THE ROLE OF MICROFINANCE INSTITUTIONS IN THE DEVELOPMENT OF SMALL
AND MEDIUM ENTERPRISES (SMEs) IN NATIONAL TRANSFORMATION
BY
PAUL DUNG GADI
Department of Business Administration & Management,
Plateau State Polytechnic, Barkin Ladi
DAVOU YAKUBU PWOL
Department of Marketing,
Plateau State Polytechnic, Barkin Ladi
SHAMMAH YAKUBU
Department of Business Administration & Management,
Nasarawa State Polytechnic, Lafia
1
ABSTRACT
Nigeria is fast moving towards becoming a developed country. history proves that the small and medium
enterprises, now called the micro, small and medium enterprises in Nigeria have always been given the
required thrust; however, with regard to the capital needs of these small units, there has been a gap
between the needs and the available resources. The goal of this study is to explore the role of
microfinance institutions in expanding economic opportunity and a way forward towards achieving
national transformation. For clear analysis, the study centre on two broad variables; the dependent
variables which is entrepreneurial development and the independent variable which is microfinance
institutions. Three different hypotheses were formulated and tested using various statistical tools such as
chi-square test, analysis of variance and the simple regression analysis. The reveal that: (i) there is a
significant difference in the number of entrepreneurs who used microfinance institutions and those who
do not used; (ii) there is significant effect of micro institutions activities in predicting productivity; and
(iii) that there is no significant effect of microfinance institutions activities in predicting entrepreneurial
development. It argues that with little efforts, the performance of micro finance institutions can be
improved and these institutions can play role better in national transformation than usual.
2
Introduction
Microfinance is not a new concept. It is dates back in the 19th century when money lenders were
informally performing the role of now formal financial institutions. The informal financial
institutions constitute; village banks, cooperative credit unions, state owned banks, and social
venture capital funds to help the poor. These institutions are those that prove savings and have
simple and straightforward procedures that originate from local cultures and are easily
understood by the population (Germidis, et al, 1991). These funds are to finance the informal
sector SMEs in developing countries and it known that these SMEs are more likely to fail
(Maloney, 2003). The creation of SMEs generates employment but these enterprises are short
lived and consequently are bound to die after a short while causing those who gained job
positions to lose them and even go poorer than how they were. It should be noted that
microfinance is not a panacea but it is a main tool that foster development in developing
countries.
The provision of credit has increasingly been regarded as an important tool for raising the
incomes of rural populations, mainly by mobilizing resources to more productive uses. As
development takes place, one question that arises is the extent to which credit can be offered to
the rural poor to facilitate their taking advantage of the developing entrepreneurial activities. The
generation of self-employment in non-farm activities requires investment in working capital.
However, at low levels of income, the accumulation of such capital may be difficult. Under such
circumstances, loans, by increasing family income, can help the poor to accumulate their own
capital and invest in employment-generating activities (Hossain, 1988). Commercial banks and
other formal institutions fail to cater for the credit needs of small holders, however, mainly due
to their lending terms and conditions. It is generally the rules and regulations of the formal
financial institutions that have created the myth that the poor are not bankable, and since they
can’t afford the required collateral, they are considered uncredit worthy (Adera, 1995). Hence,
despite efforts to overcome the widespread lack of financial services, especially among small
holders in developing countries and the expansion of credit in the rural areas of these countries,
the majority still have only limited access to bank services to support their private initiatives
(Braverman and Guasch, 1986). In the recent past, there has been an increased tendency to fund
credit programmes in the developing counties aimed at small-scale enterprises. In Nigeria,
3
despite emphasis on increasing the availability of credit to small and microenterprises (SMEs),
access to credit by such enterprises remains one of the major constraints they face. A 1995
survey of small and microenterprises found that up to 32.7% of the entrepreneurs’ surveyed
mentioned lack of capital as their principal problem, while only about 10% had ever received
credit (Daniels, et al, 1995). Although causality cannot be inferred a priori from the relationship
between credit and enterprise growth, it is an indicator of the importance of credit in enterprise
development. The failure of specialized financial institutions to meet the credit needs of such
enterprises has underlined the importance of a needs oriented financial system for rural
development. Experience from informal finance shows that the rural poor, especially women,
often have greater access to informal credit facilities than to formal sources (Hossain, 1988;
Schrieder and Cuevas, 1992; Adams, 1992). The same case has also been reported by surveys of
credit markets in Nigeria (Taikes, 1989; Alila, 1991; Daniels, et al, 1993).
