CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

The Nigerian government has over the years embarked on series of policy and institutional reforms aimed at enhancing the low of finance from the banking sector to Small and Medium Enterprises (SMEs) as well as those involved in the petty business (Micro) activities and to entrepreneurial ventures at the informal level in particular. However, the important objective of boosting the performance of the entrepreneurial activities of SMEs has not materialized. Traditional Banks perceive micro activities as bad risk, hence have little interest in funding the sector, this is coupled with issues of high transaction costs and short tenor of payback period when funding is considered. Since a robust economic growth cannot be achieved without putting in place well focused programmes to reduce poverty through empowering the people by increasing their access to formal financial services, the Central Bank of Nigeria (CBN 2005) as part of its banking reform agenda embarked on licensing Microfinance Institutions (MFIs) aimed at providing financial services to entrepreneurs who are not served by the conventional financial institutions (Ozioko, 2010). Emphasis, therefore, shifted from large-scale industries to SMEs, which have the potentials for developing domestic linkages for rapid and sustainable industrial development. According to Yarron (1998) Nigeria has remarkable entrepreneurs who need support at every level and this includes Micro, Small and Medium Enterprises as well as big businesses. A common characteristic of these enterprises is their need for good financing.

SMEs are critical agents of economic transformation as they account for more than 50 percent of Gross Domestic Product (GDP) of developing economies, are main source of innovation and technological development, source of supply of both human capital and raw materials to larger businesses and main source of entrepreneurship and enterprise (Sanusi, 2003). The contribution of the SME sector to the Nigerian economy is crucial for the achievement of the broader development objectives such as poverty alleviation, spreading of employment opportunities and increasing indigenous ownership of resources in the economy (Chidoko, Makuyana, Matungamire, & Bemani, 2011). SMEs contribute nearly half of Nigerian GDP and accounts for over 25 percent of employment in the country. There are 17 million SMEs in Nigeria, employing 32.41 million persons and contributes about 46.54 percent to the nation's GDP in nominal terms (National Bureau of Statistics 2013).

The microfinance arrangement makes it possible for MSMEs to secure credit from Microfinance Banks (MFBs) and other Microfinance Institutions (MFIs) on more easy terms. It is on this platform that we intend to examine the impact of microfinance on small business growth. Therefore, the study will fill the gap in literature on the impact of both the financial and non-financial services on small business growth and to examine the capability of microfinance to transform small enterprises to small scale industries through their technology/asset related loans.

1.2     Statement of the Problem

According to a SMEDAN 2010 report, only 15% of newly established businesses survive the first five years in Nigeria. The ones that survive after this period usually record poor performance. The crucial role of finance to the growth and survival of SMEs and the adoption of microfinance as the main source of financing SMEs in Nigeria is pivotal. It therefore makes it imperative to study the extent to which microfinance can enhance small business performance. Besides, the empirical evidences emerging from various studies about the effect of microfinance on entrepreneurial development have so far yielded mixed results that are inconclusive and contradictory. Some studies only looked at microfinance and poverty alleviation (Electrin et al, 2013, Kiiru and Kenia 2007, Boadu, 2009), other studies looked at microcredit alone as an intervention tool for entrepreneur development (Akingunola et al 2013,) others looked at the presence of microfinance institutions as a catalyst for entrepreneurial development ( Ozioko, 2007, Alalade 2013 Ojo, 2009), therefore this research will vividly investigate the impact of microcredit finance in the performance of SME in Nigeria.

1.3     Objective of the Study

The main objective of this study is to find out the impact of microcredit finance in the performance of SME in Nigeria, specifically the study intends to:

1.     Analyze the impact of microcredit finance in the performance of SME

2.     Examine ways in which micro credit finance SME in Nigeria

3.     Find out the challenges of financing SME in Nigeria

1.4     Research Question

1.     Is there any significant impact of microcredit finance in the performance of SME?

2.     What are the ways in which micro credit finance SME in Nigeria?

3.     What are the challenges of financing SME in Nigeria?

1.5     Research Hypothesis

Ho: there is no significant impact of microcredit finance in the performance of SME

Hi: there is significant impact of microcredit finance in the performance of SME

1.6     Significance of the Study

This Study will be useful in so many ways, firstly it will be useful to the microfinance institutions to assess the impact they have had in financing SME’s and provide a platform for future innovations in the financial sector to facilitate their contributions to the SME sector.

Secondly Researchers will be able to use this document as a source of information in future studies related to Micro financing of SME’s. The study will also provide information on debt rating of SMES, and conditions for SME and entrepreneurship financing that may be resourceful for policy makers in the financial sector to come up with more suitable financial solutions for SME’s. Lastly since SME’s are crucial in ensuring sustainable and inclusive growth of an economy, their role in development is critical in enabling governments create employment for its citizens.

1.7        Scope of the Study

This research will be conducted in Lagos state since, Lagos is the largest economy in Nigeria and home to many SME. This research will vividly examine the impact of microcredit finance in Nigeria on SME, the challenges faced by SME.

1.8     Delimitation of the Study

Finance for the general research work will be a challenge during the course of study. Correspondents also might not be able to complete or willing to submit the questionnaires given to them.

However, it is believed that these constraints will be worked on by making the best use of the available materials and spending more than the necessary time in the research work. Therefore, it is strongly believed that despite these constraint, its effect on this research report will be minimal, thus, making the objective and significance of the study achievable.

1.9     Definition of Terms

Microcredit Finance: also called micro banking or microfinance, a means of extending credit, usually in the form of small loans with no collateral, to nontraditional borrowers such as the poor in rural or undeveloped areas

Small and Medium Business Enterprises: made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro

Impact: a marked influence of effect on something