Description
This research work investigated the effects of micro-financing on Micro and Small Enterprises (MSEs) in South-west Nigeria.
EFFECTS OF MICROFINANCING ON MICRO AND SMALL
ENTERPRISES (MSEs) IN SOUTHWEST NIGERIA
BY
BABAJIDE, ABIOLA AYOPO
(CU03PG003)
BEING A Ph.D THESIS SUBMITTED IN PARTIAL FULFILMENT
OF THE REQUIREMENTS FOR THE AWARD OF Ph.D BANKING
& FINANCE OF THE DEPARTMENT OF BANKING & FINANCE,
COLLEGE OF DEVELOPMENT STUDIES,
COVENANT UNIVERSITY, OTA, NIGERIA
JUNE, 2011
ii
CERTIFICATION
This is to certify that this thesis titled “Effects of Microfinancing on Micro
and Small Enterprises (MSEs) in South-West Nigeria” is the original work
of Mrs. Babajide, Abiola Ayopo and is hereby submitted for the award of the
Degree of Doctor of Philosophy (Ph.D) in Banking & Finance. We also
certify that this work has not been submitted for the award of the Ph.D or
any other degree in this or any other University.
Prof. J. A.T. Ojo Date
(Supervisor & Head,
Department of Banking & Finance)
Covenant University, Ota.
Prof. Esther, O. Adegbite, Ph.D Date
(Co-supervisor)
Department of Banking & Finance
Faculty of Business Administration
University of Lagos, Akoka, Nigeria.
iii
DECLARATION
It is hereby declared that this research work titled “Effects of Micro-financing on Micro
and Small Enterprises (SMEs) in South-west Nigeria” was undertaken by Mrs. Abiola
Ayopo Babajide and is based on her original study in the Department of Banking and
Finance, School of Business, College of Development Studies, Covenant University, Ota,
under the supervision of Distinguished Professor J. A. T. Ojo and Professor (Mrs.) Esther
O. Adegbite. The ideas and views expressed in this research work are those of the
researcher, and the views of other researchers have been duly acknowledged.
Abiola Ayopo Babajide Signature & Date
(Researcher)
The above declaration is attested to by:
Prof. J. A.T. Ojo Signature & Date
(Supervisor )
Prof. Esther, O. Adegbite Signature & Date
(Co-supervisor)
Prof. J. A.T. Ojo Signature & Date
HOD, Banking & Finance
Covenant University, Ota.
Prof. K. Soremekun Signature &Date
Dean, College of Development Studies,
Covenant University, Ota.
Prof. C. A. Awonuga Signature &Date
Dean, School of Post graduate Studies,
Covenant University, Ota
iv
DEDICATION
This work is dedicated to my Lord and Saviour Jesus Christ, my Glory and
the Lifter of my head and to Bishop David Oyedepo whose inspiration has
made this work a reality.
v
ACKNOWLEDGEMENTS
I have realized in life that a journey of a thousand kilometers begins with a step. Thank
God for that step which was inspired by my parents during my formative years, the
various mentors that I have come across in the journey of my academic pursuits. I have
also realized that you fall off a bicycle only when you stop pedalling. Actualization of
one?s dream does not come easy; it must be through doggedness and determination. It is
only the grace of God that calms the troubled waters.
This academic journey has not been an easy one, particularly since December 2003 when
I like others first registered as a Ph.D student at Covenant University. The myriads
challenges or plethora of social and financial troubles that surfaced were enough to rock
the boat of success. But for God, this ideal and the successes of today would have been
unattainable.
God in His infinite mercy has positioned quite a number of people on the path to
achieving this greatness, to Him alone, I give all the Glory.
I appreciate the Visioner and Chancellor of Covenant University, Dr. David Oyedepo,
who is unequivocal in his commitment to restoring the dignity of the black race, his wife,
Pastor (Mrs.) Faith Oyedepo who stood staunchly by her husband in the pursuit of the
vision. The environment was serene for growth and as a platform for development, it was
superb. It is my sincere prayer that God will continue to be their Guide and Buckler.
Fresh unction and anointing in Jesus? name!
I would like to thank the Vice-Chancellor, Prof. Aize Obayan, who has been to me a true
sister and a personal friend. I have been through many experiences while I work in
Covenant University, she has always stood by me, shown me understanding and become
an anchor of hope for tomorrow; I am very grateful to her.
Also, I would like to thank the former Registrar, Dr. Daniel Rotimi who has always been
supportive and given necessary approval to ensure the success of this work.
vi
My special thanks also go to the first Registrar of Covenant University, Pastor Yemi
Nathaniel, who gave me the opportunity to serve on the Faculty of Covenant University
in 2002 and has always stood by me in my career pursuit in Covenant University.
I would like to express my profound gratitude to my supervisor, Prof. J. A. T. Ojo, who
has stood by me through thick and thin in the Department and has undertaken the
supervision of this work in a father - daughter relationship, painstakingly dotting the „i?s
and crossing the „t?s; undoubtedly a father indeed, he has been available at all times,
giving direction and spiritual support to ensure the success of this work. He monitored
my career progression and brought me this far in my career pursuit. I do not know where
I would be today without your guidance and deep rooted love for me. I am very grateful,
Sir.
My Co-supervisor, Dr. E. O. Adegbite also supported my research work with passion.
Her linking up and co-operation with my main Supervisor, have contributed immensely
to the success of this work. God will continue to guide your steps Ma.
My special thanks also go to the Dean of the School of Postgraduate Studies, Prof. C. O.
Awonuga who is always eager to see us postgraduate student successfully complete our
Ph.D programme. And also to the Dean of my College, Prof. K. Shoremekun for his
support and quick response on post graduate issues. My special thanks also goes to Prof.
C. K. Ayo for his concern and became my advocate on my post graduate programme.
I am also very grateful to Prof. Matthew Rotimi Ajayi, the former Dean of my College,
College of Development Studies (CDS), for constantly reminding me of the need to push
harder and round off the programme. He is very understanding and very supportive of my
work and academic career. I thank Prof. J. A. Bello, who at every opportunity asked,
„How far with our work?? His outstanding contribution has helped to enrich this work.
My special thanks go to Prof. S.O. Otokiti, who was the HOD of the Department of
Economics from 1988 to 1992 while I was an undergraduate in Lagos State University,
and whose way destiny still brought me at Covenant University. I was fortunate because
vii
without his help and constant encouragement, I do not know if the work would have been
completed by now. He made the research work possible by giving relevant materials with
directions and contributory corrections. Sir, I am very grateful to you.
My profound gratitude also goes to Professor Emmanuel Kwofie, who took of his
valuable time to proof read the work line by line, commenting on every page and making
useful suggestions that have helped to improve the work greatly. Prof. Fadayomi?s, deep
insight and outstanding contributions have helped to reshape the topic and give a better
direction to the study. Prof. J.A Oloyede is indeed a spiritual father in the Department; he
took it upon himself to ensure the successful completion of the course-work and
constantly sent messages and gave the word proclaiming the God?s blessings of success
in the Department. God will reward you abundantly.
Dr. Ranti Ogunrinola, constantly reviewed the work especially my variables and
statistical technique, drawing from his wealth of experience in field survey and thus
helped to enrich the work. Dr. Wunmi Olayiwola, made useful contributions that helped
to reshape the work and enrich its quality; for this, I am very grateful. Dr. Patrick
Edewor and Dr. Olalekan Asikhia thoroughly read the work, and joyfully contributed
useful suggestions and literature to buttress the work. Dr. G. O. Adejumo contributed to
the statistical analysis and has thus helped to enhance the quality the work. Dr. T.
Abioye, Dr. Akang Bassey and Dr. Mrs. Aretha Asakitipi read through the manuscript at
the initial stage and helped to improve the quality of the work. Mr. Emmanuel Amoo, Mr
Fashola Kazeem and Mr. Princely Osaro of Lagos Business School studied survival
statistical technique in detail to enrich the work.
I cannot but be grateful to my colleagues in the Department who peer reviewed the work
and made suggestions that helped to improve the quality of the thesis. Mr. Kehinde
Adetiloye, a brother and a friend indeed, Mrs. Wunmi Olokoyo, Mrs. Folashade
Adegboye, Mr. Segun Olowe, Mr. Alex Ehimare and Mr. Ochei Ikpefan; to you all I am
very grateful. I also thank other Department staff for running around at every stage of the
viii
work to assist in one way or another, Mr. Taiwo Urhue, Mrs. Regina Tobi-Davies, Mr.
David Obaoye and Miss Gift Madu, who is really a gift to the Department indeed.
Mr. Christopher Nkiko, Director, Centre for Learning Resources(CLR), and Mrs. Yussuf
Felicia, took it upon themselves to shop round the globe to get me good quality textbooks
on Survival Analysis Techniques; I am very grateful to them for the help. Sis. Ronke and
Mercy Ijungho and other Centre for Learning Resources staff contributed immensely in
the sourcing of materials; my sincere thanks go to them all. Similarly, key members of
the Centre for Systems and Information System, (CSIS), Mrs. Mary Aboyade, and Pastor
Afolabi Abolade, along with Miss Bimbo Babalola, and Miss Abolarin Adenike are
highly appreciated for the supportive roles they played. God will support projects of their
lives. Messrs Raphel Oloruntele, Sis. Bunmi, Miss Adenike, infact the dean?s office staff
are wonderful indeed.
Friends from other departments, who by doing their own part of other assignment have
made the success of this work a reality are worth mentioning, first among the list is Mr.
Mayowa Agboola and Mr. Samuel Epetimehin, if I fail to acknowledge you guys at this
point, it will be a great injustice and I won?t be able to forgive myself. I don?t know how
you come about your work ethics but you are indeed incredible, thank you.
Also, I would like to appreciate the following people for their contributions; Mr. Francis
Iyoha, Dr. Mrs. A. Umoren, Mr Fola Adegbie, Mrs. Dorcas Oyerinde, Mrs. Nike Adeniji,
Mrs. Owolabi, Mrs. Mathew, Dr. A. Enahoro, Dr. Samson Ibidunni, Dr. Chinoye Okafor,
Dr. Mrs. A. Shobola, Dr. Dan Gberevie, Mr. Roland Worlu, Mr. A. Adegbuyi.
This study would not have been possible without the immense contributions of the
following people in the Microfinance and SMEs industrial Executives and Managers who
assisted and ensured that the research instrument used got to the selected Banks in South-
West Nigeria: first person in this category is Mr. Johnson Osho of Farmers? Develoment
Union (FADU) Ibadan who used his connection in the Microfinance Industry to connect
me with the Loan Officers training programme organized by the CBN in Ibadan, and
talked many of the loan officers into embracing the research as a development tool in the
industry and supporting the study; Mr. Kingsley Imafidon, Divisional Manager for LAPO
ix
Bank for coordinating the distribution of copies of questionnaire in Lagos and Ogun
State; Also, Mr. O. Roland of Accion Microfinance Bank Limited for the interview
session, Mr. Jegede Adebayo Biztrust Micro finance Bank, Mr. Iyamu of BOI
Microfinance Bank, Mr. Oluwande, Covenant Micro-finance Bank, Pastor Adebiyi of
SMEDAN, Abuja, Executive Director National Association of Small and Medium
Enterprises in Nigeria, Mr.Mobolaji of Lagos State Microfinance Institution (LASMI);
Mr. Ladipo of Estate Microfinance Bank, Mr. Odubanjo, Elim Micro-finance Bank, Mr.
Oduga, Hebron Microfinance Bank and Mr. Alalade of Hybrid Microfinance Bank.
My husband, Mr. Kassim Michel Babajide and my lovely daughter Anjolaoluwa
Oyindamola Divine Babajide for their love, support and joy you brought into my life. I
love you so dearly.