That is the overall objective of this paper. The specific objectives are to: (i) examine the
importance of entrepreneurial activities to the sustainable development of Nigeria; (ii) examine
the challenges of accessibility to capital for the development of entrepreneurship in Nigeria; (iii)
examine the impact of microfinance institutions on entrepreneurial development; and (iv) create
the awareness of the importance of microfinance institutions to entrepreneurship development in
Nigeria. In other to achieve the above stated objectives, the following research questions are
advanced: (i) does microfinance contribute to entrepreneurial activities that can lead to
sustainable development in Nigeria? (ii) do entrepreneurs have access to capital for the
development of small and medium size entrepreneurship in Nigeria? (iii) what are the prospects
of microfinance in the development of entrepreneurship in Nigeria? Does entrepreneurial
development have any implication on the industrial development of Nigeria? The following null
hypotheses are proposed and tested in the course of this study. (i) There is no significant
difference between entrepreneurs who use microfinance and those who do not; (ii) there is no
significant effect of microfinance institutions activities in predicting entrepreneurial productivity;
(iii) there is no significant effect of microfinance institutions activities in predicting
entrepreneurial development.
Conceptual Issues
4
It has been acknowledged that microfinance captures elements of widespread perception,
broadening, deepening and speeding up the interconnection to poverty reduction and economic
development. Schreiner and Colombet (2001:339) clearly describe microfinance as “the attempt
to improve access to small deposits and small loans for poor households neglected by banks.”
According to Olaitan (2001) and Akanji (2001), the tools of microfinance include increased
provision of credit, increased provision of savings, reponsitories and other financial services to
low income earners or poor households. Thus, simply defined, microfinance is a development
process through the provision of microcredit and savings service to small-scale entrepreneur. The
Olaitan and Akanji perspective on microfinance go in line with Schreiner’s description of the
concept. Schreiner (2001) also proposed a definition of microfinance as “uncollateralized loans
to the poor and small-scale entrepreneurs.” This implies that microfinance provides financial
strength to the low income earners so as to enable them carry on economic activities that can
earn them improved living standard. UNDP (2001) identified microfinance as a major tool
effective in alleviating poverty. It empowers the financially disadvantaged ones. According to
Morduck, et al 92003) and Alegiemo and Attah (2005), microfinance is the financial
empowerment of economically active poor through the provision of microcredit as well as other
productive assets; it enhances the latent capacity of the poor for entrepreneurship, enabling them
engage in economic activities, be self-reliant and also enhancing the household income as well as
creating wealth. While some authors see the concepts of microfinance and microcredit as same in
terms of definition, others opine that microfinance is an extension of microcredit. Osuji (2005)
posits that microfinance is an extension of microcredit services which include savings services to
the low-income but economically active poor. In lieu of this definition, the Canadian
International Development Agency (2005) description of the concept as provisions of small loans
for micro enterprises, agriculture, education and consumption purpose seem incomplete.
Microfinance is a concept that includes mobilization of savings and disbursement of micro-credit
to the economically active poor, so as to provide employment and means of sustainability to
improve the living standard in an economy.
