Impact of Microfinance Bank on Small and Medium Enterprises in Nigeria
Objectives of the Study
The broad objective of this study is to examine the impact of microfinance bank on small and medium enterprises in Nigeria. This specific objective includes 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 Lagos 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.
REVIEW OF RELATED AND RELEVANT LITERATURE
The word Micro financing cannot be understood without referring to the micro institutions of finance (formally known as community banks) transformed to microfinance banks. The major objective of micro financing is to address the issue of poverty.
According to (UNECA 2005), one of the reasons why Africa is off track in terms of meeting the millennium development goals includes persistent gender inequality and discrimination. The current challenge facing the continent (Africa) and Nigeria in particular is how to achieve a reversal of inequalities. Emergence of Micro finance Banks was largely aggravated by the removal of the informal sector by the formal financial system in Nigeria and indeed other developing countries.
This chapter is divided into conceptual review, theoretical framework and empirical review to help breaking down the literature properly.
MICROFINANCE AND POVERTY ALLEVIATION
In the event of the failure of Small and Medium Enterprise Equity Investment Scheme (SMEEIS) initiated in 2001, the government of Nigeria decided to introduce microfinance banks to bridge the gap between the commercial banks and small and medium business owners.
Microfinance refers to the entire unique processes by which financial and enterprise development services are channelled to owners of micro and small enterprises in a sustainable manner. It entails effective engagement of clients in order to adequately determine their financial needs. The small and medium industries/enterprises subsector appears to be the target of government’s economic development policies.
The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), and National Directorate for Employment (NDE) are some of the means through which Nigerian government aims at encouraging entrepreneurial spirits in the country (Ubom,2003).
Poverty as hunger, lack of shelter, being sick and not being able to go to school, not knowing how to read, not having job and fear for the future among others. When absolute poverty is referring to this mean the existence below a reference standard of living (Kehinde, 2006; and World Bank Report, 2009)
Microfinance by definition and practice provides services to economically affected poor who are either underserved or under-banked by conventional banking system. In Nigeria, Microfinance has existed in traditional setting thrift and rotational saving known as “Esusu” or “Adash” etc.
(Muhammad, 2011) has advised operators of microfinance banks in the country to study their business environment and take into cognisance the culture of the people and try to blend it with the various products they are giving out. Speaking at the opening of the second round of microfinance banks certification programme, organised by SMEDAN in collaboration with the Nigeria Deposit Insurance Corporation (NDIC) and the Central Bank of Nigeria (CBN), Muhammad Umar told the participants that the essence of the training was to polish the MFBs towards efficiency and effectiveness.
Various definitions and understanding of small and medium enterprises (smes)
(Dr Victor 2007) has defined SMEs as follows:
- Micro/Cottage Industry: An industry with a labour size of not more than 10 workers, or total cost of not more than N1.50 million, including working capital but excluding cost of land.
- Small-Scale Industry: An industry with a labour size of 11-100 workers or a total ]
- Cost of not more than N50 million, including working capital but excluding cost of land.
- Medium Scale Industry: An industry with a labour size of between 101-300 workers or a total cost of over N50 million but not more than N200 million, including working capital excluding cost of land.
- Large Scale: An industry with a labour size of over 300 workers or a total cost of over N200 million, including working capital excluding cost of land.
- SMEEIS:For the purpose of this scheme, a small and medium enterprise is defined as any enterprise with a maximum asset base of N500 million (excluding land and working capital), and with no lower or upper limit of staff.
Small and Medium enterprises, SMEs and micro-finance are one and the same. Retired workers, graduates, and even employed people who ventured into business to cater for themselves and their families, make up the SME sub-sector which needs the micro-finance banks as much as the micro-finance banks need them to stay in business. “Invariably, SMEDAN is ever ready to cooperate with, and support them to position them better in helping to tackle the main challenge of finance militating against the developments and sustainability of micro, small and medium enterprises, MSMEs in the country” (Mohammad, 2011).
(Umar, 2011) “Stressed the need for dedicated banks to fund small and medium enterprises (SMEs) in Nigeria to ease their financial difficulties”. While receiving a German organisation working on a new private-sector development programme aimed at improving the access of micro, small and medium enterprises (MSMEs) to financial services”.
AREA OF STUDY
The fundamental objective of this research is descriptive in nature and employs this descriptive survey method in assessing the effects of MFIs on SMEs development in Nigeria. Its application does not involve or require manipulation of any variable, In order to conduct a valid analysis in the presentation and analysis of the data collected on the research fieldwork the use of descriptive statistical method such as tables and charts to depict the relevant data.
