ABSTRACT
Micro and Small Enterprises (MSEs) are currently regarded as the backbone of every economy and have been globally regarded as engines of growth, vehicles for job creation, drivers of production and income generation as well as veritable tools for poverty reduction and wealth creation. The source of microfinance is equally important because at the centre of every enterprise objective is profitability and growth that can trigger its achievement of the expected roles. MSEs in Nigeria have not played these roles effectively due to the challenges of access to finance, infrastructural deficit and vocational skills deficiency. The main thrust of this thesis, therefore, is to evaluate the effectiveness of microfinance sources on the profitability of MSEs in South East, Nigeria as well as understanding the determinants of the choice of microfinance sources and the level of support that MSEs get from funds providers. The study employed multi-stage sampling technique in identifying clusters from three cities (Onitsha, Aba and Nnewi) of the South East, Nigeria and generated relevant data through instruments such as questionnaire, personal interviews and Focused Group Discussions (FGDs). A total sample of 540 enterprises out of 1994 enterprises were selected across different clusters comprising enterprises under production, trade and services in the three cities. Using multiple regression technique and logit regression, the study found that both formal and informal microfinance sources impacted significantly on the profitability of MSEs in South East, Nigeria. The study further found interest rate, repayment period, amount or volume of capital and proximity to enterprises as the major determinants of the choice of microfinance source used by MSEs in South East, Nigeria. Also, the respondents revealed that why most of them patronized informal source of microfinance is because of the quick response as well as the relationship with the provider (social capital). The study concluded that microfinance providers should be located closer to MSEs’ location for quicker response to their financing needs to the extent of taking advantage of social capital existing within the clusters as a possible cushion for the physical collaterals and documentations often requested for loan approvals. The study recommends that microfinance policy framework and interventions should encourage providers to locate closer to the enterprise clusters with the appropriate regulatory guarantee for operators.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The impact of manufacturing industry in every
economy cannot be overemphasized as it goes a long way to enhance production,
create jobs, reduce imports, increase exports and hence increase National
revenue and income. In Nigeria, the growth pattern has been quite sluggish over
the last decades. This fact is connected to the high increase in the level of
poverty, which is further exacerbated by the pandemic problem of low
productivity (Sulaiman, 2005). Nigeria as a nation is blessed with both human
and material resources, but Maduagwu (2000) posits that poverty in the midst of
abundance is a popular paradox characterizing the Nigerian economy. According
to the Central Bank of Nigeria (CBN) (2006), foreign exchange inflow and
outflow through the Central Bank of Nigeria amounted to United States (US)
$3.25 billion and US $ 1.16 billion respectively resulting to net inflow of US
$2.09 billion. Despite this huge amount of foreign reserves, Nigerian citizens
suffer from widespread poverty.
Micro enterprises have been referred to
as the arm of the industry that could be used to reach out to relatively low
scale investors and develop the home industries. The roles of micro enterprises
cannot be overemphasized in economic development, accordingly, Chibundu (2006),
states “it is encouraging to note that research findings and empirical
evidences show that significant poverty reduction is possible and has occurred
in many countries where micro enterprises are encouraged”. They stimulate
private consumption, ownership and entrepreneurial ability; generate
employment, help diversify economic activities and make significant
contribution to export and domestic trade while utilizing local raw materials.
Micro
and Small Enterprises (MSEs) are globally acknowledged as a potentially
critical economic sector. They contribute about 30 per cent of global Gross
Domestic Product (GDP) and account for about 58 per cent of global working
population (Kushnir, Mirmulstein, and Ramalho, 2010). They are
numerically dominant, providing the majority of employment and are the prime
sources of new jobs. They play a critical role as safety net for the bulk of
the population in developing economies including Nigeria. In addition, they
provide amenable avenue for creating new jobs in the economy.
