EFFECTS OF MICROFINANCE ON MICRO AND …

1 Special issue on MICROFINANCE Publisher: Asian Economic and Social Society EFFECTS of MICROFINANCE on MICRO and small Enterprises (MSEs) Growth in Nigeria Abiola Babajide (Department of Banking and Finance, Covenant University, Ota 1023, Ota, Ogun State, Nigeria). Citation: Abiola Babajide (2012) EFFECTS of MICROFINANCE on MICRO and small Enterprises (MSEs). Growth in Nigeria Asian Economic and Financial Review , No. 3, pp. 463-477. Asian Economic and Financial Review, 2(3), pp. 463-477. EFFECTS of MICROFINANCE on MICRO and small Enterprises (Mses) Growth in Nigeria Abstract This paper investigates the EFFECTS of MICROFINANCE on MICRO and small business growth in Nigeria. The objectives are: one, to examine the EFFECTS of different loan administration practices Author(s) (in terms of loan size and tenor) on small business growth criteria.

2 Second, to examine the ability of MICROFINANCE -Banks Abiola Babajide (MFBs) (given its loan-size and rates of interest charged). Department Of Banking and Finance, towards transforming MICRO -businesses to formal small scale Covenant University, Ota 1023, Ota, Ogun State, Nigeria enterprises. The paper employed panel data and multiple Email: regression analysis to analyze a survey of 502 randomly selected enterprises finance by MICROFINANCE banks in Nigeria. We find strong evidence that access to MICROFINANCE does not enhance growth of MICRO and small enterprises in Nigeria. However, other firm level characteristics such as business size and business location, are found to have positive effect on enterprise growth. The paper recommends a recapitalization of the MICROFINANCE banks to enhance their capacity to support small business growth and expansion.

3 Keywords: small Firms, MICRO firms, Entrepreneurship, MICROFINANCE , Regression Analysis, Nigeria Introduction Attention was focused on the organized private sector to spearhead subsequent industrialization Since Nigeria attained independence in 1960, programmes. Incentives given to encourage considerable efforts have been directed towards increased participation in these sectors were the nation s industrial development. The initial directed at solving and/or alleviating the efforts were government-led through the problems encountered by industrialists in the vehicle of large industry, but lately emphasis country, thereby giving them greater leeway has shifted to small and Medium Enterprises towards increasing their contribution to the ( smes ) following the success of smes in the national economy.

4 Economic growth of Asian countries (Ojo, 2003). Thus, the recent industrial development Lack of access to finance has been identified as drive in Nigeria has focused on sustainable one of the major constraints to small business development through small business growth (Owualah, 1999; Carpenter, 2001;. development. Prior to this time, particularly Anyawu, 2003; Lawson, 2007). The reason is judging from the objective of the past National that provision of financial services is an 4-Year Development Plans, 1962-68 and 1981- important means for mobilizing resources for 85, emphasis had been on government-led more productive use (Watson and Everett, industrialization, hinged on import-substitution. 1999). The extent to which small enterprises could access fund is the extents to which small Since 1986, government had played down its firms can save and accumulate own capital for role as the major driving force of the economy further investment (Hossain, 1988).

5 However, by a process of commercialization and small business enterprises in Nigeria find it privatization. Emphasis, therefore, shifted from difficult to access formal financial institutions large-scale industries mainly to small and such as commercial banks for funds. The medium scale industries, which have the inability of the smes to meet the standard of potentials for developing domestic linkages for the formal financial institutions for loan rapid and sustainable industrial development. consideration provides a platform for informal 463. EFFECTS of MICROFINANCE on MICRO .. institutions to attempt to fill the gap usually of financing, an innovative form of financing based on informal social networks, and this is peculiar to Nigeria came in form of intervention what gave birth to MICRO -financing.

6 In many from the banks through its representatives the countries, people have relied on mutually Banker's Committee at its 246th general supportive and benefit-sharing of the social meeting held on December 21, 1999. The banks networking of these sectors for the fulfilment of agreed to set aside 10% of their profit before economic, social and cultural needs and the tax (PBT) annually for equity investment in improvement of quality of life (Portes, 1998). small and medium scale industries. The scheme Networks based on social capital exist in aimed, among other things, to assist the developed as well as developing countries, establishment of new, viable small and including Nigeria. Medium Industries (SMI) projects; thereby stimulating economic growth, and development In order to enhance the flow of financial of local technology, promoting indigenous services to the MICRO , small and Medium entrepreneurship and generating employment.

7 Enterprises (MSME) subsector, Government in Timing of investment exit was fixed at Nigeria has, in the past, initiated a series of minimum of 3 years. By the end of 2001, the programmes and policies targeted at the amount set aside under the scheme was in MSMEs. Notable among such programmes excess of 6 billion naira, which then rose to were establishment of Industrial Development over N13 billion and billion by the end Centres across the country (1960-70), the small of 2002 and 2005 respectively, but stood at Scale Industries Credit Guarantee Scheme - billion by the end of December, 2008. SSICS (1971), specialized financial schemes through development financial institutions such Despite all these efforts, the contribution of as the Nigerian Industrial Development Bank SME to Nigeria Gross Domestic Product (GDP).

8 (NIDB) 1964, Nigerian Bank for Commerce remains very poor, hence; the need for and Industry (NBCI) 1973, and National alternative funding window. In 2005, the Economic Recovery Fund (NERFUND) 1989. Federal Government of Nigeria adopted All of these institutions merged to form the MICROFINANCE as the main financing window for Bank of Industry (BOI). In 2000, the MICRO , small and medium enterprises in Nigeria. government also merged the Nigeria The MICROFINANCE Policy Regulatory and Agricultural Cooperative Bank (NACB), the Supervisory Framework (MPRSF) was People s Bank of Nigeria (PBN) and Family launched in 2005; the policy among other Economic Advancement Programme (FEAP) to things, addresses the problem of lack of access form the Nigerian Agricultural Cooperative and to credit by small business operators who do not Rural Development Bank Limited (NACRDB).

9 Have access to regular bank credits. It is also The bank was set up to enhance the provision of meant to strengthen the weak capacity of such finance to the agricultural and rural sector. entrepreneurs, and raise the capital base of Government also facilitated and guaranteed MICROFINANCE institutions. The core objective of external finance by the World Bank (including the MICROFINANCE policy is to make financial the SME I and SME II loan scheme) in 1989, services accessible to a large segment of the and established the National Directorate of potentially productive Nigerian population, Employment (NDE) in 1986. which have had little or no access to financial services and empower them to contribute to In 2003, the small and Medium enterprise rural transformation. Development Agency of Nigeria (SMEDAN), an umbrella agency to coordinate the The MICROFINANCE arrangement makes it development of the small and Medium possible for MSMEs to secure credit from Enterprises (SME) sector was established.

10 In MICROFINANCE Banks (MFBs) and other the same year, the National Credit Guarantee MICROFINANCE Institutions (MFIs) on more easy Scheme for smes to facilitate its access to terms. It is on this platform that we intend to credit without stringent collateral requirements examine the impact of MICROFINANCE on small was reorganised and the Entrepreneurship business growth. Therefore, the study will fill Development Programme was revived. In terms the gap in literature on the impact of both the 464. Asian Economic and Financial Review, 2(3), pp. 463-477. financial and non financial services on small willingness to grow a business for granted, by business growth and to examine the capability assuming profit maximization. However, of MICROFINANCE to transform small enterprises empirical evidence suggests that small business to small scale industries through their owners are reluctant to grow even if there is technology/asset related loans.