The Impact Of Micro Finance loans accessibility On Small And Medium scale enterprises (smes)

The Impact Of Micro Finance Loans Accessibility On Small And Medium Scale Enterprises (Smes)

Abstract

This study focuses on how profit impacts SMEs and the availability of financing for small and medium-sized businesses (SMEs). My primary goal in doing this study is to determine whether microfinance institutions lend to SMEs, the effects of microcredit on SMEs’ profitability, and any issues these institutions may have. Additionally, analogous microfinance programs and examples of research outcomes from other nations were mentioned. Using primary data (questionnaires), a complete evaluation of the literature in the associated field, including their objectives, was conducted.With the use of descriptive statistical approaches, including total score and simple percentage, using pie charts and tables, the collected data were processed, condensed, and interpreted in the appropriate manner. The Chi square method was used. According to the study’s findings, MFIs have helped small businesses gain access to microcredit and have helped them develop their managerial, financial, and business skills. Additionally, SMEs encounter difficulties such a high interest rate and an inability to offer collateral securities when required. Finally, the researcher suggested that credits should be client-oriented rather than product-oriented, that proper and thorough monitoring activities should be offered for clients who are granted loans, and that MFIs should regularly offer business and financial training.

Chapiter 1

Introduction

Background of the Study, paragraph 1.1

Depending on their structure, purpose, or philosophies, microfinance organizations come in a wide variety of forms. The microfinance market is sometimes divided into segments according on the clients engaged, such as microenterprises, small and medium-sized businesses (SMEs), women, agriculturalists, and so forth. Providing the poor with sustainable microfinance services in order to assist income generation and combat poverty is a primary objective of many microfinance institutions (Baumann, 2001). This started because the poor don’t have access to financial services, credit, and savings options.

Microfinance is the delivery of financial services and the management of small sums of money through a variety of products and a network of intermediary roles that are geared toward low-income clients. 2007 (Asiama).

Microfinance is, in fact, not a new idea in Nigeria. In the framework of self-help, it has long been customary for people to save money or borrow a small sum of money from other people or organizations in order to launch their own enterprises or farms. Thanks to numerous financial sector policies and programs implemented by several governments since independence, the microfinance sector has flourished through time and developed into its current position.

Lack of access to capital is a defining characteristic of small and medium-sized businesses, which limits their ability to develop and grow. Without a doubt, having access to financial services is essential for the growth of the unorganized sector. It also aids in cleaning up excess liquidity through savings that can be used as investment capital for a country’s development. It is well known that loans provided by microfinance organizations are typically used for things like housing, small-scale commerce, and “startup” loans for people’s enterprises. 2007’s Asaima

Developing countries can profit from microfinance in a number of ways. In Africa and other developing nations, microfinance institutions (MFIs) have taken over as the primary source of capital for microbusinesses.

The general perception is that Small and Medium-Sized Enterprises (SMEs) have relatively little access to deposits, credit facilities, and other financial assistance services offered by deposit money banks. This is due to the fact that many SMEs cannot offer the requisite collateral security required by these formal institutions, and banks also find it challenging to recoup the significant costs associated with doing business with small businesses. In addition, dealing with micro and small businesses is undesirable to banks due to the related risks involved (World Bank, 1994). Because small businesses statistically have high failure rates, it can be challenging for lenders to make accurate judgments about the viability of their clients’ businesses, the skills of the entrepreneur, and the possibility of payback.

SMEs in Nigeria frequently provide the impoverished with a means of subsistence, open up job opportunities, produce money, and support economic expansion. On the other hand, micro-finance, according to Otero (1999), has a role at an institutional level in addition to supplying capital to the poor in order to battle poverty on an individual level. It aims to establish organizations that provide financial services to the underprivileged, who are routinely overlooked by the conventional banking industry.

MFIs have evolved to solve this market failure, according to Littlefield and Rosenberg’s (2004) argument that the poor are typically excluded from the financial services sector of the economy. An MFI can significantly increase the number of impoverished individuals they can reach by filling this market gap in a way that is financially sustainable because they are a part of the nation’s official financial system and can access capital markets to fund their lending portfolios (Otero, 1999). More recently, experts have noted the crucial role that microcredit plays in reaching the Millennium Development Goals, including Littlefield, Murduch, and Hashemi (2003), Simanowitz, and Brody (2004), and the IMF (2005).

Some schools of thought continue to be dubious about the contribution of microcredit to development, nevertheless. In light of this, the study would determine the relationship between the profitability of SMEs and the loans provided by MFIs and determine whether the latter’s operations have any impact on the former’s growth.

1.2 Description of the Issues

It is not simple to provide microfinance services that can improve clients’ well-being and decrease their vulnerability; microfinance institutions confront several risks that could negatively affect their long-term growth, operational viability, and financial sustainability (Jeyanth, 2003).

To increase their production, profitability, and growth, SME’s require both financial and non-financial services. According to Sievers and Vanderberg (2004), small and medium-sized businesses must have access to finance and business development services in order to expand and develop.