Role of the SME Sub-sector in the Economy
A review of historical experience of economic growth and development in various countries is
replete with success stories of the salutary effect and positive impact and contributions of SMEs
5
in industrial developments, technological innovations and export promotion. These challenges
notwithstanding, SMEs have remained as much important and relevant economic catalysts in
industrialized countries as they are in the developing world. In many developed countries, more
than 90% of all enterprises are within the SME sub-sector while 80% of the total industrial
labour force in Japan, 50% in Germany and 46% in USA small businesses contribute nearly 39%
of the country’s national income. Comparable figures in many other developed countries are
even higher. Studies have indicated that the sustenance of interest in SMEs in the developed
economies is due to technological as well as social reasons more so as those economies are
currently driven by knowledge, skill and technology as opposed to material and energyintensiveness. This is also as a result of a paradigm shift to new processes of manufacturing that
are based on flexible systems and processes of production driven by sophisticated software on
robust hardware platforms. The social reasons include the need for generation of more
employment and poverty reduction through self-employment ventures and decentralized work
centres. Though it is difficult to obtain exact and comparable figures on SMEs for developing
countries, it is obvious that the role of SMEs is equally important in the economies of developing
and developed countries alike. Small domestic markets, inadequate infrastructure, high
transportation costs, shortage of capital and foreign exchange, weak currency, lack of access to
technology and foreign markets as well as surplus low quality labour are the general
characteristics of developing countries and hence are susceptible to being trapped in a
technology divide and investment gap. Foreign direct investment and the acquisition of
technology are indispensable elements for economic transformation these countries require to
achieve sustainable economic growth and poverty alleviation. Although, SMEs in developing
countries and countries with economies in transition are regarded as the engine of economic
growth, they face enormous challenges in attracting investors and accessing modern technology.
Other barriers which SMEs in developing economies face include the lack of effective
investment and technology promotion policies, inappropriate legal and regulatory frameworks,
inadequate capabilities of investment promotion and technology support institutions and the lack
of access to potential investors and sources of new technology, limited technical and managerial
skills, difficulty in obtaining financing and insufficient knowledge about laws and regulations.
Others are inability to achieve economies of scale through integration or linkages, problems of
size and relative isolation such as the difficulties in entering into national and global value chains
6
driven by large multinational corporations. All told, a competitive and resilient industrial sector
relies on an appropriate mix of large, medium and small enterprises for optimum performance.
SMEs certainly play a major role in creating employment income and value added, accounting
for up to ninety percent (90%) of manufacturing enterprises and between forty (40%) to eighty
percent (80%) of manufacturing employment. In developing countries, the role of SMEs is even
more important since SMEs often offer the only realistic prospects for creating additional
employment and thus reducing poverty and enhancing the quality of lives. A healthy SME
subsector is a sine quo non for inclusive and socially sustainable development even though
institutions that provide support services where available are often limited in capacity and
coverage in developing economies. Exports by SMEs usually range between 30 and 50 percent
of total industrial exports in developed and developing countries. In tune with the latest
developments in the world economy and the attendant globalization effects, the role of SMEs
going forward is bound to be even greater and more pervasive with a demonstrable impact on the
emerging world trading order.
Microcredit Programme and the Entrepreneurship Development
Over the last two decades, microcredit became an important tool for alleviating poverty in
Nigeria (Khandkar and Chowdhury, 1996). The overall success of microcredit programmes
depends not only on immediate alleviation of poverty, but also on long-term sustainability.
