CHAPTER ONE
1.0
1.1
INTRODUCTION
Background to the Study
Small business enterprises are no doubt the engine room for economic growth, poverty
alleviation, job creation and means of crime reduction. They constitute a large proportion of
businesses worldwide and play significant role in any economy. Small businesses enterprises go
through series of obstacles among which are financing that inhibit their long-term survival.
Researchers have shown that the rate of failure of small-scale business in developing countries is
higher than in developed world (Marlow, 2009).
For a business to realize its objectives, it depends greatly on the ability of the enterprise to
accomplish its key performance indicator in a sustainable manner (Simerly and Mingfanf, 2000;
Wan and Yiu, 2009). Micro financing involves the delivery of financial services to poor and low
income households, with limited access to formal financial institutions (Conroy, 2003).
Microfinance banks are created in Nigeria to enhance access to loans and savings services for the
underprivileged so as to eradicate poverty and ensure even economic development (Shreiner,
2001).
Government in Nigeria has in the past initiated series of programmes and policies targeted at the
small business in order to enhance the flow of financial resources to small business enterprises
(Oni and Daniya, 2012). The Small and Medium Enterprise Development Agency of Nigeria
(SMEDAN) was established in 2003, National Credit Guarantee Scheme was also established in
2003. The Microfinance Policy Regulatory and Supervisory Framework (MPRSF) was launched
to address the problem of lack of access to credit by small business operators. Although several
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programmes and policies have been implemented in Nigeria; poverty, unemployment, stunted
economic growth are still prevalent in the country (Lawson 2007; Owenubiugie and Igbinedion,
2015; Obadeyi, 2015).
In spite of the major role, significance and contribution of small business enterprises to the
nation’s economy, small business enterprises are still battling with many problems. They are
faced with significant challenges that compromises their ability to function and to contribute
optimally to the economy. Operations of small business enterprises are still bedeviled by a
number of problems such as difficulty in accessing credit, short loan repayment period,
unwillingness of microfinance banks in financing small business and high interest rates among
others.
In Nigeria, small business enterprise constitute about 90% of the industrial sector, they also
account for 70% of national industrial employment and 10% of manufacturing output (Ajayi,
2002). Anwatu (2006) opined that 75% of the private sector in Nigeria is dominated by small
scale enterprises. Developing the private sector is an engine of growth and creation of wealth and
employment in Nigeria.
The performance of small business enterprise in Nigeria falls below expectation (Basil, 2005 and
Abiodun, 2011). Thus this study assesses the impact of Micro finance bank on the performance
of small scale businesses in Nigeria.
1.2. Statement of the Research Problem
The survival of small business enterprise is considered crucial in any economy in solving the
problem of poverty, unemployment, crime and ensuring economic growth. There is inadequacy
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in the performance of small business enterprise in performing its role of economic growth,
employment creation, poverty alleviation, thus there exist difficulty of small businesses
achieving its desired goals.
Most business enterprise fail to consider proper financing that affect their chances of long-term
survival as a result experience a progressive decline in its ability. Shortage of finance is one of
the major problems facing small business enterprise. A situation whereby funds/credit are readily
available, there exist the problem of high interest rate, short repayment period. Also, most
microfinance banks are unwilling to lend the small business enterprise. All these among others
are situated in Nigeria and thus affect the performance of small business enterprises.
It is disheartening to note that governments of Nigeria over the years have not been able to
adequately help the poor grow small business. In Nigeria, the ability of small business
enterprises to achieve and sustain competitive advantage lies within the availability of suitable
strategies that would preserve its operations. It is against this backdrop that the researcher
considered the impact of microfinance banks on the performance of small scale businesses in
Nigeria.
1.3
Objectives of the study
The aim of this study was the assessment of the impact of microfinance banks on the
performance of small scale businesses in Nigeria. The specific objectives are to:
1. Examine the impact of micro-credit from microfinance bank on the performance of small
scale business in Nigeria.
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2. Appraise the success of microfinance bank in playing its role of pulling resources for
utilization by small businesses in Nigeria.
1.4
Research Questions
This study will be guided by the following research questions:
1. What is the impact of micro-credit from microfinance bank on the performance of small
scale business in Nigeria?
2. To what extent does microfinance bank play its role of pulling resources for utilization by
small scale businesses in Nigeria?
1.5
Research Hypotheses
The study is guided by the following hypotheses:
1. H0: micro-credit from microfinance do not affect the performance of
small business in Nigeria.
2. H0: microfinance bank have failed in playing its role of pulling resources for utilization
by small businesses in Nigeria.
1.6
Significance of the Study
The critical nature of small business to the success or growth of any country is given. This is
because availability of finance affects the ability of small business achieving its desired goals. As
lack of finance affect the level of productivity thereby preventing the attainment of such
significant goals small business play in an economy.
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Empirically, this study is carried out to assess the impact of microfinance banks on the
performance of small scale businesses in Nigeria so as to ameliorate the problem of low
productivity faced by small businesses.
This study will be important to small businesses it will help guide it on how it should operate. It
will teach it the importance of microfinance and the necessary guide of attaining finance for
business. It will also help owners of small businesses get maximum value from the business.
This study will be of utmost importance to investors, government and the researchers because it
will provide policy recommendations to the various Nigeria stakeholders taking adequate
measures in small scale enterprise for rapid capacity investment. It is hoped that the exploration
of small business in Nigeria will provide a broad view of the operations of small businesses to
investors and government. It will contribute to existing literature on the subject matter by
investigating empirically the role microfinance banks play in small business enterprises of the
country. This study will be of benefit to;
The Academia: members of the academia will find the study relevant as it will also form basis
for further research and a reference tool for academic works.
Government: this study will reveal to the government happenings in small-scale business
enterprises as well as microfinance banks. Formulation and implementation of policies based on
this finding would ensure development in the area.
Investors: this study shall also be valuable to the investors especially those who may have
research interest as it shall guide their private investment decisions.
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1.7
Scope of the Study
This study is intended to assess the impact of microfinance banks on the performance of small
scale businesses in Nigeria in 2019 using owners of small businesses in Nigeria.
1.8
Operational Definition of Terms
The following terms have been defined operationally.
Business performance: efficiency and effectiveness of an organization reflected in the business
objectives set by management.
