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THE ROLE OF
MICROFINANCE IN SMALL SCALE ENTERPRISE
ABSTRACT
This
research work was undertaken to roles of microfinance banks in financing small
and medium scale enterprise. The work was intended to achieve the following
objectives to ascertain the extent to which micro finance bank has been
assisting in providing credit facilities to small scale industrialists, to
determine the cost of variability in small scale industrial financing by micro
finance bank. The literature review also describe objectives and functions of
the microfinance bank, roles of microfinance policy and importance of micro and
small scale enterprises in Enugu state and Nigeria as a whole. All the aspect
of this work is relevant to both management and those who may be interested in
carrying out further study on this topic. Relevant data were collected from
both primary and secondary sources. Questionnaire was the main primary data
instruments employed while data from various relevant publications such as
textbooks, journals and internet articles constituted the sources of secondary
data. The data collected were analysis using simple tables and percentage analysis.
The study observed that Microfinance Bank performances were very impressive
during the period under study especially in making fund available for small and
meduim scale enterprise in Enugu state; although it based on operation or
services on savings deposit account, loan and advances (credit facilities) to
customers and few small scale industrialists and also payment of salaries to
workers of different organizations. The study recommended that In order to
reduce the risk of doubtful credit or facilities, the government should
increase the percentage grants to micro finance banks for small and medium
scale enterprises and also put more emphasis on credit guarantee scheme by
introducing more of such scheme for the benefit of small and medium scale enterprises.
Finally, the government and management of micro finance bank should emphasize
on collateral as a condition for granting credit facility to small scale
business in Nigeria.
CHAPTER ONE
INTRODUCTION
BACKGOUND OF
THE STUDY
In the past, government has initiated
series of micro programmes targeted at the poor with the overriding objective
of making credit readily available to those who were traditionally denied
access to credit. Such credits in the world over were used for the development
of small and meduim scale enterprise, which has been described as the
springboard for sustainable development. In all emerging economies like
Nigeria, the government has shown a great concern for the development of small
and meduim scale enterprise because of the underlying socio economic factors
plaguing the nation. some of the reasons include: the past policies failed to
generate efficient self sustaining impetus needed to uplift the country to the
‘take-off’ stage of growth, the increased emphasis on self-reliant approach to
the development and the recognition that dynamic and growing petty-business can
contribute substantially to a wide range of developmental objectives. However,
the full potential of the micro business in the development process have not
been realized owing to numerous bottlenecks. In the light of this, the Central
Bank of Nigeria (CBN) as part of its reform agenda, initiated Micro Finance
Banks, a policy initiative aimed at bringing credit to the door step of the poor
who do not have such access under the conventional financial system. The thrust
of this project is to articulate the prospects of the micro finance banks
towards boosting the performance thereby reducing the level of poverty and
enhancing employment generation.
Micro
finance banking institution were conceived and came into been in December 2007.
It was packaged to address the issue of cultivating appropriate modern banking
habits in the rural area, through the social local institution such as
community social clubs and other individuals who are encouraged to be co-owner
of the bank through the purchase of shares. The government came in as a second
tier supervisory agency through the National Board of Micro Finance Bank
(NBMFB) to oversee the establishment and operation. From December 2007, a total
of 402 community now micro finance Banks came into being with a total deposit
of =N=20 million. Loan and advances disbursed to individuals and enterprises
stood at (=N= 155.1million) all these are with share capital cash of (=N=239.8
million). To complement the efforts of microfinance banks in mobilizing the
rural infrastructures and directorate for social mobilization (MAMSER) by
virtue of their grass roots oriented programmes conducted extensive research
into the introduction of the microfinance banking system in area that it will
be of good benefit to the people. Okafor (1992), in his reports for micro
finance banks being the main link between the formal and informal financial
sectors.
It is now common knowledge according to
Egbe (2000) that the 1980s witnessed a rapid growth of commercial banking
activities in many Nigerian rural communities where banking habits, culture,
commitment and community development was poor if not non-existent. It is instructive
to note that during this period, community funds among rural dwellers were
hardly gathered for savings and loans in order to stimulate domestic
investment. Suffice it to say that in rural communities, the rural business
class hardly seeks formal institutional credits to improve their economic base.
It would be observed that, despite the
presumed developments in the Nigerian economy, the country is still largely
being regarded as a developing country (Onyema, 2006). More so, its industrial
growth is not quite impressive. Before the emergence of formal microfinance
institutions, informal microfinance activities flourished all over the country.
Traditionally, microfinance in Nigeria entails traditional informal practices
such as local money lending, rotating credit and savings practices, credit from
friends and relatives, government owned institutional arrangements, poverty
reduction programmes etc (Lemo, 2006). The Central institutions in Nigeria are
relatively new, as most of them never registered after 1981.
