Microfinance has taken a center stage in the banking industry with spontaneous growth over the last few decades. The need for financial inclusion as well as alleviating poverty in our communities has been a driving force in the adaption of microfinance services by commercial banks. This research aims at illuminating the microfinance services offered by commercial banks and the subsequent impact on the targeted population i.e. the unbanked population. Therefore, the study aims to examine and answer the research questions that seek investigate the impact of microfinance services offered by commercial banks have in alleviating poverty as well as promoting financial and social inclusion. Three UK commercial banks have been involved in the research study namely HSBC, Barclays Bank, and Lloyds Bank. The data collected was used to establish the relationship between dependent variable (poverty) and the independent variable (savings and GDP-financial inclusion and education and health status improvement-social inclusion). The data was analysed using the IBM SPSS statistics software (IBM SPSS 20.0). Regression analysis confirms a positive relationship between the dependent variable (poverty alleviation) and the independent variables studied. The coefficient of determination confirms that both financial and social inclusion contributes to 92.05 percent poverty alleviation. Microfinance services by the commercial banks are therefore crucial in alleviating poverty. The study recommends that further support by the financial institutions through promoting social inclusion and financial deepening will help the entire community in alleviating poverty.
Keywords:
Microfinance, UK Banks, Poverty, Financial inclusion, Health and Education, GDP and Savings.
Chapter One
Introduction
Background
The microfinance sector is experiencing a higher growth than ever before. The savings and cooperative banks have been the core traditional providers of microcredit in Europe including the United Kingdom (UK) (European Commission, 2003). Currently, different institutions with various goals, means, structure, and approach have dived into the microfinance service offerings thus increasing the uptake of the microfinance services. Additionally, different institutions have been offering microfinance services thus enhancing financial deepening (Guichandut and Underwood, 2007). Some of these institutions include banks, cooperative unions, religious institutions, government bodies, NGOs, savings banks among others. The diversity of these institutions can be credited to a variety of friendly regulatory frameworks experienced in this sector (Underwood, 2006).
The microfinance segments of these institutions have little attention to profitability and instead focus on the huge social impact on the society (Evers and Jung, 2007). The main goals of the microfinance services have been to provide financial inclusion to the people at the risk of poverty, to facilitate job creation, to promote the development of the microenterprises and the SMEs.
Evolution of Microfinance in the UK
The microfinance sector in the UK is relatively new. According to the survey conducted by European Microfinance Network (EMN), up to two-thirds of the institutions offering microfinance services entered the market after 2000 (Bendig et al, 2012). The survey, however, notes that the sector has experienced huge growth over the last two decades. According to Guichandut and Underwood (2007), microfinance services have particularly focused on individuals, unemployed persons who have been financially excluded. The data corrected by the 2010-11 EMN survey, however, indicate that women are still underrepresented receiving only 38 percent of the total loans disbursed.
In the 1990s, individuals both employed and unemployed faced numerous obstacles in accessing financing for their microenterprises. For example, 15 per cent of all employed persons seeking financial services in the UK banks faced difficulties (Bevan et al, 1989). Barclays Bank (1997) survey also contends with the argument adding that 14% of the entrepreneurs termed the lack of the finance as the major setback for their business growth. Therefore, the need for financial inclusion as well as eliminating poverty has pushed for the growth of microfinance segment by commercial banks. Some of the contributing factors that banks aimed at resolving with the microfinance segment include the following:
i. Lack of experience by the customers
ii. Little or no savings
Microfinance Services and Poverty Eradication
Poverty eradication is the main purpose of why MFIs are set up and they facilitate this objective through financial deepening. This can be understood as the increment in the coverage of the financial services both on the credit and saving side. Most of the MFIs have managed to achieve their objective by being successful in reducing poverty. They have ensured that their services are sustainable and available to all households.
