CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
The major problem facing African nations (including Nigeria) today is the eradication of poverty which every government has built in as part of its development programme. This research examines the effects of micro financing on and Medium Enterprises (SMEs) development in Nigeria. Tracing backward historical policies of Federal government of Nigeria on the Small and Medium Enterprises enhancement especially in relation to financial challenges which brought about schemes and policies include: Small and Medium Enterprises Equity Investment schemes (SMEEIS), the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), NDE, NEEDS, the Bank of Industry and Community Banks transformed to Micro Finance Banks (MFBs) under the supervision of the Central Bank of Nigeria (CBN).
The concept of microfinance started in the late '70s and early '80s. The first organization to receive attention for its success was the Grameen Bank, which was started by Muhammad Yunus in Bangladesh.
The global importance of Microfinance Institutions in poverty reduction, grass root business financing has created a compelling need to design strategies for providing financial service to the vulnerable, poor and low income group on a sustainable basis. Owing to the peculiar condition of the poor, these services were originally provided at subsidised rates through non-governmental organisations and self-help groups by donors and government.
This research intends to contribute to the array of literature written by different scholars on Microfinance and SMEs development. SMEs in Nigeria have the tendency to serve as sources of livelihood to the poor, create employment opportunities, generate income and contribute to economic growth. Despite its increasing roles, its accessibility to credit remains one major constraint.
However, Small and Medium scale Enterprises play important economic and social roles in employment creation and generation, economic growth and development, important linkages with larger enterprises, social security, creativity and innovations, financial markets profitability and growth (Olumide, 2011).
Microfinance is a form of financial development that has its primary aim to alleviate the poverty of the poor who are generally remained un-served or were offered improper financial service. Bank and other financial institutions are currently estimated to provide services to only 25% of potential clients worldwide. This was cited by (Mohammad, 2007) opined that only 2% of micro entrepreneurs are being provided service by banks.
However, government at all levels recognised the need to encourage the small enterprises through the provision of credit schemes and policy reforms which brought about the emergence of Micro Finance Banks the Federal Government of Nigeria introduced during the Obasanjo regime to replace the formal community Bank in Nigeria which became operational in 2005.
Nigerians in line with their governments acknowledge the need to alleviate poverty and encourage SMEs, through the provision of credit and inform policy reforms with respect to bringing the Microfinance Banks under the supervision of Central Bank of Nigeria to create enabling environment for SMEs access to small loans.
More so, to ensure that the mission of the policies were achieved, which include ensuring that the majority of the active population are reached with financial services, and that total credit as a percentage of Gross Domestic Product (GDP) ratio increase steadily, as well as micro credit as a percentage of total credit to the economy. Equally important was the need to improve access of poor active most especially women to microfinance on a consistent basis (Attah, 2008).
Finally, the other chapters arrangements were as follows: The second section reviews literatures by different authors on alternative financial sources available to SMEs and challenges facing SMEs in reaching them. The third and fourth sections describe the methods applied in collecting and analyzing data, while the last two sections represent data presentation and findings, and conclusion respectively
BACKGROUND OF THE COMPANY
Al-Barakah Microfinance Bank was incorporated in May 2, 2009. It was granted a Microfinance Bank license on February 3, 2010. Commenced business operations on April 6, 2010 Corporate head office is at 67, Ladipo Street, Mushin, Lagos. The Bank was owned largely by institutional investors and several individual investors. Raised share capital of N52 million. Now has been increase to N100 million. The customer Cash Points were at Surulere, Shomolu, Agege and Owode Onirin area of Lagos State.
OUR VISION: “To be the best Microfinance Bank in Nigeria committed to excellent customer services and delight”
OUR MISSION “We exist to make the businesses of our customers blessed and successful through provision of ethical financial services, using the right technology, committed and resourceful employees”
OUR CORE VALUE: FACTS
Faith: Belief in God from which flows qualities of consideration, respect and fairness.
Accountability: We are accountable to God as well as to our customers, in the way we run our operations.
Customers care: We are customer centric; utmost customer satisfaction is key to us.
Trust: Your money is our trust and we shall do everything to live up to the trust.
Service: We believe in quality service delivery.
OUR PRODUCTS: Savings Account, Current Account, Special Accounts include: Unique Mothers Modest Ultimate Savings Account(Ummus), Baby Bond/Young Person Savings, Sallah / Other Festival Savings, Business Growth Savings, Ethical Investment Savings, Al-Barakah e-Susu Saving, Hajj/Umrah Savings, Mosques & Organizations Support Savings among others for individuals and corporate customers.
