The Contribution Of Micro Finance Banks To The Small And Medium Scale Enterprises In Nigeria (A Case Study Of CRUTECH Micro Finance Bank, Calabar)

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The Contribution Of Micro Finance Banks To The Small And Medium Scale Enterprises In Nigeria (A Case Study Of CRUTECH Micro Finance Bank, Calabar)


Abstract


This study tends to examine the contributions of microfinance banks to the development of small and medium scale enterprises in Nigeria. In both developed and developing countries, the small scale industry is seen as the vehicle for rapid industrialization, sustainable economic growth and development, poverty alleviation as well as the seed bed of innovation and employment generation. This was done because small and medium scale enterprises have been known to play an important role in the development of any country. In order to accomplish the set out objectives of this study, two research hypotheses (Ho1 – Ho2) were formulated which were tested via primary and secondary data. More so, the result shows that Microfinance bank has a significant effect on the growth of small enterprises in Nigeria and Microfinance policy has a significant effect on employment opportunities in Nigeria. The ordinary least square analysis was also used. Based on the results gotten, both hypotheses were rejected. The study ended by giving recommendations that were considered necessary for development.


Chapter One


Introduction

1.1 Background to the Study

Effectively functioning financial markets like micro finance banks have fundamental roles to play in fostering development among small and medium scale enterprises in developing countries like Nigeria. Small and Medium Scale Enterprises are sub-sectors of the industrial sector which play crucial roles in industrial development (Ahmed, 2006). Following the adoption of Economic reform programme in Nigeria in 1981, there have been several decisions to switch from capital intensive and large scale industrial projects which was based on the philosophy of import development to Small and Medium Scale Enterprises which have better prospects for developing domestic economy, thereby generating the required goods and services that will propel the economy of Nigeria towards development. It is based on this premise that Ojo (2009), argued that one of the responses to the challenges of development in developing countries particularly, in Nigeria, is the encouragement of entrepreneurial development scheme. Despite the abundant natural resources, the country still finds it very difficult to discover her developmental bearing since independence. Quality and adequate infrastructural provision has remained a night-mare, the real sector among others have witnessed downward performance while unemployment rate is on the increase. Most of the poor and unemployed Nigerians in order to better their lots have resorted to the establishment of their own businesses. Consequently, Entrepreneurship is fast becoming a household name in Nigeria. This is as a result of the fact that the so called white collar jobs that people clamour for are no longer there. Even, the touted sectors (Banks and companies) known to be the largest employer of labour are on the down-turn following the consolidation crisis and fraudulent practices of the high and mighty in the banking sector. The companies of course are folding up as a result of erratic power supply, insecurity and persistent increase in interest rate which has led to high cost of production and undermines profit making potentials of companies operating in Nigeria (Hassan, 2003).

Since the office jobs that people desire are no longer there for the teeming population, and the few ones that succeeded in getting the jobs are thrown out as a result of the factors identified above, the need for the government and the people to have a rethink on the way-out of this mess became imperative. Hence, the need for Small and Medium Scale Enterprises (SMEs) became a reality as a means of ensuring self-independent, employment creation, import substitution, effective and efficient utilization of local raw materials and contribution to the economic development of our dear nation (Nigeria). All the aforestated benefits of Small and Medium

Scale Enterprises cannot be achieved without the direct intervention of the government and financial institutions like micro finance banks. Over the years a number of policies have been formulated by the government with a view to developing Small and Medium Scale Enterprises. The Nigerian government under the then leadership of Chief Olusegun Obasanjo promulgated micro-finance policy and other regulatory and supervisory frame work in 2005. However, the researcher is examining the contribution of microfinance banks to the Small and medium Scale enterprises in Nigeria.

Microfinance, according to Otero (1999, p.8) is “the provision of financial services to low-income poor and very poor self-employed people”. These financial services according to Ledgerwood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. Schreiner and Colombet (2001, p.339) define microfinance as “the attempt to improve access to small deposits and small loans for poor households neglected by banks.” According to Wikipedia definition, a bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords. Therefore, microfinance bank involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector.