There are studies indicating that microfinance institutions have been able to alleviate poverty noting that its prevalence has been the exacting significant impact on education, savings, health status and the real GDP (Yunus and Weber, 2009; Khavul, 2010). It has been possible to have the above factors affected because the provision of microfinance services is deemed to strengthen various crises coping mechanism and it has diversified the income earning sources. Therefore it has become possible to have assets built and the status of women improved.
There is a positive relationship between micro-financing and education, employment health status and the real GDP thus contributing to the alleviation of poverty to the affected communities (Littlefield, Morduch, and Hashemi, 2003). The above-mentioned factors are deemed as the main ones used to measure the financial prospectus of various individuals. Acquiring better education, improvement of health facilities and increased GDP of a certain region is an indication that the level of poverty of the area under observation is low and most of the people are not only above the poverty line but financially stable. Therefore, there has been notable growth in health microinsurance issuance as well as education microloans to the rural poor communities seeking to improve their education and health status. The role of the banks to provide microloans to the country’s SMEs has contributed to monumental growth in the economy. In 2016, SMEs contributed to 47% of revenue in the UK economy (Esrc.ukri.org, 2016).
Objective and Problem Statement
Most of the poor have difficulties accessing financial services that can help them in borrowing, saving and even investing. The role of UK banks in offering microfinance services to the unbanked population will help them in becoming self-dependent and hence, end poverty. Therefore, the objective of this dissertation has been to research and identify the roles and impact of microfinance in the UK banks.
Research Questions
Are commercial banks successful in poverty reduction when offering microfinance services?
Are UK banks becoming more efficient in increasing financial inclusion?
Hypothesis
H0 : There is no relationship between poverty and the research variables.
Ha: There is a relationship between poverty and the research variables with banking micro-financing [Ha ± pq ‰ 0].
Where p,q =poverty, GDP, health status improvement, and savings are such that pq ‰ 0.
The research variables affecting poverty (dependent variable) are: education and health status improvement (social inclusion) and GDP and savings (financial inclusion).
The Significance of the Study
The study has significant implications for commercial banks to capitalize on the microfinance services to the financially excluded population. Aside from profiteering, commercial banks are obligated to enhance the livelihood of the community where it operates in. Further, the findings of the study will help the industry players including the government in increasing financial inclusion to the public as well as alleviate poverty in the community.
Additionally, promoting employment, fighting poverty, financial and social inclusion as well as creating jobs stand as primary goals for microfinance services offered by banks. This research study aims to demonstrate the bank’s role in achieving these primary goals.
Chapter Two
Literature Review
Definition
Ndikumagenge (2014) defined microfinance as an approach to economic development which helps in the provision of financial services via various institutions to the low-income clients. The main agenda of setting up the microfinance institutions is to enhance the provision of certain services to the poor people such as savings, insurance and the credit services (Ndikumagenge, 2014). This chapter provides an in-depth analysis of the previous literature and studies by other researchers on the impacts the microfinance services have had on the target population.
Products and Services Provided by the Microfinance Institutions
Most of the MFIs are started with the aim of alleviating poverty in people’s minds because they provide more than just financial services. The main services that they provide include (Helms, 2007);
Financial intermediation
Enterprise development services
Social services
Microfinance Services in the UK
Microfinance service provision has been developing in the UK in the early 1970s. Most of the institutions which have been developed aimed at helping a certain group of people who are identified via their personal characteristics example being young people, women, and ethnic minorities. There are other schemes which have been developing which focus on specific geographical areas including the inner cities which have been deprived or those rural communities who have been isolated as substantiated by Sulimierska and Miele (2017).
Ayayi and Sene (2010) cited that for the last decade, microfinance has been the world’s high profiled development intervention which is generously funded. Microfinance institutions are formed by the small loans can unlock various endless opportunities for most of the people in the world who are poor. In spite of all this development, there has been no any regulatory framework for these institutions in the UK.
