ASSESSING THE IMPACT OF MICRO-FINANCING ON SMALL SCALE

BUSINESS IN NIGERIA (A CASE STUDY OF SELECTED SMALL SCALE

BUSINESSES IN KEFFI LOCAL GOVERNMENT AREA

By

Musa Zakari
Technology Incubation Centre Ado-Ekiti
Email: [email protected]

Abstract
The study examines the Assessment Of The Impact Micro-Financing on Small and Medium
Small Scale Business in Nigeria (A Case Study of Selected Small Scale Businesses in Keffi
Local Government Area. the contribution of micro finance to the survival of small and medium
scale enterprise as been commend by business expert and also, The contribution of Micro,
Small & Medium Enterprises (MSMEs) to economic growth and sustainable development is
globally acknowledged. The paper argues for the Government to realize the importance of
small businesses as the engine of growth in the Nigerian economy, the government must take
some steps towards addressing the conditions that hinder their growth and survival. The
researcher make used of survey research method and content analysis as its research
methodology that is, research relied mainly on primary and secondary source of data. The
research adopted three theory (the financial growth theory, pecking order theory and contract
theory) to explain the relationship between Micro-Financing on Small and Medium Small
Scale Business in Nigeria. It was conclude that both financial and non-financial services
obtained from Micro Finance Banks (MFBs) have highly benefited Small and Medium Scale
Business in Nigeria and have facilitated the sharing of business skills and innovative ideas, as
well as alleviated the acute shortage of finance to an extent. The researcher recommends that,
Enterprises supported by Micro Finance Banks (MFBs) should be linked up with larger
financing windows like the SMEEIS fund or Strategic Partners as suggested by Ojo (2003).
The linkages should be such that the Small and Medium Scale Business (SMSBs) would be
serviced through their MFBs based on social capital. This will enable MFBs to introduce loan
products and strategies targeted at financing technology acquisition by Small and Medium
Scale Business

1.0 Introduction

Since Nigeria attained independence in 1960, considerable efforts have been directed towards
industrial development. The initial efforts were government-led through the vehicle of large
industry, but lately, emphasis has shifted to Small Scale Enterprises (SEs) following the
lessons learnt from the success of SMEs in the economic growth of Asian countries (Ojo,
2003). Thus, the recent industrial development drive in Nigeria has focused on sustainable
development through small business development. Prior to this time, particularly judging
from the objectives of the past National Development Plans, 1962-68, 1970-75, 1976-80 and
1981-85, emphasis had been on government-led industrialization, hinged on import-
substitution strategy.

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Since 1986, government had reduced its role as the major driving force of the economy
through the process of economic liberalization entrenched in the International Monetary
Fund (IMF) pill of Structural Adjustment Programme. Emphasis, therefore, has shifted from
large-scale industries to small and medium- scale industries, which have the potentials for
developing domestic linkages for rapid and sustainable industrial development. Attention
was focused on the organized private sector to spearhead subsequent industrialization
programmes. The incentives given to encourage increased participation in these sectors were
directed at solving and/or alleviating the problems encountered by industrialists in the
country, thereby giving them opportunity to increase their contribution to the Gross Domestic
Product (GDP).

The contribution of Micro and Small Enterprises (MEs) to economic growth and sustainable
development is globally acknowledged (Central Bank of Nigeria (CBN), 2004). There is an
increasing recognition of its pivotal role in employment generation, income redistribution
and wealth creation (Nigerian Institute for Social and Economic Research (NISER), 2004).
The Micro, Small and Medium Enterprises (MSMEs) represent about 87 per cent of all firms
operating in Nigeria (United States Agency for International Development (USAID), 2005).
Non-farm micro, small and medium enterprises account for over 25 per cent of total
employment and 20 percent of the GDP (Small and Medium Enterprises Development
Agency of Nigeria (SMEDAN), 2007) compared to the cases of countries like Indonesia,
Thailand and India where Micro, Small and Medium Enterprises (MSMEs) contribute almost
40 percent of the GDP (International Finance Corporation (IFC), 2002).

Whilst MSMEs are an important part of the business landscape in any country, they are faced
with significant challenges that inhibit their ability to function and contribute optimally to the
economic development of many African countries. The position in Nigeria is not different
from this generalized position (Nigeria Investment Promotion Councils (NIPC), 2009).