In Nigeria, the
Corporate Affairs Commission (CAC) estimates that about 90% of all Nigerian
businesses in 2007 employed less than 200 persons. From the cluster
development programme in Eastern Nigeria, that is, administrative and
infrastructure costs’ survey of the manufacturing sector (Abia and Anambra
States), prepared by Skoup and Company Ltd for the International Finance
Corporation and the World Bank, February 2003, Nigeria envisions MSEs
sector that can deliver maximum benefits of employment generation, wealth
creation, poverty reduction and sustainable economic growth. Towards realizing
this goal, the Nigeria’s Vision 20:2020 advocates measures to enhance the
ability of MSEs to compete effectively in local, regional and global markets, through
increased productivity, greater technological efficiency and reduced cost of
doing business. In this context, growth and competitiveness of MSEs are,
therefore, the key objects of the national policy on MSEs. In the same vein,
the national policy seeks to enhance MSEs’ contribution to GDP and employment
and realize its potentials as a principal determinant of the prospects for the
growth and sustainability of Nigeria’s non-oil economy.
One
of the major achievements towards MSEs development in Nigeria is the
institutionalization of a policy regime that is stable, supportive and
consistent with national economic reform agenda – the Vision 20:2020, New
Partnership for Africa Development (NEPAD) of the African Union (AU) – as well
as being geared towards realising the United Nations’ Millennium Development
Goals (MDGs). For the above to be achieved, there is the need to remember that
we live in a globalizing and
increasingly interdependent world. For developing countries like Nigeria,
dependence on rich nations remains a stark fact of economic life. At the same
time, the developed world, which once prided itself on its apparent economic
self-sufficiency, has come to realize that in an age of dramatically increased
capital flows, diminishing natural and mineral resources, global environmental
threats, accelerated international migration, bourgeoning world trade in
manufactured products and services, and new forms of geopolitical tensions, it
is becoming even more economically dependent on the developing world.
The same applies to industries. They will
need to relate with one another at the national, regional and international
levels in achieving the specific objectives and broad goals of trade, economic
growth and development; hence, the popular industrial and labour maxim – “Industrial
Relations for Industrial Growth and Development”. Isolation and barriers have never worked to
develop prosperity. According to Amobi (2006), they have been the key obstacles
preventing MSEs to boost their
competitiveness. To the United Nations Industrial Development Organisation (UNIDO)
(2006), “Firms or enterprises that have come together as a group (forming a
cluster) and which are located in close proximity have proved to be capable of
rapid economic growth, sustainable leadership in export markets, significant
employment generation and preservation of high-value added jobs”. Equally,
studies from both developed and developing countries have shown that MSEs cluster development provides for economic
development, poverty reduction and social equity (UNIDO, 2006).
The potentially networking gains of clustered
firms or enterprises have led to the view that clusters offer a specific path
of regional, industrial and economic development, as well as the possibilities
of technical innovation and growth. Clusters are also considered particularly relevant
to developing countries since they motivate significant policy initiatives
within industrial development strategies. This has fostered a growing academic
literature on clusters (Markusen, 1996; Scott, 1998; Malmberg, 1996 and 1997;
Nadvi and Schmitz, 1999; Todaro and Smith, 2009).
From available literature, it is agreed
that providing a microfinance framework targeted at these clusters will create
a more sustainable model to cushion the fears of conventional banking
institutions who would rather not lend money to individual firms. This would then cultivate high confidence level
by the emerging microfinance institutions that are now expected to grant micro
credits to such target markets on enterprise clusters.
Over the years, the Nigerian government
has embarked on series of policies and institutional reforms aimed at enhancing
the flow of finance from the banking system to Small and Medium Industries
(SMIs) as well as those involved in the petty-business (micro) activities at
the informal level. The much talk on the need for government, financial
institutions, corporate organizations and government agencies to support the establishment
and development of the small enterprises subsector has its merits and demerits.
Although, it is not an indication that small business operators should fold
their arms and wait for the almighty handout from these agencies, either in the
form of loans or grants, getting such support could go a long way to transforming
the small business landscape in a number of ways and also help to strengthen
the economy of the nation.
According to Amagwu (2006), the focus of
microfinance has been on the poor in the society and the rural populace who are
believed to be the most vulnerable. He opines that, making micro finance
available to this group of people would not only guarantee that they are in a
sustainable employment but also contribute to the economic wellbeing of the
nation. In line with this argument, existing community banks were mandated to
upgrade to microfinance banks. They had to raise the minimum share capital or
shareholders’ funds of one unit bank from N5
million to N20 million with effect from
September, 2006. The minimum capital of N20
million, according to Godwin (2007), was to be deposited with the bank’s formal
application before it can be issued a unit bank operating licence. New
investors into this area were encouraged to do so. Individuals, co-operative
societies, corporate organizations, groups, investors are free to go into this
area of investment.
