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Since Nigeria attained independence in 1960, considerable efforts have been directed towards industrial development. The initial efforts were governmentled through the vehicle of large industry, but lately, emphasis has shifted to Small and Medium Scale Enterprises SMEs following the lessons learnt from the success of SMEs in the economic growth of Asian countries Ojo, 2003. Thus, the recent industrial development drive in Nigeria has focused on sustainable development through small business development. Prior to this time, particularly judging from the objectives of the past National Development Plans, 196268, 197075, 197680 and 198185, emphasis had been on governmentled industrialization, hinged on importsubstitution strategy.

Since 1986, government had reduced its role as the major driving force of the economy through the process of economic liberalization entrenched in the IMF pill of Structural Adjustment Programme. Emphasis, therefore, has shifted from largescale industries to small and medium scale industries, which have the potentials for developing domestic linkages for rapid and sustainable industrial development. Attention was focused on the organized private sector to spearhead subsequent industrialization programmes. The incentives given to encourage increased participation in these sectors were directed at solving and/or alleviating the problems encountered by industrialists in the country, thereby giving them opportunity to increase their contribution to the Gross Domestic Product GDP.

The contribution of Micro, Small amp; Medium Enterprises MSMEs to economic growth and sustainable development is globally acknowledged CBN, 2004. There is an increasing recognition of its pivotal role in employment generation, income redistribution and wealth creation NISER, 2004. The micro, small and medium enterprises MSMEs represent about 87 per cent of all firms operating in Nigeria USAID, 2005. Nonfarm micro, small and medium enterprises account for over 25 per cent of total employment and 20 percent of the GDP SMEDAN, 2007 compared to the cases of countries like Indonesia, Thailand and India where Micro, Small and Medium Enterprises MSMEs contribute almost 40 percent of the GDP IFC, 2002.

Whilst MSMEs are an important part of the business landscape in any country, they are 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 generalized position NIPC, 2009.

Realizing the importance of small businesses as the engine of growth in the Nigerian economy, the government took some steps towards addressing the conditions that hinder their growth and survival. However, as argued by Ojo 2003, all these SME assistance programmes have failed to promote the development of SMEs. This was echoed by Yumkella 2003 who observes that all these programmes could not achieve their expected goals due largely to abuses, poor project evaluation and monitoring as well as moral hazards involved in using public funds for the purpose of promoting private sector enterprises. Thus, when compared with other developing countries, Variyam and Kraybill 1994 observed that many programmes for assisting small businesses implemented in many SubSaharan African SSA countries through cooperative services, mutual aid groups, business planning, product and market development, and the adoption of technology, failed to realize sustained growth and development in these small enterprises. Among the reasons given were that the smallsized enterprises are quite vulnerable to economic failure arising from problems related to business and managerial skills, access to finance and macroeconomic policy.


Despite MSMEs important contributions to economic growth, small enterprises are plagued by many problems including stagnation and failure in most subSaharan African countries Bekele, 2008. In Nigeria, the problem is not limited to lack of longterm financing and inadequate management skills and entrepreneurial capacity alone, but also, includes the combined effect of low market access, poor information flow, discriminatory legislation, poor access to land, weak linkage among different segments of the operations in the sector, weak operating capacities in terms of skills, knowledge and attitudes, as well as lack of infrastructure and an unfavourable economic climate.


Lack of access to finance has been identified as one of the major constraints to small business growth Owualah, 1999; Carpenter, 2001; Anyawu, 2003; Lawson, 2007. The reason is that provision of financial services is an important means for mobilizing resources for more productive use Watson and Everett, 1999. The extent to which small enterprises can access fund determines the extent to which small firms can save and accumulate their own capital for further investment Hossain, 1988, but small business enterprises in Nigeria find it difficult to gain access to formal financial institutions such as commercial banks for funds. The inability of the MSEs to meet the conditionalities of the formal financial institutions for loan consideration provided a platform for attempt by informal institutions to fill the gap usually based on informal social networks; this is what gave birth to microfinancing. In many countries, people have relied on the mutually supportive and benefitsharing nature of the social networking of these sectors for the fulfilment of economic, social and cultural needs and the improvement of quality of life Portes, 1998. Networks based on social capital exist in developed as well as developing countries including Nigeria.