To my mum, Madame O. Omoniyi and my siblings Mrs. Olayinka Izegbu, Mrs. Bola
Olaribigbe, Mrs. Funmilayo Sanusi, Mr. Olakunle Olokodana and Mr. Olawale
Olokodana. I say “Thank you all” for your support.
I would like to thank the following people for their love and prayers, and concern for my
work and progress. Pastor Dele Bamgboye, Pastor Dapo Adeleye, and Pastor Ubong Ntia.
I am very grateful.
x
ABSTRACT
This research work investigated the effects of micro-financing on Micro and Small
Enterprises (MSEs) in South-west Nigeria. The study examined how micro-finance and
non-financial micro-financing activities and features such as group membership, pre-loan
training, cross guaranteeship, loan size, technical and managerial training, among others,
impact on the survival, growth, productivity and performance of Micro and Small
Enterprises in Southwest Nigeria. The hypotheses formulated were developed around the
theories of financial growth model, pecking order theory, and contract theory. Variables
were used to evolve a detailed analysis of the survival and growth models. The
theoretical models were used in developing four different hypotheses that were
investigated through the survey of four hundred and forty three (443) micro enterprises
and one hundred and eighty (180) small enterprises which were randomly selected using
multi-stage random sampling technique. Copies of well-structured questionnaire were
administered to entrepreneurs sampled. The validity and reliability of the instrument were
measured using Cronbach?s alpha which gave a result of 0.72, while predictive form
validity was 0.84. Four hypotheses were raised and tested at 0.05 significant levels. The
findings revealed that micro finance and micro-financing enhance survival of Micro and
Small Enterprises (MSEs) but not sufficient for growth and expansion of such Micro and
Small Enterprises. The result also revealed that microfinance has positive effects on
productivity and performance of local entrepreneurs. The findings from the interview
sessions revealed that micro financing is not effective and substantially being practiced in
Nigeria as many MFBs grant more individual loans than group based loans, thereby
increasing their running cost and putting their portfolio at risk. We therefore recommend
a collective and cooperative support as a critical microfinance strategy in the form of
solidarity groups at the local level; and at the national and regional level, a networking of
groups among operators of MFBs. We also recommend that enterprises supported by
MFBs should be linked up with larger financing window like the SMEEIS fund or
Strategic Partners for expansion and growth funding after survival.
xi
TABLE OF CONTENTS
Page (s)
Title page …………………………………………………..…………….. ……… (i)
Certification ………………………………………………………………………… (ii)
Declaration ……………………………………………………….... ……………. (iii)
Dedication…………………………………………………..…………………………(iv)
Acknowledgements ……………………………………………...……. ……………... (v)
Abstract ……………………………………………………………... ………………..(x)
Table of Contents………………………………………………………………………(xi)
List of Tables…………………………………………………………………………..(xvi)
List of Figures………………………………………………………………................(xix)
List of Abbreviations………………………… ……………………………………..(xx)
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study.....................................................................................1
1.2 Statement of the Problems...................................................................................6
1.3 Research Questions..............................................................................................7
1.4 Objectives of the Study........................................................................................8
1.5 Statement of Hypotheses......................................................................................8
1.6 Significance of the study......................................................................................9
1.7 Scope of the study................................................................................................10
1.8 Limitation of the study.........................................................................................10
1.9 Definition of Terms .............................................................................................11
xii
CHAPTER TWO LITERATURE REVIEW
2.1 Introduction.....................................................................................................12
2.2 Review of Conceptual Issues..........................................................................12
2.2.1 Concepts of Micro, Small and Medium Enterprises and Microfinance...........12
2.2.2 Impact Assessment of Microfinance................................................................20
2.2.3 Methods of Data Analysis Found In Literature................................................25
2.2.4 Measurement of Microfinance Impact.............................................................28
2.2.5 Enterprises Survival Prediction and Survival Analysis...................................30
2.2.6 Model Generation for Microfinance and MSMEs Survival............................34
2.3 Theoretical Framework....................................................................................38
2.3.1 Financial Growth Theory.................................................................................38
2.3.2 Pecking Order Theory......................................................................................39
2.3.3 Contract Theory................................................................................................41
2.4 Entrepreneurship and Growth..........................................................................41
2.4.1 The Firm and the Entrepreneur.........................................................................41
2.4.2 Firm Life Cycle.................................................................................................42
2.4.3 Organizational Capabilities...............................................................................43
2.4.4 Stages of Small Business Development............................................................43
2.4.5 Small Business Development...........................................................................49
2.4.6 Role of Enterpreneur in Business Formation and Growth...............................55
2.4.7 SMEs & Growth............. .................................................................................57
2.4.8 MSMEs and Economic Development in Nigeria.............................................58
xiii
2.4.9 Microcredit and Microenterprise.....................................................................60
2.4.10 Political & Social dimension to Entrepreneurship in Nigeria.........................68
2.5 Theoretical Findings.......................................................................................71
CHAPTER THREE - RESEARCH METHODOLOGY
3.1 Introduction....................................................................................................74
3.2 Research Methods..........................................................................................74
3.3 Research Design............................. ...............................................................75
3.4 Population of the Study..................................................................................75
3.5 Sample Frame.................................................................................................77
3.6 Sampling Technique.......................................................................................78
3.7 Sample Size Determination ...........................................................................79
3.8 Distribution of Questionnaire and Response Rate..........................................81
3.9 Sources of Data Collection..............................................................................83
3.10 Data Collection Method..................................................................................84
3.11 Data Collection Instrument..............................................................................84
3.11.1 The Questionnaire............................................................................................84
3.11.2 Pre-Testing of Instrument................................................................................84
3.12 Method of Data Analysis ................................................................................85
3.12.1 Survival Analysis ............................................................................................87
3.12. 2 Regression Based Estimation...........................................................................88
3.12.3 Methods for Empirical Analysis......................................................................88
3.12.4 Multiple Regressions Analysis.........................................................................90
xiv
3.13 Model Specification.........................................................................................93
3.14 Theoretical Justification of Variables Used in Study.....................................103
3.15 Validity of Research Instrument.....................................................................106
3.16 Reliability of Research Instrument.................................................................108
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS, AND
INTERPRETATION
4.1 Introduction…………………………………………………………………...109
4.2 Profile of Respondents…………………….…………………………...……..109
4.3 Business Characteristics of Respondents………………………………..........114
4.4 Business Characteristics of Respondents by Location (Urban).……………...116
4.5 Business Characteristics of Respondents by Location (Rural)………………..119
4.6 Cross Tabulation of Some Variables………………………………………….120
4.7 Survival Analysis………………………………………………………...........127
4.7.1 Result Analysis…………………………………………………………..........130
4.8 Multiple Regression Analysis………………………………………………....138
4.9 Operations, Process and Practice of Microfinance in Nigeria…………............173
Chapter Five: DISCUSSION, CONCLUSION AND RECOMMENDATION
5.1 Introduction…………………………………………………………………..178
5.2 Summary……………………………………………………………………..178
5.3 Findings………………………………………………………………………179
5.3.1 Microfinance and MSE Survival……………………………………………..179
5.3.2 Microfinance and MSE Growth……………………………………………...180
5.3.3 Microfinance and Entrepreneur?s Productivity……………………………….181
5.3.4 Non-Financial Services of Microfinance Banks and Business Performance....181
5.4 Hypothesis Testing……………………………………………………………183
5.5 Other Findings………………………………………………………………...183
5.6 Conclusion of Studies…………………………………………………………184
xv
5.7 Recommendations……………………………………………………………..185
5.8 Contribution to Knowledge …………………………………………………..187
5.9 Suggestions for Further Studies………………………………………….........187
Bibliography…………………………………………………………………………..189
Appendix A
1 Distribution of MFB by geographical zone as at March 2009…….207
Appendix B
2. Business Characteristics of Respondents by Location …………....208
Appendix C
3. Questionnaire ……………………………………………………...210
xvi
LIST OF TABLES
Page(s)
Table 2.1: Definitions of SMEs by Nigerian Institutions 12
Table 2.2: Classification adopted by National Policy On MSMEs 15
Table 2.3: Financial Growth Cycle Model 38
Table 3.4: License & Unlicense MFBs in Southwest Zone of Nigeria
as at March 2009 76
Table 3.5: Distribution of MSMEs in Southwest Zone 77
Table 3.6: Distribution of SMEs operators users of Microfinance Bank 78
Table 3.7: Minimum Returned Sample Size table for Continuous/Categorical
data 80
Table 3.8: Questionnaire distribution by State / Response rate of Micro &
Small Enterprises Operator 82
Table 3.9: Measurement of Variables – Hypothesis 1 95
Table 3.10: Measurement of Variables – Hypothesis 2 97
Table 3.11: Measurement of Variables – Hypothesis 3 100
Table 3.12: Measurement of Variables – Hypothesis 4 102
Table 4.13: Profile of Respondents 110
Table 4.14: Business Characteristics of Respondents 113
Table 4.15: Business Characteristics of Respondents by Location –Urban
Table 4.16: Business characteristics of Respondents by Location – Rural
Table 4.17: Business Resident and Kind of Business 120
Table 4.18: Education and Business Resident 121
Table 4.19: kind of Business and Form of Business 122
Table 4.20: Level of Education and Source of Initial Capital 123
Table 4.21: Level of Education and Category of Business 124
Table 4.22: Kind of Business and Category of Business 125
Table 4.23: Sources of Capital and Composition of Capital 126
Table 4.24: Business Group and Enterpreneurial Training 127
Table 4.25: Group Proportion with Regard to Long-term Survival 132
Table 4.26: Kaplan Meier Survival Estimate by Category 133
xvii
Table 4.27: Diagonistic Test Kaplan Meier Estimate 133
Table 4.28: Kaplan Meier Survival Estimate by Kind of Business 134
Table 4.29: Diagonistic Test Kaplan Meier Estimate 135
Table 4.30: Adjusted Hazard Ratio for Cox Proportional Hazard Model 135
Table 4.31: Omnibus Test of Model Coefficient 1 38
Table 4.32: Multiple Regression Analysis of Effect of Microfinance on
Small Business Growth by Category of Business 144
Table 4.33: Multiple Regression Analysis of Effect of Microfinance on
Small Business Growth by Legal Status of Business 148
Table 4.34: Multiple Regression Analysis of Effect of Microfinance on
Small Business Growth by Category of Kind of business
Business Activities 151
Table 4.35: Multiple Regression Analysis of Effect of Microfinance on
Small Business Operators Productivity by Category 155
Table 4.36: Multiple Regression Analysis of Effect of Microfinance on
Small Business Operators Productivity by Legal Status of
Business 159
Table 4.37: Multiple Regression Analysis of Effect of Microfinance on
Small Business Operators Productivity by Kind of Business 162
Table 4.38: Multiple Regression Analysis of Effect of Non- Statutory
Activities of Microfinance Bank on Small Business Performance
by Category 165
Table 4.39: Multiple Regression Analysis of Effect of Non- Statutory
Activities of Microfinance Bank on Small Business Performance
by Legal Status of Business 169
Table 4.40: Multiple Regression Analysis of Effect of Non- Statutory
Activities of Microfinance Bank on Small Business Performance
by Kind of business 172
xviii
LIST OF FIGURES
Page(s)
Figure 2.1: Conceptual Model for Microfinance
and SMEs Survival………………………………..……………………….37
Figure 2.2: Stages of Small Business Growth Characteristics…………………………48
Figure 2.3: Stages of Small Business Growth Characteristics and Failure & Exit
Modes...........................................................................................................48
Figure 2.4: Conceptual Framework and Hypotheses………………………………........73
xix
LIST OF ABBREVIATIONS
CBs - Community Banks
CBN – Central Bank of Nigeria
GDP – Gross Domestic Product
MDF - Microfinance Development Fund
MDGs – Millennium Development Goals
MFBs – Microfinance Banks
MSMEDEF - Micro, Small and Medium Enterprises Development Fund
MSMEs – Micro, Small and Medium Enterprises
NACCIMA – National Association of Chambers of Commerce, Industry, Mines
and Agriculture
NACRDB – Nigerian Agricultural, Cooperative and Rural Development Bank
NAFDAC – National Agency for Food and Drug Administration and Control
NAPEP – National Poverty Eradication Programme
NASME – National Association of Small and Medium Enterprise
NASENI – National Agency for Science and Engineering Infrastructure
NASSI – National Association of Small Scale Industrialists
NCIS - National Council on Industrial Standard
NDE – National Directorate of Employment
NEEDS - National Economic Empowerment and Development Strategy
NERFUND – National Economic Reconstruction Fund
NEPAD – National Economic Partnership for African Development
NGO – Non-Governmental Organisation
NIPC – Nigerian Investment Promotion Commission
xx
MAN - Manufacturers? Association of Nigeria.
