Bank finance

Effect of Micro Finance on Small and Medium Scale Enterprises in Nigeria

The effect of Micro Finance on  small and medium scale enterprises in Nigeria has become one of the most debated in Nigeria since the recent recession that hit Nigeria in 2016. Download the full project work from chapter one to five including reference.



1.1           Background to the Study

The role of industrialization in the process of driving economic growth and development has been widely acknowledge in literature. The government of Nigeria has adopted series of policies to develop the industrial sector over time. The initial efforts were government-led through the vehicle of large industry, but lately, emphasis has shifted to Small and Medium Scale Enterprises (SMEs) following the lessons learnt from the success of SMEs in the economic growth of Asian countries (Ojo, 2003). Thus, the recent industrial development drive in Nigeria has focused on sustainable development through small business development. Prior to this time, particularly judging from the objectives of the past National Development Plans, emphasis had been on government-led industrialization, hinged on import substitution strategy. ,,,, Discusing The effect of Micro Finance on small and medium scale enterprises in Nigeria.

Since 1986, government had reduced its role as the major driving force of the economy through the process of economic liberalization entrenched in the IMF pill of Structural Adjustment Programme. Emphasis, therefore, has shifted from large-scale industries to small and medium- scale industries, which have the potentials for developing domestic linkages for rapid and sustainable industrial development.

The contribution of Micro, Small & Medium Enterprises (MSMEs) to economic growth and sustainable development is globally acknowledged (CBN, 2004). There is an increasing recognition of its pivotal role in employment generation, income redistribution and wealth creation (NISER, 2004). The micro, small and medium enterprises (MSMEs) represent about 87 per cent of all firms operating in Nigeria (USAID, 2005).

Whilst MSMEs are an important part of the business landscape in any country, they are faced with significant challenges that inhibit their ability to function and contribute optimally to the economic development of many African countries. The position in Nigeria is not different from this generalized position (NIPC, 2009).

Realizing the importance of small businesses as the engine of growth in the Nigerian economy, the government took some steps towards addressing the conditions that hinder their growth and survival. However, as argued by Ojo (2003), all these SME assistance programmes have failed to promote the development of SMEs. This was echoed by Yumkella (2003) who observes that all these programmes could not achieve their expected goals due largely to abuses, poor project evaluation and monitoring as well as moral hazards involved in using public funds for the purpose of promoting private sector enterprises. ,,,, Discusing The effect of Micro Finance on small and medium scale enterprises in Nigeria.

Thus, when compared with other developing countries, Variyam and Kraybill (1994) observed that many programmes for assisting small businesses implemented in many Sub-Saharan African (SSA) countries through cooperative services, mutual aid groups, business planning, product and market development, and the adoption of technology, failed to realize sustained growth and development in these small enterprises. Among the reasons given were that the small-sized enterprises are quite vulnerable to economic failure arising from problems related to business and managerial skills, access to finance and macroeconomic policy.

Despite MSME‘s important contributions to economic growth, small enterprises are plagued by many problems including stagnation and failure in most sub-Saharan African countries (Bekele, 2008). In Nigeria, the problem is not limited to lack of long-term financing and inadequate management skills and entrepreneurial capacity alone, but also, includes the combined effect of low market access, poor information flow, discriminatory legislation, poor access to land, weak linkage among different segments of the operations in the sector, weak operating capacities in terms of skills, knowledge and attitudes, as well as lack of infrastructure and an unfavourable economic climate.

Lack of access to finance has been identified as one of the major constraints to small business growth (Owualah, 1999; Carpenter, 2001; Anyawu, 2003; Lawson, 2007). 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 can access fund determines the extent to which small firms can save and accumulate their own capital for further investment (Hossain, 1988), but small business enterprises in Nigeria find it difficult to gain access to formal financial institutions such as commercial banks for funds. The inability of the MSEs to meet the conditionalities of the formal financial institutions for loan consideration provided a platform for attempt by informal institutions to fill the gap usually based on informal social networks; this is what gave birth to micro-financing. In many countries, people have relied on the mutually supportive and benefit-sharing nature of the social networking of these sectors for the fulfilment of economic, social and cultural needs and the improvement of quality of life (Portes, 1998). Networks based on social capital exist in developed as well as developing countries including Nigeria.

In 2003, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), an umbrella agency to coordinate the development of the SME sector was established. In the same year, the National Credit Guarantee Scheme for SMEs to facilitate its access to credit without stringent collateral requirements was re-organised and the Entrepreneurship Development Programme was revived. In terms of financing, an innovative form of financing that is peculiar to Nigeria came in the form of intervention from the deposit-money banks.

Despite all these efforts, the contribution of SMEs in the industrial sector to the Nation‘s GDP was estimated to be 32% compared to other countries like India, Japan and Sri Lanka and Thailand where SMEs contributed 40%, 52% 55% and 47.5% respectively to the GDP in 2003, ,,,, Discusing The effect of Micro Finance on small and medium scale enterprises in Nigeria.

(UNCTAD, 2003), hence the need for alternative funding window. In 2005, the Federal Government of Nigeria adopted microfinance as the main financing window for micro, small and medium enterprises in Nigeria. The Microfinance Policy Regulatory and Supervisory Framework (MPRSF) was launched in 2005. The policy, among other things, addresses the problem of lack of access to credit by small business operators who do not have access to regular bank credits. It is also meant to strengthen the weak capacity of such entrepreneurs, and raise the capital base of microfinance institutions.

