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THE ROLE OF MICROFINANCE IN SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA. (A CASE STUDY OF ENUGU STATE)


Project topic for Economics department

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY     

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

agencies .

    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

development goals.        

  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

source. 

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.

1.2  STATEMENT OF THE PROBLEM

   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.

1.3 OBJECTIVES OF THE STUDY

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;-

  • To  find out the extent to which microfinance institutions have supported the SMEs in Nigeria.
  • To find out if the small and medium scale businesses are making good use of their advances.
  • To find out if the loan given by microfinance institutions have improved the general performance of small scale businesses.


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