Impact Of Microfinance Bank On Small And Medium Enterprises In Nigeria

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Impact Of Microfinance Bank On Small And Medium Enterprises In Nigeria


This research study investigates the impact of Microfinance Banks on small scale business in Nigeria which results in entrepreneurship development. The issue of sustainable development in the Third World countries like Nigeria has been a growing concern to both the government and private sector. Poverty is a characteristic of Nigerian households or individuals. It has been realized in the recent years that there are limits to which government can promote development. In the light of the recent economic realities, government has come to realize that large scale enterprises alone cannot perform the major roles in the development of any nation’s economy. Thus it now accords reference to Small Scale Enterprises. The importance is based mainly on the fact that such enterprises are likely to bring about a higher value added to domestic industrial production and also to facilitate the development of the economy. This research work adopts a methodology that helps reveal the impact of Micro Finance Banks on Small Scale Businesses in Nigeria. The data for the research work are sourced primarily from respondents to questionnaire. This helps to reveal the impact of Micro Finance Banks on Small Scale Businesses in Nigeria. Diverse books, publications, journals and magazines of International Labour Organization (ILO), Lagos Chamber of Commerce Industries (LCCI), Nigerian-American Chamber of Commerce (NACC), United Nations Development Programme (UNDP). Independent Reporters and Newspapers. For the purpose of this research work, 20 questionnaires were administered. The research work adopts the use of Chi-Square as its statistical tool for data analysis. In summary, the research work establishes that Micro Finance Banks have made impact on Small Scale Businesses in Nigeria. Recommendations are made to ensure greater impact of Micro Finance Banks on financing of small scale Businesses in Nigeria.

Chapter One


1.1 Background of the Study

The recent economic situations in the country have proven to the government beyond doubt, that the large scale enterprises cannot perform the major roles of economic development. This is true for Nigeria being a developing country. Hence, priority has been placed on the small scale Businesses in Nigeria. Government steps in achieving this include ban on importation of goods and commodities, encouragement of local industries, establishment of the small and medium enterprise Equity Investment Scheme (SMEEIS). In 1989, the World Bank projected an increasing size of small and indigenous sector in Sub-Saharan Africa. The small scale Businesses in Nigeria have a reputation as the ‘Seed bed’ for economic development.

The impact of Micro Finance Banks on small scale business cannot be over emphasized. The world today is inhabited by an estimated 6.6 billion people, 2.5 billion of which are believed to be living on less than US $ 2 (N300) a day. This group constitutes much .of World’s unbanked population. They have no access to financial services with which to create wealth. This is because they lack necessary collateral often requested by conventional banking institutions for credit facilities. This goes further to impoverish and worsen national and even global poverty levels. (Anyanwu C. M. (2004).

In confronting this challenge, the federal government through Central Bank of Nigeria (CBN) had carried out different reforms in the banking industries. The reforms culminate in the adoption of Micro Financing. This combat the negligence of the small scale enterprises, by the conventional banking institutions. Micro Finance as oppose to conventional banking is defined as “the provision of credit and lower income group”. It usually involves very small of less than US $200 (N30,000), without any form of ‘formal’ collateral as defined by the Nigeria Micro Finance Newsletter, volume 5, July- December 2007. Central Bank of Nigeria (CBN) defines Micro Finance as providing financial services to the poor who are traditionally not served by the conventional financial institutions. According to CBN three things distinguish micro Finance from other financial products: These are:

  1. Small loans advanced and or saving collected.
  2. The absence of asset- based- collateral and.
  3. Simplicity of operations.

The conventional financial system provides services to only 35% of the economically active population in Nigeria, while the remaining 650/0 are excluded. The Micro Finance Banks were brought under the supervision of the CBN. A micro Finance Policy was put in place to recognize, enhance and their existence formalized. This secures their monetary stability, expand their financial infrastructure and development. This policy injects vibrancy, stimuli for growth, harmonized operating standards and provides platform for economic revolution through the Small Scale Enterprises (SMEs), low investment in the small scale enterprises in the past led to low entrepreneurial drive spirit among citizens. It silences business acumen, business ideas development among youths and encourages redundancy.

The resultant factors of these are unemployment, poverty, social vices like robbery, forgery etc. all these led to low productivity and economic backwardness.

These backdrops justify the introduction of Micro Finance Policy. This helps to develop a long term, sustainable Micro Finance sub-sector that will enhance the Small Scale Enterprises (SMEs) towards economic growth and development.