The reluctance of formal financial institutions to introduce innovative ways of providing meaningful financial assistance to the MSEs is attributed to lack of competition among financial service providers, in the sense that none of financial service providers came up with an innovative way of financing small businesses. In order to enhance the flow of financial services to the MSME subsector, Government had, in the past, initiated a series of programmes and policies targeted at the MSMEs. Notable among such programmes were the establishment of Industrial Development Centres across the country 196070, the Small Scale Industries Credit Guarantee Scheme SSICS 1971, specialized financial schemes through development financial institutions such as the Nigerian Industrial Development Bank NIDB 1964, Nigerian Bank for Commerce and Industry NBCI 1973, and the National Economic Recovery Fund NERFUND 1989. All of these institutions merged to form the Bank of Industry BOI in 2000. In the same year, Government also merged the Nigeria Agricultural Cooperative Bank NACB, the Peoples Bank of Nigeria PBN and Family Economic Advancement Programme FEAP to form the Nigerian Agricultural Cooperative and Rural Development Bank Limited NACRDB. The Bank was set up to enhance the provision of finance to the agricultural and rural sector. Government also facilitated and guaranteed external finance by the World Bank including the SME I and SME II loan scheme in 1989, and established the National Directorate of Employment NDE in 1986.

In 2003, the Small and Medium Enterprise Development Agency of Nigeria SMEDAN, an umbrella agency to coordinate the development of the SME sector was established. In the same year, the National Credit Guarantee Scheme for SMEs to facilitate its access to credit without stringent collateral requirements was reorganised and the Entrepreneurship Development Programme was revived. In terms of financing, an innovative form of financing that is peculiar to Nigeria came in the form of intervention from the depositmoney banks. The deposit money banks through its representatives, the Bankers Committee, at its 246th meeting held on December 21, 1999. The depositmoney banks agreed to set aside 10 of their profit before tax PBT annually for equity investment in small and medium scale industries. The scheme aimed, among other things, to assist the establishment of new, viable SMI projects; thereby stimulating economic growth, and development of local technology, promoting indigenous entrepreneurship and generating employment. Timing of investment exit was fixed at minimum of three years, that is, banks shall remain equity partners in the business enterprises for a minimum of three years after which they may exit anytime. By the end of 2001, the amount set aside under the scheme was in excess of six billion naira, which then rose to over N13 billion and N41.4 billion by the end of 2002 and 2005 respectively.

The modality for the implementation of the fund is such that the fund set aside is to be invested within 18 months in the first instance and 12 months thereafter. After the grace period, the CBN is required to debit the banks that fail to invest the fund set aside and invest same in treasury bills for 6 months. Thereafter, the uninvested fund would be bidded for by successful investors under the scheme. The fund set aside by the banks under the scheme decreased from N41.4 billion in 2005 to N38.2billion in 2006. This was as a result of N2.5billion and N25.3 million set aside from failed banks and liquidated banks respectively, which were netted out after the bank consolidation exercise. Actual investment during the period grew from N12 billion in December 2005 to N17 billion in 2006, representing only 29.1 percent of the total fund set aside. In 2007, total amount set aside decreased further to N37.4 billion, while total investment stood at N21.1 billion representing 56 percent of the total sum set aside. The number of projects that benefitted from the scheme also increased to 302 projects in 2007, from 248 in 2006 CBN, 2007.

The CBN found the reasons for the slow pace in utilization of the SMIEIS fund to include: the desire of the Banks to acquire controlling shares in the funded enterprises and the entrepreneurs resistance to submit control; inability of the banks to adapt equity investment which is quite different from what the banks are familiar with in credit appraisal and management, and lack of proper structure for effective administration of the scheme when it took off among other factors. Responding to the findings, the Bankers Committee took a policy decision to extend funding under the scheme to all business activities including even nonindustrial enterprises, except for general commerce and financial services. The name of the scheme was changed from SMIEIS to Small and Medium Enterprises Equity Investment Scheme SMEEIS to reflect the expanded focus. Also, the limit of banks equity investment in a single enterprise was increased from N200 million to N500 million, making room for medium size industries.

Despite all these efforts, the contribution of SMEs in the industrial sector to the Nations GDP was estimated to be 37 compared to other countries like India, Japan and Sri Lanka and Thailand where SMEs contributed 40, 52 55 and 47.5 respectively to the GDP in 2003, UNCTAD, 2003, hence the need for alternative funding window. In 2005, the Federal Government of Nigeria adopted microfinance as the main financing window for micro, small and medium enterprises in Nigeria. The Microfinance Policy Regulatory and Supervisory Framework MPRSF was launched in 2005. The policy, among other things, addresses the problem of lack of access to credit by small business operators who do not have access to regular bank credits. It is also meant to strengthen the weak capacity of such entrepreneurs, and raise the capital base of microfinance institutions. The objective of the microfinance policy is to make financial services accessible to a large segment of the potentially productive Nigerian population, which have had little or no access to financial services and empower them to contribute to economic development of the country.

