Home > Development, Development Economics, Economics, Nigeria > CCT Schemes, Finance & Entrepreneurship in Nigeria

CCT Schemes, Finance & Entrepreneurship in Nigeria

This week’s Economist has a leader and a briefing which show that giving “stipends and food to the poorest if they meet certain conditions [e.g.] their children attend school, or their babies are vaccinated” has cut poverty and improved income distribution cheaply. In Brazil, the Gini index-which measures income inequality-has fallen from 0.58 to 0.54 and even though it is the largest CCT it costs just 0.5% of GDP because the payments are quite small- “around 22 reais ($12) per month per child, which a maximum payment of 200 reais”.

They also show a discrepancy in effectiveness, with the scheme reducing the poverty rate and increasing primary and secondary school enrolment rates more in rural areas than in urban areas. (The briefing gives reasons for this, but I’m sure you can read it yourself. It’s worth it).

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There’s one thing I thought I’d just point out; the introduction of the poor to “finance”.

Finance, Entrepreneurship and Development

This quote got me thinking:

“In addition, the elaborate bureaucracy built up by the programme-every household gets a debit card and the ministry of social protection runs a giant database with every transaction-should make it easier to be more precise in targeting the needy.”

In A-Level Development Economics, we looked at the fact that the poor have no access to finance as a hindrance to development. First, it widens the savings gap- the gap between the optimum investment rate for long run growth and the savings rate. Their lack of knowledge and/or mistrust of banking services means that cash would instead be saved in lockboxes or under beds. This lowers funds which can be allocated through the banking system, a reduction in scarce funds for investment and thus a reduction in growth rates and GDP levels. (NOTE: The poor, being poor, are more likely to spend all their income for subsistence and if they have a surplus would invest in a plot of land or goat which they can use to produce for themselves. This means that this effect on the supply of savings would be quite small and would increase as the income level rises).

Second, mistrust or ignorance will lead to a reluctance to take advantage of the funds that are available through the banking system. This could lead members of the public who are not cash-rich to forgo investment opportunities even though they would otherwise set up businesses.

Third, on the supply side, banks would be unwilling to lend to individuals who they do not know personally (read the extremely wealthy). This is because, without adequate means of identifying and catching up with borrowers there will be no lending. In most developing countries the infrastructure does not exist to track addresses, employment statuses etc of potential borrowers. Here again, potential entrepreneurs would forgo investing because they cannot get hold of capital. This 2007 Gallup poll shows that 67% of Nigerians have thought about setting up a business, above the West African median:

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Majorities also trust that they will be allowed to make money by the government (58%); their assets will be safe at all times (60%) and; they will easily find hardworking and qualified employees (75%).

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Among potential obstacles, Nigerians are mixed on constancy of the policy environment (44% constant to 33% changeable); 59% believe the government makes paperwork and permits difficult when starting a business (which is probably why the same poll found 69% were going to set up informal businesses).

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It can be seen that even with an okay investment climate enthusiastic entrepreneurs’ inability to obtain loans the biggest obstacle to entrepreneurship (73% agree). I think this is mostly due to the supply of investment funds as described above.

What Does This Have To Do With The Beginning?

The introduction to automated money transfers through the debit cards in CCT schemes could be used as a starting point to teaching about banking and finance in general; it’s necessity, ease and safety. This could help to increase the formal savings rate and would lead to an increase in funds the formal banking sector has to lend to investors. It could also help to increase demand for loans as people begin to know and trust the system enough to borrow money to fund investment.

It could also affect the supply of investment funds. The fact that the government has to means-test all those who benefit from the CCT schemes and keep their records, would mean that banks would have greater information to hand when making lending decisions. Banks could (I don’t know the mechanism) be allowed to use the government’s database and the debit cards issued as a means to ID borrowers and follow them up if they default. The extent to which this is true would depend on a lot of things; not least the banks’ trust in the scheme and its databases.

Conclusion

I have finished.

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