Every year, the government at federal,
state and even local and development centres through budgetary allocations, policies
and pronouncements express strong interest and appreciation of the crucial role
of this sub-sector of the economy and hence, made policies for energizing same.
Even local and international donor agencies have been inundated with requests
from non-governmental agencies and organized private sector associations for
grants and other forms of assistance to the sector.
With the above interventions, it is
necessary to ascertain whether there have been some achievements (positive or
negative) among these MSEs in the South East Nigeria, following the various pronouncements by the
governments. Among the group of people in South-Eastern Nigeria are the
artisans, petty-traders, subsistence farmers, fishermen, traders, local textile
producers, intra-city transporters, cobblers etc. These people in the South
East, Nigeria region are found within the industrial clusters at Nnewi,
Onitsha, Aba and other rural but emerging locations in the region.
Interestingly, these clusters have the advantage of proximity to several
industrial raw materials which makes it possible to produce associated
semi-finished or finished goods cheaply. Thus, this study is expected to find
how effective microfinance from both formal and informal sources affect the
profitability of these micro and small enterprises.
1.2 Statement of the Problem
The performance of Micro and Small Enterprises (MSEs)
in Nigeria, particularly in the South East has been affected by so many
problems like poor infrastructure (that is, inadequate power supply, bad roads,
and poor transportation system), financial access, poor corporate governance,
insecurity and the hostile legal framework. At the core of these problems is
that of access to finance due to the fact that the people are mostly informal
operators. Hence, the conventional commercial banks and other formal financial
arrangements shy away from extending credit facilities to the sector. Consequently,
majority of the operators resort to informal sources like family and friends, Isusu, cooperative societies, trust fund
model and informal saving groups. Unfortunately, these sources have limitations
in ensuring effective contribution of micro enterprises to economic growth and
sustainable development.
MSEs in Nigeria have not performed optimally and, hence,
have not played the expected vital and vibrant role in the economic growth and
development of Nigeria, particularly in the South East region (CBN 2008). This
situation has been of great concern to both government and the Organized
Private Sector (OPS) at various levels considering the fact that over 70% of
the Nigerian population are found in this category.
Despite the apparent significance
associated with these enterprises and the numerous policy initiatives
introduced by government in the past decade to accelerate the growth and
survival of small businesses, the performance has been disappointing. A study conducted
over thirty years on micro enterprises in the Eastern Region of Nigeria found out
that half of the MSEs in Nigeria do not
survive beyond a tenth of a century. The alarming rate of business failure
gives the Nigerian economy cause for concern and has made unemployment reach an
embarrassing level. This loss of employment opportunity has led to frustration,
insecurity and uncertainty about the future due to low performance of the
existing micro enterprises in Nigeria hence, the prevalence of chronic poverty.
According to the Manufacturers
Association of Nigeria (MAN), more than 100,000 jobs have been lost between
2001 and 2007 due to continuous closure of small businesses. Small businesses
in Nigeria at present experience a lot of problems and hardship. These
bottlenecks include serious undercapitalization with difficulty in gaining
access to bank credits and other financial markets, corruption and very high
bureaucratic costs and government seeming lack of interest in small businesses.
All these have great damaging effects on the economy. Furthermore, inconsistencies
in government policies, natural disasters, and global economic downturn
combined to ensure the dwindling growth of micro enterprises in Nigeria. These
dwindling performances have necessitated this study which is geared towards
assessing the extent to which micro enterprises help in poverty reduction
despite dismal performance in Nigeria.
