THE ROLE OF MICROFINANCE INSTITUTIONS IN THE DEVELOPMENT OF SMALL

AND MEDIUM ENTERPRISES (SMEs) IN NATIONAL TRANSFORMATION

BY

PAUL DUNG GADI

Department of Business Administration & Management,

Plateau State Polytechnic, Barkin Ladi

DAVOU YAKUBU PWOL

Department of Marketing,

Plateau State Polytechnic, Barkin Ladi

SHAMMAH YAKUBU Department of Business Administration & Management,

Nasarawa State Polytechnic, Lafia

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ABSTRACT

Nigeria is fast moving towards becoming a developed country. history proves that the small and medium

enterprises, now called the micro, small and medium enterprises in Nigeria have always been given the

required thrust; however, with regard to the capital needs of these small units, there has been a gap

between the needs and the available resources. The goal of this study is to explore the role of

microfinance institutions in expanding economic opportunity and a way forward towards achieving

national transformation. For clear analysis, the study centre on two broad variables; the dependent

variables which is entrepreneurial development and the independent variable which is microfinance

institutions. Three different hypotheses were formulated and tested using various statistical tools such as

chi-square test, analysis of variance and the simple regression analysis. The reveal that: (i) there is a

significant difference in the number of entrepreneurs who used microfinance institutions and those who

do not used; (ii) there is significant effect of micro institutions activities in predicting productivity; and

(iii) that there is no significant effect of microfinance institutions activities in predicting entrepreneurial

development. It argues that with little efforts, the performance of micro finance institutions can be

improved and these institutions can play role better in national transformation than usual.

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Introduction

Microfinance is not a new concept. It is dates back in the 19th century when money lenders were

informally performing the role of now formal financial institutions. The informal financial

institutions constitute; village banks, cooperative credit unions, state owned banks, and social

venture capital funds to help the poor. These institutions are those that prove savings and have

simple and straightforward procedures that originate from local cultures and are easily

understood by the population (Germidis, et al, 1991). These funds are to finance the informal

sector SMEs in developing countries and it known that these SMEs are more likely to fail

(Maloney, 2003). The creation of SMEs generates employment but these enterprises are short

lived and consequently are bound to die after a short while causing those who gained job

positions to lose them and even go poorer than how they were. It should be noted that

microfinance is not a panacea but it is a main tool that foster development in developing

countries.

The provision of credit has increasingly been regarded as an important tool for raising the

incomes of rural populations, mainly by mobilizing resources to more productive uses. As

development takes place, one question that arises is the extent to which credit can be offered to

the rural poor to facilitate their taking advantage of the developing entrepreneurial activities. The

generation of self-employment in non-farm activities requires investment in working capital.

However, at low levels of income, the accumulation of such capital may be difficult. Under such

circumstances, loans, by increasing family income, can help the poor to accumulate their own

capital and invest in employment-generating activities (Hossain, 1988). Commercial banks and

other formal institutions fail to cater for the credit needs of small holders, however, mainly due

to their lending terms and conditions. It is generally the rules and regulations of the formal

financial institutions that have created the myth that the poor are not bankable, and since they

can’t afford the required collateral, they are considered uncredit worthy (Adera, 1995). Hence,

despite efforts to overcome the widespread lack of financial services, especially among small

holders in developing countries and the expansion of credit in the rural areas of these countries,

the majority still have only limited access to bank services to support their private initiatives

(Braverman and Guasch, 1986). In the recent past, there has been an increased tendency to fund

credit programmes in the developing counties aimed at small-scale enterprises. In Nigeria,

