An Investigation into the Determinants of Access to Finance in Rural Areas of Katsina State

Master's Thesis, 2011

101 Pages

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Table of Contents





Chapter One: General Introduction
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Hypothesis of the Study
1.5 Significance of the Study
1.6 Scope of the Study
1.7 Limitation of the Study
1.8 Scheme of Chapters

Chapter Two: Literature Review and Theoretical Framework
2.1 Introduction
2.2 Concept of Access to Finance
2.3 Nature of Rural Nigeria
2.4 Finance and Economic Development
2.5 Determinants of Access to Finance in Rural Areas
2.5.1 Socio-economic Factors
2.5.2 The Tyranny of Collateral
2.5.3 Financial Literacy
2.5.4 Transaction Costs
2.5.5 Interest Rate
2.6 Efforts to Improve Rural Access to Finance in Nigeria
2.7 Empirical Literature
2.8 Theoretical Framework
2.8.1 Micro-Credit Delivery Model
2.8.2 Theoretical Model of Matching

Chapter Three: Research Methodology
3.1 Introduction
3.2 Description of the Study Area
3.3 Method of Data Collection
3.4 Sample Size and Sampling Techniques
3.5 Variables Measurement
3.5.1 Dependent Variable
3.5.2 Independent Variables
3.6 Techniques of Data Analysis
3.7 Model Specification
3.8 Expected Outcome

Chapter Four: Data Presentation, Analysis and Discussion
4.1 Introduction
4.2 Descriptive Results
4.3 Inferential Results
4.4 Discussion of Results
4.5 Implication of the Findings

Chapter Five: Summary, Conclusions and Recommendations
5.1 Introduction
5.2 Summary
5.3 Conclusions
5.4 Recommendations
5.5 Suggestions for Further Research





APPENDIX IV: Sample Size Table


This dissertation entitled An Investigation into the Determinants of Access to Finance in Rural Areas of Katsina State, by Saifullahi Sani Ibrahim has been approved for its contribution to knowledge and met the requirements for the award of the Master Degree of Science (Economics) in the Department of Economics of Usmanu Danfodiyo University, Sokoto.


This dissertation is dedicated to rural poor that live in pathetic condition and hoping that the recommendations offered in the study will provide an input toward improving their welfare.


All praises are due to Almighty Allah (SWT) for sparing our life and soul and made it possible for us to undertake this study. May Allah continue to bless Prophet Muhammad (SAW) and those that follow his teaching.

I am indebted to my major supervisor Dr. Haruna M. Aliero who provided a lot of materials and made fundamental observations and constructive criticisms. May Almighty Allah continue to guide him in all his endeavours and also reward his entire family with Aljannah Firdausi. I am equally indebted to my co-supervisor-I Dr. Mika’ilu Abubakar who patiently took his time to make vital observation and made useful suggestions that enriched the quality of this study. I similarly owe a lot of thanks to my co-supervisors-II Prof Sabir M. A. Bayero for the assistance, guidance and co-operation he rendered to me in the course of this study. I pray to Allah to give them abundant reward.

It is a pleasure to acknowledge Dr I. H. Aliero who made his materials available to me on demand and also in spite of his tight scheduled took time to review the questionnaire used in this study and rendered valuable suggestion and constructive criticisms that contributed immensely toward improving of the quality of this dissertation. I also acknowledge Dr. T. Garba for making his Doctorial questionnaire available to me. No word of gratitude is sufficient to appreciate the encouragement I have been receiving from time to time from the PG coordinator of this historic department in person of Dr. Y. Zakari. Moreover, the H.O.D. Dr. Sanda deserved to be commended for not only setting a work plan but also strictly adhered to it which really served as motivator to all postgraduate students. More grease to his elbows for transforming the department. I similarly express my sincere gratitude for the advices and encouragement I have been receiving from the noble lecturers of this great department; worthy mention are Dr. A. A. Sokoto, Dr. H. U. Malami, Dr. Nasir Gatawa, Dr, Yusuf Dantama and last but not the least Prof. C. U. Aliyu.

