INFORMAL MICRO FINANCING AND SMALL SCALE BUSINESS IN MAKURDI LOCAL GOVERNMENT AREA: A STUDY OF DAILY CONTRIBUTION
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INFORMAL MICRO FINANCING AND SMALL
SCALE BUSINESS IN MAKURDI LOCAL GOVERNMENT AREA: A STUDY OF DAILY CONTRIBUTION
ABSTRACT
The main
objective for embarking on this study was to examine informal micro financing
and small scale business in Makurdi Local Government Area: a study of daily
contribution. A survey research design was adopted with a sample of 160, using
a four (4) point Likert rating scale administered a questionnaire to the
sampled respondents and analyzed using simple descriptive and inferential
statistics and Chi-square test to test the hypotheses at 0.05 level of
significance. The result showed that, microfinance institutions do not care
about the finances of small scale businesses but grants loans to them when they
think the small scale business has enough collateral to secure the loan. For
that matter they do not provide any financial advice and monitoring to their
customers. It also show that much initial financing for small scale businesses
came from personal savings of the operators themselves and from formal
financial institutions, while additional financing came mainly from informal
sources. The study has proven that daily contribution is most effective for the
survival of small scale businesses. Based on the study results, the researcher
recommended that owners of SMEs in accessing financial source in order to
enhance their business’ performance; Government should establish more
microfinance banks in the state and compel them through legislation to focus
more on small scale businesses and Government should relax the interest rate
especially to those who are into small scale businesses in order to enhance
their business performance thereby reducing the crime rates and improve the
standard of living.
CHAPTER ONE
1.1 INTRODUCTION
The
contribution of Micro, Small & Medium Enterprises (MSMEs) to economic
growth and sustainable development is globally acknowledged (Central Bank of
Nigeria (CBN), 2004). There is an increasing recognition of the small scale
enterprises (SSEs) pivotal role in employment generation, income redistribution
and wealth creation (NISER, 2004). The micro, small and medium enterprises
(MSMEs) represent about 87 percent 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 (SMEDAN, 2007) compared to the cases of countries
like Indonesia, Thailand and India where Micro, MSMEs contribute a higher
percent of GDP (IFC, 2002).
In Nigeria,
credit has been recognized as an essential tool for promoting small scale Enterprises.
About 70 percent of the population is engaged in the informal sector or in
agricultural production and aquaculture sector by extension sources of funds to
finance their business (Aderibigbe, 2001). The 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 populations, who are majorly entrepreneurs, remain
unserved by the formal financial institutions (Aderibigbe, 2001).
The wide
variety of different types of finance available reflects the diversity of SME
characteristics and their specific finance needs (Department for Business
Innovation and Skills 2012). It shows that seeking for a type of financial
source has something to do with each stage of the business development. Access
to finance is a key determinant for business start-up, development and growth
for small and medium sized enterprises (SMEs) and they have very different
needs and face different challenges with regard to financing compared to large
businesses European Commission (2013). Among the various nations’ economy of
today, SMEs is considered as one of the pillars holding the nation’s economy
together. It can be likened to propeller that is propelling the nation’s
economy engine for the growth and development. Generally, in the years past,
small and medium enterprises were given little or no attention by the
government because of its small population and the discovery of crude oil (Oladele
et al., 2014). However, giving recognition to SMEs started gaining the
attention of both private and public shortly after the alarming in population
which had increased beyond what the oil sector can absorb in terms of
employment. Currently, ironically with oil money in the country, individuals
have found it difficult to survive and at the peak of this, it becomes
unavoidable for both the private and public not to pay serious attention to the
issue of SMEs in the country (Nigeria). The importance of SMEs enterprise have
been out-rightly recognized by the players (i.e. government, private,
individuals and experts) in the field of the nation’s economy as the main
engine room for sustainable growth and development (Oladele et al., 2014).
Although
many Nigerian entrepreneurs have recorded successes in the area of business but
the obvious is that more entrepreneurial dreams are aborted at conception due
to financing constraints. Small businesses have been widely acknowledged as the
spring board for sustainable economic development. In Nigeria, since the 1970’s
there has been an increased interest in the promotion of small businesses due
to the inability of government and mega organizations to employ the nation’s
teeming populace. This has strengthened individuals’ self-sustaining and
self-reliant perspective to the recognition that dynamic and growing small
businesses can contribute substantially to a wide range of national
developmental objectives.
Entrepreneurs
for small business in developing countries often cite lack of capital as a
major constraint to entrepreneurial development, a notion often referred to as
“capital illusion”. This lack of access is often associated with financial
policies and bank practice that make it hard for banks to cover the high costs
and risks involved in lending to small business. By their nature, small and
medium scale business require long term capital for investment, because they
have long gestation periods. So any capital mismatch by these enterprises in
terms of loans can have serious consequences, especially in an unstable
economic environment (Osisioma 2004). Financing has also been identified in
many small business surveys as one of the most important factors that determine
the survival and growth of small enterprises (Moses, 2010). Mambula (2002)
acknowledging this affirms that small businesses in Nigeria suffer from the
dearth of funding as top most amidst other constraints.
