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THE ROLE OF MICROFINANCE BANK IN THE FINANCING OF SMALL AND
MEDIUM SCALE ENTERPRISES IN OSUN STATE, NIGERIA.
BY
OSUNKEYE, SEUN SUNDAY
(MAC/2011/217)
BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF
MANAGEMENT AND ACCOUNTING, OBAFEMI AWOLOWO UNIVERSITY,
ILE IFE, OSUN STATE
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF
A BACHELOR OF SCIENCE (B.SC) DEGREE IN MANAGEMENT AND
ACCOUNTING
MAY, 2016.

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CERTIFICATION
This is to certify that this research work was carried out by Osunkeye, Seun Sunday with
matriculation number MAC/2011/217 of Management and Accounting Department, in
partial fulfillment of the requirement for the award of Bachelor of Science (B. Sc) in
Management and Accounting, Obafemi Awolowo University, Ile-Ife, Nigeria.
________________________ _______________________
DR. AGBAJE, T.O. DATE
Supervisor
_________________________ _______________________
PROF. AGBOOLA A.A. DATE
Head of Department

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DEDICATION
I dedicate this work to the almighty God who helped me all through this project. Without
His support, I do not think I will be who I am today and also to all those who supported
me in the completion of this project especially my father Pastor Samuel Ajayi Osunkeye
and my Mother, Deaconess Mofoluwake Abigail Osunkeye.

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ACKNOWLEDGEMENT
I take this opportunity to thank the Almighty God for seeing me through the completion
of this project. He gave me the strength and good health needed to finish this project. To
Him alone be all the glory.
I am greatly indebted to my supervisor for his professional guidance and advice through
the project who out of fatherly love gave us numerous advice for both our project and all
our future endeavours.
My special acknowledgement goes to my dad and mum for their financial, spiritual and
emotional support. Their love towards me cannot be compared to anything. They
constantly give me advice so as not to go astray. There is no one like you dad and mum.
To my younger brother and my younger sisters, I say I love u. I also want to use this
medium to appreciate Mr Shola Oshunkeye who has been my ‘Big Daddy’ ever since the
time I gained admission and also “Papa” for his financial support and advice. They have
been of great and tremendous help to me these past few years.
I acknowledge our head of department, in person of Prof. A.A. Agboola for all your
contributions to my academic excellence. I recognize the efforts of all my lecturers in the
department of Management and Accounting in persons of; Prof. T.O Asaolu, Prof. R.O.
Salawu, Prof. Osotimehin, Prof. Iyiola Akindele, Prof. Elumilade, Dr. Yemi Akinkoye,
Dr. Mrs Akinlo, Dr. T.J. Ayoola, Dr. Mrs Akinola, Mr Quadri Lawal, Mr Inneh and so
many more. I say thank u all and I am deeply grateful.

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Also I acknowledge the owners of SMEs in Oshogbo and Ile-Ife for taking time out of
their busy schedule to provide me with all the information I needed in the course of the
research. Without their immense cooperation, I would not have reached this far. Thank
you all. May the Almighty God bless you.
Lastly, my gratitude goes to my colleagues and friends; Owolabi Paul, Ogun
Oluwarotimi, Ezekiel Boma, Mr Olawale, Adebanjo Matthew, Olamide Anuoluwa, Oloni
Ayooluwa, Shaola Alexandra, Adegoke Abimbola, Samuel Oluwafemi, Adewumi Peter,
Oga Tolani and specially to Ajamah Jeyinlojor. I love you all. God bless you.