Services Rendered by Microfinance Institutions in The UK
The enterprises in the UK which provide microlending services carry out some services which include; provision of finance which is mainly meant to help individual set up or expand businesses. There are another several services which they offer and cannot be ignored, and they are outlined in this section with the sole reason of alleviating poverty and promoting financial inclusivity (Yunus and Weber, 2009):
a) Provisions of business finance to groups which have been excluded;
b) Providing flexible loans which are of low-cost;
c) Offering encouragement and support.
Commercial Banks and Microfinance
There are recent reports which indicate that there is a vast potential for the low-income customers who are looking for retail financing services and this is leading to most of the commercial banks penetrating into the opportunity. Therefore, most of the banks and other financial institutions have been entering the microfinance market at a very high rate in the last decade. There are various factors which have been promoting these institutions to introduce the microloans which are all related to the internal organization of the institution and also the market into which its operation takes place. In spite of all this, the major incentives are mostly related to the fact that risks that are to be beard are in line with the profits earned as substantiated by Allen, Otchere and Setbet (2011).
The main drivers of these banks into the microfinance services include both external and internal services. The internal factors mostly include profit, excess liquidity, risk diversification, image, bank leadership, public relations, the compatibility with the strategy formulated by the bank, and the opportunities that exist in the cross-selling. The external factors include; competition, trend, regulations, the market pressure inserted on margins and the dissertation of the traditional clients as substantiated by Ndikumagenge (2014).
Organizational Background of the Institutions under the Study
Barclay’s PLC
Barclays PLC comprise financial and a banking services provider firm with their headquarters in London. Barclays PLC is considered as the largest banking, and financial services provider ranked number 10, and one of the largest company in the world ranked number 21. Barclays PLC is a financial institution which also has microfinance initiative. The main aim of this department is to enhance the access of loan product and basic saving. They have initiative not only in the UK but also in other countries where their branches are based in (Home.barclays, 2018b).
HSBC
HSBC Holdings is a financial and banking service global provider with its headquarters in Canary Wharf, London. HSBC Holdings is considered as the second largest provider of both financial and banking services, and it is the second-largest public company. The bank was founded in London on the year 1991with its background in Hong Kong and Shanghai (Web.archive.org, 2018).
HSBC has formulated a business model with the aim of providing financial services on the doorsteps of the poor. They believe that the tiny loans they offer to these individuals can bring a great difference especially when capacity building and financial literacy is incorporated (HSBC.com, 2018).
Lloyds Banking Group
Lloyds Banking Group is one of the leading financial providers based in the UK. This institution provides a wide range of banking and other financial services primarily in the UK to both corporate and personal customers. After being formed in 2009, the institution has majored in activities such as commercial, retail and corporate banking, pension and investment provision, general and life assurance (Sulimierska and Miele, 2017).
Gross lending by MFIs to SMEs in the United Kingdom
Lloyds Banking Group has an SME charter which was mainly formulated to offer the microfinance services (Lloydsbankinggroup.com, 2018a). The main aim of the charter is to support most of the small business which are in the deprived areas. This mainly is to enable them in tackling the problems associated with economic recovery and unemployment. The commitment by the bank helps it tap into the large population of the unbanked. Lloyds Banking Group commitment to providing retail services to the customers has made it the largest retail bank in the UK. These services are essential to ensuring the majority of the residents take advantage of banking services to uplift themselves economically.
According to the Community Development Finance Association, there was an increase in lending by microfinance lenders from £113 million to £200 million in 2009 (Moules, 2018). The growth of the microfinance sector reflects the subsequent growth of country’s GDP as well as increased financial inclusion thus reducing poverty. This shows the increased demand for microfinance services from the unbanked population as well as the small business owners’ unable to access services from the mainstream financial providers. More recently, the figure increased considerably with the increasing demand for microloans from the microfinance providers. The highest reported thus far has been £ 5.8 billion reported in March 2017 (Statista, 2018). The figure below indicates the micro-lending report from 2015 to 2017 to the SMEs by banks in the UK.
