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.