Informal Micro Financing And Small Scale Business

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Informal Micro Financing And Small Scale Business


The main objective for embarking on this study was to examine informal micro financing and small scale business in Makurdi Local Government Area: a study of daily contribution. A survey research design was adopted with a sample of 160, using a four (4) point Likert rating scale administered a questionnaire to the sampled respondents and analyzed using simple descriptive and inferential statistics and Chi-square test to test the hypotheses at 0.05 level of significance. The result showed that, microfinance institutions do not care about the finances of small scale businesses but grants loans to them when they think the small scale business has enough collateral to secure the loan. For that matter they do not provide any financial advice and monitoring to their customers. It also show that much initial financing for small scale businesses came from personal savings of the operators themselves and from formal financial institutions, while additional financing came mainly from informal sources. The study has proven that daily contribution is most effective for the survival of small scale businesses. Based on the study results, the researcher recommended that owners of SMEs in accessing financial source in order to enhance their business’ performance; Government should establish more microfinance banks in the state and compel them through legislation to focus more on small scale businesses and Government should relax the interest rate especially to those who are into small scale businesses in order to enhance their business performance thereby reducing the crime rates and improve the standard of living.

Chapter One


1.1 Background of the Study

The contribution of Micro, Small & Medium Enterprises (MSMEs) to economic growth and sustainable development is globally acknowledged (Central Bank of Nigeria (CBN), 2004). There is an increasing recognition of the small scale enterprises (SSEs) pivotal role in employment generation, income redistribution and wealth creation (NISER, 2004). The micro, small and medium enterprises (MSMEs) represent about 87 percent of all firms operating in Nigeria (United States Agency, for International Development (USAID), 2005). Non-farm micro, small and medium enterprises account for over 25 per cent of total employment and 20 percent of the GDP (SMEDAN, 2007) compared to the cases of countries like Indonesia, Thailand and India where Micro, MSMEs contribute a higher percent of GDP (IFC, 2002).

In Nigeria, credit has been recognized as an essential tool for promoting small scale Enterprises. About 70 percent of the population is engaged in the informal sector or in agricultural production and aquaculture sector by extension sources of funds to finance their business (Aderibigbe, 2001). The majority of the micro and small enterprises (MSEs) in Nigeria are still at a low level of development, especially in terms of number of jobs, wealth and value creation. This is because 65% of the active populations, who are majorly entrepreneurs, remain unserved by the formal financial institutions (Aderibigbe, 2001).

The wide variety of different types of finance available reflects the diversity of SME characteristics and their specific finance needs (Department for Business Innovation and Skills 2012). It shows that seeking for a type of financial source has something to do with each stage of the business development. Access to finance is a key determinant for business start-up, development and growth for small and medium sized enterprises (SMEs) and they have very different needs and face different challenges with regard to financing compared to large businesses European Commission (2013). Among the various nations’ economy of today, SMEs is considered as one of the pillars holding the nation’s economy together. It can be likened to propeller that is propelling the nation’s economy engine for the growth and development. Generally, in the years past, small and medium enterprises were given little or no attention by the government because of its small population and the discovery of crude oil (Oladele et al., 2014). However, giving recognition to SMEs started gaining the attention of both private and public shortly after the alarming in population which had increased beyond what the oil sector can absorb in terms of employment. Currently, ironically with oil money in the country, individuals have found it difficult to survive and at the peak of this, it becomes unavoidable for both the private and public not to pay serious attention to the issue of SMEs in the country (Nigeria). The importance of SMEs enterprise have been out-rightly recognized by the players (i.e. government, private, individuals and experts) in the field of the nation’s economy as the main engine room for sustainable growth and development (Oladele et al., 2014).

Although many Nigerian entrepreneurs have recorded successes in the area of business but the obvious is that more entrepreneurial dreams are aborted at conception due to financing constraints. Small businesses have been widely acknowledged as the spring board for sustainable economic development. In Nigeria, since the 1970’s there has been an increased interest in the promotion of small businesses due to the inability of government and mega organizations to employ the nation’s teeming populace. This has strengthened individuals’ self-sustaining and self-reliant perspective to the recognition that dynamic and growing small businesses can contribute substantially to a wide range of national developmental objectives.

