THE EFFECT OF MICROFINANCE BANKS ON THE GROWTH AND DEVELOPMENT OF SMALL SCALE BUSINESSES
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EFFECT OF MICROFINANCE BANKS ON THE GROWTH AND DEVELOPMENT OF SMALL SCALE BUSINESSES BY JULIUS SAMUEL ADAJI
Transcript of THE EFFECT OF MICROFINANCE BANKS ON THE GROWTH AND DEVELOPMENT OF SMALL SCALE BUSINESSES
EFFECT OF MICROFINANCE BANKS ON THE GROWTH ANDDEVELOPMENT OF SMALL SCALE
BUSINESSES
BY
JULIUS SAMUEL ADAJI
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The small and medium enterprises contributions to
economic growth and development have been recognized
globally, Nigeria inclusive. Ofoegbu, et al. (2013)
agrees that SMEs are the panacea for the economic
development of many developing countries including
Nigeria. They believe that interest on SMEs would
contribute to creation of jobs, reduction in income
disparity, production of goods and services in the
economy, as well as providing a fertile ground for skill
development and acquisition, serve as a mechanism for
backward integration and a vehicle for technological
innovation and development especially in modifying and
perfecting emerging technological breakthroughs. SMEs
contribute to improved living standards, bring about
substantial local capital formation and achieve high
level of productivity and capability. SMEs are recognized
as the principal means of achieving equitable and
sustainable industrial diversification and dispersal.
Previous studies (Ogujiuba, et al 2013; Musa & Aisha,
2012) agree that SMEs account for well over half of the
total share of employment, sales and value added in
Nigeria. SMEs constitute the most viable and veritable
vehicle for self -sustaining industrial development, as
they possess the capability to grow an indigenous
enterprise culture more than any other strategy. SMEs
represent the sub sector of special focus in any
meaningful economic restructuring program that targets
employment generation, poverty alleviation, food
security, rapid industrialization and reversing rural
urban migration.
In Nigeria, one of the greatest obstacles that Small
and Medium Enterprises (SMEs) have to grapple with is
access to funds. This is further compounded by the fact
that even where credit facilities are available, they may
not be able to muster the required collateral to access
such. This situation has led invariably to many of them
closing shop, resulting in the loss of thousands of
unskilled, semi and skilled jobs across the country.
Microfinance emerged as a noble substitute for informal
credit and an effective and powerful instrument for
poverty reduction among people, who are economically
active, but financially constrained and vulnerable in
various countries. Microfinance covers a broad range of
financial services including loans, deposits and payment
services and insurance to the poor and low-income
households and their micro enterprises. Microfinance
institutions have shown a significant contribution
towards the poor in rural, semi urban or urban areas for
enabling them to raise their income level and living
standards in various countries Onugu (2010).
The Nigerian microfinance institutions have come a
long way, a central bank study has identified as at 2014,
870 registered microfinance institutions in Nigeria with
aggregate savings worth N100.4m and outstanding credit of
N749.6m indicating huge business transactions in the
business, Acha (2014). Institutional structures for the
provision of micro credit vary and may be Government, NGO
supported, traditional, or mixture of two or more of
these. There are all those that operate on the line of
informal models. They are credit and savings association
which are based on the traditional experience, they
provides savings and credit services to their members.
1.2 Statement of the Problem
The experience of micro- finance lending in Nigeria had
not been quite successful from the formal model approach
as observed by Arogundade (2010). This is in line with
the CBN Report (2005) that the formal financial system
provides services to about 35% of the economically active
population while the remaining 65% are often served by
the informal sector (CBN 2005). The microfinance policies
recognize these informal institutions and bring them
within the supervisory purview of the Central Bank of
Nigeria (CBN). Notwithstanding, the impact of Micro-
financing on SMEs development and growth in Nigeria have
not met the expectation and demands of the emerging
sector as observed by Ofoegbu, et al. (2013). There still
exist a gap between the expected contribution of micro-
finance banks to the growth of SMEs in Nigeria and what
is actually attainable in Nigeria today. Although there
have been a lot of research on the effect of Micro-
finance banks on the growth of SMEs, mostly in the
developed countries, (Stanley (2008), Megginson (2007),
Robinson (2009)), only a few study the effect of the
contribution of Micro-finance banks on the growth of SMEs
in developing countries, particularly Nigeria. It is on
this backdrop that this study seeks to empirically assess
the effect of micro-finance banks on the growth of SMEs
in Nigeria.
