CHAPTER 1

     INTRODUCTION

1.1  Background to the Study

The
development of the various sectors of any economy is the basis for its
survival, different measures have been   put in place by the Federal Government of
Nigeria in order to achieve this objective, such as, the establishment of  the Finance and Research Institution in 2001,
provision of direct financial assistance to small business  organization, the Small and Medium Industries  Equity Investment Scheme  (SMIEIS)  in 2001, establishment of  Small Scale Industrial Credit Scheme,
establishment of Government Intervention Strategies in 2002,  provision of 
Credit Scheme, establishment of National Economic Reconstruction
Fund  (NERFUND)  in 1989, establishment of Industrial
Development Centres and Industrial Estate 
Scheme, etc. The initial efforts were government-led through the vehicle
of large industries, but lately emphasis have shifted to Small and Medium Scale
Enterprises (SMEs) following the success of Small Scale and Medium Enterprises
in the economic growth in the Asian countries. (See Ojo, 2003) as cited in
Babajide, 2012). However, the growth of Small and Medium Scale Enterprises over
the years has been stunted because they have not been able to meet the
requirements for obtaining financial services from the conventional commercial
banks, thus their opportunity for expansion has been greatly limited. This
shortcoming of the formal financial institution is what initiated micro financing.

                  In 2005, the Federal
Government of Nigeria adopted microfinance as the main financing window for
SMEs in Nigeria. The Microfinance Policy Regulatory and Supervisory Framework
(MPRSF) was launched in 2005 with the core objective of making financial
services accessible to a large segment of the potentially productive Nigerian population
.It also addressed the problem of lack of access to credit by small business
operators who do not have access to regular bank credit. It also created the
framework for licensing, regulation and supervision of privately owned
microfinance banks, provides for the participation of various institutions such
as deposit money banks, non-governmental organizations, microfinance
institutions and financial cooperatives in the provision of financial services.
This framework was also extended to SMEs that have little or no access to
financial services..

The
Microfinance Policy (MPRSF) provides for two categories of Microfinance Bank in
Nigeria, namely: Microfinance licensed to operate as a unit bank otherwise
known as community bank which can only operate branches or cash centres within
a local government with the minimum paid up capital of ₦20 million and the
Microfinance Bank licensed to operate in a state or Federal Capital territory
with the minimum paid up capital of ₦1 billion.

                  Small and Medium Scale
Enterprises play important roles in the economic growth in both developing and
developed nations. Apart from increasing per capital income and output, micro
enterprises create  employment
opportunities, enhance basic standard of living of the populace, enabling
entrepreneurs to be self reliant, create wealth, alleviating the adverse
effects of growing population and generally promoting effective resources
utilization,onsidered critical to engineering economy development and growth.(See
Tijani, M.O., 2011). (Ogujiuba, Fadila & Stiegler, 2013; Musa & Aisha,
2012) agree that Small and Medium Scale Enterprises account for well over half
of the total share of employment sales and value added and they constitute the
most viable and veritable vehicle for self sustaining industrial development,
as they possess the capability to grow an indigenous enterprises culture more
than any other strategy.

                  However, as cited in Tijani,
M.O.(2011), the role played by Small and Medium Scale Enterprises
notwithstanding, its development is constrained by inadequate funding and poor
management. The unfavourable micro-economic environment has also been
identified as one of the major constraints which most times encourage financial
institutions to be risk-averse in funding Small and Medium Scale businesses.
Also, the reluctance on the part of the financial institutions to fund Small
and Medium Scale Enterprises can be explained by the insufficient capital base
of banks. As a result, these enterprises rely onpersonal assets for working
capital, thua making it difficult to operate at full capacity and increase
output and sales which will serve as impetus in increasing Gross Domestic
Product (GDP) of a nation like Nigeria. Thus, the concern of this research is
to examine the impact of microfinance bank on the growth of Small and Medium
Scale Enterprises in Ilorin metropolis

1.2  Statement of the Problem

The microfinance banks (MFIs) promoted by the Federal Government
of Nigeria was meant to  purview credits
entrepreneurs who owned Small and Medium Scale Enterprises because of their
limited access  to sources of finance. Small
and Medium Scale Enterprises face a lot of problems in obtaining finance from
the conventional finance banks because of the cost of finance, collateral
security and the bureaucracy involved in accessing loans; the high interest
rate etc. In addition, this entrepreneurs are predominantly made up of
illiterates who cannot understand all the paperwork   involved in applying   for a
loan. Also, the banks are not very excited because of the fact that the credit
deposited by them is so little compared to what is deposited by customers in
other big businesses. These problems and more necessitated the emergence of the
MFBs.   

