Microfinance; A Tool For Facilitating The Growth Of Small And Medium Enterprises In Nigeria

Project and Seminar Material for Economics

Microfinance; A Tool For Facilitating The Growth Of Small And Medium Enterprises In Nigeria


This study examined the impact of Micro Finance Banks on individuals, small scale Business e.t.c. It shows the extent Micro Finance can achieve the following:

  1. Poverty eradication, if not totally but to a large extent.
  2. Increase wealth by reducing the gap between the rich and the poor on the long run.
  3. Provision and availability of funds by administration of micro credit programmes.
  4. Providing information to enhance the delivery of service my Micro Finance Institutions to Micro Entrepreneur.
  5. Marjory to provide employment to Nigeria citizens.

Chapter One

1.0 Introduction

Effectively functioning financial markets have fundamentals roles to play in fostering development. At the level of individual livelihoods, financial markets can perform very crucial functions. They can be a principle means for the poor to get financial assets; through facilitating saving, they can be of importance in reducing the vulnerability associated with uneven and unpredictable year to year changes in circumstances and they help convert illiquid assets into liquid ones in the event of emergencies without putting up viable programmes to encourage the SME’s which are the engine of growth for all economies all over the world.

The latent capacity of the poor for entrepreneurship would be significantly enhanced through the provision of micro finance services to enable them engage in economic activities and be more self-reliant in turn improve their abilities to create wealth a few number of highly effective micro finance programs have demonstrated that low-income clients especially women can manage meager resources productively provided the interest rate is relatively low.

Over the past decade, a few pioneer micro finance institutions have demonstrated not only ability of the poor but also the potential for sustain ability of financial institution that serve the poor. Full financial sustainability is reached when administrative; loan loss, inflation and financial costs are covered entirely by revenues. Savings services are needed urgently by the large number of poor people around the world to protect their income and serve as an alternative to acquisition to debt, micro finance institutions are therefore increasingly under pressure to mobilize savings to assist the poor.

Savings deposit also offers micro finance institutions a valuable source of getting substantial local funds. Before the emergence of formal micro finance institutions, the informal associations that operate traditional micro finance in various forms are found in all the rural and urban, communities in Nigeria (Out, etc al, 2003). The practice of micro finance in Nigeria is dated back to several centuries ago. The traditional micro finance institutions, work together for the mutual benefits of their members; these groups provide access to credit for the rural and urban, low-income earners. They are mainly the informal self-help groups or rotating savings and credit association types. Other providers of micro finance services include model is built around group concept. The model works in a situation where groups whose commitment to savings and credit are weak and look up to donor-sponsored credit. Informal model include:

The Grameen Bank experience of Bangladesh founded by Mohammed Yunus started with the group concept-informal lending to the poor. The program has since been linked to formal micro credit model. The model had been quite successful as a bank for the poor and as a social movement based on principles of awareness and training, which has facilitated active participation of the poor.

As at 1999, the Grameen Bank had provided its services to about 1.5 million poor unified about 60,000 small village banks on the linkage process and about $480 million to its clients for small scale trade.

Non Governmental Organization tends to adopt the Grameen principles, and is usually gender specific and sectorally motivated. There are women groups, farmers union, trade union etc. In different parts of Nigeria, a revolving loan scheme is practiced where members make fixed contributions of money at regular intervals to assists In financing their small-scale businesses. At each interval, one member collects the entire contributions of money from all. Among, the Yorubas it is called “Esusu”, Hausas call it “Adashi” while Igbos call it “Itutu”, could also server as a savings mechanism to the members.

The demand for micro finance services is high and increasing in Nigeria. He continuous lay-off of labour from both the public and private sectors since the introduction of structural adjustment programme in 1986 and the growing number of graduates from schools is pushing a large proportion of the population in to informal sector activities.

Many micro enterprises are, therefore, springing up but without bank financial support. Also, the domestic market is large, with over 1450 million people in need various goods and services. including financial services. The growth in micro finance activities reflects the expansion of informal sector activities and the exclusion of a large proportion of economically active population from the various financial services of the formal sector.

