Small and medium enterprises are believed to be the engine room for development of any
economy, because they form the bulk of business activities in an economy like that of Nigeria.
The small and medium enterprises are positioned to generate employment, create wealth, reduce
the prevalence of poverty and sustain economic development. Microfinance is the provision of a
broad range of financial services such as deposits, loans, payment of services, money transfers
and insurance to poor and low income households.
Ojo (2009), he emphasized that the goal of microfinance institutions as development
organization is service to the financial needs and underserved market as a means of meeting
development objectives. Microfinance dates back to the 19th century when money lenders were
formally performing the role of formal financial institution such as village banks, cooperative
credit unions, state owned banks; these institutions are those that provide savings and credit
services for small and medium enterprises which is the springboard for sustainable development.
Over the years, microfinance has emerged as an effective strategy for poverty reduction.
Across developing countries, micro, small and medium enterprises are turning to
microfinance institutions for an array of financial services. Microfinance is acknowledged as
one of the prime strategies to achieve the sustainable development goals.
Institutions offering microfinance services are very diverse, including commercial banks,
community banks and state owned development banks. The former/traditional microfinance
institution include; Self Help Groups [SHGs], or the Rotating Saving and Credit Associations
[ROSCAs] and cooperative societies, while the former/modern microfinance institutions
include; community banks, Non-Governmental Organizations’ microfinance institutions
[NGO-MFIs], public sector alleviation agencies, special microfinance schemes and donor
The central Bank of Nigeria Survey (2001) indicated that the operations of formal
microfinance institutions in Nigeria are relatively new; as most of them were registered after
1981. They operate in both urban and rural areas, the roles played by these institutions are
diverse according to the scope of their operations which vary from social to economic roles,
in other words; from financial intermediation to technical and managerial assistance.
According to Anyanwu (2004), the bulk of credit beneficiaries were women, as most of the
microfinance institutions began as NGOs that had the promotion of female welfare as the
basis for their establishment. Apart from the general belief that women are marginalized in
terms of economic opportunities and should therefore have separate promotional agenda, the
microfinance institutions are of the view that women perform better than men in managing
meager resources and promoting micro enterprises.
According to Daily Trust Newspaper (2009) the microfinance policy of the federal
government is already bearing fruits in Kaduna state as the 18 community banks already are
converted to microfinance banks as at January 2009, 23 of such have either been licensed or
given approval and principle by Central Bank to operate. One can say that the microfinance
institutions have been performing below capacity over the years but with the additional
liquidity provided by the recent banks it is expected that the microfinance policy objectives
would be realized which will move the Nigerian economy to the attainment of sustainable
Studies on industrial development countries have shown that small and medium enterprises
constitute a fundamental part of the industrial sector and play an active role and bring
development to these countries. Over the year, the Nigeria economy has been dominated by
large industries which are mostly multinational. This is obviously due to the government
policies which encouraged and emphasized the development of these large industries at
the expense of the small scale industries. Eventually, the Nigerian government recognized the
development of small scale industrial as an imperative prerequisite for sustaining a well
balanced industrial sector. Faust (2000) submits that four basic interrelated inputs are
required to give impetus to their development. They included;
i. Favorable government policies and incentives
ii. Technical assistance
iii. Managerial assistance
iv. Finance assistance
Due to the uncertainties, the lower rate of return, the expense of administration and the
mediocre expense of previous government lending programs, Faust added, financial
assistance for the small entrepreneur has been lacking from both government and commercial
Consequently this heralded the institution dedicated to assisting small enterprises, the
poor and households who have access to financial services. Institutions offering microfinance
institutions are designed financial institutions dedicated to assisting small enterprises, the
poor and households who have no access to financial services. Institutions offering
microfinance services are very diverse, including commercial banks, community banks and
state owned development banks.
With all the measures implemented to encourage new business, help existing businesses
grow and to ultimately improve the economy, there is still a growing concern of business
development. As a means to address this concern, microfinance banks were introduced to
cater especially for the poor low income earners who are underserved by conventional
commercial banks. According to Echo Microfinance, microfinance banks are institutions
licensed by the Central Bank of Nigeria (CBN) to operate as financial institutions that offer
savings, loans, local funds transfer and other financial services needed by the poor
economically active Small and Medium sized Enterprises owners, to operate and expand their
businesses. A large share of the total population of poor SME owners are excluded from
services rendered by conventional financial institutions. According to CBN, 2010 showed a
slight increase in the rate of those served by formal financial market.
The study revealed an increase of 1.3 percent within the first five years after
launching microfinance banks. All economies of the world are characterized by commercial
activities which consist of all businesses or business operations in the economy. Despite
the great desire by Nigerians to become entrepreneurs, only 40% actually start up businesses
and only 20% of these start ups survive (UNIDO, 2015). Establishment of Micro-finance
banks as an effort by the government to improve the access to loans and savings services for
poor people is currently being promoted as a key development strategy to develop businesses
at the grassroots and develop the economy ultimately (Shreiner, 2005).
This study is aimed at examining the roles of microfinance institutions in small and medium
scale enterprises in Nigeria.
Most of the small and medium scale enterprises in Nigeria have remained relatively small
and seen stunted growth over the years. This is due to the fact that a large percentage of
enterprenuers in the country 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.
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. As a result of this,
the high rate of failure of small and medium scale enterprises has become a matter of major
concern in developing economies. Lack of finance, collateral security and overhead dues to
spiral inflation and non-availability of infrastructures discourages microfinance and also
SMEs growth. However, microfinance institutions try to fill the gap of inadequate fund for
SMEs in their own little ways. This research work is carried to investigate the role of
microfinance in small and medium scale enterprises in Nigeria.
The general objective of this study is to examine the role of microfinance in small and
medium scale enterprises in Nigeria. The specific objectives include;-
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