Impact Of Micro-Finance Banks On SMEs In Nigeria

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Impact Of Micro-Finance Banks On SMEs In Nigeria


The critical causes on why financing small and medium scale industries by microfinance banks in Nigeria have not been very effective were evaluated. Not only are the SMEs starved with financial back-up, they are also faced with other external problems such as high interest rates, inconsistency in government industrial policies, lack of infrastructural facilities and internally; poor management practices, high rate of business failure, poor accounting standards, shortage of skilled manpower and financial indiscipline. In view of these numerous problems, this research work was conducted so as to come out with solutions as this will pave way for banks to have more confidence in financing these SMEs efficiently and effectively as against hitherto , their stringent lending policies and the risk averse behavior of funding. This has become necessary as it is a well known fact that the survival, growth and development of SMEs of any country depend largely on funding with other factors put in place.

Chapter One


1.1 Background to the Study

In Nigeria, credit has been recognized as an essential tool for promoting small and Micro Enterprises (SMEs). About 70 percent of the population is engaged in the informal sector or in agricultural production. The Federal and State governments have recognized that for sustainable growth and development, the financial empowerment of the people is vital. If this growth strategy is adopted and the latent entrepreneurial capabilities of this large segment of the people is sufficiently stimulated and sustained, then positive multipliers will be felt throughout the economy. To give effect to these aspirations various policies have been instituted over time by the Federal Government to improve rural and urban enterprise production capabilities (Olaitan 2006)

Small Business Enterprise (SBE) transformation is all about seeking to bring about improvement in the living condition of the farmer, the artisan, the tenant and the landless within the simple and rustic economies of the country-sides and urban slums. The basis for employment generation and entrepreneurship development in the country, therefore, is to enhance the improvement of the living condition of the people (Mustapha, 2009).

The Micro business entrepreneurs lack the necessary financial services, especially credit from the commercial banks; this is because they are considered not credit worthy. Consequently they depended on families, friends and other informal sources of funds to finance their businesses.

Successive governments have come up with special programs, whose principal targets are the overall empowerment of low income earners in urban centers. These programmes range from Agricultural Development Projects (ADPs), the establishment of Agricultural Credit Banks to Better Life Programme for Rural Women and the like. Unfortunately most of the programmes failed to achieve the desired result. That led to the emergence of microfinance banks which aimed at extending credits to micro enterprises and encouraging entrepreneurship.

The Nigerian microfinance industry has come a long way; it boasts of all the four well-known models in the industry. A CBN study identified, as of 2001, 160 registered MFIs in Nigeria with aggregate savings worth N99.4 million and outstanding credit of N649.6 million, indicating huge business transactions in the sector (Anyanwu, 2004). Institutional structures for the provision of micro credit vary and may be any of the following: government or public sector-oriented, NGO supported, traditional or a mixture of two or more of these.

Lagos state, with a population of about 15 million (2006 census report) of which about two -thirds of the residents are poor and struggling for survival in the face of high rate of unemployment, the need for micro finance support cannot be over emphasis. Most of these people in Lagos are dependent on micro and small-scale farming and off-farm enterprises for their livelihood. As such, their entrepreneurial contributions are strategic to the Nigerian economic development and growth has great potential to contribute to income generation and poverty alleviation.

In the light of the foregoing, this study is conducted to examine the impact of microfinance banks on Micro Business Enterprises (SBE) in Nigeria.

1.2 Statement of Problem

One of the challenges of micro financing in Nigeria at present is how to the Micro Finance Institutions (MFI) can reach a greater number of small scale business enterpreneurs. The CBN survey indicated that their client base was about 600,000 in 2001, and there were indications that they may not be above 1.5 million in 2003. The existing microfinance banks in Nigeria serves less than 1 million people out of 40 million potential people that need the service (CBN, 2005).

Also, the aggregate micro credit facilities in Nigeria, account for about 0.2 percent of GDP and less than one percent of total credit to the economy. The effect of not appropriately addressing this situation would further accentuate poverty and slow down growth and development of SMEs in the country.

The Microfinance Banks replaced the ailing Community Banks created by former military head of state General Ibrahim Babangida but was soon caught in the throes of an inefficient Nigerian economic system. This laudable concept has been hijacked by money bags; it has been caught by bureaucracy of the Nigerian politics and economics. The concept of micro financing is presently being misapplied. The CBN directs that every microfinance bank should have a minimum reserve of not less than N20 million, while at the same time directing that the NDIC insures each depositor for a maximum N100,000.00 regardless of the amount of money invested.