Interest: This is the charge for the privilege of borrowing money, typically expressed as annual
percentage rate (APR). Interest can also refer to the amount of ownership a stockholder has in a
company, usually expressed as a percentage.
Interest Rate: The interest rate is the amount a lender charges for the use of assets expressed as
a percentage of the principal. The interest rate is typically noted on an annual basis known as the
annual percentage rate (APR).
Micro Credit: Microcredit is the extension of very small loans to impoverished borrowers who
typically lack collateral, steady employment, or a verifiable credit history. It is designed to
support entrepreneurship and alleviate poverty.
Microfinance: microfinance is a category of financial services targeting individuals and small
businesses that lack access to conventional banking and related services.
Small business enterprise: small business enterprise is an enterprise marked by limited number
of employees and a limited flow of finances and materials.
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CHAPTER TWO
LITERATURE REVIEW
2.1
Introduction
The level of financial inclusions in forms of credits transmissions for investments in an economy
is one of the major elements in determining its future productive capacity and growth. As a
matter of fact, the shortage of finance is a critical limiting factor facing the small business
enterprise and the realization of an entrepreneurial dream globally, especially in developing
economies. In the light of the above and in realization of the fact that the activities and
contributions of small and medium enterprises are required for rapid economic growth, most
developing economies formulated and developed many policies targeted to ease the financial
problems of small holders ventures across the globe, Nigeria inclusive. In Nigeria, it is in this
direction and vision that the ideal of microfinance-banks financing was articulated because the
conventional banks frown at granting loans to Small Scale Enterprise. In supporting this
assertion, (Anyanwu, 2004) wrote that small business enterprises in Nigeria find it difficult to
access loans from formal financial institutions because of their inability to meet the standard
requirements for loan consideration. In his own contribution, (Ugwuanyi W, 2012) lamented that
conventionally speaking, banks traditionally frown at giving loans to small scale enterprises
rather they prefer lending to large enterprises which are judged to be creditworthy. They avoid
doing business with the poor and their micro enterprises because of the associated cost and risks
involved which are considered to be relatively high. As a result, lack of access to finance has
been identified as one of the major constraints to small business growth especially in the
developing nations. This ugly situation provides a platform for microfinance institutions to
attempt to fill the gap based mainly on informal social networks and this is what gave birth to
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micro-financing in Nigeria. Hence, microfinance institutions (MFIs) have become the main
sources of funding small scale enterprises in Nigeria and in African regions as a whole.
Microfinance institutions have been established to grant micro-credit to poor people to enable
them develop small businesses with expectations of higher returns capable of improving their
standards of living. (Olaitan M.A, 2007) described microfinance as a specialized scheme aims at
providing funds in form of loans to poor households who are mainly small savers that cannot
affords obtaining loans from conventional banks or other money lending institutions. In this
same view, (Oleka, D.C, 2008) noted that about 80% of the populations of most developing
economies in which Nigeria is one of them are engaged in informal sector financing in which
microfinance institutions are the major players as they play notable roles of making finance
available for SSEs at favorable conditions. As a matter of necessity, in Nigeria, both the federal
and state governments have recognized that for sustainable growth and development to be
achieved, the financial empowerment of the small-scale entrepreneurs is very vital in
repositioning the predominantly poor in the society. If this growth strategy envisaged is to be
seriously supported and the latent entrepreneurial capabilities of this large segment of the
artisans is sufficiently stimulated and sustained, their cottage industries, skill acquisition will
spread further and positive multipliers will be felt throughout the economy,(Okoy C.A,
2010).This will lead to economic development through rural transformation and the
improvement in the economic conditions of the artisans and small-scale industrialists. In regret to
the poor situation faced by small scale enterprises in Nigeria, (Ogwu, 2020) lamented that the
small scale entrepreneurs lack the necessary financial inclusion, especially credits from the
conventional banks because of inability to meet the stringent loan conditions such as provision of
adequate collaterals and the likes. Although the commercial banks on their part have claim at the
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point that they play vital role towards industrial revolution in Nigeria through financial support,
the corresponding volumes of industrial production is insignificant. This study is aimed at
examining the part played by the micro-finance banks towards the development of small
business enterprise in Nigeria. Considering the fact that their programs are designed to support
clients to be engaged in small scale businesses, which paves way to be self-employed, and in the
mean time to contribute to the family income, their programs are recently focusing to support
members in various forms. Some of the programs are designed strictly to follow a credit system,
while some are designed in an integrated manner by incorporating a package of programs on
entrepreneurial financial needs.
2.2
Microfinance Concept
Microfinance concept has been in operation for centuries in different parts of the world but
unfortunately its notion has long been misinterpreted as micro-credit to household-based
entrepreneurs. (Lawson, B 2007) confirmed that these two terms are used interchangeably but
the term microfinance connotes broader activities than micro-credit. (Oleka 2008) defined
microfinance as the provision of small amount of money to individuals or group of individuals
who are mainly low income earners for a short period without demanding collateral securities for
the loans.
Microfinance can be described as an appropriate tool which is designed to reach the Millennium
goals. In practice, microfinance is much more than disbursement, management and collection of
little bits of loan primarily, it seeks to create access to credit for the poor who ordinarily are
locked out of financial services in the formal financial mainly for reason of their poverty, that is
lack of command over assets. It therefore, places obligation on the borrowers for proper
9
utilization and complete repayment of the borrowed amounts even at commercial interest rate.
2.2.1 An Overview of Microfinance Banks in Nigeria
In Nigerian concept, microfinance banks are institutions constructed as a company, licensed to
carry on the business of providing microfinance services such as micro credit loans, insurance,
money transfer services and other non-financial services that are needed by the poor as well as
the small-holder or micro enterprises.
Microfinance banks are licensed to operate as a unit to meet the financial needs of clients who
supposed to be mostly the poor and the low income earners in a particular community. As a
matter of fact, microfinance banks are supposed to be community/rural oriented but what we are
seeing in Nigeria today is a sort of misdirected location target from community to macro settings
as most of them are located in the urban cities without having a particular community as a target.
