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This study examines the impact of Microfinance Institutions in financing small scale enterprises for
economic growth in Nigeria. Time series data from Central bank of Nigeria (CBN) report on the
activities of Microfinance Institutions (MFIs) from 1992 to 2014 were used . Ordinary Least Square
(OLS) regression analysis was used for the investigation. The findings revealed that there is a
significant impact as, a result of microfinance institutions on the SMEs growth in Nigeria. There is
also significant effect of microfinance institutions in alleviating poverty by increasing income and
changing economic status of those who patronize them. The study concludes that microfinance
institution is indeed a potent strategy of government to reduce poverty and a viable tool for financial
inclusion. The recommendations include that microfinance can only be appropriate tool for poverty
alleviation and increase economic activities. Government should introduce more viable programmes
outreach than the present by encouraging survival and continuity of MFIs so that rural dwellers can
build confidence on them.
Table of Contents
Tables: page
i. Table 1 21
ii. Table 2 22
iii. Table 3 23
iv. Table 4 24
Sections One: Introduction
1.0 Introduction 1
1.1 General Background of The Study 1
1.2 Statement of Problem 3
1.3 Objective of the Study 3
1.4 Research Question 3
1.5 Formulation of Hypotheses 3
1.6 Significant of the Study 4
1.7 Scope and limitation of the study 4
1.8 Definition of terms 4
Section Two: Literature Review
2.0 Introduction 5
2.1 Overview of Small and Medium Scale Enterprises 5
2.2 Review of Past Reforms aimed at Rural Development in Nigeria since 1970s 8
2.3 Microfinance Policy Measure and Institutions in Nigeria 9
2.4 Participating Institutions in Microfinance activities in Nigeria 11
2.5 Non Government Organization Microfinance Institutions ( NGO- MFIs ) 12
2.6 Role of Microfinance Banks in Nigerian Economy 13
2.7 Challenges facing Microfinance Banks in Nigeria 15
2.8 Microfinance Models 16
Section Three: Research Methodology
3.0 Introduction 19
3.1 Research Design 19
3.2 Population and Sample 20
3.3 Data Analysis Techniques and Model 20
Section Four : Data Presentation and Analysis of Results
4.1 Data Presentation 21
4.2 Data Analysis 22
Section Five: Summary, Conclusion and recommendation
5.0 Summary 25
5.1 Conclusion and Recommendation 25
References : 26
A OLS Regression Output 29
B Cointegration ( Unit Root test ) H01 30
C Cointegration ( Unit Root test ) H02 33
D1-4 Serial correlation test (Correlogram) ( Ljung-Box Q statistics Higher-Order ) 37
E Johansen Cointegration Test 41
F Economics a priori criterion graph 43
G VAR and VEC (autoregressive and error correction model) 44
Section One
1.0 Introduction
Small and Medium Enterprises (SMEs) play a vital role in the growth and economic
development of any Nation, especially developing country like Nigeria.. SMEs have been
advised by Ayozie and Latinwo,(2010), Safiriyu and Njogo, (2012) to encourage
entrepreneurship. As explained by Muritala, Awolaja and Yusuf (2012) there is the
greater likelihood that SMEs will utilize labour-intensive technologies thereby reducing
unemployment particularly in developing countries and thus have an immediate impact
on employment generation and poverty alleviation. The problems bedeviling the SMEs in
Nigeria are multi-faceted. Ekpenyong (1997) and Utomi (1997) identified inadequate
capital, managerial inefficiency and inaccessible credit facilities from formal financial
institution among others as key problems. Long term development institutional credit was
known not to be available to SMEs because they are generally considered high credit
risks by financial institutions. The stated by Evbuomwan, Ikpi, Okoruwa and Akinyosoye
(2012) about 75.7% of their survey respondents relied mostly on own funds to finance
their businesses. A widespread concern is that the banking system in the sub sector
which supposed to be the major financier of SMEs is not providing enough support to
new economic initiatives and in particular to the expansion of SMEs and agricultural
sector. It is noted that commercial banks which retained liquidity levels in excess of
regulation have shown reluctance in financing SMEs (Sacerdoti, 2005). This motivated
Micro Finance Institutions (MFIs) to expand vigorously in a number of countries,
especially developing countries.