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despite emphasis on increasing the availability of credit to small and microenterprises (SMEs),

access to credit by such enterprises remains one of the major constraints they face. A 1995

survey of small and microenterprises found that up to 32.7% of the entrepreneurs’ surveyed

mentioned lack of capital as their principal problem, while only about 10% had ever received

credit (Daniels, et al, 1995). Although causality cannot be inferred a priori from the relationship

between credit and enterprise growth, it is an indicator of the importance of credit in enterprise

development. The failure of specialized financial institutions to meet the credit needs of such

enterprises has underlined the importance of a needs oriented financial system for rural

development. Experience from informal finance shows that the rural poor, especially women,

often have greater access to informal credit facilities than to formal sources (Hossain, 1988;

Schrieder and Cuevas, 1992; Adams, 1992). The same case has also been reported by surveys of

credit markets in Nigeria (Taikes, 1989; Alila, 1991; Daniels, et al, 1993).

That is the overall objective of this paper. The specific objectives are to: (i) examine the

importance of entrepreneurial activities to the sustainable development of Nigeria; (ii) examine

the challenges of accessibility to capital for the development of entrepreneurship in Nigeria; (iii)

examine the impact of microfinance institutions on entrepreneurial development; and (iv) create

the awareness of the importance of microfinance institutions to entrepreneurship development in

Nigeria. In other to achieve the above stated objectives, the following research questions are

advanced: (i) does microfinance contribute to entrepreneurial activities that can lead to

sustainable development in Nigeria? (ii) do entrepreneurs have access to capital for the

development of small and medium size entrepreneurship in Nigeria? (iii) what are the prospects

of microfinance in the development of entrepreneurship in Nigeria? Does entrepreneurial

development have any implication on the industrial development of Nigeria? The following null

hypotheses are proposed and tested in the course of this study. (i) There is no significant

difference between entrepreneurs who use microfinance and those who do not; (ii) there is no

significant effect of microfinance institutions activities in predicting entrepreneurial productivity;

(iii) there is no significant effect of microfinance institutions activities in predicting

entrepreneurial development.

Conceptual Issues

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It has been acknowledged that microfinance captures elements of widespread perception,

broadening, deepening and speeding up the interconnection to poverty reduction and economic

development. Schreiner and Colombet (2001:339) clearly describe microfinance as “the attempt

to improve access to small deposits and small loans for poor households neglected by banks.”

According to Olaitan (2001) and Akanji (2001), the tools of microfinance include increased

provision of credit, increased provision of savings, reponsitories and other financial services to

low income earners or poor households. Thus, simply defined, microfinance is a development

process through the provision of microcredit and savings service to small-scale entrepreneur. The

Olaitan and Akanji perspective on microfinance go in line with Schreiner’s description of the

concept. Schreiner (2001) also proposed a definition of microfinance as “uncollateralized loans

to the poor and small-scale entrepreneurs.” This implies that microfinance provides financial

strength to the low income earners so as to enable them carry on economic activities that can

earn them improved living standard. UNDP (2001) identified microfinance as a major tool

effective in alleviating poverty. It empowers the financially disadvantaged ones. According to

Morduck, et al 92003) and Alegiemo and Attah (2005), microfinance is the financial

empowerment of economically active poor through the provision of microcredit as well as other

productive assets; it enhances the latent capacity of the poor for entrepreneurship, enabling them

engage in economic activities, be self-reliant and also enhancing the household income as well as

creating wealth. While some authors see the concepts of microfinance and microcredit as same in

terms of definition, others opine that microfinance is an extension of microcredit. Osuji (2005)

posits that microfinance is an extension of microcredit services which include savings services to

the low-income but economically active poor. In lieu of this definition, the Canadian

International Development Agency (2005) description of the concept as provisions of small loans

for micro enterprises, agriculture, education and consumption purpose seem incomplete.

Microfinance is a concept that includes mobilization of savings and disbursement of micro-credit

to the economically active poor, so as to provide employment and means of sustainability to

improve the living standard in an economy.