The microfinance arrangement makes it possible for MSEs to secure credit from Microfinance Banks (MFBs) and other Microfinance Institutions (MFIs) on more liberal terms. It is on this platform that we intend to examine the impact of microfinance on small business growth, survival, as well as business performance of MSEs operators.

1.2           Statement of Research Problems  

Majority of the micro and small enterprises (MSEs) in Nigeria are still at a low level of development, especially in terms of number of jobs, wealth and value creation. This is because 65% of the active population, who are majorly entrepreneurs, remain unserved by the formal financial institutions. The microfinance institutions available in the country prior to 2005 were not able to adequately address the gap in terms of credit, savings and other financial services. As reported by the CBN, the share of micro credit as a percentage of total credit was 0.9%, while its contribution to GDP was a mere 0.2% (CBN, 2005).

The CBN in 2005 identified the unwillingness of conventional banks to support micro-enterprises, paucity of loanable funds, absence of support institutions in the sector, as well as weak institutional and managerial capacity of existing microfinance institutions among other reasons as the major reasons for the failure of past microfinance initiatives in the country. To address the situation, the Microfinance Policy, Regulatory and Supervisory Framework (MPRSF) for Nigeria was launched by CBN in 2005 to provide sustainable financial services to micro entrepreneurs.

,,,, Discusing The effect of Micro Finance on small and medium scale enterprises in Nigeria.

This initiated an important turning point in the microfinance industry with the establishment of the Microfinance Bank (MFB) as an institutional vehicle for privately owned, deposit taking Microfinance Institutions (MFIs). The framework is designed to unite the best of the NGO credit organizations, and new MFI initiatives under a common legal, regulatory and supervisory regime. Five years down the line, though microfinance has proven to be one of the ways of bridging the resource gap created in the Nigerian economy, there are still some undesirable problems experienced against its proper execution. The lack of documentation of the practice of microfinancing in Nigeria has made it difficult to formulate supportive programmes for the growth of the sector.

Despite the potential importance of MSMEs in any economy, high mortality rate among established MSMEs is a matter of major concern in developing economies. International Finance Corporation (IFC) reported in 2002 that only 2 out of every 10 newly established businesses survive up to the fifth year in Nigeria. The report was corroborated by Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) that only 15% of newly established businesses survive the first five years in Nigeria. This is a pointer to the fact that there is a problem. The indispensable role of finance to the growth and survival of MSMEs and the adoption of microfinance as the main source of financing MSMEs in Nigeria therefore makes it imperative to study the extent to which microfinance can enhance small business survival. The study does aimed at assessing the effect of microfinancing on micro, small and medium enterprises in Nigeria.

1.3           Research Questions

The study attempts to answer the following research questions:

  1. To what extent does micro financing enhance the survival of MSEs in Nigeria?
  2. To what extent is the growth of small businesses influenced by the financing capacity of Microfinance Banks?
  3. How does the injection of microfinance funds into small business operations affect the productivity of MSEs in Nigeria?
1.4           Objectives of the Study

The aim of this study is to estimate the effects of microfinancing on business performance of MSEs in Nigeria.

The primary objectives are to:

  1. assess the contributions of microfinancing to the survival of MSEs in Nigeria.
  2. analyse the effects of microfinancing on MSE growth and expansion capacity in Nigeria.
  3. ascertain the effects of microfinance on the productivity of MSEs operators in Nigeria.
1.5           Statement of Hypotheses
  1. Ho – Microfinancing makes no significant contribution to the survival of MSEs in Nigeria.
  2. Ho – Microfinancing does not have the capability to influence the expansion capacity of MSEs in Nigeria.
  3. Ho – Microfinance has no significant effect on the level of productivity of MSEs in Nigeria.
1.6           Significance of the Study

To the best of our knowledge, the impact of microfinance on Micro and Small Enterprise survival and growth has not been empirically tested in the literature, especially in Nigeria. Most researchers in Nigeria have also not taken time to document the nature, mode of operation and processes involved in microfinancing. This study therefore becomes significant in filling this observed gap by testing empirically the impact of both the financial and non-financial services offered by Microfinance Banks on small business growth/survival and by examining the capability of Microfinance institutions in enhancing the expansion capacity of small businesses in Nigeria.

The study also contributes to the literature on microfinance and small business survival.

Successive governments in Nigeria have always had a policy programme for SMEs, but most of the programmes have failed to achieve sustainable growth in the SMEs sub-sector.  Most of the government assisted-programmes have themselves become failures. The findings of this study is expected to inform policy makers regarding the direction of further research into interventionist programmes for MSEs in Nigeria.  The study is expected to help the government to validate or reject the choice of microfinance as the main source of financing MSEs in Nigeria and also suggest ways of improving the existing financing arrangements, if need be.

1.7           Scope of the study

The study provides insight into microfinance and small business survival and growth, as well as provides a measure of the effects of microfinancing on small business performance and productivity in Nigeria. It covers MSEs that have access to microfinance for a period of at least five years (2010 – 2015).

1.8           Limitation of the study

The main limitation of the study is the reliance on information supplied by micro and small business operators who normally do not want to make a full disclosure of their businesses to an unknown person for fear of being subjected to tax payment. In the same vein, most of the small business operators lack proper record keeping practices and do not adhere to standard book keeping and accounting procedures. Some of them do not have the necessary skills needed for sound book keeping, auditing and tax assessment; neither do they employ qualified personnel to undertake such tasks for them.   However, we rely on scientific methods to obtain the data and the analysis is based on superior analytical techniques, which we believe allow us to generalize our findings.


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