Formal
interventions for small scale businesses in the provision of financing has
improved the access of micro credit. However, in the same environment, credit
from informal sources has performed better, particularly in exhibiting very low
loan default rates (Adedoyin, 2014). Informal finance mechanisms are as diverse
as they are ubiquitous, including institutions such as rotating savings and
credit associations (ROSCAs), accumulating savings and credit associations
(ASCAs), informal moneylending, loan brokers, and burial societies, to name a
few. Such mechanisms may or may not be 'traditional', and range from simple to
complex (International Labour Organization, 2015). They attend to diverse needs
such as consumption smoothing, enterprise financing, promoting savings
discipline, and intermediation between savers and borrowers. Arguably, the
core-identifying characteristic of informal financial institutions is that
emphasize inter-personal relationships, rather than relying on anonymous
interaction between a client and a formal institution (ILO, 2015).
Over the
years, studies have documented many constraints faced by firms especially in
developing countries including infrastructure, energy, access to markets and
macroeconomic instability. However, a fast growing literature has revealed
financial constraints to firms as the most binding of these constraints
(Carpenter et al ., 2002, Guariglia 2008, Beck et al., 2006, Beck et al., 2013,
Ayyagari et al., 2006, Quartey, 2008). The issue of financial constraints may
be especially serious for informal firms who may not have been in existence for
long and may lack collateral. These firms may have two options; formal finance
and informal finance. Informal finance may require less information to get
funds from lenders due to less rigorous information requirement but is normally
limited in supply and hence, come at a higher interest rate. Formal finance on
the other hand can help firms overcome financial constraints because of its
abundance and expert advice on how to manage their firms, but may be difficult
for informal firms to take advantage of given the collateral requirements. This
makes access to finance quite complex for informal firms.
1.2 STATEMENT OF THE PROBLEM
Given that
informal financial institutions rely on strategies for minimizing transaction
costs that are generally not available to most formal financial institutions.
As an example, moneylenders and commercial banks adopt different strategies for
trying to cope with the fundamental challenge of asymmetric information between
lenders and would-be borrowers. Banks are apt to cope with asymmetric
information by rationing according to objectively observable criteria such as
occupation and financial history, which has the effect of reducing the
transaction costs they incur at the expense of altogether screening out many
lower-income applicants. Meanwhile, the application process imposes high
transaction costs on credit applicants, i.e. waiting in bank queues, overcoming
language and literacy obstacles, producing legal documents, and enduring
lengthy delays while they wait for a verdict on their application. By contrast,
the forte of informal moneylending is to exploit personal acquaintance with the
applicant, as with loans from shopkeepers or input suppliers with whom the
applicant is in frequent contact, or loans from one's landlord or rich
neighbor. The observation has thus been made over and over again, that even
where they might succeed in qualifying for a bank loan, many people seeking
credit will rather approach a local moneylender, even if this means paying
higher interest rates (Rutherford, 2001). It is to this effect the present
study seeks to assess micro financing and small scale businesses in Makurdi Local
Government Area with a focus on daily contribution.
1.3 RESEARCH OBJECTIVES
The main
objective is to examine the effect of micro financing on small scale businesses
with a focus on daily contribution.
Specifically,
the study seeks to:
i. determine the factors that accounts
for the preference of daily contribution by small scale businesses in Makurdi
Local Government Area, Benue State
ii. examine the effort of daily
contribution on the growth of small scale business in Makurdi Local Government
Area, Benue State
iii. ascertain the challenges of daily
contribution to the survival of small scale businesses in Makurdi Local
Government Area, Benue State
1.4 RESEARCH QUESTIONS
In the
course of this study, the following research questions were raised:
What are what are the factors that accounts
for the preference for daily contribution as a main financial source?
What is the effort of daily contribution as
a source of micro financing on the growth of small scale businesses in Makurdi
Local Government Area, Benue state?
What are the challenges of daily
contribution to the survival of small scale businesses in Makurdi Local
Government Area, Benue State?
1.5 RESEARCH HYPOTHESES
A number of
hypothesis were formulated by the researcher to enable her test the validity or
otherwise of the information obtained from the research work.
H01: Factors that account for the preference
for daily contribution does not have effect on small scale businesses financing
H02: Effort of daily contribution as a source
of micro financing does not have effect on the growth of small scale businesses
1.6 SCOPE OF THE STUDY
The scope of
this work covers the effect of daily contribution as an informal micro finance
source on the growth and survival of small scale businesses Makurdi Local
Government Area, Benue state.
1.7 SIGNIFICANCE OF THE STUDY
This study
is of great significant value to many interested groups such as:
Small Scale Businesses
Government: This study will be of great
value to the different levels of government to enable them formulate policies
that will affect the lives of people running small scale business.
Intellectual community
1.8 OPERATIONAL DEFINITION OF TERMS
Micro
finance: another term for microcredit.
Small Scale
Business: business that employs a small number of workers and does not have a
high volume of sales. Such enterprises are generally privately owned and
operated sole proprietorships, corporations or partnerships.
Daily
contribution: It is also known as Esusu. It is a form of micro financing
capital accumulation. Participants in the Esusu pays the thrift collector a participation
fee depending on the rate to which they contribute money. If they contribute
daily they owe the thrift collector one full days contribution every eighth
day.
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