The Impact Of Micro Financial Institutions On The Growth Of Small And Medium Scale Business
This study discusses the impact of Microfinance Institution (MFIs) on the growth of Small and Medium Scale Enterprises (SMEs) in Illorin Metropolis. The study examined the detailed profile of SMEs in Illorin Metropolis, the contribution of MFIs to entrepreneurial growth, the challenges encountered by SMEs in accessing credit and the rate of credit utilization by SMEs. An analysis of the profile of SMEs show that most SMEs are at their Micro stages since they employ less than six people and the sector is hugely dominated by the commerce sub-sector. The research also indicates that MFIs have had a positive effect on the growth of SMEs. Some of the critical contributions of MFIs include; greater access to credit, savings enhancement and provision of business, financial and managerial training. Irrespective of the contributions of MFIs to SMEs, there are challenges that affect their operations of both SMEs and MFIs. The major challenge faced by SMEs is the cumbersome process associated with accessing credit of which collateral security and high interest rate are major setback. The MFIs on the other hand, face some challenges relating to credit misappropriation and non-disclosure of the relevant facts of their businesses. In the final analysis, the research clearly reveals that MFIs have a positive effect on the growth SMEs. In other to enhance a sustained and accelerated growth in the operations of SMEs credits should be client-oriented and not product- oriented. Proper and extensive monitoring activities should be provided for clients who are granted loans.
1.1 Background to the Study
The development of the various sectors of any economy is the basis for its survival, different measures have been put in place by the Federal Government of Nigeria in order to achieve this objective, such as, the establishment of the Finance and Research Institution in 2001, provision of direct financial assistance to small business organization, the Small and Medium Industries Equity Investment Scheme (SMIEIS) in 2001, establishment of Small Scale Industrial Credit Scheme, establishment of Government Intervention Strategies in 2002, provision of Credit Scheme, establishment of National Economic Reconstruction Fund (NERFUND) in 1989, establishment of Industrial Development Centres and Industrial Estate Scheme, etc. The initial efforts were government-led through the vehicle of large industries, but lately emphasis have shifted to Small and Medium Scale Enterprises (SMEs) following the success of Small Scale and Medium Enterprises in the economic growth in the Asian countries. (See Ojo, 2003) as cited in Babajide, 2012). However, the growth of Small and Medium Scale Enterprises over the years has been stunted because they have not been able to meet the requirements for obtaining financial services from the conventional commercial banks, thus their opportunity for expansion has been greatly limited. This shortcoming of the formal financial institution is what initiated micro financing.
In 2005, the Federal Government of Nigeria adopted microfinance as the main financing window for SMEs in Nigeria. The Microfinance Policy Regulatory and Supervisory Framework (MPRSF) was launched in 2005 with the core objective of making financial services accessible to a large segment of the potentially productive Nigerian population .It also addressed the problem of lack of access to credit by small business operators who do not have access to regular bank credit. It also created the framework for licensing, regulation and supervision of privately owned microfinance banks, provides for the participation of various institutions such as deposit money banks, non-governmental organizations, microfinance institutions and financial cooperatives in the provision of financial services. This framework was also extended to SMEs that have little or no access to financial services..
The Microfinance Policy (MPRSF) provides for two categories of Microfinance Bank in Nigeria, namely: Microfinance licensed to operate as a unit bank otherwise known as community bank which can only operate branches or cash centres within a local government with the minimum paid up capital of ₦20 million and the Microfinance Bank licensed to operate in a state or Federal Capital territory with the minimum paid up capital of ₦1 billion.
Small and Medium Scale Enterprises play important roles in the economic growth in both developing and developed nations. Apart from increasing per capital income and output, micro enterprises create employment opportunities, enhance basic standard of living of the populace, enabling entrepreneurs to be self reliant, create wealth, alleviating the adverse effects of growing population and generally promoting effective resources utilization, onsidered critical to engineering economy development and growth.(See Tijani, M.O., 2011). (Ogujiuba, Fadila & Stiegler, 2013; Musa & Aisha, 2012) agree that Small and Medium Scale Enterprises account for well over half of the total share of employment sales and value added and they constitute the most viable and veritable vehicle for self sustaining industrial development, as they possess the capability to grow an indigenous enterprises culture more than any other strategy.