Realizing the importance of small businesses as the engine of growth in the Nigerian
economy, the government took some steps towards addressing the conditions that hinder
their growth and survival. However, as argued by Ojo (2003), all these SME assistance
programmes have failed to promote the development of SMEs. This was echoed by K.
Tumkella (2003) who observes that all these programmes could not achieve their expected
goals due largely to abuses, poor project evaluation and monitoring as well as moral hazards
involved in using public funds for the purpose of promoting private sector enterprises. Thus,
when compared with other developing countries, J. Variyam and D. Kraybill (1994) observed
that many programmes for assisting small businesses implemented in many Sub-Saharan
African (SSA) countries through cooperative services, mutual aid groups, business planning,
product and market development, and the adoption of technology, failed to realize sustained
growth and development in these small enterprises. Among the reasons given were that the
small-sized enterprises are quite vulnerable to economic failure arising from problems related
to business and managerial skills, access to finance and macroeconomic policy.
The Federal Government of Nigeria adopted microfinance as the main financing window for
micro, small and medium enterprises in Nigeria. The Microfinance Policy Regulatory and
Supervisory Framework (MPRSF) were launched in 2005. The policy, among other things,
addresses the problem of lack of access to credit by small business operators who do not have

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access to regular bank credits. It is also meant to strengthen the weak capacity of such
entrepreneurs, and raise the capital base of microfinance institutions. The objective of the
microfinance policy is to make financial services accessible to a large segment of the
potentially productive Nigerian population, which have had little or no access to financial
services and empower them to contribute to economic development of the country.
The microfinance arrangement makes it possible for MSEs to secure credit from
Microfinance Banks (MFBs) and other Microfinance Institutions (MFIs) on more liberal
terms. It is on this platform that we intend to examine the impact of microfinance on small
business growth, survival, as well as business performance of MSEs operators.
Statement of the Problem
Majority of the micro and small enterprises (MSEs) in Nigeria are still at a low level of
development, especially in terms of number of jobs, wealth and value creation. This is
because 65% of the active population, who are majorly entrepreneurs, remain unserved by
the formal financial institutions. The microfinance institutions available in the country prior
to 2005 were not able to adequately address the gap in terms of credit, savings and other
financial services. It is not uncommon to find in many microfinance programmes non-
financial services such as advisory services, managerial and technical training, weekly
meetings and pre-loan training to mention only a few, rendered as support services to
MSMEs. These services that are poorly provided in Nigeria are mostly very costly to deliver
( S. McKernan, 2002), yet many microfinance programmes consider them an integral part of
the success of their programmes. Though the contribution of such non-financial services is
not in doubt, the extent of the contributions is yet to be ascertained in Nigeria.
Despite Micro and Small Enterprises (MSEs) important contributions to economic
growth, small enterprises are plagued by many problems including stagnation and failure in
most sub-Saharan African countries (E. Bekele, 2008). In Nigeria, the problem is not limited
to lack of long-term financing and inadequate management skills and entrepreneurial
capacity alone, but also, includes the combined effect of low market access, poor information
flow, discriminatory legislation, poor access to land, weak linkage among different segments
of the operations in the sector, weak operating capacities in terms of skills, knowledge and
attitudes, as well as lack of infrastructure and an unfavourable economic climate.
Lack of access to finance has been identified as one of the major constraints to small
business growth. The reason is that provision of financial services is an important means for
mobilizing resources for more productive. The extent to which small enterprises can access
fund determines the extent to which small firms can save and accumulate their own capital
for further investment, but small business enterprises in Nigeria find it difficult to gain access
to formal financial institutions such as commercial banks for funds. The inability of the
MSEs to meet the conditionality of the formal financial institutions for loan consideration
provided a platform for attempt by informal institutions to fill the gap usually based on
informal social networks; this is what gave birth to micro-financing.
It is based on the above identified problem that research tend to examine the impact of micro
financing to small scale business especially in Keffi Local Government Area.
Objectives of the Study
The main objective of this study is to estimate the effects of micro-financing on business
performance of MSEs in Keffi Local Government Area.
The primary objectives are to:

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 1. To assess the contributions of micro-financing to the survival of MSEs in Keffi Local
Government Area.
2. To analyse the effects of micro-financing on MSE growth and expansion capacity in
Keffi Local Government Area.
3. To ascertain the effects of microfinance on the productivity of MSEs operators in
Keffi Local Government Area.
4. To assess the impact of micro-financing on small and medium scale business in Keffi
Local Government Area.
Research Questions
The study attempts to answer the following research questions:
1. To what extent does micro financing enhance the survival of MSEs in Keffi market?
2. To what extent is the growth of MSEs in Nigeria influenced by the financing capacity
of Microfinance Banks?
3. How does the injection of microfinance funds into small business operations affect
the profitability of MSEs in Keffi Local Government Area?
4. What is the general impact of Micro-finance on small scale business in Keffi Local
Government Area?