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TABLE OF CONTENT
PAGES
Title Page…………………… i
Certification………………… ii
Dedication………………….. iii
Acknowledgement………….. iv
Abstract…………………….. v
Table of Content…………… vi
List of Tables……………….. x
List of Figures………………. xi
Abstract…………………….. x
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 3
1.3 Objectives of the Study 5
1.4 Research Questions 6
1.5 Research Hypothesis 6
1.6 Significance of the Study 7
1.7 Scope and Limitation of the Study 8
1.8 Definition of Terms 9

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CHAPTER TWO: LITERATURE REVIEW
2.1 CONCEPTUAL REVIEW 10
2.1.1 Concept of Microfinance Banks 10
2.1.2 Origin of Microfinance Banks 13
2.1.3 Objectives of Microfinance Banks 20
2.1.4 Concept of Small and Medium Enterprises 21
2.1.5 The Performance of SMEs in Nigeria 26
2.1.6 Concept of the Role of Microfinance to SMEs 28
2.1.6.1 Savings 29
2.1.6.2 Credit 30
2.1.6.3 Services 32
2.2 Empirical Review 32
2.3 Theoretical Review 36
2.3.1 Micro Credit Theory 36
2.3.2 The Bicycle Tire Theory of Microcredit Market Stability 38
2.3.3 The Grameen Bank Model 39
2.4 Conceptual Framework 40

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CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design 43
3.2 Sources and Collection of Data 43
3.3 Population, Sampling Technique and Sample Size 44
3.4 Measurement of Variables 44
3.5 Research Instrument 45
3.6 Validation of Research Instrument and Testing 46
3.7 Data Analytical Techniques 47
3.8 Expected Contribution to Knowledge 48
CHAPTER FOUR: PRESENTATION, ANALYSIS AND INTERPRETATION OF
DATA
4.1 Socio-demographic Characteristic of Respondents 49
4.2 The Role of Microfinance Banks in the Financing of SMEs 54
4.2.1 Credit 54
4.2.2 Savings 55
4.2.3 Services 57
4.3 The Effectiveness of Microfinance Credit Scheme on SMEs Performance 58
4.4 MFBs Saving Scheme and its Impact on SMEs Performance 61
4.5 The Impact of Services Provided by MFBS on SME Performance 64

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4.6 Inferential Analysis 66
4.6.1 Coefficient of Determination 67
4.6.2 Multiple Regression Analysis 68
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings 70
5.2 Conclusion 72
5.3 Recommendation 75
5.4 Suggestion for Further Studies 77
BIBLIOGRAPHY 78
Appendix I………………Questionnaire 84

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LISTS OF TABLES
Table 4.1: Socio-Demographic Characteristics of respondents 51
Table 4.2 The Number of SMEs that Receive Loans from MFBs 54
Table 4.3: The Role of Microfinance Banks in Providing Credit 55
Table 4.4 Do Microfinance Banks provide you Access to Savings? 56
Table 4.5 If your answer is yes, do you save with them? 56
Table 4.6 Microfinance Banks Services 57
Table 4.7: Microfinance banks Credit Scheme 60
Table 4.8 Impact of MfBs Savings on SMEs performance 63
Table 4.9 Services and Performance 65
Table 4.10 Coefficient of Determination 67
Table 4.11 Regression Table 68

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LIST OF FIGURES
Figure 2.1: Analytical Framework of the Roles of MFBs on the Financing of SMEs 41

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ABSTRACT
Microfinance is a powerful tool to alleviate poverty. Microfinance banks roles are
summarized into three major areas of credit, savings and services. Previous studies find
that for the majority of borrowers income increases are small, and in some cases negative.
The purpose of the study was to discover if Microfinance Banks play a Major Role in the
Financing of SMEs in Osun State, Nigeria. The researcher studied 100 SMEs in both
Oshogbo and Ile Ife. This research study used purposive sampling technique to select 100
SMEs. Primary data was gathered through structured questionnaires. The data was then
analyzed using descriptive statistics. A multivariate regression model was applied to
determine the relative importance of each of the variables with respect to financial
performance of SMEs.
The study concludes that microfinance banks do not play a major role in Osun State. It
was also concluded that their credit scheme does not have any significant effect on the
performance of SMEs. The study further concludes that Microfinance banks saving
scheme has an impact on SMEs performance. It was also concluded that the services
provided by MFBs has a positive impact on their performance. From the coefficient of
determination and regression result, it was concluded that credit, savings and services
plays an insignificant role in the financial performance of SMEs and that while savings
and services has a little positive effect on financial performance, credit has a negative
effect on it.