The untiring moral and financial support I got from my parent would always be remembered. May Almighty Allah reward them beyond their expectations. I am equally grateful to my wife and my children for their support and patience they showed throughout my study period. Financial assistance and encouragement of my elder brother, Ahmed Sani Matazu is also highly commendable. I am also indebted to the duo of my younger brothers; Umar Sani and Abubakar Sani for taking care of my business while I am away. May Allah bless them abundantly.

I take this opportunity to thank the entire lecturers of Economics Department of Isa Kaita College of Education, Dutsin-ma for their invaluable suggestions and inspiring support. Similar appreciation goes to Mal. Dikko Suleiman; the provost of IKCOE, Dutsin-ma for taking the pain and criticism to approve my study leave. This acknowledgement will not be complete without mentioning the names of the research assistants that helped me in administering the questionnaire to the selected rural areas. They are Aliyu Ahmed Tsagem, Sama’ila Lawal Batagarawa and Murtala Musa Kurfi. Similarly, Mallam Sani Aliyu would never be forgotten for the tripartite role he played between department and PG school in the one hand and I and the department on the other hand. I pray Almighty Allah to bless his entire family. All errors either by commission or by omission in this research remained mine.

List of Tables

Table 4.1: Age of the Respondents

Table 4.2: Sex of the Respondents

Table 4.3: Marital Status of the Respondents

Table 4.4: Educational Qualification of Respondents

Table 4.5: Respondents’ Occupation

Table 4.6: Sources of Income of the Respondents

Table 4.7: Income Category of the Respondents

Table 4.8: Respondents’ Access to Finance

Table 4.9: Respondents’ Access to Finance by Demographic Factors

Table 4.10: Banking Characteristics of the Respondents

Table 4.11: Awareness of Bank Advancing Credit

Table 4.12: Respondents Loan’ Application

Table 4.13: Source of Credit Apart from Bank

Table 4.14: Distances from Banks to Respondents’ House

Table 4.15: Respondents’ Responses on Interest Rate

Table 4.16: Respondents’ Response on Transaction Cost

Table 4.17: Respondents’ Collateral Possession

Table 4.18: Financial Advice

Table 4.19: Summary of Probit Results


Access to finance is widely acknowledged as a catalyst for the reduction of poverty in rural areas. Along this line, this study investigates the determinants of access to finance in rural areas in Katsina state. A cross-sectional primary data was collected via questionnaire from a sample of 384 respondents. This study used probit modelling approach to analyse the factors that influence access to finance. The study revealed that collateral, financial literacy and gender have significant positive influence on access to finance, while age has an insignificant positive influence on access to finance. In contrast, interest rate and transaction cost have significant negative influence on access to finance. Thus, the study concluded that with the prevailing banking arrangement where collaterals are required and banks charge interest and also some level of literacy is required, rural dwellers will continue to find it difficult in relating with conventional banks. Therefore, the study recommended that rural dwellers should organise themselves into Credit Cooperative Societies, which could be used as Informal Financial Unit for Linkage Banking arrangement. The government (at all level) can also use these associations to channel their agricultural credit. It is also recommended that legal framework, be provided, that will pave way for the establishment of full-pledged interest-free banks (Islamic Bank) or conversion of existing commercial banks in rural areas into interest-free banks, since most of the rural dwellers do not like taking usurious loans because of their religious inclination.

Chapter One: General Introduction

1.1 Background to the Study

Economic development remains Nigeria’s main policy priority and target since political independence in 1960. Successive Nigerian governments implemented several development plans aimed at serving as a catalyst for expanding the country’s production possibility frontier. However, it turns out that population explosion and abject poverty which appears to be undisputed features of developing economy predominates in Nigeria (Ekong, 1977; Olayide, Eweka and Osagie 1980; Babasanya, Bolagun, Zungun and Olawohuwa, 2008). Unsurprisingly, the poor are disproportionately located in rural areas, primarily engaged in agricultural and associated activities and are mostly women and children than adult males (Todaro, 2000). Never the less, rural poor need only a little money to set up a business that can make a dramatic difference in the quality of their lives (Yunus, 2006). Yet, poverty in rural Nigeria resulted from lack of adequate financial access in the area, among other things (Egwuatu, 2008; Ladipo, 2008).

