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IMPACT OF MICROFINANCE BANKS ON THE PERFORMANCE OF SMALL
BUSINESSES IN ILORIN METROPOLIS
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Micro and small businesses are believed to be the engine room
for the development of any economy because they form the bulk of business
activities in a growing economy like that of Nigeria (Ashamu, 2014). Since
Nigeria attained independence in 1960, considerable efforts have been directed
towards industrial development. The initial efforts were government led through
the vehicle of large industry but lately emphasis has been shifted to small and
medium scale enterprises following the lessons learnt from the success of micro
and small enterprises (MSEs) in the economic growth of Asian countries (Ojo,
2003). Thus, the recent industrial development drive in Nigeria according to
Abiola (2012) has now focused on sustainable development through small business
development.
The contribution of
micro and small enterprises (MSE) to the economic growth and sustainable
development is globally acknowledged (CBN, 2004). They form an important part
of the business landscape in any country, but they are however faced with
significant challenges that inhibit their ability to function and contribute
optimally to the economic development of many African countries. The position
in Nigeria is not different from this generalised position (NIPC, 2009 as
indicated by Abiola & Salami, 2011). In line with this, Owualah, Carpenter,
Lawson and Anyanwu (as cited by Abiola 2012) identified lack of access to
finance as one of the major constraints to successful small business
performance. The reason is that provision of financial services is an important
means for mobilizing resources for more productive use (Watson & Everett,
1999). The extent to which small businesses can access funds determines the
extent to which they can save and accumulate their own capital for further
investment, but small businesses in Nigeria find it difficult to gain access to
formal financial institution such as commercial banks for fund (Holmes &
Kent, 1991).
Abdul (2008) cited that a study carried out by Rweyemamu,
Kimaro and Urassa (2003) also revealed that, formal financial institutions have
failed to serve the small business in both urban and rural communities. It was
also emphasized by Ogawa and Suzuki (2000) that bank do not want to offer loans
to MSEs because the nature of loans required by the informal sector is too
small and those banks find it more expensive to offer such loans. In line with
this, Chijoriga and Cassimon (2000) are
of the opinion that most of the
conventional institutions regard low- income households as too poor to save, do
not keep written accounts or business plans and they usually borrow small and
uneconomic sums as such they find it difficult to extend their credit
facilities to them.
The dismal performance of the conventional finance sectors
coupled with the need to fill the credit gap created by these same conventional
financial institutions through haemal social networks triggered the avocation
of microfinance by policy makers, practitioners and international organisation
as a tool for poverty reduction and provision of credit facilities to low
income earners (Nwanchukwu & Mejeha 2008). According to Ronaldo (2010),
microfinance is a good way of supporting entrepreneurs and small businesses
because it provides poor borrowers with access to sustainable funds through
granting of zero or very low interest loans. The establishment of microfinance
banks as an effort by the government to improve access to loans and savings
services for small businesses through microfinance banks (MFBs) and other
microfinance institutions (MFIs) is currently being promoted as a key
development strategy to enhancing poverty eradication and economic development
(Alalade, Amusa & Bolanle, 2013). In line with this, Abimiku (2000) also
asserted that finance is the pre-occupation of the banking industry that brings
together the factors of production such as land labour, and entrepreneur.
According to Babagana (2010), there is no doubt that small businesses need the
assistance through microfinance banks to become sustainable and competitive,
thus the promotion of small businesses has been carried out by subsidizing
credit, providing preference treatment and target location for business.
1.2 Statement of the Problem
The establishment of microfinance banks arose as an effort of
the government to cater for the financial needs of the informal sector who find
it difficult to access funds from the conventional banks (commercial banks) due
to insufficient collateral, small amount of loan transaction and low earning
capacity (Olowe, Moradeyo & Babalola, 2013). However, the financial and
credit needs of the informal sector which are the major target for the
establishment of microfinance banks have
not been adequately met by the banks as they
face challenges in accessing the facilities rendered by the microfinance
banks . In the light of this, this research work investigates the impact the
microfinance banks have on the performance of small businesses, who are the
major constituents of the informal sector in terms of productivity,
profitability and sustainability and continuity.
1.3 Research Questions
Based on the statement of problem, the following research
questions were raised
i. What impact do microfinance banks have on the performance
of small businesses?
ii Has micro financing improved the productivity level of
small businesses?
iii Does microfinance credit increases the profitability of
small businesses?
iv In what ways will the continuity of small business be
determined by micro financing?
