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ABSTRACT

This research work was carried out to assess the effectiveness of Microfinance Banks’ enhanced service delivery to small scale enterprises in Imo State. The survey research method was adopted

for this study. A 35 items questionnaire was used in studying a population size of the managers of 58 registered small and medium scale enterprises in Imo State, which include companies

dealing on farming such as fishery, piggery, poultry and cassava processing industry. Also other firms  that  deal on  garment  making,  fabricating  and  construction  industries etc.  The  mean

statistics and t-test analytical tools were adopted in analyzing data. The study revealed that the savings services of microfinance banks facilitate operations of small scale business managers.

Also that the study revealed among others that microfinance banks makes efforts to encourage the savings habit of operators which is important in ensuring small scale business growth. The

study  recommended  among  others  that  microfinance  banks  should  organize  enlightenment workshops on a regular basis for small business owners to equip them with knowledge and

understanding of microfinance banks operations services and how the small business owners can benefit from microfinance banks.

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CHAPTER 1

INTRODUCTION

Background of the Study

Microfinance refers to provision of financial services to the poor who are traditionally not served by the conventional financial institutions. Microfinance is basically distinguished from other formal financial products by the smallness of loans or savings collected, the absence of asset-based collateral, and simplicity of operations (CBN, 2005). Microfinance creates access to credits which make small, businesses viable and raise income above poverty line. This underscores the pertinence of microfinance as a catalyst  for economic development  in any society. Littlefield, Morduch and Hashemi (2003) cited in Akpomuvie (2010) observed that microfinance is  unique among  all  development  interventions because  it  provides access  to flexible, convertible and affordable financial services that empower and equip the poor to make their own choices and build their way out of poverty in a sustainable and self determined way.

As Akpomuvie (2010) noted, extraordinary high interest rates, limited capital and the risk of appropriation often keep the underprivileged operating at levels of marginal productivity that are simply not competitive in regional or world markets. The numerical growth of private sector and other microfinance institutions in Nigeria is largely due to the unwillingness of the formal financial institutions to provide financial services to the urban and rural poor coupled with the

vulnerability of government sponsored development financial schemes. Among the beneficiaries

1

or targets of microfinance activities are small scale enterprises which constitute a major pillar in the economic development of any nation, especially developing nations.

The term Small Scale Enterprises (SME) has been defined in terms of capital base and turnover. The Central Bank of Nigeria regards small scale businesses as any enterprise whose annual turnover is less than N500,000 (Okoye, 1998). Ballunywa (2011) noted that a small scale enterprise is defined according to the following basic measures; (i) number of people employed, capital employed, and sales turnover. Balunywa further observed that these indices vary from country to country. In Nigeria, the number of employees of a small scale enterprise ranges from

5-50, the capital employed ranges from N5,000 – N10 million, and the average sales turnover is less than N500,000 (CBN, 2005; Okoye 1998).

Small scale business in Nigeria could range from hawking plastic sealed water, popularly known as pure water, on the streets to leasing or renting an office space for wholesale, retail or services (www.ehow.com). Tijani (2004) writes that the entrepreneur viz a viz the small scale business person is the most critical factor in the economic development of any nation. Small scale businesses differ from micro and large scale businesses in that micro businesses operate with 1-5 or 1-10 workers and basically involves capital investment of as low as N5,000 (five thousand naira).The management of micro business enterprise is largely built around the sole owner or micro entrepreneur. A medium scale business operates with 20-50 to 300-500 workers while a large scale enterprise operates with 300-500 workers and above. However, the focus of this work is small scale business enterprises which also operate with relatively low capital base, small number of employees (between 10-50) and narrowly defined target consumer scope.

The pertinence of small scale businesses in the development of the Nigerian economy is captured by Asuquo and Latinwo (2010) who observed  that small scale business firms result in the mobilization of resources of the environment and thereby improve the standard of living of the population, contribute to the labour market by absorbing an ever growing supply, and in doing so, sufficiently help to curtail the rising unemployment in the country.

Okoye (1998) notes that micro and small businesses constitute the engine for economic growth, particularly because of the utilization of local raw materials, generate employment, bring about rural development, and diversify the economy. These businesses further encourage selF- reliance, thereby contributing immensely in checking the problem of unemployment especially in developing nations.

One of the major problems of small scale businesses in Nigeria is their inability to attract financial credit  from financial  institutions To  take off or  expand.  This  financial  limitation hampers the growth of small scale businesses in developing nations. Big financial institutions shy away from supporting small scale businesses. Egwuatu (2007) noted  that it is very difficult to lend to small and medium businesses in Nigeria and this is because of the structure inherent in small businesses in terms of management, security and so on. This is a worrisome development because Lawson further notes that it is generally known all over the world that robust economic growth cannot be attained without putting in place well focused programs and structures to reduce poverty, improve living standards and engender socio-economic growth. This plays up the  role  of  microfinance  banks  in  ensuring  the  growth of small  scale  enterprises  through provision of access to credits required for the growth of small scale industrial sector. In Nigeria, as in many developing countries, a systematic approach and well articulated program through the

provision  of  credit  facilities  and  financial  services  to  low  income  earners  and  micro entrepreneurs is the panacea for socio-economic growth.