1.3 Objectives of the Study
The main objective of this study is to assess the effect
of Micro-finance banks on the growth and development of
small scale businesses. However, the specific objectives
are;
1. To establish the relationship between micro-financing
and the growth and development of small scale
businesses in Makurdi.
2. To examine the challenges faced by SMEs in obtaining
finance from micro-finance banks
3. To ascertain the impact of micro-financing on the
profitability of SMEs in Makurdi.
1.4 Research Questions
The following research questions were formulated based on
the prior stated objectives.
1. What is the relationship between Micro-financing and
the growth and development of small scale businesses
in Makurdi?
2. What are the challenges faced by SMEs in obtaining
finance from Micro-finance banks?
3. What impact has Micro-financing on the profitability
of SMEs in Makurdi?
1.5 Research Hypotheses
Based on the earlier stated objectives, the following
null hypotheses have been developed to be tested in the
course of this study;
H01: There is no significant relationship between Micro-
financing and the growth and development of small
scale businesses in Makurdi.
H02: There are no challenges faced by SMEs in obtaining
finance from Micro-finance banks
H03: Micro-financing has no significant impact on the
profitability of SMEs in Makurdi.
1.6 Significance of the Study
This research work is very significant in many
aspects. The study is useful to owner of small scale
business organization. It creates awareness about the
existence of micro financial services that are capable of
boosting the operations of small scale business
organizations and enhancing their profitability.
On conclusion, this study is expected to provide an
insight on the workings of Micro-finance banks in the
Nigeria financial system with a view to bringing to bare
their roles and contributions towards the growth of small
scale businesses in Nigeria.
This study is also important in the light that it
will, on conclusion, bring to bare the various problems
that has hitherto besiege small scale businesses in the
country in relation to financing.
Finally, this study represents a humble contribution to
the archive of knowledge and will form bedrock upon which
further studies on the topic can be based.
1.7 Scope of the Study
This study seeks to assess the effect of Micro-finance
banks on the growth and development of small scale
businesses. However, the scope shall be limited to
assessing the effect of Micro-financing on the growth and
development of small scale enterprises in Makurdi
metropolis, Benue State.
1.8 Limitation of the Study
The major limitations that confront this study are
inaccessibility of relevant materials and non-availability
of adequate data. However, measure such as subscribing to
get journals on the internet has been used to curb the
problems of relevant materials and inadequate data.
Another limitation of this study is in the area of
methodological constraints in terms of which type of
analytical technique is most appropriate for the work. In
addition, because of funds and time constraint, the work
is further limited to the selected organizations.
1.9 Definition of Operational terms
Keyword: Microfinance, Microfinance banks, small scale
enterprises, economic growth and development, Benue
state.
Microfinance: flexible structures and processes by
which financial services are delivered to micro
entrepreneurs or it is defined as a development tool
created which access for the economically active poor
to financial services at an affordable price; (CBN,
2011).
Microfinance bank: special banks dedicated to
carryout microfinance services or any company
licensed to carry on the business of providing
microfinance services (CBN, 2005).
Entrepreneur: the proprietor or owner of a small
business enterprise.
Small and medium enterprise: this concept of SMEs has
no any universal accepted definition whereas the CBN
1985 in its credit policy guideline to banks defined
small scale business as those with annual turnover
not exceeding N5000 (excluding cost of land) or
maximum turnover of N5m.
Economic Development: Is a process whereby the real
per capital income of a country increase over a long
period of time subject to the stipulations that the
number of people below an absolute poverty line does
not increase and that the distribution of do not
become more unequal.
Economic Growth: Is the gradual and steady change in
the long-run which comes about by a gradual increase
in the rate of savings and population.
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