IMPACT OF MICROFINANCE BANK ON SMALL AND MEDUIM SCALE ENTERPRISES IN NIGERIA

IMPACT OF MICROFINANCE BANK ON SMALL AND MEDUIM SCALE ENTERPRISES IN NIGERIA

ABSTRACT

Micro Finance is a living idea and Nigeria and the rest of the world cannot do without Micro finance and SMEs in their bid to improving the living conditions of citizens and the alleviation of poverty around the world. The objectives of this research are, to; examine the impact of MFBs loans and advances on the net profit of SMEs, examine the impact of loans and advances on shareholders’ funds of SMEs and examine the impact of loans and advances on investment levels of SMEs in Nigeria. The ex post facto research design was adopted to enable the researcher make use of secondary data and determine cause-effect relationship. The data were analyzed using simple linear regression model. The results as revealed by the hypotheses tested indicated that; there was a negative non-significant impact of loans and advances on profitability; there was a positive significant impact of loans and advances on shareholders’ fund and lastly, there was a positive significant impact of loans and advances on the investment level of SMEs. It was also revealed from the study that since the introduction of Micro finance banking in Nigeria in December 2005, SMEs financing options have increased productivity and growth. Also, government policies on Micro finance have been effective, thus, Micro Finance banks have an impact on Small and Medium Scale Enterprises in Nigeria.

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Microfinance banks in Nigeria play very positive roles towards sustaining the economy of the country these are small scale banks that are approved by the federal government of Nigeria through the central bank of Nigeria to give loans to people to use and boost their existing business, or to give to the people to start up their business. The banks also provide a good condition for people like market traders, small scale business operators and even the non-literate to open a savings account with them and also encourage them on how to save their money. Micro-finance banks have help small and medium scale enterprises to increase productivity, create jobs and help alleviate poverty.

Also, in developed economies Small and Medium Scale enterprises (SMEs) represent more than half of their GDP and account for nearly two/ third (2/3) of employment (Sanusi, 2003). But, these Small and Medium Scale Enterprises are largely absent from the formal economic sector of Nigeria.

Small and Medium Scale Enterprises are often able to sustain macro-enterprises and huge conglomerates but in Nigeria, their impact are missing because of lack of funding for SMEs, therefore increasing funding for Small and Medium Scale Enterprises could help big firms become a powerful engine of growth not only in Nigeria but in the rest of the world. (Soludo, 2005).

For Small and Medium Scale Enterprises in the developing world, although they are a potentially high impact and high return on investment, only a trickle of capital reaches them. Large business has access to formal, bank-based credit and in some markets, private equities and public markets unlike at the other end of the spectrum. However, over the last 30 years, the micro finance movement has made substantial strides in making capital available to households and micro entrepreneurs.

But, Small and Medium Scale Enterprises have remained under-served and lack access to the tools and finance necessary for rapid expansion, they are the “missing middle”

(USAID, 2005).  According to a UN report in 2004, there are indications that SMEs could generate high returns on invested capital. Today, these investments are expensive to find, execute and manage relative to their sizes and the returns on investment often do not match the expense, because the cost of sourcing and completing deals are high. (USAID, 2005)Microfinance is a living idea. As the awareness grows, this idea will continue to evolve. No wonder on 15th December 2005, the Central Bank of Nigeria launched the micro finance policy and framework basically to assist SMEs. 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 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; increase employment opportunities, enhance household income and create wealth (CBN, 2005).

The practices of Micro finance in Nigeria have always existed in Nigeria at a traditional level. The traditional Micro finance institutions provide access to credit for the rural and urban low-income earners. They are mainly of the informal Self-Help Groups (SHGs) or Rotating Savings and Credit Associations (ROSCAs). Other providers of Micro finance services include savings collectors and co-operative societies. The informal financial institutions generally have limited outreach due primarily to paucity of loanable fund (Adewusi, 2007).

In order to enhance the flow of financial services in Nigerian rural areas, government has in the past, initiated a series of publicly financed micro/rural credit programmes and policies targeted to the SMEs. Notable among such programmes were the Rural Banking programmes, sectoral allocation of credit, a concessionary interest rate and the Agricultural Credit Guarantee Schemes (ACGS). Other institutional arrangements were the establishment of the Nigerian Agricultural and Co-operative and Rural bank Limited (NACRB), the National Directorate of employment (NDE), the Nigerian Agricultural Insurance Corporation (NAIC) the Micro Finance Banks (MFBs). (CBN, 2005)

Micro finance services, particularly, those sponsored by government have adopted the traditional supply-led subsidized credit approach mainly directed to the agricultural sector and non-farming activities, such as trading, factoring, weaving, blacksmithing, agro-processing and transportation.

Although the services have resulted in an increased level of credit disbursement and gains in production and other activities the effect were short-lived, due to the unsustainable nature of the programmes.

 1.2       STATEMENT OF THE PROBLEM

The Nigerian economy is characterised by high level of poverty, which is basically because of imbalance in our financial system. This is a financial system where the poor who constitute not less than the 50% of the nation’s population but enjoys less than 1% of the total credit support from financial institutions. Thus, in other to address the high level of poverty, the Federal Government of Nigeria launched the National Economic Empowerment Development Strategy (NEEDS) in May 2004. NEEDS is based on a commonly accepted development strategy in which micro, small and medium enterprises can act as the engine of national economic growth for Nigeria’s economy if they have access to market resources, including financing and the right enabling environment. A key component of NEEDS according to Soludo (2005) is to reduce barriers and greatly expand private sector led growth in the rural and agricultural sector. The micro-finance movement was born to ease the suffering caused by poverty and to awaken the global economy’s sleeping giant the undercapitalized productivity of the world’s working poor. But successive government efforts to solve the problem, through several rural finance and development programmes, have met with unsatisfactory results. This was due to the lack of mechanism, which would encourage the mobilization of savings among people at the grassroots level and at the same time simplify the disbursement of funds through loans and advances. Therefore, the problems which Small and Medium Scale Enterprise may encounter are;

1. Low Net Profit Margin.
2. Non growth of Shareholders Fund.
3. No growth as a result of lack of investment opportunities.