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The study therefore recommends that SMEs should use the loans advanced to them for
the purpose of the business only and that they should cultivate the habit of saving. The
study also recommends that MFBs should help to ease the pressure on SMEs by reducing
interest rate and increasing repayment period. It is also recommended that they give
advice to SMEs. The study also recommends to the government in following Roodman’s
bicycle tire theory and can issue out some policies to protect SMEs. It also recommends
that MFBs should put more effort in financing of SMEs so that their roles can be felt in
terms of growth and performance.

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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Small and medium scale enterprises have long been believed to be catalysts for economic
growth and national development both in developed and developing countries. In Nigeria
where private sector is not well developed, SMEs are assumed to play the role of
employment generation, facilitator of economic recovery and national development. This
view makes us to look at the challenges which SMEs face in Nigeria of which financing
is the major challenge. These enterprises are the major drivers of the economy; therefore
attention has to be given to how they are financed because of their impact on the
economy. Their impact is felt in the following ways according to Ikherehon (2002) and
Osotimehin, Jegede, Akinlabi and Olajide (2012), SMEs constitute the very basis of the
Nigerian economy in terms of development of local technology, stimulation of
indigenous entrepreneurship, mobilization and utilization of domestic savings,
employment creation, structural balancing of large and small industry sectors in both
rural and urban sectors.
The brain behind every successful Small and Medium Scale Enterprise is
entrepreneurship which in the words of Olagunju (2004) is an undertaking in which one
is involved in the task of creating and managing an enterprise for a purpose. The purpose
as further stated may be personal, social or developmental. One who is involved in this

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task is called an entrepreneur. Also a line between an entrepreneur and business owners
must be drawn. While business owners establish and manage their own enterprise for
personal gains, entrepreneurs exploit ideas that create a business that benefits them, the
society and act as developmental weapon.
One of the factors that can hinder the growth of business or completely destroy it is lack
of financial backup. Since the larger number of the population of most countries are
involved in small and medium scale enterprises of which Nigeria is not an exemption,
microfinance banks provide credit facilities to such businesses. Microfinance Banks are
seen as one of the prime strategies for achieving Millennium Development Goals
(MDGs). Microfinance banks particularly targets poverty eradication, gender equality
and the empowerment of the disadvantaged groups by granting loans to individuals and
groups when they meet the requirements for such loans. Microfinance banks are financial
institutions that grant access to credit facilities to individuals, small businesses and
organizations. The loans that microfinance banks give to people and small businesses are
known as micro loans. People who want to acquire loans from a microfinance bank must
have met the requirements for acquiring such loan.
Acquiring loans from commercial banks could be cumbersome compared to microfinance
banks. Also, the chances of average people and small scale businesses to get loans from
commercial banks are very slim, unlike microfinance banks whose primary or main
objective is to grant loans to small scale enterprises and individuals, irrespective of their
financial status, especially poor and low income earners. Small and medium scale

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enterprises are not considered credit worthy by commercial banks because they lack the
necessary financial services or they are unable to meet their requirements. ACBN study
identified, as of 2001, 160 registered microfinance banks in Nigeria with aggregate
savings worth N99.4million and outstanding credit of N649.6million which indicates
huge transaction by the banks (Anyanwu, 2004).
Thus, the whole reason why this study is conducted is to examine the role of
microfinance banks on the financing of small and medium scale enterprises (SMEs) in
Osun State, Nigeria.
1.2 Statement of the Problem
Most of the small and medium scale enterprises are still at a low level of development
especially in terms of the number of job, value and wealth creation because they are
currently faced with the challenges of raising finance. Less than 5% of SMEs are able to
survive the first few years of operation according to a survey of which financing are their
major challenge. Microfinance banks have not lived up to the expectations of people.
Majority of the people engaged in SMEs are among the poor and low income groups in
Nigeria and are found in the rural areas. As observed by Soludo (2008), banking services
were only available to about 40% of the population in 2008, whereas more than 70% of
the poor did not have access to formal finance in the same year. Consequently, poverty
levels continued to worsen from 68.7 million people in 2003/2004 to 112.519 million in
2010 (NBS, 2011). These poor people do not have access to institutional credit mainly

