Format: MS WORD Chapters: 1-5
Pages: 92 Attributes: COMPREHENSIVE RESEARCH
1.1. Background to the Study
Small and Medium Enterprises (SMEs) have been recognized as driving force for economic growth in any nation. Empirical evidences have shown that they contribute to employment, alleviate poverty and increase productivity level in a nation. In recognition of the role of SMEs in the economic growth process of Nigeria, government has taken concerted efforts to foster the growth of SMEs and also develop entrepreneurship (Hossain, 2016).
SMEs are of necessity to a nation’s industrialization process. One foremost way of promoting SMEs is by having easy access to finance. Finance is of high importance to the growth of SMEs. Ojo (2013), noted that a major gap in Nigeria’s industrial development process in the past years has been the absence of a strong and virile SMEs sector attributable to the reluctance of banks especially commercial banks to lend to the sector.
The Nigeria government has over the years embarked on series of policy and institutional reforms aimed at enhancing the flow of finance from the banking sector to Small and Medium Enterprises (SMEs) as well as those involved in the petty business (Micro) activities and to entrepreneurial ventures at the informal in particular. However, the important objective of boosting the performance of the entrepreneurial activities of SMEs has not materialized (Ozioko, 2010).
Traditional Banks perceive micro activities as bad risk, hence have little interest in funding the sector, this coupled with issues of high transaction costs and short tenor of payback period when funding is considered. Since a 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 formal financial services, the Central Bank of Nigeria (CBN 2005) as part of its banking reform agenda embarked on licensing Microfinance the conventional financial institutions (Chidoko et al 2011).
Emphasis, therefore, shifted from large and sustainable industrial development. According to Lawson (2017), Nigeria has remarkable entrepreneurs who need support at every level and this includes Micro, Small and Medium Enterprises as well as big businesses. A common characteristic of these enterprises is their need for good financing.
SMEs are critical agents of economic transformation as they account for more than 50 percent of Gross Domestic Product (GDP) of developing economics, are main source of innovation and technological development, source of supply of both human capital and raw materials to larger businesses and main source of entrepreneurship and enterprise (Mkpado & Arene, 2014).
The contribution development objectives such as poverty alleviation, spreading of employment opportunities and increasing indigenous ownership of resources in the economy, since SMEs contribute nearly half of Nigerian GDP and accounts for over 25 percent of employment in the country. There are 17 million SMEs in Nigeria, employing 32.41 million persons and contributes about 46.54 percent to the nation’s GDP in nominal, terms (National Bureau of Statistics, 2013).
However, despite the huge contributions of SMEs to national development, they are contending with numerous challenges. Lawson (2017), emphasized that lack of access to finance has been identified as one of the major constraints of SMEs. The reason is that provision of financial service is an important means for mobilizing resources for more productive use.
The extent to which small enterprises can access fund determines the extent to which small firms can save and accumulate their own capital for further investment (Hossain, 2016), but SMEs in Nigeria find it difficult to gain access to formal financial institutions such as commercial banks for funds because they generally lack the requirements. This inadvertently hinders their performance. The inability to the SMEs to meet the conditionality of the traditional financial institutions for loan consideration provided a platform for attempt by informal institutions to fill the gap usually based on informal social networks; this is what gave birth to micro-financing.
There are several definitions to the concept of microfinance. Ojo (2013), described microfinance as a revolution that involves the large scale provision of small and deposit services to low income people by secure, and conveniently located. It includes a broader range of services mainly credit, savings opportunities, insurance, money transfers and other financial if at all, as being about micro-credit i.e. lending small amounts of money to the poor.
Microfinance is not only this, but it also has a broader perspective which also includes insurance, transactional services, and importantly, savings. Savings is a common word used by individuals on daily basis. It simply means putting something aside for future use or what will be considered as deferred expenditure (Ozioko, 2010).
Micro-savings as a microfinance service enable people with few assets to save, since they could make weekly savings as well as contribute to group savings, and such savings are mobilized by the microfinance institutions for further lending as loan to other clients. Consequently, SMEs lack access to formal savings; many of them are unaware of the importance of this service especially as it could serve as an insurance buffer for them in terms of shocks (Mkpado & Arene, 2014).
Hossain (2016), defined micro-credit as the extension of small loans to low-income individuals who typically lack collateral, steady employment and a verifiable credit history, access to finance is also identified as a key constraint to the poor in securing their savings or to SMEs attempting to grow and expand their businesses.
Amu and Amu (2012), also stresses the role of credit in financing innovation to bring about development. In his theory, economic development arises as a result of innovation which is attributed to entrepreneurs. But without credit the benefits may not be realized by the society and here lies the argument for continuous financial support for SMEs to realize its full potential.
Lawson (2017), described performance as the result from a person’s effort which is achieved by the presence of labour, ability and assignment perception, effort because of motivation, satisfaction, and organizational commitment that shows the amount of energy used by an individual in initiating a task. Therefore, a good measurement of organizational performance must be able to consider the foal of the owner designed to promote the business such as SMEs in the areas of some specific results as output and profitability.
The two main mechanisms for the delivery of financial services to clients by Microfinance institutions are: relationship based banking for individual entrepreneurs and small businesses; and group-based where several entrepreneurs come together to apply for loans and other services as a group. In a country where only one in ten working Nigerians is formally employed and underemployment is estimated at 70.5 percent, microfinance, SME finance and branchless banking are important in supporting growth and reducing poverty through employment creation.
