THE IMPACT OF MICROFINANCE BANK IN GROWTH OF SMALL AND MEDIUM SCALE BUSINESS IN NIGERIA (A CASE STUDY OF SELECTED BUSINESS IN OWERRI URBAN)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Nigeria is said to have a relatively long history of government initiatives to promote and finance, small and medium enterprises (Small and medium scale business). The contributions these Small and medium scale business make to the economic development and growth of Nigeria are substantial because so many people are employed by these enterprises. This is so because it is accepted worldwide that the development and growth of Small and medium scale business can play an important role in turning the growing unemployment situation around. In the light of foregoing, policies and programmes that would support the development of Small and medium scale business are formulated and implemented to better the lives of the citizenry. According to Mbuta and Nkandela (1998), the importance of Small and medium scale business in contributing to job creation and output growth is now widely accepted in both developed and developing countries. Of particular interest is the process of expansion of these enterprises from micro or small into medium size, as it is when they become medium-sized that growth- oriented Small and medium scale business make their most tangible contribution to economic growth and job creation. Dynamic medium-sized enterprises provide a competitive edge in two ways – as leading subcontractors and as venture firms in their own right. (Cited in the research work of Owusu, 2011)

Also as cited in the research work of Owusu, 2011 Abugre (1994) micro and small enterprises are those enterprises employing 29 or fewer workers. Microenterprises are those that employ between 1 to 5 people with fixed assets not exceeding 10,000 US Dollars excluding vehicles, land and buildings. Small enterprises employ between 6 and 29 or have fixed assets not exceeding 100,000 US Dollars excluding land and building. It must be emphasized that lack of finance remains the major constraint to small and medium enterprises in the country.

It is believed that Nigeria began officially promoting the activities of small and medium businesses in 1969 with the establishment of the credit guarantee scheme by the Bank of Nigeria to assist entrepreneurs in obtaining bank credit. This was followed in 1970 by the creation of the Nigeria business promoting programme. The objective of these initiatives was to promote financial and technical assistance to newly established and existing micro, small and medium scale businesses, but their impact was limited. The schemes benefited mostly politically connected Nigeriaian managers of foreign owned manufacturing companies (Abugre, 1994).

In fact, the need for sustainable sources of funding for Small and medium scale business had necessitated the emergence of financial non-governmental organisations on the economic and business scene of the country. According to Opare-Djan (2002), the role Kraban Foundations has played in the microfinance business is substantial. One can also cite the case of Kiva, Sinapi Aba among others in NGOs implementation of micro financing activities.

1.2 STATEMENT OF THE PROBLEM

In the 2009 Bank of Nigeria report on the major operations of Banks and other financial institutions in Nigeria, it was established that most formal banking institutions do not cultivate the habit of doing business with individuals and small business customers, since they consider them to be high risk clients. Small and medium scale business are considered as high risk businesses because they lack the necessary collateral to serve as security for loans and it is costly. This is because applicants from the informal sector tend to apply for small loans which require the same administrative procedure and oversight that are required for the relatively larger loan request made by medium or large scale firms. Hence, the co-operate culture of banks and financial institutions are far removed from the informal world of the micro-entrepreneur.

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