Micro Finance plays an important role in the fight against poverty, by providing sustainable access to financial services. For instance, Micro Fi4nance helps the poor to increase their income, build viable business and in essence help in reducing their vulnerability .to external shocks (social and economic). It can also serve as a powerful instrument for self -employment to women (CBN 2005).

Nigeria, being a developing country is faced with financial problem low for small scale enterprises (SMEs). This result in low par capital income, poor standard of living, abject poverty, malnutrition, poor health status and a host of poverty related problems.

Micro Finance is about provision of financial services to the economically active poor who are traditionally not served by the conventional financial institutions. Micro Finance focuses its spot light on the Small Scale Enterprises (SMEs). Micro Finance appreciates small business initiatives and ideals. It supports and raises necessary non-collateral based credit facility.

1.2 Statement of the Problem

Over the years, there has been noticeable laxities in the government effort through the CBN in financing small scale business In Nigeria. This makes it difficult for small scale business to thrive. The government however later initiated credit programmes, sectorial Credit Allocation, Concessionary Interest Rate and Agricultural credit Guarantee Scheme (ACGS).

In addition to these were the establishment of Nigerian Agriculture and Cooperative Bank (NACB), the National Agricultural Insurance Corporation (NAJC) , others are the People’s Bank of Nigeria (PBN), the community Banks (CBs) and the Family Economic Advancement Programme (FEAP). In year 2000, government merged the NACB with the PBN and FEAP to form The Nigerian Agricultural Cooperative and Rural development Bank Limited (NACRDB) to enhance the provision of finance to the Agricultural sector. The National Poverty Alleviation Programme (NAPEP), was also created and was given a mandate to provide financial service to alleviate poverty.

All these reforms in the banking sector is to redirect focus on the small scale businesses. This however are confronted with several setbacks. They were with little or no. success. The programmes or initiatives are Micro finance service majorly sponsored by the government. Something significant about the programmes is that they are focused mainly on agricultural and other activities such as tailoring, hairdressing, trading, weaving, agro-processing, black smiting, barbing, transportation e.t.c. These programmes were equipped with huge funds but the effects were not visible and were short- lived where visible. The initiatives were not sustained due to mis-management, fraud and change in government.

It was thus imperative for the government organizations and donor agencies to recognize the need for the establishment of Micro Finance Bank. It provide funds for the small scale industries towards economic growth and development.

1.3 Objectives of the Study

The set objectives of the study is to ascertain a quantitative and qualitative analyses of the impact of the Micro Finance Banks on small scale Businesses in Nigeria. The specific set of objectives of these study are:

  1. To examine the capacity of the small scale businesses in Nigeria.
  2. To ascertain the impact of the small scale businesses in Nigeria.
  3. To determine the impact of the Micro Finance Banks (MFBs) on the small scale businesses in Nigeria.
  4. To ascertain the level of job/ employment provision In Nigeria.
  5. To ascertain the level of wealth creation through the credit facilities provided by the Micro Finance Banks (MFBs) to small scale businesses in Nigeria, and also see if the credit facilities are enough.

Through the Micro Finance Bank, low income earners will have access to small loans which are non -collateral based to finance their businesses.

1.4 Research Questions

The research hypothesis will be deduced from some of the following research questions. These will serve as a guide to this present line of reasoning.

  1. What is the capacity of the small businesses in Nigeria?
  2. What is the impact of the small scale businesses in Nigeria?
  3. What has being the impact of the Micro Finance Banks (MFBs) on the small scale businesses in Nigeria?
  4. Has there been any noticeable Increase in job/ employment provision in Nigeria?
  5. Has the Micro Finance Banks (MFBs) provided enough credit facilities for small scale businesses in Nigeria?
  6. Has there been commensurate creation of wealth through credit facilities provided to small scale businesses in Nigeria?
  7. Has the Micro Finance Banks have any influence on social services in Nigeria?

1.5 Research Hypothesis

In order to find solution to the research problem identified and to achieve the goal of this research work, the following hypothesis shall be tested with the use of statistical tools.

Ho: Null Hypothesis

H1: Alternative Hypothesis

Hypothesis I
  • Ho: Micro Finance Banks have impact on small scale businesses in Nigeria.
  • H1: Micro Finance Bank do not have impact on small scale businesses in Nigeria.
Hypothesis II
  • Ho: Micro Finance Banks create positive effect on small scale businesses in Nigeria.
  • H1: Micro Finance Bank create negative effect on small scale businesses in Nigeria.

