, Kenya, Tanzania), Cull, Demirgüç-Kunt, and Morduch (2018) examined the impact of microfinance on savings. They found that microfinance customers had significantly higher savings rates (mean 15% of income) than non-customers (mean 5% of income). The effect was stronger for institutions that emphasized savings mobilization (rather than credit only) and for institutions that used mobile technology. (Cull et al., 2018)

In a study of 500 rural households in Bangladesh, Khandker (2018) examined the impact of microfinance on savings and asset accumulation. Using panel data from 1991-2015, he found that access to microfinance increased savings by 25% and asset accumulation by 30% over 10 years. The effect was larger for women borrowers than men. The study concluded that microfinance stimulates savings habits and reduces poverty. (Khandker, 2018)

2.4.2 African Studies

In a study of 500 rural households in Ghana, Amoako and Asante (2018) examined the impact of microfinance on financial inclusion. They found that rural households with access to microfinance were 3.2 times more likely to have a formal savings account than those without access (odds ratio = 3.2, p < 0.01). The average savings deposit was 50% higher for microfinance customers than non-customers. Barriers to banking included distance (45% of respondents), lack of documentation (30%), and low income (25%). (Amoako and Asante, 2018)

In a study of 300 rural households in Kenya, Ochieng and Wamukoya (2019) examined the impact of mobile money (M-Pesa) on banking habits. They found that mobile money users were 4.5 times more likely to have a formal savings account than non-users (odds ratio = 4.5, p < 0.01). Mobile money reduced the distance barrier (transactions conducted via phone). The study recommended that microfinance banks integrate mobile money to stimulate banking habits. (Ochieng and Wamukoya, 2019)

In a study of 400 rural households in Tanzania, Ndede (2020) examined the impact of microfinance on savings behavior. Using a treatment-control design (200 customers, 200 non-customers), she found that microfinance customers had significantly higher savings rates (mean 12% of income) than non-customers (mean 4% of income). Financial literacy training (provided by MFBs) was a significant predictor of savings behavior (β = 0.35, p < 0.01). (Ndede, 2020)

2.4.3 Nigerian Studies

Several Nigerian studies have examined microfinance banks and banking habits. Okoye, Okafor, and Nnamdi (2020) surveyed 500 rural dwellers in Enugu State. They found that only 28% of rural dwellers had a formal bank account (commercial or microfinance). Among account holders, 60% used microfinance banks, 30% used commercial banks, and 10% used both. The average savings deposit was ₦5,000 per month for MFB customers vs. ₦2,000 for non-customers (p < 0.01). Barriers to banking included: distance (55%), lack of documentation (45%), low income (40%), low financial literacy (35%), and lack of trust (30%). (Okoye et al., 2020)

Adeyemi and Ogundipe (2019) surveyed 200 microfinance bank customers in Lagos State (urban, not rural). They found that 80% of customers opened accounts because of savings mobilization agents (door-to-door collection). Savings frequency was weekly (45%), monthly (35%), or daily (20%). The average deposit size was ₦500-₦2,000. Financial literacy training increased savings frequency (β = 0.42, p < 0.01). (Adeyemi and Ogundipe, 2019)

Eze and Okafor (2021) examined the impact of agent banking on financial inclusion in rural Anambra State. They surveyed 300 rural dwellers in communities with agent banking vs. 300 in communities without. Communities with agent banking had significantly higher account ownership (45% vs. 15%, p < 0.01) and higher savings frequency (3.2 deposits per month vs. 0.8, p < 0.01). The study concluded that agent banking reduces the distance barrier. (Eze and Okafor, 2021)

Ogunyemi and Adewale (2021) examined the impact of COVID-19 on microfinance and banking habits in Ogun State. They surveyed 200 rural dwellers and found that: (1) 60% reported reduced income during COVID-19; (2) 45% reduced savings; (3) 30% withdrew savings to meet expenses; (4) 20% defaulted on loans; and (5) 15% closed accounts. However, mobile money usage increased (from 10% to 25%). The pandemic negatively impacted banking habits but accelerated digital adoption. (Ogunyemi and Adewale, 2021)

2.4.4 Studies on Barriers to Banking Habit

Several studies have examined barriers to banking habit among rural dwellers. EFInA (2020) found that the most common barriers in Nigeria were: distance (60% of unbanked adults), lack of documentation (40%), low income (35%), low financial literacy (30%), and lack of trust (25%). The relative importance of barriers varied by region: distance was most important in rural areas; lack of documentation was most important in urban areas. (EFInA, 2020)

In a study of 500 rural households in Northern Nigeria, Usman and Musa (2020) found that distance to the nearest bank branch was the strongest predictor of account ownership (β = -0.55, p < 0.01). Each additional kilometer reduced the probability of account ownership by 5%. The study recommended that microfinance banks establish branches or agent points in rural communities. (Usman and Musa, 2020)