Of greater concern to all stakeholders
is the fact that despite the acclaimed strong focus on this critical segment of
the economic foundation by policy makers, the sub-sector has fallen short of
expectations in terms of profitability and thus employment generation. The
situation becomes more scaring when compared with other developing economies
with similar profile in human and material resources like Nigeria. It has been
shown in the literature that there is a high correlation between the degree of
poverty, hunger, unemployment, economic well-being of the citizens of nations
and the effectiveness of the MSEs in the economic activities of the nation. If
Nigeria were to record a significant success towards attaining the Millennium
Development Goals (MDGs) for 2015, it would be important to vigorously pursue
the development of the micro and small scale enterprises sub-sector of the
economy. Attainment of the MDGs by 2015 may indeed be a mirage unless the micro
and small scale enterprises participate actively and effectively in the
economic life of our nation.
Micro enterprises have been described as
an engine of economic empowerment and growth. MSEs are not just job creators but creators of wealth in
the society. While it has been argued that a small business can only make a
minor contribution to the economy as a result of its size, many micro enterprises
can make substantial contributions collectively. For example, according to data
from the European Observatory (CBN 2008), SMEs employing up to 250 people
accounted for 68 million jobs in the European Union in 1995. Again, available
data from some African countries shows that in 2003, small enterprises in Kenya
employed 3.2 million people, accounting for 18% of the national GDP. In Nigeria,
according to Manufacturers Association of Nigeria (MAN), small enterprises are
the backbone of the economy; they account for 95% of formal manufacturing
activities and 70% of Industrial jobs.
Though lack of capacity, inadequate
coordination and synergy, poor networking, isolation, lack of detailed
articulation of stakeholders roles in the sector operations and policy shortfalls
have been identified as major problems of the sector, at the center of it all
is lack of access to formal credits. According to CBN (2008), less than 5% of
total credits to the private sector were allocated to micro and small scale
enterprises. It is therefore evident that MSEs do not have adequate access to
formal credit facilities and this situation had restricted the sector to
informal financing through traditional credit supports like Isusu, trade credits, cooperative
societies, market associations, Non-Governmental Organizations (NGOs),
government grants and interventions, etc.
The inadequacies in these forms of
credit facilities like reliability volume, training, standards, spread and
repayments have limited the performance of such enterprises and hence, their poor
contributions to the economic growth and development of the industrial clusters
in the South East and the nation as a whole.
The introduction of micro finance banks
by CBN in 2005, associated microfinance institutions, microfinance institutions
and development finance institutions have not bridged this gap of inequality in
credit accessibility in Nigeria after close to 10 years of their operations. It
becomes imperative to evaluate the effectiveness of both the formal and informal
sources of microfinance to Micro and Small Enterprises (MSEs), especially in
the South East of Nigeria. It is therefore believed that understanding these
micro credit problems and providing practical solutions for them would be the
right step towards making micro and small scale enterprises contribute
effectively towards growth and development of the industrial cluster in South
East, Nigeria and the nation as a whole, like their counterparts in other
countries.
1.3 Objectives of the Study
The
major objective of the study is to evaluate the effectiveness of the
microfinance sources on the profitability of Micro and Small Enterprise (MSE) clusters
in South East, Nigeria.
The
sub-objectives are:
- To assess the impact of formal
microfinance sources on the profitability of enterprise clusters in South East
of Nigeria,
- To ascertain the impact of informal
microfinance sources on the profitability of enterprise clusters in South East
of Nigeria,
- To examine the determinants of the
choice of the microfinance source by enterprise clusters in south East,
Nigeria,
- To assess the level of support of microfinance
providers for the sustenance of profitability of enterprise clusters in South
East, Nigeria.
1.4 Research Questions
The
following are the research questions:
- To what extent do the formal microfinance sources affect
the profitability of enterprise clusters in South East of Nigeria?
- To what extent do the informal microfinance
sources affect the profitability of enterprise clusters in South East of
Nigeria?
- What are the determinants of the choice
of the microfinance sources by enterprise clusters in South East, Nigeria?
- How much is the level of support of
microfinance providers for the sustenance of profitability of enterprise clusters
in South East, Nigeria?
1.5 Research Hypotheses
The
following research hypotheses are presented in their null forms.
- There is no significant impact of the formal microfinance sources on the profitability of Micro and Small Enterprise clusters in South East of Nigeria,
- There is no significant impact of the informal microfinance sources on the profitability of enterprise clusters in South East of Nigeria,
- There exist no significant determinants (i.e. amount, interest, extent of protocols including collateral availability, relationship with the provider) of the choice of microfinance sources by enterprise clusters in South East, Nigeria,
- There is no high involvement of the microfinance providers for the sustenance of profitability of enterprise clusters in South East Nigeria.