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 entrepreneurs 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. 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. In order to remedy 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. However, although microfinance has proven to be one of the ways of bridging the resource gap created in the Nigerian economy, the country has not enjoyed the full benefits from it due to problems militating against its proper execution. The lack of documentation of the practice of micro financing 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 failures of SMEs has become 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, 2007) 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 performance of SMEs and the adoption of microfinance as the main source of financing SMEs in Nigeria therefore makes it imperative to study the extent to which microfinance can enhance SME growth and performance.


1.3 Objectives of the Study

  1. To examine the contributions of microfinance banks on the development of Small and medium Scale enterprises in Nigeria.
  2. To determine the effectiveness of microfinance banks in Nigeria.
  3. To identify the factors limiting the development of microfinance banks in Nigeria.
  4. To determine the effect of financial services of micro finance banks on the growth of small and medium scale business.

1.4 Research Questions

  1. What is the effects of financial services of micro finance banks on the growth of small and medium scale business?
  2. Are there challenges facing small scale enterprise in accessing bank loan?
  3. What is the impact of non-financial services of micro finance banks on the performance of small and medium scale business?
  4. What are the factors limiting the development of microfinance banks in Nigeria?
  5. Do micro finance banks contribute to small and medium scale enterprises in Nigeria?

1.5 Research Hypotheses

  1. H0: There is no significant difference in the level of awareness of micro finance institutions by small and medium scale enterprises in Nigeria.
    H1: There is a significant difference in the level of awareness of micro finance institutions by small and medium scale enterprises in Nigeria.
  2. H0: There is no significant difference in the difficulties small and medium scale enterprises face when accessing finance from various sources.
    H2: There is a significant difference in the difficulties small and medium scale enterprises face when accessing finance from various sources.

1.6 Scope and Limitation of the Study

This study covers the operations of microfinance banks in Nigeria but particularly focused on Crutech Micro Finance Bank, Calabar with a view of identifying their contributions towards the development of small and medium scale enterprises in Nigeria. In the cause of the study, the researcher encounters some limitations which limited the scope of the study;

Staff Reluctance:

In most cases the staffs of Crutech Micro Finance Bank, Calabar often feels reluctance over providing required information required by the researcher. This result in finding information where the structured questionnaires could not point out.

Researcher’s Commitment:

The researcher, being of full time student spent most of her time on other academic activities such as test, class work, assignment, examination etc which takes average focus from this study.

Inadequate Materials:

Scarcity of material is also another hindrance. The researcher finds it difficult to long hands in several required material which could contribute immensely to the success of this research work.

Financial constraint:

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).


1.7 Significance of the Study

A study of this nature is very imperative as it provides an average Nigerian a means to access to financial services in their localities to boost their standard of living in a sustainable manner in line with the millennium development goal of alleviating poverty in developing countries. The study will assist micro finance institutions to adopt the necessary measures needed to ensure the desired growth in the small and medium scale business enterprises (SMEs) industry. It is also beneficial for formulation of policies and programmes by the federal and state government as they might be looking forward to taking necessary steps to prevent the collapse or failure of small scale businesses in Nigeria and Cross River State in particular. Again, it will enable the entrepreneurs to have more understanding of how businesses should be financed, thus having knowledge on funding further research in this area. Finally, the study would serve as a source of reference for other researchers or members of the general public who need information in the subject. More importantly, entrepreneurs of small and medium scale enterprises may find it useful in the successful operation of their enterprises as the study will unveil some of the reasons why some small and medium scale business enterprises (SMEs) finds it hard to repay their loans.


1.8 Definition of Terms

Microfinance:

Micro finance is defined as providing micro loan to poorest of the poor (basically those are neglected by banks, microfinance provides them loan facility), and a source of financial services for entrepreneurs and small businesses lacking access to banking and related services.

Bank:

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.