2.0 Research Methodology

The multiple-method strategy was adopted for this study so as to reduce the possibility of
personal bias by not depending on only one method or response from only one firm or sector.
Adopting this approach enhances the authenticity of the study. The study was designed to
combine primary survey-based data with secondary information from customer opinion and
bank records. Both qualitative and quantitative data were used in a variety of ways, including
a detailed overview of survey results in terms of a general profile and a model of Nigerian
micro and small firms. A well structured questionnaire was administered to operators and
semi - structured interviews were conducted with Micro-finance Bank Officials to document
the practice and process of micro-financing in Keffi Local Government Area. The idea
behind this was to obtain cross-referencing data and some independent confirmation of data,
as well as a range of opinions. The panel data, that is the combination of primary and
secondary longitudinal data already gathered by the banks gives a better perspective of the
clients/customers profile over a period of time and makes better judgment possible. Panel
data facilitate a precise specification of timing so that the effect of a factor is measured after
the factor has changed. What is also important is that they permit the use of fixed firm
specific effects. This is suitable for the present study because we are looking at a variable in
retrospect (microfinance) and relating it to the enterprise (survival, performance, and
growth). The interview sessions contained questions directed to workers of the bank in
mostly face-to-face interview to document the process, practice and mode of operations of
micro-financing in Nigeria.
This research identified two-in-one aggregation or study groups; Keffi Microfinance bank
(MFB), Bank of Industry and Agricultural Bank and some selected Microfinance Bank
(MFB) clients who are operators of small Business in Keffi Local Government Area,
particularly those that have benefited at one time or another from the financial and non
financial services rendered by a MFB. Selected
Small Business Owner adopted for the study are;
a. Agro-businesses, Food and Beverages

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 b. Textile, Apparel & Footwear
c. Chemical and Pharmaceutical
d. Electrical/Electronics
e. Basic Metal, Iron and Steel

3.0 Reviewed of Related Literature

Concepts of Microfinance

The Central Bank of Nigeria (CBN, 2005) defines microfinance as the provision of financial
services to the economically active poor and low income households. These services include
credit, savings, micro-leasing, micro-insurance and payment transfer, to enable them to
engage in income generating activities. The Microfinance Policy defines the framework for
the delivery of these financial services on sustainable basis to the Micro, Small and Medium
Enterprises (MSMEs) through privately-owned Microfinance Banks.

In another contribution, Ojo (2007) defined microfinance as small scale financial services
that are provided to rural/informal small scale operators for farming, fishing, trading, and
building of houses and to engage in any other productive and distributive activities.
Microfinance and micro financial institutions are intended to fill a definite gap in the finance
market and the financial system respectively, to assist the financing requirements of some
neglected groups who may be unable to obtain finance from the formal financial system.
These neglected groups that constitute the target users of such microfinance are mainly in the
informal sector of the economy and are predominantly engaged in small scale farming,
commercial/trading and industrial activities.

P. Mosley (2001) defined microfinance as financial services for poor and low-income clients.
In practice, the term is often used more narrowly to refer to loans and other services from
providers that identify themselves as microfinance institutions (MFIs). These institutions
commonly tend to use new methods developed over the last 30 years to deliver very small
loans to unsalaried borrowers, taking little or no collateral. These methods include group
lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an
implicit guarantee of ready access to future loans if present loans are repaid fully and
promptly. According to Gupta (1996), microfinance is a movement that envisions a world in
which low-income households has permanent access to a range of high quality financial
services to finance their income-producing activities, build assets, stabilize consumption and
protect against minor investment risks. These services are not limited to credit, but include
savings, insurance, and money transfers.