Role of the SME Sub-sector in the Economy

A review of historical experience of economic growth and development in various countries is

replete with success stories of the salutary effect and positive impact and contributions of SMEs

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in industrial developments, technological innovations and export promotion. These challenges

notwithstanding, SMEs have remained as much important and relevant economic catalysts in

industrialized countries as they are in the developing world. In many developed countries, more

than 90% of all enterprises are within the SME sub-sector while 80% of the total industrial

labour force in Japan, 50% in Germany and 46% in USA small businesses contribute nearly 39%

of the country’s national income. Comparable figures in many other developed countries are

even higher. Studies have indicated that the sustenance of interest in SMEs in the developed

economies is due to technological as well as social reasons more so as those economies are

currently driven by knowledge, skill and technology as opposed to material and energy-

intensiveness. This is also as a result of a paradigm shift to new processes of manufacturing that

are based on flexible systems and processes of production driven by sophisticated software on

robust hardware platforms. The social reasons include the need for generation of more

employment and poverty reduction through self-employment ventures and decentralized work

centres. Though it is difficult to obtain exact and comparable figures on SMEs for developing

countries, it is obvious that the role of SMEs is equally important in the economies of developing

and developed countries alike. Small domestic markets, inadequate infrastructure, high

transportation costs, shortage of capital and foreign exchange, weak currency, lack of access to

technology and foreign markets as well as surplus low quality labour are the general

characteristics of developing countries and hence are susceptible to being trapped in a

technology divide and investment gap. Foreign direct investment and the acquisition of

technology are indispensable elements for economic transformation these countries require to

achieve sustainable economic growth and poverty alleviation. Although, SMEs in developing

countries and countries with economies in transition are regarded as the engine of economic

growth, they face enormous challenges in attracting investors and accessing modern technology.

Other barriers which SMEs in developing economies face include the lack of effective

investment and technology promotion policies, inappropriate legal and regulatory frameworks,

inadequate capabilities of investment promotion and technology support institutions and the lack

of access to potential investors and sources of new technology, limited technical and managerial

skills, difficulty in obtaining financing and insufficient knowledge about laws and regulations.

Others are inability to achieve economies of scale through integration or linkages, problems of

size and relative isolation such as the difficulties in entering into national and global value chains

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driven by large multinational corporations. All told, a competitive and resilient industrial sector

relies on an appropriate mix of large, medium and small enterprises for optimum performance.

SMEs certainly play a major role in creating employment income and value added, accounting

for up to ninety percent (90%) of manufacturing enterprises and between forty (40%) to eighty

percent (80%) of manufacturing employment. In developing countries, the role of SMEs is even

more important since SMEs often offer the only realistic prospects for creating additional

employment and thus reducing poverty and enhancing the quality of lives. A healthy SME

subsector is a sine quo non for inclusive and socially sustainable development even though

institutions that provide support services where available are often limited in capacity and

coverage in developing economies. Exports by SMEs usually range between 30 and 50 percent

of total industrial exports in developed and developing countries. In tune with the latest

developments in the world economy and the attendant globalization effects, the role of SMEs

going forward is bound to be even greater and more pervasive with a demonstrable impact on the

emerging world trading order.

Microcredit Programme and the Entrepreneurship Development

Over the last two decades, microcredit became an important tool for alleviating poverty in

Nigeria (Khandkar and Chowdhury, 1996). The overall success of microcredit programmes

depends not only on immediate alleviation of poverty, but also on long-term sustainability.

Long-term sustainability then depends on accumulation assets (Chowdhury, 2004). Njow, more

than 300 non- governmental organisations (NGOs), national commercial banks and specialized

financial institutions operate microcredit programmes in Nigeria. Such programmes have proven

to be a strong means to alleviate poverty through the social and economic empowerment of rural

and disadvantaged women (Tende, 2012). Such a group savings programme can help the rural

women to bring economic security into their lives (Secretary General, UN, 1998). The changing

role of women shows a steady upward growth in the economic activities in Nigeria (Arefin and