SA - Survival Analysis
SEEDS - State Economic Empowerment and Development Strategy
SSI - Small Scale Industries
SSE – Small Scale Enterprise
SMEDAN – Small and Medium Enterprise Development Agency of Nigeria
Appendices
1. Distribution of Microfinance Banks by Geopolitical Zone in Nigeria
2. Business Characteristics of Respondents by location Tables 4.14 and 4.15
3. Questionnaire
1
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Since Nigeria attained independence in 1960, considerable efforts have been directed towards
industrial development. The initial efforts were government-led through the vehicle of large
industry, but lately, emphasis has shifted to Small and Medium Scale Enterprises (SMEs)
following the lessons learnt from the success of SMEs in the economic growth of Asian
countries (Ojo, 2003). Thus, the recent industrial development drive in Nigeria has focused on
sustainable development through small business development. Prior to this time, particularly
judging from the objectives of the past National Development Plans, 1962-68, 1970-75, 1976-80
and 1981-85, emphasis had been on government-led industrialization, hinged on import-
substitution strategy.
Since 1986, government had reduced its role as the major driving force of the economy through
the process of economic liberalization entrenched in the IMF pill of Structural Adjustment
Programme. Emphasis, therefore, has shifted from large-scale industries to small and medium-
scale industries, which have the potentials for developing domestic linkages for rapid and
sustainable industrial development. Attention was focused on the organized private sector to
spearhead subsequent industrialization programmes. The incentives given to encourage increased
participation in these sectors were directed at solving and/or alleviating the problems
encountered by industrialists in the country, thereby giving them opportunity to increase their
contribution to the Gross Domestic Product (GDP).
The contribution of Micro, Small & Medium Enterprises (MSMEs) to economic growth and
sustainable development is globally acknowledged (CBN, 2004). There is an increasing
recognition of its pivotal role in employment generation, income redistribution and wealth
creation (NISER, 2004). The micro, small and medium enterprises (MSMEs) represent about 87
per cent of all firms operating in Nigeria (USAID, 2005). Non-farm micro, small and medium
enterprises account for over 25 per cent of total employment and 20 percent of the GDP
2
(SMEDAN, 2007) compared to the cases of countries like Indonesia, Thailand and India where
Micro, Small and Medium Enterprises (MSMEs) contribute almost 40 percent of the GDP (IFC,
2002).
Whilst MSMEs are an important part of the business landscape in any country, they are faced
with significant challenges that inhibit their ability to function and contribute optimally to the
economic development of many African countries. The position in Nigeria is not different from
this generalized position (NIPC, 2009).
Realizing the importance of small businesses as the engine of growth in the Nigerian economy,
the government took some steps towards addressing the conditions that hinder their growth and
survival. However, as argued by Ojo (2003), all these SME assistance programmes have failed to
promote the development of SMEs. This was echoed by Yumkella (2003) who observes that all
these programmes could not achieve their expected goals due largely to abuses, poor project
evaluation and monitoring as well as moral hazards involved in using public funds for the
purpose of promoting private sector enterprises. Thus, when compared with other developing
countries, Variyam and Kraybill (1994) observed that many programmes for assisting small
businesses implemented in many Sub-Saharan African (SSA) countries through cooperative
services, mutual aid groups, business planning, product and market development, and the
adoption of technology, failed to realize sustained growth and development in these small
enterprises. Among the reasons given were that the small-sized enterprises are quite vulnerable
to economic failure arising from problems related to business and managerial skills, access to
finance and macroeconomic policy.
Despite MSME‘s important contributions to economic growth, small enterprises are plagued by
many problems including stagnation and failure in most sub-Saharan African countries (Bekele,
2008). In Nigeria, the problem is not limited to lack of long-term financing and inadequate
management skills and entrepreneurial capacity alone, but also, includes the combined effect of
low market access, poor information flow, discriminatory legislation, poor access to land, weak
linkage among different segments of the operations in the sector, weak operating capacities in
terms of skills, knowledge and attitudes, as well as lack of infrastructure and an unfavourable
economic climate.
3
Lack of access to finance has been identified as one of the major constraints to small business
growth (Owualah, 1999; Carpenter, 2001; Anyawu, 2003; Lawson, 2007). The reason is that
provision of financial services is an important means for mobilizing resources for more
productive use (Watson and Everett, 1999). 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, 1988), but small business enterprises in Nigeria find it difficult to
gain access to formal financial institutions such as commercial banks for funds. The inability of
the MSEs to meet the conditionalities of the formal 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. In many countries, people have relied
on the mutually supportive and benefit-sharing nature of the social networking of these sectors
for the fulfilment of economic, social and cultural needs and the improvement of quality of life
(Portes, 1998). Networks based on social capital exist in developed as well as developing
countries including Nigeria.
The reluctance of formal financial institutions to introduce innovative ways of providing
meaningful financial assistance to the MSEs is attributed to lack of competition among financial
service providers, in the sense that none of financial service providers came up with an
innovative way of financing small businesses. In order to enhance the flow of financial services
to the MSME subsector, Government had, in the past, initiated a series of programmes and
policies targeted at the MSMEs. Notable among such programmes were the establishment of
Industrial Development Centres across the country (1960-70), the Small Scale Industries Credit
Guarantee Scheme (SSICS) 1971, specialized financial schemes through development financial
institutions such as the Nigerian Industrial Development Bank (NIDB) 1964, Nigerian Bank for
Commerce and Industry (NBCI) 1973, and the National Economic Recovery Fund (NERFUND)
1989. All of these institutions merged to form the Bank of Industry (BOI) in 2000. In the same
year, Government also merged the Nigeria Agricultural Cooperative Bank (NACB), the People‘s
Bank of Nigeria (PBN) and Family Economic Advancement Programme (FEAP) to form the
Nigerian Agricultural Cooperative and Rural Development Bank Limited (NACRDB). The Bank
was set up to enhance the provision of finance to the agricultural and rural sector. Government
4
also facilitated and guaranteed external finance by the World Bank (including the SME I and
SME II loan scheme) in 1989, and established the National Directorate of Employment (NDE) in
1986.
In 2003, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), an
umbrella agency to coordinate the development of the SME sector was established. In the same
year, the National Credit Guarantee Scheme for SMEs to facilitate its access to credit without
stringent collateral requirements was reorganised and the Entrepreneurship Development
Programme was revived. In terms of financing, an innovative form of financing that is peculiar
to Nigeria came in the form of intervention from the deposit-money banks. The deposit money
banks through its representatives, ?the Banker's Committee‘, at its 246
th
meeting held on
December 21, 1999. The deposit-money banks agreed to set aside 10% of their profit before tax
(PBT) annually for equity investment in small and medium scale industries. The scheme aimed,
among other things, to assist the establishment of new, viable SMI projects; thereby stimulating
economic growth, and development of local technology, promoting indigenous entrepreneurship
and generating employment. Timing of investment exit was fixed at minimum of three years, that
is, banks shall remain equity partners in the business enterprises for a minimum of three years
after which they may exit anytime. By the end of 2001, the amount set aside under the scheme
was in excess of six billion naira, which then rose to over N13 billion and N41.4 billion by the
end of 2002 and 2005 respectively.
The modality for the implementation of the fund is such that the fund set aside is to be invested
within 18 months in the first instance and 12 months thereafter. After the grace period, the CBN
is required to debit the banks that fail to invest the fund set aside and invest same in treasury bills
for 6 months. Thereafter, the un-invested fund would be bidded for by successful investors under
the scheme. The fund set aside by the banks under the scheme decreased from N41.4 billion in
2005 to N38.2billion in 2006. This was as a result of N2.5billion and N25.3 million set aside
from failed banks and liquidated banks respectively, which were netted out after the bank
consolidation exercise. Actual investment during the period grew from N12 billion in December
2005 to N17 billion in 2006, representing only 29.1 percent of the total fund set aside. In 2007,
total amount set aside decreased further to N37.4 billion, while total investment stood at N21.1
5
billion representing 56 percent of the total sum set aside. The number of projects that benefitted
from the scheme also increased to 302 projects in 2007, from 248 in 2006 (CBN, 2007).
The CBN found the reasons for the slow pace in utilization of the SMIEIS fund to include: the
desire of the Banks to acquire controlling shares in the funded enterprises and the entrepreneurs‘
resistance to submit control; inability of the banks to adapt equity investment which is quite
different from what the banks are familiar with in credit appraisal and management, and lack of
proper structure for effective administration of the scheme when it took off among other factors.
Responding to the findings, the Bankers‘ Committee took a policy decision to extend funding
under the scheme to all business activities including even non-industrial enterprises, except for
general commerce and financial services. The name of the scheme was changed from SMIEIS to
Small and Medium Enterprises Equity Investment Scheme (SMEEIS) to reflect the expanded
focus. Also, the limit of banks‘ equity investment in a single enterprise was increased from N200
million to N500 million, making room for medium size industries.
Despite all these efforts, the contribution of SMEs in the industrial sector to the Nation‘s GDP
was estimated to be 37% compared to other countries like India, Japan and Sri Lanka and
Thailand where SMEs contributed 40%, 52% 55% and 47.5% respectively to the GDP in 2003,
(UNCTAD, 2003), hence the need for alternative funding window. In 2005, the Federal
Government of Nigeria adopted microfinance as the main financing window for micro, small and
medium enterprises in Nigeria. The Microfinance Policy Regulatory and Supervisory Framework
(MPRSF) was launched in 2005. The policy, among other things, addresses the problem of lack
of access to credit by small business operators who do not have access to regular bank credits. It
is also meant to strengthen the weak capacity of such entrepreneurs, and raise the capital base of
microfinance institutions. The objective of the microfinance policy is to make financial services
accessible to a large segment of the potentially productive Nigerian population, which have had
little or no access to financial services and empower them to contribute to economic
development of the country.
The microfinance arrangement makes it possible for MSEs to secure credit from Microfinance
Banks (MFBs) and other Microfinance Institutions (MFIs) on more liberal terms. It is on this
6
platform that we intend to examine the impact of microfinance on small business growth,
survival, as well as business performance of MSEs operators.
