ABSTRACT
This study examines the performance of Micro
finance Institutions (MFIS) in Lagos State, based on the development of small
and medium Scale Industry. The findings indicate that the operations of MFIs
have grown phenomenally in the last three years, driven largely by expanding
informal sector activities, the conversion of the community banks to micro
finance banks and the reluctance of banks to fund the emerging micro
enterprises. The study also reveals the sub-sector faces a number of
challenges, which have been addressed in this project. They include the urgent
need to 'approved and implement a policy framework that would regulate and
standardize the MFI· operations; -accessing medium to long term sustainable
commercial sources of funds, such as SMIEIES. Commercial banks traditionally
lend to medium and large enterprises, which are judged to be creditworthy. They
avoid doing business with the small and medium scale industry because the
associated cost and risks are considered to be relatively high. Microfinance
institutions (MFls) have therefore become· the main sources of funding small
and medium scale industry in Africa and in other developing regions.
TABLE OF CONTENTS
CHAPTER
ONE
INTRODUCTION
1.1 Background
to the study
1.2 Statement
of Problem
1.3 Objectives
of Study
1.4 Research
Hypothesis
1.5 Research
Hypothesis
1.6 Methodology
and Survey Execution
1.7 Scope
of the study
1.8 Limitation
of the study
1.9 Definition
of Terms
CHAPTER
TWO
LITERATURE
REVIEW
2.1 Introduction
2.2 Operational
Definition the Term Small Scale Business
2.3 Summary
of Legal and Regulatory Issues Affecting Microfinance
2.4 Summary of Legal and Regulatory Issues Affecting Microfinance
Banks
2.5 Principles for Effective Micro – Finance Institution
2.6 Challenges to the Government and the Regulatory Environment
2.7 Transformations of Micro-Finance Schemes from Subsistence
2.8 Policy
Options on small scale industry
2.9 National
Microfinance Policy
2.10 Proposed
Changes to the SMIEIS program
2.11 Prospects of Nigerian SMES under the small
and Medium Industries Investment Schemes (SMIEIS) Basic Concepts in SMES
2.12 Activities
Covered By SMES
2.13 Bilateral/
Multilateral Institutions Efforts
2.14 Potentials
of SMES
2.15 Historical
Development Orientation of small scale Industry in Nigeria
2.16 Marketing
Problems of small Business Enterprises
2.17 The
Nigerian Government Participation in Small Scale Industries
2.18 Government
as a Business Regulator
2.19 The
Importance of a Small Business
2.20 Special
Causes of Small Scale Business Failure in Nigeria
2.21 Financing
of Small Scale Enterprises
CHAPTER
THREE
RESEARCH
METHODS
3.0 Financing
of Small Scale Enterprises
3.1 Research
Design
3.2 Re-Statement
of Research Questions
3.3 Re-Statement
of Research Hypothesis
3.4 Data
Collection Techniques
3.5 Population
of Study
3.6 Determination
of study & Sampling Techniques
3.7 Validity
& Reliability of Instrument
3.8 Data
Analysis Methods
3.9 Limitations
of study
CHAPTER
FOUR
DATA
PRESENTATION AND ANALYSIS
4.1 Introduction
4.2 Data
Analysis of Respondent Bio-Data
4.3 Test
of Hypotheses
4.4 Decision
Rule
CHAPTER
FIVE
SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1 Summary
of Findings
5.2 Conclusion
5.3 Recommendations
Bibliography
Appendix
1
Appendix
11
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
Microfinance is the provision of a broad range of financial services
such as deposits loans, payment services, money transfers, and insurance to
poor and low-income households and, their micro-enterprises. Microfinance
services are provided by three types of sources:
·
Formal
institutions, such as rural banks and cooperatives
·
Semiformal
institutions, such as non-governmental organizations: and
·
Informal
sources such as money lenders and shopkeepers
Institutional micro finance is defined to include
micro finance services provided by both formal and semiformal institutions.
Microfinance institutions are defined as institutions whose major business is
the provision of microfinance services.
M.S Robinson asserts that "if it were widely
available institutional commercial micro finance could improve the economic
activities and the quality of life of hundreds of millions of people in the:
developing world". However it is generally agreed that micro-credit given
to those of the poor who do not have a capacity to repay can increase their
poverty.