Chowdhury, 2008). Studies show that female entrepreneurs are doing better in the service sector

than in the manufacturing sector in Bangladesh (Begum, 2002). Microcredit is a structured

programme under which micro level loans are given to disadvantaged residents, especially to

poor rural women without collateral security. It is a group-based and intensively supervised loan

programmes. The uniqueness of this loan programme is that there is no requirement of collateral

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security from the borrowers. Anyone can apply for this credit and is also eligible to receive

credit. The purpose of this microcredit programme is to give loans for self-employment that

generates income and allows them to care for themselves and their family members (Sankaran,

2005). These programmes increase income and help the female borrowers to spend more in order

to foster the development of their families. Such programmes also help to increase household

income which in turn, improves the consumption patterns and lifestyles of the families (Hossain

and Sen, 1992; Navajas, et al, 2000). Increased income indirectly improves the level of education

of the borrowers and the awareness about consumption and sanitation needs as well. The

improvement of education among the rural borrowers helps to increase consciousness about their

health and the future of the next generation. Credit programmes increase productive resources for

rural families and their housing conditions and also result in economic security for the

borrowers. The needs of enable them to conduct frequent transactions both for small savings and

for borrowing at irregular intervals (Sinha, 2003). A survey on Grameen Bank shows that

microcredit programmes generated new employment for about one third of its members

(Hossain, 1986). In Vietnam, the microcredit programme has also reduced the poverty rate of the

participants (Cuong, 2008).

Microfinance, SMEs and National Transformation

The transformation agenda is anchored on the pillars and specific targets of the Nigeria Vision

20:2020 (NV 20:2020). However, as a medium term roadmap for secur8ing a better future, the

transformation agenda is targeted at:

a) Creating decent jobs in sufficient quantities to resolve the protracted problem of

unemployment and reduce poverty;

b) Laying a foundation for robust and inclusive growth within the Nigerian economy; and

c) Improving on a sustainable basis the well-being of all classes of Nigerians regardless of

their personal circumstances and location.

Given the rapid growth rate of the economy experienced between 1999 and 2010, averaging 8

percent per annum, a robust real GDP growth rate of 11.7% per annum is anticipated for 2011-

2015. This translates to a nominal GDP of $US475.3 billion (N73.2 trillion) at the end of 2015;

implying that Nigeria would have added over US$282 billion to the current value of her nominal

GDP during the period. Nigeria would have covered over 50% of the journey to meeting the

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NV20:2020 aspiration of achieving a GDP of US$900 billion. The projected GDP growth for the

period is predicated on improved sectoral performance fuelled by a better domestic business

environment and a favourable global economic arena, combined with improved policy

formulation, implementation and coordination to generate a stable macroeconomic environment

and increased investment.

Economic development cannot be fully realized without programmes that seek to reduce poverty,

especially those that empower the people by increasing their access to factors of production,

especially credit. NV20:2020 aims for 99 million adequately equipped and gainfully employed

citizens that are engaged in productive activities and wealth generation.

This has implications for micro financing and acquisition of other productive assets/means of

production. The aggregate credit facilities in Nigeria account for only 0.2 percent of the GDP

and less than 1 percent of the total credit to the economy. Put graphically, the formal financial

system in the country provides services to only about 35% of the economically active population

while the remaining 65% 11 are excluded from access to financial services and are served only

by the informal financial sector.

Research Methodology

Data were collected from a sample of enterprises to determine the relationship between

entrepreneurial development (the dependent variable) and microfinance (the independent

variable). The theoretical population of the study consists of the entire SMEs in the country.