1.2 Statement of Research Problems
Majority of the micro and small enterprises (MSEs) in Nigeria are still at a low level of
development, especially in terms of number of jobs, wealth and value creation. This is because
65% of the active population, who are majorly entrepreneurs, remain unserved by the formal
financial institutions. The microfinance institutions available in the country prior to 2005 were
not able to adequately address the gap in terms of credit, savings and other financial services. As
reported by the CBN, the share of micro credit as a percentage of total credit was 0.9%, while its
contribution to GDP was a mere 0.2% (CBN, 2005). The CBN in 2005 identified the
unwillingness of conventional banks to support micro-enterprises, paucity of loanable funds,
absence of support institutions in the sector, as well as weak institutional and managerial
capacity of existing microfinance institutions among other reasons as the major reasons for the
failure of past microfinance initiatives in the country. To address the situation, the Microfinance
Policy, Regulatory and Supervisory Framework (MPRSF) for Nigeria was launched by CBN in
2005 to provide sustainable financial services to micro entrepreneurs. This initiated an important
turning point in the microfinance industry with the establishment of the Microfinance Bank
(MFB) as an institutional vehicle for privately owned, deposit taking Microfinance Institutions
(MFIs). The framework is designed to unite the best of the NGO credit organizations, and new
MFI initiatives under a common legal, regulatory and supervisory regime. Five years down the
line, though microfinance has proven to be one of the ways of bridging the resource gap created
in the Nigerian economy, there are still some undesirable problems experienced against its
proper execution. The lack of documentation of the practice of microfinancing in Nigeria has
made it difficult to formulate supportive programmes for the growth of the sector.
Despite the potential importance of MSMEs in any economy, high mortality rate among
established MSMEs is a matter of major concern in developing economies. International Finance
Corporation (IFC) reported in 2002 that only 2 out of every 10 newly established businesses
survive up to the fifth year in Nigeria. The report was corroborated by Small and Medium
Enterprise Development Agency of Nigeria (SMEDAN) that only 15% of newly established
businesses survive the first five years in Nigeria. This is a pointer to the fact that there is a
7
problem. The indispensable role of finance to the growth and survival of MSMEs and the
adoption of microfinance as the main source of financing MSMEs in Nigeria therefore makes it
imperative to study the extent to which microfinance can enhance small business survival.
The impact of micro-financing majorly should be seen in the multiplication of MSEs across
Nigeria. The survival of these MSEs should reflect in employment generation, engagement of
available local resources, local technology utilization, improved standard of living and growing
gross domestic product (GDP). However, despite MSEs representing about 87% of all firms
operating in Nigeria (USAID, 2005), they only account for 10% of total manufacturing output,
25% of total employment in the productive sector and 37% of GDP (Investment Climate
Assessment (ICA) survey, 2009). A common problem for the Nigerian small business sector is
that, the high rates of formation of new businesses evidenced in Corporate Affairs Commission
(CAC) annual report have not yet translated into comparable high rates of small firm growth.
New firms are being started but few grow rapidly to become significant international
competitors. For the great majority of micro and small enterprise in Nigeria long term growth
remains uncertain and bleak. The question is how many of these small businesses are
transforming from the subsistence level at start-up to the stage of maturity and later expansion
where they will have to employ more hands? Total productive output is also low compared to
other emerging economies like India, Sri Lanka and Thailand where SMEs contribute 40%, 55%
and 47% respectively in 2002 into the productive sectors of the economy (UNCTAD, 2003).
It is not uncommon to find in many microfinance programmes non-financial services such as
advisory services, managerial and technical training, weekly meetings and pre-loan training to
mention only a few, rendered as support services to MSMEs. These services that are poorly
provided in Nigeria are mostly very costly to deliver (McKernan, 2002), yet many microfinance
programmes consider them an integral part of the success of their programmes. Though the
contribution of such non-financial services is not in doubt, the extent of the contributions is yet
to be ascertained in Nigeria.
1.3 Research Questions
The study attempts to answer the following research questions:
1. To what extent does micro financing enhance the survival of MSEs in Nigeria?
8
2. To what extent is the growth of small businesses influenced by the financing capacity of
Microfinance Banks?
3. How does the injection of microfinance funds into small business operations affect the
productivity of MSEs in Nigeria?
4. What role(s) does the incorporation of non-financial services of microfinance banks play
in enhancing the business performance of MSEs in Nigeria?
5. What is the nature, mode of operation and process of micro financing in Nigeria?
1.4 Objectives of the Study
The aim of this study is to estimate the effects of microfinancing on business performance of MSEs
in Nigeria.
The primary objectives are to:
1. assess the contributions of microfinancing to the survival of MSEs in Nigeria.
2. analyse the effects of microfinancing on MSE growth and expansion capacity in Nigeria.
3. ascertain the effects of microfinance on the productivity of MSEs operators in Nigeria.
4. examine the effects of non-financial services of microfinance institutions on MSEs
business performance in Nigeria.
5. document the operations and processes of microfinancing activities in Nigeria.
1.5 Statement of Hypotheses
1. H
o
– Microfinancing makes no significant contribution to the survival of MSEs in
Nigeria.
2. H
o
– Microfinancing does not have the capability to influence the expansion capacity of
MSEs in Nigeria.
3. H
o
– Microfinance has no significant effect on the level of productivity of MSEs in
Nigeria.
4. H
o
– The provision of non-financial services (training and advisory services) by micro
finance institutions does not enhance the performance of MSEs in Nigeria.
9
1.6 Significance of the Study
A significant amount of empirical research has been carried out both within and outside the
country on the relationship between microfinance and microenterprise development (See Kotir
and Obeg-odom, 2009; Ogunrinola and Alege, 2007; Pronyk, Hargreaves and Morduch, 2007;
Matouv, 2006; Khandker, 2005; Morduch and Haley, 2002). It has been observed from the
literature, that most research works treated microfinance as a solution to poverty. To the best of
our knowledge, the impact of microfinance on Micro and Small Enterprise survival and growth
has not been empirically tested in the literature, especially in Nigeria. Most researchers in
Nigeria have also not taken time to document the nature, mode of operation and processes
involved in microfinancing. This study therefore becomes significant in filling this observed gap
by testing empirically the impact of both the financial and non-financial services offered by
Microfinance Banks on small business growth/survival and by examining the capability of
Microfinance institutions in enhancing the expansion capacity of small businesses in Nigeria.
The study also contributes to the literature on microfinance and small business survival.
Successive governments in Nigeria have always had a policy programme for SMEs, but most of
the programmes have failed to achieve sustainable growth in the SMEs sub-sector. Most of the
government assisted-programmes have themselves become failures. The findings of this study is
expected to inform policy makers regarding the direction of further research into interventionist
programmes for MSEs in Nigeria. The study is also of great importance to Microfinance
Institutions, in the sense that it is expected to assist the microfinance institutions in assessing the
effectiveness of their programmes and to know which variables contribute most to small business
growth and survival. The study is expected to assist the microfinance institutions in their credit
policy formulation strategies. For owners and managers of micro and small businesses, access to
a study like this can aid their understanding of current challenges and reveal the essential factors
that promote small business growth and survival and thus enable them to focus on the relevant
ones in an attempt to enhance their growth and performance. The study is expected to help the
government to validate or reject the choice of microfinance as the main source of financing
MSEs in Nigeria and also suggest ways of improving the existing financing arrangements, if
need be.
10
1.7 Scope of the study
The study provides insight into microfinance and small business survival and growth, as well as
provides a measure of the effects of microfinancing on small business performance and
productivity in Nigeria. It covers MSEs that have access to microfinance for a period of at least
five years (2004 – 2008). The population for the study includes the clients of the selected
Microfinance Banks, that is, the 169 Microfinance Banks in the South-West geopolitical zone
that have obtained their final operating licenses as of the year 2009. These includes microfinance
banks that metamorphosed from community Banks into MFBs in 2005. They are spread across
both rural and urban areas of the South-West geographical zone. The microfinance clients are
selected based on the following criteria:
1. The client that has stayed for a minimum of 5 years with the Microfinance Banks, i.e
from the period 2004 to 2008.
2. The client operates/manages a small or micro business enterprise.
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.
1.8 Limitation of the study
The main limitation of the study is the reliance on information supplied by micro and small
business operators who normally do not want to make a full disclosure of their businesses to an
unknown person for fear of being subjected to tax payment. In the same vein, most of the small
business operators lack proper record keeping practices and do not adhere to standard book
keeping and accounting procedures. Some of them do not have the necessary skills needed for
sound book keeping, auditing and tax assessment; neither do they employ qualified personnel to
undertake such tasks for them. The oath of secrecy between the bank and its customers is
another area of constraint in this study. Factors such as economic environment, political
instability and government policy on MSEs are considered to have strong effects on MSE
performance but are not readily available and so constitute a constraint to the study. However,
we rely on scientific methods to obtain the data and the analysis is based on superior analytical
techniques, which we believe allow us to generalize our findings.
11
1.10 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.
12
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
In this chapter, the literature on microfinance and small business survival, growth and
performance is reviewed. Also included is the conceptual and theoretical framework of
microfinance and MSMEs in Nigeria. Also included is the result of past impact assessment
studies of microfinance in Nigeria and other countries of the world.
2.2 Review of Conceptual Issues
2.2.1 Concepts of Micro, Small and Medium Enterprises and Microfinance
Defining small business has always been very difficult and controversial. The term ?small
business‘ covers a variety of firms (Hertz, 1982; Nguyen and Bellehumeur, 1983) and it is used
loosely in most of the literature. According to Peterson, Albaum and Kozmetsky (1986), a small
business is one which is independently owned and operated and which is not dominant in its field
of operation. Researchers and other interested parties have used specific criteria to operationalize
the small business, from the perspective of value added, value of assets, annual sales, and
number of employees. Annual sales and number of employees are most often used to delimit the
category. The problem of definition confronts all researchers as well as operators in the field.
A review of the literature on Micro, Small and Medium Enterprises (MSMEs) shows that the
definition of MSMEs significantly varies from country to country depending on factors such as
the country‘s state of economic development, the strength of the industrial and business sectors,
the size of MSMEs and the particular problems experienced by MSMEs (Harabi, 2003). Hence,
there is no uniform or universally accepted definition of MSMEs (Investment Climate
Assessment (ICA), 2009). In Nigeria, parameters such as asset base (excluding land), the number
of workers employed and the annual turnover are used for the classification of MSMEs.
Carpenter (2001) maintains that there is no one definition for SMEs; they are defined in Nigeria
and other countries based on one or all of the following: the size or amount invested in assets
excluding real estate; the annual turnover and the number of employees. The 1992 review by the
National Council on Industrial Standards (NCIS) defined small and medium scale enterprises (SMEs) as
enterprises with total cost (including working capital but excluding cost of land) of more than
13
N31m, but not exceeding N3,150million, with a labour size of between 11 and 100 employees.
There is, however, a consensus of opinions when it comes to defining SMEs in terms of asset
base than on any other parameter. This is because in case of an economic depression, the impact
on turnover and employment base would be greater than the impact on asset base. For instance,
during a depression, there is a tendency for turnover and the number of people employed to fall
substantially, while the asset base may be unaffected (NCIS,1992).
MSMEs can be divided into micro, small and medium enterprises. The Federal Ministry of
Industries defines a medium-scale enterprise as any company with operating assets less than
N200 million, and employing less than 300 persons. A small-scale enterprise on the other hand,
is one that has total assets of less than N50 million, with less than 100 employees. Annual
turnover is not considered in the definition of an SME. The National Economic Reconstruction
Fund (NERFUND) defines an SSE as one whose total assets are less than N10 million, but
makes no reference either to its annual turnover or the number of employees. These and other
definitions of the National Association of Small Scale Industries (NASSI), the National
Association of Small and Medium Enterprises (NASME), the Central Bank of Nigeria (CBN)
and other institutions are shown in the Table below.
Table 2.1 Definition of SME by Nigerian Institutions
Parameters Total Assets ( N‘m) Annual Turnover (N‘m) No of Employees
Nigerian Institution MSE SSE ME MSE SSE ME MSE SSE ME
Fed. Min. of
Industries.