Nigeria is endowed with abundant resources both human and material, but it has been classified among the poor countries in terms of its per capita income (Umoh and Ibanga, 1997). Also available data (see for instance, UNDP, 1990 and World Bank, 1995) revealed that basic social and economic indicators point to the fact that even when the rest of developing countries are making substantial progress, Nigeria is not getting beyond where it was thirty years ago. The country is also disturbed with severity of poverty; the World Bank (1995) reported that poverty was found to be a rural phenomenon, in every 10 million of Nigerians, 8.4 million are extremely poor people being from rural areas. The rural sectors is made up of small-scale poor farmers, food processors, informal traders and other micro-entrepreneurs who are said to account for about two-third of the population living in poverty (World Bank, 1996). More so, recently UNDP (2010) ranked Nigeria as 142nd in a sample of 169th poorest countries in the world.

Access to financial service has become a major concern for policymakers in developing countries (Beck and De la Torre, 2006). This concurred with the fact that inadequate access to finance has a significant positive link with rural poverty in developing countries (Beck, Demirgue-kunt, and Levine, 2004; Christen, 2004; Garba, Sanda, Bawa and Mika’ilu, 2007). Like all economic agents, rural household can benefit from credit, savings, and insurance services and thus contribute immensely to the development of their community (Basu, 2006). Rural farmers’ savings is their insurance, protecting them against periods of droughts or crop failure. Savings also provide a vehicle for future expenditure needs, whether expected or unexpected. As such, provision of financial services to the rural population at affordable prices has remained a very important component in the development agenda of both developed and developing countries for a long time (Aliero and Abdullahi, 2007).

Attempts to reduce the gap in the provision of rural finance often focus on the supply side interventions, including government and donor-funded targeted credit programmes (Yaron, McDonald and Piprek, 1997). Several factors were identified as what hinder the proliferation of financial institutions in rural areas of developing countries. Such factors include high risks, poor collateral, low and unstable income, exorbitant interest rate, low financial literacy, uncertainty, asymmetric information and high operating cost in the areas among others (Onumah, 2001; Ladipo, 2008; Sani 2008; Abbassi, Khaled, Prochaska and Tarazi, 2009). Observing these problems, Sani (2008) contends that the Millennium Development Goals (MDGs) were adopted in the year 2000 by the entire world government as a blue print for building a better world in the 21st century. The MDGs consist of eight goals, the first of which is to reduce poverty by half come year 2015 and to some extent to alleviate suffering in rural areas particularly by improving their financial condition.Abbildung in dieser Leseprobe nicht enthalten Empowering the poor with education does not only give them access to good employment but also gives them access to information which they can use to take advantage of market opportunities (IPAR, 2007). It has been argued that lack of market information and therefore, inadequate access to finance by the rural poor, is one of the main reasons why they remain poor. It is in this regard that Burgess and Pande (2003) have argued that access to finance is critical to enable the poor to transform their production systems and thus exit poverty. Access to finance through credit assists the poor not only to smooth their consumption but also to build their assets, which enhance their productive capacity (IPAR, 2007). Against this background, this study intends to empirically investigate the determinants of access to finance in rural areas of Katsina State.

1.2 Statement of the Problem

Lending in rural areas is surrounded by uncertainty about repayment which emanates from irregular income streams and volatile expenditure patterns of rural poor, perhaps they tends to be highly exposed to systemic risks such as crop failures or fall in commodity prices and therefore may face real difficulties in servicing their loans. Therefore, banks have legitimate concerns while dealing with a rural poor and tend to perceive such loans as risky (Basu, 2006). Along this argument, Ogujiuba, Ohuche and Adenuga (2004) identified three factors responsible for the risk in rural finance. Firstly, unstable macro-economic environment manifested in terms of fluctuation in interest rate, inflation, unemployment etc. Secondly, lack of basic infrastructural facilities, comprises things like access to electricity, road network, potable water, clinic etc. Thirdly, they lack adequate securitized collateral to back them while negotiating loans with the rural financial institutions.

