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| Chapters: 1-5
| Pages: 70
IMPACT OF MICROFINANCE BANKS ON GROWTH AND SUSTAINANCE OF SMEs IN NIGERIA..
Background to the Study
Microfinance banks (MFBs) have gained tremendous popularity for providing services such as credit and capacity building amongst other products to small and medium enterprises (SMEs) since the late 1980's (Gudz, F., 1999). This popularity is attributable to the massive employment opportunities they provide to low-income citizens of their host countries who also make up a majority of SMEs (Taiwo, et al., 2017). Poverty has long been a major force against development among the rural populace from underdeveloped countries like Nigeria (Ocasio, V.M., 2012). To combat rising poverty rates, microfinance concepts have been utilised by governments in developing the financial depth of small businesses owned by low-income persons through the provision of low-capacity financial services not usually attainable through large commercial banks (Weiss & Montgomery, 2004). It is expected that such small businesses, identified as SMEs, will be instrumental to the economic and financial competence of their resident nation. Therefore, in realisation of this, the Nigerian government through the Central Bank of Nigeria (CBN) in 2005, instituted a policy for the development of Microfinance banking through the conversion of pre-existing small-medium scale financial institutions such as community banks into MFBs with the mandate to provide financial products and services in order to grow the nation’s SMEs. Despite an observed increment in the number of registered MFB since 2005, there have been reports that indicate mixed reviews regarding their impact on SMEs within the areas they operate in (Oluyombo, D., 2010).
1.2. Background of study
Since their establishment through the microfinance policy established by the Central Bank of Nigeria (CBN) in 2005, the largest of the newly established MFBs have clustered in major economic cities where a majority of SMEs are located such as Lagos, Kano and Abuja – the Federal Capital Territory (FCT). Despite this, there have not been clear or consentient perceptions of the effectiveness of these institutions on the development of the SMEs they were mandated to serve (Oluyombo, D., 2010).
SMEs are globally perceived to be of paramount importance when considering the growth, sustenance, or recovery of a country’s economy (Ayyagari et al., 2007). This is widely due to the benefits, which come with the development of a robust SME industry such as employment, financial stability and the development of a middleclass population, whom are widely regarded as the backbone of a nation’s economy (Levy, B., 1993). Despite this, (Beck & Demirguc-Kunt, 2006) asserted that developing countries (such as Nigeria) who are most in need of an overhaul of economic activities are yet to implement effective frameworks into programs such as Microfinance Banking in order to support SMEs.
Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group (Idowu, 2008).
In regions like Southern Africa, microfinance is used to describe the supply of financial services to low-income employees, which is closer to the retail finance model prevalent in mainstream banking. For some, microfinance is a movement whose object is a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Many of those who promote microfinance generally believe that such access will help poor people out of poverty, including participants in the Microcredit Summit Campaign (Bi and Pandey, 2011). For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Microcredit is one of the aspects of microfinance and the two are often confused. Critics may attack microcredit while referring to it indiscriminately as either ‘microcredit’ or ‘microfinance’. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact (Elumilade, Asaolu and Adereti ,2006). Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does do, however, is to enhance financial inclusion. (Elumilade etal,2006).
Microfinance is the provision of financial services to the poor who are traditionally not served by the conventional banks. These financial services include credit, savings, micro-leasing and money transfer and payment services. The features that distinguish microfinance from other forms of formal financial products are; smallness of loans advanced and savings collected, near absence of assets–based collateral and simplicity of operations. It can be deduced from the foregoing that microfinance is a poverty alleviation strategy which operates by providing credit and other financial services to economically active and low income households and their businesses. To achieve this poverty alleviation objective, microfinance helps the poor increase their income, build viable business, reduce vulnerability to shocks and create employment. The practice of microfinance is not new in Nigeria. Nigerians have always tried to provide themselves with needed finances through informal microfinance approaches like self-help groups (SHGs), rotating savings and credit associations, (ROSCAs), accumulating credit and savings associations (ASCAs) and direct borrowings from friends and relations. These approaches may have sufficed in the traditional society but the growth in the sophistication of the economy and the increasing incidence of poverty among citizens has revealed the shortcomings of this approach (Adebayo ,2012).The Central Bank of Nigeria (CBN) alluded to this when it pointed out that the informal financial institutions that attempt to provide microfinance services generally have limited outreach due primarily to paucity of loanable funds (Adebayo,2012).
Small businesses have the tendency of increasing individual productive capacity and create wealth when the products produced or services are sold from time to time .The evolvement of small and medium enterprise helps industrial dispersal thus stemming the rural –urban drift through creation and sales of goods and services that help individuals to directly mobilise domestic saving, which could be ploughed back into business to ensure growth and contribute to economic development (Asikhia, 2010).