Currently, micro finance banks are of two forms, as all licensed community banks in Nigeria that
met CBN guidelines have been transformed to microfinance banks. The first category is the
microfinance banks that are hitherto community banks licensed to operate branchless network
with cash centers subject to meeting the prescribed prudential requirements and availability of
free funds for opening such cash centers. The minimum paid-up capital for this category of banks
is N20 million for each autonomous center. The next category is microfinance banks licensed to
operate at state levels which are authorized to operate in all parts of the state including the
federal capital territory in which they are registered subject to meeting the prescribed prudent
requirements and availability of free funds for opening cash centers. The minimum paid-up
capital for this category of banks shall be N1.0 billion. (Ajayi 2005) noted that diversification of
ownership is encouraged to enhance good cooperate governance of licensed MFB, hence,
microfinance institutions can be established by individuals, groups of individual, churches,
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community development associations, private corporate entities, missionaries and foreign
investors. (Oleka, 2008) noted that the major participants in the microfinance activities in
Nigeria are Universal banks, Community banks and Non-governmental Organization (NGO).
Governments can join with co-operatives to partner with the microfinance banks to raise bulk
loans to be disbursed to the beneficiaries who supposed to be mainly the less privileged in the
society. In this context, the microfinance banks comprise both some of the commercial banks
that want to venture into such and the hitherto the community banks. These institutions are
licensed by the regulatory authority to offer credit facilities to small scale enterprises (SSEs) in
Nigeria. By so doing, the banks are increasing and sustaining the sizeable number of people that
venture into small and medium-scale businesses.
2.2.2 Microfinance in Nigeria
The use of microfinance in Nigeria has existed for a very long time, mostly through informal
microfinance activities without government policies and regulations. The CBN (2004) noticed
that microfinance institutions grew as a result of the failure of the formal financial institutions to
provide financial services to the poor. Microfinance institutions can be grouped into formal and
informal institutions. The former consists of banks, while the latter include cooperative societies,
self-help groups etc. Several microfinance programmes and institutions have been established by
both governmental and non-governmental agencies, to promote economic growth and
development in the country by increasing and improving the productive capacity and living
standard of the poor. Informal microfinance groups include: the Esusu/Itutu/Adashai,
Daily/periodic contribution. While the formal group includes: The Nigerian Bank for Commerce
and Industry (NBCI), The Nigerian Industrial Development Bank (NIDB), Nigerian Agricultural
and Cooperation Bank (NACB) etc.
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2.2.3 Microfinance Policy in Nigeria
Microfinance refers to a source of financial service provided for people who are not eligible for
services from the traditional financial system due to their poor status. These services, primarily,
are in the form of savings and loan. According to CBN (2004), microfinance is an instrument
used to provide those with lower economic status access to financial services at affordable and
reasonable price. Thus, microfinance is all about providing the poor with access to financial
services, which they would not normally have access to. These financial services enable them
become self-reliant, create jobs, enhance their standard of living etc. According to Ajie, H A
(2011) although the availability of microfinance and the establishment of microfinance banks are
expanding in Nigeria, there are yet no established government policies and mechanisms for
regulating and supervising activities in the sector. In the year 2000, a national conference on
microfinance organized by the Federal Government of Nigeria recommended that the CBN
should take up the responsibility of developing an appropriate policy, as well as regulatory and
supervisory framework for the operatives of microfinance banks. The workshop recognized that
the development of appropriate microfinance policy was critical to the development of sound
microfinance practice, sustainable microfinance banks and by implication viable small scale
businesses in Nigeria.
The microfinance policy, regulatory and supervisory framework for Nigeria was established on
15thDecember, 2005. The aim of the scheme, as noted by the central Bank of Nigeria includes the
following:
 Integration of the informal subsector into the financial system.
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 Make financial services readily available to productive Nigerians who are not eligible to
services from the traditional financial system.
 Contribute to rural industrialization.
2.2.4 Benefits of Microfinance Banks in Nigeria
The primary purpose of establishing microfinance banks in Nigeria was poverty alleviation
through the provision of financial services to the poor. By providing these services, the
microfinance banks can contribute to the wellbeing of the economy through the following ways:
 Enhancement of savings and investment opportunities, they mobilize local savings into
productive activities, thereby contributing to the growth of the economy.
 Improve income distribution of the Nigerian population
 They encourage rural industrialization thereby reducing rural-urban migration.
 They encourage entrepreneurship behavior among the youth by providing them with
financial services which would allow them engage in economic activities and become
self-reliant. By doing this, microfinance banks help tackle the problem of poverty and
unemployment.
2.2.5 The Challenges of Microfinance Banks
The expanding microfinance industry in Nigeria faces enormous challenges. The first challenge
is for the microfinance banks to reach a greater number of the poor (Ajie, 2011). There is also no
policy framework that regulates the establishment, operations and activities of Microfinance
banks in Nigeria. This encourages multiple standards and lack of uniformity in financial
transactions. Another challenge of the microfinance bank is that real sector activities especially
13
agriculture and manufacturing are less funded by it, instead the bulk of the microfinance bank
funding goes to commerce. Again Ajie, (2011) noted that currently only about 14.1 and 3.5%
went to Agriculture and manufacturing while 78.4% went to commerce. All these factors among
others contribute to small scale businesses‟ inability to access funds hence making the
establishments of small scale businesses still very low. Adeyemi, (2008), established some of the
problems faced by microfinance banks to be: undercapitalization, inefficient management, which
has impinged on their ability to perform. Also, Nwanyanwu, (2011), cited diversion of funds,
inadequate finance, and inconsistency of government policies, huge loan losses as hindrances to
the growth of this subsector. Kanu, Clementina and Isu, Gabriel (2015), cited the following as
constraints faced by microfinance banks: Low Capital Base, Insiders Abuse, Inadequate business
opportunity in Nigeria, change in government policies, and focusing on the wrong group of
customers.
2.2.5 Concept of Microfinance bank credits growth on small scale enterprises
According to (Kwankwo F, 2012) on it microfinance policy described Microfinance as any
company licensed to carry on the business of providing microfinance services such as savings,
loan, domestic fund transfer, and other financial services that are needed by the economically
active poor, micro, small and medium enterprises to conduct or expand their businesses.