A well functioning banking system plays an important role in channelling resources to the best firms and investment projects. While large companies residing in cities tend to be well catered for, small enterprises in rural areas often have to rely on their retained profit and informal source of finance. The implication of lack of access to banking services in rural areas is severe; the issue of access affects the ability of economic agents to receive government transfers, or to make payments or to accumulate cash surpluses for planned expenses or emergencies (Beck and De la Torre, 2006). Individuals who have no option than to carry cash are exposed to security risks (Basu, 2006). Undoubtedly, lack of facilities for mobilisation of saving and allocation of credit in rural areas may result to low-income economic agent resort to expensive short-term debt.

Access problem is defined by Beck, Demirgue-kunt, Laeven and Makismovic (2006) with reference to some form of observable limitation that leads to a contrast between the active use of a given financial service (say, a loan) by a certain group, on the one hand and the low use (or lack of use) of that service by another group on the other hand. Thus, geographic limitation reflected in form of absence of bank branches or delivery points in remote and sparsely populated rural areas that are costlier to service. So also socio-economic limitations, which occurs when financial services appear inaccessible to specific income, social or ethnic groups either because of high costs, rationing, financial illiteracy, or discrimination. Lastly, limitation of opportunity where for instance, talented new comers with profitable project are denied finance because they lack fixed collateral or are not well connected.

Therefore, in order to empirically investigate the determinants of access to finance in rural areas of Katsina state, this study addresses the following research questions:

i) To what extent does age influence financial accessibility in rural areas of Katsina state?
ii) Is gender a determining factor on financial accessibility in rural Katsina state?
iii) Does collateralisation of loan affect accessibility of finance by rural dwellers of Katsina state?
iv) Is interest rate a factor in determining access to finance in rural areas of Katsina state?
v) Does financial literacy constitute influence on access to finance in rural Katsina state?
vi) To what extent does transaction cost affect access to finance of rural dwellers in Katsina state?

1.3 Objectives of the Study

The broad objective of this study is to examine the determinants of access to finance in rural areas of Katsina state. Other specific objectives are as follows:

i) To empirically investigate the influence of age on access to finance in rural areas.
ii) To identify the impact of collateral on financial accessibility.
iii) To examine the effect of financial literacy on access to finance.
iv) To identify the impact of gender on financial accessibility.
v) To investigate the effect of interest rate on access to finance.
vi) To examine the influence of transaction cost on access to finance

1.4 Hypothesis of the Study

From the research questions and objectives of this study, the following hypotheses were tested using binary probit regression analysis. They are:

i) Age, collateral, financial literacy, gender, interest rate and transaction cost has no significant influence on access to finance in rural areas of Katsina state.

1.5 Significance of the Study

There is growing body of theoretical and empirical literature on access to finance in developing countries. These studies reviewed mainly the impact of access to finance on poverty reduction (see for instance Beck et al., 2006; IPAR, 2007; Garba et al., 2007). While the study by Basu, (2006) on the determinants of access to finance in rural areas not only focused on rural India but also suffered some methodological weakness for relying solely on descriptive statistics to draw conclusion. However, specific case of rural Nigeria particularly in Katsina state seems to receive little attention by scholars. This study intends to fill-in the gap by extending the literature to specific context of rural Nigeria.

Similarly, in a study by Agundu and Henry (2008) noted that there exist huge untapped potentialities for financial intermediation at the rural level of the Nigerian economy, however, the study failed to identify factors responsible for the financial gap in the rural areas of the country. Promoting efficient, sustainable and widely accessible rural financial system remains a major development challenge in most Sub-Saharan Africa (SSA). With about 73% of SSA population living in rural area, with a high incidence of rural poverty, improvement in rural finance is seen as crucial in achieving pro-poor growth and poverty reduction (Onumah, 2003). Therefore, analysis of access to finance in rural areas could help the policymakers to design a sustainable financial system that will play a significant role in addressing the severity of poverty in rural Nigeria.