In a study of 300 rural women in South-Western Nigeria, Okafor and Ugwu (2021) found that lack of trust was the most significant barrier for women (55% of respondents). Women reported that they did not trust bank staff (fear of fraud) or did not trust the banking system (fear of bank failure). The study recommended that microfinance banks build trust through community engagement, female staff, and NDIC deposit insurance awareness. (Okafor and Ugwu, 2021)

2.4.5 Studies on Solutions to Barriers

Several studies have examined solutions to barriers. Cull, Demirgüç-Kunt, and Morduch (2018) found that mobile money and agent banking were the most effective solutions to the distance barrier. In countries with mobile money (Kenya, Tanzania), account ownership increased by 20-30 percentage points. (Cull et al., 2018)

In Nigeria, Eze and Okafor (2021) found that agent banking increased account ownership by 30 percentage points in communities with agents. The cost of agent banking was lower than branch banking (reduced transportation costs, time). (Eze and Okafor, 2021)

Okafor and Ugwu (2021) found that financial literacy training increased financial literacy scores by 40% and increased savings frequency by 35%. The training also increased trust in banks (measured by willingness to deposit). (Okafor and Ugwu, 2021)

Adeyemi and Ogundipe (2019) found that savings mobilization agents (door-to-door collection) increased savings frequency and deposit size. Customers who used agents saved 2x more than customers who did not. (Adeyemi and Ogundipe, 2019)

2.5 Regulatory Framework in Nigeria

This section outlines the key regulatory provisions governing microfinance banks and financial inclusion in Nigeria.

CBN Microfinance Policy, Regulatory and Supervisory Framework (2005, revised 2015): The policy established the legal framework for microfinance banks. Key provisions include: (1) licensing categories (unit, state, national); (2) capital adequacy requirements; (3) permissible activities (savings, loans, transfers, insurance); (4) consumer protection (disclosure of interest rates, fees); (5) reporting requirements; and (6) prudential guidelines.

National Financial Inclusion Strategy (NFIS) (2012, revised 2018): The NFIS sets targets for reducing the adult exclusion rate from 40% (2010) to 20% by 2024. The NFIS identifies microfinance banks, agent banking, and mobile money as key vehicles for reaching underserved populations. The NFIS also targets specific groups: women, youth, farmers, and rural dwellers.

Nigeria Deposit Insurance Corporation (NDIC) Act: NDIC insures deposits in licensed banks (including microfinance banks) up to ₦500,000 per depositor. NDIC coverage increases depositor confidence and trust.

Know-Your-Customer (KYC) Regulations: KYC requires banks to verify customer identity using formal identification (national ID, driver’s license, passport, voter’s card). The CBN has introduced tiered KYC for low-value accounts (simplified documentation for small accounts).

Agent Banking Guidelines (2013): The guidelines permit banks (including microfinance banks) to use third-party agents (shopkeepers, fuel stations) to provide basic banking services (deposits, withdrawals, transfers) in areas without branches.

Mobile Money Guidelines (2015): The guidelines permit mobile money operators to provide financial services via mobile phones. Microfinance banks can partner with mobile money operators.

2.6 Summary of Literature Gaps

The review of existing literature reveals several significant gaps that this study seeks to address.

Gap 1: Limited Nigerian-specific evidence on the impact of microfinance banks on banking habits of rural dwellers. Most Nigerian studies focus on urban areas or general financial inclusion. This study focuses specifically on rural dwellers.

Gap 2: Lack of multi-dimensional measurement of banking habit (account ownership, savings frequency, deposit size, use of other services, persistence). Most studies measure only account ownership. This study measures multiple dimensions.

Gap 3: Lack of treatment-control comparison (customers vs. non-customers). Most studies survey only microfinance customers. This study surveys both customers and non-customers.

Gap 4: Lack of assessment of specific MFB services (savings accounts, loans, financial literacy, agent banking). Most studies examine overall MFB access. This study examines the impact of specific services.

Gap 5: Lack of prioritization of barriers (which barriers are most important). Most studies list barriers but do not quantify their relative importance. This study quantifies relative importance.

Gap 6: Lack of examination of MFB characteristics (branch proximity, staff training, technology). Most studies focus on customer characteristics, not MFB characteristics. This study examines MFB characteristics.

Gap 7: Lack of COVID-19 impact analysis. The pandemic affected rural incomes and banking habits. This study includes COVID-19 period data.

Gap 8: Lack of theoretical integration (financial intermediation, financial inclusion, social capital, planned behavior). Most Nigerian studies are descriptive. This study uses multiple theoretical frameworks.

Gap 9: Lack of policy recommendations for CBN, NDIC, and MFBs. Most studies describe problems but do not propose solutions. This study proposes evidence-based recommendations.