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ACC00113 - ASSESSING THE IMPACT OF MICROFINANCE BANK LOANS ON SMALL AND MEDIUM SCALE ENTERPRISES (SMES) USING OGBOMOSO SOUTH LOCAL GOVERNMENT AREA OYO STATE AS THE CASE STUDY


CHAPTER 1

INTRODUCTION

1.1     Background of the Study

The rise of small and medium enterprises (SMEs) in Nigeria is gaining increasing attention worldwide. The production of SMEs accounted for over 60% of Nigeria’s total GDP by March 2012, increasing from 1% in the 1980s. However, SMEs in Nigeria have been facing challenges of financing or refinancing since their birth as it is difficult to obtain conventional loans from commercial banks to start up small or medium scale enterprises. The main reason is that commercial banks demand collateral before giving loans for business purposes. The higher the risk the business has the more the collateral the banks need to charge, whereas SMEs are subject to higher risk and easily default. The limited funding sources for SMEs make the issue of providing sufficient collateral even worse. The high collateral demanded by commercial banks basically cuts the official channel of SMEs in obtaining loans. Thus, the difficulty of access to loans from the state financial institutions such as commercial banks constitutes a great setback to entrepreneurial development (Fashua 2006).

One of the responses to the challenges of lack of financing options for SMEs is the introduction and development of microfinance. According to the Nigerian Association of Microfinance, microfinance in Nigeria refers to financial services provided for the middle and low income population that cannot get loans from traditional banks. Microfinance has the ability to strengthen SMEs and encourage best practices among operators of SMEs. In terms of supply of microfinance, diversified microfinance suppliers and supply channels have emerged in Nigeria since 1990s. However, the overall volume of supply is limited, and the majority of such supply in its experimental stage. From the perspective of demand, there are various types of people in need of microfinance, including urban laid-off workers, rural households, and micro entrepreneurs. At the same time, the types of demand for microfinance services is also diversified, such as microcredit, micro savings, micro insurance and investment (Li et al, 2009).

The paper is organized in the following way. Section 2 is a literature review that aids the analysis and establishes some hypothesis. Methodology, including a brief description of the survey from which the data for this study was drawn, is interpreted in Section 3. Section 4 reports the results of the research, and Section 5 summarizes findings and key conclusions (Li, 2012).

 

1.2     Statement of the problem

In Nigeria, access to formal credit is a major problem facing the Small and Medium Enterprises (SMEs) operators due to the prevalence of some factors such as delays in loan disbursement on the part of financial institutions and payment defaults on the part of the beneficiaries (Olajide, 1980).

According to Ubom, (2003), finance is still considered as one of the major hindrances to entrepreneurial development in Nigeria, loan is the first essential thing in business growth and development. Loan to Small and Medium Scale Enterprises (SMEs) have been an important instrument in the development of industrialization an improving the efficiency of the enterprises as well as expanding productivity. The issue of inadequate loan facilities to Small and Medium Scale Enterprises (SMEs), has for long time been the main headache of National Association of Small Scale Industries (NASSI) which is the umbrella organization. In spite of the tremendous contributions made by the Small and Medium Scale Enterprises (SMEs) to the economy, they have always been denied access to credits by conventional banking institutions who always demand for collateral. The Federal Government has put in place microfinance banks to assist in financing Small and Medium Scale Enterprises (SMEs), by giving out loans to SMEs operators on the basis of the physical presence of their business and not on the basis of collateral. This research work focuses on the impact of microfinance banks’ loans on Small and Medium Scale Enterprises (SMEs) in Nigeria.

 

1.3     Research Questions

In order to achieve the above stated problems, the following research questions are advanced:

  1. Do entrepreneurs have access to capital for the development of their enterprises in Ogbomoso South Local Government?
  2. Do microfinance banks loan have any influence on the performance of SMEs in Ogbomoso South Local Government?
  3. What are the problems that SMEs face in Ogbomoso South Local Government?

 

1.4     Research hypothesis

H0:       Microfinance banks loan do not have significant impact on the performance of SMEs in Ogbomoso South Local Government.

 

1.5     Significance of the Study

The study will give potential investors and entrepreneurs insight into the challenges facing the adequacy of performance of microfinance banks in financing SMEs. It will also give other researchers insight into the role of microfinance bank in the development of Small and Medium Scale Enterprises (SMEs), conducting related research on this topic.

 

1.6     Scope of the Study

This study aims at assessing the impact of microfinance bank loans on Small and Medium Scale Enterprises (SMEs) using Ogbomoso South Local Government Area Oyo State as the case study due to time and financial constraint. The choice of Ogbomoso South LGA stems from the fact that it is a major commercial center in Ogbomoso region.

 

1.7     Limitations of the Study

Among the limitations encountered in the course of this research work are time constraint, delay in retrieval of questionnaires, secrecy of information on the part of the respondents.

 

1.8     Operational Definition of Terms

Credits: A sum of money lend by a bank, a loan etc.

Bank: An organization or a place that provide financial services.

Disbursement: The act of paying out money especially from a fund collected for a purpose.

Development: The act of becoming or making something larger, more advanced or more organized.

Repository: A place where things are kept or store.

Economy: The relation between production, trade and supply of money in a particular region.

Entrepreneur: This is a person of very attitude who pioneers change, organize production and takes risk associated with the production processes.

Enterprise: A business developed and managed by individual rather than the state.

Funds: Financial resources, money.

Frame-work: A social order or system.

Invest: To stake or commit resources into a business.

Instruments: A formal document, especially legal document.

Population: The total number of people living in a particular place.

SMEs: Small and Medium Scale Enterprises.

SSEs: Small Scale Enterprises.

SSIs: Small Scale Industry.