The role of Financial Institutions on the Development of Rural Areas: Case of Mbiame Cooperative Credit Union Ltd

Project Details

Department
Economics
Project ID
EC007
Price
5000XAF
International: $20
No of pages
47
Instruments/method
Quantitative method
Reference
Yes
Analytical tool
Regression Analysis
Format
 MS word & PDF
Chapters
1-5

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OR

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background to the study

A major development issue facing many developing countries has been the need to reduce the scale and depth of poverty among the growing population. Chandy and Gerts (2011) estimate that there were about 878.2 million people living below the poverty line in the year 2010. Of this number over 700 million live in rural areas. African has a 369.9 million population or proportion of poor people the elimination and reduction of poverty is a key concern of development thinkers and practitioner (Coyle, 2007; Ifrpi, 2008).

The beginning of the 1970s saw attention general towards improving the wellbeing of the rural poor who formed the majority of the population in developing countries, many governments and international and local agencies shifted their attention and channelled their resources towards the development of the rural area.

This idea was motivated by the intention of reducing the levels of unemployment, increasing access to public goods and services by the development of rural population and more particularly, lowering poverty and overcoming income inequalities in most developing and least-developed countries according to brad show (2006), the explanation of poverty may be structural, personal, social or economic according to (Burgess &Pande, 2002).

In the fight against poverty, it is believed that the introduction of banks in rural areas enhances the livelihood of the rural dwellers. It is assumed that intervention will change human behaviours and practices in a way that will lead to the achievement of the desired outcome.

According to Van Santen (2010), financial services for the poor have also been proven to be a powerful instrument for reducing poverty, enabling poor people to build assets and increase incomes, and reducing vulnerability to economic stress and shocks.

Microfinance is not a new concept. It dates back to the 19th century when money lenders were formally performing the role of now financial institutions. Generally, a large segment of the world’s population is still underprivileged as such; this fosters a great demand for the services of micro-financial institutions for rural development. These institutions extend loans to applicants who typically belong to the lowest group of people in society.

There have been government policies on the role of microfinance in the rural development process for more than four decades. In the 1960s and 1970s, the policies focused on the provision of agricultural technologies aimed at improving farmers’ incomes and feed the nations. Later the focus broadened to include credit provision to the rural population engaged in other enterprises.

Presently, the international development agenda is dominated by the millennium goals with poverty eradication heading the list of goals and with microfinance strongly linked to these goals. In the highly globalized present-day world, microfinance is undoubtedly an essential tool in facing poverty in the 3rd world countries by which inequality between the developed and the underdeveloped world could be reduced.

Since independence, the government of Cameroon has embarked on several attempts aimed at promoting agricultural development in the country, especially in rural areas. In 1961, she brought forth the policy of the “Green revolution”, which was aimed at encouraging the development of agriculture (Simarski 1992).

Other efforts included the setting up of agencies like the National Fund for Rural Development (FONADER) and other rural agricultural extension programs. Despite all these attempts, much is still needed to boost this sector, particularly in rural areas, since it is very vital in the economic life of the state.

A recent development in this sector has been the increasing involvement of NGOs and microfinance institutions in the process of enhancing the development of small and medium-sized enterprises particularly at the rural level.

The question now is why microfinance at this point in time? The notion of credit unions was brought to the country by Rev Father Anthony Jansen and this was as a result of complaints that were coming up from the farmers and inhabitants in the locality in which he was living.

Among the difficulties faced by these people, was the fact that most of them save their money by hiding it in some parts of the house in which case ants and rats often eat them up. Besides, some farmers sold their crops before harvest due to a lack of storage facilities.

It was then that the first credit union was formed so that farmers could have a bit of financial power to afford better seedlings (www.camccul.org). How then are these microfinance institutions of significance to the sustainable development of the country particularly rural areas?

Even though the government promotes rural development, it is still important to know how micro-financial institutions influence development in rural areas. This work will be concerned with the role which the Mbiame Cooperative Credit Union Ltd (MBIACCUL) plays in the rural development of Mbiame.

1.2 Statement of the Problem

Micro Finance Institutions could be a powerful strategy or instrument among several others, for Development in general and Rural Development in particular in developing countries. Although many developing countries, such as African have scored relative successes in using microfinance institutions as an instrument for development in general, and rural development in particular, it has not been so for many other developing countries.

Most of the micro-finance programs operated in these countries have left the so-called beneficiaries in debts. In a similar vein, a most organization involved in providing micro-finance service, including government institution, co-operatives and Nongovernmental Organizations (NGOs) have in most cases performed very poorly.

High rates of non-repayment of loans by clients have on several occasions led to the collapse of micro-finance institutions. Notwithstanding this, micro-finance has continued to gain popularity among rural developers as a visible tool for improving rural agricultural practice and the diversification of economic activities of smallholder farming householders.

Lack of adequate loan funds, inadequate institutional capacities, poor coordination, little or no participation of the beneficiaries in the planning of micro-finances programs, lack of effective training programs for both beneficiaries and operators of the programs are some of the reasons behind the ineffectiveness of micro-finance as a strategy for Rural Development in developing countries.

It is just recent that MFIs gained recognition thanks to the noble price winner Yunus Mohammed (2003) of the Grameen bank. According to him, MFIs are financial intermediaries which are aimed at providing services such as accepting deposit savings, microcredit facilities, money transfer and other businesses.

It is generally known that the poor cannot borrow from banks because they do not have what is required to be granted a loan. The lack of financial power is a contributing factor to most societal problems. MFIs target the poor who are considered risky but their repayment rate tends to be positive as compared to regular commercial banks (Zellar and Sharma,1998). These services will go a long way to raise income levels and standards of living for rural people.

Besides the development of these institutions has gone away with the various transactions taking place in society that are related to the development of the world economy as a whole. Thus in most developing countries such as Cameroon, the development of MFIs have had a significant impact on the development of the rural economy. 

However, the problem here is that there is no clear distinction of the extent to which MFIs help rural development. Therefore, studies relating to the impact of micro-financial institutions on rural development would explain and indicate in quantitative terms the impact of loans on the growth of the GDP in rural areas.

1.3 Research questions

In order to enable us to determine the impact of MFIs in the development of rural areas, the following research questions are formulated:

  • What are the types of loans offered by MBIACCUL?
  • What are the effects of the various types of loans offered by MBIACCUL on the growth of agriculture, small and medium-sized enterprises, education, employment in Mbiame?

1.4 Objectives of the study

The main objective of this study is to examine the contributions of MFIs to the development of rural areas with the case study of Mbiame Cooperative Credit Union Ltd (MBIACCUL). The specific objectives include:

  • To identify the types of loans offered by MBIACCUL.
  • To examine the effects of the various loan types on agriculture, small and medium-sized businesses, employment and education.
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