Long-term sustainability then depends on accumulation assets (Chowdhury, 2004). Njow, more
than 300 non- governmental organisations (NGOs), national commercial banks and specialized
financial institutions operate microcredit programmes in Nigeria. Such programmes have proven
to be a strong means to alleviate poverty through the social and economic empowerment of rural
and disadvantaged women (Tende, 2012). Such a group savings programme can help the rural
women to bring economic security into their lives (Secretary General, UN, 1998). The changing
role of women shows a steady upward growth in the economic activities in Nigeria (Arefin and
Chowdhury, 2008). Studies show that female entrepreneurs are doing better in the service sector
than in the manufacturing sector in Bangladesh (Begum, 2002). Microcredit is a structured
programme under which micro level loans are given to disadvantaged residents, especially to
poor rural women without collateral security. It is a group-based and intensively supervised loan
programmes. The uniqueness of this loan programme is that there is no requirement of collateral
7
security from the borrowers. Anyone can apply for this credit and is also eligible to receive
credit. The purpose of this microcredit programme is to give loans for self-employment that
generates income and allows them to care for themselves and their family members (Sankaran,
2005). These programmes increase income and help the female borrowers to spend more in order
to foster the development of their families. Such programmes also help to increase household
income which in turn, improves the consumption patterns and lifestyles of the families (Hossain
and Sen, 1992; Navajas, et al, 2000). Increased income indirectly improves the level of education
of the borrowers and the awareness about consumption and sanitation needs as well. The
improvement of education among the rural borrowers helps to increase consciousness about their
health and the future of the next generation. Credit programmes increase productive resources for
rural families and their housing conditions and also result in economic security for the
borrowers. The needs of enable them to conduct frequent transactions both for small savings and
for borrowing at irregular intervals (Sinha, 2003). A survey on Grameen Bank shows that
microcredit programmes generated new employment for about one third of its members
(Hossain, 1986). In Vietnam, the microcredit programme has also reduced the poverty rate of the
participants (Cuong, 2008).
Microfinance, SMEs and National Transformation
The transformation agenda is anchored on the pillars and specific targets of the Nigeria Vision
20:2020 (NV 20:2020). However, as a medium term roadmap for secur8ing a better future, the
transformation agenda is targeted at:
a)
Creating decent jobs in sufficient quantities to resolve the protracted problem of
unemployment and reduce poverty;
b)
Laying a foundation for robust and inclusive growth within the Nigerian economy; and
c)
Improving on a sustainable basis the well-being of all classes of Nigerians regardless of
their personal circumstances and location.
Given the rapid growth rate of the economy experienced between 1999 and 2010, averaging 8
percent per annum, a robust real GDP growth rate of 11.7% per annum is anticipated for 20112015. This translates to a nominal GDP of $US475.3 billion (N73.2 trillion) at the end of 2015;
implying that Nigeria would have added over US$282 billion to the current value of her nominal
GDP during the period. Nigeria would have covered over 50% of the journey to meeting the
8
NV20:2020 aspiration of achieving a GDP of US$900 billion. The projected GDP growth for the
period is predicated on improved sectoral performance fuelled by a better domestic business
environment and a favourable global economic arena, combined with improved policy
formulation, implementation and coordination to generate a stable macroeconomic environment
and increased investment.
Economic development cannot be fully realized without programmes that seek to reduce poverty,
especially those that empower the people by increasing their access to factors of production,
especially credit. NV20:2020 aims for 99 million adequately equipped and gainfully employed
citizens that are engaged in productive activities and wealth generation.
This has implications for micro financing and acquisition of other productive assets/means of
production. The aggregate credit facilities in Nigeria account for only 0.2 percent of the GDP
and less than 1 percent of the total credit to the economy. Put graphically, the formal financial
system in the country provides services to only about 35% of the economically active population
while the remaining 65% 11 are excluded from access to financial services and are served only
by the informal financial sector.
Research Methodology
Data were collected from a sample of enterprises to determine the relationship between
entrepreneurial development (the dependent variable) and microfinance (the independent
variable). The theoretical population of the study consists of the entire SMEs in the country.