The extensive reliance of poor households on
informal arrangement reflects the importance of financial services for their
lives.
Until the early 1960s many economists viewed the
continued existence of small scale industries in less developed countries as
justified by scarcity of capital and administrative experience. It was often argued
that with economic growth the small traditional type of enterprise would in one
sector after another be superseded by modern forms of large-scale production. I
n order to ensure an orderly transition, small industries were seen to deserve
support, but mainly in sectors where modem methods could not be immediately
applied. In the mid- 1960s a new approach to small and medium-scale enterprise
(SME) development began to emerge due to several factors. First there was
growing concern over low employment elasticity of modem large-scale production.
It was claimed that even with more optimal policies, this form of industrial
organization was unable to absorb a significance proportion of the rapidly
expanding labour force (Cherney et al 1974 ILO. 1973). Second, there was
widespread recognition that the benefits of economic growth were not being fairly
distributed, and that the use of large-scale capital intensive techniques was
partly to blame (MctCormick. 1988; House. 1981; Cherney et al 1974). Third
empirical studies revealed that the causes of poverty were not confined to
unemployment and that most of the poor were employed in a large variety of
small-scale production (Noormohamcd 1985).
This suggests a new role of small industries in
what has come to be labeled "the urban informal sector". Small. labour-intensive
industries were seen not only to increase employment but also to increase the
living standards of the poor. They were also thought to be capable of providing
a new dynamic of economic growth. The new objective was not just to stop to
retreat but to promote the small-scale sector (House. 198I; Schmitze, 1982;
Giamartino, 1991).
This change in approach was accompanied by a shift
of focus towards a "rurally orientated smallholder" (ROSH)
industrialization strategy, well-articulated in Kilby (1975). Child (1976), House
(1978), Noormohamed (1'985) and Olofin (1990) among others. While the Word Bank
(1992) and others have tended to favour the ROSH implementation strategy by
assigning the major role to the private sector, there are those who favour its
implementation by assigning a major role to government (Olefin 1990,
Noorrnhamed, 1985). Assigning the major role to the private sector has its
appeal in the fact that the private sector has the resources needed to
implement the strategy. But the proponents of assigning the role to the
government are aware that in many developing economies; government is the major
mover of the: economy with only a small and sometimes weak private sector.
Thus, they argue that assigning such an important role to the private sector
would not work. Besides, for the strategy to produce an optimal effect on the well-being
of the people, the social environment has to be considered something the
private sector may not be willing to do.
Kilby (1969) Sees SMEs as a quasi-sponge for urban
employment and a provider of inexpensive consumer goods with little or no
import content, serving an important pressure-releasing and welfare-augmenting
function. SMEs also contribute to long-run industrial growth by producing an
increasing number of firms that grow up and-out of the small-sector.
Most previous studies throughout African treat the
information sector as essentially homogenous in its characteristics (Morris and
Pitt, 1995; Bewayo, 1995; Ekpenyong and Nyong; 1992). Recent research suggests
that government policy should be more narrowly targeted to sub-sectors within
the informal sector (Parker and Torres, 1994). This study examines survey data
in order to evaluate the characteristics of small-scale manufacturers that make
it more difficult for them to be profitable and the particular problems that
they face which may have contributed to their poor performance.
Since her independent in 1960, Nigeria has been
trying to meet the yearnings and aspirations of her teeming population,
especially in the area of provision of employment. Unfortunately, not much has
been achieved in this respect. Given the importance of 'small' and 'very small'
enterprise in the creation of employment, this study seeks to evaluate the financing
of microenterprises in Lagos State of Nigeria by identifying the problems of
financing very small enterprises (VSE's).
However the growth of the country's economy has
not been without problems. For instance, Omopariola (1978) notes three
successive phases can be discerned in the economic history of Nigeria. The first
phase, dating back to 1900 "was the peasant economy characterized by
static, agrarian and subsistence product" and a "high birth rate
which was equally matched by high death rate" (P.15 resulting in a low population. growth rate. The second phase which
occurred in the middle of the nineteenth century was' a dynamic
export-oriented economy" (Ibid. p.16) Omopariola reports further that
during this economic phase, "Nigeria
had a steady growth in her economy which was stimulated primarily by
agricultural exports during the first three decades of the twentieth century."