This research work investigated the effects of micro-financing on Micro and Small Enterprises (MSEs) in South-west Nigeria.
EFFECTS OF MICROFINANCING ON MICRO AND SMALL
ENTERPRISES (MSEs) IN SOUTHWEST NIGERIA
BY
BABAJIDE, ABIOLA AYOPO
(CU03PG003)
BEING A Ph.D THESIS SUBMITTED IN PARTIAL FULFILMENT
OF THE REQUIREMENTS FOR THE AWARD OF Ph.D BANKING
& FINANCE OF THE DEPARTMENT OF BANKING & FINANCE,
COLLEGE OF DEVELOPMENT STUDIES,
COVENANT UNIVERSITY, OTA, NIGERIA
JUNE, 2011
ii
CERTIFICATION
This is to certify that this thesis titled “Effects of Microfinancing on Micro
and Small Enterprises (MSEs) in South-West Nigeria” is the original work
of Mrs. Babajide, Abiola Ayopo and is hereby submitted for the award of the
Degree of Doctor of Philosophy (Ph.D) in Banking & Finance. We also
certify that this work has not been submitted for the award of the Ph.D or
any other degree in this or any other University.
Prof. J. A.T. Ojo Date
(Supervisor & Head,
Department of Banking & Finance)
Covenant University, Ota.
Prof. Esther, O. Adegbite, Ph.D Date
(Co-supervisor)
Department of Banking & Finance
Faculty of Business Administration
University of Lagos, Akoka, Nigeria.
iii
DECLARATION
It is hereby declared that this research work titled “Effects of Micro-financing on Micro
and Small Enterprises (SMEs) in South-west Nigeria” was undertaken by Mrs. Abiola
Ayopo Babajide and is based on her original study in the Department of Banking and
Finance, School of Business, College of Development Studies, Covenant University, Ota,
under the supervision of Distinguished Professor J. A. T. Ojo and Professor (Mrs.) Esther
O. Adegbite. The ideas and views expressed in this research work are those of the
researcher, and the views of other researchers have been duly acknowledged.
Abiola Ayopo Babajide Signature & Date
(Researcher)
The above declaration is attested to by:
Prof. J. A.T. Ojo Signature & Date
(Supervisor )
Prof. Esther, O. Adegbite Signature & Date
(Co-supervisor)
Prof. J. A.T. Ojo Signature & Date
HOD, Banking & Finance
Covenant University, Ota.
Prof. K. Soremekun Signature &Date
Dean, College of Development Studies,
Covenant University, Ota.
Prof. C. A. Awonuga Signature &Date
Dean, School of Post graduate Studies,
Covenant University, Ota
iv
DEDICATION
This work is dedicated to my Lord and Saviour Jesus Christ, my Glory and
the Lifter of my head and to Bishop David Oyedepo whose inspiration has
made this work a reality.
v
ACKNOWLEDGEMENTS
I have realized in life that a journey of a thousand kilometers begins with a step. Thank
God for that step which was inspired by my parents during my formative years, the
various mentors that I have come across in the journey of my academic pursuits. I have
also realized that you fall off a bicycle only when you stop pedalling. Actualization of
one?s dream does not come easy; it must be through doggedness and determination. It is
only the grace of God that calms the troubled waters.
This academic journey has not been an easy one, particularly since December 2003 when
I like others first registered as a Ph.D student at Covenant University. The myriads
challenges or plethora of social and financial troubles that surfaced were enough to rock
the boat of success. But for God, this ideal and the successes of today would have been
unattainable.
God in His infinite mercy has positioned quite a number of people on the path to
achieving this greatness, to Him alone, I give all the Glory.
I appreciate the Visioner and Chancellor of Covenant University, Dr. David Oyedepo,
who is unequivocal in his commitment to restoring the dignity of the black race, his wife,
Pastor (Mrs.) Faith Oyedepo who stood staunchly by her husband in the pursuit of the
vision. The environment was serene for growth and as a platform for development, it was
superb. It is my sincere prayer that God will continue to be their Guide and Buckler.
Fresh unction and anointing in Jesus? name!
I would like to thank the Vice-Chancellor, Prof. Aize Obayan, who has been to me a true
sister and a personal friend. I have been through many experiences while I work in
Covenant University, she has always stood by me, shown me understanding and become
an anchor of hope for tomorrow; I am very grateful to her.
Also, I would like to thank the former Registrar, Dr. Daniel Rotimi who has always been
supportive and given necessary approval to ensure the success of this work.
vi
My special thanks also go to the first Registrar of Covenant University, Pastor Yemi
Nathaniel, who gave me the opportunity to serve on the Faculty of Covenant University
in 2002 and has always stood by me in my career pursuit in Covenant University.
I would like to express my profound gratitude to my supervisor, Prof. J. A. T. Ojo, who
has stood by me through thick and thin in the Department and has undertaken the
supervision of this work in a father - daughter relationship, painstakingly dotting the „i?s
and crossing the „t?s; undoubtedly a father indeed, he has been available at all times,
giving direction and spiritual support to ensure the success of this work. He monitored
my career progression and brought me this far in my career pursuit. I do not know where
I would be today without your guidance and deep rooted love for me. I am very grateful,
Sir.
My Co-supervisor, Dr. E. O. Adegbite also supported my research work with passion.
Her linking up and co-operation with my main Supervisor, have contributed immensely
to the success of this work. God will continue to guide your steps Ma.
My special thanks also go to the Dean of the School of Postgraduate Studies, Prof. C. O.
Awonuga who is always eager to see us postgraduate student successfully complete our
Ph.D programme. And also to the Dean of my College, Prof. K. Shoremekun for his
support and quick response on post graduate issues. My special thanks also goes to Prof.
C. K. Ayo for his concern and became my advocate on my post graduate programme.
I am also very grateful to Prof. Matthew Rotimi Ajayi, the former Dean of my College,
College of Development Studies (CDS), for constantly reminding me of the need to push
harder and round off the programme. He is very understanding and very supportive of my
work and academic career. I thank Prof. J. A. Bello, who at every opportunity asked,
„How far with our work?? His outstanding contribution has helped to enrich this work.
My special thanks go to Prof. S.O. Otokiti, who was the HOD of the Department of
Economics from 1988 to 1992 while I was an undergraduate in Lagos State University,
and whose way destiny still brought me at Covenant University. I was fortunate because
vii
without his help and constant encouragement, I do not know if the work would have been
completed by now. He made the research work possible by giving relevant materials with
directions and contributory corrections. Sir, I am very grateful to you.
My profound gratitude also goes to Professor Emmanuel Kwofie, who took of his
valuable time to proof read the work line by line, commenting on every page and making
useful suggestions that have helped to improve the work greatly. Prof. Fadayomi?s, deep
insight and outstanding contributions have helped to reshape the topic and give a better
direction to the study. Prof. J.A Oloyede is indeed a spiritual father in the Department; he
took it upon himself to ensure the successful completion of the course-work and
constantly sent messages and gave the word proclaiming the God?s blessings of success
in the Department. God will reward you abundantly.
Dr. Ranti Ogunrinola, constantly reviewed the work especially my variables and
statistical technique, drawing from his wealth of experience in field survey and thus
helped to enrich the work. Dr. Wunmi Olayiwola, made useful contributions that helped
to reshape the work and enrich its quality; for this, I am very grateful. Dr. Patrick
Edewor and Dr. Olalekan Asikhia thoroughly read the work, and joyfully contributed
useful suggestions and literature to buttress the work. Dr. G. O. Adejumo contributed to
the statistical analysis and has thus helped to enhance the quality the work. Dr. T.
Abioye, Dr. Akang Bassey and Dr. Mrs. Aretha Asakitipi read through the manuscript at
the initial stage and helped to improve the quality of the work. Mr. Emmanuel Amoo, Mr
Fashola Kazeem and Mr. Princely Osaro of Lagos Business School studied survival
statistical technique in detail to enrich the work.
I cannot but be grateful to my colleagues in the Department who peer reviewed the work
and made suggestions that helped to improve the quality of the thesis. Mr. Kehinde
Adetiloye, a brother and a friend indeed, Mrs. Wunmi Olokoyo, Mrs. Folashade
Adegboye, Mr. Segun Olowe, Mr. Alex Ehimare and Mr. Ochei Ikpefan; to you all I am
very grateful. I also thank other Department staff for running around at every stage of the
viii
work to assist in one way or another, Mr. Taiwo Urhue, Mrs. Regina Tobi-Davies, Mr.
David Obaoye and Miss Gift Madu, who is really a gift to the Department indeed.
Mr. Christopher Nkiko, Director, Centre for Learning Resources(CLR), and Mrs. Yussuf
Felicia, took it upon themselves to shop round the globe to get me good quality textbooks
on Survival Analysis Techniques; I am very grateful to them for the help. Sis. Ronke and
Mercy Ijungho and other Centre for Learning Resources staff contributed immensely in
the sourcing of materials; my sincere thanks go to them all. Similarly, key members of
the Centre for Systems and Information System, (CSIS), Mrs. Mary Aboyade, and Pastor
Afolabi Abolade, along with Miss Bimbo Babalola, and Miss Abolarin Adenike are
highly appreciated for the supportive roles they played. God will support projects of their
lives. Messrs Raphel Oloruntele, Sis. Bunmi, Miss Adenike, infact the dean?s office staff
are wonderful indeed.
Friends from other departments, who by doing their own part of other assignment have
made the success of this work a reality are worth mentioning, first among the list is Mr.
Mayowa Agboola and Mr. Samuel Epetimehin, if I fail to acknowledge you guys at this
point, it will be a great injustice and I won?t be able to forgive myself. I don?t know how
you come about your work ethics but you are indeed incredible, thank you.
Also, I would like to appreciate the following people for their contributions; Mr. Francis
Iyoha, Dr. Mrs. A. Umoren, Mr Fola Adegbie, Mrs. Dorcas Oyerinde, Mrs. Nike Adeniji,
Mrs. Owolabi, Mrs. Mathew, Dr. A. Enahoro, Dr. Samson Ibidunni, Dr. Chinoye Okafor,
Dr. Mrs. A. Shobola, Dr. Dan Gberevie, Mr. Roland Worlu, Mr. A. Adegbuyi.
This study would not have been possible without the immense contributions of the
following people in the Microfinance and SMEs industrial Executives and Managers who
assisted and ensured that the research instrument used got to the selected Banks in South-
West Nigeria: first person in this category is Mr. Johnson Osho of Farmers? Develoment
Union (FADU) Ibadan who used his connection in the Microfinance Industry to connect
me with the Loan Officers training programme organized by the CBN in Ibadan, and
talked many of the loan officers into embracing the research as a development tool in the
industry and supporting the study; Mr. Kingsley Imafidon, Divisional Manager for LAPO
ix
Bank for coordinating the distribution of copies of questionnaire in Lagos and Ogun
State; Also, Mr. O. Roland of Accion Microfinance Bank Limited for the interview
session, Mr. Jegede Adebayo Biztrust Micro finance Bank, Mr. Iyamu of BOI
Microfinance Bank, Mr. Oluwande, Covenant Micro-finance Bank, Pastor Adebiyi of
SMEDAN, Abuja, Executive Director National Association of Small and Medium
Enterprises in Nigeria, Mr.Mobolaji of Lagos State Microfinance Institution (LASMI);
Mr. Ladipo of Estate Microfinance Bank, Mr. Odubanjo, Elim Micro-finance Bank, Mr.
Oduga, Hebron Microfinance Bank and Mr. Alalade of Hybrid Microfinance Bank.
My husband, Mr. Kassim Michel Babajide and my lovely daughter Anjolaoluwa
Oyindamola Divine Babajide for their love, support and joy you brought into my life. I
love you so dearly.