However, the study was restricted to Plateau State. A simple random sampling technique was
used to select a total of 60 entrepreneurs that constituted our sample size. Primary method of data
collection was used in this study. The primary data consists of a number of items in well
structured non-disguised questionnaire that was administered to and completed by the
respondents. The decision to structure the questionnaire is predicated on the need to reduce
variability in the meanings possessed by the questions as a way of ensuring comparability of
responses. The return rate of completed questionnaire was 80 percent as we were able to get back
48 out of 60 questionnaires given to our respondents. |Thus, only 48 questionnaires were used for
final analysis in this study. Data collected from the questionnaire were analyzed, summarized,
and interpreted accordingly with the aid of descriptive statistical techniques such as total score
9
and simple percentage. Chi-square was used to measure the discrepancies existing between the
observed and expected frequency and to proof the level of significance in testing stated
hypotheses. Regression Analysis and Variance (ANOVA) were computed with the help of
Statistical Packages for Social Sciences (SPSS). The trends, and patterns and relationship among
data were identified and interpreted.
Testing of Hypotheses and Interpretation of Results
Three hypotheses were raised for this study and tested at 0.05 significant level. Hypothesis 1:
There is no significant difference in the number of entrepreneurs who used microfinance
institutions and those who do not.
Table 1: X2 Summary
Variable
X
Adoption of microfinance institutions
38
Non adoption of microfinance institutions
10
df
1
X2-
p-
ob
value
12.44
<0.05
X2 = 12.44, 1 degree of freedom and 0.05 significant level, it implies that most entrepreneurs
chose microfinance institutions (38) 79.2% and non-adoption of microfinance institutions (10)
19.8%.
Hypothesis One is rejected
Hypothesis 2: There is no significant effect of microfinance institutions activities in predicting
entrepreneurial productivity.
Table 2: Model summary of the simple regression for Entrepreneurial Productivity
Model
R
R Square
Adjusted
Std. Error
R Square
of the
Estimate
1
a.
.722
.50
.48
128.4227
Predictors:(Constant microfinance institutions activities)
To test the second hypothesis, simple regression analysis was used to regress the independent
variable against dependent variable used in determining independent variable. Table 2 above
10
indicates the model summary of the simple regression equation that predicted entrepreneurial
productivity. The explanation of the values presented is given in the table below.
Table 3: Summary of Analysis of Variance for Entrepreneurial Productivity
Model
Variation
Sum of
df
Squares
1
F
Sig.
16.64
0.05
Square
Regression
466
1
466
Residential
1316
47
28
1782
48
Total
a)
Mean
Predictors (Constant microfinance institutions activities)
Source: Field Survey, 2012
The model summary table provides useful information about the regression analysis. First, the
‘multiple R’ column is the correlation between the actually observed independent variables and
the predicted dependent variable (i.e. predicted by the regression equation). ‘R square’ is the
square of R and is also known as the ‘coefficient of determination.’ It states the proportion
(percentage) of the (sample) variation in the dependent variable that can be attributed to the
independent variable(s). In this study, 50% of the variations in entrepreneurial productivity could
be accounted for by the microfinance activities. The ‘adjusted R square’ refers to the best
estimate of R square for the population from which the sample was drawn. Finally, the ‘standard
error of estimate’ indicates that on average, observed entrepreneurial productivity deviate from
the predicted regression line by a score of 128.4227. The hypothesis two which stated that there
is no significant effect of microfinance institutions activities in predicting entrepreneurial
productivity was rejected at R = .722, R2 = .50, F(1.48) = .16.64; p<.05. This implies that there
is a significant effect of microfinance institutions activities in predicting entrepreneurial
productivity.
Hypothesis 3: There is no significant effect of microfinance institutions activities in predicting
entrepreneurial development.
Table 4: Model summary of the Simple Regression for Entrepreneurial Development
Model
R
R Square
Adjusted
Std. Error
R Square
of the
Estimate
11
1
a)
.462
.213
.189
2.1427
Predictors (Constant microfinance institutions activities)
Source: Field Survey, 2012
To test the third hypothesis, simple regression analysis was used to regress the independent
variable against dependent variable used in determining independent variable. Table 4 above
indicates the model summary of the simple regression equation that predicted entrepreneurial
development. The explanation of the values presented is given in table 5 below.
