The Impact of Microcredit Finance on the Performance of Small and Medium Business Enterprises
Chapter One
Objective of the Study
The main objective of this study is to find out the impact of microcredit finance in the performance of SME in Nigeria, specifically the study intends to:
- Analyze the impact of microcredit finance in the performance of SME
- Examine ways in which micro credit finance SME in Nigeria
- Find out the challenges of financing SME in Nigeria
CHAPTER TWO
LITERATURE REVIEW
Introduction
This chapter discusses works of various scholars and authors who contributed their information concerning this study. And it consists of theoretical literature, empirical literature, conceptual framework and research gap.
Conceptual Definition
Microfinance
Otero (1999) defines “microfinance as the provision of financial services to the poor who are above the official poverty line and to the core poor households”. According to ledgerwood (1998) microfinance services are given based on payment behavior of the borrower which shows the capability of the borrower to recover the debt.
According to Schreiner and Colombet (2001) state that “microfinance program is appropriate when there are improvements in credit accessibility especially to those who are in need of assistance rejected by banks” apart from loan provision microfinance also provide non-financial services such as training.
Microcredit and Microfinance
Microcredit and microfinance are different terms and they differ in content, although the two terms are used interchangeably because they are related. Therefore according to the study conducted by Sinha (1998) states that “microcredit refers to micro loan, whereas microfinance is appropriate when involves NGO’s and other financial institutions in the loan supplement along with non-financial facilities.”
And some argued that, microcredit is a component of microfinance which only involved in providing credit to the poor, whereas microfinance is far from that since it also provides non-financial service to un-served markets. Basically the primary social objective of microfinance is to reach under-served market both in urban and rural areas.
Small and Medium Enterprises
The SMEs stands for Small and Medium Enterprises sometimes referred to micro, small and medium enterprises (MSMEs). Any activity involved in production and distribution of outputs to meet the expectation of client can be referred to as small and medium enterprises as respectively explained by Kessy and Urio (2006).
Tanzanian government defines SMEs based on the number of employments, whereby it was considered to the facts that, micro enterprises range to 0 up to 5 employees, 5 up to 49 employees for small businesses, medium business comprises with 50 up to 99 employees and more than 100 employees for big enterprises. And investment expenditure demand differ from each level of enterprises.
According to the United Republic of Tanzania (2003) the definition sometime do not include informal sectors especially those who are engaged in low income generation activities in Tanzania.
Theoretical Reviews
The transaction cost theory explained in the article titled “The Problem of Social Cost” by Ronald Coase (1937) and expectancy theory proposed by Victor Vroom in 1964 explained by Salaman et al, (2005)., was used as the theoretical framework in this study.
The theory explains that “in order to effect and manage a market transaction is done through discovering who is the one that wishes to deal with, to conduct negotiation leading up to a bargain, to inform people that one wishes to deal and on what terms. Hence, all of these is done in order to make effective inspection which is needed to ensure that terms of the contract are observed.”
Therefore, in order to manage and effect any market transaction taken into account is through drafting. And this is done so as to prevent many transactions that would be carried out in a world in which the pricing system worked without cost.
Training and technical assistance, time involved in loan processing, management practices, searching a lender, credit contract preparation, selecting qualified loan, preparation of necessary documents needed by microfinance institutions, negotiation, group forming, and transportation of all these factors move up the transaction cost as explained clearly by (Bhatt and Shui-Yan 1998).
The expectancy theory had been proposed by Victor Vroom in 1964. “This theory is based on the hypothesis that individuals adjust their behavior in the organization on the basis of anticipated satisfaction of valued goals set by them. The individuals modify their behavior in such a way which is most likely to lead them to attain these goals. This theory underlies the concept of performance management as it is believed
that performance is influenced by the expectations concerning future events” (Salaman et al, 2005).
Review of Empirical Evidences
Amin et al (2001) the consumption and income done for 229 households used to identify household that are poor and vulnerable from three microcredit institutions namely Grameen Bank, Bagladesh rural advancement committee (BRAC) and association for social advance (ASA). The findings revealed that though microcredit programs are unsuccessful at reaching those who are in need of assistance (vulnerable poor) due to limitation of subsidized credit, still programs are successful in reaching the poor.