These requirements takes the microfinance industry out of the reach of the people it was intended to serve; the very poor. While at the same time it discourages prospective investors because their funds are not sufficiently secured. It is interesting to know that the CBN does not regulate interest rates charged by microfinance banks; so with N20m tied up in the CBN vaults as legal reserve ratio, high cost of incorporation of business ventures; taxes, approvals, rents, salaries etc the operators hardly have enough left to commence operations.

Having failed to capture its target market, Microfinance banks in the country are now trying to compete with full fledged banks but are grossly lacking in the most important aspect of its operations; that is raising funds from depositors and getting prospective clients to shed their phobia for bank loans for fear of exorbitant interest rates charged and hidden bank charges.

According to Akindutire,(2008) Operators of microfinance banks believe it is a short cut to owning a bank without going through the rigours of procuring a banking license or paying the over N250m CBN deposit required to start a banking business. It is commonplace to find a microfinance bank taking out expensive paid adverts and expensive corporate imaging in the hope that it will open them up to the market.

On the contrary it extrapolated their problems. For instance what would a microfinance bank be doing at AdeolaOdeku or Ikoyi? When the target market is at Okokomaiko, Mile 2, or all other places where you can find an akara, plantain (boli) seller, recharge card seller, okada rider e.t.c instead microfinance banks are competing for corporate accounts they want to have salary accounts for government parastatal, or finance petroleum marketing industries, consequently you will find them in suits, chauffeur driven in state of the art cars.

Against the backdrop of the foregoing problems, this study will examine the micro finance institutions and their impact on small scale businesses in Nigeria.

1.3 Objectives of Study

The primary objective of this study shall be to examine the impact of micro finance bank on the Growth and development of Micro Business Enterprises in Nigeria and Lagos in particular. Other salient objectives will include;

  1. To determine the relationship between Micro finance banks and Small Business Entrepreneurs in Nigeria.
  2. To examine the challenges of micro financing in Nigeria
  3. To identify the impact of lack of financial support on small scale businesses
  4. To suggest means by which micro finance institutions can be more responsive to Small business needs in Nigeria

1.4 Research Questions

The following research questions shall guide the study;

  1. What is the relationship between micro finance Banks and small business enterprises in Nigeria?
  2. What are the challenges of Micro Finance in Nigeria?
  3. What are the effects of lack of financial support on Small business?
  4. How can micro Finance institutions be responsive to small business enterprises demands?

1.5 Research hypotheses

The following hypotheses will be tested in the study;

  1. Ho: There is no relationship between Micro finance Banks and Small Business Enterprises in Nigeria
    Hi: There is a relationship between Micro finance Banks and Small Business Enterprises in Nigeria
  2. Ho: Micro finance banks do not encourage small business owners in Lagos
    Hi: Micro finance banks do not encourage small business owners in Lagos

1.6 Significance of the Study

Robust economic growth cannot be achieved without putting in place well focused programmes to reduce poverty through empowering the people by increasing their access to factors of production, especially credit. The latent capacity of the poor entrepreneurs would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant; increase employment opportunities, enhance household income, and create wealth.

However, the lack of required financial support from the microfinance banks to Micro Business operators in Lagos state has become a major concern in Nigeria. Hence, this study shall be relevant to policy makers in the areas of finding out the impact of micro financing on the small scale investors. Also, this study shall enhance further research in the subject area.

1.7 Scope and Limitations of the Study

The scope of the study shall cover micro finance banks and micro business entrepreneurs in Lagos state metropolis. However, owing to shortage of literature and financial data, raw data shall be generated from selected small business operators in Ojo local government area of Lagos state.

1.8 Research Methodology

The study shall employ the survey research method in the process of data collection. The method entails identifying population of study and collection of data through questionnaire administration.

Population of Study

The population of study shall comprise of Small Business Entrepreneurs in Ojo local government area of Lagos state. The population size is at about 420 Micro and Small Businesses Entrepreneurs which largely includes owners of supermarkets, electronic shops, pharmacies, Business centers/ cyber cafes, restaurants, barbing and hair dressing salons, pure water companies and paint companies in the metropolis.