Furthermore, this study will help to give foresight to policymakers interested in rural financial deepening in their quest to redress rural financial difficulties. It will also help in understanding how the two genders differ on the issue of access to finance in the era of calls and agitation for gender equity. Similarly, understanding the differences in the educational status of people living in rural areas on their financial access will help the financial institutions to design a coherent way of dealing with them taking into consideration of their different levels of literacy. This study will also contribute to the fountain of existing literature of rural finance as well as to open areas for further research.

1.6 Scope of the Study

This study is mainly concerned with the factors that influence access to finance from formal financial institutions in rural areas. The study only covers the rural areas in Katsina state but references were made to other places where necessary. Moreover, a cross-sectional data was used sourced via questionnaire. A structured questionnaire was administered to the selected rural areas of Katsina state in October 2010.

1.7 Limitation of the Study

Among the major limitation that aroused in the conduct of this study was incapability of cross-sectional data to capture changes in the variables under study over time. However, most of the variable under this study are relatively stable, they don’t change widely from year to year that could affect representation of the findings. In addition, lack of cooperation by some respondents in answering questionnaire pose another limitation of this study. However, caution was taken to enlighten the respondents regarding the need for their cooperation and they were also assured that information provided will be used for pure academic purpose and so was treated confidentially and privately without letting others have access to them.

Similarly, the researcher faced difficulties in interacting with populace dwelling in rural areas of Katsina state because majority of them can neither read nor write English text. Nevertheless, effort was made to translate the questionnaire into Hausa language as well as we follow-up each questions due to the fact even the literates may not be conversant with economics terminology which enables us to get the best response from the respondents.

1.8 Scheme of Chapters

This study is organised into five chapters. Chapter one is the introduction which consists background to the study, statement of the problem, objectives of the study, hypotheses of the study, significance of the study, scope and limitations of the study as well as the scheme of chapters. Chapter two is the review of related literature; it comprises the concept of access to finance in rural areas, nature of rural Nigeria, finance and economic development, determinants of access to finance in rural areas, efforts to improve access to finance in Nigeria, empirical review of literature on access to finance and theoretical framework.

Chapter three describes the research methodology. It includes introduction, description of the study area i.e. rural areas of Katsina state, method of data collection, sampling techniques and sample size, variables measurement, techniques of data analysis, model specification as well as the expected outcome of this research. Chapter four is data presentation, analysis and discussion of findings. It contains descriptive results, inferential results, discussions of results and implication of the findings. Finally, chapter five gives summary of the findings, draws conclusion, makes recommendation for the improvement of financial access to rural Nigeria and suggestions were made on areas for further study.

Chapter Two: Literature Review and Theoretical Framework

2.1 Introduction

This chapter reviews relevant literature on access to finance in rural areas. Issues discussed include; concept of access to finance, nature of rural Nigeria, finance and economic development, determinants of access to finance in rural areas, efforts to improve access to finance in Nigeria, empirical literature as well as theoretical framework.

2.2 Concept of Access to Finance

There is no unanimity among scholars on the concept of access to finance; in fact there are as many definitions of the concept as there are scholars. For instance, Egwuatu (2008) defined access to finance as a sustainable financial services that will enable the poor to increase income, build assets and reduce their vulnerability to external shocks. Put differently, Godwin (2008) viewed financial access as ability of community based financial institutions to extend credit to low-income clients who are usually excluded from mainstream financial systems. He further argued that, it is a form of financial intermediation, which primarily focuses on alleviating poverty through provision of financial services to the poor.

