The Impact of Micro Financial Institutions on the Growth of Small and Medium Scale Business
Chapter One
Objectives of the Study
The broad objective of this study is to examine the impact of microfinance banks on the growth of small and medium-scale enterprises in the Ilorin metropolis. This specific objective includes the following:
- To examine the nature of SME financing before MFB establishment?
- To examine the role of microfinance banks in the growth of SMEs in the Ilorin metropolis.
- To examine the problems Microfinance banks face in providing finance to SMEs.
- To examine in what ways the services rendered by the Microfinance banks can be improved upon to enhance the growth of SMEs.
CHAPTER TWO
LITERATURE REVIEW
Introduction
Jovanovic‟s Learning Effect Model (1982) asserts that firms learn about their efficiency overtime. New firms entering the market are unaware of their true efficiencies immediately, but as they mature they are able to uncover their productive efficiencies (Staines, 2005). Empirical implication derived by this model is that young firms have accumulated less information than older ones about their managerial abilities. For this reason there will be more failure among young firms than older firms. According to entrepreneurial choice theory by Papadaki and Chami (1982), people have certain characteristics that are associated with the propensity for entrepreneurial behavior and individuals who have more of these characteristics are more likely to grow faster than those who have fewer ones (Papadiki and Chami, 2002). In other words the attitude of the individual in taking risks, motive of going into self employment, his or her managerial abilities to raise capital and perceive new markets, will determine the growth of the firm.
CONCEPTUAL FRAMEWORK
The concept of microfinance
Microfinance is defined as a development tool that grants or provides financial services and products such as very small loans, savings, micro-leasing, micro-insurance and money transfer to assist the very or exceptionally poor in expanding or establishing their businesses. It is mostly used in developing economies where SMEs do not have access to other sources of financial assistance (Robinson, 1998). In addition to financial intermediation, some MFIs provide social intermediation services such as the formation of groups, development of self confidence and the training of members in that group on financial literacy and management (Ledgerwood, 1999). There are different providers of microfinance (MF) services and some of them are; Non-Governmental Organizations B(NGOs), savings and loans cooperatives, credit unions, government banks, commercial banks or non bank financial institutions. The target group of MFIs are self employed low income entrepreneurs who are; traders, seamstresses, street vendors, small farmers, hairdressers, rickshaw drivers, artisans blacksmith etc (Ledgerwood, 1999).
Small and micro enterprises (SMEs)
In the Nigerian context, Small enterprises are those undertakings engaging 5 to 49 employees or with capital investment of TSHS.5.0 million to TSHS.200 million. Micro enterprises are those engaging up to four people in most cases family members or with an investment not exceeding TSHS 5.0 million (URT, 2002).
Performance of small businesses
Performance in this case is defined as the capability to lead to the creation of employment and wealth by business start-up, survival and sustainability (Sandberg, Vinberg, and Pan, 2002).
Business success
Business success is the process of improving some measure of an enterprise’s success. Which is achieved either by boosting the top line or revenue of the business with greater product sales or service income, or by increasing the bottom line or profitability of the operation by minimizing costs (Sexton, 1988).
Regulations/Legislative process
This is process of developing detailed plans, procedures and mechanisms needed to ensure legislative and regulatory requirements are achieved.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter discusses the research design and methodology which will be used in conducting this study. It contains the following information, the research design and area of study, target population, the Sampling frame and sample size, sampling procedures, data instruments, data collection procedure, data processing and analysis techniques and validity and reliability of the research instruments. Finally it describes how ethical issues will be considered.
Research Design
Survey research design is adopted in this study to assess the effect of MFI‟s on the growth of SMEs in Illorin Metropolis. A survey is an investigation about the characteristics of a given population by means of collecting data from a sample of that population and estimating their characteristics through the systematic use of statistical methodology. The survey is a non-experimental, descriptive research method. It tends to be quantitative and aims to collect information from a sample of population such that the results are representative of the population within a certain degree of error. Survey research design was chosen because the sampled elements and the variables that are being studied are simply being observed as they are without making any attempt to control or manipulate them. Also the design is chosen because quantitative information needs to be collected through the use of standard and structured questionnaire.
However, some of the weaknesses are that the researcher may not have sufficient information about all the variables occurring at the time. The researcher does not have control or regarding what variables was controlled and this makes causal statements very difficult to make.
Target population
Target population is the population which the researcher wants to generalize results of the study on (Mugenda and Mugenda 2003). The researcher will focus on MFIs and SMES Managers, Employees and Customers and loan officials. The target population is therefore 140 people from MFIs and SMEs including Managers, Loan officials, employees and customers.