The microfinance arrangement makes it possible for MSEs to secure credit from Microfinance Banks MFBs and other Microfinance Institutions MFIs on more liberal terms. It is on this platform that we intend to examine the impact of microfinance on small business growth, survival, as well as business performance of MSEs operators.



Majority of the micro and small enterprises MSEs in Nigeria are still at a low level of development, especially in terms of number of jobs, wealth and value creation. This is because 65 of the active population, who are majorly entrepreneurs, remain unserved by the formal financial institutions. The microfinance institutions available in the country prior to 2005 were not able to adequately address the gap in terms of credit, savings and other financial services. As reported by the CBN, the share of micro credit as a percentage of total credit was 0.9, while its contribution to GDP was a mere 0.2 CBN, 2005. The CBN in 2005 identified the unwillingness of conventional banks to support microenterprises, paucity of loanable funds, absence of support institutions in the sector, as well as weak institutional and managerial capacity of existing microfinance institutions among other reasons as the major reasons for the failure of past microfinance initiatives in the country. To address the situation, the Microfinance Policy, Regulatory and Supervisory Framework MPRSF for Nigeria was launched by CBN in 2005 to provide sustainable financial services to micro entrepreneurs. This initiated an important turning point in the microfinance industry with the establishment of the Microfinance Bank MFB as an institutional vehicle for privately owned, deposit taking Microfinance Institutions MFIs. The framework is designed to unite the best of the NGO credit organizations, and new MFI initiatives under a common legal, regulatory and supervisory regime. Five years down the line, though microfinance has proven to be one of the ways of bridging the resource gap created in the Nigerian economy, there are still some undesirable problems experienced against its proper execution. The lack of documentation of the practice of microfinancing in Nigeria has made it difficult to formulate supportive programmes for the growth of the sector.

Despite the potential importance of MSMEs in any economy, high mortality rate among established MSMEs is a matter of major concern in developing economies. International Finance Corporation IFC reported in 2002 that only 2 out of every 10 newly established businesses survive up to the fifth year in Nigeria. The report was corroborated by Small and Medium Enterprise Development Agency of Nigeria SMEDAN that only 15 of newly established businesses survive the first five years in Nigeria. This is a pointer to the fact that there is a problem. The indispensable role of finance to the growth and survival of MSMEs and the adoption of microfinance as the main source of financing MSMEs in Nigeria therefore makes it imperative to study the extent to which microfinance can enhance small business survival.

The impact of microfinancing majorly should be seen in the multiplication of MSEs across Nigeria. The survival of these MSEs should reflect in employment generation, engagement of available local resources, local technology utilization, improved standard of living and growing gross domestic product GDP. However, despite MSEs representing about 87 of all firms operating in Nigeria USAID, 2005, they only account for 10 of total manufacturing output, 25 of total employment in the productive sector and 37 of GDP Investment Climate Assessment ICA survey, 2009. A common problem for the Nigerian small business sector is that, the high rates of formation of new businesses evidenced in Corporate Affairs Commission CAC annual report have not yet translated into comparable high rates of small firm growth. New firms are being started but few grow rapidly to become significant international competitors. For the great majority of micro and small enterprise in Nigeria long term growth remains uncertain and bleak. The question is how many of these small businesses are transforming from the subsistence level at startup to the stage of maturity and later expansion where they will have to employ more hands Total productive output is also low compared to other emerging economies like India, Sri Lanka and Thailand where SMEs contribute 40, 55 and 47 respectively in 2002 into the productive sectors of the economy UNCTAD, 2003.

It is not uncommon to find in many microfinance programmes nonfinancial services such as advisory services, managerial and technical training, weekly meetings and preloan training to mention only a few, rendered as support services to MSMEs. These services that are poorly provided in Nigeria are mostly very costly to deliver McKernan, 2002, yet many microfinance programmes consider them an integral part of the success of their programmes. Though the contribution of such nonfinancial services is not in doubt, the extent of the contributions is yet to be ascertained in Nigeria.



The study attempts to answer the following research questions:

1.To what extent does micro financing enhance the survival of MSEs in Nigeria

2.To what extent is the growth of small businesses influenced by the financing capacity of Microfinance Banks

3.How does the injection of microfinance funds into small business operations affect the productivity of MSEs in Nigeria

4.What roles does the incorporation of nonfinancial services of microfinance banks play in enhancing the business performance of MSEs in Nigeria

5.What is the nature, mode of operation and process of micro financing in Nigeria


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