IMPACT OF MICROFINANCE INSTITUTIONS ON SMALL SCALE ENTERPRISES DEVELOPMENT IN NIGERIA

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IMPACT OF MICROFINANCE INSTITUTIONS ON SMALL SCALE ENTERPRISES DEVELOPMENT IN NIGERIA

Abstract:

This study examines the impact of Microfinance Institutions in financing small scale enterprises for economic growth in Nigeria. Time series data from Central bank of Nigeria (CBN) report on the activities of Microfinance Institutions (MFIs) from 1992 to 2014 were used. Ordinary Least Square (OLS) regression analysis was used for the investigation. The findings revealed that there is a significant impact as, a result of microfinance institutions on the SMEs growth in Nigeria. There is also significant effect of microfinance institutions in alleviating poverty by increasing income and changing economic status of those who patronize them. The study concludes that microfinance institution is indeed a potent strategy of government to reduce poverty and a viable tool for financial inclusion. The recommendations include that microfinance can only be appropriate tool for poverty alleviation and increase economic activities. Government should introduce more viable programmes outreach than the present by encouraging survival and continuity of MFIs so that rural dwellers can build confidence on them.

CHAPTER ONE

1.0 Introduction

Small and Medium Enterprises (SMEs) play a vital role in the growth and economic development of any Nation, especially developing country like Nigeria.. SMEs have been advised by Ayozie and Latinwo,(2010), Safiriyu and Njogo, (2012) to encourage entrepreneurship. As explained by Muritala, Awolaja and Yusuf (2012) there is the greater likelihood that SMEs will utilize labour-intensive technologies thereby reducing unemployment particularly in developing countries and thus have an immediate impact on employment generation and poverty alleviation. The problems bedeviling the SMEs in Nigeria are multi-faceted. Ekpenyong (1997) and Utomi (1997) identified inadequate capital, managerial inefficiency and inaccessible credit facilities from formal financial institution among others as key problems. Long term development institutional credit was known not to be available to SMEs because they are generally considered high credit risks by financial institutions. The stated by Evbuomwan, Ikpi, Okoruwa and Akinyosoye (2012) about 75.7% of their survey respondents relied mostly on own funds to finance their businesses. A widespread concern is that the banking system in the sub sector which supposed to be the major financier of SMEs is not providing enough support to new economic initiatives and in particular to the expansion of SMEs and agricultural sector. It is noted that commercial banks which retained liquidity levels in excess of regulation have shown reluctance in financing SMEs (Sacerdoti, 2005). This motivated Micro Finance Institutions (MFIs) to expand vigorously in a number of countries, especially developing countries.

1.1 General Background of The Study

The condition of the rural dwellers remained deplorable in spite of the federal government’s rural development programmes. Some researchers believed that government’s centralize approach to this was the main reason why the programmes did not achieve much of the desired results. A more participatory and decentralized approach, which paves the way for the active involvement of these rural dwellers in their development was advocated. The success of the participatory and rural development was predicated on the fact that 70% of the Nigeria’s population lives in the rural areas where potentials for agricultural production abound. Development of local arts, crafts and technology has also been described as a veritable means of laying a solid technological base for Nigeria. These small scale industries are more labour intensive and hence generate more employment. The capital ratio is very low and seems better suited to the development of home grown technology.

Naturally, poor people are excluded from formal financial system all over the world. Exclusion ranges from country to country depending on the level of development, that is, less in developed more than developing countries. Absence of access to formal financial services has made poor people to develop a wide variety of informal community based financial arrangement to meet their financial needs. Microfinance is created to fill this gap (Acha, 2008).

Microfinance is the lending of small amount of capital to poor entrepreneurs in order to create a mechanism to alleviate poverty by providing the poor and destitute with resources that are available to the wealthy. According to Anyanwu, (2004) microfinance bank is not just providing capital to the poor, but also combat poverty at an individual level. It has a role at institutional level. It seeks to mob excesses liquidity among the poor in rural areas and create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector.

In Africa and other developing regions, microfinance institutions (MFIs) are regarded as the main source of funding micro enterprises (Anyanwu, 2004). Formal credit and savings institutions for the poor are also available around the globe providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperative and development finance institution. Suffice it to say that the unwillingness or inability of the formal financial institutions to provide financial services to the urban and rural poor, coupled with the unsustainability of government sponsored development financial schemes contributed to the growth of private sector-led microfinance in Nigeria.

1.2 Statement of Problem

The current Microfinance policy to reduce poverty and improve access to factors of production by SMEs to create wealth is not yielding expected result after ten years of operation in the country despite government endeavour to improve the standard of living of its citizen. Therefore, this study tries to investigate through empirical research method on how Microfinance Institutions have contributed to the development of SMES in Nigeria.

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