1.6 Significance of the Study
The
significance of this study cannot be overemphasized. It is so significant in the sense that;
- It will help to
expose the various micro financing strategies employed in the development of
industrial clusters in Nigeria, with particular interest in the South-Eastern
part of the country. In addition to the
above, it will help in examining the strengths and/or weaknesses and relevance
of these micro credit strategies to the development of the industrial clusters
in Nigeria, particularly, in the South East.
- Since the microfinance
supports for the development of industrial clusters in Nigeria, with particular
interest in the South East cannot be effectively/efficiently carried out
without active participation of stakeholders, the study will therefore help to
ascertain the contributions of various stakeholders, and their levels of
commitment in terms of relationship and willingness in ensuring that the goals
and objectives of the micro credit supports for the development of industrial
clusters in Nigeria, particularly in the South East are actualized. Informal
micro financing sources are (a) Esusu (b) Self Help Group Contribution (SHGC)
(c) TFM – Trust Fund Model, (d) family and friends, (e) Non-Governmental
Organizations (NGOs) (f) others
- The study will
bring to the knowledge of the major stakeholders in the development of
industrial clusters and MSEs in Nigeria,
i.e. the government, the microfinance banks, the micro-business operators
themselves, the national and international donor/aid agencies etc., the
efficacy of establishing and developing industrial clusters in the country, the
kind of impact (negative or positive) the industrial clusters development would
make on the economy, which eventually will enable them formulate favourable and
positive policies and implement fully the developed strategies that would help
the micro credit scheme, aimed at eradicating poverty achieve its goals and
objectives.
- Finally, this
study will help to add to the already existing literature, especially in the
developing counties, which Nigeria is part of, and this will surely serve as a
reference material for scholars who may want to embark on further studies on
this subject matter or those related to it.
1.7 Scope of the Study
This study focuses mainly on the impact of microfinance
sources on the profitability of Micro and Small Enterprises (MSEs) in Nigeria with
particular interest in the South-East, Nigeria using Micro and Small Enterprise
(MSE) clusters at Onitsha, Aba, and Nnewi. Profitability as a key objective of
every business is measured by return on investment. Micro enterprises would be
the target group based on the objectives and the information required from the
questionnaires. The study covers the period between 2013 and 2014.
1.8 Limitations and Structure of the Study
Like
all other studies, this study witnessed its own circumstantial difficulties.
The main fact that the study employed primary survey analysis that warranted
fieldwork and questionnaires introduced all the challenges that go with it.
First of all, the timing of the fieldwork vis-à-vis
the study programme was a major concern as the rainy season could be a major
hindrance to the field survey. There was,
therefore, the need to situate the field survey in a dry and friendly season in
order to ease the distribution and collection of the questionnaires.
The
fieldwork itself had issues like every other field which include; reliability
of the information given, reliability of the enumerators amongst others. This
was however lessened with the degree of supervision and monitoring of the
survey. Nevertheless, this study faced peculiar issues due to the nature and
occupation of the respondents. The respondents (business men) had no time to
respond to the questions and the few that were able to respond, were still not
very patient and needed a lot of persuasion. The respondents were also very
skeptical about the use of the data. Some of them feared that the fieldworkers
were actually tax officials who were sent as spies. The respondents were
equally very nonchalant about the documents as they opined that the government
had done little or nothing in the past and that that was just another paper
framework.
Also,
the fieldwork was very expensive. It employed fieldworkers who went to the
three clusters at Aba, Nnewi and Onitsha and were supposed to cover the three
sectors of production that include; production, trade and services. The fieldworkers
had to be motivated to go to the clusters and spend some days. Also, the supervision
required moving to the clusters to monitor groundwork and equally implied
increasing cost of the field survey. The Focus Group Discussion (FGD) which was
intended to collect responses from
questionnaires and interviews was difficult to obtain from traders as
most were busy with trading transactions and had little time to sit for
discussions.