Figure 1: A Graph Showing Gross lending by MFIs to SMEs in the UK
(from November 2015 to October 2017 (million £)
Source: www.statista.com/statistics
An Analysis of Microfinance Services as a Tool Used to Reduce Poverty
Sarma and Pais (2011) argue that there are various opinions conflicting and several other studies which have analysed the degree level to which the microfinance institutions reduce poverty to the user. There are their studies which show that microfinance services do not reduce poverty. The results of these studies indicate that most the borrowers in these microfinance with starting income below the poverty line, resulted with less incremental income after accessing those loans as compared to people who did not access the loans. They argue that microfinance services are not the main factors considered to determine the success of these institutions in enhancing the well being of the households. Thus, it is clear that the microfinance services from the banks cannot alleviate households from poverty. Instead, there is the need for them to be combined with complementary factors which are more innovative as substantiated by Sarma and Pais (2011).
Researchers argue that the borrowers who have the advantage of using these services are those who have certain business skills, education and other entrepreneurship abilities. These are the borrowers who have the likelihood to succeed and rise above the poverty line. There, loans should be geared towards the small enterprises and mostly those that are in the informal sector instead of having them directed to the people without assets or entrepreneurship abilities. Recommendations are that for the microfinance services to be effective in poverty reduction, and then public policies must focus on programs which have broad growth avenues and which have the intention of increasing the levels of employment and the overall productivity.
Development of a Conceptual Framework
To measure the level unto which poverty has been eradicated, the factors that will be considered is the microfinance in education, savings, health status and the real GDP. Therefore poverty becomes the dependent variable against education, health status, real GDP and savings which are the independent variable.
Research Gaps
Previous researchers have not put much emphasis on the role of commercial banks in the micro-finance services. There is much that needs to be done to understand the role played by commercial banks in providing microfinance services. Commercial banks will shape the next frontier of microfinance service offering, a subject that requires further research interest.
Conclusion
According to the literature reviewed, microfinance services play a vital role in incorporating the unbanked population into the financial system. With correct reinforcement and government support, poverty can be eliminated with the provision of microfinance services from various organizations. The next chapter describes the methodology used by the researcher with the aim of answering the research questions.
Chapter Three
Methodology
Introduction
The chapter has set out a description of the research methodology. The chapter illustrates the methods followed in establishing the roles of commercial banks in providing microfinance services and their impacts in the reduction of poverty, improving social and financial inclusion, as well as creating jobs and promoting employment (Bryman and Bell, 2011).
Research Design
The research study adopted both qualitative and explanatory quantitative methods to investigate the possible impact of banking microfinance services to the reduction of poverty in the unbanked community. A conceptual framework has been developed that depicts the relationship between the dependent and the independent variables (Saunders, Lewis and Thornhill, 2012). The conceptual framework is displayed below:
Poverty: - dependent variable
Microfinance services in education and Health improvement (Social Inclusion) and savings and increase in GDP (Financial inclusion) - independent variable.
P= f (e,h,s,g)
Where,
e=education
h=health status improvement
s=savings
g=GDP
According to Bryman and Bell (2015), using a logical examination outline will attempt to examine gathered information from a given population with the intention of providing the current status for one or more variables in the study research. Therefore, this research set up a connection and a causal relationship between poverty and financial as well as social inclusion aspects that have been made available through microfinance services by commercial banks.
Research Study Population
There are numerous commercial banks in the UK that provide microfinance services to the community. The research study narrows down to three commercial banks for this research. These include HSBC, Barclays PLC, and Lloyds Bank.