1.3   Statement of the
Research Questions

Thus,
the above problems raises the following questions:

i)                   
What are the nature of SMEs
financing before the establishment of  
MFBs?    

ii)                 
 What role does microfinance banks play in the
growth of SMEs?

iii)               
What are the problems
Microfinance banks faces in providing finance to SMEs?

iv)               
In what ways can the services
rendered by microfinance banks be improved upon to enhance the growth of SMEs?

1.4       Objectives of the Study

The
broad objective of this study is to examine the impact of microfinance banks on
the growth of small and medium scale enterprises in Ilorin metropolis. This
specific objective include the following:

·        
To examine the nature of SMEs financing before MFBs
establishment?

·        
To examine the role of microfinance banks’ in the growth of
SMEs in Ilorin metropolis.

·        
To examine the problems Microfinance banks face in providing
finance to SMEs.

·        
To examine in what ways the services rendered by the
Microfinance banks can be improved upon to enhance the growth of SMEs.

1.5       Justification
for the Study

A considerable number of literatures have
been written on this subject matter both inside and outside the country; (see Babajide,
2011; Olowe, 2013; Moradeyo, 2013; Babalola, 2013 and Agboola, 2012).To the
government and policy makers, the study on the impact of microfinance banks on
the growth of SMEs will enable them come up with policies i.e fiscal and
monetary policies to improve the efficiency of the SMEs. The result from this
finding would enable the stakeholders to employ ways to improve the
contribution of SMEs to the country. This research work will contribute to the
literatures on the impact of microfinance on the growth of SMEs for the benefit
of researchers.

1.6  Scope
of the Study

This study covered microfinance
banks and Small and Medium Scale Enterprises in Ilorin metropolis  because Ilorin metropolis is a fast developing
city where many Small and Medium Scale Enterprises are springing up and more
microfinance banks are being established and also because of the convinience  and low cost of carrying out the research
work.  This work covered the period of
5yrs from year 2009- year 2013.

 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 (as cited in Babajide, 2011).

1.7  Hypothesis
of the Study

The hypothesis for this study
is stated in null form as follows:

: There is no significant
difference between the roles of microfinance  
banks and the growth of SMEs in Ilorin metropolis.

: There is no significant difference
between microfinance banks and the problems they face in providing finance to
SMEs in Ilorin metropolis.

: The
services rendered by MFBs have no significant difference on the growth of SMEs.

Definition of Terms:

Microfinance Banks: These are special banks established by
the federal government to promote the growth and development of Small and Medium
Scale Enterprises/businesses.

Microfinance: It is the provision
of a broad range of financial services such as deposits, loans, payment
services, money transfer and insurance to the poor and low income households
and their microenterprises. (Asian Development Bank, 2000).

SMEs:
Nigeria’s
national Council on Industry; an SME is defined in terms of employment i.e. as one
with between 10 and 300 employees.

Entrepreneurs: This refers to
the proprietor or owner of a privately owned business enterprise. The
entrepreneur employs his capital in the business, manages the business   resources and takes the risk of business
alone. He is self  employed i.e he is not
employed by anyone but instead he employes 
others to work for him.  

Regression analysis: This is
a statistical approach to forecasting change in a dependent variable on the
basis of change on more independent variables.

Development: An event
constituting a new stage in a changing situation.

GDP (Gross Domestic Product):
It is the value of goods domestically produced in a country.

Growth: An increase in size,
number, value or stren ght.                                                                                                                                
                           

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