STATEMENT OF PROBLEM
In view of government aims to tackle financial challenges facing Small and Medium Enterprises (SMEs) over years, there are ways to encourage and improve indigenous participation at real sector of the economy that can translate to improved GDP.
Sequence to the above roles performed by governments at all levels on SMEs, there were noticeable challenges faced by same such as long, cumbersome and time consuming process of incorporation or business registration to afford the business easy access to better funding opportunities. Another challenge is the inability of most SMEs to provide collaterals for loan security creates misalignment that further compounds the existing funding gap (Olumide, 2011).
However, this research has indentified major challenges of the SMEs ranges from poor capacity of newly established MFBs to fund, CBN policy on MFBs single oblique limit, undefined interest rate for MFBs, price inflation rate on raw material, non availability of some basic infrastructures like roads networks, electric power, among others.
RESEARCH QUESTIONS
In other to achieve the identified objectives the following questions would be relevant in proffer reasonable conclusion:
What are the positive differences that happen to SMEs financing since establishment of MFBs in Nigeria?
What is the financial capability of MFBs to meet the financial needs of SMEs with CBN lending policy?
Examine whether there is difficulty in accessing loan from MFBs by SMEs?
OBJECTIVE OF THE STUDY
This research study investigates the effects of microfinance on SMEs, which would centre on two broad variables; the dependent variable which is the SMEs development and the independent variable which is Microfinance institutions.
Other objectives include to;
Examine whether there is positive impacts of MFBs on SMEs financing since inceptions.
Examine the MFBs capital adequacy by providing cooperate loans to their customers including SMEs.
Examine SMEs accessibility to MFBs Loans/credit products.
Ascertain whether there is other financing options available to the SMEs
HYPOTHESIS OF THE STUDY
However, the following hypotheses are proposed in the course of this study.
Null hypothesis: There are no significant effects of microfinance institutions on the SMEs development in Nigeria.
Alternative hypothesis: There are significant effects of microfinance institutions on SMEs development in Nigeria.
SIGNIFICANCE OF STUDY
This topic became attractive among others because my personal experience and familiarity with micro financing activities. Also to put into test the assumption of generic and unsealing interest rate to MFBs. This means that interest rate should be regulated by force of demand and supply for fund at grass root in line with the corresponding variables involved (i.e. Micro finance bank and SMEs) with respect to the well being of the Nigerians at grass root of the economy. The recent increase in the CBN direct supervision and guidelines for the micro finance bank to concentrates on SMEs.
1.8 SCOPE AND LIMITATIONS OF THE STUDY
Specifically on this work, there were some constraints that affect the extent and detailed as planed which include available time, fund among others. The research findings and data collected were subject to the constraint stated and conclusions with recommendations were made therein. Reasonably and reliably the information gathered through personal interview and questionnaires were treated confidential.
1.9 DEFINITION OF TERMS
Micro finance institutions (MFBs): are the grass root banks formally known as community banks but currently known as Micro finance banks.
SMEs: Small and Medium scale Enterprise
CBN: Central Bank of Nigeria (that is the apex bank in Nigeria)
Economic active poor: The entrepreneurs, who have business ideals, experience and have little or no capital to establish on their own.
GDP: Gross Domestic Products are the total goods and services produce by all citizens of a country either at home or abroad at a particular period (usually a calendar year)
Development: Maturity; Optimum; Advancement.
CHAPTER TWO
LITERATURE REVIEW
2.1 INTRODUCTION
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.
2.2 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.
2.3 VARIOUS DEFINATIONS 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”.
2.4 GOVERNMENT INTERVENTIONIST POLICIES
SMEs have played important roles in the development process in most developed economies, and have proved to be the most viable engines of economic growth and development. The successes recorded by these countries were because of serious consideration of the future rewards from sustained investment in this sector. Due to their size and scope of operations, these enterprises require relatively small capital investment to start, thereby offering a relatively high labour-to-capital ratio. They also demand low technology and managerial skills, which are readily available within the society.
The government has begun to address the constraints that impede their growth by taking the following steps:
Merge all SME/Industry financing agencies comprising the Nigerian Bank for Commerce and Industry (NBCI), NERFUND, and the Nigerian Industrial Development Bank (NIDB) into one agency – The Bank of Industry - to administer loan schemes to SMEs at lower than commercial rates.
Set up a Small and Medium Industries Development Agency (SMIDA), an umbrella agency to coordinate the development of the SME sector.
Establish a National Credit Guarantee Scheme for SMEs to facilitate this access to credit without stringent collateral requirements.
Revive the Entrepreneurship Development Programme.
Increased budgetary allocations for SMEs development.
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