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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
With all the measures implemented to encourage new business, help existing businesses
grow and to ultimately improve the economy, there is still a growing concern of business
development. As a means to address this concern, microfinance banks were introduced to
cater especially for the poor low income earners who are underserved by conventional
commercial banks. According to Echo Microfinance, microfinance banks are institutions
licensed by the Central Bank of Nigeria (CBN) to operate as financial institutions that
offer savings, loans, local funds transfer and other financial services needed by the poor
economically active Small and Medium sized Enterprises owners, to operate and expand
their businesses. A large share of the total population of poor SME owners are excluded
from services rendered by conventional financial institutions. According to CBN, a study
by EFinA back in 2010 showed a slight increase in the rate of those served by formal
financial market. The study revealed an increase of 1.3 percent within the first five years
after launching microfinance banks. All economies of the world are characterized by
commercial activities which consist of all businesses or business operations in the
economy. Despite the great desire by Nigerians to become entrepreneurs, only 40%
actually start up businesses and only 20% of these start ups survive (UNIDO, 2015). The
modern society cannot exist without business as it contributes to improvement in the
standard of living, utilization of resources, production of goods and services, employment
opportunities and economic growth.
Small and Medium Scale Enterprises (SMEs) which are the most common types of
business are the engines for growth and development of any society or nation,
specifically, developing nations. This is because of the facts that they have become major
sources of employment for the unemployed youths, wealth creation, provision of varieties
of goods and services and improvement of Gross Domestic Product (GDP) and Gross
National Product (GNP) for developing economies of the world. It is also becoming an
instrument for ensuring peaceful coexistence among societies (Ekpudu, Posu and Olabisi,
2014). SMEs represent the sub-sector of special focus in any meaningful economic
restructuring programme that targets employment generation, poverty alleviation, food
security, rapid industrialization and reversing rural-urban migration (Olowe, Moradeyo &
Babalola, 2013).
The importance of microfinance institutions in the reduction of poverty and development
of a nation cannot be overemphasized. It is a tool employed as a means of getting small
capital to small businesses that find it difficult to survive and grow beyond their capacity.
Microfinance services are thus vital in the lives of the rural poor because most of the
income earners either small or medium scale entrepreneurs in rural areas mostly lack the
necessary financial services and support (Abdulmumini, 2012). Provision of financial
services by microfinance institutions to SMEs in developing countries has aided the
growth of businesses as well as the economy. Interest on SMEs would contribute to
creation of jobs, reduction in income disparity, production of goods and services in the
economy, as well as providing a fertile ground for skill development and acquisition,
serve as a mechanism for backward integration and a vehicle for technological innovation
and development especially in modifying and perfecting emerging technological
breakthroughs (Olowe et al, 2013). It can be ascertained that for an economy to progress,
microfinance banks are essential to provide financial services to business owners who can
use their potentials to impact on the standard of living and quality of life of hundred
people in such economy.
Establishment of Micro-finance banks as an effort by the government to improve the
access to loans and savings services for poor people is currently being promoted as a key
development strategy to develop businesses at the grassroots and develop the economy
ultimately (Shreiner, 2005). The size of the unserved market by the existing financial
institutions is large. The aggregate micro-credit facilities in Nigeria are very marginal,
accounted for about 0.2% of Gross Domestic Product (GDP) and less than one percent of
total credit to the economy (CBN, 2011). In 2008, 79 percent of the total population in the
country had been unbanked out of which 68% were rural dwellers (CBN, 2011). This
showed that financial services are not provided for the poor entrepreneur and household,
and this has further increased the level of poverty in the country.