Validity and Reliability
According to Golafshani (2003), validity gives the research study accuracy and significance of inferences which can be based on the research results. Therefore, true replication of the data variables brings concise and meaningful research conclusions. The secondary source of data was obtained from the banks’ websites where further examination of the financial statements was conducted (Home.barclays, 2018a, HSBC.com, 2018, Lloydsbankinggroup.com, 2018). Further comparison was conducted with the regulator's data to ascertain the validity of the data (Bankofengland.co.uk, 2018b). The three banks were selected from a pool of banks offering microfinance services in the UK as provided by the Bank of England (MFI List, 2018)
Data
In the study, a ten-year secondary data (2006 to 2015) drawn was used. The poverty level and its variability over the ten years were examined to elaborate or illustrate the change of the citizen’s wellness. Other factors which indicate the changes in the wellness of the citizens and which were examined in the study included the GDP, health status improvement and the changes seen in the savings for the ten years. The examined variability for the ten years was the social and financial inclusion.
Data Analysis and Presentation
The data was collected and analysed by the use of descriptive statistics. The research instruments used include the ordinary least squares multiple regression analysis and the Granger causality test. The sample size of the three banks made it easier for analysis of the various variables selected in view of micro-financing services provided by Commercial banks. The analysis was conducted using the IBM SPSS statistics software (SPSS 20.0). To answer the research questions, a multiple regression analysis was used where independent variable was regressed against the dependent variables in order to establish the relationship between the variables. Therefore, the regression model is presented as follows:
P= f (e,h,s,g)
P= C + B1 e + B2
H + B3 S + Bg
Where,
C=constant
B-B3 = Regression coefficients
e=education
h=health status improvement
s=savings
g=GDP
Choice of Variables
The above variables have been selected because they form the central purpose if the role of microfinance services. According to Littlefield, Morduch, and Hashemi (2003), the poor and unbanked population access microfinance services from various providers effectively improving health, education status, and their financial status. The financial empowerment created by the banks through microfinance services, in turn, results in improved savings and investments that consequently lead to the growth of the GDP. Harnessing the microfinance services offered by the back creates an effect on the economy that generally alleviates the poor from poverty.
Ethical Considerations
Findings and interpretation of this research were presented in a manner that it will depict honesty and will be objective. This will be to avoid any untrue deceptive or even doctored results. Any of the respondents involved in the study or any information presented was not disclosed to anyone. The information was used as per the intent of this study where the statistical procedures were applied without any bias.
Constraints
Despite that the impact of this study was underpinning, there were several constraints that the researcher went through. Some of these problems were problems with accessing data, and unfavourable respondents. These happened to be the main problems noting that to come to a credible and upheld conclusion, data used must be reliable. Other challenges included the access to financing noting that resources used were a bit expensive.
Conclusion
In the chapter above, the research mainly revisited on the traditional arguments on the trade-offs between some of the banks in offering microfinance services and reaching people mostly those who are poor. The main contribution that the chapter has to the discourse is empirical which from several procedures including sampling, estimation and indicator measurement.
Chapter Four
Findings and Discussion
Analysis Background
This chapter presents the study findings and the discussions of the results with reference to our objectives and research questions. The chapter presents the analyzed data sourced from the three banks that form the research scope and population.
Quantitative Statistics
The below section involves the quantitative descriptive analysis of the selected firms. The study sought to establish the influence of the microfinance services role by the commercial banks used in the study. The alleviation of poverty is the main objective of the study. Variation in the poverty levels by the study independent variables will signify the role of commercial banks in offering microfinance services. The study variables are analyzed below:
Table 1: Descriptive Statistics
Table 1 presents the results of the descriptive statistics across variables. The variables were obtained from the three banks selected as explained earlier. Three banks were investigated thus the observations (n) are three (n=3). The variables are tabulated as indicated in below:
Mean
Median
Maximum
Minimum
Std. Deviation
Obs. (n)
P(Poverty)
82.75
63.8
131
49.6
32.2
3
e
98.34
98.34
111.1
82.8
9.5
3
h
153.12
160.07
215.5
98.3
44.4
3
s
604.80
564.5
1206.8
160.6
427.6
3
g
-1.056
0
23.1
-33.80
16.5
3
Source: Author’s calculation
Table 2: Correlations Table
Table 2 presents the correlation between the selected variables. These include poverty (p) and savings(s), poverty and GDP (g), Education and GDP (g) and lastly health improvement status (h) and GDP (g).