Little evidence of an impact on the program participants was found by Coleman (1999). He went further agreed with Adam, D. and von Pischke’s J.D (1992) assertion that “debt is not an effective tool for helping most of poor people to enhance their economic condition” and there was other reasons for the poor to be poor rather than lack of credit accessibility.
There was favorable contribution to poverty alleviation as a result of micro credit finances through its positive impact on income and assert level. But it should be remembered that each institution has its own effective strategies of poverty reduction. Hence, the higher the amount of loan the more poverty reduction since there will be expansion of demand for labour amongst the poor as illustrated in the work conducted by Mosley (1999) as respectively explained.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
In this chapter, we would describe how the study was carried out.
Research design
Research design is a detailed outline of how an investigation took place. It entails how data is collected, the data collection tools used and the mode of analyzing data collected (Cooper & Schindler (2006). This study used a descriptive research design. Gill and Johnson (2002) state that a descriptive design looks at particular characteristics of a specific population of subjects, at a particular point in time or at different times for comparative purposes. The choice of a survey design for this study was deemed appropriate as Mugenda and Mugenda (2003) attest that it enables the researcher to determine the nature of prevailing conditions without manipulating the subjects.
Further, the survey method was useful in describing the characteristics of a large population and no other method of observation can provide this general capability. On the other hand, since the time duration to complete the research project was limited, the survey method was a cost effective way to gather information from a large group of people within a short time. The survey design made feasible very large samples and thus making the results statistically significant even when analyzing multiple variables. It allowed for many questions to be asked about a given topic giving considerable flexibility to the analysis. Usually, high reliability is easy to obtain by presenting all subjects with a standardized stimulus; observer subjectivity is greatly eliminated. Cooper and Schindler (2006) assert that the results of a survey can be easily generalized to the entire population..
Research settings
This study was carried out in Lagos state, Lagos, sometimes referred to as Lagos State to distinguish it from Lagos Metropolitan Area, is a state located in the southwestern geopolitical zone of Nigeria. The smallest in area of Nigeria’s 36 states, with a population of over 15 million, Lagos State is arguably the most economically important state of the country, containing Lagos, the nation’s largest urban area. It is a major financial centre and would be the fifth-largest economy in Africa if it were a country.
It has the highest population density of Nigeria’s states. The actual population total is disputed between the official Nigerian Census of 2006 and a much higher figure claimed by the Lagos State Government. Lagos State annual GDP is 1 trillion naira.
Lagos State is bounded on the north and east by Ogun State. In the west it shares boundaries with the Republic of Benin. Its southern borders are with the Atlantic Ocean. 22% of its 3,577 km2 are lagoons and creeks.
Victoria Island, the financial center of the metropolis, is known for its beach resorts, boutiques and nightlife. To the north, Lagos Island is home to the National Museum Lagos, displaying cultural artifacts and craftworks. Nearby is Freedom Park, once a colonial-era prison, now a major venue for concerts and public events. Lagos state’s gross domestic product of $84bn compares with Ghana’s $67bn, Rwanda’s $10.4bn and Kenya’s $95.5bn according to Lagos State Governor Jide Sanwo-Olu. The current governor of Lagos State is Babajide Sanwo-Olu who won the governoship post under the All Progressive Congress (APC) on March 10, 2019.
Sources of Data
The data for this study were generated from two main sources; Primary sources and secondary sources. The primary sources include questionnaire, interviews and observation. The secondary sources include journals, bulletins, textbooks and the internet.
Population of the study
A study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description (Udoyen, 2019). The population of the study were all SMEs operators in Lagos state Nigeria.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of seventy (70) questionnaires were administered to respondents of which 65 were returned. The analysis of this study is based on the number returned.
CHAPTER FIVE
DISCUSION OF FINDINGS, CONCLUSION AND RECOMMENDATION
Introduction
This chapter discusses the findings by comparing what is established in this study with what other scholars have been established before in the literature review. It helps to draw conclusions as well as recommendations and other areas for future research. So this discussion is according to the study objectives.
Discussion of Findings
Assessment of the Impacts of MFI Loans in the Business Expansion of Small and Medium Enterprises
The results indicated that the majority of the respondents agreed on the increase of their fund, ability to cope with new technology and to compete, access to market as well as increased number of experienced employees as the result of loan. And this leads to the increased of branches, increased number of customer, creation of employment opportunities and profits has increased, improvement in standard of living as well as SMEs were able to enjoy economies of scale.