Access to formal financial services is the governmental and monetary authorities’ programmes designed for countries facing the challenges of increasing provision of banking facilities to firms and households alike. While the use of financial service measured as having deposit account with banks reaches over 90% in most high-income countries, in many low and even middle income countries, the use of formal financial services is still restricted to a small number of firms and households (Peachy and Roe, 2004; Beck , Demirgue-kunt and Peria, 2005). Access to financial services can be seen as a public good that is essential to enable participation in the benefits of a market-based economy, in the analogous way, as is the access to safe water, basic health services, and primary education (Peachey and Roe, 2004).

Access to finance therefore, is provision of financial services to knocks and crannies of a country to enables every economic agent accesses finance and hence contribute their quota toward economic growth of their country.

2.3 Nature of Rural Nigeria

The pathetic picture that the rural communities of Nigeria portrayed resulted from inequality created by unequal distribution of wealth whose source is the rural areas of the country. As such majority of rural dwellers are living in a helpless and hopeless state while few others residing in the urban areas are swimming in opulence and plenty (Babasanya et al., 2008). Agriculture is the mainstay of rural community especially before oil boom of 1970s; farming is virtually subsistence in nature. Perhaps commercial agriculture was largely absent, this is partly because most people dwelling in rural areas are poor, characterized by low income, large family size, lack of adequate formal education, low savings and investment, lack of access to credit facilities and use of crude farm production technologies. As a result of that, poor economic base, untold hardship, living from hand to mouth, joblessness, high death rate, etc are the order of the day in rural community (Olayide et al., 1980) .

A stylized fact about rural Nigerians is that, they lack regular source of income and sparsely populated. Ekong (1977) shows that, the level of living of the rural peoples indicated that modal rural income is below N 1000 per annum; average rural family size is between 5 and 7 and over 51% of rural dwellers feel dissatisfied with their present level of living. There is no doubt, the rural communities of Nigeria are endowed with avalanche of natural resources and in a bid to harness them the government had opened up these areas through many project aimed at developing as well as transforming the economic and social life of the rural people, yet the journey seems unending, this led Sancho (1996) to described rural poor in a rather more pathetic form. According to him, they lack an adequate level of education and cannot satisfy their basic heath needs. Rural poor usually have no (or limited) access to basic necessities of life such as food, clothing, decent shelter, unable to meet social and economic obligations, they also lack skills and gainful employment, have few (if any) economic assets, and sometimes lack self-esteem.

A critical assessment of the rural economy confirms agriculture, involving basic food production and other subsistence farming practices as the most predominant and most viable source of income for rural people. This is further underscored by the fact that in most developing countries of the world, including Nigeria, over 80% of the total agricultural produce was derived from subsistence farming activities. Ironically, rural farmers are simply not paid enough for their produce, whereas price for basic farming tools and other essential inputs are constantly rising beyond their reach (Babasanya et al., 2008). The low income level of rural farmers stem from global instability of the demand for agricultural output as well as the rising costs of agricultural input compelled rural farmers to operate purely on subsistence level with low investment as a result of low productivity and low income (Beck, Levine and Loayza, . 2000).

Another feature of rural areas of Nigerian economy that adversely affect financial access is inadequacy of infrastructural facilities. Poor roads network hinders not only transportation of people and agricultural output to the cities but also affect banks commitment to operate in rural areas (Odejide, 1997). The problem is more severe in terms of electricity, most rural areas in Nigeria lack convenient source of electricity (Babasanya et al., 2008). However, this problem is common even in the cities, but the obstacle is more pronounced in the villages. Only very few rural dwellers can afford generators, this impacted negatively on economic activities in rural Nigeria. Although in recent decades, Nigeria recorded a considerable progress in the provision of health services, most of these benefits have been captured by well off, this is because the health programmes have not been properly managed to target rural poor. As such, many villages lack clinics and hospitals, the few fortunate villages with clinic lack adequate health personnel for consultation (Hemmer, 1994).