p
E
H
s
G
P(Poverty)
1
0.669025350
0.409382260
0.030883700
-0.535414160
e
0.669025350
1
0.67371180
0.607326220
-0.162110490
h
0.409382260
0.67371180
1
0.774160
0.261007510
s
0.030883710
0.60732621
0.774163
1
0.173354670
g
-0.53541
-0.16211
0.261008
0.173360
1
Source: Author’s calculation
Table 3: Regression Table
Table 3 will generate the equation that will provide the statistical relationship between all the predictor variables which have been used and the responses. Further, a model summary is presented indicating both R-squared and adjusted R-squared as well as the Durbin-Watson statistic that are necessary in the interpretation of the findings.
Dependent variable: log poverty
Method: least squares
Table 3a: Regression log
C
Le
Lh
Ls
Lg
Variable Coefficient
-151.13
1.800471
0.621705
-0.065215
-1.019242
Standard error
41.88386
0.526959
0.136172
0.012087
0.228874
t-statistics
-3.608312
3.416721
4.565588
-5.395264
-4.453297
Probability (elasticity)
0.0226
0.0269
0.0103
0.0057
0.0112
Source: Author’s calculation
Table 3b: Model summary
R-squared
Adjusted R-squared
S-E of regression
Durbin-Watson statistic
0.960243
0.920485
9.086818
1.9545621
Source: Author’s calculation
Tables 3(a and b) presents the regression analysis of the variables. The tables show that the coefficient of savings (elasticity) and the GDP have correct (negative) theoretical signs. The other variables have positive signs. Therefore, educations, health status improvement, savings, GDP have statistically significant coefficients. The coefficient of determination (R2) is high suggesting a multi-colinearity problem. The Durbin-Watson test shows that there is no problem of auto-correlation.
The coefficient of determination (R squared) in the regression model (table 3b) serves to explain the variation (percentage variation) of the dependent variable by the independent variables. R squared (R2) illustrates the degree of change on the dependent variable that can be explained by the changes in the independent variables.
The regression table is the most important aspect of the analysis as it shows us the direct relationship between dependent variable and independent variables. In our analysis, the independent variables used in this study [i.e. savings(s), poverty, GDP (g), Education, health improvement status (h)] indicate a contribution of 92.05% in the variation of poverty (dependent variable) as can be shown by the adjusted R2 of 0.920485 in table 3b above. The contribution of the independent variables used in the study constitutes to variation and alleviation of poverty by 92 per cent. Therefore, the microfinance role by the commercial banks is pivotal in eliminating poverty.
Table 4: Causality Test
Table 4 provides a causality test. The causality test shows that all the cases failed to reject the null hypothesis. Given that the variable p does not affect variable q
significantly.
P,q= poverty, education, GDP, health improvement status, savings such that p ‰ q.
s does not Granger Cause e
0.57800
0.48900
g does not Granger Cause s
0.00420
0.95130
e does not Granger Cause g
2.69950
0.16100
g does not Granger Cause e
1.87550
0.22900
g does not Granger Cause h
1.71200
0.24760
s does not Granger Cause h
2.63730
0.17970
s does not Granger Cause g
0.00050
0.98360
h does not Granger Cause g
0.39710
0.55630
e does not Granger Cause s
1.16040
0.34202
h does not Granger Cause s
0.39190
0.565330
h does not Granger Cause e
0.00990
0.92430
e does not Granger Cause h
0.62860
0.46390
g does not Granger Cause p
0.29330
0.61140
p does not Granger Cause s
3.60490
0.13040
p does not Granger Cause g
2.07521
0.20930
h does not Granger Cause p
0.72722
0.43270
s does not Granger Cause p
1.11491
0.35060
e does not Gran
