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ABSTRACT
This study
is on micro-credit and Small and medium scale enterprises (SMEs): loans
accessibility, and profit impact on SMEs. My main aim of carrying out this
research is to investigate if micro finance institutions issue out loans to
SMEs, and the impact of micro-credit on the profitability of SMEs and problems encountered
by these institutions. Also other programs similar to micro finance and models
of findings in other countries were pointed out. In the review of related
literature area, such as their objectives, their past performances were carried
out thoroughly using primary data (questionnaires). Collected data where
analyzed, summarized, and interpreted accordingly with the aid of descriptive
statistical techniques such as total score and simple percentage, using pie
charts and tables. Chi square technique was adopted. Based on the findings of
this study, the researcher found out that SMEs have greater access to
micro-credit, and MFIs has contributed to Business, Financial and Managerial
Training of SMEs. Also, SMEs face challenges such as Inability to provide the
collateral securities in cases where they are demanded, and high interest rate.
Finally, the researcher recommended that credits should client-oriented and not
product- oriented, proper and extensive monitoring activities should be
provided for clients who are granted loan, and business and financial training
should be provided by MFIs on a regular basis.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
There are
many types of microfinance institutions depending on structure, function or philosophy.
In many instances, the microfinance market is segmented according to the
clients involved i.e. micro-enterprises, small and medium scale business
enterprises (SMEs), women, agriculturalists and so on. A main goal of many
micro finance institutions is to provide sustainable micro finance facilities
to the poor to facilitate income generation and reduce poverty (Baumann, 2001).
The genesis of this is that the poor lack access to financial services, credit
and savings facilities.
Microfinance
encompasses the provision of financial services and the management of small
amounts of money through a range of products and a system of intermediary
functions that are targeted at low income clients. (Asiama, 2007).
Indeed, the
concept of microfinance is not new in Nigeria. There has always been the
tradition of people saving and/or taking small loans from individuals and
groups within the context of self-help to start businesses or farming ventures.
Over the years, the microfinance sector has thrived and evolved into its
current state, thanks to various financial sector policies and programs
undertaken by different governments since independence.
Small and
medium scale business group is characterized by lack of access to credit, which
constrains the development and growth of that sector of the economy. Clearly,
access to financial services is imperative for the development of the informal
sector and also helps to mop up excess liquidity through savings that can be
made available as investment capital for national development. It is known that
loans advanced by microfinance institutions are normally for purposes such as
housing, petty trade, and as “startup” loans for their businesses. (Asaima,
2007)
Micro
finance has several benefits for developing nations. Microfinance institutions
(MFIs) have become the main source of funding micro enterprises in Africa and
in other developing countries.
Small and
Medium Enterprises (SMEs) are commonly believed to have very limited access to
deposits, credit facilities and other financial support services provided by
deposit money banks. This is because these SMEs cannot provide the necessary
collateral security demanded by these formal institutions and also, the banks
find it difficult to recover the high cost involved in dealing with small
firms. In addition to this, the associated risks involved in lending to MSEs
make it unattractive to the banks to deal with micro and small enterprises
(World Bank,1994). Statistically, small enterprises are reported to have high
failure rates making it difficult for lenders to assess accurately the
viability of their enterprises, the abilities of the entrepreneur, and the
likelihood of repayment.
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.
Micro-finance, on the other hand, according to Otero (1999) is not just about
providing capital to the poor to combat poverty on an individual level, it also
has a role at an institutional level. It seeks to create institutions that
deliver financial services to the poor, who are continuously ignored by the
formal banking sector.
Littlefield
and Rosenberg (2004) argue that the poor are generally excluded from the
financial services sector of the economy so MFIs have emerged to address this
market failure. By addressing this gap in the market in a financially
sustainable manner, an MFI is part of the formal financial system of a country
and so can access capital markets to fund their lending portfolios, allowing
them to dramatically increase the number of poor people they can reach (Otero,
1999). More recently, commentators such as Littlefield, Murduch and Hashemi
(2003), Simanowitz and Brody (2004) and the IMF (2005) have commented on the
critical role of micro-credit in achieving the Millennium Development Goals.
However,
some schools of thought remain skeptical about the role of micro-credit in
development. In the light of this, the study would find the relationship
between SMEs profitability and MFIs loan and to ascertain whether the
operations of the former have any effects on the growth of the latter.
1.2 Statement of the Problems
Provision of
microfinance services that can have a sustainable impact on client’s wellbeing
and reduced vulnerability is not an easy endeavor; microfinance institutions
face many risks that can adversely affect their long term growth, operational
and financial sustainability (Jeyanth, 2003).
SME’s need
both financial and non-financial services to enhance their productivity,
profitability and growth. Sievers and Vanderberg (2004) hold the view that
access to financial and business development services are essential for growth
and development of small scale and medium business enterprise.
The Microfinance
industry has become a major backbone in the sustenance and survival of small
scale and medium business enterprise in Nigeria. Microfinance Institutions
(MFIs), as part of their core business, are supposed to provide credit to SMEs.