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because they are not considered credit worthy hence they cannot borrow from banks or
formal financial institutions.
Also, a review of the distribution of Microfinance Banks in the twelve most populous
states of the federation as at 31st October 2011 revealed that while the most populous
states in the federation, Kano state (according to 2006 census) had just seven
Microfinance banks, the second most populous state, Lagos State had 178 Microfinance
banks. Also, the 11th most populous state, Borno State had only four (4) microfinance
banks while Delta State which was the 12th most populous state had 39 Microfinance
banks. This skewed distribution of Microfinance banks is capable of limiting the access
of a vast majority of the economically active poor as well as the SMEs to credit. Even in
those parts with sizable numbers of Microfinance Banks, most of the institutions are
located in urban places to the neglect of the rural areas because of pure profit making
considerations.
Notwithstanding, it is interesting to note that Microfinance bank lending to SMEs moved
in the same trend with its bank deposit. This implies that as Microfinance Bank deposits
increased, its lending to SMEs increased and as the deposits decrease, lending to SMEs
also decreases. Regardless of the direct impact of Microfinance Bank on SMEs, SMEs
still cry for lack of funding and lending to SMEs in Nigeria is still poor. This is so
because their capital reserve and deposit are very small and insufficient to meet the needs
of SMEs. This raises the question of how SMEs will be able to raise finances for their
survival.

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However, the recent Central Bank report (2011) on poor performance of Microfinance
Banks to deliver micro-credit to SMEs is one of the reasons why this study is important.
This is because this poor credit delivery poses a threat on SMEs in achieving their
objectives and the objective of the country as a whole e.g. Millennium Development
Goal. Microfinance banks have failed SMEs in performing their role, therefore, the extent
to which SMEs have benefitted from Microfinance banks is worthy of exploration.
1.3 Objectives of the Study
The primary objective of this research is to discover if Microfinance Banks play a major
role on the financing of small and medium scale enterprise in Osun State, Nigeria. In
view of all the above problems facing SMEs financing in Nigeria, the followings are the
specific objectives of the study:
· To discover how effective the credit scheme of Microfinance banks are on the
performance of SMEs.
· To determine the impact of Microfinance Banks Saving Scheme on SMEs
Performance.
· To determine the effect of services provided by Microfinance bank on SMEs
Performance.
· To know if there is any relationship between the roles of microfinance bank and
financial performance of SMEs.

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1.4 Research Questions
In order to achieve the stated objectives above, the researcher has formulated the
following research questions:
· Do microfinance banks play a major role in the financing of SMEs?
· Does the credit scheme of Microfinance Banks have any effect on the
performance of SMEs?
· Does the Microfinance Banks Saving Scheme have any impact on SMEs
Performance?
· How effective is the services provided by microfinance banks on SMEs
performance?
· Is there any relationship between the roles of Microfinance Bank and financial
performance of SMEs?
1.5 Research Hypothesis
To achieve the objective of this study which is to critically examine the impact of
Microfinance Banks on the financing of SMEs in Nigeria, these three hypotheses have
been generated by the Researcher which is to be tested in the course of this study. They
are;
· H0: Microfinance Banks do not play a major role on the Financing of SMEs.
H1: Microfinance Banks play a major role on the financing of SMEs.

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· H0: The credit scheme of Microfinance Banks does not have any effect on the
performance of SMEs.
H1: The credit scheme of Microfinance Banks has an effect on the performance of
SMEs.
· H0: Microfinance Banks saving scheme does not impacts SMEs Performance.
H1: Microfinance Banks saving scheme impacts SMEs Performance.
· H0: Microfinance Banks services have no effect on SMEs performance.
H1: Microfinance Banks services have an effect on SMEs performance.
· H0: There is no relationship between the roles of Microfinance Bank and financial
performance of SMEs.
H1: There is a relationship between the roles of Microfinance Bank and financial
performance of SMEs.
1.6 Significance of the Study
In the past and currently, Nigeria’s over dependence on oil which has been and is really
exposing the economy to unprecedented macro-economic instability resulting from the
effects of external shocks to oil prices, is worthy of note. The world economic recession
and the sustained slump in oil prices pose a serious challenge on Nigeria economy. The
SME sector is positioned to generate employment, create wealth, reduce the prevalence
of poverty and sustain economic growth but they are faced with the problem of finance.