M. Yunus (2006) describes microfinance as an amazingly simple approach that has been
proved to empower very poor people around the world to pull them out of poverty. It is a
financial system that relies on the traditional skills and entrepreneurial instincts of the active
poor people, mostly women, using small loans (usually less than US$200), other financial
services, and support from local organizations called microfinance institutions (MFIs) to
start, establish, sustain, or expand very small, self-supporting businesses. A key to
microfinance is the recycling of loan. As each loan is repaidusually within six months to a
yearthe money is recycled as another loan, thus multiplying the value of each loan in
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defeating global poverty and changing lives and communities. He further explains that
microcredit refers specifically to loans and the credit needs of clients, while microfinance
covers a broader range of financial services that create a wider range of opportunities for
success. Examples of these additional financial services include savings, insurance, housing
loans and remittance transfers. The local MFI might also offer microfinance in addition to
activities such as entrepreneurial and life skills training, and advice on topics like health and
nutrition, sanitation, improving living conditions and the importance of educating children.

Gert van Maanen (2004), describes microfinance as banking the unbankables, bringing
credit, savings and other essential financial services within the reach of millions of people
who are too poor to be served by regular banks, due to lack of sufficient collateral."
Corroborating this position, Yunus (2003) opines that microcredit is based on the premise
that the poor have skills which remain unutilized or underutilized and that it is not the lack of
skills that makes poor people poor. . . Charity is not the answer to poverty. It only helps
poverty to continue. It creates dependency and takes away the individual's initiative to break
through the wall of poverty, therefore, the solution to poverty is to unleash financial energy
and help individual develop their creative capacity.

Yunus (2003) also observes that these loans are character-based rather than collateral-based.
Five women group all vouch for one another to get a loan, the women are not only
individually responsible, but their group is also liable for the loan. Just as important as
making microloans available so is providing business training and life skills classes where
borrowers will acquire the skills they need to succeed (Adelante,2006).
E. Costa (2007) explains microfinance as a field that focuses on providing a variety of
financial services to the poor. Typically, individuals with very little income experience great
difficulty in taking advantage of things like savings opportunities and insurance products.
Often, low incomes go hand-in-hand with a lack of collateral and credit, making it difficult
for the poor to obtain loans, invest and enjoy insurance protection. Microfinance seeks to
eliminate this problem, providing micro-insurance, microloans, and other financial services
to low-income people. Often, microfinance services are aimed at helping people to start their
own businesses thus creating the opportunity for increased income and greater financial
independence. For example, a microfinance loan of less than $100 United States Dollars
(USD) could help an individual start a business, creating a new income stream for him and
maybe even providing new job opportunities for others. Such a small loan could benefit the
borrower in many ways, setting him up to provide food, shelter, and education for his
dependents. That microfinance loan could even help the borrower to afford important
medicines.

C. Barnes (2000) explains that microfinance is aimed at providing financial services in small
amounts. For example, it is possible for a person to benefit greatly from a loan of just $50
USD. A bank would probably be uninterested in granting such a small loan and a low-income
person could have great difficulty in securing the loan of a larger amount. In such a case, a
needy individual might seek a loan from an unsafe source, accepting incredibly high rates
and suffering from unfair lending practices. With help from a microfinance institution,
however, the individual could secure a loan at a reasonable rate, without suffering
unfortunate consequences.

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The Economic and Social Commission of Western Asia (ESCWA, 2002) describes
microfinancing as a financial system that enables poor micro entrepreneurs to raise income
through productive activities and viable businesses. Its operations and its success depend on
the support it gets from the government, the civil society and from the financial institutions.
The countrys investment policy, its economic management, the policy of the financial
institutions and the role played by international organizations and NGOs in the country
determine the environment in which it operates
Concept of Small and Medium Scale Business
Small and Medium Scale Business (SMBs) as defined by the National Council of Industries
(2009) refer to business enterprises whose total costs excluding land is not more than two
hundred million naira (N200,000,000.00) only. Although, there exists no consensus among
policy makers and scholars concerning the point at which a business firm is deemed to be
small or medium.
Indeed, there is no universally or even nationally acceptable standard definition except that
the scale of business needs to be defined for a specific purpose. The problem of SMES
identification is more acute in the developing countries because apart from the fact that,
small and medium scale business is difficult to count, they are also difficult to measure
individually, hence statistics on the number, size, geographical distribution and activities of
enterprises and the SME sub-sectors are partial and highly unreliable (USAID,2004). The
United Nations Industrial Development
Organisation (UNIDO) identified fifty definitions of small scale business in seventy-five
different countries based on parameters such as installed capacity utilization, output,
employment, capital, type of country or other criteria, which have more relevance to the
industrial policies of the specific country. However, it has been suggested that the SMEs sub-
sector may comprise about 87 per cent of all firms operating in Nigeria, excluding informal -
enterprises. This study adopted USAID definition of-enterprises as informal businesses
employing five or fewer workers including unpaid family labour; small enterprises as those
operating in the formal sector with five to twenty employees; and medium enterprises as
those employing 21 to 50 employees. (Kayanula & Quartey, 1999).
In spite of its definitional problem, there exists a high level of consensus on the importance
of SMES, especially the SMEs sub-sector to economic growth and development. Oluba
(2009) has, however, observed that the importance of SMEs varies with sectors and with the
developmental stage of a country. He opined that developing characteristics such as the level
of capital allocation/requirements, management size and arrangement as well as limited
market access which make SMEs less amenable to the disappointing results of development
strategies that focus on large, capitalintensive and high import dependent industrial plants as
well as failed public enterprises.
Role of Microfinance Banks
Credit Delivery
This is perhaps one of the most important roles of microfinance banks as the loans extended
are used to expand existing businesses and in some cases to start new ones. According to
CBN (2008) microfinance loans granted to clients is increasing from 2007 to date and most
of it goes to financing microenterprises in rural areas. J. Ketu, (2008) observed that
microfinance banks have disbursed more than N800 million micro credits to over 13,000
farmers across the country to empower their productive capacities. As such it is expected that

