MICROFINANCE BANKS AND THE INFORMAL SECTOR OF THE NIGERIA ECONOMY: A PERFORMANCE EVALUATION
ABSTRACT
The study examined the impact of micro financing in the informal sector of Nigeria Economy.
The study employed descriptive statistic and Ordinary Linear Square (OLS) econometric technique in its empirical estimation. The findings revealed that microfinance institution had a weak impact on the informal sector in Nigeria particularly in the agricultural sector  but a marked positive impact on the  transport and other commercial during the period of study.
The study recommends amongst others; the adoption of flexible policies by microfinance institutions so as to accommodate the local small scale informal economic activities, a vigorous drive towards funding small scale business ventures at the local level and the provision of technical assistance to them to enhance the informal sector development and the overall national economy.   
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background of the Study                    
1.2    Statement of Research Problem                
1.3    Objective of the Study                    
1.4    Research Hypothesis                    
1.5    Scope of the Study                        
1.6    Significant of the Study                    
CHAPTER TWO: LITERATURE REVIEW
Introduction                    
Brief History of Microfinance Banks And
The Nigerian Experience                    
The Role of Nigerian Informal Sector
In Reducing Unemployment Rate in Nigeria
2.4    Growth of the Informal Sector (Nigeria) And Credit    
2.5    Challenges Facing Microfinance Banks in Nigeria         
2.6    The Role of Informal Sector in the Nigerian Economy    
2.7     Theoretical Framework                    
CHAPTER THREE: RESEARCH METHODOLOGY
    Introduction                         
Research Design                        
Population and Sample                    
Operationalization and Measurement of
Variables                     
Model Specification                
Sources Of Data                    
Data Analysis Method                
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.0     Introduction                        
4.1     Statistical Analysis                    
4.2     Empirical Analysis                    
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1     Summary of Findings                
5.2     Recommendations                    
5.3     Conclusion                            
    Bibliography                    
    Appendix                         
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
The Nigerian economy is characterized by the existence of forms of institutionalized banking and financial system and informal financial markets in both rural and urban areas. The advocation of the microfinance banks was triggered by the poor performance of the conventional finance sector and that of the informal sector of the Nigerian economy.
The dismal performance of the conventional finance sector and the informal sector of the economy triggered the advocation of micro-financing by policy makers, practitioners’ and international organizations as a tool for poverty reduction. Since the emergence, the number of micro-finance banks around the world especially in Nigeria has increased drastically. The Nigerian micro-finance banks have come a long way to boosting the entire four well-known models of the industry. Which are:
i.    The welfare model
ii.    The competition Model
iii.     The growth Model
iv.    The innovation Model
     A Central Bank of Nigeria (CBN) study identified as at 2001, 160 registered micro-finance banks or institution (MFIs) in Nigeria with aggregate savings worth N99.4 million and outstanding credit of N649.6 million indicating huge business transaction in the sector (Anyanwu 2004).
       The informal sector in Nigeria economy refers to the economic activities in all sectors of the economy that are operated outside the preview of government regulations. It encompasses a wide range of small-scale, large self-employment activities as most of them operate the traditional method production though activities in the informal sector are difficult to measure, they are highly dynamic and thereby contributes largely or substantially to the general growth of the economy. Available statistics from the ministry of labour and productivity indicates that the informal sector contributes about 60 per cent of the nation’s Gross Domestic Product (GDP) (USAID, 1995).Like many other developing countries, the sector is considered crucial to job creation as it accounts for about 90 per cent of job in the country. (Nigeria). Despite these contributions, the Nigerian informal sector is faced with a number of challenges which include lack of access to credit facilities, multiple taxation and levies. It is important to also note that the sector is often not recognized and protected under existing legal and regulatory framework of government and are characterized by high degree of vulnerability and poverty (Anyanwu 2004).
        Nigerian government at various levels has adopted policies aimed at enhancing the performance of the informal sector. An example of these policies are those policies that have been designed to promote small and medium scale enterprises and they are entrepreneurship development policy, international financial assistance, monetary policy through micro-finance banks amongst others.
 It has been recognized that credit is an essential tool for promoting small and micro enterprises (SMES). About 70 per cent of the populations are engage in the informal sector or in agricultural production. The federal and state governments have recognized that for suitable growth and development, the financial empowerment of the rural areas is vital being the repository of the predominantly poor in the society and in particular the small and micro enterprises (SMES). If this growth strategy is adopted and the later entrepreneurial capacities of this large segment of the people is sufficiently stimulated and sustained, then positive multiplier will be felt throughout the economy. There is a significant difference in the number of entrepreneurs who used micro-finance institution or banks and those that do use them and there is also no significant difference effect of microfinance banks or institution activities in predicting entrepreneurial development (ICEAFAA, November 2009).