The research hypothesis is done with the view of examining the impact of Micro Finance Banks on small scale businesses in Nigeria, the effect could be positive as in the case of null Hypothesis (Ho) or negative as in the case of alternative hypothesis (HI).

1.6 Significance of the Study

The fact that this study sheds light on the significance and relevance of Micro Finance Banks in Nigeria, as it relates to the small scale businesses gives credence to the justification of this study. It draws attention to the problems and solutions of the small scale businesses finance. This with its consequential results of unemployment, poverty, economic decadence e.t.c.

This study is necessary as it gives an avenue of understanding and appreciating the roles played by Micro Finance Banks so far in strengthening the Nigeria’s economy, by empowering small scale businesses.

The importance of Micro Finance Banks cannot be over emphasized in any economy. Micro Finance Banks channel their funds to the economically active poor. This group would have been left economically idle as they were not served by the ‘formal financial institutions’. The economically active poor would not have played a role in Nigeria’s economic growth and development, if not for the Micro Finance Banks (MFBs).

1.7 Scope and Limitation of the Study

The period under review will cover significant episodes of Micro Finance Banks transformation in Nigeria. This study will exploit relevant information and resource materials on the impact of Micro Finance Banks (MFBs) on small scale Businesses in Nigeria, focusing on olive microfinance bank, Ikeja Lagos.

Consequently, the study focuses attention on small scale businesses in Nigeria and the degree to which Micro Finance Banks (MFBs) have fared in enhancing its performance. It will shed light on the prospect of the Micro Finance Banks (MFBs) in the future.

During the field survey, most of the respondents were reluctant to answer the researchers questions when they later agree to answer it takes a while to retrieve the questionnaires.

Also, delay in data collection constitutes a major limitation to this research work as most of the questionnaire are delayed but all at the end retrieved, fully answered.

1.8 Organisation of the Study

This study comprises five chapter. Chapter one introduces the background to the study, statement of research problem, research questions, research objectives, justification of the study, statement of the hypothesis and organization of the study.

The second chapter concentrates on the ‘review of relevant literature’ on the impact of Micro Finance Banks on small scale Businesses in Nigeria.

The third chapter’ provides the methodology for the research work. It discusses the subject of the research work, sample size, sampling procedure and instrument for data collection and the method of data analysis.

Chapter four shows the presentation and analysis of data while chapter five provides a summary and conclusion to the project work, and makes recommendation for further research work.

1.9 Operational Definition of Terms.


Small and Medium scale Enterprises is a type of business which requires small capital for its operations.

Micro Finance

Is a finance structure which deals with financing of business on a small and medium level.

Micro Finance Bank

Is a type of bank which intermediate funds on a micro level in the economy to cater for survival and operation of small and medium enterprises.


Any activities that involve a transaction of exchange of ideas for the sole aim of making profit and generating Income.

Economic Growth

Is the sustained increase in GNP and per-capita GNP which is the desirable rate of increase in the economic variables.

Economic Development

Is the sustained increase in GNP and per-capita GNP plus a desirable social change.

Chapter Five

Summary, Conclusion and Recommendations

5.0 Summary of Findings

This research work can be summarized for a proper functioning and efficient of small and medium enterprises (SMEs), there must be adequate and regular supply of finance to aid the operations of these SMEs. But, this finance is not available as the formal financial institutions (Commercial banks) avoid doing business with these enterprises, as they are considered highly risky.

Therefore, it is imperative for the microfinance banks (MFBs) to supply the finance needed to fund the activities of these enterprises to aid their development. So, the main challenge before the microfinance banks (MFBs) is to rise to the task of funding the SMEs in order to aid their development in Lagos State. The efforts to make MFBs more viable should not end up by relegating the provision of efficient financial services to small enterprises and poor households to a separate and unequal existence. Rather, the challenge should be to make efficient financial service available to all, even though their producers may vary quite widely.

The finding of this research work is that, microfinance is an effective tool to develop small and medium enterprises (SMEs) in Lagos State. Also, the analysis of data indicated that, microfinance banks (MFBs) financial services can contribute to SMEs development in Lagos State. Furthermore, hypotheses were created in order to be able to fully ascertain the level of these contributions.

The data collected were analysed using multi regression analysis. This revealed major findings as regards the contributions of MFBs to SMEs in Nigeria. According to the findings of this study, the growth and performance level of the SMEs depends largely on the activities of SMEs operating in that vicinity. Variables like loan size, loan duration (financial variables), and networking meetings and cross guaranteeship (non-financial variables) were found to have a positive impact on SMEs. The study thus confirmed the positive contributions of MFBs towards promoting SMEs performance and growth.