However, the study was restricted to Plateau State. A simple random sampling technique was

used to select a total of 60 entrepreneurs that constituted our sample size. Primary method of data

collection was used in this study. The primary data consists of a number of items in well

structured non-disguised questionnaire that was administered to and completed by the

respondents. The decision to structure the questionnaire is predicated on the need to reduce

variability in the meanings possessed by the questions as a way of ensuring comparability of

responses. The return rate of completed questionnaire was 80 percent as we were able to get back

48 out of 60 questionnaires given to our respondents. |Thus, only 48 questionnaires were used for

final analysis in this study. Data collected from the questionnaire were analyzed, summarized,

and interpreted accordingly with the aid of descriptive statistical techniques such as total score

9

and simple percentage. Chi-square was used to measure the discrepancies existing between the

observed and expected frequency and to proof the level of significance in testing stated

hypotheses. Regression Analysis and Variance (ANOVA) were computed with the help of

Statistical Packages for Social Sciences (SPSS). The trends, and patterns and relationship among

data were identified and interpreted.

Testing of Hypotheses and Interpretation of Results

Three hypotheses were raised for this study and tested at 0.05 significant level. Hypothesis 1:

There is no significant difference in the number of entrepreneurs who used microfinance

institutions and those who do not.

Table 1: X2 Summary

Variable X d

f

X2-

ob

p-

value

Adoption of microfinance institutions 38 1 12.44 <0.05

Non adoption of microfinance institutions 10

X2 = 12.44, 1 degree of freedom and 0.05 significant level, it implies that most entrepreneurs

chose microfinance institutions (38) 79.2% and non-adoption of microfinance institutions (10)

19.8%.

Hypothesis One is rejected

Hypothesis 2: There is no significant effect of microfinance institutions activities in predicting

entrepreneurial productivity.

Table 2: Model summary of the simple regression for Entrepreneurial Productivity

Model R R Square Adjusted

R Square

Std. Error

of the

Estimate

1 .722 .50 .48 128.4227

a. Predictors:(Constant microfinance institutions activities)

To test the second hypothesis, simple regression analysis was used to regress the independent

variable against dependent variable used in determining independent variable. Table 2 above

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indicates the model summary of the simple regression equation that predicted entrepreneurial

productivity. The explanation of the values presented is given in the table below.

Table 3: Summary of Analysis of Variance for Entrepreneurial Productivity

Model Variation Sum of

Squares

df Mean

Square

F Sig.

1

Regression 466 1 466 16.64 0.05

Residential 1316 47 28

Total 1782 48

a) Predictors (Constant microfinance institutions activities)

Source: Field Survey, 2012

The model summary table provides useful information about the regression analysis. First, the

‘multiple R’ column is the correlation between the actually observed independent variables and

the predicted dependent variable (i.e. predicted by the regression equation). ‘R square’ is the

square of R and is also known as the ‘coefficient of determination.’ It states the proportion

(percentage) of the (sample) variation in the dependent variable that can be attributed to the

independent variable(s). In this study, 50% of the variations in entrepreneurial productivity could

be accounted for by the microfinance activities. The ‘adjusted R square’ refers to the best

estimate of R square for the population from which the sample was drawn. Finally, the ‘standard

error of estimate’ indicates that on average, observed entrepreneurial productivity deviate from

the predicted regression line by a score of 128.4227. The hypothesis two which stated that there

is no significant effect of microfinance institutions activities in predicting entrepreneurial

productivity was rejected at R = .722, R2 = .50, F(1.48) = .16.64; p<.05. This implies that there

is a significant effect of microfinance institutions activities in predicting entrepreneurial

productivity.

Hypothesis 3: There is no significant effect of microfinance institutions activities in predicting

entrepreneurial development.

Table 4: Model summary of the Simple Regression for Entrepreneurial Development

Model R R Square Adjusted

R Square

Std. Error

of the

Estimate

1 .462 .213 .189 2.1427

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a) Predictors (Constant microfinance institutions activities)

Source: Field Survey, 2012

To test the third hypothesis, simple regression analysis was used to regress the independent

variable against dependent variable used in determining independent variable. Table 4 above

indicates the model summary of the simple regression equation that predicted entrepreneurial

development. The explanation of the values presented is given in table 5 below.