However, Microfinance is the provision of small scale financial services to low income clients’
parts, who have no access to financial services provided by the formal sector, conformity as
ranted above, (IFC, 2011) infers that microfinance as small scale financial services primarily
credit and saving, provided to people who farm fish or herd, who operate small enterprises or
micro enterprises where goods are produced, recycled, repaired or sold, who provide services,
who work for wages or commissions, who gain income from renting out small amounts of land,
14
vehicles, draft animals, or machinery and tools, and to other individuals and groups at the local
levels of developing countries both rural and urban. (Olawepo, M. 2002) was not left out, as he
defines microfinance as an economic approach to the delivery of financial services to those that
are hitherto unreachable at a fee that is affordable and economic to the users of such services,
and also, using funds from the providers of financial services to generate adequate returns for the
users thereby building up their enterprises and creating employment opportunities which will
reduce the poverty level in the economy. On this backdrop, (Ogbunka, 2003) explains three
features that distinguish microfinance from other formal financial products. These he said
include the smallest of the loans advanced or savings collected, the absence of asset based
collateral and simplicity of operations. On that note, (Abdel Hafiez Ali, 2013) deduced that
microfinance as an economic development approach intended to benefit low income women and
men. Furthermore, however, is to reach the low income earners either in the urban or rural areas
with financial services that will enable them creates wealth without any discrepancy as to the sex
of such person.
The growth of Small scale enterprise exclusively depends on the fundability of the Microfinance
Institutions. In Nigeria small scale enterprises are heavily relied on microfinance help to either
start or boost business activities. (Olowe & Babalola, 2013) articulated that access to finance is
the only key to SSEs growth globally and Nigeria inclusive. In Nigeria, financial inclusion has
been recognized as an essential tool for SSEs development. Lack of access to financial
institutions also hinders the ability for entrepreneurs in Nigeria to engage in new business
ventures, inhibiting economic growth and often the sources and consequences of entrepreneurial
activities which are neither financially nor environmentally sustained. On the other hand,
(Chaston, I. & Mangles, 2017) acknowledged that there is no single strategy to firm growth.
15
Therefore, the probability of achieving growth is increased by avoiding excessive emphasis on
single strategy transformation initiatives and by giving different capabilities priority depending
upon the development stage of the firm.
Three factors were identified by them as limiting the growth of small business which includes
ability, need and opportunity. (Kolawole, 2013) admits that the promotion of micro enterprises in
developing countries is justified because of their abilities to foster economic development.
Accordingly, (Idowu F.C, 2010) confirms that access to loans is one of the major problems
facing SSEs in Nigeria. (Olowe, 2013) evolves that the main objective of micro credit is to
improve welfare of the poor as a result of better access to SSEs loans that are not offered by the
formal financial institutions. It is evident from literature that not all small businesses are growth
oriented and for certain times’ growth is a voluntary choice (Masurel and Montfort, 2006)
emphases that the insufficient access to credit by the poor may have negative consequences for
SSEs and overall welfare. Iterates that access to credit further increases SSEs risk bearing
abilities, improve risk copying strategies and enables consumption smoothing overtime. The idea
of creating microfinance institutions (MFIs) is to provide an easy accessibility of SSEs to
finance/fund particularly those which cannot access formal bank loans.
2.3
Theoretical Framework
The microfinance policy presented a blue print for the emergence of a regulated microfinance
subsector in Nigeria under the supervisory purview of the CBN and with deposit insurance cover
provided guidelines for the establishment of De novo microfinance Banks as well as migration of
the existing community Banks and NGO-MFIs to microfinance Banks.
16
The policy also directed community Banks that were unable to covert to MFBs to close shop.
Furthermore, the policy provided for the emergence of two types of microfinance Banks namely.
Unit microfinance Banks (MFBs) with a minimum paid-up capital of N20 million and
operational outreach not beyond a state of the federation and state MFBs with a minimum paidup capital of N 1billion Naira and operational outreach across the state of the federation (Umar
B.D, 2011). The growth of microfinance activity reflects the expansion of informal sector
activities and the exclusion of a large proportion of economically active population from the
sector. Large volumes of financial transactions are concerned out by microfinance institutions,
with little or no publicity around them. Their operations are not explicitly captured in official
financial statistics and their activities are hardly reported on by the mass media yet their
transactions impact directly on a large section of the population especially the poor and the small
scale enterprises (Central Bank of Nigeria, 2001). In this regards, the Central Bank of Nigeria
study has identified as at 2001, 160 registered microfinance institutions in Nigeria with aggregate
savings worth N 99.4m and outstanding credit of N 649.6 million indicating huge business
transactions in the business (Anyanwu C.M, 2004). Small Scale Enterprises (SSEs) are very
important part of the Nigerian economy as a study by the IFC shows that approximately 96% of
Nigerian businesses are SSEs (Oyelaran O.B, 2010). The SSEs represent about 90% of
Manufacturing/Industrial sector in terms of number of enterprises in Nigeria. Thus, every
enterprise is financed either through debt or equity or a combination of both. These are usually
sourced from either the informal finance sector (IFS) or the formal finance sector (FFs) (Gbandi,
& Amissah 2014). SSEs are generally distinguished by the nature of their production and
management arrangements, trading relations, financial practices, internal competence, etc. In
(Soludo C.C, 2008) overview of the performance of the SSEs in Nigeria shows that past policies
17
made limited impact on the Micro enterprises sector. Accordingly, (Oladejo M. 2013) noted that
SSEs account 70% of the total industrial employment in Nigeria, but contributed only 10 to 15
percent of the total manufacturing output. In this guards that the small and Medium Enterprises
Development Agency of Nigeria (SMEDAN) act of 2003 was established to promote the
development of Micro, small and Medium Enterprises (MSME). Its functions are to stimulate,
monitor and co-ordinate development of MSME sector, to initiate and articulate policy ideas for
MSME growth, to promote and facilitate development programmes, instrument and support
services to accelerate development and modernization, poverty reduction and Job creation and
enhanced sustainable livelihood, link MSME to internal and external service of finance,
technology and technical skills, among others. Hence, the microfinance policy regulatory and
supervisory framework was launched in December, 2005 to align its objectives.