Against this background, the need to encourage the development of microfinance institutions that would engage in efficient service delivery to small businesses draws special attention especially in view of the fact that this would help actualize the goals of the National Economic Empowerment and Development Strategy (NEEDS) through the provision of the needed financial services to empower the poor and the private sector to enable them engage in or expand their present scope of economic activities and generate employment (CBN 2005). This informed the establishment of micro finance banks in 2005 by the Central Bank of Nigeria (CBN) to serve the following purposes among others; provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, which would enable them to undertake and develop long-term, sustainable entrepreneurial activities; create employment opportunities and increase the productivity of the active poor in the country, and enhance organized, systematic and focused participation of the poor in the socio-economic development and resource allocation process (CBN, 2005). This policy further directed the conversion of community banks in the country into micro finance banks with a capital base of N20 million and licensed to operate either as a unit bank in a community or  a capital base of N1.00 billion to operate in a state.

Microfinance bank is defined as any monetary institution that offers or provides micro credits as well as other  financial services such as savings/deposits, leasing,  funds transfer, insurance and payment (Fajemirokun, 2007).  Microfinance banks specifically designed to target

the poor and operators of micro, small and medium scale businesses who have little or no opportunity of accessing micro credits from conventional banks.

Micro finance banks provide micro finance to the public, especially the relatively poor or the less privileged entrepreneurs or potential entrepreneurs. A poor person refers to a person who has meager means of sustenance or livelihood and whose total income during a year is less than the minimum taxable limit set out in the law relating to income tax (CBN, 2005).

Today, micro finance banks exist in the nooks and crannies of Nigeria with the basic objective of doing for the poor and micro business managers, what the conventional banks and financial institutions could not do for them. These banks are expected to provide enhanced service delivery to small and medium scale enterprises to make such enterprises vibrant and competitive in today’s economic environment. The term Effectiveness is defined as producing intended, expected or desired result. Microfinance banks were established to deliver services such as loans, deposits, and ancillary services to small and medium scale businesses. How effective the delivery of these services is constitutes a basic focus of this study.

The concept Service Delivery here refers to offering of banking and ancillary services to small and medium scale enterprises with a view to encouraging the growth and expansion of these firms. The Oxford Advanced Learner’s Dictionary defines the term Services as providing people  with  something they  need.  With reference to  microfinance banking and  Small  and medium scale  businesses, service delivery means offer of   such banking services as loans, deposits, and ancillary services to small and medium scale businesses.

Micro finance banks offer lower interest rates on loans given for small businesses. The interest rates range from 1% to 6%, depending on the amount being collected. Lending is not as

strict as in conventional banks. Micro finance banks do what is called character lending. In this type of lending, no collateral is required. The customer is given the loan based on recognition. Also for most loans given by micro finance banks, the repayment or grace period is from six months, depending on the amount. These services are designed to enhance the financial empowerment of micro business managers or those who wish to go into micro businesses. The term Assessment here refers to a detailed research-based evaluation of the banking services – loans, deposits and ancillary support services – offered to micro businesses by microfinance banks. This research work assessed how these services are working or whether they exist in theory.

Imo  State, the eastern heartland,  is not  left  out  in this emerging trend of increased existence of micro finance banks. These banks exist in both urban and rural areas of the state. Various micro businesses are also operated in the state. Fast food centers, small and medium scale manufacturing industries, sachet and bottled water businesses, soap-making firms, plastic products manufacturing industries, are among many micro businesses operated in the state. The small  and  medium  scale  businesses  exist  in  urban  and  rural  areas.  Whether  these  micro businesses have access to the micro finance facilities supposed to be offered by micro finance banks, is among the key issues this study intends to establish.

Statement of the Problem

Micro finance banks were established to provide the required windows of opportunity and  also  provide safe,  less  costly,  convenient  and  easily accessible  finance that  would  be attractive to the poor and less privileged entrepreneurs in the business environment, particularly

micro business managers. These facilities such as micro credit loans and ancillary services are expected to encourage the development of micro businesses, empower the poor and stimulate economic growth. They were establishment to provide the windows of opportunity, safe, less costly, convenient and easily accessible finance to the poor and less privileged entrepreneurs in Nigeria. These facilities which include micro credit loans and ancillary services are expected to encourage the development of micro, small and medium scale businesses, empower the poor and stimulate economic growth.

Whether small scale businesses are enjoying micro credits and ancillary support facilities from microfinance banks is what this study sought to ascertain. CBN (2005) observes that funds meant  for  micro  credit  was  not  being  utilized  in  full  capacity due  to  lack  of appropriate framework and confidence in the existing institutions that would have served the purpose of disbursing the fund. This is in view of the challenges microfinance banks face, which constitute constraints to their operations. Ogunteye (2008), cited  in Bayagbon (2008, p.8) writes that among the constraints faced by microfinance banks are weak corporate governance, inadequate awareness and total lack of risk management processes by some microfinance banks. Dauda (2007) outlines the problems of microfinance banks to include inadequate legal supervisory/regulatory environment, internal control weakness, ownership and boardroom squabble, lack of deposit insurance cover, high over-head and difficulties in achieving cost- effective operations and unhealthy relationship with correspondent banks.