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Therefore, with this study, possible means of overcoming some of the problems of SMEs
of which financing is chief will be examined critically and possible solutions will be
recommended to help solve these problems. It has been said that most of SMEs do not
survive more than their first few years of establishment and in order to achieve the goals
of the Federal Government, there is need for these businesses to be in existence for a long
time. The Federal Government can use the outcome of this study to help solve this
problem of short life span as a result of financial problems by issuing out policies to help
protect SMEs from MFBs. Also, the outcome of this study is important to entrepreneurs
and small business owners to help increase the performance of their business and also
help them to stay in the business for a long time. Microfinance Banks will also come to
the consciousness of their role and how they can help finance SMEs better and thus, help
the economy at large.
1.7 The Scope and the Limitations of this Study
The scope of this research is the Microfinance Banks and their SMEs customers as well
as other SMEs who are not using Microfinance Banks to finance their business.
However, because of the numerous SMEs in Osun State, the researcher is limited to
SMEs in Osun State and due to the time constraint, the researcher is further limited to
only the state capital (Oshogbo) and Ile-Ife. As regarding the limitations on this study, it
would be impossible to reach out to about 70,000 SMEs in Osun State alone (Aganga,

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2012). Thus, time and financial constraint is a major challenge that the researcher faced
in the course of this study.
1.8. DEFINITION OF TERMS
· Small and Medium Scale Enterprises (SMEs): These refers to enterprises with a
workforce of between 10 and 199 and total assets between N5 million and N500
million (National Policy on MSMEs, 2010). But for the purpose of this research
and realistically in Nigeria, SMEs refers to any business with a workforce of at
least two and total asset of at least N50,000.
· SMEDAN: Small and Medium Enterprises Development Agency of Nigeria.
· Microfinance Banks (MFBs): They are financial Institutions that grant access to
credit facilities to individuals, small and medium scale enterprises and
organizations.

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CHAPTER TWO
LITERATURE REVIEW
This section presents the literature review on the impact of microfinance banks on the
financing of SMEs in Osun State, Nigeria. This chapter begins with the conceptual
review and three theoretical reviews were thoroughly discussed starting from micro credit
theory to the bicycle tire theory of micro credit market stability which was propounded
by David Roodman (2012) and lastly, the Grameen Bank model which was postulated by
Yunus was also discussed. The section ended with the summary of the literature review.
2.1 CONCEPTUAL REVIEW
2.1.1 Concept of Microfinance Banks
Microfinance is the provision of financial services to poor and low income households
without access to formal financial institutions (Conroy, 2003). Microfinance also refers to
the activity of providing financial services to clients who are excluded from the formal
financial system on account of their lower economic status. According to CBN (2004),
microfinance is a development tool used to create access for the economically active poor
to financial services at a sustainably affordable price. Microfinance is also described as
banking for the poor.

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Microfinance is all about providing financial services to the poor who are traditionally
not served by the conventional financial institutions. They are different from the
conventional commercial banks because they have limited banking services which are
directed primarily to a designated catchments area or group. Accessing financial services
by the poor enables them to have control over factors of production, be more self-reliant,
generate employment, enhance family income and create wealth.
What distinguishes a micro finance bank from other conventional financial sector are; the
smallness of loans advanced, the absence of asset based collateral and simplicity of the
operation. Its major function is to provide finance to small scale enterprises. According to
Rolando (2010), microfinance is a good way of supporting entrepreneurs. It provides
poor borrowers with access to sustainable livelihood through zero or very low interest
loans. However, Jegede (2011) observed that entrepreneurs prefer personal savings and
cooperative credits to microfinance banks and commercial banks fund citing reasons of
non accessibility, prohibitive collaterals and high interest rate as barriers. The dismal
conventional finance sectors triggered the advocation of micro financing by policy
makers, practitioners and international organizations as a tool for poverty reduction
according to Mejeha and Nwachuckwu (2008).
The development of Microfinance banks over the last few decades and its relative success
have shown that microfinance is a major tool for combating poverty. Looking at the
emerging theory of microfinance, recent developments in developing countries have
reinforced the contention that microfinance structures are essential for development of

