THE IMPACT OF MICRO FINANCE BANK IN THE DEVELOPMENT OF SMALL SCALE INDUSTRIES IN NIGERIA

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THE IMPACT OF MICRO FINANCE BANK IN THE DEVELOPMENT OF SMALL SCALE INDUSTRIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The development of the various sectors of any economy is the basis for its survival, different measures have been put in place by the Federal Government of Nigeria in order to achieve this objective, such as, the establishment of the Finance and Research Institution in 2001, provision of direct financial assistance to small business organization, the Small and Medium Industries Equity Investment Scheme (SMIEIS) in 2001, establishment of Small Scale Industrial Credit Scheme, establishment of Government Intervention Strategies in 2002, provision of Credit Scheme, establishment of National Economic Reconstruction Fund (NERFUND) in 1989, establishment of Industrial Development Centres and Industrial Estate Scheme, etc. The initial efforts were government-led through the vehicle of large industries, but lately emphasis have shifted to Small and Medium Scale Enterprises (SMEs) following the success of Small Scale and Medium Enterprises in the economic growth in the Asian countries. (See Ojo, 2003) as cited in Babajide, 2012). However, the growth of Small and Medium Scale Enterprises over the years has been stunted because they have not been able to meet the requirements for obtaining financial services from the conventional commercial banks, thus their opportunity for expansion has been greatly limited. This shortcoming of the formal financial institution is what initiated micro financing.

In 2005, the Federal Government of Nigeria adopted microfinance as the main financing window for SMEs in Nigeria. The Microfinance Policy Regulatory and Supervisory Framework (MPRSF) was launched in 2005 with the core objective of making financial services accessible to a large segment of the potentially productive Nigerian population .It also addressed the problem of lack of access to credit by small business operators who do not have access to regular bank credit. It also created the framework for licensing, regulation and supervision of privately owned microfinance banks, provides for the participation of various institutions such as deposit money banks, non-governmental organizations, microfinance institutions and financial cooperatives in the provision of financial services. This framework was also extended to SMEs that have little or no access to financial services.. The Microfinance Policy (MPRSF) provides for two categories of Microfinance Bank in Nigeria, namely: Microfinance licensed to operate as a unit bank otherwise known as community bank which can only operate branches or cash centres within a local government with the minimum paid up capital of ₦20 million and the Microfinance Bank licensed to operate in a state or Federal Capital territory with the minimum paid up capital of ₦1 billion.

Small and Medium Scale Enterprises play important roles in the economic growth in both developing and developed nations. Apart from increasing per capital income and output, micro enterprises create employment opportunities, enhance basic standard of living of the populace, enabling entrepreneurs to be self reliant, create wealth, alleviating the adverse effects of growing population and generally promoting effective resources utilization,onsidered critical to engineering economy development and growth.(See Tijani, M.O., 2011). (Ogujiuba, Fadila & Stiegler, 2013; Musa & Aisha, 2012) agree that Small and Medium Scale Enterprises account for well over half of the total share of employment sales and value added and they constitute the most viable and veritable vehicle for self sustaining industrial development, as they possess the capability to grow an indigenous enterprises culture more than any other strategy.

However, as cited in Tijani, M.O.(2011), the role played by Small and Medium Scale Enterprises notwithstanding, its development is constrained by inadequate funding and poor management. The unfavourable micro-economic environment has also been identified as one of the major constraints which most times encourage financial institutions to be risk-averse in funding Small and Medium Scale businesses. Also, the reluctance on the part of the financial institutions to fund Small and Medium Scale Enterprises can be explained by the insufficient capital base of banks. As a result, these enterprises rely onpersonal assets for working capital, thua making it difficult to operate at full capacity and increase output and sales which will serve as impetus in increasing Gross Domestic Product (GDP) of a nation like Nigeria. Thus, the concern of this research is to examine the impact of microfinance bank on the growth of Small and Medium Scale Enterprises in Ilorin metropolis