In a bid to resolve the identified deficiency of the informal microfinance sector that the CBN in 2005 introduced a microfinance policy a prelude to the licensing of microfinance banks in Nigeria. According to this policy document, its aim is to provide a microfinance framework that would enhance the provision of diversified microfinance services on a long-term sustainable basis for the poor and low income groups, create a platform for the establishment of microfinance banks and improve CBN’s regulatory/supervisory performance in ensuring monetary stability and liquidity management (CBN, 2008).
Microfinance banks were therefore established because of the failure of the existing microfinance institutions to adequately address the financing needs of the poor and low income groups. The CBN further justified its licensing of microfinance banks with the lack of institutional capacity and weak capital base of existing community banks, existence of huge un-served market and need for increased savings opportunity. Taking the issue of lack of capacity by existing financial institutions further the CBN pointed out that only 35% of Nigerians had access to financial services and that most of those without access to financial services dwell in the rural areas (CBN, 2008).
In order to enhance the flow of financial services to the Micro, Small and Medium Enterprises (MSME) subsector, Government has, in the past, initiated a series of programmes and policies targeted at the MSMEs. Notable among such programmes were 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 National Economic Recovery Fund (NERFUND) 1989. All of these institutions merged to form the Bank of Industry (BOI). In 2000, the 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 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 (Chiyah and Forchu,2010).
In 2003, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), an umbrella agency to coordinate the development of the Small and Medium Enterprises (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 peculiar to Nigeria came in form of intervention from the banks through its representatives ‘the Banker’s Committee’ at its 246th annual general meeting held on December 21, 1999. The 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 Small and Medium Industries (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 3 years. By the end of 2001, the amount set aside under the scheme was in excess of 6 billion naira, which then rose to over N13 billion and N41.4 billion by the end of 2002 and 2005 respectively, but stood at N48.2 billion by the end of December, 2008.(Chiyah and Forchu,2010)
The microfinance arrangement makes it possible for MSMEs to secure credit from Microfinance Banks (MFBs) and other Microfinance Institutions (MFIs) on more easy terms. It is on this platform that we intend to examine the impact of microfinance on small business growth. Therefore, the study will fill the gap in literature on the impact of both the financial and non-financial services on small business growth and to examine the capability of microfinance to transform small enterprises to small scale industries through their technology/asset related loans.
Despite all these efforts, the contribution of SME to Nigeria Gross Domestic Product (GDP) remains very poor, 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 core 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 rural transformation but are these instruments insuring business growth and sustainability?
Many researchers have linked business growth to additional financial inflow obtained into the business either through formal financial institutions or micro credit schemes. It is however unclear if microfinance banks have an impact on the growth and sustenance of SME`s in Nigeria.
Background to the Study
Microfinance banks (MFBs) have gained tremendous popularity for providing services such as credit and capacity building amongst other products to small and medium enterprises (SMEs) since the late 1980's (Gudz, F., 1999). This popularity is attributable to the massive employment opportunities they provide to low-income citizens of their host countries who also make up a majority of SMEs (Taiwo, et al., 2017). Poverty has long been a major force against development among the rural populace from underdeveloped countries like Nigeria (Ocasio, V.M., 2012). To combat rising poverty rates, microfinance concepts have been utilised by governments in developing the financial depth of small businesses owned by low-income persons through the provision of low-capacity financial services not usually attainable through large commercial banks (Weiss & Montgomery, 2004). It is expected that such small businesses, identified as SMEs, will be instrumental to the economic and financial competence of their resident nation. Therefore, in realisation of this, the Nigerian government through the Central Bank of Nigeria (CBN) in 2005, instituted a policy for the development of Microfinance banking through the conversion of pre-existing small-medium scale financial institutions such as community banks into MFBs with the mandate to provide financial products and services in order to grow the nation’s SMEs. Despite an observed increment in the number of registered MFB since 2005, there have been reports that indicate mixed reviews regarding their impact on SMEs within the areas they operate in (Oluyombo, D., 2010).
1.2. Background of study
Since their establishment through the microfinance policy established by the Central Bank of Nigeria (CBN) in 2005, the largest of the newly established MFBs have clustered in major economic cities where a majority of SMEs are located such as Lagos, Kano and Abuja – the Federal Capital Territory (FCT). Despite this, there have not been clear or consentient perceptions of the effectiveness of these institutions on the development of the SMEs they were mandated to serve (Oluyombo, D., 2010).
SMEs are globally perceived to be of paramount importance when considering the growth, sustenance, or recovery of a country’s economy (Ayyagari et al., 2007). This is widely due to the benefits, which come with the development of a robust SME industry such as employment, financial stability and the development of a middleclass population, whom are widely regarded as the backbone of a nation’s economy (Levy, B., 1993). Despite this, (Beck & Demirguc-Kunt, 2006) asserted that developing countries (such as Nigeria) who are most in need of an overhaul of economic activities are yet to implement effective frameworks into programs such as Microfinance Banking in order to support SMEs.
Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group (Idowu, 2008).
