This study is on micro-credit and Small and medium scale enterprises (SMEs): loans accessibility, and profit impact on SMEs. My main aim of carrying out this research is to investigate if micro finance institutions issue out loans to SMEs, and the impact of micro-credit on the profitability of SMEs and problems encountered by these institutions. Also other programs similar to micro finance and models of findings in other countries were pointed out. In the review of related literature area, such as their objectives, their past performances were carried out thoroughly using primary data (questionnaires). Collected data where analyzed, summarized, and interpreted accordingly with the aid of descriptive statistical techniques such as total score and simple percentage, using pie charts and tables. Chi square technique was adopted. Based on the findings of this study, the researcher found out that SMEs have greater access to micro-credit, and MFIs has contributed to Business, Financial and Managerial Training of SMEs. Also, SMEs face challenges such as Inability to provide the collateral securities in cases where they are demanded, and high interest rate. Finally, the researcher recommended that credits should client-oriented and not product- oriented, proper and extensive monitoring activities should be provided for clients who are granted loan, and business and financial training should be provided by MFIs on a regular basis.



1.1     Background of the Study

There are many types of microfinance institutions depending on structure, function or philosophy. In many instances, the microfinance market is segmented according to the clients involved i.e. micro-enterprises, small and medium scale business enterprises (SMEs), women, agriculturalists and so on. A main goal of many micro finance institutions is to provide sustainable micro finance facilities to the poor to facilitate income generation and reduce poverty (Baumann, 2001). The genesis of this is that the poor lack access to financial services, credit and savings facilities.

Microfinance encompasses the provision of financial services and the management of small amounts of money through a range of products and a system of intermediary functions that are targeted at low income clients. (Asiama, 2007).

Indeed, the concept of microfinance is not new in Nigeria. There has always been the tradition of people saving and/or taking small loans from individuals and groups within the context of self-help to start businesses or farming ventures. Over the years, the microfinance sector has thrived and evolved into its current state, thanks to various financial sector policies and programs undertaken by different governments since independence.

Small and medium scale business group is characterized by lack of access to credit, which constrains the development and growth of that sector of the economy. Clearly, access to financial services is imperative for the development of the informal sector and also helps to mop up excess liquidity through savings that can be made available as investment capital for national development. It is known that loans advanced by microfinance institutions are normally for purposes such as housing, petty trade, and as “startup” loans for their businesses. (Asaima, 2007)

Micro finance has several benefits for developing nations. Microfinance institutions (MFIs) have become the main source of funding micro enterprises in Africa and in other developing countries.

Small and Medium Enterprises (SMEs) are commonly believed to have very limited access to deposits, credit facilities and other financial support services provided by deposit money banks. This is because these SMEs cannot provide the necessary collateral security demanded by these formal institutions and also, the banks find it difficult to recover the high cost involved in dealing with small firms. In addition to this, the associated risks involved in lending to MSEs make it unattractive to the banks to deal with micro and small enterprises (World Bank,1994). Statistically, small enterprises are reported to have high failure rates making it difficult for lenders to assess accurately the viability of their enterprises, the abilities of the entrepreneur, and the likelihood of repayment.

SMEs in Nigeria have the tendency to serve as sources of livelihood to the poor, create employment opportunities, generate income and contribute to economic growth. Micro-finance, on the other hand, according to Otero (1999) is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector.

Littlefield and Rosenberg (2004) argue that the poor are generally excluded from the financial services sector of the economy so MFIs have emerged to address this market failure. By addressing this gap in the market in a financially sustainable manner, an MFI is part of the formal financial system of a country and so can access capital markets to fund their lending portfolios, allowing them to dramatically increase the number of poor people they can reach (Otero, 1999). More recently, commentators such as Littlefield, Murduch and Hashemi (2003), Simanowitz and Brody (2004) and the IMF (2005) have commented on the critical role of micro-credit in achieving the Millennium Development Goals.

However, some schools of thought remain skeptical about the role of micro-credit in development. In the light of this, the study would find the relationship between SMEs profitability and MFIs loan and to ascertain whether the operations of the former have any effects on the growth of the latter.

1.2     Statement of the Problems

Provision of microfinance services that can have a sustainable impact on client’s wellbeing and reduced vulnerability is not an easy endeavor; microfinance institutions face many risks that can adversely affect their long term growth, operational and financial sustainability (Jeyanth, 2003).

SME’s need both financial and non-financial services to enhance their productivity, profitability and growth. Sievers and Vanderberg (2004) hold the view that access to financial and business development services are essential for growth and development of small scale and medium business enterprise.

The Microfinance industry has become a major backbone in the sustenance and survival of small scale and medium business enterprise in Nigeria. Microfinance Institutions (MFIs), as part of their core business, are supposed to provide credit to SMEs. In addition to these financial services, MFIs also provide non-financial services like business training, financial and business management to help improve the capacity of their clients in managing the loan resources granted them.