One of the most consistent themes from SMEs operators is the lack of loanable capital. It is a major impediment to the growth and expansion of their business. Generally, Small and Medium

Scale operators believe that additional capital alone will solve the majority if not all, of the problems they are facing. This perception applies to starting up and continuing their enterprises in a competitive market place. In addition to seeking short term production and working capital (loans), many are aware of the need to match their longer term production cycles with appropriate longer term loans which at present, banks are generally not meeting. It leads to low net profit margin. It is therefore believed that with the introduction of micro fiancé banks, these problems of inadequate capital can be taken care of Shareholder funds a major factor that has hindered the growth of SMEs in Nigeria, with the limited funds, default on loans and advances will continue to have an adverse effect on the growth of the Nigerian economy.

Another major problem which has hindered the growth of SMEs in Nigeria is investment opportunities because of the ongoing reforms getting loans from banks to finance small and medium scale enterprises is become more difficult not only that banks are willing to lend because most of them burnt their finger in the recent past, the process of getting loans or funds for expansion for small businesses is now very cumbersome. Though the federal government mandated banks to set aside a certain percentage of their income to finance SMEs, what happened in the banking industry recently is making banks skeptical to lend to small and even big ones. Even if an opportunity comes their way the problem of who loans them stare their faces.

1.3       OBJECTIVES OF THE STUDY

As a result of the problems stated above, the major objectives of this study are;

1. To examine the impact of loans and advances on the net profit of some Small and Medium Scale Enterprises in Nigeria.
2. To examine the impact of loans and advances in shareholder funds of some Small and Medium Scale Enterprises in Nigeria.
3. To examine the impact of loans and advances have on investment opportunities of some Small and Medium Scale Enterprises in Nigeria.

1.4       RESEARCH QUESTIONS

As a follow-up to the above objectives of this study, the research questions are;

1. What impact does loans and advances have on the net profit of some Small and Medium Scale Enterprises in Nigeria?
2. What are the impact of loans and advances on shareholder funds of some Small and Medium Scale Enterprises in Nigeria?
3. What impact does loans and advances have on investment opportunities of some Small and Medium Scale Enterprises in Nigeria?

1.5       HYPOTHESES

The following hypotheses are formulated to test the influence of Loans and Advances of Microfinance banks and its’ impact on MFBs in Nigeria.

Ho1: Loans and Advances granted by microfinance banks do not have a positive significant impact on Net profit of SMEs in Nigeria.

Ho2: Loans and Advances granted by microfinance banks do not have a positive significant impact on Shareholders’ funds of SMEs in Nigeria.

Ho3: Loans and Advances granted by microfinance banks do not have a positive significant impact on Investment Opportunities of SMEs in Nigeria.

1.6       SCOPE OF THE STUDY

To avoid ambiguity in this work, the scope to be covered is between 2002 and 2007. This is necessitated by the Micro financing policy and framework, which was launched in 2005 and is still currently implemented in Nigeria. Therefore, with this time frame in mind, the impact of one (1) Micro-finance Bank and on three (3) Small and Medium Scale Enterprises in Nigeria will be critically examined.

1.7       SIGNIFICANCE OF THE STUDY

This research work will be significant and beneficial to the following groups:

Micro Finance Banks Operators.

The intended beneficiaries are Micro-finance banks and other potential providers of financial services to Micro, Small and Medium Scale Enterprises. It will provide information about the types of products and services in demand by SMEs.

Small and Medium Scale Enterprises Operators

SMEs will have a better understanding of the constraints affecting the banking sector in providing supply of financial services. It is anticipated that recommendation made will improve advocacy by SMEs organizations and stimulate the provision of specific interventions that will strengthen SMEs management and performance.

Technical Assistant providers

Providers of training and technical assistance, both to Micro-finance banks and SMEs, will benefit by understanding the gaps in the provisions and utilization of SMEs financial services which can be used to develop and undertake appropriate technical interventions.

Academic Purposes

This will also add to the body of literatures available on Micro finance and SMEs in Nigeria. It will not only act as a reference point but also provide better understandings of the role of Micro finance banks in the enhancement of growth of SMEs in Nigeria.

1.8       LIMITATIONS OF THE STUDY

It must be stated here that, this work are limited by;

1. Time Constraint: The amount of time needed to extensively evaluate and process this research work is so enormous. Not all Micro-finance banks can be accessed as a result of time required. However, not withstanding this constraint, effort was made to produce a standard research work.
2. Financial Constraint: This was another factor which limited this research work. Not all planned banks were visited as a result of financial constraint. However, standard was not compromised.
3. Information Constraint: Some source materials and document required by the researcher were not assessed as it was termed classified by operators of Micro finance banks and SMEs.

1.9       DEFINITION OF TERMS

1. Micro-finance: This denotes the provisions of financial services adaptable to the needs of low income people such as micro entrepreneurs and simple payment services needed by micro entrepreneurs and other persons.
2. Small and Medium Scale Enterprises: Refers to the range of informal and formal enterprises with up to 50 employees.
3. Micro-Finance Institutions: Are organizations whose activities consist wholly or in significant part of the provision of financial services to micro-entrepreneurs.

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