METHOD OF INVESTIGATION
This study utilizes primary sources of data in which structured questionnaire were extensively used. Also interview were conducted for the management staff of Al-Barakah Microfinance Bank among the other respondents to the questionnaire. The purpose is to generate data about the opinion and perceptions of SMEs owners and Microfinance staff in relation to the effectiveness of MFIs loans to the performance of their companies. Thus, in addition provides means of analyzing the likely impact of Microfinance loans on SMEs.
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
This chapter presents the data for the study as obtained from the administration of questionnaire. Total of one hundred and fifty (150) questionnaires were administered to microfinance bank staff and small and medium enterprises owners distributed all over Lagos state in Nigeria. Out which only ninety (90) respondents’ response were received. The analysis and testing of research questions were carried out using percentage analysis method.
SUMMARY, CONCLUSION AND RECOMMENDATION
In overview of the facts and previous related texts on this topic critically, this research has really bridged the gap on the subject; impact of microfinance bank on small and medium enterprises in Nigeria.
In chapter two various literatures were reviewed to establish numbers of statutory functions of Microfinance Banks as stated in the established framework and CBN guidelines on MFBs which were not only book warm policy but need proper monitoring by the Apex Bank. These include account opening requirements, Single oblique limit, and demand and supply determined interest rates, among others have double impacts on the Micro borrowers including the SMEs and their businesses.
However, SMEs can only boost of meaningful expansion and growth when source financing is adequate to meet their business need and other challenges impose by government policies through excessive regulations, prohibitive levels of taxation, inadequate government protection against cheap imported products, laxity about black markets (which results in unfair competition for the micro business sector), harassment by government officials for operating businesses on the streets, and inadequate services among others. In the real sense microfinance institutions have limited fund to offer the customers including SMEs which would be determined by MFBs equity capital not impaired by loss to be granted to a single customer as a point in time.
The government at all level need to be fully involved in SMEs financing by making existing policy on SMEs schemes beneficial to all small enterprises without any discrimination via government implementation policy and monitoring.
More so, the private sectors including wealth individuals should be encouraged by government to have tax relief for financing SMEs, while SMEs should be encouraged to have tax holiday for at least five years.
In the chapter four after collation and critical analysis of data it was deduce that Micro finance and SMEs are dependent, which implies there is significance relationship between Microfinance Banks’ efforts and SMEs development in Nigeria a case study of Al-Barakah Microfinance Bank, Lagos.
The following conclusions were reached based on these findings as:
- There were relationships (impacts) between the Microfinance institutions and Small and medium scale Enterprises to transform to economy growth and consequently to economy development in Nigeria.
- There is need for the apex Bank (Central bank of Nigeria) to review her guidelines in relation to no interest ceiling, Single oblique limit est. on MFBs.
- There is need for the government at various levels to participate in the SMEs financing through genuine schemes, tax holiday for newly establish SMEs and grants or aid.
- There is need to increase MFBs equity capital requirements for incoming ones and recapitalisation of the existing ones.
- There is need for specify and statutory collateral to be taken as loan security by MFBs to mitigate their risk of bad loans, general and specific loan loss.
- The commercial banks should be encouraged to participate in the SMEs financing most especially when it involve huge amount of money.
- finally, there should be more public enlighten on importance of job creations via SMEs and its benefits to the economy development.
After a careful analysis of the topic and the following recommendations have been made as:
- Microfinance bank shareholders should increase the share capital to afford them ability to provide and meet up with the customers (including SMEs) loan request.
- The MFBs should carefully carried out their due diligence and know your customer (KYC) to avoid wrong credit/loan decision.
- The MFBs should be more involve in joint investment with reliable and trusted SMEs rather leverage on interest charges only.
- The SMEs owners should careful analysis their available finance options in relation to duration, interest charges, tax savings est. before taking financing decisions.
- The SMEs should cultivate the habit of doing more banking transactions compare to cash transactions. Especially Nigeria economy going towards cashless. Their business account should be opened with a microfinance bank preferably.
- The government at various levels to participate in the SMEs financing through genuine schemes either to improve the existing scheme or establish new ones, tax holiday for newly establish SMEs and grants or aid.
- Where the MFBs are not capable to meet up the SMEs request, the commercial banks should be arbitrator to financing most especially when it involve huge amount of money.
- The apex bank should review and increase her oversight functions on MFBs to create enabling environment for SMEs via financing to achieve improve GDP, growth and economy development.
SUGGESTIONS FOR FURTHER STUDIES
Despite the facts that above findings and recommendations were made on this study, it was necessary for further research study to examine:
- The impacts of non ceiling of interest rate to MFBs on loan/credit the SMEs productivity.
- The effects of government policy and scheme on SMEs financing to improve Gross Domestic Products.
With these all relevancy, including broad functions and economic benefits of SMEs financing would be analysis further.
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