In Nigeria, the microfinance sector has emerged as a crucial pillar supporting the sustenance and survival of small and medium-sized businesses. Credit to SMEs is something that Microfinance Institutions (MFIs) are expected to offer as part of their core business. Along with these financial services, MFIs also offer non-financial services to help their clients become better at managing the loan resources that have been granted to them, such as business training and financial and business management.

Nigeria has an increasing number of MFI institutions. Their widespread presence does not, however, match the degree to which the primary obstacles to the expansion of SMEs in the nation have been overcome. The goal of this study is to examine how loans from MFIs affect the profitability of SMEs in Nigeria.

1.3. The study’s objectives

This study aims to ascertain if MFI lend to SMEs and what effect microcredit has on SMEs’ profitability.

1.4.1 Research Issues

Are SMEs able to easily obtain loans from MFIs?

Does microcredit help small and medium-sized businesses be more profitable?

Hypothesis 1.5.

H0: Microcredit does not considerably increase small- and medium-sized businesses’ profitability.

H1: Microcredit considerably boosts the success of small and medium-sized businesses.

1.6. Importance of the research

It is noteworthy that the majority of academics believe that this field of research is crucial to the growth of socioeconomic activities in developing nations like Nigeria. The focus of this study is on MFI operations and how they help Nigeria’s small and medium-sized businesses grow.

A research of this kind is absolutely necessary because it would give the government the knowledge it needs to create a framework for policy that would support the growth of the SME industry. Additionally, it would inform the general public about the function MFIs do in the small and medium-sized firm (SME) market.

In line with the millennium development goal of eradicating poverty in developing nations, microfinance as a whole gives the average Nigerian a way to access financial services in their communities and raise their living standards in a sustainable way. The study will help MFIs take the necessary actions to ensure the industry’s small and medium-sized firms (SMEs) experience the expected growth.

Additionally, the study would be used as a resource for the public or other scholars who seek information on the topic. More importantly, SMEs’ owners may find it helpful in running their businesses successfully because the study will highlight some of the reasons why certain SMEs find it challenging to repay their loans.

1.7 The study’s scope and limitations

In the country, microfinance institutions are widely available in both urban and rural areas. The Kaduna metropolis’s microfinance institutions are the subject of this investigation. As a result, the study includes a few particular registered institutions.

Definitions of Important Terms

Cottage small and medium-scale firms are defined more broadly by the Central Bank of Nigeria (CBN) in its 2005 archives as;

Small-scale industries

a sector of the economy that employs no more than 10 people or has annual costs of no more than N1.50 million, including working capital but excluding land costs.

Small-Scale Business

a sector that employs between 11 and 100 people and has a total cost of no more than N50 million, including working capital but excluding land costs.

An industry that employs between 101 and 300 people, has a total cost of at least N50 million but not more than N200 million, including working capital but excluding the cost of land, is considered to be of medium scale.

Broad Instance

a sector of the economy with a labor force of more than 300 employees or a total cost of more than N200 million, excluding the cost of land.

The definition of a small or medium firm has received a lot of attention in the literature.

This business category has typically been defined differently by different authors. SMEs are in fact not exempt from the defining issue that is typically related to concepts with numerous components. Researchers use different definitions of firms based on their size. some try to utilize the capital

whereas others leverage labor skill and turnover rate as assets. Some people categorize SMEs according to their legal standing and mode of production. In an effort to highlight the risk of classifying a firm’s status solely by its size, Storey (1994) claims that while all firms may be considered small in some industries, small enterprises may not exist in others. The first “economic” and “statistical” definition of a small firm was created by the Bolton Committee in 1971.

According to the “economic” definition, a company is considered tiny if it satisfies the following three requirements:

Its market share is relatively tiny; Its management is done on a more individualized level by the owners or joint owners rather than via the use of a formal management structure;

It is independent in the sense that it is not a component of a sizable corporation.

The following standards were suggested by the Committee for the “statistical” definition:

the size of the small business sector and how it affects things like GDP, employment, and exports.

how much the economic output of small businesses has changed through time;

applying the statistical definition for comparing the economic impact of small businesses across countries.

According to Weston and Copeland (1998), definitions of enterprise size are not universally applicable. This, in their opinion, is due to the fact that enterprises can be thought of in a variety of ways. Size has been described in a variety of ways, including in terms of the number of employees, annual revenue, industry, ownership, and fixed asset value.

According to Van der Wijst (1989), small and medium businesses are privately held companies that employ 1 to 9 and 10 to 99 employees, respectively. According to Jordan et al. (1998), SMEs are companies with less than 100 employees and annual sales of under €15 million. tiny independent private limited enterprises are defined by Michaelas et al (1999) as having fewer than 200 employees, and López and Aybar (2000) defined tiny as having annual revenues of less than €15 million.

There is no universally accepted definition of what a SME is, as is evident by the many definitions. Different sectors and nations have different definitions. Now, it’s critical to look at definitions of SMEs provided in the context of Nigeria.