(Ibid. p.16) the economic. Starting from the collapse of international trade
during the world economic crisis grinded to a halt in its growth in 1929 and
remained more or less stagnant until 1945. From 1954 until the outbreak of the
war of unity (civil war) in 1967 and up to the end of the war in 1970.
"Nigeria experienced steady economic growth" (Ibid. P. 16). The third
Phase which has its roots in 1960 when the country attained political
independence from the British colonialists has been described as the
indigenized economy. This is still the phase under which the Nigerian economy
is characterized.
Thus over the years the Nigerian economy has been
going through a number of developmental stages and its growth has not been
smooth. Although the economy continues to hold out a bright promise of growth,
this has been hampered by factors such as under-productivity, unemployment heavily
depreciated national currency inadequate infrastructure facilities and
structural defects in the country's industrial framework. The scope of this
study focuses on the latter factors, structural defects in the nation's
industrial framework.
A business whether small or big, simple or complex,
private or public etc. is created to
provide competitive prices. Business in Nigeria has been classified as small medium
and large. However, a small scale industry can be defined by the criteria of
project costs, capital cost turnover by the employee etc. The federal and state
ministries of industry and commerce have adopted the criterion of value of
installed fixed capital to determine what a small scale industry is in this
respect the value has varied from N60, 000 in 1972, N159. 000 in 1975. N250.000
in 1979. N500, 000 in 1986 to a fixed investment of not more than N2.000.000 (Two Million Naira) in 1992. This figure
is exclusive of of building
and subject to government determination and land prevailing objectives
of public policy. In the wake of SFEM, and SAP, this value has now been
reviewed and subsequently increased to five million naira. Since this happened.
there may be a need to classify' the small scale industry into MICRO and SUPER
MICRO business with a view to providing adequate incentives and protection for
the former.
In the meantime, any business or enterprises below
the upper limit of N250. 000 and whose annual turnover exceeds that of a
cottage industry currently put at N5, 000per annum is a small scale industry.
The National Directorate of Employment (NDE) concept of a small scale industry
has been fixed to a maximum ofN35, 000.
1.2 STATEMENT OF PROBLEM
Over the last five decades, the small-scale
industries (SSI) sector has acquired a place of prominence in the economy .of
the country. It has contributed significantly to the growth of the Gross
Domestic Product (GDP), employment generation and exports. The sector now
includes not only SSI units but also small scale services and business
enterprise (SSSBEs) and is thus referred to as the small enterprises sectors.
The small enterprises sector, however, faces
several problems which hamper it in achieving its full growth potential. Some
of the major problems faced by the sector are access to timely and adequate
credit, technological obsolescence infrastructural bottlenecks, marketing
constraints and a plethora of rules and regulations. Some policy initiatives
taken during the year may help promote and develop the small-scale and medium
sector.
While one had to search for strength in most of
the informal sector entrepreneurs, several did emerge. First, each
micro-business provides an income for the owner and his family, and in many cases,
a livelihood for his/her extended family. However one may ask, how easy will this
small scale industry get equipped with necessary things to function well.
Various strategy to improve small scale industry in Nigeria has' not yielded
the desired result; it is believed that the micro finance strategy can be a
better option. It is likely to improve on the National Directorate of
Employment Scheme, however the earlier looks at some of the problems that can
easily beset a successful microfinance strategy to the development of
small-scale industry the better the solution can be. Such problems will
includes:
- Genuineness of taking loan and utilizing for
small scale industry development
- Needs to obtain loan with ease:
- Collateral security needed for the loan may be
difficult to find
- The level of infrastructural development can
hinder progress
1.3 OBJECTIVE
OF STUDY
The banks themselves are becoming more open to
real sector investments that require long gestation ·periods. Then the purpose
here is to find a possible way of adequate financing of small scale industry
looking at the roles they play in Economic Development. The purpose of this
project therefore is to look at the strategy of using micro finance in the
development of small scale industry with emphasizes laid to Lagos State.
However, if small businesses are encouraged, some
of these will be things of the past. Employment opportunity will abound with
small business. There will be reduction in the demand for the scarce foreign
exchange. If Nigerian produce such items as safety pins, blades etc. so that
foreign exchange could be allocated to the priority sector.
