Financial Sector Development and Household Welfare: Micro Level Evidence from Nigeria

Abstract

Nigeria's development efforts since independence have accentuated poverty and inequality reduction through economic growth, employment creation, and financial sector development. Although the basic commitment to tackling poverty remains high, these efforts have not always yielded expected results. About 40% of Nigerians remain mired in poverty, with women and rural households most affected. One poverty alleviation intervention that has received significant interest in the research and policy space is access to finance, as not having access to basic financial services is considered as one of the biggest barriers to poverty and inequality alleviation, as well as other measures of economic prosperity. Although prolific literature has developed on the role of finance for poverty alleviation, controversies continue to plague the literature on the microeconomic links between access to finance and a range of measures of economic prosperity. In addition, a number of policy-relevant issues have remained significantly under-researched. For instance, although the literature conclusively suggests that access to finance has positive implications for poverty alleviation in developing countries, less conclusive evidence is available on the role of access to finance on inter-household inequality and occupational choices. Furthermore, due to data limitations, little policy-relevant knowledge has accumulated in specific contexts, such as that of Nigeria. Till date, no rigorous analysis has explored the role of financial sector development on inequality and entrepreneurship, despite the importance of its linkages for both sustainable growth and social stability in Nigeria. To address the academic and policy gap in the literature this thesis consists of three independent but closely linked studies investigating the implication of access to formal finance for household welfare in Nigeria using the GHS-Panel sub-section of the Nigeria’s Living Standard Measurement Study (LSMS) surveys for 2010-2011 and 2012-2013. The first study examines the effects of access to formal finance on welfare and inter-household inequality, measured by the disparity in per capita household expenditures. We employ a treatment effects model to decompose the links between access to finance, proxied by owning an account with a formal financial institution, and household per capita expenditures. Thereafter, the study uses an innovative decomposition methodology, based on the treatment effects model, to explore the distributional effect of access to finance on households’ per capita expenditures in Nigeria. The methodology allows for the computation of the relative contribution of different explanatory variables to the inter-household disparity in living standards. While there is a prolific research on the effect of access to finance on poverty, the implications for inequality at the micro level remain under-studied. Our results indicate that although access to formal finance improves household welfare, it tends to increase inter-household inequalities, despite ameliorating the inequality-enhancing effect of urban versus rural residence and enhancing the inequality ameliorating the effect of greater educational attainment. We also find that the contribution of access to formal finance on inter-household inequality is substantially smaller than the effect of unobserved household characteristics, suggesting that welfare and inequality-enhancing strategies in Nigeria should be holistic, as opposed to addressing one policy variable at a time. For years, the conventional paradigm in poverty analysis ignored the dynamic nature of household welfare. This conventional paradigm assumes that household poverty is static, thereby overlooking the fact that households inevitably move in and out of poverty over time. In a departure from the conventional welfare analysis paradigm, this second paper builds on the first paper and explores the role of access to formal finance in house

Date of Award	31 Dec 2017
Original language	English
Awarding Institution	The University of Manchester
Supervisor	David Lawson (Supervisor) & Ralitza Dimova (Supervisor)