2.3.1 Nature and Scope of Microfinance Banks on Small Scale Enterprises Development
in Nigeria
Small Scale Business is the one whose total asset in capital, equipment, plant and working
capital are less than N250, 000 and employing fewer than 50 full time workers (Chukwemeke,
2004).(Umam, F.J. 2013) defined SSEs as one who has a minimum of 5employees with
minimum capital outlay of not less than N5,000. The issues of sustainable growth and
development of Small Scale Enterprises is a huge concern in the third world countries. The
seemingly policy idea was to diversify Nigeria economy sub-sector and create more robust
financing options so as to alleviate subsistence sufferings, poverty, unemployment, boost income
and ensuring sustainable active entrepreneur and development of SSEs. In a bid to accelerate
SSEs growth and ensuring that the least team population is gainfully employed and painstakingly
theselected ones initiated entrepreneurial development schemes. (Fasua K.O 2006) has noted that
18
believe of such policy makers and decisions will inculcate entrepreneurial spirit in the mind of
people so as to prepare them for wealth creation through small scale enterprises. SSEs are
generally distinguished by the nature of their production and management arrangements, trading
relations, financial practices, internal competence; e.t.c. SSEs have been recognized by
government and development experts as the main engine of economic growth and a major factor
by extension in promoting the realization of the financial systems strategy 2020. This because
the development of this sub-sector is an essential element in the growth strategy, not only in
contributing improved standard of living, they also bring substantial local capital formation and
achieve high level of productivity capacity (Etim E.O, 2010). Typically, the following features in
varying degree characterize SSEs in Nigeria. Small units often rural-based and family-owned,
small independent enterprises, standing alone and producing for a well-defined market
specialized firm, producing specialized products, selling to the international and/or local markets,
rely on low cost of raw materials, low energy costs, low labour costs, low division of labour,
flexible and often small production runs, low capital formation and largely labour intensive units
with low-level technologies (Nwankwo, F. 2012).SSEs exists in the form of sole proprietorship
and partnership, though some could be registered as limited liability companies, management
structure is simple thus decision-making is easy. However, ownership and management fuse
together in one person or few individuals. SSEs operate in many areas of economic activities e.g.
manufacturing, transportation, communication, etc. relationship between employer and
employees is largely informal, while majority are labour intensive, requiring more human per
capital per unit of production. Its’ usually make greater use of local raw materials and
technologies involved are always very simple. They enjoy wide dispersal throughout the country
providing a variety of goods and services, limited access to financial capital due to inadequacy of
19
collateral are also involved. On this context that in 1992, the National Council on Industry
streamlined the various definition of SSEs in order to remove ambiguities and agreed to revise
them every four years. Hence, small scale enterprises were defined as those with fixed assets
about N 1 million but not exceeding N 10 million Naira, excluding land but including working
capital, while medium scale enterprises are those with fixed assets, excluding card but including
working capital, of over N10 million but not exceeding N40 million. The definitions were
revised in 1996 with small scale industry defined as those with total cost, including working
capital but excluding cost of land above N1million but not exceeding N 40 million with a labour
size of between 11 and 35 workers while medium scale industry was defined as to those with
total cost, including working capital but excluding cost of land, above N40 million but not
exceeding N150 million with a labour size of between 36 and 100 workers(Ademi K.S. 2008)
On this backdrop that the small and medium scale enterprises Development Agency (SMEDAN)
was established in 2003 to coordinate, promote and facilitate the growth and development of
MSSEs. The institution becomes operational in 2005. SMEDAN receives funding from the
Federal Ministry of Trade and Investment, BOI and NERFUND. SMEDAN has over 300
employees in the entire country and is not financial or legally empowered to create interventions,
but plays an advisory and facilitating role such as delivery demand side capacity building for
MSSEs, Assisting in drafting MSMs laws, promoting MSME cooperatives, collecting
information from a national survey of MSSEs, developing a ratings agency for MFBs, reworking
and managing 23 of the Industrial Development Centres (IDCs) (United Nation 2006).
SMEDAN’s primary focus is on demand side capacity building of entrepreneurs, through 15
Business Support Centres (BSCs) and 37 Business Information Centres (BICs). In April 2010,
the small and medium enterprise credit guarantee scheme SMECGs was launched as a guarantee
20
scheme available to participating banks (DMBs) and (MFBs) in Nigeria for guaranteeing lending
to SSEs. The fund is N200 billion in sizes for the scheme. It is the responsibility of the SME to
notify the participating banks that they wish to utilize SMECGs to cover the loan after which the
participating bank makes the application to the CBN on their behalf. It is up to the participating
bank to advertise the scheme to borrowers. Hence the SSEsare defined as it contained in the
national definitions (Olorunshola J.A. 2003).
However, the CBN wholly funds the Scheme and is the managing agent and responsible for the
day to day administration of SMECGs. The CBN has authority to monitor the projects. The
modalities for participating banks are that maximum loan size distributed will be N 100 million
and maximum loan tenure will be 7 years and/or a working capital facility of one year with
provision for rollover. The turnaround time is stipulated to be no more than 60days. The
participating banks’ lending rate is the prime lending rate. Every loan must be collateralized with
adequate collateral that is both realizable and acceptable to the participating Banks, as stated in
the guidelines. The CBN has committed that the guarantee will cover 80% (percent) of the
principal and interest. The guarantee will be executed as the point of loan disbursement and can
be redeemed once the loan has been declared as a non-performing loan (NPL).
2.3.2 Microfinance Banks loan contributions to Small Scale Enterprises
The contribution of microfinance Banks Loans on SSEs in Nigeria is huge and still becoming.
This suffices not to say that major strides are yet to be made. Microfinance banks in Nigeria
undertakes all baking and financial services provision that mega banks do but on small scale to
small and medium scale entrepreneurs. They basically render services to the poor for poverty
alleviation and also deal in business development and improvement of SSEs (Thom-Otuya, C.V.
21
& Chukuigwe, N. 2014). In their view, therefore, microfinance banks are used as traditional
banking instrument to serve their customers. Statutorily, a micro finance bank is not allowed to
lend more than N500, 000 to a single individual or business, but microfinance banks credit
classification is more stringent than the mega banks. In their case, account can be classified
losses if it stays indebtedness by a debtor for interest and capital for up to 365 days. Hence,
microfinance loan if they remain for 90% (percent) days can be classified losses.