  1. Microfinance plays a great impact in the development of small and medium scale in Lagos State
  2. It can be concluded that there are various sources of funds available for the development of small and medium scale industry.
  3. There are various government policies affect the development of SME especially with regards to Microfinance bank
  4. Small and Medium Scale Industry improve Economic Development in Nigeria.
  5. The introduction of microfinance will improve the strategy of small-scale development in Nigeria.
  6. The introduction of microfinance will improve accessibility to loan for small-scale industry in Nigeria.

5.1 Conclusions

It can therefore be concluded that, microfinance is an effective developmental financial scheme, which can contribute to the development and growth of the SMEs sector in Lagos State. Therefore, the credit facilities of the microfinance banks (MFBs) should be directed towards the activities that would aid the development and growth of SMEs in Lagos State. That is, any credit granted should be such that aid the quick development of sector in the economy. Also, the deposit facilities of these banks (MFBs) can contribute to the growth and development of the Lagos State SMEs sector.

Apart from provision of tax incentives, and financial supports, it is recommended that Government should try to provide sufficient infrastructural facilities such as electricity, good road network and training institutions. Further study should be conducted on how best SMEs can make use of equity finances such as Venture Capital, Business Angels and other alternative sources of finance available to SMEs in Nigeria.

Although microfinance institutions in Nigeria are faced with insufficient funds problems which militates against their efforts to grant sufficient loans to small scale enterprises (Isern J. et al., 2009), yet their tendencies to augment the financial needs of small scale enterprises is considerable acknowledged.

Furthermore, it has been unveiled that government policies and programs designed to develop small scale enterprises in Nigeria are ineffective and thereby need to be reconceptualized.

From the foregoing analysis, micro-finance banks contribute immensely to employment creation and rural development, which has a multiplier effect on the overall economy. The importance of microfinance banks can be felt in all the subsectors of the rural economy under study.

Therefore, microfinance is an effective tool to develop SMEs in Lagos State.

5.2 Recommendations

It is hereby recommended that, for microfinance banks to really be a means of developing the SMEs sector, the banks should ensure that, the confidence put in them by the general public or patronizing members of public are not reposed by this attitude of embezzling the funds kept in their banks, which have sometimes been the practice in the formal financial institutions.

Based on the exploratory survey of the paper, the following recommendations are suggested for implementation.

  1. There is need for development of a regulatory and supervisory framework for all forms of operations of the MFIs in Nigeria in general and Lagos in particular so as to assist the development of small and medium scale industry. It is not only desirable to regulate only Microfinance Banks, but also others that mobilize savings for purposes of lending to their clients.
  2. An apex regulatory institution should be established and charged with the responsibility of building capacity through the training or directors and managers of MFIs to enable them develop an efficient information system for identifying and managing risks, and satisfying relevant data and information requirement of regulators and stakeholders.
  3. The government should also improve on the state of infrastructural facilities to reduce the transactional costs associated with the administration of micro credit in the country so as to assist small and medium scale industry.
  4. A monitoring committee should be set up in the bank to oversee credit being administered
  5. Management of microfinance institutions should incorporate SME’s views or inputs into the formulation or review of their credit management policies. This will enable microfinance institutions to know the peculiar needs and problems of SMEs since they are deprived and need special attention.
  6. Interest rate charges on loans given to SME should be relatively lower than that of the commercial banks since they are deprived and there is the need to bridge the gap. This will encourage them to go in for more loans and will be able to repay promptly to alleviate their condition.
  7. The microfinance institutions should embark on vigorous monitoring of the SMEs that have received loans so as see to it that the loans are being used for its intended purpose. This will put the SMEs on their toes to work hard to succeed in the business in which the money is invested so as to be able to repay the loan.
  8. The microfinance institutions should at all time give professional advice to SME’s. This will help them know whether the loan they applied for can finish the project. Proper professional advice would come from proper appraisal of the loan and this will inform the lending microfinance institutions whether the amount the SME requested for is too much for the project or less.
  9. Seminars and workshops should be organized by the microfinance institutions to educate SMEs on their policies and judicious use of funds for SMEs and what it takes to assess loans. Also, the microfinance institutions should initiate more developmental projects in order to win the confidence and trust of the SME’s.
  10. Government initiated programmes should be restructured, if not redesigned and should be centered on a participatory approach to enhance SME development.

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