7
agricultural output will increase with the increase in funding .The entrepreneurial capacity of
the farmers will thus improve.
Boosting Small Scale Enterprises/Agriculture
About 60 percent of poor people in the country live in the rural areas, and 80 percent of them
are farmers and artisans (NBS, 2005). Microfinance banks have therefore been the main
sources of funding to these disadvantaged groups. Rural people are empowered through
microfinance loans and services and hence small scale agricultural practice and
microenterprise is developed. Governments go into co-operatives to partner with the
microfinance banks to raise bulk loans to be disbursed to the beneficiaries in so doing the
banks are increasing and sustaining the number of people going into small businesses.
Employment Generation
Agriculture and microenterprises contribute immensely to job creation, and are of particular
interest to all Microfinance Banks in rural areas. Microfinance banks have so far engaged in
extending credits and other services to many rural enterprises and hence generating
employment and promoting entrepreneurship. The promotion of employment in rural areas
by microfinance banks covers the following areas; blacksmithing, gold-smiting, watch
repairing, bicycle repairing, basket weaving, barbing, palm wine tapping, cloth weaving,
dyeing, food selling, carpentry, brick-laying, pot-making, leather works and drumming. Even
though found in urban areas, these industries are more prominent in the rural areas. It has,
therefore, been acknowledged that the rural setting is an arena of many industries, which
could be developed to contribute significantly to the national economy, just as rural people
are more frequently self-employed than urban people (Ketu, 2008).
Improvement in Skill Acquisition
Improvement of the condition of women through the provision of, skills acquisition and adult
literacy is another role played by microfinance banks. This is done through building
capacities for wealth creation among enterprising poor people and promoting sustainable
livelihood by strengthening rural responsive banking methodology and the introduction of
simple cost-benefit analysis in the conduct of businesses. In most cases a profit sharing
agreement is entered between a bank and an entrepreneur and new methods and innovations
are passed to the prospective entrepreneur by the banks professionals, while at the end of the
production period the proceeds are shared and the entrepreneur, if he so wishes, can continue
on his own after the necessary skills and production techniques are acquired.
(Umar, 2008).
Facilitates Poverty Alleviation
Employment and income generation are important aspects of poverty alleviation efforts.
Microfinance banks have accelerated the operation of government poverty alleviation
programmes and in doing that promising entrepreneurs are supported and new ones emerged.
The federal governments National Poverty Eradication Programme (NAPEP) and
National Economic Empowerment and Development Strategy (NEEDS), to mention a few,
aimed at achieving the United Nations Millennium Development Goals (MDGs) by 2015
required these microfinance institutions for success.
The success of these programmes and projects for advancement of the MDGs are linked with
the promotion of entrepreneurs in rural areas and subsequent reduction in the level of poverty
(Ketu, 2008).
Other roles played by microfinance banks include; reorientation of the rural populace on
sound financial practices, as well as issues such as reproductive health care, and girl child

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 education. All these areas have direct link with entrepreneurial capabilities of the rural
people.