To my mum, Madame O. Omoniyi and my siblings Mrs. Olayinka Izegbu, Mrs. Bola
Olaribigbe, Mrs. Funmilayo Sanusi, Mr. Olakunle Olokodana and Mr. Olawale
Olokodana. I say “Thank you all” for your support.
I would like to thank the following people for their love and prayers, and concern for my
work and progress. Pastor Dele Bamgboye, Pastor Dapo Adeleye, and Pastor Ubong Ntia.
I am very grateful.
x
ABSTRACT
This research work investigated the effects of micro-financing on Micro and Small
Enterprises (MSEs) in South-west Nigeria. The study examined how micro-finance and
non-financial micro-financing activities and features such as group membership, pre-loan
training, cross guaranteeship, loan size, technical and managerial training, among others,
impact on the survival, growth, productivity and performance of Micro and Small
Enterprises in Southwest Nigeria. The hypotheses formulated were developed around the
theories of financial growth model, pecking order theory, and contract theory. Variables
were used to evolve a detailed analysis of the survival and growth models. The
theoretical models were used in developing four different hypotheses that were
investigated through the survey of four hundred and forty three (443) micro enterprises
and one hundred and eighty (180) small enterprises which were randomly selected using
multi-stage random sampling technique. Copies of well-structured questionnaire were
administered to entrepreneurs sampled. The validity and reliability of the instrument were
measured using Cronbach?s alpha which gave a result of 0.72, while predictive form
validity was 0.84. Four hypotheses were raised and tested at 0.05 significant levels. The
findings revealed that micro finance and micro-financing enhance survival of Micro and
Small Enterprises (MSEs) but not sufficient for growth and expansion of such Micro and
Small Enterprises. The result also revealed that microfinance has positive effects on
productivity and performance of local entrepreneurs. The findings from the interview
sessions revealed that micro financing is not effective and substantially being practiced in
Nigeria as many MFBs grant more individual loans than group based loans, thereby
increasing their running cost and putting their portfolio at risk. We therefore recommend
a collective and cooperative support as a critical microfinance strategy in the form of
solidarity groups at the local level; and at the national and regional level, a networking of
groups among operators of MFBs. We also recommend that enterprises supported by
MFBs should be linked up with larger financing window like the SMEEIS fund or
Strategic Partners for expansion and growth funding after survival.
xi
TABLE OF CONTENTS
Page (s)
Title page …………………………………………………..…………….. ……… (i)
Certification ………………………………………………………………………… (ii)
Declaration ……………………………………………………….... ……………. (iii)
Dedication…………………………………………………..…………………………(iv)
Acknowledgements ……………………………………………...……. ……………... (v)
Abstract ……………………………………………………………... ………………..(x)
Table of Contents………………………………………………………………………(xi)
List of Tables…………………………………………………………………………..(xvi)
List of Figures………………………………………………………………................(xix)
List of Abbreviations………………………… ……………………………………..(xx)
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study.....................................................................................1
1.2 Statement of the Problems...................................................................................6
1.3 Research Questions..............................................................................................7
1.4 Objectives of the Study........................................................................................8
1.5 Statement of Hypotheses......................................................................................8
1.6 Significance of the study......................................................................................9
1.7 Scope of the study................................................................................................10
1.8 Limitation of the study.........................................................................................10
1.9 Definition of Terms .............................................................................................11
xii
CHAPTER TWO LITERATURE REVIEW
2.1 Introduction.....................................................................................................12
2.2 Review of Conceptual Issues..........................................................................12
2.2.1 Concepts of Micro, Small and Medium Enterprises and Microfinance...........12
2.2.2 Impact Assessment of Microfinance................................................................20
2.2.3 Methods of Data Analysis Found In Literature................................................25
2.2.4 Measurement of Microfinance Impact.............................................................28
2.2.5 Enterprises Survival Prediction and Survival Analysis...................................30
2.2.6 Model Generation for Microfinance and MSMEs Survival............................34
2.3 Theoretical Framework....................................................................................38
2.3.1 Financial Growth Theory.................................................................................38
2.3.2 Pecking Order Theory......................................................................................39
2.3.3 Contract Theory................................................................................................41
2.4 Entrepreneurship and Growth..........................................................................41
2.4.1 The Firm and the Entrepreneur.........................................................................41
2.4.2 Firm Life Cycle.................................................................................................42
2.4.3 Organizational Capabilities...............................................................................43
2.4.4 Stages of Small Business Development............................................................43
2.4.5 Small Business Development...........................................................................49
2.4.6 Role of Enterpreneur in Business Formation and Growth...............................55
2.4.7 SMEs & Growth............. .................................................................................57
2.4.8 MSMEs and Economic Development in Nigeria.............................................58
xiii
2.4.9 Microcredit and Microenterprise.....................................................................60
2.4.10 Political & Social dimension to Entrepreneurship in Nigeria.........................68
2.5 Theoretical Findings.......................................................................................71
CHAPTER THREE - RESEARCH METHODOLOGY
3.1 Introduction....................................................................................................74
3.2 Research Methods..........................................................................................74
3.3 Research Design............................. ...............................................................75
3.4 Population of the Study..................................................................................75
3.5 Sample Frame.................................................................................................77
3.6 Sampling Technique.......................................................................................78
3.7 Sample Size Determination ...........................................................................79
3.8 Distribution of Questionnaire and Response Rate..........................................81
3.9 Sources of Data Collection..............................................................................83
3.10 Data Collection Method..................................................................................84
3.11 Data Collection Instrument..............................................................................84
3.11.1 The Questionnaire............................................................................................84
3.11.2 Pre-Testing of Instrument................................................................................84
3.12 Method of Data Analysis ................................................................................85
3.12.1 Survival Analysis ............................................................................................87
3.12. 2 Regression Based Estimation...........................................................................88
3.12.3 Methods for Empirical Analysis......................................................................88
3.12.4 Multiple Regressions Analysis.........................................................................90
xiv
3.13 Model Specification.........................................................................................93
3.14 Theoretical Justification of Variables Used in Study.....................................103
3.15 Validity of Research Instrument.....................................................................106
3.16 Reliability of Research Instrument.................................................................108
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS, AND
INTERPRETATION
4.1 Introduction…………………………………………………………………...109
4.2 Profile of Respondents…………………….…………………………...……..109
4.3 Business Characteristics of Respondents………………………………..........114
4.4 Business Characteristics of Respondents by Location (Urban).……………...116
4.5 Business Characteristics of Respondents by Location (Rural)………………..119
4.6 Cross Tabulation of Some Variables………………………………………….120
4.7 Survival Analysis………………………………………………………...........127
4.7.1 Result Analysis…………………………………………………………..........130
4.8 Multiple Regression Analysis………………………………………………....138
4.9 Operations, Process and Practice of Microfinance in Nigeria…………............173
Chapter Five: DISCUSSION, CONCLUSION AND RECOMMENDATION
5.1 Introduction…………………………………………………………………..178
5.2 Summary……………………………………………………………………..178
5.3 Findings………………………………………………………………………179
5.3.1 Microfinance and MSE Survival……………………………………………..179
5.3.2 Microfinance and MSE Growth……………………………………………...180
5.3.3 Microfinance and Entrepreneur?s Productivity……………………………….181
5.3.4 Non-Financial Services of Microfinance Banks and Business Performance....181
5.4 Hypothesis Testing……………………………………………………………183
5.5 Other Findings………………………………………………………………...183
5.6 Conclusion of Studies…………………………………………………………184
xv
5.7 Recommendations……………………………………………………………..185
5.8 Contribution to Knowledge …………………………………………………..187
5.9 Suggestions for Further Studies………………………………………….........187
Bibliography…………………………………………………………………………..189
Appendix A
1 Distribution of MFB by geographical zone as at March 2009…….207
Appendix B
2. Business Characteristics of Respondents by Location …………....208
Appendix C
3. Questionnaire ……………………………………………………...210
xvi
LIST OF TABLES
Page(s)
Table 2.1: Definitions of SMEs by Nigerian Institutions 12
Table 2.2: Classification adopted by National Policy On MSMEs 15
Table 2.3: Financial Growth Cycle Model 38
Table 3.4: License & Unlicense MFBs in Southwest Zone of Nigeria
as at March 2009 76
Table 3.5: Distribution of MSMEs in Southwest Zone 77
Table 3.6: Distribution of SMEs operators users of Microfinance Bank 78
Table 3.7: Minimum Returned Sample Size table for Continuous/Categorical
data 80
Table 3.8: Questionnaire distribution by State / Response rate of Micro &
Small Enterprises Operator 82
Table 3.9: Measurement of Variables – Hypothesis 1 95
Table 3.10: Measurement of Variables – Hypothesis 2 97
Table 3.11: Measurement of Variables – Hypothesis 3 100
Table 3.12: Measurement of Variables – Hypothesis 4 102
Table 4.13: Profile of Respondents 110
Table 4.14: Business Characteristics of Respondents 113
Table 4.15: Business Characteristics of Respondents by Location –Urban
Table 4.16: Business characteristics of Respondents by Location – Rural
Table 4.17: Business Resident and Kind of Business 120
Table 4.18: Education and Business Resident 121
Table 4.19: kind of Business and Form of Business 122
Table 4.20: Level of Education and Source of Initial Capital 123
Table 4.21: Level of Education and Category of Business 124
Table 4.22: Kind of Business and Category of Business 125
Table 4.23: Sources of Capital and Composition of Capital 126
Table 4.24: Business Group and Enterpreneurial Training 127
Table 4.25: Group Proportion with Regard to Long-term Survival 132
Table 4.26: Kaplan Meier Survival Estimate by Category 133
xvii
Table 4.27: Diagonistic Test Kaplan Meier Estimate 133
Table 4.28: Kaplan Meier Survival Estimate by Kind of Business 134
Table 4.29: Diagonistic Test Kaplan Meier Estimate 135
Table 4.30: Adjusted Hazard Ratio for Cox Proportional Hazard Model 135
Table 4.31: Omnibus Test of Model Coefficient 1 38
Table 4.32: Multiple Regression Analysis of Effect of Microfinance on
Small Business Growth by Category of Business 144
Table 4.33: Multiple Regression Analysis of Effect of Microfinance on
Small Business Growth by Legal Status of Business 148
Table 4.34: Multiple Regression Analysis of Effect of Microfinance on
Small Business Growth by Category of Kind of business
Business Activities 151
Table 4.35: Multiple Regression Analysis of Effect of Microfinance on
Small Business Operators Productivity by Category 155
Table 4.36: Multiple Regression Analysis of Effect of Microfinance on
Small Business Operators Productivity by Legal Status of
Business 159
Table 4.37: Multiple Regression Analysis of Effect of Microfinance on
Small Business Operators Productivity by Kind of Business 162
Table 4.38: Multiple Regression Analysis of Effect of Non- Statutory
Activities of Microfinance Bank on Small Business Performance
by Category 165
Table 4.39: Multiple Regression Analysis of Effect of Non- Statutory
Activities of Microfinance Bank on Small Business Performance
by Legal Status of Business 169
Table 4.40: Multiple Regression Analysis of Effect of Non- Statutory
Activities of Microfinance Bank on Small Business Performance
by Kind of business 172
xviii
LIST OF FIGURES
Page(s)
Figure 2.1: Conceptual Model for Microfinance
and SMEs Survival………………………………..……………………….37
Figure 2.2: Stages of Small Business Growth Characteristics…………………………48
Figure 2.3: Stages of Small Business Growth Characteristics and Failure & Exit
Modes...........................................................................................................48
Figure 2.4: Conceptual Framework and Hypotheses………………………………........73
xix
LIST OF ABBREVIATIONS
CBs - Community Banks
CBN – Central Bank of Nigeria
GDP – Gross Domestic Product
MDF - Microfinance Development Fund
MDGs – Millennium Development Goals
MFBs – Microfinance Banks
MSMEDEF - Micro, Small and Medium Enterprises Development Fund
MSMEs – Micro, Small and Medium Enterprises
NACCIMA – National Association of Chambers of Commerce, Industry, Mines
and Agriculture
NACRDB – Nigerian Agricultural, Cooperative and Rural Development Bank
NAFDAC – National Agency for Food and Drug Administration and Control
NAPEP – National Poverty Eradication Programme
NASME – National Association of Small and Medium Enterprise
NASENI – National Agency for Science and Engineering Infrastructure
NASSI – National Association of Small Scale Industrialists
NCIS - National Council on Industrial Standard
NDE – National Directorate of Employment
NEEDS - National Economic Empowerment and Development Strategy
NERFUND – National Economic Reconstruction Fund
NEPAD – National Economic Partnership for African Development
NGO – Non-Governmental Organisation
NIPC – Nigerian Investment Promotion Commission
xx
MAN - Manufacturers? Association of Nigeria.