In the long run, foreign exchange could be
obtained if products made by small enterprises are exported to the neighboring
countries. Another importance of small business in Nigeria is product variety
and product accessibility. Some of the product manufactured by medium and
large-scale business are limited in sizes and variety. If small business come
to focus as we have in soap making the consumers will have varied opportunities
to buy products at affordable price.
Small businesses also encourage and advance our
social values. Those imported items did not take our cultural value into
consideration. Nigeria is now a dumping ground for all kinds of product that
are against our value product which constitute nuisance to them are now dumped
on our grounds in the name of "Tokunbo".
However the importance of small scale to the owner
cannot be overemphasized. It provides sense of independence to owner. More so,
there is immediate chance for higher income than what you earn as a salary
earner.
1.4 RESEARCH
QUESTIONS
In order to examine these issues, the following
research questions have been raised:
1)
To ascertain
whether micro finance will improve the strategy of small scale industry
development in Lagos State.
2)
To determine
whether micro finance will improve accessibility to loan for small scale
industry in Lagos State.
3)
To know how
has micro finance faired in granting loan to small
scale industry especially in Lagos State.
4)
To determine
the extent to which government policy has affected the development of SMEs.
1.5 RESEARCH
HYPOTHESIS
The statement of hypothesis seeks to determine the
relationship between impact of Microfinance on Small and Medium Scale Industry
in Lagos State. The hypothesis to be tested can be summarized as follows:
Hypothesis One Null Hypothesis (Ho): Small and Medium Scale
Industry will not be improved with the introduction of microfinance.
Alternative Hypothesis (Hi): Small and Medium
Scale Industry will be improved with the introduction of microfinance.
Hypothesis Two
Null Hypothesis (Ho): Small and Medium Scale
Industry will not improve Economic Development in Lagos.
Alternative Hypothesis (Hi): Small and Medium
Scale Industry will improved Economic Development in Lagos.
1.6 METHODOLOGY
AND SURVEY EXECUTION
The data for the study was collected by employing
face-to-face structured interviews with representatives of micro-enterprises. A
census in the industrial areas or the
three towns counted 2,626 small manufacturers with 20 or fewer workers. Since
only percent of this population fell between 10 and 20 workers. We are
ostensibly writing" about firms with 10 or fewer workers. The general
category of textile work. Including tailoring, dressmaking. Knitting and sewing
of textile products is the largest activity group. Woodworkers are the second
largest group and are composed of carpenters mostly making wooden furniture. Supplying
wooden doors and windows and doing repair work. The last category is the metal
workers producing cooking utensils, charcoal stove, metal boxes, small
hardware, metal furniture, metal door and window frames and iron gates.
The population of enterprises revealed roughly 20
percent women entrepreneurs but this hides the fact that roughly 90percent of
that figure are in the textiles trade with very few women entrepreneurs in
carpentry or metal work. This bias of women towards textiles pays on
stereotypes of women as seamstresses who are barred from other areas of gainful
employment.
1. 7 SCOPE OF THE STUDY
The scope of the study is definitely wide,
although the researchers descriptively explore necessary journals, magazines
and textbooks and studies in the areas of Small and Medium Scale industry in
general looked at the direct and indirect impact it has on the economy as a
whole and the positive side that it has in the area of allowing other sector to
improve generally. The scope therefore will analyze the operation of
microfinance bank.
1.8 LIMITATION
OF THE STUDY
One of the limitation of the study is the weakness
in the data as provided by the Nigerian agencies. Data generation and
processing in Nigeria is still at its infancy. The major problems are those of
data adequacy, reliable and timeliness which affect the overall quality of the
data. However, these problems are partly eliminated in this study by using data
largely published by the international organization and only complimented: with
data from Nigeria agencies. This set of data is used in this study without
giving way to perfectionist despair.
1.9 DEFINITION
OF TERMS
1.
SMEs: A Small and Medium Scale Enterprises with a working capital base not
exceeding N250, 000 and employing on
full time bases. Fifty (50) workers or
less.
Microfinance: Denotes the provision of financial
services adapted to the needs of low income people such as micro entrepreneurs
especially the provisions of small loans, the acceptance of small savings
deposits and simple payments services needed by micro-entrepreneurs and other
poor people.
Micro Enterprises: Are very small-scale,
informally organized business activities undertaken by low-income people that
employ less than 10 workers.
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