In addition to these financial services, MFIs also provide non-financial
services like business training, financial and business management to help
improve the capacity of their clients in managing the loan resources granted
them.
The number
of MFI institutions in Nigeria continues to grow. However, their wide presence
does not correspond with the extent of reduction in the major challenges that
affect the growth of SMEs in the country. This study is designed to analyze the
effect of MFIs loans on the profitability of SMEs in Nigeria.
1.3. Objectives of the study
This study
is intended to investigate if MFI issue out loans to SMEs, and the impact of
micro-credit on the profitability of SMEs.
1.4 Research Questions
Are MFIs
loans easily accessible to SMEs?
Does Micro-credit
contribute to the profitability of small and medium scale industries?
1.5.
Hypothesis
H0:
Micro-credit do not significantly contribute to the profitability of small and
medium scale enterprises
H1:
Micro-credit contributes significantly to the profitability of small and medium
scale industries
1.6. Significance of the study
It is worth
mentioning that most researchers have found this area of study very important
to the development of the socio-economic activities in developing countries like
Nigeria. This study is centered on the activities of MFIs and their
contributions to the development of small and medium size businesses in
Nigeria.
A study of
this nature is very imperative as it would provide the government with the
needed information in designing a policy frame work to enhance the development
of the SME industry. It would also enlighten the public on the role MFIs play
in the small and medium scale business enterprises (SMEs) sector.
Microfinance
as a whole provides the average Nigerian a means to have access to financial
services in their localities to boost their living standards in a sustainable
manner in line with the millennium development goal of alleviating poverty in
developing countries. The study will assist MFIs to adopt the necessary
measures needed to ensure the desired growth in the small and medium scale
business enterprises (SMEs) industry.
In addition,
the study would serve as a source of reference for other researchers or members
of the general public who need information in the subject. More importantly,
entrepreneurs of SMEs may find it useful in the successful operation of their
enterprises as the study will unveil some of the reasons why some small and
medium scale business enterprises (SMEs) finds it hard to repay their loans.
1.7 Scope and limitations of the study
Microfinance
institutions have a wide coverage in both rural and urban areas of the country.
This study focuses on microfinance institutions operating in Kaduna metropolis.
The study therefore covers some selected registered institutions.
1.8. Definitions of Relevant terms
A broader
definition by Central bank of Nigeria which can be found in the archives of the
CBN (2005) defines cottage small and medium scale enterprises as;
An industry
with a labor 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.
An industry
with a labor size of 11-100 workers or a total cost of not more thanN50
million, including working capital but excluding cost of land.
An industry
with a labor size of between 101-300 workers or a total cost of over N50
million but not more than N200 million, including working capital but excluding
cost of land.
An industry
with a labor size of over 300 workers or a total cost of over N200 million,
including working capital but excluding cost of land.
The issue of what constitutes a small or medium enterprise
is a major concern in the literature.
Different
authors have usually given different definitions to this category of business.
SMEs have indeed not been spared with the definition problem that is usually
associated with concepts which have many components. The definition of firms by
size varies among researchers. Some attempt to use the capital
assets while
others use skill of labor and turnover level. Others define SMEs in terms of
their legal status and method of production. Storey (1994) tries to sum up the
danger of using size to define the status of a firm by stating that in some
sectors all firms may be regarded as small, whilst in other sectors there are
possibly no firms which are small. The Bolton Committee (1971) first formulated
an “economic” and “statistical” definition of a small firm.
Under the
“economic” definition, a firm is said to be small if it meets the following
three criteria:
It has a
relatively small share of their market place;
It is managed
by owners or part
owners in a
personalized way, and
not through the medium of a formalized management
structure;
It is
independent, in the sense of not forming part of a large enterprise.
Under the
“statistical” definition, the Committee proposed the following criteria:
The size of
the small firm sector and its contribution to GDP, employment, exports, etc.
The extent
to which the small firm sector’s economic contribution has changed over time;
Applying the
statistical definition in a cross-country comparison of the small firms’
economic contribution.
Weston and
Copeland (1998) hold that definitions of size of enterprises suffer from a lack
of universal applicability. In their view, this is because enterprises may be
conceived of in varying terms. Size has been defined in different contexts, in
terms of the number of employees, annual turnover, industry of enterprise, ownership
of enterprise, and value of fixed assets.
Van der
Wijst (1989) considers small and medium businesses as privately held firms with
1 – 9 and 10 – 99 people employed, respectively. Jordan et al (1998) define
SMEs as firms with fewer than 100 employees and less than €15 million turnover.
Michaelas et al (1999) consider small independent private limited companies
with fewer than 200 employees and López and Aybar (2000) considered companies
with sales below €15 million as small.
It is clear
from the various definitions that there is not a general consensus over what
constitutes an SME. Definitions vary across industries and also across
countries. It is important now to examine definitions of SMEs given in the
context of Nigeria.
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