In regions like Southern Africa, microfinance is used to describe the supply of financial services to low-income employees, which is closer to the retail finance model prevalent in mainstream banking. For some, microfinance is a movement whose object is a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Many of those who promote microfinance generally believe that such access will help poor people out of poverty, including participants in the Microcredit Summit Campaign (Bi and Pandey, 2011). For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Microcredit is one of the aspects of microfinance and the two are often confused. Critics may attack microcredit while referring to it indiscriminately as either ‘microcredit’ or ‘microfinance’. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact (Elumilade, Asaolu and Adereti ,2006). Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does do, however, is to enhance financial inclusion. (Elumilade etal,2006).
Microfinance is the provision of financial services to the poor who are traditionally not served by the conventional banks. These financial services include credit, savings, micro-leasing and money transfer and payment services. The features that distinguish microfinance from other forms of formal financial products are; smallness of loans advanced and savings collected, near absence of assets–based collateral and simplicity of operations. It can be deduced from the foregoing that microfinance is a poverty alleviation strategy which operates by providing credit and other financial services to economically active and low income households and their businesses. To achieve this poverty alleviation objective, microfinance helps the poor increase their income, build viable business, reduce vulnerability to shocks and create employment. The practice of microfinance is not new in Nigeria. Nigerians have always tried to provide themselves with needed finances through informal microfinance approaches like self-help groups (SHGs), rotating savings and credit associations, (ROSCAs), accumulating credit and savings associations (ASCAs) and direct borrowings from friends and relations. These approaches may have sufficed in the traditional society but the growth in the sophistication of the economy and the increasing incidence of poverty among citizens has revealed the shortcomings of this approach (Adebayo ,2012).The Central Bank of Nigeria (CBN) alluded to this when it pointed out that the informal financial institutions that attempt to provide microfinance services generally have limited outreach due primarily to paucity of loanable funds (Adebayo,2012).
Small businesses have the tendency of increasing individual productive capacity and create wealth when the products produced or services are sold from time to time .The evolvement of small and medium enterprise helps industrial dispersal thus stemming the rural –urban drift through creation and sales of goods and services that help individuals to directly mobilise domestic saving, which could be ploughed back into business to ensure growth and contribute to economic development (Asikhia, 2010).
In a bid to resolve the identified deficiency of the informal microfinance sector that the CBN in 2005 introduced a microfinance policy a prelude to the licensing of microfinance banks in Nigeria. According to this policy document, its aim is to provide a microfinance framework that would enhance the provision of diversified microfinance services on a long-term sustainable basis for the poor and low income groups, create a platform for the establishment of microfinance banks and improve CBN’s regulatory/supervisory performance in ensuring monetary stability and liquidity management (CBN, 2008).
Microfinance banks were therefore established because of the failure of the existing microfinance institutions to adequately address the financing needs of the poor and low income groups. The CBN further justified its licensing of microfinance banks with the lack of institutional capacity and weak capital base of existing community banks, existence of huge un-served market and need for increased savings opportunity. Taking the issue of lack of capacity by existing financial institutions further the CBN pointed out that only 35% of Nigerians had access to financial services and that most of those without access to financial services dwell in the rural areas (CBN, 2008).
In order to enhance the flow of financial services to the Micro, Small and Medium Enterprises (MSME) subsector, Government has, in the past, initiated a series of programmes and policies targeted at the MSMEs. Notable among such programmes were 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 National Economic Recovery Fund (NERFUND) 1989. All of these institutions merged to form the Bank of Industry (BOI). In 2000, the 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 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 (Chiyah and Forchu,2010).
In 2003, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), an umbrella agency to coordinate the development of the Small and Medium Enterprises (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 peculiar to Nigeria came in form of intervention from the banks through its representatives ‘the Banker’s Committee’ at its 246th annual general meeting held on December 21, 1999. The 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 Small and Medium Industries (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 3 years. By the end of 2001, the amount set aside under the scheme was in excess of 6 billion naira, which then rose to over N13 billion and N41.4 billion by the end of 2002 and 2005 respectively, but stood at N48.2 billion by the end of December, 2008.(Chiyah and Forchu,2010)
The microfinance arrangement makes it possible for MSMEs to secure credit from Microfinance Banks (MFBs) and other Microfinance Institutions (MFIs) on more easy terms. It is on this platform that we intend to examine the impact of microfinance on small business growth. Therefore, the study will fill the gap in literature on the impact of both the financial and non-financial services on small business growth and to examine the capability of microfinance to transform small enterprises to small scale industries through their technology/asset related loans.
Despite all these efforts, the contribution of SME to Nigeria Gross Domestic Product (GDP) remains very poor, 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 core 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 rural transformation but are these instruments insuring business growth and sustainability?
Many researchers have linked business growth to additional financial inflow obtained into the business either through formal financial institutions or micro credit schemes. It is however unclear if microfinance banks have an impact on the growth and sustenance of SME`s in Nigeria.
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