1.2 Statement of the Problem

The microfinance banks (MFIs) promoted by the Federal Government of Nigeria was meant to purview credits entrepreneurs who owned Small and Medium Scale Enterprises because of their limited access to sources of finance. Small and Medium Scale Enterprises face a lot of problems in obtaining finance from the conventional finance banks because of the cost of finance, collateral security and the bureaucracy involved in accessing loans; the high interest rate etc. In addition, this entrepreneurs are predominantly made up of illiterates who cannot understand all the paperwork involved in applying for a loan. Also, the banks are not very excited because of the fact that the credit deposited by them is so little compared to what is deposited by customers in other big businesses. These problems and more necessitated the emergence of the MFBs.

1.3 Statement of the Research Questions

Thus, the above problems raises the following questions:

i) What are the nature of SMEs financing before the establishment of MFBs?

ii) What role does microfinance banks play in the growth of SMEs?

iii) What are the problems Microfinance banks faces in providing finance to SMEs?

iv) In what ways can the services rendered by microfinance banks be improved upon to enhance the growth of SMEs?

1.4 Objectives of the Study

The broad objective of this study is to examine the impact of microfinance banks on the growth of small and medium scale enterprises in Ilorin metropolis. This specific objective include the following:

• To examine the nature of SMEs financing before MFBs establishment?

• To examine the role of microfinance banks’ in the growth of SMEs in Ilorin metropolis.

• To examine the problems Microfinance banks face in providing finance to SMEs.

• To examine in what ways the services rendered by the Microfinance banks can be improved upon to enhance the growth of SMEs.

1.5 Justification for the Study

A considerable number of literatures have been written on this subject matter both inside and outside the country; (see Babajide, 2011; Olowe, 2013; Moradeyo, 2013; Babalola, 2013 and Agboola, 2012).To the government and policy makers, the study on the impact of microfinance banks on the growth of SMEs will enable them come up with policies i.e fiscal and monetary policies to improve the efficiency of the SMEs. The result from this finding would enable the stakeholders to employ ways to improve the contribution of SMEs to the country. This research work will contribute to the literatures on the impact of microfinance on the growth of SMEs for the benefit of researchers.

1.6 Scope of the Study

This study covered microfinance banks and Small and Medium Scale Enterprises in Ilorin metropolis because Ilorin metropolis is a fast developing city where many Small and Medium Scale Enterprises are springing up and more microfinance banks are being established and also because of the convinience and low cost of carrying out the research work. This work covered the period of 5yrs from year 2009- year 2013. Five years is often used as a yardstick for survival by demographers (Alexander, Davern and Stevenson, 2010) to permit greater balancing of statistical power of test (as cited in Babajide, 2011).

1.7 Hypothesis of the Study

The hypothesis for this study is stated in null form as follows: There is no significant difference between the roles of microfinance banks and the growth of SMEs in Ilorin metropolis. There is no significant difference between microfinance banks and the problems they face in providing finance to SMEs in Ilorin metropolis. The services rendered by MFBs have no significant difference on the growth of SMEs.

Definition of Terms

Microfinance Banks: These are special banks established by the federal government to promote the growth and development of Small and Medium Scale Enterprises/businesses.

Microfinance: It is the provision of a broad range of financial services such as deposits, loans, payment services, money transfer and insurance to the poor and low income households and their microenterprises. (Asian Development Bank, 2000).

SMEs: Nigeria’s national Council on Industry; an SME is defined in terms of employment i.e. as one with between 10 and 300 employees.

Entrepreneurs: This refers to the proprietor or owner of a privately owned business enterprise. The entrepreneur employs his capital in the business, manages the business resources and takes the risk of business alone. He is self employed i.e he is not employed by anyone but instead he employes others to work for him.

Regression analysis: This is a statistical approach to forecasting change in a dependent variable on the basis of change on more independent variables.

Development: An event constituting a new stage in a changing situation.

GDP (Gross Domestic Product): It is the value of goods domestically produced in a country.

Growth: An increase in size, number, value or stren ght.

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