Similar sentiments were expressed by Kobla (2009) examines the impact of microfinance banks on small scale enterprises in the South Tongu district through the use of descriptive statistics. The study revealed that beneficiaries who benefitted considerably from the products of microfinance enjoyed increase in income, increase in equipment, creation of employment, and improvement in standard of living.
Also Brune (2009) examines empirically the impact of micro-finance institutions on the development of SMEs, concluded that there is empirical evidence for significant positive impact of micro-finance institutions on development of SMEs.
Therefore, growing bodies of knowledge have proven that microfinance was, and still continues to positively influence at household and individual levels.
Assessment on Whether Or Not MFIs Training Help That Small and Medium Enterprises to Improve Their Financial Status
The findings indicated that, loan along with training provided by MFIs help small and medium enterprises to maintain and improve their financial status of their business in terms of inventory, sales volume and assets which help SMEs reduce direct and overhead costs, increased net profits and income, improved market share and, reduced liabilities.
According to Obadeyi (2015) in his study titled the impact of microfinance on the development of small business in Nigeria, the study reveals that microfinance helps in creating sufficient finance and wealth, generating employment opportunities as well as enhancing household income.
Therefore, the researcher’s findings are not a seclusion with other studies elsewhere in the developing countries, though the researcher thought that SMEs in order to maintain financial credibility should be well educated concerning how much to pay and for what amount of loan due to the existence of insufficient knowledge on the matter of costs.
Assessment on whether MFIs provide A Better Chance for SMEs to Improve Their Productivity Capacity
The study revealed that, MFIs loan help their clients to secure quality inputs, equipments and machinery needed, access adequate and efficient infrastructure for the business. Hence, leads to low overall operational cost, improved balance of trade, and price has been reduced, as well as improved customer lead time.
According to Ayopo (2011), examine the effects of micro-financing on micro and small enterprises survival, growth, productivity and performance in south-west Nigeria. The findings revealed that though microfinance is not sufficient for growth and expansion of small business but it has positive effects on productivity and performance of entrepreneurs.
The Asia Pacific Economic Cooperation (APEC) (2003) revealed that the roles of micro finance institutions are very important for development of SMEs. At least two main goals of giving access for SMEs through development of micro finance institutions, namely: increasing business activity of enterprises through working capital or investment fund, and promoting and developing spirit of entrepreneurship. Therefore, without a close relationship between MFIs and SMEs their goals may not be achieved.
Hence, sufficient amount of loan together with proper utilization of loan can improve the performance of business productivity and generate more revenue and manage to repay back installment flexibly, therefore the researcher concurs with the above authors.
Assessment on Quality of Services Provided By SMEs after Receiving Loan
According to the findings it is indicated that due to the improvement in design of product, services delivery process and environment as a result of microcredit services cause the reduction number of customer’s complaint, waiting time for assistance has reduced as well as customer satisfaction has improved.
Also, the research thought that, MFIs should put more emphasis on improving the environment business which small and medium enterprises are operated in can help business to grow and improve quality of services provided.
Waithanji, S. W, (2011) studied the effect of microfinance credit on the performance of SMEs in kiambu Kenya, there should be provision of enabling environment for SMEs to grow, hence, there should be strategies developed which will enhance increased access to microfinance credit by SMEs.
Researcher discovered that, the impact of microcredit toward provision of quality services by small and medium business has not received adequate research attention in Tanzania. On realizing this gap, research came up with an idea that, MFIs should provide training as quality of services concern, and the great benefits of that is higher customer satisfaction which leads to an increase in demand repurchase, and retaining of customers.
It won’t only help them to perform well but also it will help MFIs to know the progress of client’s businesses and identify potential clients for disbursement.
Conclusion
Assessment of the Impacts of MFI Loans in the Business Expansion of Small and Medium Enterprises
The study revealed that through microcredit, individuals do manage to come out from a poor life style, since the income of households increased, which enabled them to fulfill their basic needs and hence vulnerability have been reduced.
Furthermore, microcredit can enhance the expansion of business of their clients when they decide to incorporate their services with training, supply of equipments and regular monitoring. Therefore, provision of sufficient funds could advance the creation of a new class of small entrepreneur leading to the expansion of middle class and a wider distribution of income.
Assessment on whether or not MFIs Training Help That Small and Medium Enterprises to Improve Their Financial Status
MFIs provide good and affordable financial services and help small and medium enterprises to maintain the self-sufficient financial sustainability, which directly have a positive impact on their livelihood.