Intermittently, micro bank operators opt for very short term liquid loans. (Majoux, L. 2001)states
that while microfinance has much potential, the main effects on poverty have been;
 Credit making a significant contribution to increasing incomes of the better-off poor,
including women,
 Microfinance services contributing to the smoothing out of peaks and troughs in income
and expenditure thereby enabling the poor to cope with unpredictable shock and
emergences.
The contribution of micro, small scale enterprises (SSEs) to economic growth and sustainable
development is widely acknowledged in developed and developing Economies (Cetnral Bank of
Nigeria 2005). Considerably, in Nigeria, microfinance loan is granted to the operators of microenterprises, such as peasant farmers, artisans, fisher-men, youths, women, senior citizens and
non-salaried workers in the formal and informal sectors. The loans are usually unsecured, but
typically granted on the basis of the applicant’s character, and the combined cash flow of the
business and household. However, the term of the loans is usually within 180 days which is 6
months. In a special case where the tenures are longer than six (6) months it would be treated as
such. In case of agriculture, or projects with longer gestation period, a maximum tenure of 12
22
(twelve) months is permissible while in housing microfinance, a longer tenure of twenty-four
months is permissible. Microfinance loans may also require joint and several guarantees of one
or more persons. The repayment may be on a daily, weekly, bi-monthly, monthly basis or in
accordance with amortization schedule in the loan contact (Central Bank of Nigeria, 2011).
2.3.3 The Role of Microfinance Banks Promoting Small Scale Enterprises in Nigeria.
Microfinance Banks in Nigeria has played most significance roles of mediating between SSEs
and donors of Micro credits. It serves as channels by which soft loans are passed through to the
poor, vulnerable, low income earners, artisans, entrepreneurs, etc. Microfinance Banks ensure
that those policy guidelines are strictly adheres in dispensing grants and facilities for these
groups as appropriate as possible. The role played by microfinance banks in ameliorating
poverty, ensuring no barricade in access to micro credits, policies guidelines are followed, as
well as entrepreneurial development which limits all setbacks on the acquisition of these SSEs
loans in the country has been tremendously remarkable.
Lending on SSEs has been the bedrock of most countries economic growth. SSEs as a backbone
of accelerated growth in terms of its contributions to GDP in most economies like ours need
being given keen attentions in other to achieve developmental goals. They help in governmental
and non-governmental donors to reach their end users. It promotes quality services by accepting
savings, granting of savings, provision of advisory and mental services, advancing business ideas
and businesses knowledge recycling (Adeleke, A. 2002).The CBN and other multinational
foreign donors such as IMF, World Bank, UNESCO but to mention a few uses MFIs to articulate
their goals, as well as reach their targeted audience through the countries collaborating agencies
etc. MFB also played a vital role in area of policy directions, programmes implementations, as
23
ensuring progress reports, awareness and donor supports mechanisms, outline are adheres with
(Okpara, G. C. 2010).
In Nigeria, credit has been recognized as an essential tool for promoting small scale enterprises
(SSEs). There is an increasing recognition of its pivotal role in employment generation, income
redistribution and wealth creation (NISER, 2004). The small scale enterprises (SSEs) represent
about 87 % (percent) of the firms operating in Nigeria (USAID 2015). (Ejiogu, A. O. & Ejiogu,
B. C. 2010) also established that microfinance institutions played crucial roles on economic
growth and development, especially in their services for unserved or underserved markets to help
meet development objectives which include to reduce poverty, create employment, help existing
businesses to grow, diversify their activities, empower women and other disadvantaged groups
and even encourage the growth of a new businesses. Microfinance Banks in Nigeria has played
the role of mediating between SSEs and donors of micro credits.
Microfinance banks advances its course by ensuring that the facilities met for SSEs are not get
loss or entered into wrong hands. It also involves in not just given short and long credits but
develops programmes which tend promoting the scheme as contains other vices. Another of such
roles is the CBN through its department of development finances has worked out different
programmes to make low-interest loan available for key operator in the SSEs branches of the
economy and in the agricultural value chain. One of such programmes is the improvement of
band lending to the real sector. Emphatically, it must be noted that CBN also empowers small
scale business enterprise through credit guarantee scheme (SMECGS) by provision of guarantee
as well as training for providing entrepreneurs in specialized centres in different locations in the
country. Its role is to promote access to credit by SSEs in Nigeria, setting pace for
24
industrialization of the Nigerian Economy and to increase access to credit by promoting SSEs
and manufacturers.
2.4
Empirical Framework
Several empirical disclosures have been carried out to evaluate the impact of microfinance bank
on the development of small scale enterprises in Nigeria. There seems to be a consensus from
most of these studies that microfinance banks have impacted meaningfully on SSEs development
as well as economic growth and these were justified in different views as follows. In a study
conducted on the effects of micro financing on small scale enterprises (SSEs) in Nigeria using
some of the small scale enterprise and micro finance bank in the state. The study indicates that
microfinance enhances survival of Small scale business in Nigeria, that microfinance does not
enhance growth and expansion capacity of SSEs in Nigeria, the study revealed that microfinance
impacts significantly on the level of productivity of MSEs operators in Nigeria and that the
provision of non-financial service by microfinance institutions enhances the performance small
scale enterprises (SSEs) in Nigeria.
2.5
SUMMARY OF THE LITERATURE REVIEW
In summary of the majority of the authors in the review of literature reflected the stress small
scale encounter while trying to obtain loan from microfinance bank to boost their businesses.
Also it is stated that some of the small scale business fails to benefit from microfinance bank
opportunity due to their inability to meet up with the criteria.
25
CHAPTER THREE
3.0
METHODOLOGY
This chapter aimed at discussing the entire method in carrying out research work and how the
data collected was generated for analysis in order to supply solution to the research question.
The research method employed was Description Techniques and Statistical tools. This research
was based on administering prepared questionnaire to some of small scale business owners and
the Micro finance bank in Nigeria, in their respective business place.
3.1
Research Design
Fagoyinbo (2014) define research design as the plan or strategy for conducting a result. It is the
plan structure and strategy operated by the investigator to provide answers to the research
questions and to control variance. The Study employs the co-integration econometric technique
which helps to explain the short run dynamics and the long run (steady state) effects of
microfinance banks on small and medium scale enterprises in Nigeria.The methodology was also
used by (Brow J.D, 2004) to examine stock market development and economic growth in
Mauritius. However, because time series data are not usually stationary in their level form but in
their first-order differences (Niskanen, M & Niskanen, J 2007). There is therefore the need to
investigate the stationary of variables in our model and whether or not there is any evidence of
co-integration among the hypothesized variables. If the explanatory variables in their level forms
are not stationary but their first difference are stationary and these variables are co-integrated
with Small Scale Enterprises, then an Error Correction model (ECM) will be appropriate.