SA - Survival Analysis
SEEDS - State Economic Empowerment and Development Strategy
SSI - Small Scale Industries
SSE – Small Scale Enterprise
SMEDAN – Small and Medium Enterprise Development Agency of Nigeria
Appendices
1. Distribution of Microfinance Banks by Geopolitical Zone in Nigeria
2. Business Characteristics of Respondents by location Tables 4.14 and 4.15
3. Questionnaire
1
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Since Nigeria attained independence in 1960, considerable efforts have been directed towards
industrial development. The initial efforts were government-led through the vehicle of large
industry, but lately, emphasis has shifted to Small and Medium Scale Enterprises (SMEs)
following the lessons learnt from the success of SMEs in the economic growth of Asian
countries (Ojo, 2003). Thus, the recent industrial development drive in Nigeria has focused on
sustainable development through small business development. Prior to this time, particularly
judging from the objectives of the past National Development Plans, 1962-68, 1970-75, 1976-80
and 1981-85, emphasis had been on government-led industrialization, hinged on import-
substitution strategy.
Since 1986, government had reduced its role as the major driving force of the economy through
the process of economic liberalization entrenched in the IMF pill of Structural Adjustment
Programme. Emphasis, therefore, has shifted from large-scale industries to small and medium-
scale industries, which have the potentials for developing domestic linkages for rapid and
sustainable industrial development. Attention was focused on the organized private sector to
spearhead subsequent industrialization programmes. The incentives given to encourage increased
participation in these sectors were directed at solving and/or alleviating the problems
encountered by industrialists in the country, thereby giving them opportunity to increase their
contribution to the Gross Domestic Product (GDP).
The contribution of Micro, Small & Medium Enterprises (MSMEs) to economic growth and
sustainable development is globally acknowledged (CBN, 2004). There is an increasing
recognition of its pivotal role in employment generation, income redistribution and wealth
creation (NISER, 2004). The micro, small and medium enterprises (MSMEs) represent about 87
per cent of all firms operating in Nigeria (USAID, 2005). Non-farm micro, small and medium
enterprises account for over 25 per cent of total employment and 20 percent of the GDP
2
(SMEDAN, 2007) compared to the cases of countries like Indonesia, Thailand and India where
Micro, Small and Medium Enterprises (MSMEs) contribute almost 40 percent of the GDP (IFC,
2002).
Whilst MSMEs are an important part of the business landscape in any country, they are faced
with significant challenges that inhibit their ability to function and contribute optimally to the
economic development of many African countries. The position in Nigeria is not different from
this generalized position (NIPC, 2009).
Realizing the importance of small businesses as the engine of growth in the Nigerian economy,
the government took some steps towards addressing the conditions that hinder their growth and
survival. However, as argued by Ojo (2003), all these SME assistance programmes have failed to
promote the development of SMEs. This was echoed by Yumkella (2003) who observes that all
these programmes could not achieve their expected goals due largely to abuses, poor project
evaluation and monitoring as well as moral hazards involved in using public funds for the
purpose of promoting private sector enterprises. Thus, when compared with other developing
countries, Variyam and Kraybill (1994) observed that many programmes for assisting small
businesses implemented in many Sub-Saharan African (SSA) countries through cooperative
services, mutual aid groups, business planning, product and market development, and the
adoption of technology, failed to realize sustained growth and development in these small
enterprises. Among the reasons given were that the small-sized enterprises are quite vulnerable
to economic failure arising from problems related to business and managerial skills, access to
finance and macroeconomic policy.
Despite MSME‘s important contributions to economic growth, small enterprises are plagued by
many problems including stagnation and failure in most sub-Saharan African countries (Bekele,
2008). In Nigeria, the problem is not limited to lack of long-term financing and inadequate
management skills and entrepreneurial capacity alone, but also, includes the combined effect of
low market access, poor information flow, discriminatory legislation, poor access to land, weak
linkage among different segments of the operations in the sector, weak operating capacities in
terms of skills, knowledge and attitudes, as well as lack of infrastructure and an unfavourable
economic climate.
3
Lack of access to finance has been identified as one of the major constraints to small business
growth (Owualah, 1999; Carpenter, 2001; Anyawu, 2003; Lawson, 2007). The reason is that
provision of financial services is an important means for mobilizing resources for more
productive use (Watson and Everett, 1999). 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, 1988), but small business enterprises in Nigeria find it difficult to
gain access to formal financial institutions such as commercial banks for funds. The inability of
the MSEs to meet the conditionalities of the formal 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. In many countries, people have relied
on the mutually supportive and benefit-sharing nature of the social networking of these sectors
for the fulfilment of economic, social and cultural needs and the improvement of quality of life
(Portes, 1998). Networks based on social capital exist in developed as well as developing
countries including Nigeria.
The reluctance of formal financial institutions to introduce innovative ways of providing
meaningful financial assistance to the MSEs is attributed to lack of competition among financial
service providers, in the sense that none of financial service providers came up with an
innovative way of financing small businesses. In order to enhance the flow of financial services
to the MSME subsector, Government had, in the past, initiated a series of programmes and
policies targeted at the MSMEs. Notable among such programmes were the establishment of
Industrial Development Centres across the country (1960-70), the Small Scale Industries Credit
Guarantee Scheme (SSICS) 1971, specialized financial schemes through development financial
institutions such as the Nigerian Industrial Development Bank (NIDB) 1964, Nigerian Bank for
Commerce and Industry (NBCI) 1973, and the National Economic Recovery Fund (NERFUND)
1989. All of these institutions merged to form the Bank of Industry (BOI) in 2000. In the same
year, Government also merged the Nigeria Agricultural Cooperative Bank (NACB), the People‘s
Bank of Nigeria (PBN) and Family Economic Advancement Programme (FEAP) to form the
Nigerian Agricultural Cooperative and Rural Development Bank Limited (NACRDB). The Bank
was set up to enhance the provision of finance to the agricultural and rural sector. Government
4
also facilitated and guaranteed external finance by the World Bank (including the SME I and
SME II loan scheme) in 1989, and established the National Directorate of Employment (NDE) in
1986.
In 2003, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), an
umbrella agency to coordinate the development of the SME sector was established. In the same
year, the National Credit Guarantee Scheme for SMEs to facilitate its access to credit without
stringent collateral requirements was reorganised and the Entrepreneurship Development
Programme was revived. In terms of financing, an innovative form of financing that is peculiar
to Nigeria came in the form of intervention from the deposit-money banks. The deposit money
banks through its representatives, ?the Banker's Committee‘, at its 246
th
meeting held on
December 21, 1999. The deposit-money banks agreed to set aside 10% of their profit before tax
(PBT) annually for equity investment in small and medium scale industries. The scheme aimed,
among other things, to assist the establishment of new, viable SMI projects; thereby stimulating
economic growth, and development of local technology, promoting indigenous entrepreneurship
and generating employment. Timing of investment exit was fixed at minimum of three years, that
is, banks shall remain equity partners in the business enterprises for a minimum of three years
after which they may exit anytime. By the end of 2001, the amount set aside under the scheme
was in excess of six billion naira, which then rose to over N13 billion and N41.4 billion by the
end of 2002 and 2005 respectively.
The modality for the implementation of the fund is such that the fund set aside is to be invested
within 18 months in the first instance and 12 months thereafter. After the grace period, the CBN
is required to debit the banks that fail to invest the fund set aside and invest same in treasury bills
for 6 months. Thereafter, the un-invested fund would be bidded for by successful investors under
the scheme. The fund set aside by the banks under the scheme decreased from N41.4 billion in
2005 to N38.2billion in 2006. This was as a result of N2.5billion and N25.3 million set aside
from failed banks and liquidated banks respectively, which were netted out after the bank
consolidation exercise. Actual investment during the period grew from N12 billion in December
2005 to N17 billion in 2006, representing only 29.1 percent of the total fund set aside. In 2007,
total amount set aside decreased further to N37.4 billion, while total investment stood at N21.1
5
billion representing 56 percent of the total sum set aside. The number of projects that benefitted
from the scheme also increased to 302 projects in 2007, from 248 in 2006 (CBN, 2007).
The CBN found the reasons for the slow pace in utilization of the SMIEIS fund to include: the
desire of the Banks to acquire controlling shares in the funded enterprises and the entrepreneurs‘
resistance to submit control; inability of the banks to adapt equity investment which is quite
different from what the banks are familiar with in credit appraisal and management, and lack of
proper structure for effective administration of the scheme when it took off among other factors.
Responding to the findings, the Bankers‘ Committee took a policy decision to extend funding
under the scheme to all business activities including even non-industrial enterprises, except for
general commerce and financial services. The name of the scheme was changed from SMIEIS to
Small and Medium Enterprises Equity Investment Scheme (SMEEIS) to reflect the expanded
focus. Also, the limit of banks‘ equity investment in a single enterprise was increased from N200
million to N500 million, making room for medium size industries.
Despite all these efforts, the contribution of SMEs in the industrial sector to the Nation‘s GDP
was estimated to be 37% compared to other countries like India, Japan and Sri Lanka and
Thailand where SMEs contributed 40%, 52% 55% and 47.5% respectively to the GDP in 2003,
(UNCTAD, 2003), hence the need for alternative funding window. In 2005, the Federal
Government of Nigeria adopted microfinance as the main financing window for micro, small and
medium enterprises in Nigeria. The Microfinance Policy Regulatory and Supervisory Framework
(MPRSF) was launched in 2005. The policy, among other things, addresses the problem of lack
of access to credit by small business operators who do not have access to regular bank credits. It
is also meant to strengthen the weak capacity of such entrepreneurs, and raise the capital base of
microfinance institutions. The objective of the microfinance policy is to make financial services
accessible to a large segment of the potentially productive Nigerian population, which have had
little or no access to financial services and empower them to contribute to economic
development of the country.
The microfinance arrangement makes it possible for MSEs to secure credit from Microfinance
Banks (MFBs) and other Microfinance Institutions (MFIs) on more liberal terms. It is on this
6
platform that we intend to examine the impact of microfinance on small business growth,
survival, as well as business performance of MSEs operators.