Entrepreneurs for small business in developing countries often cite lack of capital as a major constraint to entrepreneurial development, a notion often referred to as “capital illusion”. This lack of access is often associated with financial policies and bank practice that make it hard for banks to cover the high costs and risks involved in lending to small business. By their nature, small and medium scale business require long term capital for investment, because they have long gestation periods. So any capital mismatch by these enterprises in terms of loans can have serious consequences, especially in an unstable economic environment (Osisioma 2004). Financing has also been identified in many small business surveys as one of the most important factors that determine the survival and growth of small enterprises (Moses, 2010). Mambula (2002) acknowledging this affirms that small businesses in Nigeria suffer from the dearth of funding as top most amidst other constraints.

Formal interventions for small scale businesses in the provision of financing has improved the access of micro credit. However, in the same environment, credit from informal sources has performed better, particularly in exhibiting very low loan default rates (Adedoyin, 2014). Informal finance mechanisms are as diverse as they are ubiquitous, including institutions such as rotating savings and credit associations (ROSCAs), accumulating savings and credit associations (ASCAs), informal moneylending, loan brokers, and burial societies, to name a few. Such mechanisms may or may not be ‘traditional’, and range from simple to complex (International Labour Organization, 2015). They attend to diverse needs such as consumption smoothing, enterprise financing, promoting savings discipline, and intermediation between savers and borrowers. Arguably, the core-identifying characteristic of informal financial institutions is that emphasize inter-personal relationships, rather than relying on anonymous interaction between a client and a formal institution (ILO, 2015).

Over the years, studies have documented many constraints faced by firms especially in developing countries including infrastructure, energy, access to markets and macroeconomic instability. However, a fast growing literature has revealed financial constraints to firms as the most binding of these constraints (Carpenter et al ., 2002, Guariglia 2008, Beck et al., 2006, Beck et al., 2013, Ayyagari et al., 2006, Quartey, 2008). The issue of financial constraints may be especially serious for informal firms who may not have been in existence for long and may lack collateral. These firms may have two options; formal finance and informal finance. Informal finance may require less information to get funds from lenders due to less rigorous information requirement but is normally limited in supply and hence, come at a higher interest rate. Formal finance on the other hand can help firms overcome financial constraints because of its abundance and expert advice on how to manage their firms, but may be difficult for informal firms to take advantage of given the collateral requirements. This makes access to finance quite complex for informal firms.

1.2 Statement of the Problem

Given that informal financial institutions rely on strategies for minimizing transaction costs that are generally not available to most formal financial institutions. As an example, moneylenders and commercial banks adopt different strategies for trying to cope with the fundamental challenge of asymmetric information between lenders and would-be borrowers. Banks are apt to cope with asymmetric information by rationing according to objectively observable criteria such as occupation and financial history, which has the effect of reducing the transaction costs they incur at the expense of altogether screening out many lower-income applicants. Meanwhile, the application process imposes high transaction costs on credit applicants, i.e. waiting in bank queues, overcoming language and literacy obstacles, producing legal documents, and enduring lengthy delays while they wait for a verdict on their application. By contrast, the forte of informal moneylending is to exploit personal acquaintance with the applicant, as with loans from shopkeepers or input suppliers with whom the applicant is in frequent contact, or loans from one’s landlord or rich neighbor. The observation has thus been made over and over again, that even where they might succeed in qualifying for a bank loan, many people seeking credit will rather approach a local moneylender, even if this means paying higher interest rates (Rutherford, 2001). It is to this effect the present study seeks to assess micro financing and small scale businesses in Makurdi Local Government Area with a focus on daily contribution.

1.3 Research Objectives

The main objective is to examine the effect of micro financing on small scale businesses with a focus on daily contribution.

Specifically, the study seeks to:

  1. Determine the factors that accounts for the preference of daily contribution by small scale businesses in Makurdi Local Government Area, Benue State
  2. Examine the effort of daily contribution on the growth of small scale business in Makurdi Local Government Area, Benue State
  3. Ascertain the challenges of daily contribution to the survival of small scale businesses in Makurdi Local Government Area, Benue State

1.4 Research Questions

In the course of this study, the following research questions were raised:

  1. What are what are the factors that accounts for the preference for daily contribution as a main financial source?
  2. What is the effort of daily contribution as a source of micro financing on the growth of small scale businesses in Makurdi Local Government Area, Benue state?
  3. What are the challenges of daily contribution to the survival of small scale businesses in Makurdi Local Government Area, Benue State?