Challenges Facing Micro-financing of small scale businesses

High Operating Cost: Small units of services, pose the challenges of high operating cost,
several loan applications to be processed, numerous accounts to be managed and monitored,
and repayment collections to be made from several locations especially in rural communities.
Repayment Problem: Loan default is a major threat to microfinance banks
sustainability; it is the deadly virus which afflicts the operation of the banks. It demoralizes
staff and deprives beneficiaries of further valuable services.
Inadequate Experienced Credit Staff: Micro financing is more than
Dispensing loans. To be viable, microfinance banks require experienced and skilled
personnel. As a young and growing industry, there is a dearth of experienced staff in
planning, product development and effective engagement with clients.
Problems of illiteracy: This affects record keeping and decision-making ability of
borrowers and consequently affects their relationship with the banks.
Inadequate or non-monitoring of micro and small enterprises by banks, leading to
defaults.

4.0 Theoretical Foundation

Financial Growth Theory

Berger and Udell (1998) proposed a financial growth theory for small businesses where the
financial needs and financing options change as the business grows, becomes more
experienced and less informational opaque. They further suggest that firms lie on a
size/age/information continuum where the smaller/younger/more opaque firms lie near the
left end of the continuum indicating that they must rely on initial insider finance, trade credit
and/or angel finance. The growth cycle model predicts that as firm grows, it will gain access
to venture capital (VC) as a source of intermediate equity and mid-term loans as a source of
intermediate debt. At the final stage of the growth paradigm, as the firm becomes older, more
experienced and more informational transparent, it will likely gain access to public equity
(PE) or long-term debt.

Problems related to financing are dominant in the literature with regard to small firms. There
are numerous empirical studies describing inadequate financing as the primary cause of
MSMEs failure (Coleman, 2000; Owualah, 2007). The capital structure of smalls firm
differs significantly from larger firms because small firms rely more on informal financial
market which limits the type of financing they can receive. The small firms initial use of
internal financing creates a unique situation in which capital structure decisions are made
based on limited financing options. It is widely accepted that small firms have different
optimal capital structures and are financed by various sources at different stages of their
organizational lives (Berger and Udell, 1998). Researchers have found that certain attributes
of small firms influence the type of funds available to finance the firms operations (Van
Auken and Neeley, 1996; Hall et al., 2000, Romano et al.,2001;).

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 Financial Growth Cycle

Very small firms, Medium Sized Firms. Large firms of known

possibly with no Some track records. risk and track record.
collateral and no track Collateral available, if
record. necessary.

Initial Insider Financing Venture Capital Public Equity

Angel Medium - term financial Long term financial
Institutions. institutions.
Figure 2: Model adapted from Berger and Udell (1998).

Angel financing is a type of microfinance where an individual or a corporate organization

raises limited amount of capital for a micro entrepreneur at start up or for expansion with less
stringent conditions for repayment.

Pecking Order Theory

Another financing theory that is very familiar with the operations of the small business is the
pecking order theory, proposed by Myers (1984). It sheds light on the incentives that drive
SMEs capital structure decisions. This theory proposes that firms prefer to use internal
sources of capital first and will resort to external sources only if internal sources are
inadequate. This theory has been found to be relevant to the financing of SMEs. Most SMEs
start with internal financing before looking for external sources. Older firms, by definition,
have had more opportunities to accumulate retained earnings than younger companies and
thus more funds are available to finance operational growth. Pecking order theory suggests
that those funds should be used before external capital sources are tapped. Holmes and Kent
(1991) found that small businesses experience a more intense version of pecking order in
their decisions because access to appropriate external sources of capital is limited. It has been
noted that small businesses differ in their capital structure but their intense reliance on
pecking order is only one of the variables that make small businesses financing decision
unique. Small businesses rely on private capital markets, while larger firms are financed
through public market. Information on small businesses is much less readily available than
information on larger firms which can be picked up in the annual reports. Small businesses
reliance on private markets limits the types of financing that they can receive; most small
businesses rely on commercial banks and finance companies to provide capital (Berger and
Udell, 1998). In most cases, the cost of capital for small businesses is usually higher than it is
for larger firms. The size of the loan and lack of information on the quality of operation of
the small firms force lenders to protect their investment by demanding higher rates of return,
which come in the form of high interest rate and high cost of capital for the small firm. In an
attempt to avoid higher cost of capital, smaller firms are then forced to use more short-term
debt, which carries lower costs but raises the firms risk (Chittende, 1996). When loaning to