CHAPTER FOUR
DAT PRESENTATION, ANALYSIS AND INTERPRETATION
Introduction
This chapter comprises of presentations of results, and their interpretation. The results are presented according to study objectives which were:
- To analyze the relationship between credit financing and SMEs growth in Illorin Metropolis.
- To examine the challenges SMEs face in accessing credit.
- To examine the utilization of credit by
CHAPTER FIVE
DISCUSSION, SUMMURY OF THE FINDINGS, CONCLUSION AND RECOMMENDATIONS
Discussion
The main findings of this research revealed that micro-financing as practiced in Illorin microfinance banks do not enhance growth and expansion capacity of small and mediumenterprise in Illorin. The findings confirmed the views expressed by Olutunla and Obamuyi (2008) that the growth of SMEs is not just dependent on accessing bank loan but accessing the right size of loan at the right time. Looking at the result critically, it was also revealed that among small firm sample, variables such as technology related training received by the entrepreneur, business location, business age and business registration in that order are the variables that impact significantly on small business growth, none of the micro finance variables was found to have significant impact on small business growth for small firm sample. The result also revealed that variables such as owners‟ education, loan interest, duration of asset loan, business location, technology related training received and size of asset loan, all impact significantly on micro firm growth but the magnitude of the beta coefficient of micro finance variables are so small. When the result was split by type of business activities, the result obtained shows variation in the type of variables that impact significantly on small business growth and expansion. In the service sub-sector, only owners‟ education, gender, business age and size, and duration of asset loan appears to be statistically significant. In the trading sub- sector, repayment of asset loan, loan interest, duration of asset loan and business location and other owner and firm characteristics variables were positively correlated with sales growth and statistically significant too. In the manufacturing sector, it is technology related training received by the entrepreneurs, loan interest, business location, business registration and business age that appears to be statistically significant.
Summary of the findings
Profile of SMEs in Ilorin Metropolis
The contribution of the SME sector to the economy in terms of employment cannot be ignored.
The SME sector in made up of various sub-sectors such as; commerce, Service, Manufacturing and other artisan bodies. The research shows that the sector is hugely dominated (93%) by commerce which is basically buying and selling. This, the researcher believes, is due to the fact that very little capital is needed to begin and operating such businesses does not require any regulatory processes. It was also revealed that about 72 percent of the total population of SMEs in the Illorin Metropolis is at their Micro stages since they employ less than six people in their businesses. This shows that the sector though has a potential for growth is faced with a high capital constraint.
In terms of start-up capital, the research unveils that Financial Institutions play an important role as most respondents indicated that the source of their start-up capital were financial institutions.
The Contribution of MFIs to the Entrepreneurial Activities of SMEs
.As mentioned earlier, the major setback in the SME sector is capital constraint and this constraint, as it were, are supposed be minimized by the existence of the traditional banks through credits. However, most entrepreneurs have indicated that access to credit from the traditional banks has been their major problem.
The research finding show that MFIs have contributed enormously to the growth of the SME sector through several activities as enumerated below:
Greater access to credit – The MFIs have provided SMEs a greater access to credit than the commercial banks. Most respondents indicated that 100% of their credit demand was granted. Since most of these SMEs are Micro, their credit needs are very smalland their credit needs are most of the times Most SMEs were found to be dealing with more than one MFI, and the credits granted helped to boost their capital and expand their businesses.
An enhanced saving habit. The traditional banking sector is unable to introduce saving products that will attract Micro businesses. MFIs have been able to create a platform that enables Micro businesses to save the little income they earn on daily basis with little
For most MFIs, the saving accumulated is the basis for the amount of loan to be granted. The habit of saving has been enhanced through the activities of MFIs.
Business, Financial and Managerial Training. A majority of SMEs revealed that they have been beneficiaries of Business, Financial and Managerial training activities of MFIs.
Knowing that most entrepreneurs lack or have very little knowledge in financial management, these support services have gone a long way to make them more competitive and very alert to the implications of their financial decisions.
General effects. The findings also revealed a majority of 86 percent respondents indicating that the operations of MFIs had had a positive effect on their
The challenges SMEs face in accessing credit. Despite the contribution of MFIs in the activities of SMEs, there are some challenges faced by SMEs in the process of accessing
Some of the SME respondents find the process of accessing credit as cumbersome. Some these challenges are: Inability to provide the collateral securities in cases where they are demanded.
High interest rate was as mentioned as one of the challenges faced in accessing credit. The high interest rates in most cases make clients unable to repay their loans.