26
3.2
Sources of Data
The data used in this study are secondary data and sourced from the Nigerian stock exchange
publications and the Central Bank of Nigeria Statistical Bulletin (2015). It covers a period of 10
years (2010 to 2020). The choice of the period is predicated on the fact that the period is long
enough to be able to capture the various impact of microfinance bank variables on Small Scale
Enterprise in Nigeria. Also, the period witnessed the various reforms in both microfinance banks
and Small Scales Enterprise in the state. Thus, it enables us to have a fair evaluation of the effect
of microfinance bank on the SSEs in the short run and at the long run.
3.3
Sampling Techniques
The descriptions of the procedure use in selecting the sample and for the purpose of this study
are of two types. The analytical techniques employ by the study are description techniques which
suggests ratios based on the observations from the data collection and the statistical tools applied
in analyzing the annual reports/financial statement in order to establish the association between
the variables postulated in the hypothesis.
3.4
Method of Data Collection
To get reliable, adequate and accurate information both primary and secondary data collection
source were used.
Primary Data Source: Thesource of gathering the data includes the use of questionnaire and
personal interview. The questionnaire was designed to avail the respondents the opportunity to
provide answers to question asked. Microfinance bank in Nigeria and some of the Small scale
Enterprise served as the source where information concerning this study was elicited.
27
Secondary Data Source: This method involves the use of external data which include hand
books, daily news papers, magazine, textbook etc.
3.5
Questionnaire Design
The questionnaire was designed in such a manner that covers the areas of the study. The
questionnaire was designed and articulated to make sure that it only contained well designed and
clear questions.
The questionnaire was categorized into two; section A and B. section A contains questions on the
bio data of the respondents while section B are questions that are related to the research topic.
3.6
Reliability and Validity Test
Reliability refers to the extent to which we get a consistent measurement. The reliability of a
questionnaire is ability to give same result when filled out by likeminded people in similar
circumstances. For the purpose of this research, the Cronbach’s Alpha test was used to measure
the internal consistency of the research.
Validity as defined by Ifenowo (2012) as the extent to which any research instrument measures
accurately that which it purports to measure. To test the validity of this work, the by the research
instrument was subjected to content validity done by the project supervisor. Content validity was
used to know the extent to which the information sought from the respondents is relevant to the
topic of the research work. In addition to the validation done by the supervisor a factor analysis
was also conducted by the researcher.
28
However for the purpose of this research work, the basis of data analysis is through SPSS in
which simple linear regression analysis was conducted in testing the hypothesis.
3.7
Method of Data Analysis
Many statistically tools are available for the use in analyzing research data and testing
hypothesis. Some of the tools include chi-square the spearman coefficient of rank order
correlation and the Pearson’s product moment correlation co-efficient.
3.8
Model Specification
Some microfinance variables exerting some influence on small and medium scale enterprises.
Thus, the model is specified in functional form as follows:
SSEs = f(MASSET, MDEP, MGE, MFLOAN)
However, the econometric form of the model is stated thus;
SSEs = β0 + β1 MASSET + β2 MDEP + β3 MGE + β4 MFLOAN + Ut.
Where: SSEs = Small Scale Enterprises
MASSET = Microfinance Bank Assets
MDEP = Microfinance Bank Deposits
MGE = Microfinance Bank Gross Earnings
MFLOAN = Microfinance Bank Loans
Ut = s the error term
29
The a priori expectations in the model are β1, β2, β3, β4 > 0
3.9
Justification of the Model
Our model estimation and methodology in use are consonant with the procedure adopted in
(Osatimehin, K. O, 2012) on Microfinance Bank as a Catalyst for Entrepreneurship Development
in Nigeria: Evidence from Nigeria. Their assessment was to know the extent to which
microfinance banks and their operations can impact entrepreneurship development in Nigeria.
They however measured entrepreneurs with Number of employees created and profit earned by
the use of multiple regression analyses as well as secondary data. The independent variables
were specified as capital adequacy (CA), asset quality (AQ), earning and liquidity (ES). Where
No of employee
(EMP) = ao+b1CA+b2AQ+b3ES+b4LQ+µ while Profitability
(PFT) = do+e1CA+e2AQ+e3ES+e4LQ+µ. This was also inconsequent with the works of Olawe
et al. (2013) on empirical study of the impact of microfinance bank on small enterprise growth in
Nigeria. The work basically uses primary data to capture Small Business Growth (SBG) in entire
Nigeria SSEs. The Study randomly selected 85 SSEs Operators as sample size and was regressed
against the independence variables proxy by microfinance variables as capture in their work as
Loan Disbursement (LDM), Loan Repayment (LRM), Interest Rate (IRR), Loan Duration
(LDR), and Collateral Security (COS). The model is SBC = β0 + β1LDM + β2IRR + β3LDR +
β4LRM + β5COS + µi.
LIST OF MICRO-FINANCE BANKS
LAPO Micro-Finance Bank
30
Astra Polaris Micro-Finance Bank
The Federal Polytechnic, Micro-Finance Bank
Ojokoro Micro-Finance Bank Ifo Ogun-State
LIST OF SMALL MEDIUM ENTERPRISES
Classic foods and event Sango Otta Singer Ewupe Ogun-State
Goodwill Ceramics Tiles Nigeria Agbara Ado, Igbesa Abeokuta Ogun-State
Abesco Plaze Ilaro Ogun-State
Obi Business Enterprise Ayetoro Ogun-State
31
CHAPTER FOUR
DISCUSSION OF RESULT
In this section, we empirically estimate a model that helps explain the long run (steady state)
impact of microfinance bank on small scale enterprises in Nigeria. However, because some
recent studies on macroeconomic variables in Nigeria suggest time series data are not stationary
in their level form but that their first-order differences are (Nwaobi, 2000), there is the need to
investigate the stationary of variables in our model and whether or not there is any evidence of
co-integration between microfinance bank and small and medium scale enterprises variables.