     Besides, the empirical evidences emerging from various studies about the effects of microfinance banks on the informal sector of the Nigerian economy have so far yielded mixed result that are inconclusive and contradicting. So the question of whether microfinance banks improves or worsen entrepreneurial development is still of worthy of further research such as the one being undertaken in this study. The impact of microfinance banks on the informal sector of Nigerian economy has not received adequate research attention in Nigeria.
     Microfinance banks play one of the major roles in the development of the formal sector of Nigerian economy and the world at large. This is why CBN adopted it as the main source of financing for the informal sector of the Nigerian economy. This happened due to the inability of the commercial banks to provide financial service to most informal sector in the economy.
         Microfinance banks have been seen as a viable toll for fighting poverty. Despite this, finance is still considered as one of the major hindrance to the development of Nigerian informal sector (Ubom 2003). This is due to the unwillingness of the formal financial institution to provide financial service to the informal sector of the Nigerian economy. The financial services provided by microfinance banks in Nigeria include saving, credit and insurance facilities. These services are targeted at reducing poverty and encouraging improved performance in the informal sector.
STATEMENT OF RESEARCH PROBLEM
Robust economic growth cannot be achieved without putting in place well-focused programmes to reduce poverty through empowering the people by increasing their access to credit and finance. The latent capacity of the poor for entrepreneurship would be significantly enhance through the provision of microfinance services to enable them engage in economic activities and be more self-reliant: increase employment opportunities enhance household income and Create Wealth.
Microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions known as the formal sector. Due to some limiting factors, the share of informal microfinance in total financial activities in Nigeria is still below the desired level needed to propel the development of the informal sector. This has brought the level of economic activities, particularly employment below the anticipated.
Despite the huge size of the informal sector of the Nigerian economy, it has not received any appreciable support from the formal financial system of the economy. In a bid to stem this apparent dislocation and unemployment caused by the lack of access to finance by the informal sector, the idea of microfinance institution was mooted. These institutions were tasked with the primary responsibility of providing or meeting the financial needs of the informal sector comprised mainly of individuals. These include; micro-entrepreneurs and small businesses that lack access to formal banking services due to high transaction costs associated with serving poor clients.
In specific terms, this research work seeks to provide answers to the following questions:
How well has the microfinance institutions performed in meeting the financial challenges of the informal sector of the Nigerian economy?
Is there any relationship between microfinance banks and the informal sector of the economy (Nigerian economy)?
Has microfinance banks increased productivity in the informal sector of the Nigerian economy.
OBJECTIVES OF THE STUDY
The aim of this study is to examine the important role played by microfinance banks in the development of the informal sector of the Nigerian economy.
The research work also seeks to consider the contributions of microfinance banks towards the development of the Nigerian informal sector and these contributions shall be given special attention in this research work.
 The specific objectives of this study are as follows:
To determine and evaluate the contributions of microfinance banks towards the developments of the informal sector of the Nigerian economy.
To evaluate the performance of microfinance banks and the informal sector of the economy (Nigerian).
To determine the impact that microfinance banks had on the financial frontier i.e. in integrating the informal sector into the mainstream of the national development.
Make policy recommendations on the potential impact of microfinance banks on the exploitation of economic development and opportunities in the informal sectors.
RESEARCH HYPOTHESIS
In order to achieve the objectives of this study, the following hypothesis are to be tested in null form.
Ho1:    There is no significant relationship between microfinance bank and the performance of the informal sector.
Ho2:    Microfinance credit (loans) has no significant impact on the informal sector’s output.
SCOPE OF THE STUDY
The study basically seeks to examine the effect of microfinance banks on the performance of the informal sector and the relationship therewith. The study uses annual time series data covering the period 1992 – 2011.
SIGNIFICANCE OF THE STUDY
Although, a lot of studies have been done on the role of microfinance banks to economic development, not much has been done with respect to the informal sector’s output. The significance of this study can therefore not be over-emphasized.
First, the study will be of immense value to policy makers on the assumed relationship between microfinance banks and the informal sector, such an understanding will provide them with reliable intuitions and directions for financial system designs especially concerning the establishment, regulation and supervision of microfinance banks. Secondly, in order for governments to formulate informal sector growth enhancing policies, expert knowledge of the workings and impact of microfinance banks is of great importance. Thirdly, it will constitute viable reference material to researchers and students who may want to embark on further study in the subject area.