EFFECTS OF MICROFINANCING ON MICRO AND SMALL ENTERPRISES (MSEs) IN SOUTHWEST NIGERIA

By

BABAJIDE, ABIOLA AYOPO (CU03PG003)

Presented To

Department of Banking and Finance

ABSTRACT
This  research  work  investigated the effects of micro-financing on  Micro and Small
Enterprises  (MSEs)  in South-west Nigeria. The study  examined how micro-finance and
non-financial micro-financing activities and features such as group membership, pre-loan
training, cross guaranteeship, loan size, technical and managerial training, among others,
impact on  the  survival, growth, productivity  and performance  of  Micro and Small
Enterprises in Southwest Nigeria. The hypotheses formulated were developed around the
theories of  financial growth model, pecking order theory, and contract theory. Variables
were  used to evolve  a detailed analysis of  the survival and growth models.  The theoretical  models  were  used in developing four  different hypotheses  that were investigated through the survey of  four hundred and forty three (443) micro enterprises and one hundred and eighty (180) small enterprises which were randomly selected using multi-stage random sampling technique.  Copies of well-structured  questionnaire were administered to entrepreneurs sampled. The validity and reliability of the instrument were measured  using Cronbach‟s  alpha  which gave a result  of 0.72, while predictive  form validity was 0.84. Four hypotheses were raised and tested at 0.05 significant levels. The findings revealed that micro finance and micro-financing enhance survival of Micro and Small Enterprises (MSEs) but not sufficient for growth and expansion of such Micro and Small  Enterprises.  The result also revealed that microfinance has positive effects on productivity and performance of local entrepreneurs.  The  findings from the    interview sessions revealed that micro financing is not effective and substantially being practiced in Nigeria as many MFBs  grant  more  individual loans  than group based loans, thereby increasing their running cost and putting their portfolio at risk. We therefore recommend a collective and cooperative support as a critical microfinance strategy in the form of solidarity groups at the local level; and at the national and regional level, a networking of groups  among operators of MFBs. We also recommend  that  enterprises  supported by MFBs should be linked up with larger financing window like the SMEEIS fund  or Strategic Partners for expansion and growth funding after survival.

TABLE OF CONTENTS                 Page (s)
Title page - - - -        (i)  
Certification - -    (ii)
Declaration - - -       (iii)                      
Dedication - - - (iv)                    
Acknowledgements - - - (v)
Abstract - - - (x)
Table of Contents - - - (xi)
List of Tables - - - (xvi)
List of Figures - - - (xix)
List of Abbreviations - - - (xx)
                                                                                                                                                                         
CHAPTER ONE:   INTRODUCTION             
11  Background to the Study - - - 1
12  Statement of the Problems - - - 6
13  Research Questions - - - 7
14  Objectives of the Study - - - 8
15  Statement of Hypotheses - - - 8
16  Significance of the study - - - - 9
17  Scope of the study - - - - 10
18  Limitation of the study - - - 10
19  Definition of Terms - - - 11

CHAPTER TWO  LITERATURE REVIEW
21  Introduction - - - - 12
22  Review of Conceptual Issues - - 12
221  Concepts of Micro, Small and Medium Enterprises and Microfinance - 12
222  Impact Assessment of Microfinance - - 20
223  Methods of Data Analysis Found In Literature - 25
224  Measurement of Microfinance Impact - - 28
225  Enterprises Survival Prediction and Survival Analysis - 30
226  Model Generation for Microfinance and MSMEs Survival - 34 
23  Theoretical Framework - - 38 
231  Financial Growth Theory - - - 38 
232  Pecking Order Theory - - - 39 
233  Contract Theory - - - 41
24  Entrepreneurship and Growth - - 41
241  The Firm and the Entrepreneur - - 41 
242  Firm Life Cycle - - - 42 
243  Organizational Capabilities - - 43 
244  Stages of Small Business Development - - 43 
245  Small Business Development - - - 49 
246  Role of Enterpreneur in Business Formation and Growth - 55
247  SMEs & Growth - - - - 57
248  MSMEs and Economic Development in Nigeria - - 58
249  Microcredit and Microenterprise - - 60 
2410  Political & Social dimension to Entrepreneurship in Nigeria - 68
25  Theoretical Findings - - - 71
 
