The impact of microfinance banks on the growth of small and medium scale enterprises in illorin metropolis

Abstract

In today’s knowledge on economy, firm performance and competitive advantage are derived more from what a firm knows and the human capital that permits the firm to use what it knows. Thus human capital has been identified as one of the most critical agents of SMEs performance while human capital development has been recognized as one of the most vital tools for improving SMEs performance. This research therefore offers a field  of insight into the relationship between human capital development and SMEs performance in illorin through a survey of randomly selected SMEs operating in illorin metropolis. This research therefore recommends that SMEs operators should actively promote participation in seminars, trade fairs, workshops and exhibition in order to acquire current knowledge that will positively impact on the performance of the SMEs and enhance their capacity for growth and survival.

CHAPTER ONE                                                 INTRODUCTION

1.1 Background of 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. 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, considered critical to engineering economy development and growth. 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 on personal assets for working capital, thus 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 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 illorin metropolis. This specific objective include the following:-

(i) To examine the nature of SMEs financing before MFBs establishment.

(ii) To examine the role of microfinance banks’ in the growth of SMEs in Ilorin metropolis.

(iii) To examine the problems Microfinance banks face in providing finance to SMEs.

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

1.4 Research question

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

(ii) What are the different roles that 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

1.5 Significance of the study

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 like 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 and limitations of the study

For the purpose of this study as the topic depicts, the scope of this research will be focused on the impact of microfinance banks on the growth of small and medium scale enterprises in illorin metropolis.

However, the study has some constrained and limitations which are:-

(a) Availability of research material:-

The research material available to the researcher is insufficient, thereby limiting the study.

(b) Time

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

(c) Finance

The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.

1.7 Hypothesis of the study

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

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

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

(iii) The services rendered by MFBs have no significant difference on the growth of SMEs.

1.8 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.

SMEs:

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 employing others to work for him.

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 strength.

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