More than 80% of those dwelling in rural areas of Nigeria do not have access to institutional banking services (Egwuatu, 2008). This is because they do not have collateral to secure loans from formal financial institutions. Besides, the technical backstopping needed for creativity and enhanced productivity is absent. Since there were few financial institutions to serve them, thus poor entrepreneurs and households rely largely on informal sources such as family, friends and village money lenders for their financial needs. A key characteristic of rural finance is that the stock of bank credit to the rural poor is very low compared with the situation in the urban areas (Sacerdoti, 2005). Underdevelopment in rural infrastructural is directly increases the cost of financial intermediation to both clients and financial institutions as a result of poor performing roads, electricity, telecommunication and security systems that increase the cost and risk associated with lending to farming households and servicing their savings (Yaron, 2005).

2.4 Finance and Economic Development

The literature addressing the question of whether finance creates growth (e.g., Hicks (1969)) or follows growth (e.g., Robinson (1952)) is vast, and dates back at least as far as Schumpeter (1912). There is ample evidence showing a strong and causal relationship between financial sector development and economic growth. An efficient financial sector that responds to the needs of the private sector increases investment, enhances economic growth, and creates a job which is one of the major challenges for developing economies (Nasr, 2006). Improving households’ access to financial services will also help to reduce poverty and improve income equality while financial exclusion can retard economic growth and increase poverty and inequality (Butler and Cornaggia, 2008). 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 factors of production, especially credit (CBN, 2005a). The capacity of poor for entrepreneurship would be significantly enhanced through the provision of financial services to enable them engage in economic activities and be more self-reliant, increase employment opportunities, enhance household income thereby leading to the economic growth.

Broad access to financial services is related to the economic and social development agenda for at least two reasons. First, a large theoretical and empirical literature has shown the importance of well developed financial system for economic development and poverty alleviation (Beck et al., 2000; Beck et al., 2004). Second, access to financial services can be seen as a public good that is essential to enables participation in the benefits of a market based economy, in an analogous way, as is access to safe water, basic health services, and primary education (Peachey and Roe, 2004). Similarly, Sacerdoti (2005) argued that faster economic growth will not be possible without a deepening of the financial system and, in particular, more support from the banking system. He further showed that there is strong association between access to bank credit and overall economic development of a country. Access to finance can help poor to increase income, build viable business, and reduce their vulnerability to external shocks. It can also be a powerful instrument for self-empowerment by enabling the poor, especially women, to become economic agents of changes (Bashir, 2008). As noted by De la Torre and Schmukler (2006), the discussion of the plausible channels through which financial depth could cause economic growth often resorts to access related stories. Prominent in this regard is the Schumpeterian view that finance lead to growth because it reduces creative destruction by allocating resources to efficient newcomers. That is through broader access to external funds, talented newcomers are empowered and freed the disadvantages that would otherwise arise from their lack of inherited wealth and absence of connection to the network of well off incumbents (Rajan and Zingales, 2003).

Aggregate economic growth and efficiency are influenced by financial transaction in their role in agglomerating capital, selecting projects most likely to yield the highest return, monitoring borrowers (investors), enforcing contracts, transferring, sharing, and pooling risk, and promoting diversification (Stiglitz, 1993). An expansion of the supply of agricultural credit will have a better chance of success if it is embedded in effort to improve the performance of rural financial market and in effort to achieve greater market integration and more rapid economic growth in the rural areas (Gonzalez-Vega, 2003). The ability of the poor to borrow a small amount of money to take advantages of a business opportunity not only impacts positively on eradication of poverty but also tend to swell the rank of micro-entrepreneurs (Egwuatu, 2008). The supply of efficient, sustainable, and broadly-based financial service is particularly important in rural areas, giving high risks and transaction costs in most rural markets for goods, services, assets, and factors of production, which result in large degrees of market fragmentation that is, the costs and risk are responsible for low level of market integration and for a wide dispersion of the marginal rates of return on resources used (Mckinnon, 1973).