High unknown costs, apart from interest rate, have been mentioned as being among the challenges in accessing credit facilities of MFIs which leads to poor performance; since some of the respondents found it very difficult to manage hence using their small working capital instead.
Assessment on whether MFIs Provide a Better Chance for SMEs to Improve Their Productivity Capacity
It has been noted that, through loan productivity capacity of small and medium enterprises has been improved as a result of ability to acquire equipments, quality inputs and easier access to infrastructure.
It is worth noting that MFIs provide better access to credit than the traditional banks. However, the research reveals that a good number of MFIs require tangible collateral security before loans are granted. This negatively affects the SMEs productivity because some are unable to provide the requested collateral.
Assessment on Quality of Services Provided By SMEs after Receiving Loan
The findings show that MFIs have also contributed toward the performance of SMEs through the provision of non-financial service such as business, financial and managerial training programmes, good customer care and frequent business follow up which reduces misappropriation of loans.
Furthermore, good design of products and services delivery process skills helps small business owners, managers and potential entrepreneurs to meet the challenges of today’s business environment in order to manage the ever-changing world and plan for future of their business.
This would be achievable because it is argued that “in order to pursue growth strategies effectively an entrepreneur requires business and marketing skills in order to improve management and marketing efficiencies” (Fisher, 1998).
Generally, most entrepreneurs have indicated that the operations of MFIs had positive impacts on their businesses in terms of increased financial credibility, market share, number of employment, sales revenue, net profits, and decreased liabilities.
Recommendation
In view of the findings made and conclusions drawn from the study the following recommendations are provided to help in the enhancement of an accelerated and sustained performance in the SME sector and also provide recommendations to help in the improvement of the services of MFIs.
- i) Therefore, it is recommended that MFIs and SMEs should be done sustainably. The Government should ensure that the institutions adhered to the laws and regulation of the country in a reasonable manner. MFIs and SMEs should be used in consideration to benefit the present and future generation. And this should be integrated into economic and other development plan which should be taken into account by applying financial objectives.
- ii) The researcher recommends that the performance of SMEs does not rely on access to credits and the creation of favourable and formidable business environment. And the factors which used to measure the success in MFIs may not be a success if their activities do not reflect in the performance of SMEs. Hence the activities should focus on the objectives of the institution.
- Researcher also found that proper and extensive activities should be provided for clients who are granted loans. The credits should be client oriented and not product oriented. Therefore MFIs have a great responsibility to ensure that the proper use of credit which was important tools when it comes to the business acceleration.
- Researcher recommends that financial training should be provided by MFIs on their regular basis. MFIs can research into very profitable business lines and offer credit to clients who having the capacity to exploit such business in order to reduce the rates in case of any default arises.
- Researcher also recommended that it is important to consider the reliability and ethical practices in order to avoid the occurrence of other indirect costs that may never be in knowledge of abilities to SMEs owners. This means that SMEs were driven by the credit terms as the basis for choosing the MFIs.
- Clients lack proper written records and how they separate business incomes from their private resources. It becomes complicated to measure incomes based on perception and not written records. Hence it recommended to SMEs to keep records which show their sales, expenses and profit.
- In order to maintain business potential it is recommended that, SME owners should use loan for business purpose and not in personal use like in traditional ceremonies such as “kutunzana”
REFERENCES
- Adams, D. and Picshke, J. D. (1992). “Microenterprise Credit Programs: Déjàvu” World Development, Vol. 20, issue 10, pp 1463-1470.
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- Ayyagari, M., Beck, T., and Demirgüç-Kunt, A. (2005). “Small and Medium Enterprises across the Globe” World Bank Working Mimeo. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi…pdf on 11th March, 2016.
- Bhatt, N. and Tang, S. Y. (1998). The Problem of Transaction cost on group-based micro lending: an institutional perspective. World Development, Vol. 32, issue 4, pp 623-37. Retrieved on 23rd September, 2015 from http://www. microfinance.com/…/Microenterprise_in_First_and_Third_Worlds.
- Chijoriga, M. M. (2000). “The Performance and Sustainability of Micro Finance Institution in Tanzania.” Working Paper. Retrieved on 21st December, 2015 from http://www.devnet.org.nz/conf/ Papers/cornford.pdf .
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