Table 5: Summary of Analysis of Variance for Entrepreneurial Development
Model
Variation
Sum of
df
Squares
1
F
Sig.
20.13
0.05
Square
Regression
1127.28
1
1127.28
Residential
2632
47
56
3759.28
48
Total
a)
Mean
Predictors (Constant microfinance institutions activities)
Source: Field Survey, 2012
It states the proportion (percentage) of the (sample) variation in the dependent variable that can
be attributed to the independent variable(s). In this study, 21% of the variations in
entrepreneurial development could be accounted for by the microfinance activities. The ‘adjusted
R square’ refers to the best estimate of R square for the population from which the sample was
drawn. Finally, the ‘standard error of estimate’ indicates that on average, observed
entrepreneurial development deviate from the predicted regression line by a score of 2.1427. The
hypothesis three which stated that “there is no significant effect of microfinance institutions
activities in predicting entrepreneurial development was rejected at R = .462, R2 = .213, F(1,48)
= 20.13; p<.05. This implies that there is a significant effect of microfinance institutions
activities in predicting entrepreneurial development.
Summary of Research Findings
12
This research work has been able to identify the impact of microfinance on entrepreneurial
development in Nigeria. The analysis of data indicates that financial institutions are not
adequately financing SMEs. The findings are as follows:
i.
There is a significant difference in the number of entrepreneurs who used microfinance
institutions and those who do not.
ii.
There is a significant effect of microfinance institutions activities in predicting
entrepreneurial productivity.
iii.
There is no significant effect of microfinance institutions activities in predicting
entrepreneurial development.
iv.
Microfinance is sustainable to the development of entrepreneurship activities in Nigeria.
v.
People have access to capital for entrepreneurship development in Nigeria through
microfinance.
vi.
Microfinance has affected entrepreneurship in the country positively.
vii.
Entrepreneurship develop is vital to the industrialization process of the country.
The major contribution of microfinance institutions to the developing economy like that of
Nigeria is its role in promoting entrepreneurship development in the nation. One of the goals of
entrepreneurship routed by successful Nigerian Government has been the reduction of
unemployment and poverty alleviation. A cordial thrust in public policy for the achievement of
indigenous entrepreneurship through the provision of long term loans and equity capital by banks
for enterprise. Given the gap between savings and invertible funds, the shortfall is provided by
credit delivery. Many newly developed and developing countries have therefore made credit
delivery an endurable strategy in the development of entrepreneurship in both industry and
agriculture.
Conclusion and Implications
The review of several literature shows that the microfinance institutions are evident tools for
entrepreneurship development due to the various services they offer and the role they performs
towards the development of the economy. It is expected that with the current reforms put in place
by the Federal Government through its regulatory authorities, microfinance institutions in
Nigeria will be able to compete favourably in the global market and gainfully increase
entrepreneurship development in Nigeria. Microfinance institutions have positive relationship
13
with the Nigerian economy represented by expanded GDP. Although, interest rate is not
significantly influential, the results of findings of this study can still be summarized that the
microfinance institutions and their activities go a long way in the determination of the pattern
and level of economic activities and development in the Nigerian economy.
Recommendations
The financial institution need to put more effort in financing SMEs, their role need to be felt by
the SMEs in terms of growth and development. This study recommends that guidelines by
microfinance institutions to finance SMEs need to be flexible to accommodate the SMEs only
when financial institutions appreciates and give technical assistant to the SME would be
contributing to the SMEEIS to ensure success in the SME sector. It is the researcher hope that
microfinance institutions in Nigeria will develop more interest in supporting the growth of
SMEs. NV20:2020 strategy to guarantee accessibility, effectiveness and reliability of
microfinance institutions will require regular supervision and declaration of financial records and
ensuring increased access to financial and market performance records. A major policy thrust
will be to encourage cash flow consideration over collateral in SME lending, so that a larger
percentage of business owners, entrepreneurs and new entrants can benefit from the micro-credit
fund.
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