THE ROLE OF MICRO FINANCE INSTITUTIONS IN FINANCING SMALL SCALE BUSINESSES

ABSTRACT

The study on the roles of micro finance institutions (MFI) in Kaduna metropolis, base on a survey of five MFIs Yamans’s sampling technique was used to determine the sample size in this research work. Primary data was gathered through the administration of questionnaires. In testing the various hypotheses, the chi-square method was used. The findings indicated that there is inadequate knowledge on the part of small scale entrepreneurs on improved lending conditions of MFIs, clients’ apathy and the number of beneficiaries seems to be small. The recommendation given in the study include: information dissemination and Involvement of clients, proper documentation of records to meet the diverse loan requirements of clients and proper documentation of records by the Kaduna state ministry of commerce and Industry.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Studies on industrial development countries have shown that small and medium enterprises constitute a fundamental part of the industrial sector and play an active role and bring development to these countries. Over the year, the Nigeria economy has been dominated by large industries which are mostly multinational. This is obviously due to the government policies which encouraged and emphasized the development of these large industries at the at the expense of the small scale industries. Eventually, the Nigerian government recognized the development of small scale industrial as an imperative prerequisite for sustaining a well balanced industrial sector. Faust (2000) submits that four basic interrelated inputs are required to give impetus to their development. They included;

1. Favorable government policies and incentives
2. Technical assistance

• Managerial assistance

1. Finance assistance

Due to the uncertainties, the lower rate of return, the expense of administration and the mediocre expense of previous government lending programs, Faust added, financial assistance for the small entrepreneur has been lacking from both government and commercial source.

Consequently this heralded the institution dedicated to assisting small enterprises, the poor and households who have access to financial services. Institutions offering micro finance institutions are designed financial institutions dedicated to assisting small enterprises, the poor and households who have no access to financial services. Institutions offering micro finance services are very diverse, including commercial banks, community banks and state owned development banks.

The formal/traditional micro finance institution include: the Self help Groups (SHGS), or the rotating saving and Credit Associations (ROSCAs), and cooperative societies, while the formal/modern Micro finance institutions include universal banks, community Banks (Micro-MFIs), non-Government Organizations Micro finance Institutions (NGO-MFIs), public sector poverty alleviation agencies, special micro finance schemes and Donor Agencies. (Iganiga, 2008).

The central Bank of Nigeria survey (2001) indicated that the operations of formal micro finance institutions in Nigeria are relatively new, as most of them were registered after 1981. They operate in both urban to rural areas, the roles played by these institutions are diverse according to the scope of their operations which vary from social to economic roles, in other words, from financial inter mediation to technical and managerial assistance.

According to Anyawu (2004), the bulk of credit beneficiaries were women, as most of the micro finance institutions began as NGO that had the promotion of female welfare as the basis for their establishment. Apart from the general belief that women are marginalized in terms of economic opportunities and should therefore have separate promotional agenda, the MFIs are of the view that women perform better than men in managing meager resources and promoting micro enterprises.

Over the years, micro finance has emerged as an effective strategy for poverty reduction. Across developing countries, micro, small and medium enterprises are tuning to micro finance institutions (MFIS) for an array of financial services. Microfinance is acknowledged as one of the prime strategies to achieve the millennium development goals (Ehigiamusoe, 2005).

However, institutions and programs put input in place for this purpose, (micro financing) by government and individuals and group of individuals have at best recorded limited successes in securing wide access to sustainable micro credit as a critical instrument for growth and poverty reduction. It could be observed that most of the these policies and schemes relating to micro finance become moribund few years after initiation due to high operating cost, repayment process, weak access to refunding facilities, client apathy and drop out and internal control challenges among others (Iganiga, 2008) according to the Daily Trust news paper (2009), the micro finance policy of the federal government: is already bearing fruits in Kaduna State as the 18 community banks already been converted to micro finance banks and as January 2009, 23 of such have either been licensed or given approval in principled by the central Bank to operate.

One can say that the micro finance institutions have been performing below capacity over the years but with the additional liquidity provided by the recent banks Iganiga (2008) added, it is expected that the micro finance policy objectives would be realized which will move the Nigerian economy .to the attainment of the millennium development goals. This study is aimed at examining the roles of micro finance institutions in financing small seals businesses.

