IMPACT OF MICRO FINANCE BANKS ON GROWTH AND SUSTENANCE OF SMEs IN NIGERIA

Abstract

Creation and sustenance of small and medium scale enterprises is a function of many factors which include funding. The effort to transform innovations into economic goods certainly would require reasonable level of funding which appears elusive due to global economic recession. Accessing credit from conventional money deposit banks has proved irrational due to its attendant cost, hence the need for microfinancing which is deliberate initiative to enhance the performance and sustenance of small and medium scale enterprises. This study therefore investigated the impact of microfinance on growth and sustenance of small and medium scale enterprises with a survey of one hundred and fifty SMEs. Data collected with a well structured questionnaire was analysed with descriptive statistics while hypothesis formulated was tested with correlation analysis. The tested hypothesis showed a significant relationship between microfinance bank and SMEs at a p-value=0-000; r=0.044.The study however concluded that small scale entrepreneurs hardly have access to credit particularly from the formal sector. There is also the need to strengthen microfinance institutions, improving and expanding firms` productive facilities for optimal performance.

Background to the Study

Microfinance is reputed for offering monetary loans to small and medium scale enterprises to enhance economic activities and business growth and sustainability. Everyone needs a diverse range of financial instrument to grow his/her businesses, build asset, stabilize consumption, and shield self against risks. Financial services needed by firms include working capital, loans, consumer credit, savings, pension, insurance, and money transfer services (Yahaya, Osemene and Abdulraheem,2011).

Microfinance has helped Bangladesh in reducing poverty from 10% over the past years to 40%. This rate puts Bangladesh on track to meet its Millennium Development Goals of halving poverty by 2015. According to Muhammad Yunus, 2006 Nobel Peace Prize winner“ poverty is caused by our inadequate understanding of human capabilities and by our failure to create enabling theoretical frameworks, concepts, institutions and policies to support those capabilities and not a lack of human capital or labour; eradicating poverty can give you real peace” (Yunus, 1998:48).

The microfinance practiced in Nigeria painfully adds to the inequitable distribution of income and wealth. This was brought about by the inconsistencies in the interest rates regime: interest on borrowing (between 30 and 100%) by far exceeds that on savings (between 3.5 and 6%). This development also saw borrowers go through pains – further aggravated poverty – in trying to repay loans; they resorted to added borrowing and selling of personal properties. In Nigeria, credit is largely granted for commerce related activity to the detriment of the agricultural sector. Those who do not have access to microfinance in Nigeria are estimated to be 40 million people, according to Irobi (2008). The implication is that microfinance, as practiced in Nigeria, has not been able to address credit, savings, and other related financial services gap required by micro entrepreneurs (CBN, 2008; Irobi, 2008).

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.