 
CHAPTER THREE   -  RESEARCH METHODOLOGY 
31  Introduction - - - 74 
32  Research Methods - - - 74
33  Research Design - - - - 75 
34  Population of the Study - - - 75 
35  Sample Frame - - - 77
36  Sampling Technique - - - 78 
37  Sample Size Determination - - - 79 
38  Distribution of Questionnaire and Response Rate - 81
39   Sources of Data Collection - - 83
310  Data Collection Method - - - 84
311  Data Collection Instrument - - 84
3111  The Questionnaire - - - 84
3112  Pre-Testing of Instrument - - - - 84
312  Method of Data Analysis - - - 85
3121  Survival Analysis - - - 87
312 2 Regression Based Estimation - - - 88
3123  Methods for Empirical Analysis - - - 88
3124  Multiple Regressions Analysis - - 90
313  Model Specification - - - 93
314  Theoretical Justification of Variables Used in Study - 103
315  Validity of Research Instrument - - 106
316  Reliability of Research Instrument - - - 108

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS, AND INTERPRETATION  
41  Introduction - - 109
42  Profile of Respondents - - 109
43  Business Characteristics of Respondents - - 114
44  Business Characteristics of Respondents by Location (Urban) - 116
45  Business Characteristics of Respondents by Location (Rural) - 119
46  Cross Tabulation of Some Variables - - 120
47  Survival Analysis - - 127
471  Result Analysis - - - 130
48  Multiple Regression Analysis - - 138
49  Operations, Process and Practice of Microfinance in Nigeria - 173
 
Chapter Five: DISCUSSION, CONCLUSION AND RECOMMENDATION
51  Introduction - - - 178
52  Summary - - - 178
53  Findings - - - 179
531  Microfinance and MSE Survival - - 179
532  Microfinance and MSE Growth - - 180
533  Microfinance and Entrepreneur‟s Productivity - 181
534  Non-Financial Services of Microfinance Banks and Business Performance - 181
54  Hypothesis Testing - - 183
55  Other Findings - - - 183
56  Conclusion of Studies - - 184
57  Recommendations - - - 185
58  Contribution to Knowledge - - 187
59  Suggestions for Further Studies - - 187
Bibliography - - - 189
 
 
                                                                                                                         
Appendix A
1  Distribution of MFB by geographical zone as at March 2009207                      
Appendix B  
2  Business Characteristics of Respondents by Location - 208
Appendix C
3  Questionnaire - - 210 


LIST OF TABLES          Page(s)
Table 21:  Definitions of SMEs by Nigerian Institutions      12
Table 22:  Classification adopted by National Policy On MSMEs    15
Table 23:  Financial Growth Cycle Model          38
Table 34:  License & Unlicense MFBs in Southwest Zone of Nigeria  
as at March 2009              76  
Table 35:  Distribution of MSMEs in Southwest Zone        77
Table 36:  Distribution of SMEs operators users of Microfinance Bank    78                                 
Table 37:  Minimum Returned Sample Size table for Continuous/Categorical   
    data                     80
Table 38:  Questionnaire distribution by State / Response rate of Micro &
    Small Enterprises Operator            82
Table 39:  Measurement of Variables â€" Hypothesis 1        95
Table 310:  Measurement of Variables â€" Hypothesis 2        97
Table 311:  Measurement of Variables â€" Hypothesis 3        100
Table 312:  Measurement of Variables â€" Hypothesis 4        102   
Table 413:  Profile of Respondents            110                          
Table 414:  Business Characteristics of Respondents        113
Table 415:  Business Characteristics of Respondents by Location â€"Urban   
Table 416:  Business characteristics of Respondents by Location â€" Rural     
Table 417:  Business Resident and Kind of Business        120
Table 418:  Education and Business Resident          121
Table 419:  kind of Business and Form of Business        122
Table 420:  Level of Education and Source of Initial Capital      123
Table 421:  Level of Education and Category of Business      124
Table 422:  Kind of Business and Category of Business        125      
Table 423:  Sources of Capital and Composition of Capital      126
Table 424:  Business Group and Enterpreneurial Training      127                              
Table 425:  Group Proportion with Regard to Long-term Survival    132
Table 426:  Kaplan Meier Survival Estimate by Category      133
Table 427:  Diagonistic Test Kaplan Meier Estimate        133
Table 428:  Kaplan Meier Survival Estimate by Kind of Business    134
Table 429:  Diagonistic Test Kaplan Meier Estimate        135
Table 430:  Adjusted Hazard Ratio for Cox Proportional Hazard Model   135
Table 431:  Omnibus Test of Model Coefficient          1 38                             
Table 432:  Multiple Regression Analysis of Effect of Microfinance on  
    Small Business Growth by Category of Business      144                    
Table 433:  Multiple Regression Analysis of Effect of Microfinance on  
    Small Business Growth by Legal Status of Business     148                              
Table 434:  Multiple Regression Analysis of Effect of Microfinance on  
    Small Business Growth by Category of Kind of business  
    Business Activities              151                            
 Table 435:  Multiple Regression Analysis of Effect of Microfinance on  
    Small Business Operators Productivity by Category      155    
 Table 436:  Multiple Regression Analysis of Effect of Microfinance on  
    Small Business Operators Productivity by Legal Status of
 Business                159
Table 437:  Multiple Regression Analysis of Effect of Microfinance on  
    Small Business Operators Productivity by Kind of Business     162
Table 438:  Multiple Regression Analysis of Effect of Non- Statutory  
Activities of Microfinance Bank on Small Business Performance   
by Category                 165
Table 439:  Multiple Regression Analysis of Effect of Non- Statutory  
Activities of Microfinance Bank on Small Business Performance
by Legal Status of Business             169
Table 440:  Multiple Regression Analysis of Effect of Non- Statutory  
Activities of Microfinance Bank on Small Business Performance
by Kind of business              172
 