In
terms of research structure, the first chapter contains the introduction,
problem statement, study objectives, research questions and hypotheses; as well
as the study scope, limitations, MSEs background and operational definitions as
used in the study. The second chapter reviewed not just the conceptual
literature but theoretical and empirical literature. It also summarized all
reviewed literature and identified potential gaps and how they were covered in
the current study. Chapter three presented the theoretical framework and the
study design including study area, study population, sample size, study models,
estimation procedures and hypotheses testing techniques. Chapter four presented
all the analyses and study results as well as findings, decisions on hypotheses
tested and discussion of findings while the final chapter (five) summarized the
findings, identified policy implications and based on that made
recommendations. It also contains areas and issues for further research,
contributions to knowledge and conclusions.
1.9 Background Information on Development of MSEs
Microfinance institutions were created in Nigeria by
the Central Bank in 2005. However, before the emergence of formal microfinance
institutions, informal microfinance activities flourished all over the country.
Informal microfinance is provided by traditional groups that work together for
the mutual benefits of their members. These groups provide savings and credit
services to their members. The informal microfinance arrangements operate under
different names: Esusu, among the
Yoruba of Western Nigeria, Utuu, for
the Igbo in the South East and Adashi,
in the North for the Hausa (CBN, 2003). The key features of these informal
schemes are savings and credit components, informality of operations and higher
interest rates in relation to the formal banking sector.
The informal associations that operate traditional
microfinance in various forms are found in all the rural communities in Nigeria
(Otu, Ramlal, Wilkinson, Hall, and Hecky, 2011). They also operate in the urban centers. However, the size of
activities covered under the scheme has not been determined. The
non-traditional, formalized Microfinance Institutions (MFIs) are operating side
by side with the informal services. The financial services provided by the MFIs
in Nigeria include: savings, credit and insurance facilities. The major formal microfinance suppliers include the Commercial
Banks and Microfinance as well as the Development Finance Institutions. However,
microfinance suppliers exist so as to provide low and accommodative rates of
interest because of the existence of inequitable distribution of wealth and
income and to reach out to the poor. From the appraisal of existing
microfinance-oriented institutions in Nigeria, the following facts have become
evident: weak
institutional capacity, weak capital base, existence of a huge
un-served market, economic empowerment of the poor, employment generation and poverty
reduction, the need for increased savings opportunity, the interest of local
and international communities in micro-financing and utilization of the small
and medium enterprises equity investment (SMEEIS) fund.
SMEEIS, however, is said to have failed due to
the fact that, it required a partnership of ownership between the micro
enterprises and the microfinance operators as a means of involving the banks
fully into developing these enterprises. This effort failed partly because the
entrepreneurs had a jealous and, of course, protective ownership attitude of
their enterprises and so did not accept to get in terms with the banks. On the
other hand, several bureaucratic engagements that are involved in becoming
co-owners such as the Memorandum of Understanding (MoU) scared the banks from
actively getting involved. This led to the creation of the Microfinance
Development Fund in 2013 by CBN. This project was launched with a seed capital
of ₦220
billion, having 80% devoted to micro enterprises and 20% to small and medium
size enterprises. The Microfinance Development Fund that is now operational has
the advantage of asserting specific amounts for interest rates, sectorial loan
quotas, and sex ratios. Unlike the SMEEIS that compelled both banks and
entrepreneurs to be co-owners, the Microfinance Development Fund allows banks
to operate from a distance yet ensures that the modalities are moderate.
1.10 Operational Definition of Terms
Micro Enterprise: It is a firm whose total cost including working capital and excluding cost of land is not more than ten million naira (N10,000,000) and/or with a labour size of not more than ten (10) full-time workers and/or an annual turnover of less than two million naira (N2,000.000) only.
Small Enterprises: It is an enterprise whose total cost including working capital but excluding cost of land is between ten million naira (N10,000,000) and one hundred million naira (N100,000,000) and/or a workforce between eleven (11) and forty nine (49) full-time staff and/or with annual turnover of not more than ten million naira (N10,000,000) in a year.
Medium Enterprises: It describes a company with total cost including working capital but excluding cost of land of more than one hundred million naira (N100,000,000) but less than three hundred million naira (N300,000,000) and/or a staff strength of between fifty-one (51) and two hun