However, as cited in Tijani, M.O.(2011), the role played by Small and Medium Scale Enterprises notwithstanding, its development is constrained by inadequate funding and poor management. The unfavourable micro-economic environment has also been identified as one of the major constraints which most times encourage financial institutions to be risk-averse in funding Small and Medium Scale businesses. Also, the reluctance on the part of the financial institutions to fund Small and Medium Scale Enterprises can be explained by the insufficient capital base of banks. As a result, these enterprises rely on personal assets for working capital, thua making it difficult to operate at full capacity and increase output and sales which will serve as impetus in increasing Gross Domestic Product (GDP) of a nation like Nigeria. Thus, the concern of this research is to examine the impact of microfinance bank on the growth of Small and Medium Scale Enterprises in Ilorin metropolis
1.2 Statement of the Problem
The microfinance banks (MFIs) promoted by the Federal Government of Nigeria was meant to purview credits entrepreneurs who owned Small and Medium Scale Enterprises because of their limited access to sources of finance. Small and Medium Scale Enterprises face a lot of problems in obtaining finance from the conventional finance banks because of the cost of finance, collateral security and the bureaucracy involved in accessing loans; the high interest rate etc. In addition, this entrepreneurs are predominantly made up of illiterates who cannot understand all the paperwork involved in applying for a loan. Also, the banks are not very excited because of the fact that the credit deposited by them is so little compared to what is deposited by customers in other big businesses. These problems and more necessitated the emergence of the MFBs.
1.3 Statement of the Research Questions
Thus, the above problems raises the following questions:
- What are the nature of SMEs financing before the establishment of MFBs?
- What role does microfinance banks play in the growth of SMEs?
- What are the problems Microfinance banks faces in providing finance to SMEs?
- In what ways can the services rendered by microfinance banks be improved upon to enhance the growth of SMEs?
1.4 Objectives of the Study
The broad objective of this study is to examine the impact of microfinance banks on the growth of small and medium scale enterprises in Ilorin metropolis. This specific objective include the following:
- To examine the nature of SMEs financing before MFBs establishment?
- To examine the role of microfinance banks’ in the growth of SMEs in Ilorin metropolis.
- To examine the problems Microfinance banks face in providing finance to SMEs.
- To examine in what ways the services rendered by the Microfinance banks can be improved upon to enhance the growth of SMEs.
1.5 Justification for the Study
A considerable number of literatures have been written on this subject matter both inside and outside the country; (see Babajide, 2011; Olowe, 2013; Moradeyo, 2013; Babalola, 2013 and Agboola, 2012).To the government and policy makers, the study on the impact of microfinance banks on the growth of SMEs will enable them come up with policies i.e fiscal and monetary policies to improve the efficiency of the SMEs. The result from this finding would enable the stakeholders to employ ways to improve the contribution of SMEs to the country. This research work will contribute to the literatures on the impact of microfinance on the growth of SMEs for the benefit of researchers.
1.6 Scope of the Study
This study covered microfinance banks and Small and Medium Scale Enterprises in Ilorin metropolis because Ilorin metropolis is a fast developing city where many Small and Medium Scale Enterprises are springing up and more microfinance banks are being established and also because of the convinience and low cost of carrying out the research work. This work covered the period of 5yrs from year 2009- year 2013.
Five years is often used as a yardstick for survival by demographers (Alexander, Davern and Stevenson, 2010) to permit greater balancing of statistical power of test (as cited in Babajide, 2011).
1.7 Hypothesis of the Study
The hypothesis for this study is stated in null form as follows:
Ho: There is no significant difference between the roles of microfinance banks and the growth of SMEs in Ilorin metropolis.
Ho: There is no significant difference between microfinance banks and the problems they face in providing finance to SMEs in Ilorin metropolis.
Ho: The services rendered by MFBs have no significant difference on the growth of SMEs.
1.8 Definition of Terms:
These are special banks established by the federal government to promote the growth and development of Small and Medium Scale Enterprises/businesses.
It is the provision of a broad range of financial services such as deposits, loans, payment services, money transfer and insurance to the poor and low income households and their microenterprises. (Asian Development Bank, 2000).
Nigeria’s national Council on Industry; an SME is defined in terms of employment i.e. as one with between 10 and 300 employees.
This refers to the proprietor or owner of a privately owned business enterprise. The entrepreneur employs his capital in the business, manages the business resources and takes the risk of business alone. He is self employedi.e he is not employed by anyone but instead he employes others to work for him.
This is a statistical approach to forecasting change in a dependent variable on the basis of change on more independent variables.