1.1 General Background of The Study
The condition of the rural dwellers remained deplorable in spite of the federal
government’s rural development programmes. Some researchers believed that
government’s centralize approach to this was the main reason why the programmes did
not achieve much of the desired results. A more participatory and decentralized
approach, which paves the way for the active involvement of these rural dwellers in their
development was advocated. The success of the participatory and rural development
was predicated on the fact that 70% of the Nigeria’s population lives in the rural areas
where potentials for agricultural production abound. Development of local arts, crafts and
technology has also been described as a veritable means of laying a solid technological
base for Nigeria. These small scale industries are more labour intensive and hence
generate more employment. The capital ratio is very low and seems better suited to the
development of home grown technology.
Naturally, poor people are excluded from formal financial system all over the world.
Exclusion ranges from country to country depending on the level of development, that is,
less in developed more than developing countries. Absence of access to formal financial
services has made poor people to develop a wide variety of informal community based
financial arrangement to meet their financial needs. Microfinance is created to fill this gap
(Acha, 2008).
Microfinance is the lending of small amount of capital to poor entrepreneurs in order to
create a mechanism to alleviate poverty by providing the poor and destitute with
resources that are available to the wealthy. According to Anyanwu, (2004) microfinance
bank is not just providing capital to the poor, but also combat poverty at an individual
level. It has a role at institutional level. It seeks to mob excesses liquidity among the poor
in rural areas and create institutions that deliver financial services to the poor, who are
continuously ignored by the formal banking sector.
In Africa and other developing regions, microfinance institutions (MFIs) are regarded as
the main source of funding micro enterprises (Anyanwu, 2004). Formal credit and
savings institutions for the poor are also available around the globe providing customers
who were traditionally neglected by commercial banks a way to obtain financial services
through cooperative and development finance institution. Suffice it to say that the
unwillingness or inability of the formal financial institutions to provide financial services to
the urban and rural poor, coupled with the unsustainability of government sponsored
development financial schemes contributed to the growth of private sector-led
microfinance in Nigeria.
1.2 Statement of Problem
The current Microfinance policy to reduce poverty and improve access to factors of
production by SMEs to create wealth is not yielding expected result after ten years of
operation in the country despite government endeavour to improve the standard of living
of its citizen. Therefore, this study tries to investigate through empirical research method
on how Microfinance Institutions have contributed to the development of SMES in
1.3 Objectives of the study
The objectives of this study therefore are to:
1. Assess the performances of Microfinance Institutions on fund
mobilization for SMEs growth.
2. Examine the roles of Microfinance Institution’s (MFIs) to lend to
SMEs for the growth of their business.
1.4 Research Questions
In order to achieve the above stated objectives, the following research questions are
1. Do Microfinance Institutions contribute to the SMES growth through
fund mobilization (Liquidity) ?
2. Do Microfinance Institutions loan significantly contribute to the
growth of SMEs in
Nigeria through economic empowerment ?
1.5 Formulation of Hypotheses
H01 There is no significant relationship between microfinance institutions performance
and Credit mobilization to the SMEs in Nigeria.
Ho2 Microfinance Institution’s loan disbursement has no significant relationship with
SMEs growth in Nigeria.
1.6. Significance of The Study
This study enables Government to understand that their continuous review of policy
formulation will encourage survival of Microfinance Institutions in Nigeria for economic
growth. Through this study, Microfinance Institutions created opportunity for poor people
to have access to finance for economic empowerment to alleviate poverty. The work will
help consultants and financial analysts in their work and it creates further opportunities to
1.7 Scope and Limitation of The Study
This study covered all Microfinance Institutions (MFIs) and Small and Medium Scale
Enterprises (SMEs) in Nigeria from 1992 to 2014. Financial records of MFIs from CBN
annual statistical Bulletin and SMEs annual contribution to GDP from National bureau of
Statistics in Nigeria analyzed for the work.
Owing to time and financial constraints, only two branches of MFB in Okada ( Edo State)
visited to examine their annual financial reports.
1.8 Definition of Terms
(1.) Small and Medium Scale Enterprises (SMEs); This is small business enterprises
which have less than 250 employees.
(2.) Microfinance Institutions (MFIs); This is formal financial (micro) institutions that
serve the poor in rural or urban area.
(3.) Economic growth; Increase in Financial activities of the country to achieve standard
of living.
(4) Rural development; Increase in economic activities through financial intermediation
in rural environment.
(5) Government; Authority and law enforcement agent or policy maker in NIgeria.
(6) Data; Quantitative information manipulated to receive report.
(7) Poverty; Economic disability that made people to suffer for financial needs.
(8) Economic Empowerment; Financial opportunity to create wealth.
(9) Poor people; Less financial privileged individual that could not be served by
formal Financial Institutions
(10) Alleviate Poverty; Removal of financial burden on individual to become financially


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