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.
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.