An event constituting a new stage in a changing situation.
GDP (Gross Domestic Product):
It is the value of goods domestically produced in a country.
An increase in size, number, value or strength
Discussion, Summary of the Findings, Conclusion and Recommendations
The main findings of this research revealed that micro-financing as practiced in Illorin microfinance banks do not enhance growth and expansion capacity of small and medium enterprise in Illorin. The findings confirmed the views expressed by Olutunla and Obamuyi (2008) that the growth of SMEs is not just dependent on accessing bank loan but accessing the right size of loan at the right time. Looking at the result critically, it was also revealed that among small firm sample, variables such as technology related training received by the entrepreneur, business location, business age and business registration in that order are the variables that impact significantly on small business growth, none of the micro finance variables was found to have significant impact on small business growth for small firm sample. The result also revealed that variables such as owners‟ education, loan interest, duration of asset loan, business location, technology related training received and size of asset loan, all impact significantly on micro firm growth but the magnitude of the beta coefficient of micro finance variables are so small. When the result was split by type of business activities, the result obtained shows variation in the type of variables that impact significantly on small business growth and expansion. In the service sub-sector, only owners‟ education, gender, business age and size, and duration of asset loan appears to be statistically significant. In the trading sub- sector, repayment of asset loan, loan interest, duration of asset loan and business location and other owner and firm characteristics variables were positively correlated with sales growth and statistically significant too. In the manufacturing sector, it is technology related training received by the entrepreneurs, loan interest, business location, business registration and business age that appears to be statistically significant.
5.2 Summary of the Findings
Profile of SMEs in Illorin Metropolis
The contribution of the SME sector to the economy in terms of employment cannot be ignored.
The SME sector in made up of various sub-sectors such as; commerce, Service, Manufacturing and other artisan bodies. The research shows that the sector is hugely dominated (93%) by commerce which is basically buying and selling. This, the researcher believes, is due to the fact that very little capital is needed to begin and operating such businesses does not require any regulatory processes. It was also revealed that about 72 percent of the total population of SMEs in the Illorin Metropolis is at their Micro stages since they employ less than six people in their businesses. This shows that the sector though has a potential for growth is faced with a high capital constraint.
In terms of start-up capital, the research unveils that Financial Institutions play an important role as most respondents indicated that the source of their start-up capital were financial institutions.
The Contribution of MFIs to the Entrepreneurial Activities of SMEs
As mentioned earlier, the major setback in the SME sector is capital constraint and this constraint, as it were, are supposed be minimized by the existence of the traditional banks through credits. However, most entrepreneurs have indicated that access to credit from the traditional banks has been their major problem.
The research finding show that MFIs have contributed enormously to the growth ofthe SME sector through several activities as enumerated below:
- Greater access to credit – The MFIs have provided SMEs a greater access to credit than the commercial banks. Most respondents indicated that 100% of their credit demand was granted. Since most of these SMEs are Micro, their credit needs are very small and their credit needs are most of the times meet. Most SMEs were found to be dealing with more than one MFI, and the credits granted helped to boost their capital and expand their businesses.
- An enhanced saving habit. The traditional banking sector is unable to introduce saving products that will attract Micro businesses. MFIs have been able to create a platform that enables Micro businesses to save the little income they earn on daily basis with little cost. For most MFIs, the saving accumulated is the basis for the amount of loan to be granted. The habit of saving has been enhanced through the activities of MFIs.
- Business, Financial and Managerial Training. A majority of SMEs revealed that they have been beneficiaries of Business, Financial and Managerial training activities of MFIs. Knowing that most entrepreneurs lack or have very little knowledge in financial management, these support services have gone a long way to make them more competitive and very alert to the implications of their financial decisions.
- General effects. The findings also revealed a majority of 86 percent respondents indicating that the operations of MFIs had had a positive effect on their businesses.
The challenges SMEs face in accessing credit. Despite the contribution of MFIs in the activities of SMEs, there are some challenges faced by SMEs in the process of accessing credit.
Some of the SME respondents find the process of accessing credit as cumbersome. Some these challenges are:
Inability to provide the collateral securities in cases where they are demanded.
High interest rate was as mentioned as one of the challenges faced in accessing credit. The high interest rates in most cases make clients unable to repay their loans.