10
small businesses, most financial institutions require the owners of the small businesses to
personally guarantee the loan. These personal guarantees allow the institution recourse
against the personal wealth of the small businesses owner in the event of default (Berger and
Udell, 1998). These restrictions on the type of finance available to SMEs coupled with the
small firms insistence on first using internal sources of capital (Holmes and Kent, 1991),
creates a unique structure for small business. Romano, (2001) describe the situation as a
complex array of factors that influence small to medium size enterprises (SME) owner-
managers financing decisions. This is supported by Hall, (2000) who found that firms size
is positively related to long-term debt and negatively related to short-term debt. In further
support, Chittenden et al. (1996) suggest that a firms size is correlated with the firms
reliance on pecking order theory in capital structure decisions. Thus, smaller firms are more
likely to rely on internal funds. Romano et al. (2001) found a significant relationship between
the size of the firm and the use of debt. Again, these results are consistent with pecking order
theory and the Berger and Udell (1998) model.

Availability of information is another factor that limits the financing ability of the small firm.
Small firms often do not have audited financial statements. Larger firms, on the other hand,
must disclose a large amount of information about their financial standing on a systematic
basis. As a result of this information void, the investor in small firms is unable to distinguish
between high-quality and low-quality companies and therefore raises the firms cost of
funding to compensate for risk. The investor will require a high rate of return in exchange for
investing in a firm without all of the proper information. The investor requires this higher
rate of return because the information is not available to establish the extent to which the
small firm is likely to default. This actually limits small firms in accessing external fund
(Weinberg, 1994).

Contract Theory
In contract theory, asymmetric information arises when one of two parties engaged in a
business transaction happens to have more or different information than the other. In such a
situation, one party often does not know enough about the other party and fails to make an
accurate decision. This circumstance leads to a potential adverse selection and moral hazard
problems in the credit market. Adverse selection is a problem arising from asymmetric
information which occurs before a transaction is entered into. A lender may decide not to
lend money although the borrower is worthy of the loan and has the potential to make loan
repayments as expected. Moral hazard is a problem of asymmetric information that arises
after transition has occurred. The borrower might engage in activities that are undesirable
from the lenders point of view, and this makes it less likely that the loan will be paid back.
For these reasons, formal financial institutions insist on collaterals as a prerequisite for
providing loan money to small enterprises. The disbursement of loan money without securing
adequate collateral is considered too risky. Stigilitz and Weiss (1981) have pointed out that
information asymmetry is one major cause of credit constraint in small businesses and
enterprises.
Discussion of Findings
It can be deduce that Small and Medium Scale Business in Wuse Market has been able to
survival still date as result of the contribution of Micro-financing Banks. This is as a result of
the fact that micro finance banks has been offering working capital loan for small scale

11
businesses that desire to borrow money for business purposes but lack conventional collateral
to secure their loans and due to fact the loan has improved their business through increase in
market size.
The study reveals that the likelihood of survival of small and medium scale business is their
ability to get easy access to micro credit and as well make profit and plough back such profits
generated into re-investments. Financial assistance as well as financial advice has significant
influence on long-term survival of small business. Technical capacity like assess to raw
material may be assessed in terms of ability to adapt to new technology, regular technology-
related training, application of information technology and sound business plan writing.
Successful businesses and enterprises were associated with managers who are given to
continuous innovation and adapting new technology. The study also reveals profitability as a
key predictor of long-term survival and viability of SMSBs.
Easy access to micro credit is significantly associated with small business survival. Easy
access to microfinance is closely associated with cordial relationship and regular contact with
loan/banks official as well as regular participation in microfinance. The appropriateness of
loan size, proper utilization of loan given and a good repayment plan schedule are the factors
that make micro credit worthwhile for small business operators. The study has shown that
businesses that participate in microfinance programmes, particularly at the group level, have
survived much better than those which do not participate. These results have shown that there
is a robust and positive correlation between small business survival and regular participation
in microfinance activities.
The study provided empirical evidence of the variables that enhance small business
productivity and performance. This will enable Small and Medium Scale Business to
concentrate more on factors that sustain business growth and survival, thus giving insightful
information concerning the practice, process and mode of operation of Microfinance Banks.
The study also showed the strength and limitation of microfinance as a method of financing
Small and Medium Scale Business in Nigeria by providing evidence that microfinance can
only support the survival and growth of Small and Medium Scale Business in Nigeria.
The study succeeded in operationalizing small business survival, growth and entrepreneurs
productivity, providing empirical evidence on the survival rate and survival probability for
enterprise financed by microfinance banks in Wuse Market.
It is important to note that regular contact with lender/banks was found to be the most
significant factor; other factors of significant impact are monthly repayment of loan, low
interest rate as well as free collateral was found to be the most important contributory factor
to the survival of Small and Medium Scale Businesses.
Conclusion and Recommendations
Small and Medium Scale Business in the small and micro sub-sector of the economy in
Nigeria require access to finance for their businesses to thrive on a sustainable basis.
Although, the Small and Medium Scale Business sector contributes significantly to the
national economy, the sector has so far not been given due recognition commensurate with
level of the contribution. Although financial issues are important to all firms, results from
this study show that both financial and non-financial services obtained from Micro Finance
Banks (MFBs) have highly benefited Small and Medium Scale Business in Nigeria and have
facilitated the sharing of business skills and innovative ideas, as well as alleviated the acute
shortage of finance to an extent. The policy implication of this study is that, micro financing