The micro finance seeks to make financial services available on a sustainable basis to the economically active poor, low-income earners and the micro, small and medium enterprises through privately owned banks (micro finance). This is to create a vibrant micro finance sub-sector that provides the necessary stimulus for national growth and economic development.

1.1 Statement of the Research Problem

There are Many research problems that are in line with the study of Micro Finance. This problems goes thus;

  1. The problem of funding real sector activities needed to promote the micro finance institution since this provides the foundation for sustainable growth & development
  2. The problem of identification and issuance of who is worthy of establishing a micro finance bank.
  3. The problem of supervision on the operations of micro finance banks by the CBN
  4. The problem of identifying the people who qualifies as a micro finance clients and benefits from micro finance bank

1.2 Objectives of the Study

The objective of the study highlights & explains what the study (Micro Finance) is set to achieve and these are as follows:

  1. To examine how micro finance contribute to poverty alleviation in Nigeria.
  2. To examine the contribution of micro finance to economic growth in Nigeria.
  3. To analyze how micro finance can effectively provide and disseminate information to prospective clients.
  4. To examine how micro finance provides employment to Nigerian citizen.
  5. To reduce the gap between the rich and the poor on the long-run.
  6. To promote and increase confidence of the rural areas so as to make them understand that sustainable livelihood dwells not only in the urban area but also in rural areas.

1.3 Research Questions

The following research questions will be answered

  1. How does a micro finance bank-operate?
  2. What supporting institutional arrangement would ensure that micro finance banks succeed in their operations?
  3. What is the impact of micro finance in the development of small and medium scale enterprisers?
  4. Can non-governmental organizations operate micro finance banks?
  5. How can small and medium enterprises benefit from a micro finance bank?

1.4 Research Hypothesis

The researcher will set the following hypothesis

Hypothesis 1
  • Ho: Micro finance has no significant impact on the growth of small and medium enterprises in Nigeria.
  • Hi: Micro finance has significant impact on the growth of small and medium enterprises in Nigeria.
Hypothesis II
  • Ho: Micro finance policy does not help in creating employment opportunities and financial services to the economically active poor .
  • Hi: Micro finance policy helps In creating employment opportunities and financial services to the economically active poor.

1.5 Scope of the Study

This study is limited to Lagos Metropolis. The study will, involve the analysis of different methods of micro financing and micro credit for the purpose of enhancing the growth of small and medium scale enterprises.

1.6 Limitations of the Study

There are many obstacles encountered by the researcher while carrying out this research work. These problems serve as constraints; which prevented more accurate data. Some of the problems are;

Inadequate time, financial constraint, inability to access library facilities and inadequate information from some of the entrepreneurs for fear of releasing vital information to their competitors.

1.7 Research Methodology

For the purpose of this study, the method of data analysis that will be used is the chi-square(X2 test) method. It is an important extension of hypothesis testing and is used when it is wished to compare and actual (observed) distribution with a hypothesis or expected distribution. It is non-parametric econometric method often referred to as a goodness of fit test distribution.

The formula for the calculation of X is given as

X2 = E (O-E)2E

1.8 Significant of the Study

The topic micro finance is a very vital part of financial sector of any economic. It is about providing financial services to the poor who are economically active but could not access the conventional financial institutions, therefore the significance which is the importance of this study goes thus.

  1. Micro finance builds community capacities for wealth creation among enterprising poor people and to promote sustainable livelihood by strengthening rural responsive banking methodology.
  2. Micro Finance eradicate poverty through provision of micro finance bank and skill acquisition development for income generation.
  3. Micro Finance helps reduce the gap between the rich and the poor.
  4. Micro Finance helps provides and disseminate information to clients so as to enhance delivery of service by micro finance institution to micro entrepreneur.
  5. Micro finance provides veritable avenue for the administration of micro credit programmes.

1.9 Organization of the Study

The structure of the thesis is organized, within five chapters. Chapter one showed overall introduction of the paper.