The MFIs on their part provided some of the challenges they also face in granting credit. These are:
- Problem of repayment of loans
- Lack of collateral security required on the part of theSMEs
- Poor records keeping on the part of theSMEs
- Lack of BUSINESS LOCATION in the business accounts and related business information
- Lack of proper documentation in terms of business registration and a permanent businessaddress.
Rate of creditutilization
It is a fact that if credits are misapplied, SMEs will be unable to achieve business growth. The research revealed that 43 percent of respondents in the SME sector felt the need to use business loans for other purposes whiles 31 percent actually indicated that they have misapplied their business loans. This phenomenon is a bit worrying as the increase in this practice will defeat the goals of the MFIs and in the worst scenario make clients unable to repay theirloans.
The research which was undertaken to find the effects of MFIs on the growth of SMEs reveals that MFIs have a positive effect on the growth of the latter, notwithstanding the inherent challenges. It has been noted that, access to credit which is a major challenge in the SME sector has been reduced to a large extent through the operations of MFIs. The findings also show that MFIs have also contributed to the growth of SMEs through the provision of non-financial service such as Business, Financial and Managerial training programmes.
MFIs have also contributed largely in the area of mobilizing savings through their saving schemes that make saving more accessible, less costly and ready to receive little amounts.
The habit of saving is enhanced as low income earners who where hitherto unable to save with traditional banks are offered an opportunity to save. The practice helps to improve capitalization as most of these saving are ploughed back in their businesses.
It is also critical to highlight the challenges that have the tendency of derailing the efforts of the MFIs in granting credit. Some of these are the inability of client store pay their loans and the rate of credit misappropriation. It is worth noting that MFIs provide better access to credit than the traditional banks. However, the research reveals that a good number of MFIs require collateral security before loans are granted and this negatively affects the SMEs as some are unable to provide the collateral requested. High interest rate has also been mentioned as one of the challenges in accessing credit facilities of MFIs. In relation to high interest rate, MFIs have explained that the risk attached to the granting of loans is on the high side and are unable to reduce the interest rates.
In the midst of these challenges, I wish to emphasize that the finding of this research clearly indicates that MFIs have had a positive effect on the growth of SMEs.
In view of the findings made and conclusions drawn from the study the following recommendations are provided to help enhance an accelerated and sustained growth in the SME sector and also provide recommendations to help in the improvement of the services of MFIs.
The MFIs may be quick to measure their success rate by considering factors like high repayment, outreach and financial sustainability, but these may not be success if their activities do not reflect in the growth of SMEs. The growth of SMEs does not only rely on access to credits but also the creation of favorable and formidable business environment.
The MFIs have a great responsibility of ensuring the proper use of credit which is an important facility in business acceleration. To achieve this, credits should client-oriented and not product-oriented.
Proper and extensive monitoring activities should be provided for clients who are grantedloans.
In order to reduce the rate of default, MFIs can research into very profitable business lines and offer credit to clients who have the capacity to exploit such business lines.
Finally, the researcher recommends that business and financial training should be provided by MFIs on a regular basis and most cases should be tailored toward the training need of the client
This study suggests that policies aimed at promoting the growth of small and medium enterprises should adopt a sectoral approach and, within that, address specific issues that affect enterprises at the lower and upper ends of the spectrum of growth and expansion. Thus, approaches and resources should address the most critical determinants of growth in focal sub-sectors, aiming to augment access to critical resources and, perhaps, overcome the disadvantages that cannot be easily varied.
The study recommends that MFIs should increase the duration of their clients’ asset loans, or spread the repayment over a longer period of time, or increase the moratorium. This will enable the clients to have greater use of the loan over a longer period for the acquisition of capital assets and technology.
In order to encourage technology acquisition for MSE expansion, MFIs can categorize their loans into low and high interest loans. The conventional loans to clients can be maintained as high interest loans, while loans for capital assets or technology acquisition should be low interest loans, which can be secured by a mortgage over the fixed asset so acquired by the micro-borrower. To achieve this, the Microfinance Banks should be recapitalized to enable the banks to support MSEs growth expansion adequately.
The Government should urgently tackle the problem of infrastructure development and maintenance. These include electricity, water and efficient transportation system which impact greater on MSE operations. The bureaucratic bottleneck involved in small business registration should also be removed.
Lastly, Government should establish relevant well adapted and appropriately structured institutions and organizations to provide support for MSEs in such aspect as; procurement, supply and distribution of raw material, supply of local/imported machines for use on concessional terms, training in several technical grades, and create favorable market conditions.
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