Before now,
commercial banks traditionally lend to medium and large enterprises which are
judged to be credit-worthy. They avoided doing business with the poor and their
micro enterprises because the associated cost and risks are considered to be
relatively high (Anyanwu, 2004).
Barbara (1999), posit that the need for
microfinance banking among rural dwellers has been on the increase, and as
such, between 1989 and 1990, the Federal Government initiative aimed at
actualizing this growing need expanded the rural banking scheme with the
launching of Peoples Bank and Community Bank respectively. To make borrowing
easy enough for rural communities, these banks do not require sophisticated
collateral for borrowing. Also, interest on borrowed money was made as low as
possible by the two banks to enable small-scale rural community industrialist
and agriculturist to borrow with ease. Today, many rural communities in Nigeria
have one or more of this microfinance bank, and they have had far more reaching
implications for the entire socio-economic development of rural communities in
Nigeria. It is worthwhile to note, according to Usang (2006), that many would
recall how lack of funds often caused the collapse of small businesses and the
extinction of ingenious ideas before they could be translated into reality.
It is now
widely believed that following government’s acclaimed policies on rural
development, rural investment will be given a boost via microfinance banking as
all frustrations of our hardworking, devoted but under-privileged masses would
come to an end. However, the idea behind microfinance banking is to encourage
rural development through rural commitment in modern financial institutions
within the rural environment.
Thus,
microfinance banking is supposed to be the machineries for financial and
economic emancipation as its growth is connected with the community in which it
serves. It is therefore not certain whether or not micro-finance banks actually
impacts on small and meduim scale businesses
in the rural communities.
STATEMENT OF
THE PROBLEM
The financing in most cases in normally
provided by the owners. The owners fail to realize the importance of external
source of capital in order affect expansion in the business; in most cases, the
by the owner, members of the family and friends in most cases. In another
development, small and medium enterprise experiences difficulties in raising
equity capital from the finance houses or individuals. Even when the finance
house agrees to provide equity capital, the conditions are always dreadful. All
these result to inadequate capital available to the sector and thus lead to
poor financing. This is the bane of most cottage industries in Nigeria. About
80% of small and medium enterprises are stifled because of this problem of poor
financing and other problems associated with it (Chukwuemeka, 2006). The
problems that emanated from poor financing include:
a) Lack of
competent management which is the consequence of inability of owners to employ
the services of experts. b) Use of obsolete equipment and methods of production
because of owner’s inability to access new technology. c) Excessive competition
which resulted from sales which is a consequence of poor finance to cope with
increased competition in the industry.
The statement of the problem or
challenges facing micro finance bank in financing small and meduim scale enterprises in Enugu are:
i. High Operating Cost: Small units of
services pose the
challenges
of high operating cost, several loan applications to be processed, numerous
accounts to be managed and monitored, and repayment collection to be made from
several locations especially in rural communities.
ii. Repayment Problem: Loan default is a
major threat
to micro
finance banks’ sustainability; it is the deadly “virus” which affects the
operation of the banks. It demoralized staff and deprives beneficiaries of
further valuable services.
iii. Inadequate Experienced Credit Staff:
Micro
financing is
more than dispensing loans, to be viable micro finance banks require
experienced and skilled personnel. As a young and growing industry, there is a
dearth of experienced staff in planning, product development and effective
engagement with clients.
iv. Problems Of Illiteracy: This affects
record keeping
and
decisions-making ability of borrowers and consequently affects their
relationship with the banks.
OBJECTIVE OF
THE STUDY
It
is against this backdrop that the purpose of this work attempts to ascertain
the role of microfinance banks in small and meduim scale enterprise in Enugu
State, and specifically:
1.) To Identify and analyze the effect of
microfinance banks on socio economic development i.e. employment and income
generation of the rural communities in state.
2.). To examine the influence of microfinance bank
credit subsidy, interest etc, on the level of credit demand by small scale
businesses.
3.) To ascertain the extent to which
Microfinance Bank has been assisting in providing credit facilities for rural
development and problems hindering the assistance.
4.) To identify the problems encountered by
small scale business in obtaining credit facilities from Microfinance Bank.
RESEARCH
QUESTIONS
The following research question guided this
study
1. Do you think that microfinance
banks have played a significant role in small and meduim scale enterprise in
Enugu State?
2. Have the microfinance banks
positive effect on socio economic development of Nigeria as a whole?
3. To what extent has
Microfinance Bank assisted in providing credit facilities for rural development
and problems hindering the assistance?
4. What are the problems
encountered by businesses in obtaining credit facilities from Microfinance Bank
in Enugu?
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