The second chapter deal with literature review, the third shows methodology of the study, the fourth contain data presentation and analysis and the final one is about conclusion and policy recommendation

Chapter Five

Conclusion and Recommendation

5.1 Conclusion

Micro finance plays a central role in the development and performance of Micro and Small Business Enterprises in the real world especially for developing country like Nigeria, Lagos. Data have been analyzed by applying both descriptive and inferential. From the data collected and analyzed Micro and Small Enterprises had a positive change after got access of loan from MFIs on their productivity, introducing new technology, expanding their market share, upgrading their capital goods, introducing new products/services, by diversifying their business, by adopting new business strategies, by increasing employment opportunity, increasing their competiveness and increasing their profit. Micro and small Enterprises in Lagos faced various challenges. These are lack of business skill, lack of training, lack of skilled labour, lack of finance, government policy problem, lack of market access, high competition in the economy, weak management skill, shortage of row material supply, land, e.t.c. Among these finance is the central problem for Micro and small Enterprise development performance in Lagos. The majority of SMEs are not benefited from existed MFIs because of high collateral requirement, long process, high interest rate, small loan size, bureaucracy, high rate matching fund, problem of liquidity of matching fund, existence of corruption, small suppliers/numbers of MFIs, ect.; constraint manly on their credit service. From all the above challenges collateral requirement accounts for higher degree of severity for SMEs to get access of credit from MFIs. Monitoring and evaluation of SMEs by MFIs is significant for Micro and small Enterprises development and performance but MFIs monitoring and evaluation for their credit on SMEs is so poor; this is assured by 76.80 percent respondents.

As the regression analysis indicated that positive relation was build between enterprise development and performance and loan size of Micro Finance Institution and also there was a negative relationship was build between enterprise development and performance and collateral, interest rate and matching fund respectively in the model. In addition, when the independent variables loan size of Micro Finance Institution, collateral, interest rate and matching fund has zero values the dependant variable EDAP value would be 9.655. To sum up, the findings due to the effect of the independent variables a majority of the Micro and small Enterprises in Lagos will not beneficiary from Micro Finance Institution service especially from microfinance loan or credit.

5.2 Policy Recommendation

In light of findings and conclusions, the research found that, it is important to make recommendation to guide the enterprises, Micro Finance Institutions, trade and industry associations, microenterprises, concerned government and non-government bodies and researchers. From the study the following recommendations are provided to sustainably improve the development and performance of Micro and small Enterprises.

The government will intervene more in increasing finance supplier or financial institutions according to the population of the small enterprises in the nation economy.

The Micro and small Enterprises will organize their own associations who reflect their voice together to solve financial and non-financial problems for their sustainable development and performance.

The trade and industry associations will work together with government by taking memorandum of understanding and by creating by laws in the sense of public private partnership/PPP/ on Micro and Small Enterprises issues especially on financial institutions.

The Micro Finance Institution will create conducive environment for their credit and other MFIs services. The MFIs also provide non-financial services for Micro and small Enterprises like business development services; strengthen micro and small business association and capacity building trainings.

The government in collaboration with the private sector needs to accelerate the pace of financial reforms to improve the range and availability of loans and other financial services for Micro and small Enterprises and also encourage financial literacy a key component of financial inclusion. Reforms could include a framework that allows SMEs to collateralize their assets and policies that promote saving mobilization, encouraging liquidity of matching fund, balance interest rate and matching fund.

A special credit will aimed to special sectors which have higher employment opportunity like manufacturing sector and construction sector in Lagos.

The Micro Finance Institutions will facilitate new services that are not exercised to day like check payment service, mobile banking services, guaranty service as insurance when Micro and small Enterprise will have access to business contract agreements with others.

The government will improve information dissemination on relevant institution and project that provide assistance to Small and Micro Enterprises

Research institution, universities and all concerned bodies will conduct a number of researches on specific problem of SMEs.

The government and MFIs should develop the quality and accessibility of the service of supporting institutions by assigning employees that have accurate knowledge in the specific area to identify the SME gaps and to provide continuous follow up of the development and performance of Micro and small Finance Institution and their execution program.

The Financial Institutions like banks will provide credit service for Micro and small Enterprises based on their business proposal and stage of SMEs development.

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