12
contributes significantly to an enhanced business growth and survival by making the business
environment more conducive and narrows the resource gap for small businesses.
When properly harnessed and supported, microfinance can scale-up beyond the micro-level
as a sustainable part of the process of economic empowerment by which the poor improve
their situation. Based on findings from this study, the use of Micro Finance Banks (MFBs)
has potentials for enhancing the performance of small businesses in three major ways-
regular participation in micro financing, offering of non financial services, and as a means
to enhance Small and Medium Scale Business growth and survival.
If we consider the variation in impact of these factors on the intensity of MSE growth and
survival within any one sub-sector, it is possible to define a common series of critical factors
for sub-sets of firms. This suggests that policies aimed at promoting the performance of
micro and small enterprises should adopt a sectoral approach. The paper recommends that,
1. Enterprises supported by Micro Finance Banks (MFBs) should be linked up with larger
financing windows like the SMEEIS fund or Strategic Partners as suggested by Ojo
(2003). The linkages should be such that the Small and Medium Scale Business
(SMSBs) would be serviced through their MFBs based on social capital. This will
enable MFBs to introduce loan products and strategies targeted at financing technology
acquisition by Small and Medium Scale Business
2. Small and Medium Scale Business should endeavour to payback their loan when due to
enable the bank has more funds for further disbursement of such loan to others
businesses.
3. In order to encourage technology acquisition for SMSBs expansion, MFBs can
categorize their loans into low and high interest loans. The conventional loans to clients
can be maintained as high interest loans, while loans for capital assets or technology
acquisition should be low interest loans, which can be secured by a mortgage over the
fixed asset so acquired by the micro-borrower. To achieve this, the Microfinance Banks
can be recapitalized.
4. MFBs should increase the duration of their clients' asset loans, or spread the repayment
over a longer period of time, or increase the moratorium. This will enable the clients to
have greater use of the loan over a longer period for the acquisition of capital assets and
technology.
5. The microfinance banks should reduce the gap between their savings deposit rate and
the lending rate by mobilising more savings from the informal financial market which
is an integral part of their operating environment.
6. In terms of policy on support services, MFBs should assist their clients by providing
training on credit utilization and provide information on government programmes to
SMSBs operators in the country. Such MSE support and training institutions should be
strengthened and properly funded while the services should be properly delivered too.
MFBs can partner with relevant technology enterprise development organizations/skills
training institutions to provide client-focused skills training to their clients.
7. MFBs should seek long-term capital from the Pension and Insurance Companies in the
country. This will help to reduce their lending rates and enable them spread their
interest payments over a longer period to encourage the acquisition of capital assets and
technology.

13
8. The banks should employ relationship-based financing rather than insisting on a solid
business plan only, particularly since regular contact with lender is found to have
positive impact on Small and Medium Scale Business survival.
9. The CBN should not adopt a blanket financing option for all categories of businesses
and sectors within the economy. Rather, policies aimed at promoting the performance
and growth of micro and small enterprises should adopt a sectoral approach. Thus,
resources for each sector would address the most critical determinants of performance
and growth in focal sub-sectors.
10. The Government should urgently tackle the problem of infrastructure development and
maintenance. These include electricity, water and efficient transportation system which
impact greater on Small and Medium Scale Business operations. The bureaucratic
bottleneck involved in small business registration should also be removed.
11. Government should establish relevant well adapted and appropriately structured
institutions and organizations to provide support for MSEs in such aspect as;
procurement, supply and distribution of raw material, supply of local/imported
machines for use on concessional terms, training in several technical grades, and create
favourable market conditions.

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