2.5 Determinants of Access to Finance in Rural Areas

The growing interest in rural financial deepening has been an interest in poverty alleviation. Though, the relationship between poverty and finance are quite complex, it is most important to recognize that, despite major earlier attempts to expand the supply of agricultural credit and despite the massive use of public funds for this purpose, the majority of the rural population of the developing countries has actually never had access to formal financial services (Gonzale-vega, 2003). Thus, the unquestionably basic question is; why has the rural populations not had adequate access to formal financial services, despite their legitimate demands, for various types of loans, deposit facilities and other financial product. Some of the factors identified in the literature are explored below:

2.5.1 Socio-economic Factors

More often gender and age were stressed in the literature among the factors that influences access to finance especially in developing countries. Sabopetji and Belete (2009) argued that men accesses finance more than do by women. Women were largely poor and illiterate; perhaps they lack critical collateral to use for sourcing credit. They further reveal that over 90% of rural women had not access formal financial services in rural South Africa. Similarly, Kaino (2005) discovered an insignificant proportion of women accessing financial services in rural Myanmar. It has been argued that, access to finance has the capacity to change women positively thereby enabling them to possess and control over their assets ((Naved, 1994; Zaman, 1999).

Age also plays an important role in explaining access to finance in rural areas of Developing countries. Researchers revealed different direction about the influence of age on access to finance. On the one hand, Sabopetji and Belete (2009) contend that decision to take credit decreases with household age i.e. there is negative significant influence of age on access to finance. On the other hand, Kaino (2005) observed that age have a significant positive effect on access to finance in rural areas.

2.5.2 The Tyranny of Collateral

It is widely recognized that for bank intermediation to deepen it is necessary that collateral is sufficiently available to borrowers and enforceable to lenders (Sacerdoti, 2005). One way in which a financier can reduce the risk of losing his money due to uncertainty is by requiring collateral. Collateral reduces the problem of uncertainty, since the lender can theoretically recover some, or all, of his loan in the event of non-repayment. It also reduces information asymmetries; it is often easier to value physical assets than to value character. Moreover, the borrowers will find it costly to put valuable collateral if they intend to default with the proceeds of the loan, because they will lose their collateral. Thus, the collateral requirement can also help to weed out rogues from honest borrowers, leaving only those bona-fide applicants who fully intend to repay the loan. The potential loss of their collateral also makes the borrower think twice before investing in risky ventures (Basu, 2006).

Unfortunately, most people in rural areas are living in abject poverty, they do not own assets that are acceptable as traditional collateral on loans, this hinders financial access to the rural poor (Fleising and De la Pena, 2003). Besides, collateral realization processes are often very weak in SSA countries, this as a barrier to credit protection, was aggravated by the fact that in many countries the issuance of tittles is extremely low, due to the absence of appropriate procedures for registration of properties, and inadequate resources of property registration offices (Sacerdoti, 2005). One problem in all this, of course, is that the rural poor typically do not have collateral, so they lose out once again. Another problem is that collateral can only provide security to lenders in an environment where households have proper titles to their assets, and where the legal system makes it relatively straight forward for lenders to enforce contracts and repossess collateral ( Basu, 2006).

2.5.3 Financial Literacy

It has been observed that financial institution in developing countries appears inaccessible to rural dwellers because not only they are sparsely populated but also they lack adequate critical financial knowledge that is said be essential for financial intermediation in the area (Beck, et al. 2006). While Ladipo (2008) argued that rural poor in Nigeria are excluded from mainstream financial institution because they are highly illiterate. Rural Nigerians were poor, pathetically they lacks formal education which in turn has a proportional correlation with their financially illiteracy (Sancho, 1996; Babasanya et al., 2008). This is based on the fact formal knowledge is critical in enhancing financial literacy.

Women were more financial illiterate compared to men in developing countries (Todaro, 2000). Along this regard Devkota (2006) argued that women were largely illiterate and thus were not involved in financial activities that need specific knowledge and skills, and requires information.

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An Investigation into the Determinants of Access to Finance in Rural Areas of Katsina State
Usmanu Danfodiyo University, Sokoto
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investigation, determinants, access, finance, rural, areas, katsina, state
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Saifullahi Sani Ibrahim (Author), 2011, An Investigation into the Determinants of Access to Finance in Rural Areas of Katsina State, Munich, GRIN Verlag,


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