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The focus of the study is to investigate the role of small and medium enterprises SMEs in poverty alleviation in Ekiti state, Nigeria. Specifically, the study analysed the characteristics of SMEs in Ekiti State and then examined the socioeconomic factors influencing the capacity of SMEs to alleviate poverty. The main reason for this focus is that the existing studies failed to examine the underlying factors that could explain any weak relationship between small and medium scale enterprises development and poverty alleviation especially at the grass root level in developing economies. A systematic random sampling technique was used to select 75 respondents and structured questionnaire administered on them to collect relevant data used. The data were analyzed using descriptive statistics and probit regression. The results showed that majority72 of surveyed businesses were microenterprises employing less than 10 workers while only 21 and 7 of the respondents engaged in small scale and medium scale enterprises, employing between 1050 and 51250 workers respectively. The results also showed that business size, nature of business and source of capital were the major factors determining both income and employment generation potentials of the small and medium enterprises in the study area. Finally the results showed that income from business was the most significant determinant plt;0.01 of per capita consumption of the SMEs owners in the study area. The study therefore concluded that SMEs in Ekiti State, Nigeria had contributed to poverty alleviation through income generation and job creation.



In most third world countries where poverty is not only rampant but pervasive, microcredit makes greater sense than huge capital intensive investment which may not after all be feasible if the mass of the citizenry is to be the focus of policy for entrepreneurial development. The Nigerian experience replicates what obtains in other developing countries of the world. The data on poverty records rating across the nations show that about 1.1 billion people earn less than one dollar per day, and they face daily risks and hardships that determine their very survival and existence www.usaid.gov/ourwork/agriculture/landmanageme nt/poverty/pubs/ povertynrm report.pdf. This is a fact, going by a huge quantum of evidence that surround us on the level of poverty that pervades the society Olomola 1994; Fayomi, 2006; Imam 2002.

In order to enhance the flow of financial services to Nigerias small and medium scale enterprises SMEs, grassroots, rural and urban poors, government had in the past, initiated a series of publicly financed micro/rural credit programmes and policies targeted at the grassroots. Notable among such programmes were the Rural Banking Programme, Sectoral Allocation of credits, Concessionary Interest Rate, and the Agricultural Credit Guarantee Scheme ACGS. Other institutional arrangements were the establishment of the Nigerian Agricultural and Cooperative Bank Limited NACB, the National Directorate of Employment NDE, the Nigerian Agricultural Insurance Corporation NAIC, other programmes and policies were Small Scale Industries Credit Scheme SSICS 1971, Rural Banking Programme RBP 1977, Agricultural Credit Guarantee Scheme ACGS 1977, Nigerian Bank for Commerce and Industry NBCI 1978, Directorate of Food, Roads and Rural Infrastructures DFRRI 1986, The National Economic Reconstruction Fund NERFUND 1986, the Peoples Bank of Nigeria 1990 PBN, Community Banking Scheme CBS 1991, The Small and Medium Enterprises Development Agency of Nigeria SMEDAN 2003, and Microfinance 2005. In year 2000, Government merged the NACB with the PBN and Family Economic Advancement Programme FEAP to form the Nigerian Agricultural Cooperative and Rural Development Bank Limited NACRDB to enhance the provision of finance to the agricultural sector, SMEs and the grassroots. Successive governments in Nigeria have introduced all these programmes and policies in order to develop the SMEs and hence addressing the rate of poverty Fayomi, 2006.

A number of urban poverty reduction measures have also been introduced and implemented by Non-Governmental organizations NGOs and Civil Society organization’s CSOs. These include pilot community development projects, self-help Projects targeted at mobilizing people to help themselves. The World Bank Nigeria Poverty Assessment exercise World Bank, 1996 which covered 37 urban and 58 rural communities in 45 Local Government Areas of 10 states of Nigeria confirmed the general situation of poverty in the country www.cenbank.org/out/publications/efr/rd/2002/efr/v ol3944.pdf.

Over the years successive governments in Nigeria have recognized the importance and the vital role of the Small and Medium Scale Enterprises SMEs in ensuring meaningful and sustainable growth in a developing economy. Emphasis has shifted from large scale capital intensive enterprises to small and medium scale ones because of their potentials for developing domestic linkages for rapid and sustainable industrial development. Apart from their potential for ensuring self reliant industrialization, SMEs are also in a better position to boost employment. The provision of credit to the grassroots has been a leading component of many of the government programmes and policies because lack of access to productive capital is thought to be one of the main factors preventing the populace from breaking away from the poverty trap. This trap, i t is argued, makes it extremely difficult for the grassroots to overcome poverty without outside intervention. In its simplest form, this trap can be viewed in terms of the populations low capacity to generate income, savings, and investment in the economic environment that offers limited employment opportunities, which thus leave the grassroots in perpetual poverty and deprivation. According to Hulme and Mosley 1996 the idea of enabling the poor to have access to loans is based on the virtuous cycle principle: low inco me, investment, more income, more credit, more investment, more income

A look at economic history indicates that no nation has ever developed without an appreciable growth in the financial sector. Both the financial sector and the real sector of the economy are interwoven. Developments in the real sector influence the speed of growth of the financial sector directly; while the growth of finance, money and financial institutions influence the real economy. Saving is a major determinant of the rate at which productive capacity and income can grow. Availability of financial institutions make savings possible and these savings are in turn, through the process of financial institutions intermediation role, directed at investments leading to the accumulation of capital stock Fayomi, 2006.


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 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 government led industrialization, hinged on import substitution 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 Sub-Saharan 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 small sized 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 sub-Saharan African countries Bekele, 2008. In Nigeria, the problem is not limited to lack of long term 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 un-favourable 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 conditionality’s 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 micro financing. In many countries, people have relied on the mutually supportive and benefit sharing 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 centers 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 re-organised 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 deposit money banks. The deposit money banks through its representatives, the Bankers Committee, at its 246th meeting held on December 21, 1999. The deposit money 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 un-invested 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.


The objectives of this study are to:

a examine the relationship between poverty alleviation and SMEs and the relationship between Microcredit and SMEs

b identify the various sources of fund for SMEs;

c identify governmental roles in SMEs development

d examine the effect of Microcredit and SMEs on poverty alleviation in the economy of Osun State, Nigeria.

e identify problem militating SMEs in the achievement of their goals

f identify factors that would assist SMEs to achieve poverty reduction.

This study is divided into 4 sections including the background to the study. The second part consists of the relevant literature on the topic. Third section of the paper presents the empirical data and analysis on the study and lastly the paper concludes.


A significant amount of empirical research has been carried out both within and outside the country on the relationship between microfinance and microenterprise development See Kotir and Obegodom, 2009; Ogunrinola and Alege, 2007; Pronyk, Hargreaves and Morduch, 2007; Matouv, 2006; Khandker, 2005; Morduch and Haley, 2002. It has been observed from the literature, that most research works treated microfinance as a solution to poverty. To the best of our knowledge, the impact of microfinance on Small and Medium Enterprise survival and growth has not been empirically tested in the literature, especially in Nigeria. Most researchers in Nigeria have also not taken time to document the nature, mode of operation and processes involved in SMEDAN. This study therefore becomes significant in filling this observed gap by testing empirically the impact of both the financial and nonfinancial services offered by SMEDAN on small business growth/survival and by examining the capability of SMEDAN institutions in enhancing the expansion capacity of small businesses in Nigeria. The study also contributes to the literature on SMEDAN and small business survival.


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