1.2 Statement of Research Problems
Majority of the micro and small enterprises (MSEs) in Nigeria are still at a low level of
development, especially in terms of number of jobs, wealth and value creation. This is because
65% of the active population, who are majorly entrepreneurs, remain unserved by the formal
financial institutions. The microfinance institutions available in the country prior to 2005 were
not able to adequately address the gap in terms of credit, savings and other financial services. As
reported by the CBN, the share of micro credit as a percentage of total credit was 0.9%, while its
contribution to GDP was a mere 0.2% (CBN, 2005). The CBN in 2005 identified the
unwillingness of conventional banks to support micro-enterprises, paucity of loanable funds,
absence of support institutions in the sector, as well as weak institutional and managerial
capacity of existing microfinance institutions among other reasons as the major reasons for the
failure of past microfinance initiatives in the country. To address the situation, the Microfinance
Policy, Regulatory and Supervisory Framework (MPRSF) for Nigeria was launched by CBN in
2005 to provide sustainable financial services to micro entrepreneurs. This initiated an important
turning point in the microfinance industry with the establishment of the Microfinance Bank
(MFB) as an institutional vehicle for privately owned, deposit taking Microfinance Institutions
(MFIs). The framework is designed to unite the best of the NGO credit organizations, and new
MFI initiatives under a common legal, regulatory and supervisory regime. Five years down the
line, though microfinance has proven to be one of the ways of bridging the resource gap created
in the Nigerian economy, there are still some undesirable problems experienced against its
proper execution. The lack of documentation of the practice of microfinancing in Nigeria has
made it difficult to formulate supportive programmes for the growth of the sector.
Despite the potential importance of MSMEs in any economy, high mortality rate among
established MSMEs is a matter of major concern in developing economies. International Finance
Corporation (IFC) reported in 2002 that only 2 out of every 10 newly established businesses
survive up to the fifth year in Nigeria. The report was corroborated by Small and Medium
Enterprise Development Agency of Nigeria (SMEDAN) that only 15% of newly established
businesses survive the first five years in Nigeria. This is a pointer to the fact that there is a
7
problem. The indispensable role of finance to the growth and survival of MSMEs and the
adoption of microfinance as the main source of financing MSMEs in Nigeria therefore makes it
imperative to study the extent to which microfinance can enhance small business survival.
The impact of micro-financing majorly should be seen in the multiplication of MSEs across
Nigeria. The survival of these MSEs should reflect in employment generation, engagement of
available local resources, local technology utilization, improved standard of living and growing
gross domestic product (GDP). However, despite MSEs representing about 87% of all firms
operating in Nigeria (USAID, 2005), they only account for 10% of total manufacturing output,
25% of total employment in the productive sector and 37% of GDP (Investment Climate
Assessment (ICA) survey, 2009). A common problem for the Nigerian small business sector is
that, the high rates of formation of new businesses evidenced in Corporate Affairs Commission
(CAC) annual report have not yet translated into comparable high rates of small firm growth.
New firms are being started but few grow rapidly to become significant international
competitors. For the great majority of micro and small enterprise in Nigeria long term growth
remains uncertain and bleak. The question is how many of these small businesses are
transforming from the subsistence level at start-up to the stage of maturity and later expansion
where they will have to employ more hands? Total productive output is also low compared to
other emerging economies like India, Sri Lanka and Thailand where SMEs contribute 40%, 55%
and 47% respectively in 2002 into the productive sectors of the economy (UNCTAD, 2003).
It is not uncommon to find in many microfinance programmes non-financial services such as
advisory services, managerial and technical training, weekly meetings and pre-loan training to
mention only a few, rendered as support services to MSMEs. These services that are poorly
provided in Nigeria are mostly very costly to deliver (McKernan, 2002), yet many microfinance
programmes consider them an integral part of the success of their programmes. Though the
contribution of such non-financial services is not in doubt, the extent of the contributions is yet
to be ascertained in Nigeria.
1.3 Research Questions
The study attempts to answer the following research questions:
1. To what extent does micro financing enhance the survival of MSEs in Nigeria?
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2. To what extent is the growth of small businesses influenced by the financing capacity of
Microfinance Banks?
3. How does the injection of microfinance funds into small business operations affect the
productivity of MSEs in Nigeria?
4. What role(s) does the incorporation of non-financial services of microfinance banks play
in enhancing the business performance of MSEs in Nigeria?
5. What is the nature, mode of operation and process of micro financing in Nigeria?
1.4 Objectives of the Study
The aim of this study is to estimate the effects of microfinancing on business performance of MSEs
in Nigeria.
The primary objectives are to:
1. assess the contributions of microfinancing to the survival of MSEs in Nigeria.
2. analyse the effects of microfinancing on MSE growth and expansion capacity in Nigeria.
3. ascertain the effects of microfinance on the productivity of MSEs operators in Nigeria.
4. examine the effects of non-financial services of microfinance institutions on MSEs
business performance in Nigeria.
5. document the operations and processes of microfinancing activities in Nigeria.
1.5 Statement of Hypotheses
1. H
o
– Microfinancing makes no significant contribution to the survival of MSEs in
Nigeria.
2. H
o
– Microfinancing does not have the capability to influence the expansion capacity of
MSEs in Nigeria.
3. H
o
– Microfinance has no significant effect on the level of productivity of MSEs in
Nigeria.
4. H
o
– The provision of non-financial services (training and advisory services) by micro
finance institutions does not enhance the performance of MSEs in Nigeria.
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1.6 Significance of the Study
A significant amount of empirical research has been carried out both within and outside the
country on the relationship between microfinance and microenterprise development (See Kotir
and Obeg-odom, 2009; Ogunrinola and Alege, 2007; Pronyk, Hargreaves and Morduch, 2007;
Matouv, 2006; Khandker, 2005; Morduch and Haley, 2002). It has been observed from the
literature, that most research works treated microfinance as a solution to poverty. To the best of
our knowledge, the impact of microfinance on Micro and Small Enterprise survival and growth
has not been empirically tested in the literature, especially in Nigeria. Most researchers in
Nigeria have also not taken time to document the nature, mode of operation and processes
involved in microfinancing. This study therefore becomes significant in filling this observed gap
by testing empirically the impact of both the financial and non-financial services offered by
Microfinance Banks on small business growth/survival and by examining the capability of
Microfinance institutions in enhancing the expansion capacity of small businesses in Nigeria.
The study also contributes to the literature on microfinance and small business survival.
Successive governments in Nigeria have always had a policy programme for SMEs, but most of
the programmes have failed to achieve sustainable growth in the SMEs sub-sector. Most of the
government assisted-programmes have themselves become failures. The findings of this study is
expected to inform policy makers regarding the direction of further research into interventionist
programmes for MSEs in Nigeria. The study is also of great importance to Microfinance
Institutions, in the sense that it is expected to assist the microfinance institutions in assessing the
effectiveness of their programmes and to know which variables contribute most to small business
growth and survival. The study is expected to assist the microfinance institutions in their credit
policy formulation strategies. For owners and managers of micro and small businesses, access to
a study like this can aid their understanding of current challenges and reveal the essential factors
that promote small business growth and survival and thus enable them to focus on the relevant
ones in an attempt to enhance their growth and performance. The study is expected to help the
government to validate or reject the choice of microfinance as the main source of financing
MSEs in Nigeria and also suggest ways of improving the existing financing arrangements, if
need be.
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1.7 Scope of the study
The study provides insight into microfinance and small business survival and growth, as well as
provides a measure of the effects of microfinancing on small business performance and
productivity in Nigeria. It covers MSEs that have access to microfinance for a period of at least
five years (2004 – 2008). The population for the study includes the clients of the selected
Microfinance Banks, that is, the 169 Microfinance Banks in the South-West geopolitical zone
that have obtained their final operating licenses as of the year 2009. These includes microfinance
banks that metamorphosed from community Banks into MFBs in 2005. They are spread across
both rural and urban areas of the South-West geographical zone. The microfinance clients are
selected based on the following criteria:
1. The client that has stayed for a minimum of 5 years with the Microfinance Banks, i.e
from the period 2004 to 2008.
2. The client operates/manages a small or micro business enterprise.
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.
1.8 Limitation of the study
The main limitation of the study is the reliance on information supplied by micro and small
business operators who normally do not want to make a full disclosure of their businesses to an
unknown person for fear of being subjected to tax payment. In the same vein, most of the small
business operators lack proper record keeping practices and do not adhere to standard book
keeping and accounting procedures. Some of them do not have the necessary skills needed for
sound book keeping, auditing and tax assessment; neither do they employ qualified personnel to
undertake such tasks for them. The oath of secrecy between the bank and its customers is
another area of constraint in this study. Factors such as economic environment, political
instability and government policy on MSEs are considered to have strong effects on MSE
performance but are not readily available and so constitute a constraint to the study. However,
we rely on scientific methods to obtain the data and the analysis is based on superior analytical
techniques, which we believe allow us to generalize our findings.
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1.10 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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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
In this chapter, the literature on microfinance and small business survival, growth and
performance is reviewed. Also included is the conceptual and theoretical framework of
microfinance and MSMEs in Nigeria. Also included is the result of past impact assessment
studies of microfinance in Nigeria and other countries of the world.
2.2 Review of Conceptual Issues
2.2.1 Concepts of Micro, Small and Medium Enterprises and Microfinance
Defining small business has always been very difficult and controversial. The term ?small
business‘ covers a variety of firms (Hertz, 1982; Nguyen and Bellehumeur, 1983) and it is used
loosely in most of the literature. According to Peterson, Albaum and Kozmetsky (1986), a small
business is one which is independently owned and operated and which is not dominant in its field
of operation. Researchers and other interested parties have used specific criteria to operationalize
the small business, from the perspective of value added, value of assets, annual sales, and
number of employees. Annual sales and number of employees are most often used to delimit the
category. The problem of definition confronts all researchers as well as operators in the field.
A review of the literature on Micro, Small and Medium Enterprises (MSMEs) shows that the
definition of MSMEs significantly varies from country to country depending on factors such as
the country‘s state of economic development, the strength of the industrial and business sectors,
the size of MSMEs and the particular problems experienced by MSMEs (Harabi, 2003). Hence,
there is no uniform or universally accepted definition of MSMEs (Investment Climate
Assessment (ICA), 2009). In Nigeria, parameters such as asset base (excluding land), the number
of workers employed and the annual turnover are used for the classification of MSMEs.
Carpenter (2001) maintains that there is no one definition for SMEs; they are defined in Nigeria
and other countries based on one or all of the following: the size or amount invested in assets
excluding real estate; the annual turnover and the number of employees. The 1992 review by the
National Council on Industrial Standards (NCIS) defined small and medium scale enterprises (SMEs) as
enterprises with total cost (including working capital but excluding cost of land) of more than
13
N31m, but not exceeding N3,150million, with a labour size of between 11 and 100 employees.
There is, however, a consensus of opinions when it comes to defining SMEs in terms of asset
base than on any other parameter. This is because in case of an economic depression, the impact
on turnover and employment base would be greater than the impact on asset base. For instance,
during a depression, there is a tendency for turnover and the number of people employed to fall
substantially, while the asset base may be unaffected (NCIS,1992).
MSMEs can be divided into micro, small and medium enterprises. The Federal Ministry of
Industries defines a medium-scale enterprise as any company with operating assets less than
N200 million, and employing less than 300 persons. A small-scale enterprise on the other hand,
is one that has total assets of less than N50 million, with less than 100 employees. Annual
turnover is not considered in the definition of an SME. The National Economic Reconstruction
Fund (NERFUND) defines an SSE as one whose total assets are less than N10 million, but
makes no reference either to its annual turnover or the number of employees. These and other
definitions of the National Association of Small Scale Industries (NASSI), the National
Association of Small and Medium Enterprises (NASME), the Central Bank of Nigeria (CBN)
and other institutions are shown in the Table below.
Table 2.1 Definition of SME by Nigerian Institutions
Parameters Total Assets ( N‘m) Annual Turnover (N‘m) No of Employees
Nigerian Institution MSE SSE ME MSE SSE ME MSE SSE ME
Fed. Min. of
Industries.