1.2. Statement of Problem
The bedrock of any nation’s industrial development is entrepreneurial activities this can be attested with economic breakthroughs in the Asian tigers. The economic boom recorded in some of the Asian countries which is not unconnected to SMEs have lifted hundreds of millions of people out of poverty and created tens of millions of few middleclass consumers (Ojo, 2013).
The role of financial institutions in development of a country is demonstrated through the crucial role that savings and credit play in economic growth (Hossain, 2016). Unfortunately, traditional banks in Nigeria are reticent in offering financial services to the poor, because they are usually unable to meet their requirements. It is worrisome that despite the potential importance of SMEs in any economy, high mortality rate among established SMEs is becoming a reoccurring phenomenon in Nigeria.
According to SMEDAN 2010 report, only 15% of newly established businesses survive the first five years in Nigeria. The ones that survive after this period usually record poor performance. The crucial role of finance to the growth and survival of SMEs and the adoption of microfinance as the main source of financing SMEs in Nigeria is pivotal. It therefore makes it imperative to study the extent to which microfinance can enhance small business performance (Hossain, 2016).
Besides, the empirical evidences emerging from various studies about the effect of microfinance on entrepreneurial development have so far yielded mixed results that are inconclusive and contradictory. Some studies only looked at microfinance and poverty alleviation (Ozioko, 2010), other studies looked at microcredit alone as an intervention tool for entrepreneur development (Mkpado & Arene, 2014), others looked at the presence of microfinance institutions as a catalyst for entrepreneurial development (Amu & Amu, 2012), (Hossain, 2016), (Lawson, 2017).
Question of whether specific microfinance service (micro-credit, micro savings) improves or worsens SMEs performance is still worthy of further research such as the one being undertaken in this study.
1.3 Research Questions
Based on the problem stated above, this study seeks to answer the following questions:
(i) What is the effect of micro loan disbursed on small business growth (SBG)?
(ii) What is the relationship between inflation rate and small business growth (SBG)?
(iii) To what extent does sectorial micro lending has on small business growth (SBG)?
1.4. Objectives of the Study
The main objective of this study is to examine the effect of microfinance banks on small and medium scale enterprises (SMEs) in Nigeria. The specific objectives are to:
(i) Examine the effect of micro loan disbursed on small business growth (SBG)
(ii) Determine the relationship between inflation rate and small business growth SBG;
(iii) Assess the influence of sectorial micro lending on small business growth SBG;
1.5. Research Hypotheses
In order to achieve the research objectives and answer the research questions, the following hypotheses stated in null form will be put to empirical test:
Ho1: There is no significant statistical relationship between small business growth and micro loan disbursed.
Ho2: There is no significant statistical relationship between inflation rate and small business growth.
Ho3: There is no significant statistical relationship between small business growth and sectional micro lending.
1.6. Significance of the Study
The study will help MFBs with better understand the effects of microfinance loan on the performance of SMEs in order to implement better and effective programs in the future. More so this study will better expose possible areas of improvement in micro financing in Nigeria. It sheds light on the relationship between microfinance loan and the performance of small and medium enterprise. This can help to address problems and challenges which small and medium enterprises of face. It can also offer empirical evidence for use in short term and long term interventions especially in the fight against poverty. It also enlightens the government and the public on the role of MFI in the SMEs sector.
1.7. Scope of the Study
This study is an empirical analysis of the effect of microfinance banks on small and medium scale enterprises (SMEs) in Nigeria. The research work will make emphases on the Nigerian economy vis-à-vis international trade between the periods of 1970-2017.
1.8. Definition of Terms
Micro enterprise: Micro- enterprise is the informally organized business activity undertaken by entrepreneurs; excluding crop production by convention, employing less than ten people and having assets less than N5 million excluding land and building.
Small enterprise: Small enterprise is any enterprise that employs between ten (10) to forty-nine (49) people and has asset worth (excluding land and building) between N5 million and N50 million.
Medium enterprise: Medium enterprise is any enterprise that employs between fifty (50) and one hundred and ninety–nine (199) people and has assets worth (excluding land and building) between N50 million and N500 million (SMEDAN, 2007).
Microfinance Banks: Microfinance Banks are licensed financial institutions meant to serve the un-served, but economically active clients in the rural and peri-urban areas by providing diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, which would enable them to undertake and develop long-term, sustainable entrepreneurial activities and mobilize savings for intermediation (CBN, 2005).
Microfinance Institutions: Microfinance Institutions are organizations whose activities consist wholly or in significant part, of the provision of financial services to micro entrepreneurs.
Microfinance: Microfinance denotes the provision of financial services adapted to the needs of low income people such as micro-entrepreneurs, especially the provision of small loans, acceptance of small savings deposits and simple payment services needed by micro-entrepreneurs and other poor people (USAID, 2005).
Microcredit: Microcredit is commonly defined in terms of loan amount as a percentage of average per capita income (USAID, 2005). In the context of Nigeria, with a GDP per capita of N42,000 (about $300) in 2003, loans up to N50,000 (around $350) will be regarded as micro loans. GDP per capital (PPP U$) in 2007 was U$1,969 (UNDP – HD Report, 2009).
Microsavings: Microsavings are defined as savings accounts with a balance of less than N8,400 (about $50), that is less than 20% of the average annual income per capita.
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