1.5 Research Hypotheses

A number of hypothesis were formulated by the researcher to enable her test the validity or otherwise of the information obtained from the research work.

H01: Factors that account for the preference for daily contribution does not have effect on small scale businesses financing

H02: Effort of daily contribution as a source of micro financing does not have effect on the growth of small scale businesses

1.6 Scope

The scope of this work covers the effect of daily contribution as an informal micro finance source on the growth and survival of small scale businesses Makurdi Local Government Area, Benue state.

1.7 Significance of the Study

This study is of great significant value to many interested groups such as:

Small Scale Businesses


This study will be of great value to the different levels of government to enable them formulate policies that will affect the lives of people running small scale business.
Intellectual community

1.8 Operational Definition of Terms

Micro finance:

Another term for microcredit.

Small Scale Business:

Business that employs a small number of workers and does not have a high volume of sales. Such enterprises are generally privately owned and operated sole proprietorships, corporations or partnerships.

Daily contribution:

It is also known as Esusu. It is a form of micro financing capital accumulation. Participants in the Esusu pays the thrift collector a participation fee depending on the rate to which they contribute money. If they contribute daily they owe the thrift collector one full days contribution every eighth day.

Chapter Five

Discussion, Conclusion and Recommendation

5.1 Discussion

In this part of the paper, we shall take each of the specific objectives to compare with theory. A conclusion will then be drawn whether there are any discrepancies or the findings are in line with theory. We shall then try to find out why these inconsistency and suggest possible solutions.

The main focuses of our investigation were:

  • To investigate how Informal microfinance and thrift societys tries to help its members in developing their small or medium size businesses.
  • To find out whether Informal microfinance and thrift society members feel they have reasonable and fair access to micro financing

Micro finance, its members and the development of their businesses Microfinance in its mission statement has as priority to improve the welfare of its members by promoting them to become financially strong. This informal microfinance and thrift society is a semi formal financial institution providing banking services to the poor. They do not cater for the poorest. The criteria set up are difficult for the poorest to meet and hence they cannot be a member and cannot benefit from Thrift’s intermediation services. They give out loans to boost the economic sector and also train members how to judiciously use the money granted to them so as to repay back without any difficulty.

According to Ledgerwood (1999), some Thrifts provide financial and social intermediation services such as the formation of groups, development of self confidence and the training of members in that group on financial literacy and management. We can say here that, this study realized the similarity of the empirical study and theory.

They have services and products that members or inhabitants of rural localities never use to have. The services that were only meant for the rich can now be enjoyed by the poor though not the poorest, who were unable to finance their economic activities previously due to lack of access to commercial banks.

Making a comparative analysis, both the members and the credit unions confirmed that the Thrift’s is helping them in most of their business activities. When a business is flourishing, it means the living standards of the family concern will be better and also the expansion and consequently job opportunities will come up.

The increase in membership indicates that there is a positive impact in Thrift’s activities. They have rated the level of awareness of their products and services to members as high. They notice this by the influx of new members and that the number increases at an increasing rate. Here some of the staffs are deployed to the various localities to sensitize on the availability and need for small businesses to contact them for the services they offer and that it will help them. They also go around mobilizing their members to save and this is done from business to business.
The effect of business size in securing financing for growth

Securing finance in the form of loans by MSEs is determined not only by the size of business operation but also of the type of business and the worth of it. Thrift’s does not only grant these aspiring businesses loans but also provide them with some training. These trainings are meant to feed the entrepreneur with the necessary business skills to better run the venture. The determining factor for a firm’s growth is the availability of resources to the firm (Ghoshal, Halm and Moran,2002).