The MFIs on their part provided some of the challenges they also face in granting credit. These are:
- Problem of repayment of loans
- Lack of collateral security required on the part of theSMEs
- Poor records keeping on the part of theSMEs
- Lack of BUSINESS LOCATION in the business accounts and related business information
- Lack of proper documentation in terms of business registration and a permanent business
Rate of credit utilization
It is a fact that if credits are misapplied, SMEs will be unable to achieve business growth. The research revealed that 43 percent of respondents in the SME sector felt the need to use business loans for other purposes whiles 31 percent actually indicated that they have misapplied their business loans. This phenomenon is a bit worrying as the increase in this practice will defeat the goals of the MFIs and in the worst scenario make clients unable to repay their loans.
Conclusion
The research which was undertaken to find the effects of MFIs on the growth of SMEs reveals that MFIs have a positive effect on the growth of the latter, notwithstanding the inherent challenges. It has been noted that, access to credit which is a major challenge in the SME sector has been reduced to a large extent through the operations of MFIs. The findings also show that MFIs have also contributed to the growth of SMEs through the provision of non-financial service such as Business, Financial and Managerial training programmes.
MFIs have also contributed largely in the area of mobilizing savings through their saving schemes that make saving more accessible, less costly and ready to receive little amounts.
The habit of saving is enhanced as low income earners who where hitherto unable to save with traditional banks are offered an opportunity to save. The practice helps to improve capitalization as most of these saving are ploughed back in their businesses.
It is also critical to highlight the challenges that have the tendency of derailing the efforts of the MFIs in granting credit. Some of these are the inability of clients to repay their loans and the rate of credit misappropriation. It is worth noting that MFIs provide better access to credit than the traditional banks. However, the research reveals that a good number of MFIs require collateral security before loans are granted and this negatively affects the SMEs as some are unable to provide the collateral requested. High interest rate has also been mentioned as one of the challenges in accessing credit facilities of MFIs. In relation to high interest rate, MFIs have explained that the risk attached to the granting of loans is on the high side and are unable to reduce the interest rates.
In the midst of these challenges, I wish to emphasize that the finding of this research clearly indicates that MFIs have had a positive effect on the growth of SMEs.
Recommendations
In view of the findings made and conclusions drawn from the study the following recommendations are provided to help enhance an accelerated and sustained growth in the SME sector and also provide recommendations to help in the improvement of the services of MFIs.
The MFIs may be quick to measure their success rate by considering factors like high repayment, outreach and financial sustainability, but these may not be success if their activities do not reflect in the growth of SMEs. The growth of SMEs does not only rely on access to credits but also the creation of favorable and formidable business environment.
The MFIs have a great responsibility of ensuring the proper use of credit which is an important facility in business acceleration. To achieve this, credits should client-oriented and not product-oriented.
Proper and extensive monitoring activities should be provided for clients who are granted loans.
In order to reduce the rate of default, MFIs can research into very profitable business lines and offer credit to clients who have the capacity to exploit such business lines.
Finally, the researcher recommends that business and financial training should be provided by MFIs on a regular basis and most cases should be tailored toward the training need of the client
This study suggests that policies aimed at promoting the growth of small and mediumenterprises should adopt a sectoral approach and, within that, address specific issues that affect enterprises at the lower and upper ends of the spectrum of growth and expansion. Thus, approaches and resources should address the most critical determinants of growth in focal sub-sectors, aiming to augment access to critical resources and, perhaps, overcome the disadvantages that cannot be easily varied.
The study recommends that MFIs should increase the duration of their clients’ asset loans, or spread the repayment over a longer period of time, or increase the moratorium. This will enable the clients to have greater use of the loan over a longer period for the acquisition of capital assets and technology.
In order to encourage technology acquisition for MSE expansion, MFIs can categorize their loans into low and high interest loans. The conventional loans to clients can be maintained as high interest loans, while loans for capital assets or technology acquisition should be low interest loans, which can be secured by a mortgage over the fixed asset so acquired by the micro-borrower. To achieve this, the Microfinance Banks should be recapitalized to enable the banks to support MSEs growth expansion adequately.
The Government should urgently tackle the problem of infrastructure development and maintenance. These include electricity, water and efficient transportation system which impact greater on MSE operations. The bureaucratic bottleneck involved in small business registration should also be removed.
Lastly, Government should establish relevant well adapted and appropriately structured institutions and organizations to provide support for MSEs in such aspect as; procurement, supply and distribution of raw material, supply of local/imported machines for use on concessional terms, training in several technical grades, and create favorable market conditions.
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