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rural areas in consideration of the fact that areas of development in these countries have
been traditionally urban-centered (Iheduru, 2002). Therefore, micro finance as a tool for
economic strategy should target the poor given its multiplier effect on production and
marginal propensity to consume.
Researchers as well as stakeholders have yet to reach a uniform definition or consensus
on what a small scale business is. There are numerous definitions of what constitutes a
small scale business. According to CBN, SMEs in Nigeria according to asset base and
number of staff employed, the criteria are an asset base between N5million and
N500million and between 10 and 100 employees. In South Africa, according to their
National Small Business Amendment Act 26 of 2003, SME is any business with less than
200 employees. For United Kingdom, an SME is a business with less than 250 employees
and has a turnover that is less than 25million Euros. Nzelibe (1991) using the position of
United Nations Industrial Development Organization (UNIDO) states that a small
business is characterized by localized area of operation, capital supplied by the owner
with policy decisions held by individual or small group of entrepreneurs, owner’s
participation in all decision-making and daily operations. Nwokoye (1988) defines Small
and Medium-Scale business as “any enterprise employing between five and one hundred
workers with an annual turnover of about four hundred thousand Naira (N400,000).The
National Directorate of Employment (NDE) defines Small and Medium-Scale business in
the 1989 National Budget to include project with a capital investment as low as N3,000
and employing as few as three persons. The Federal Ministry of Commerce and Industry

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defines SMEs as firms with a total investment (excluding cost of land but including
capital) of up to N750,000, and paid employment of up to fifty (50) persons. In a later
report, the Federal Ministry of Industry (1988) defines a small-scale industry as those
industries with a total investment of between N100,000 and N2,000,000 exclusive of land
but including working capital. Okorie (1989) defines small-scale industry as wholly
indigenous owned enterprises with less than fifty full time employees. Thus SME are
without a universal definition but a major criterion for classification of SME are the
number of employees, relative size, initial capital outlay, sales value, financial strength
and balance sheet size. From the above definitions, one can broadly describe an SME as
an enterprise with initial capital outlay of between N100,000 and N500,000,000
(excluding land) and employees between 1 and 100. One thing that is generally agreed
worldwide according to Adamu (2005) is that SMEs are generally managed by their
owners either as a sole proprietor or as a partnership. Also, it is generally agreed that
SME are crucial for economic development.
2.1.2 Origin of Microfinance Banks
Microfinance bank has been in Nigeria as early as the 16th century. The Central Bank of
Nigeria (2004) observed that the inability of the formal financial institutions to provide
financial services to both the urban and rural poor induced the growth of microfinance
institutions. Microfinance is the provision of financial services to the poor who are not
traditionally served by the conventional banks. As stated earlier, the practice of

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microfinance is not new in Nigeria. Nigerians have always tried to provide themselves
with needed finances through informal microfinance approaches such as self-help groups
(SHGs), rotating savings and credit associations (ROSCAs), accumulating credit and
savings association (ASCAs) and direct borrowing from friends and relations. These
approaches may have sufficed in the traditional society but the growth in the
sophistication of the economy and the increasing incidence of poverty among citizens has
revealed the shortcomings of this approach. The Central Bank of Nigeria (CBN) alluded
to this when it pointed out that the informal financial institutions that attempt to provide
microfinance services generally have limited outreach due to paucity of loan able funds.
It was in a bid to resolve this identified deficiency of the informal microfinance sector
that the CBN (2005) introduced a microfinance policy a prelude to the licensing of
microfinance banks in Nigeria. According to this policy document, its aim is to provide a
microfinance framework that would enhance the provision of diversified microfinance
services on a long term sustainable basis for the poor and low income groups, create a
platform for the establishment of microfinance banks and improve CBN’s
regulatory/supervisory performance in ensuring monetary stability and liquidity
management.
Microfinance banks were therefore established because of the failure of the existing
microfinance institutions to adequately address the financing needs of the poor and low
income groups. The CBN further justified its licensing of microfinance banks with the