Early stage businesses are not easily granted with loans. They represent a smaller percentage from the field data gotten. Most of them do not or find it difficult to meet the requirements for a loan (collateral). They cannot secure the necessary resources and has a possibility to die in this early stage. The granting of loans is much easier to large firms that small ones (Gary and Guy, 2003). Thrifts consider client’s ability to repay debt and assess the minimal sum they can contribute as equity before offering a loan. Existing firms are considered to have a history that
can be judge by the Thrifts before granting a loan. A bad history means loan denial and a good history means the loan will be granted. A start up business does not have this history and Thrifts do not rely on them because of not facing the problem of information asymmetry. This is in confirmation with Ledgerwood (1999) that Thrifts prefer to provide products and services to meet the needs of growing businesses since they are considered more reliable and less risky.

Informal microfinance and thrift society’s are important in that they fill the gaps that exist between commercial banks and wealthy clients. They are to meet the needs of those who are considered not fit to use the bank’s services and most especially the poorest. There is a mad rush of customers to the credit unions to enjoy their services which the banks do not offer. These services include; low interest rates, not so strict collateral, generally an encouraging banking conditions. Since more well to do people are rushing to become members, this has made the credit unions stricter in its liquidity criteria that has made it not easy for the poorest to meetup.

The country has been stroke by economic crisis thus making the inhabitants skeptical to save in commercial banks. During the crises period most banks were liquidated and made away with client’s money. They leave to suffer the consequences. With the credit union, which operates more or less like a cooperative, the customers are the owners. They are confident in it because they know how it is run and all decisions taken are taken by themselves (Tawah et al., 2008). There exist local NGO‟s who, with the help of the Government helps in meeting the needs of the local people. The NGO‟s are more concern with farmers. They provide them with subsidies popularly known as “subventions”. These are in the form of tools, fertilizer, seedlings etc and manpower training.

CIG‟s are groups of individuals with common goals in an area and whose activities are considered of paramount to the well being of the society. The government is more involve with these local groups than with individuals. The individuals that are considered are those with large pieces of land and who can be able to manage the inputs. They must have the knowhow to convince the actors concern.

5.2 Conclusion

Informal microfinance and thrift societys are an asset to the developing and transition countries. The services they provide are tailored to meet the needs and aspirations of the local inhabitants and emphases are towards the poor.
The products and services put forth to the members are not by itself a solution to the numerous problems affecting the poor. These problems range from business skills, lack of financial intermediation services, and the lack of markets, technology etc. This financial intermediation services will only provide a plat-form for those who are considered not fit to meet the obligations of the banks to be a client. MSEs are very much affected by these constraints and these Thrifts are towards bridging the gap between formal and informal financial services. These institutions and its network being a typical example, provides a focal point that makes its members financially comfortable but with their hard work and commitment. It should be noted that microfinance does not serve or solve all the problems of the poor but it serves as a means of helping them to boost their economic activities or augmenting their status. According to Hulme et al (1996), microfinance schemes often are of paramount importance when the targeted problem is in its initial stage and not when it has emanated. Microfinance is only a portion of what is needed to boost an enterprise activity in the rural areas and who are incapable of getting the necessary assistance from a commercial bank. It develops new markets, increases income, creates and accumulates assets and promotes a culture of entrepreneurship. Besides infrastructural development, Thrift’S needs information from the poor micro entrepreneur about market trends and skills so as to create a favorable financial environment for them.

Thrift’s has as mission statement to sustain and develop a secure and law abiding network of cooperatives credit unions that offer efficient development of their members and communities. It is noticed that Thrifts has as main target the poor and the poorest. Thrift’s and its network can be considered as targeting the poor but not the poorest. The requirements needed by the credit unions to become a member are not easy to be met by these poorest individuals. The amount demanded to own a share is high for these poorest. The products and services and also the convenience of the informal microfinance and thrift societys are noted to be one of the driving forces behind its success.

Despite the high interest rate charged sometimes, their products and services are still demanded but at times they are subsidized by the government or NGOs. The main underlying factor here is that commercial banks do not serve poor clients with small loans as compared to Informal microfinance and thrift societys in the society for their growth.

5.3 Problems Encountered During the Research

During this survey, I went through some inevitable problems which hindered me to fully acquire data to get an understandable result, however it didn’t stop the completion of the research.