LIST OF FIGURES
           
                                                                                                                                    Page(s)
Figure 21:  Conceptual Model for Microfinance  
                   and SMEs Survival - - 37   
Figure 22:  Stages of Small Business Growth Characteristics - 48
Figure 23:  Stages of Small Business Growth Characteristics and Failure & Exit  Modes - - - - 48
            
Figure 24: Conceptual Framework and Hypotheses - - 73

 LIST OF ABBREVIATIONS
  CBs  -  Community Banks
  CBN   â€"   Central Bank of Nigeria
 
  GDP   â€"   Gross Domestic Product
 
  MDF   -   Microfinance Development Fund
 
  MDGs   â€"   Millennium Development Goals
 
  MFBs   â€"   Microfinance Banks  
 
  MSMEDEF -   Micro, Small and Medium Enterprises Development Fund
 
  MSMEs   â€"   Micro, Small and Medium Enterprises
 
  NACCIMA â€"   National Association of Chambers of Commerce, Industry, Mines  
and Agriculture
 
  NACRDB   â€"  Nigerian Agricultural, Cooperative and Rural Development Bank   
 
  NAFDAC  â€"   National Agency for Food and Drug Administration and Control  
 
  NAPEP   â€"   National Poverty Eradication Programme  
 
  NASME   â€"   National Association of Small and Medium Enterprise  
 
  NASENI   â€"   National Agency for Science and Engineering Infrastructure  
 
  NASSI   â€"   National Association of Small Scale Industrialists  
 
  NCIS  -  National Council on Industrial Standard
 
  NDE   â€"   National Directorate of Employment  
 
  NEEDS   -   National Economic Empowerment and Development Strategy
 
  NERFUND â€"   National Economic Reconstruction Fund  
 
  NEPAD â€"     National Economic Partnership for African Development  
 
  NGO   â€"  Non-Governmental Organisation  
 
  NIPC   â€"   Nigerian Investment Promotion Commission  
  MAN   -  Manufacturers‟ Association of Nigeria
 
  SA   -  Survival Analysis
 
  SEEDS   -  State Economic Empowerment and Development Strategy
 
  SSI     -  Small Scale Industries
 
  SSE   â€"   Small Scale Enterprise
 
  SMEDAN  â€"   Small and Medium Enterprise Development Agency of Nigeria
 
 
 
Appendices
 
1  Distribution of Microfinance Banks by Geopolitical Zone in Nigeria
2  Business Characteristics of Respondents by location Tables 414 and 415     
3  Questionnaire