The number of MFI institutions in Nigeria continues to grow. However, their wide presence does not correspond with the extent of reduction in the major challenges that affect the growth of SMEs in the country. This study is designed to analyze the effect of MFIs loans on the profitability of SMEs in Nigeria.

1.3.    Objectives of the study

This study is intended to investigate if MFI issue out loans to SMEs, and the impact of micro-credit on the profitability of SMEs.

1.4     Research Questions

Are MFIs loans easily accessible to SMEs?

Does Micro-credit contribute to the profitability of small and medium scale industries?

1.5. Hypothesis

H0: Micro-credit do not significantly contribute to the profitability of small and medium scale enterprises

H1: Micro-credit contributes significantly to the profitability of small and medium scale industries

1.6.  Significance of the study

It is worth mentioning that most researchers have found this area of study very important to the development of the socio-economic activities in developing countries like Nigeria. This study is centered on the activities of MFIs and their contributions to the development of small and medium size businesses in Nigeria.

A study of this nature is very imperative as it would provide the government with the needed information in designing a policy frame work to enhance the development of the SME industry. It would also enlighten the public on the role MFIs play in the small and medium scale business enterprises (SMEs) sector.

Microfinance as a whole provides the average Nigerian a means to have access to financial services in their localities to boost their living standards in a sustainable manner in line with the millennium development goal of alleviating poverty in developing countries. The study will assist MFIs to adopt the necessary measures needed to ensure the desired growth in the small and medium scale business enterprises (SMEs) industry.

In addition, the study would serve as a source of reference for other researchers or members of the general public who need information in the subject. More importantly, entrepreneurs of SMEs may find it useful in the successful operation of their enterprises as the study will unveil some of the reasons why some small and medium scale business enterprises (SMEs) finds it hard to repay their loans.

1.7     Scope and limitations of the study

Microfinance institutions have a wide coverage in both rural and urban areas of the country. This study focuses on microfinance institutions operating in Kaduna metropolis. The study therefore covers some selected registered institutions.

1.8.    Definitions of Relevant terms

A broader definition by Central bank of Nigeria which can be found in the archives of the CBN (2005) defines cottage small and medium scale enterprises as;

An industry with a labor size of not more than 10 workers, or total cost of not more than N1.50 million, including working capital but excluding cost of land.

An industry with a labor size of 11-100 workers or a total cost of not more thanN50 million, including working capital but excluding cost of land.

An industry with a labor size of between 101-300 workers or a total cost of over N50 million but not more than N200 million, including working capital but excluding cost of land.

An industry with a labor size of over 300 workers or a total cost of over N200 million, including working capital but excluding cost of land.

The  issue of what constitutes a small or medium enterprise is a major concern in the literature.

Different authors have usually given different definitions to this category of business. SMEs have indeed not been spared with the definition problem that is usually associated with concepts which have many components. The definition of firms by size varies among researchers. Some attempt to use the capital

assets while others use skill of labor and turnover level. Others define SMEs in terms of their legal status and method of production. Storey (1994) tries to sum up the danger of using size to define the status of a firm by stating that in some sectors all firms may be regarded as small, whilst in other sectors there are possibly no firms which are small. The Bolton Committee (1971) first formulated an “economic” and “statistical” definition of a small firm.

Under the “economic” definition, a firm is said to be small if it meets the following three criteria:

  • It has a relatively small share of their market place;
  • It is  managed  by owners  or  part  owners  in  a  personalized  way,  and  not  through  the medium of a formalized management structure;
  • It is independent, in the sense of not forming part of a large enterprise.

Under the “statistical” definition, the Committee proposed the following criteria:

  • The size of the small firm sector and its contribution to GDP, employment, exports, etc.
  • The extent to which the small firm sector’s economic contribution has changed over time;
  • Applying the statistical definition in a cross-country comparison of the small firms’ economic contribution.

Weston and Copeland (1998) hold that definitions of size of enterprises suffer from a lack of universal applicability. In their view, this is because enterprises may be conceived of in varying terms. Size has been defined in different contexts, in terms of the number of employees, annual turnover, industry of enterprise, ownership of enterprise, and value of fixed assets.

Van der Wijst (1989) considers small and medium businesses as privately held firms with 1 – 9 and 10 – 99 people employed, respectively. Jordan et al (1998) define SMEs as firms with fewer than 100 employees and less than €15 million turnover. Michaelas et al (1999) consider small independent private limited companies with fewer than 200 employees and López and Aybar (2000) considered companies with sales below €15 million as small.

It is clear from the various definitions that there is not a general consensus over what constitutes an SME. Definitions vary across industries and also across countries. It is important now to examine definitions of SMEs given in the context of Nigeria.