1.4 Objectives of the Study
The main objective of the study is to evaluate the impact of
microfinance banks on the performance of small businesses in Ilorin metropolis.
While the specific objectives are to
i Determine if the services rendered by microfinance banks
have improved the performance of small businesses
ii Analyse the impact microfinance services has on the
productivity level of small businesses.
iii Ascertain the impact of microfinance credit on the profitability of small businesses.
iv Find out the impact of microfinance services on the
continuity of small businesses.
1.5 Hypotheses of the Study
Based on the research questions the following hypotheses were
formulated
HO1: There is no significant relationship between services
rendered by microfinance bank and small business performance
Ho2: There is no significant relationship between micro financing
and the productivity level of small business
Ho3: There is no significant relationship between
microfinance credit and the profitability of small businesses
Ho4: There is no significant relationship between
microfinance and the continuity of small businesses
1.6 Justification of the Study
Many researches have been done relating to this study, such
as Babajide (2012) who examined the effects of microfinance banks on micro and
small enterprises (MSEs) growth in Nigeria, Oyeniyi (2014) who investigated the
influence of Microfinance bank on the performance of small businesses at the
community level and Ashamu (2014) who studied the impact of micro finance on
small scale business in Nigeria. However, not so many researches have been
carried out on the impact of microfinance banks on the performance of small
businesses in urban areas like Ilorin in which this study was conducted. This
study is therefore justified in filling this observed gap by examining the
various services rendered by microfinance banks in order to determine its
impact on the performance of small businesses in Ilorin metropolis in terms of
profitability, productivity, continuity and also to provide empirical evidence
on the impact of micro credit on the short term and long term performance of
small businesses.
1.7 Scope of the Study
Majority of small business are either individually owned or
family owned, have a low capital base, are located in urban and semi urban
areas and largely reside in the informal sector (Ojo, 2003). The research work
therefore focuses on the various small businesses in Ilorin metropolis in order
to analyse what impact the microfinance banks have on their performance.
1.8 Definition of Terms
• Micro enterprise: Micro- enterprise is the informally
organized business activity undertaken by entrepreneurs; excluding crop
production by convention, employing less than ten people and having assets less than N5 million
excluding land and building ( Abiola, 2011).
• Micro and Small Business: According to Babajide (2012), The
MSE nomenclature is used to mean Micro and Small Enterprises. It is sometimes
referred to as micro, small and medium enterprises (MSMEs). A small business is
any business that is independently owned and managed; started with little
capital and is being operated using a few number of employees to produce goods
and services to satisfy the needs of the local community for profit.
• Microfinance Banks: Microfinance Banks are licensed
financial institutions meant to serve the un-served, but economically active
clients in the rural and peri-urban areas by providing diversified, affordable
and dependable financial services to the active poor, in a timely and
competitive manner, which would enable them to undertake and develop long-term,
sustainable entrepreneurial activities and mobilize savings for intermediation
(CBN, 2005).
• Microfinance Institutions: Microfinance Institutions are
organizations whose activities consist wholly or in significant part, of the
provision of financial services to micro entrepreneurs.
• Microfinance: By definition microfinance is described as
the provision of appropriate financial services to significant numbers of low
income, economically active people with an end objective to alleviate poverty (
Ledger wood, 1998).
• Microfinance Services: These are servies rendered by
microfinance banks and these icludes; provision of cheap or low interest loan,
savings, advisory services, training services, micro insurance and microcredit.
• Microcredit: Microcredit is commonly defined in terms of loan
amount as a percentage of average per capita income. In the context of Nigeria,
with a GDP per capita of N42,000 (about $300) in 2003, loans up to N50,000
(around $350) will be regarded as micro loans (UNDP, 2009 as cited in Dunn,
2012).
• Small Business Performance: Enterprise performance implies
attributes that show changes in volumes
of activities or physical size. It indicates the enterprises ability to
prevail. When these changes are increasing the performance is generally
positive. These attributes i.nclude profitability, productivity, employment
levels and expansion in physical facilities
• Profitability: A typical enterprise defines profitability
as follows: Gross Margin = (Sales - Cost of Goods Sold) ÷ Annual Sales.
Profitability reflects the financial performance of an enterprise.
• Productivity: Productivity is an overall measure of the
ability to produce a good or service. More specifically, productivity is the
measure of how specified resources are managed to accomplish timely objectives
as stated in terms of quantity and quality.
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