In this direction, Olowe, Moradeyo & Babalola, (2013) noted that Microfinance Banks
(MFBs) emerged as a substitute to the formal banks, as they are effective and powerful
instruments for poverty reduction among people who are economically active but
financially constrained. The international year for microcredit in 2005, stressed on the
relevance of microfinance as integral part of collective efforts at achieving the
Millennium Development Goals (Ekpudu, Posu and Olabisi, 2014). The Central Bank of
Nigeria (CBN) introduced microfinance bank policy option having used a number of
failed fiscal and physical credit options in the past in an attempt to empower the
vulnerable and poor group of people to have access to credit facilities to start up new or
expand existing businesses. This led to the approval of licenses to two categories of
microfinance banks in Nigeria- those licensed to operate within a local government and
those to operate within a state or federal capital territory, with a minimum capital
requirement of N20 million and N1billion respectively (Ekpudu, Posu and Olabisi, 2014).
1.2 Statement of Research Problem
The rate of unemployment in the nation has motivated individuals to venture into
entrepreneurship and in a bid to maximize gains from this, there is the need for
development. Most entrepreneurs engage in small or medium scale business as a start due
to several constraints (financial and technical). Microfinance banks are closer to them, as
such play vital roles in development or growth of the business. 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, 2007 as cited in
Emmanuel and Ikenna, 2015) 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.
Many microfinance programmes have been established in Nigeria to provide financial
and non-financial services in order to render support services to the SMEs. Without a
doubt, consistent access to credit facilities implies execution and implementation of plans
and project; expansion and improvement of business operations in order to increase profit
level.
In Nigeria, one of the greatest obstacles that Small and Medium Enterprises (SMEs) have
to grapple with is access to funds from microfinance institutions which have occasioned
the low development of business (most especially SMEs) in the economy. (Olowe et al,
2013). Other problems are related to access to microfinance banks, their system of
operations or conditions associated with obtaining a credit facility. Some misuse the loans
they get due to poor managerial skills or orientation. The indispensable role of finance to
the growth and performance of SMEs and the adoption of microfinance as the main
source of financing SMEs and advisory services to business owners in Nigeria, therefore,
opens the research gap for this study to examine the impact of microfinance banks on
business development in the country.
1.3 Purposes of the Study
The main objective of the study is to assess the role played by microfinance institutions
on entrepreneurship development. Specifically, the study aims to achieve the following
objectives:
i. Assess the impact of financial services from microfinance banks on business
development.
ii. Assess the impact of advisory services from microfinance banks on business
development.
iii. Examine the impact conditions of obtaining credit facility has on business
development.
iv. Examine the impact availability of microfinance institutions have on business
development.
1.4 Research Questions
The following are the research questions
i. Do financial services of microfinance banks impact on business development?
ii. Do advisory services of microfinance banks impact on business development?
iii. What impact do the conditions of obtaining credit facility have on business
development?
iv. What impact does availability of microfinance banks have on business development?
1.5 Statement of Hypothesis
In respect to the research questions, the following hypotheses will be verified.
Hypothesis one
H01: Financial services of microfinance banks have no significant impact on business
development.
H11: Financial services of microfinance banks have a significant impact on business
development.
Hypothesis Two
H02: Advisory services of microfinance banks have no significant impact on business
development.
H12: Advisory services of microfinance banks have a significant impact on business
development.
Hypothesis Three
H03: The conditions of obtaining credit has no significant impact on business
development.
H13: The conditions of obtaining credit has a significant impact on business development.
Hypothesis Four
H04: Availability of microfinance banks has no significant impact on business
development.
H14: Availability of microfinance banks has a significant impact on business
development.
1.6 Significance of the Study
This study was chosen as an area of concentration given that the background of any
nation’s industrial development is small and medium scale enterprises. The result of the
study will show the significance and role of microfinance banks towards developing
business in Nigeria. Recommendations from the study will proffer a lasting solution
which will aid the development of business as well as Nigeria economy.
It will also be useful to educationists, scholars and students who wish to carry out further
research on the related topic or even produce textbook to add to existing literature on the
topic.
1.7 Scope of the Study
The study is mainly focused on small and medium scale businesses; on the other hand,
microfinance banks in the locality of study area would also be of interest. This study will
be carried out within Adamawa and seeks to make use of data and information collected
from respondents within Yola and Jimeta precisely with the aim of examining the impact
of microfinance banks on business development.

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