Using table 1: Do Microfinance bank micro credit make positive impact on small scale
businesses?
Responses
Code
Fo
Fe
Fo-Fe
(Fo – Fe)2
(Fo − Fe)2
2𝑎
Strongly Agree
5
24
22
2
4
0.18
Agree
4
38
22
16
256
11.64
Undecided
3
11
22
-11
121
5.5
Disagree
2
29
22
7
49
2.23
Strongly Agree
1
8
22
-14
196
8.91
110
110
Total
Therefore X2c = 28.46
Degree of freedom (df) = (K-1)
= (5-1)
32
28.46
= (4)
df = 4
Degree of freedom (4) at 0.05 level of significance will give 9.49 table value of Chi-square (x2t)
Hence
X2c = 28.46
X2t = 9.49
Decision based on finding
Since the calculated value of chi-square (x2c) is greater than the table value of chi-square (x2t)
x2c > x2t (28.46 > 9.49) then the alternative hypothesis (H0) which states that micro-credit from
microfinance do not affect the performance of small business in Nigeria.
Alternative Hypothesis (H1): Micro finance has failed in playing its role of pulling resources for
utilization by small businesses in Nigeria.
Table 2: Does Micro Finance Failed in playing its role of pulling resources for utilization by
small scale businesses?
Responses
Code
Fo
Fe
Fo-Fe
(Fo – Fe)2
(Fo − Fe)2
2𝑎
Strongly Agree
5
42
22
10
100
4.5
Agree
4
23
22
1
1
0.09
Undecided
3
16
22
-6
36
1.64
Disagree
2
27
22
5
25
1.14
33
Strongly Agree
1
Total
2
22
110
110
-20
400
18.18
2.55
Therefore X2c = 28.46
Degree of freedom (df) = (K-1)
= (5-1)
= (4)
df = 4
Degree of freedom (4) at 0.05 level of significance will give 9.49 table value of Chi-square (x2t)
Hence
X2c = 26.51
X2t = 9.49
Table 3: Do Microfinance bank affect the performance of small scale business?
Responses
Code
Fo
Fe
Fo-Fe
(Fo – Fe)2
(Fo − Fe)2
2𝑎
Strongly Agree
5
42
22
10
100
4.5
Agree
4
23
22
1
1
0.09
Undecided
3
16
22
-6
36
1.64
Disagree
2
27
22
5
25
1.14
34
Strongly Agree
Total
4.1
1
2
22
110
110
-20
400
18.18
2.55
Decision based on finding
Since the calculated value of chi-square (x2c) is greater than the table value of chi-square (x2t)
x2c > x2t (26.51> 9.49) then the alternative hypothesis (Hi) which states that small and medium
scale industry will not be improved with the introduction of microfinance.
DECISION RULE: REJECT H0 IF X2C>X2T OTHERWISE ACCEPT H1
Hence the calculated is greater than the tabulated we therefore reject the Null Hypothesis (Ho:)
and accept the alternative hypothesis (Hi).
35
CHAPTER FIVE
SUMMARY AND CONCLUSION
The role of microfinance banking in the growth and development of small and medium scale
enterprises has been recognized in the extant literature across the globe. This is true because,
microfinance banks provide the closest link with micro, small and medium enterprises by
providing them with the necessary funds needed for the day-to-day running of the enterprises. It
has been severally argued by many scholars such as Carpenter (2001), and Lawson (2007) state
that lack of access to finance has been identified as one of the major constraints to small business
growth. The reason is that provision of financial services is an important means for mobilizing
resources for more productive use (Watson and Everett, 1999). The extent to which small
enterprises could access fund determines their savings and investment capacity.
5.1
RECOMMENDATION
In view of the findings of this study, the following salient recommendations are made: Since,
the result of the study indicates a significant negative relationship between SMEs and
microfinance bank loans, there is the need to spread the loan repayment over a longer period or
increase the moratorium. This will enable the microfinance clients to have greater use of the loan
over a reasonable period for meaningful and profitable investment that will assure easy
repayment and thus, impact more positively on the overall growth and development of small and
medium scale enterprises in the country. There is also the urgent need for microfinance banks’
operators and relevant regulatory authorities to evolve a policy measure that will ensure that
microfinance bank’s assets base, deposits and gross earnings are improved upon in order to
36
effectively support the growth of the SMEs sector in the country. In addition, the government
through its appropriate agenciesshould closely monitor the loan disbursement processes to ensure
that loans are appropriately disbursed to the right firms for the right purposes. This will surely go
a long way to avoid incidences of loan diversions occasioned by corruption and sharp bank
practices by bank staff.
Finally, the Government should arise to its responsibility to the sector by providing the enabling
environment for microfinance banks to strive and effectively support the SMEs performance
through the provision of relevant infrastructural facilities such as security, modern bank’s
technology, telecommunication, electricity, water and efficient transportation system that will
help to enhance the overall growth and development of the SMEs sector in the country.
37
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41
Please mark, “√” on the space that agrees with your answers.
KEY:
FSLC (FIRST SCHOOL LEAVING CERTIFICATION), SSCE (SENIOR SCHOOL
CERTIFICATE EXAMINATION),
DEMOGRAPHIC SECTION:
1. Educational Level:
(a) FSLC/SSCE
(b) OND/NCE
(a) 18 yrs – 40 yrs
(b) 41 yrs - 70
(c) HND/BSC.
(d) OTHERS
2. Age:
3. Marital Status:
Single
Married
(c) 71 and Above
Divorced
QUESTION SECTION
4.
QUESTIONS
Is there any impact of Microfinance bank to small scale businesses?
5.
Do Microfinance banks have meaningful impact in the performance of
small scale businesses?
6. Do Microfinance bank micro credit make positive impact on small
Scale businesses?
7.
Do Micro finance bank affect the performance of small scale
business?
8.
Is there wrong impressions about Microfinance bank performance on
small scale business?
9.
Do you think Microfinance bank will improve in their performance
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in supporting small scale businesses?
10. Has Microfinance bank achieve their goals in supporting small scale
businesses?
12.
Do you think the entire fund raised by Microfinance bank to small scale business is utilized
for the purpose that is meant for?
16.
If answer in No 12 is “Yes” please give reason: -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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