Table 5: Summary of Analysis of Variance for Entrepreneurial Development

Model Variation Sum of

Squares

df Mean

Square

F Sig.

1

Regression 1127.28 1 1127.28 20.13 0.05

Residential 2632 47 56

Total 3759.28 48

a) Predictors (Constant microfinance institutions activities)

Source: Field Survey, 2012

It states the proportion (percentage) of the (sample) variation in the dependent variable that can

be attributed to the independent variable(s). In this study, 21% of the variations in

entrepreneurial development could be accounted for by the microfinance activities. The ‘adjusted

R square’ refers to the best estimate of R square for the population from which the sample was

drawn. Finally, the ‘standard error of estimate’ indicates that on average, observed

entrepreneurial development deviate from the predicted regression line by a score of 2.1427. The

hypothesis three which stated that “there is no significant effect of microfinance institutions

activities in predicting entrepreneurial development was rejected at R = .462, R2 = .213, F(1,48)

= 20.13; p<.05. This implies that there is a significant effect of microfinance institutions

activities in predicting entrepreneurial development.

Summary of Research Findings

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This research work has been able to identify the impact of microfinance on entrepreneurial

development in Nigeria. The analysis of data indicates that financial institutions are not

adequately financing SMEs. The findings are as follows:

i. There is a significant difference in the number of entrepreneurs who used microfinance

institutions and those who do not.

ii. There is a significant effect of microfinance institutions activities in predicting

entrepreneurial productivity.

iii. There is no significant effect of microfinance institutions activities in predicting

entrepreneurial development.

iv. Microfinance is sustainable to the development of entrepreneurship activities in Nigeria.

v. People have access to capital for entrepreneurship development in Nigeria through

microfinance.

vi. Microfinance has affected entrepreneurship in the country positively.

vii. Entrepreneurship develop is vital to the industrialization process of the country.

The major contribution of microfinance institutions to the developing economy like that of

Nigeria is its role in promoting entrepreneurship development in the nation. One of the goals of

entrepreneurship routed by successful Nigerian Government has been the reduction of

unemployment and poverty alleviation. A cordial thrust in public policy for the achievement of

indigenous entrepreneurship through the provision of long term loans and equity capital by banks

for enterprise. Given the gap between savings and invertible funds, the shortfall is provided by

credit delivery. Many newly developed and developing countries have therefore made credit

delivery an endurable strategy in the development of entrepreneurship in both industry and

agriculture.

Conclusion and Implications

The review of several literature shows that the microfinance institutions are evident tools for

entrepreneurship development due to the various services they offer and the role they performs

towards the development of the economy. It is expected that with the current reforms put in place

by the Federal Government through its regulatory authorities, microfinance institutions in

Nigeria will be able to compete favourably in the global market and gainfully increase

entrepreneurship development in Nigeria. Microfinance institutions have positive relationship

13

with the Nigerian economy represented by expanded GDP. Although, interest rate is not

significantly influential, the results of findings of this study can still be summarized that the

microfinance institutions and their activities go a long way in the determination of the pattern

and level of economic activities and development in the Nigerian economy.

Recommendations

The financial institution need to put more effort in financing SMEs, their role need to be felt by

the SMEs in terms of growth and development. This study recommends that guidelines by

microfinance institutions to finance SMEs need to be flexible to accommodate the SMEs only

when financial institutions appreciates and give technical assistant to the SME would be

contributing to the SMEEIS to ensure success in the SME sector. It is the researcher hope that

microfinance institutions in Nigeria will develop more interest in supporting the growth of

SMEs. NV20:2020 strategy to guarantee accessibility, effectiveness and reliability of

microfinance institutions will require regular supervision and declaration of financial records and

ensuring increased access to financial and market performance records. A major policy thrust

will be to encourage cash flow consideration over collateral in SME lending, so that a larger

percentage of business owners, entrepreneurs and new entrants can benefit from the micro-credit

fund.

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