1.2       STATEMENT OF THE PROBLEM

A number of small scale businesses lack access to financial services from micro finance institutions, either for credit or savings, which further fuels the vicious cycle of poverty. Lack of access to micro finance institutions hinders small businesses to engage in new business ventures. Small scale business, industrialists have frequently faced discrimination from lending institutions since they are perceived to be less credit worthy. The challenge of micro finance institutions on the other hand, is how to efficiently improve lending practices and at the same time cover their operating cost so as to survive in the long run (Anyawu, 2004).

1.3       RESEARCH QUESTIONS

In other to fulfill the objectives of the study, the researcher attempt to answer the following questions.

1. To what extent have the micro finance institutions supported the operations of small scale business?
2. To what extent have small scale businesses benefited from the credit scheme designed for them?

• Are the small scale businesses making good use of their advances?
• Will this loan given by micro finance institutions improve the general performance of the small scale business?

1.4       HYPOTHESES OF THE STUDY

A hypothesis is a preposition that is stated in a testable form and predicts a particular relationship between two or more variables. By ―test‖ we mean either to confirm it or to prove it wrong (Baily, 1987). The hypotheses in this case are:

Hypothesis I

HO = micro finance Institutions do not support the operations of small scale businesses in Kaduna metropolis.

Hypothesis II

HO = small scale businesses have not benefited from the credit scheme designed for them by micro finance institutions Kaduna metropolis.

Hypothesis III

HO = small scale businesses are not making good use of their advances from micro finance institutions in Kaduna metropolis.

Hypothesis IV

HO  =  the  loan  given  out  by  micro finance  institutions  in  Kaduna  has  not  improved  the  genera: performance of the small scale businesses in Kaduna state.

1.5       OBJECTIVE OF THE STUDY

The general objective is to examine the role of micro finance institutions in finance small scale businesses in Kaduna metropolis. Apart from the general objective, the research work also aimed at the following objectives:

1. To find out extent to which micro finance institutions have supported the small scale business?
2. To find out the extent to which the small scale businesses benefited from the credit scheme designed for them by micro finance institutions.

• To find out if the small scale business are making good use of their advances.

1. To find out if the loan given by micro finance institutions have improved the general performance of small scale business

1.6       SIGNIFICANCE OF THE STUDY

The relevance of the roles played by modern micro finance institutions cannot be overlooked. When the objectives of this study are achieved it will go a long way to create awareness among small and medium entrepreneurs about the existence of MFIs as well as correct the perceptions of small and medium entrepreneurs that have unfounded reservations about the operations of the modem MFIs. The study may provide solutions to the challenges faced by modern MFIs in services delivery and provide a platform for the improvement of their services which the state economy undoubtedly needs to attain the millennium development goals. The research may help entrepreneurs and managers understand the major role of micro finance institutions in financing small scale businesses as well as how to benefit from the loans given to them by these institutions. It will also serve as a guide or reference to scholars and writers who need to know more about micro finance role in financing small scale businesses.

1.7       SCOPE AND LIMITATIONS OF THE STUDY

The study attempts to find out the role of micro finance institutions in financing small scale businesses and will be limited to Kaduna metropolis. The small scale businesses that are covered are; hair dressing industry and agricultural industry.

In the process of carryout this research, some constraints are identified and these include; the unwillingness of the micro finance banks to release relevant information (facts and figures) of individual amounts of small scale businesses.

Another major constraint is the secret nature of some of the small scale businesses in Kaduna metropolis, in the sense that they operate without the necessary permit and registration formalities required for their legal existence. This in turn, tends to create suspicion from the board of internal revenue. Time and finance has constrained on the researcher to perform a more thorough research. This is due to the internship program running simultaneously as at the time the research work was done and under a time frame.

The need to define some of the key terms that were frequently used in this study cannot be over looked.

Micro finance institutions (MFIs): are designated financial institutions dedicated to assisting small enterprises, the poor, and the households who have no access to the more institutionalizes financial systems, in mobilizing savings, and obtaining access to financial services. (Elahi et al 2004).

1. Micro finance: is defined as the provisions of very small loans (micro – credit) to the poor, to help them engage in new productive business activities and/or to grow/expand existing ones. (Kimotho, 2005).

1. Small medium enterprises: this is an outline which requires small amount of capital and has some reasonable number of employees. (Anderson 1998)
2. Micro credit is broadly recognized as the practice of offering small, collateral – free loans to members of cooperation’s who otherwise would not have access to the capital necessary to begin small businesses (Hossain, 2002).

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