Contribution:

Contribution refers to the act of contributing or the thing contributed (such as personal time, money, ideas, private property or assistance).

SMEs:

Small and medium-sized enterprises (SMEs, also small and medium enterprises) or small and medium-sized businesses (SMBs) are businesses whose personnel numbers fall below certain limits. The abbreviation “SME” is used in the European Union and by international organizations such as the World Bank, the United Nations and the World Trade Organization (WTO). Small enterprises outnumber large companies by a wide margin and also employ many more people. SMEs are also said to be responsible for driving innovation and competition in many economic sectors.


1.9 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  1. Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  2. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
  3. Chapter three deals on the research design and methodology adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Summary Conclusion and Recommendation

5.1 Introduction

It is pertinent to note that this research was aimed at finding out the positive impacts of micro finance banks to small and medium scale business, thus the topic “the contribution of micro finance banks ro the small and medium scale enterprises in Nigeria”.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges associated with micro finance banks in Nigeria.


5.2 Summary

Results from the hypotheses testing are not controversial. The results have clearly indicated positive relationships between access to micro-credit and two (2) other variables such as; physical assets acquired by small business and employment of labour. In the first hypothesis test the result indicates that there is a significant difference in the level of awareness of micro finance institutions by small and medium scale enterprises in Nigeria. However, this result is in line with research findings in a study conducted by Skoufias (2004), Tarus et al, (2004) where statistical significant relationship between access to microcredit and fixed assets of small firms was established. The second hypothesis also indicates the same kind of relationship (positive relationship) between micro-finance banks and small and medium scale enterprises. Findings of this research in respect of relationship between access to microcredit and change in the rate of employment concur with the results reported in similar research studies conducted by Papadaki and Chama (2002), Afrane (2000), Tarus et al (2006) and Brown et al (2005).


5.3 Conclusion

The findings of the study shows that Microfinance banks do have a significant impact on the growth of Small Scale Enterprises in Nigeria. Although, SSEs lack the necessary financial services, especially from the Microfinance Banks and the deposit money banks. This is because the entrepreneurs considered loans from microfinance banks as unprofitable and unworthy because of various factors attached to the loan which include high interest rate, difficulty in loan accessibility, and unsatisfactory period of repayment among others. Consequently, most SSEs rather source for loans from families and friends, cooperative society and other informal sources to finance their various businesses. On the part of the financial institutions and government, more still need to be done to increase SSEs‟ credit accessibility, so as to increase their growth and SSEs‟ employment capacity as well as to maintain economic growth. In order to achieve this success, this study recommends that the government should repackage program such as Rural Banking Program RBP introduced in 1977, Thepeoples bank of Nigeria and development of financial institutions such as Nigeria Agricultural And Cooperative Banks, The Nigeria export import bank with the aim to extend credit facilities to the SSEs with less stringent conditions.


5.4 Recommendation

Based on the findings of the study, the following recommendations are proffered:

  1. Financial institutions, particularly microfinance banks should be encouraged increasing their loans and training to SMEs operators. This can be achieved through relaxing the conditions of granting loan, flexible repayment period, reduction in the rate of interest and awareness through routine training and programs.
  2. Government should establish relevant well adapted and appropriately structured financial institutions that will provide non-interest banking services to people who believes that interest led transactions are prohibited based on their religious belief.
  3. Small and Medium Scale enterprise supported by MFBs should be linked up with larger financing windows like the Small and Medium Scale Enterprise Investment Scheme (SMEIS) fund or strategic local and international partners for the expansion of their access to adequate capital for business operations.
  4. Provision of adequate infrastructures in an economy is also very vital for SMEs development. This is because no nation can move forward towards industrilisation with poor social and economic infrastructure. Government should therefore as a matter of urgency rehabilitate the existing facilities and embark upon provision of new ones.
  5. Finally, the bureaucracy involved in registration and commencement of SMEs business should be eliminated. This can give room for the expansion of their activities and pave way for overall growth and development of Nigerian economy.

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