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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, and
emphasis had been on government-led industrialization, hinged on import-substitution
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 large-scale
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
The contribution of Micro, Small & 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 87percent of all firms operating in Nigeria (USAID, 2005). Non-farm
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micro, small and medium enterprises account for over 25 per cent of total employment and
20percent 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 40percent 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 (2006) 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 (2007) 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 MSME‘s 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 unfavourable economic climate.
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Despite all these efforts, the contribution of SMEs in the industrial sector to the
Nation‘s 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 micro-enterprises,
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
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(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
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 micro-financing 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
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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 start-up
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 non-financial services
such as advisory services, managerial and technical training, weekly meetings and pre-loan
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 non-financial services is not in doubt, the
extent of the contributions is yet to be ascertained in Nigeria.
A significant amount of empirical research has been carried out both within and
outside the country on the relationship between microfinance and microenterprise
development. 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 Micro and Small 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 microfinancing.
This study therefore becomes significant in filling this observed gap by testing empirically
the impact of both the financial and non-financial services offered by Microfinance Banks
on small business growth/survival and by examining the capability of Microfinance
institutions in enhancing the expansion capacity of small businesses in Nigeria. The study
also contributes to the literature on microfinance and small business survival.
Successive governments in Nigeria have always had a policy programme for SMEs,
but most of the programmes have failed to achieve sustainable growth in the SMEs subsector.
Most of the government assisted-programmes have themselves become failures. The
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findings of this study is expected to inform policy makers regarding the direction of further
research into interventionist programmes for MSEs in Nigeria. The study is also of great
importance to Microfinance Institutions, in the sense that it is expected to assist the
microfinance institutions in assessing the effectiveness of their programmes and to know
which variables contribute most to small business growth and survival. The study is
expected to assist the microfinance institutions in their credit policy formulation strategies.
For owners and managers of micro and small businesses, access to a study like this can aid
their understanding of current challenges and reveal the essential factors that promote small
business growth and survival and thus enable them to focus on the relevant ones in an
attempt to enhance their growth and performance. The study is expected to help the
government to validate or reject the choice of microfinance as the main source of financing
MSEs in Nigeria and also suggest ways of improving the existing financing arrangements, if
need be.
The aim of this study is to estimate the effects of microfinancing on business performance
of MSEs in Nigeria. The primary objectives are to:
1. Assess the contributions of microfinancing to the survival of MSEs in Nigeria.
2. Analyse the effects of microfinancing on MSE growth and expansion capacity in
3. Ascertain the effects of microfinance on the productivity of MSEs operators in
4. Examine the effects of non-financial services of microfinance institutions on
MSEs business performance in Nigeria.
5. Document the operations and processes of microfinancing activities in Nigeria.
The study provides insight into microfinance and small business survival and growth,
as well as provides a measure of the effects of microfinancing on small business
performance and productivity in Nigeria. It covers MSEs that have access to microfinance
for a period of at least five years (2004 –2008). The population for the study includes the
clients of the selected Microfinance
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Banks, that is, the169 Microfinance Banks in the South-West geopolitical zone that
have obtained their final operating licenses as of the year 2009. These includes microfinance
banks that metamorphosed from community Banks into MFBs in 2005. They are spread
across both rural and urban areas of the South-West geographical zone. The microfinance
clients are selected based on the following criteria:
1. The client that has stayed for a minimum of 5 years with the Microfinance Banks,
i.e. from the period 2004 to 2008
2. The client operates/manages a small or micro business enterprise.
Five years is often used as a yardstick for survival by demographers (Alexander,
Davern and Stevenson, 2010) to permit greater balancing of statistical power of
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 is the nature, mode of operation and process of micro financing in Nigeria?
1. Ho– Microfinancing makes no significant contribution to the survival of
MSEs in Nigeria.
2. Ho–Microfinancing does not have the capability to influence the expansion
capacity of MSEs in Nigeria.
3. Ho–Microfinance has no significant effect on the level of productivity of
MSEs in Nigeria.
4. Ho–The provision of non-financial services(training and advisory services)
by microfinance institutions does not enhance the performance of
MSEs in Nigeria.
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The main limitation of the study is the reliance on information supplied by micro and
small business operators who normally do not want to make a full disclosure of their
businesses to an unknown person for fear of being subjected to tax payment. In the same
vein, most of the small business operators lack proper record keeping practices and do not
adhere to standard book keeping and accounting procedures. Some of them do not have the
necessary skills needed for sound book keeping, auditing and tax assessment; neither do
they employ qualified personnel to undertake such tasks for them. The oath of secrecy
between the bank and its customers is another area of constraint in this study. Factors such
as economic environment, political in stability and government policy on MSEs are
considered to have strong effects on MSE performance but are not readily available and so
constitute a constraint to the study. However, we rely on scientific methods to obtain the
data and the analysis is based on superior analytical techniques, which we believe allow us
to generalize our findings.
i. Micro enterprise: Micro-enterprise is the informally organized business activity
undertaken by entrepreneurs; excluding crop production by convention, employing
less than ten people and having assets less than N5 million excluding land and
ii. Small enterprise: Small enterprise is any enterprise that employs between ten
(10) to forty-nine (49) people and has asset worth (excluding land and building)
betweenN5 million and N50 million.
iii. Medium enterprise: Medium enterprise is any enterprise that employs between
fifty (50) and one hundred and ninety–nine (199) people and has assets worth
(excluding land and building) between N50 million and N500 million
(SMEDAN, 2007).
iv. Microfinance Banks: Microfinance Banks are licensed financial institutions
meant to serve the un-served, but economically active clients in the rural and
peri-urban areas by providing diversified, affordable and dependable financial
services to the active poor, in a timely and competitive manner, which would
enable them to undertake and develop long-term, sustainable entrepreneurial
activities and mobilize savings for intermediation (CBN, 2005).
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v. Microfinance Institutions: Microfinance Institutions are organizations whose
activities consist wholly or in significant part, of the provision of financial services
to micro entrepreneurs.
vi. Microfinance: Microfinance denotes the provision of financial services adapted to the
needs of low income people such as micro-entrepreneurs, especially the provision of
small loans, acceptance of small savings deposits and simple payment services
needed by micro-entrepreneurs and other poor people (USAID, 2005).
vii. Microcredit: Microcredit is commonly defined in terms of loan amount as a
percentage of average per capita income (USAID, 2005). In the context of Nigeria,
with a GDP per capita of N42,000 (about $300) in 2003, loans up to N50,000
(around $350) will be regarded as micro loans.GDP per capital (PPP U$) in 2007
was U$1,969 (UNDP –HD Report,2009).
viii. Microsavings: Microsavings are defined as savings accounts with a balance of
less than N8,400 (about $50), that is less than 20% of the average annual income
per capita.


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