Sample Size

A sample size of 110 respondents was drawn from the study population. The constitution of the sample was as follows;

Sampling Technique

The study shall adopt the stratified random sampling technique. The method entails grouping respondents into strata on the bases of common characteristics which in this case is the industrial affiliation. After the grouping, the simple random sampling technique is then applied to select the required sample size

Data Collection Instrument

Data collection will be done through the questionnaire method. The questionnaire was structured into section A and B with close ended questions. Section A shall generate information on respondents’ bio-data while, section B, will elicits information on respondents perception of the impact of Microfinance Banks on small business enterprises in Lagos State.

The questionnaire is in a close ended format which allowed the respondents to offer their views according to the Lickert scale of responses as follows;

  • SA – Strongly Agreed
  • A – Agreed
  • U – Undecided
  • D -disagreed
  • SD – Strongly Disagreed
Administration of the Instrument

To foster quick response to the questionnaire, the researcher will personally administered the questionnaires to the respondents. The effort enable the researcher to clear some of the items contain in the instrument with the respondents while, at the same time, respondent attention were drawn to some items yet to be filled.

Method of Data Analysis

All data collected shall be analysed using statistical tools such as frequency distribution table, percentages, and T-test for testing the formulated hypotheses.

Chapter Five

Conclusion And Recommendations

5.1 Conclusion

From the analysis of the results in chapter four, one can deduce that the accessibility to credit market for small and medium scale businesses in Nigeria is extremely difficult due to the fact that the macroeconomic instability and uncertainty in the business environment has forced banks to lend short to SMEs. Also such facilities i.e. overdrafts and short term loans are made available at a very high interest rate of over 26 percent and they are heavily collaterised. In a situation in which SMEs are mainly dependent on bank loans, this situation could be very disastrous. The implication is that many SMEs do not have access to bank loans with grave implications for their growth and development. Also the inconsistency in government industrial policies for example the inability of the government to execute budgets on time is a major restriction on the ability of manufacturing firms to factor tariff measures into their trade decisions. The lack of infrastructural facilities is also part of external problems that affect the growth of small and medium scale industries. Here, many banks blame their inability to fund SMEs on the poor economic climate prevalent in the country, citing for instance the low performance of public utilities as one of the factors threatening fund managers.

Apart from the external problems that harm the growth of SMEs, there are also serious internal problems that greatly constrain their growth and serve as a deterrent for banks to lend. These problems include among others poor management practices, high rate of business failure, poor accounting standards, shortage of skilled manpower and financial indiscipline.

On the basis of these problems, some recommendations are made below which , if implemented will improve the dwindling state of our economy in general and the small and medium scale industries in particular.

5.2 Recommendations

There is no way Nigeria can achieve sustainable funding of small and medium scale enterprises by microfinance banks and other agencies such as NERFUND, NIDB etc established for the funding purposes until both the external and internal problems of SMEs are solved. Banks react to the stimulus of the macroeconomic environment and as long as the environment remains unconducive, banks will continue to exhibit risk-averse behavior irrespective of the programs put in place to address this problem including the SMIEIS program that was already highlighted.
The following recommendations in my opinion will help improve the growth and development of the SMEs:

  1. The government should cut down the interest rate since interest rates are not favorable to investors in the sense that the cost of funds could undermine profits and cause a loss of the investment. Interest rates in Nigeria officially are as high as 23.6% and this has a negative impact on the ability of small and medium scale industries to obtain credit from the banks.
  2. The government should be consistent in its industrial policies so as to enable manufacturing firms to factor tariff measures into their trade decisions.
  3. The government should provide adequate infrastructural facilities like electricity, roads and water supply for the SMEs as this will reduce the high cost of doing business. This will encourage banks to fund the SMEs as their investment will be recouped.
  4. The government should regard SMEs should regard SMEs as the ‘eggs’ that hatch big businesses. Apart from the adequate incentives in (3) above, the government should support SMEs by bulk purchasing their products and retailing them both for the domestic market and for exports.
  5. To facilitate their access to bank credits, the government should be issuing LPOs to the SMEs and payment should be made promptly to the SMEs as this will encourage their growth and the banks can also accept such contract papers as collateral.
  6. On the issue of the internal problems of the SMEs like poor management practices, high rate of business failure, poor account standards, shortage of skilled manpower and financial indiscipline, the government should set up small business management assistance agencies manned by highly skilled and dedicated workers with the view of tackling these problems. The agencies should compliment the provision of credit by insuring its efficient use through training and counseling of the small and medium scale entrepreneurs.

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