We had a problem in administering the questionnaire because some informal microfinance and thrift society refused to receive me, claiming that they were too busy. Other refused because they didn’t want to disclose private information about their institutions.

Furthermore when the questionnaires were administered the institution gave me appointments during their break and on reaching there, no one would be on seat. At times, I had to stand outside their office for about an hour and a half before being attended to.

More so getting the financial statement of the Micro and small size Enterprises was very difficult because they did not want their financial data to be publicized.

Again during the interviewing process, business owners deliberately refused to collaborate because they thought I was a tax inspector.

Also the fact this research this work was carried out at the same time attending lectures was a limitation. The informal microfinance and thrift society gave us appointment at the same hours we were supposed to be in class. So we had to forgo one.

Finally we had financial difficulties. The manuscript were repeatedly printed or documented each time we had to correct as well as research was tough due to our low accessibility to internet as we always bought time and other research kits and accessories.

5.4 Recommendation

The membership fee for new applicants should be reduced so as to incorporate the very poor into the system. This will enable them get access to the products and services that those just below or just above the poverty line enjoy.
The mode of repayment should be revised so that the poorest can borrow without collateral. This should be done in a way that will increase the frequency of repayments and this is known to reduce the risk of non-payments. Evidence from Bangladesh by Armendariz and Morduch (2005) suggest that Thrifts with high repayment rates have low moral hazard problems.

The Nigeria Government on its part should a more stable and predictable environment to encourage nationals to keep their money with informal microfinance and thrift societys This will serve as a means to increase its depth since some poor men and women cannot have access to these products and services. But with the formation of a group, members of that group may apply for the services and members in the group act as guarantors for the others. Informal microfinance and thrift societys should always try to attend to students who come for research purposes such as questionnaires, before they reject them because not all research involve inside or secret information.

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Frequently Asked Questions

What is the financing gap for micro and informal enterprises?

The financing gap is even larger when micro and informal enterprises are taken into account. Overall, approximately 70% of all micro, small and medium-sized enterprises (MSMEs) in emerging markets lack access to credit. While the gap varies considerably region to region, it’s particularly wide in Africa and Asia.

How to improve SME finance?

Introducing innovation in SME finance such as e-lending platforms, use of alternative data for credit decisioning, e-invoicing, e-factoring and supply chain financing. Policy work, analytical work, and other Advisory Services can also be provided in support of SME finance activities.

What is the difference between a small business and an SME?

SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises.

What are the factors that affect SME financing?

A number of factors affect SME financing. Some developed countries take a capitalistic approach with little government incentives for SME financing, while others use government guarantees and other measures to reduce risks and costs.

What are the government incentives for SME financing?

Some developed countries take a capitalistic approach with little government incentives for SME financing, while others use government guarantees and other measures to reduce risks and costs.

How can Bangladesh enhance SME finance?

Bangladesh lacked a single policy with systemic plan to enhance SME finance. With nearly 10 million SMEs contributing to 23% of the GDP, 80% of jobs in the industries sector and 25% of the total labor force, the SME Finance Policy will play a pivotal role in enhance SME financing.

How are SMEs financed in emerging economies?

In emerging economies, to date, most SMEs (including formal sector firms) are financed from sources outside the formal financial sector, which is expensive for the enterprise and can hamper the flow of financing, thus hindering its growth.

What is an SME company?

Employees: The European Union has defined an SME as a legally independent company with 101-500 employees IT skills: Generalist skills. Employees often lack specialty skills Small Business VS. Large Business: When Company Size Makes a Difference

What is the difference between SMB and SME?

SME (Small and Medium Enterprises). Also known as the “Mid-Market” SME is a more globally-used term than SMB, and is the official market phrase for internationally-based enterprises such as the United Nations, World Bank, World Trade Organization and the European Union.

What is the difference between SMEs and large companies?

These types of businesses come under small and medium enterprises (SMEs). The number of SMEs in the world is way more than large companies and employs many more employees collectively. Each country has its own standards to identify SMEs.

What is the difference between SME and start-up in India?

As per the revised definition, SMEs in India now comprise both manufacturing and service enterprises. The following classifications based on the turnover value and investment amount determine an MSME’s micro, small or medium enterprise status. A start-up starts small but has a very big vision.

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