Against the backdrop these problems faced by microfinance banks in service delivery, to what extent have these problems affected microfinance services delivery to small scale business enterprises in lmo State? How are micro finance banks carrying out their service delivery to

small scale business enterprises in Imo State, in the face of these constraints? Are micro finance banks      creating      the      atmosphere      or      windows      of      opportunity      for      the financial empowerment for small and medium scale businesses as is expected? These questions present the problem that informed this research work.

Purpose of the Study

The purpose of this study is to assess the effectiveness of microfinance bank’s service delivery to small scale business enterprises in Imo State. Specifically, the study seeks:

1. to  determine small scale  business managers’ perception of   microfinance banks’ service delivery in handling bank deposits of small scale enterprises in Imo State.

2.  to  determine/small  scale  business  managers’  perception  of  microfinance  banks’  service delivery in handling bank loans to small scale enterprises in Imo State.

3. to assess the ancillary/support banking services rendered to small scale businesses by microfinance banks operating in Imo State.

4. to assess microfinance banks’ service delivery in the supply of industrial and agricultural inputs to small scale enterprises in Imo State.

5. to assess the professional advice services rendered to small scale businesses in Imo State by microfinance banks.

Significance of Study

The findings of this study will be of immense benefit to the following: Microfinance banks, small scale business entrepreneurs, Central Bank of Nigeria, Researchers and Students, Imo State Government, and the Nigerian economy.

The findings of this study have implications for the public, the private business, microfinance banks, the government and the economy in general.

To the public, the result of this study will reveal to them an assessment of the services rendered by microfinance institutions to small scale business enterprises in Nigeria. The result will also reveal to them how they could benefit from the operation of microfinance institutions, should they wish to run micro, small or medium scale business enterprises.

To the private businesses, especially small business operators, this study will broaden their knowledge and understanding of microfinance banks in Nigeria and the wide range of services rendered by these institutions in the areas of bank deposits, bank loans, ancillary/support services, industrial and agricultural services, and professional advice services. The study will help small scale business entrepreneurs to plan effectively on which services of microfinance banks they could seek for the purpose of business expansion based on the assessment of these services presented in this work. To the government, this study will provide data for the government on whether microfinance banks are delivering the services for which they were established based on the assessment of microfinance banks services by small scale business operators as presented in this work.

To the economy in general, the study will provide data an how to boost the economy by strengthening microfinance institutions which in turn power and revive small businesses which constitute the engine for economic growth. This is based on the fact that the study will provide data on which services were being rendered effectively by microfinance banks and the services not  being  rendered,  which  require  strengthening  for  effective,  goal-oriented  microfinance banking sector.

Researchers,  students,  and  business  managers  could  use  the  findings  as  reference materials in research works or in coming up with write-ups on the workability of micro finance banks in Nigeria. The findings of this study will also add to literature in the area of micro finance banks and MSMEs in Nigeria.

Research Questions

In order to achieve the purpose of this study, the following research questions were formulated;

1.          What are the small scale business managers’ assessment of microfinance Banks’ service delivery in handling bank deposits.

2.        What are the small scale business managers’ assessment of microfinance banks service delivery in handling bank loans?

3.        What are the small scale business managers’ assessment of the ancillary/ support banking services of microfinance banks?

4. What are the     small scale business managers’ assessment of credit sales and supplies of industrial and agricultural inputs services rendered by microfinance banks in lmo State?

5. What are the small business managers’ assessment of the professional advice services of microfinance banks in Imo State?

Hypotheses

The following null hypotheses was formulated to guide the study and  tested at 0.05 level of significance;

H01: There is no significant difference in the mean responses of small scale

business entrepreneurs in urban and rural areas on their assessment of bank deposits service delivery by microfinance banks in Imo State.

H02: There is no significant difference in the mean responses of small scale

business managers in urban and rural areas on their assessment of microfinance banks’

service delivery in handling bank loans.

Delimitations of the study

This study was delimited to only micro business managers and micro finance banks in Imo state. The geographical scope is Imo state. Micro finance banks offer a wide range of services, from deposits/savings of all kinds, property development, to loans and micro credit facilities. However, this study is delimited to the loans, micro credits, bank deposits, ancillary/support services, credit sales and supply of industrial/agricultural inputs, and professional advice services of microfinance banks. These are the services of microfinance banks which will be used to ascertain the opinion of small and medium scale business managers on the level of efficiency of micro finance banks’ services.


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ASSESSMENT OF THE EFFECTIVENESS OF MICROFINANCE BANKS’ ENHANCED SERVICE DELIVERY TO SMALL SCALE ENTERPRISES IN IMO STATE

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