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lack of institutional capacity and weak capital base of existing community banks,
existence of huge un-served market and need for increased savings opportunity.
Since every administration is always poised to improving the living condition of its
people, especially the poor, several programme and institutions were established in that
direction in Nigeria by various governments. There was a call by governments and non-
governmental agencies, for Nigeria to emulate the general worldwide practice, whereby
government as a matter of deliberate policy was asked to institute schemes for providing
concessionary finance to the poor entrepreneurs in recognition of their highly
disadvantaged position in the open market competition for finance and other resources
with big companies. In view of this, both government and non-government agencies
established series of micro finance programme and institutions. Most microfinance
institutions are Non-Governmental Organization (NGO) based and derive their capital
from original owners. Informal micro finance groups/schemes are:
The Esusu/Itutu/Adashi: This is a contribution-based savings scheme, which is operated
on the basis of rotating savings and loans association. This is common in Nigeria
especially among rural dwellers.
Daily/Periodic Contribution: This is like a savings scheme amongst traders in which an
agreed amount of money is paid daily to convener, agreed upon by the traders.

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The formal micro finance institutions and programme are:
Operation Feed the Nation (OFN)
This programme was introduced by General Olusegun Obasanjo in 1976 following the
chronic inability of the agricultural sector of the economy to satisfy the food need of the
nation. The programme was able to create awareness on self-reliance in food production
among the Nigerian citizens.
The Nigeria Industrial Development Bank (NIDB): It was established in 1964 with the
major aim of ensuring that credit facilities were provided for medium and large scale
enterprises. It also had the responsibility of funding small scale businesses with total
capital outlay of not more than N750,000. The bank could grant loans ranging from a
minimum of N50,000 to a maximum of N15 million or 15 percent of NIDBS’ equity base
but not more than 75 percent of the fixed assets of the business being financed (Otiti,
2007).
The Nigeria Bank for Commerce and Industry (NBCI): was established in 1973, with
an objective of providing financial services such as equity investment and granting of
loans and guarantees to indigenous enterprise in commercial and manufacturing
activities. In 1990, government established the National Economic Reconstruction fund
(NERFUND) to facilitate access to low cost long-term finance to SMEs and to enable
SMEs have access to funds from international lending agencies.
Nigeria Agricultural and Cooperative Bank (NACB): Established in 1973, to lend to
agriculture, using cooperative societies as a channel of loan disbursement and repayment.

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Records available on NACB’S financial services indicate that the number of agricultural
projects that were granted loans by NACB increased from 2446 in 1990 to 6286 in 1994,
which account for 157% growth in the number of loan approved by the bank in five
years.
The Agricultural Credit Guarantee Scheme Fund (ACGSF): It was established in
1977 by CBN to bridge the gap between rural farmers and urban-based financial
institutions as regards the packages of collateral for credit acquisition. ACGSF was
established to provide guarantee in respect of loans granted by commercial and merchant
banks for agricultural purposes with the aim of increasing the level of bank credit to the
sector and to ensure continuous production. According to the CBN statistical bulletin
(2001) about 97% of the loans guaranteed by ACGSF were mostly to small farmers from
rural areas in various Nigerians states.
The Small and Medium Enterprises Equity Investment Scheme (SMEEIS): The
scheme is an initiative of the Bankers Committee, representing banks contribution to the
efforts of the federal government towards stimulating sustainable economic growth,
development of local technology, poverty alleviation and employment generation.
Through the initiative, banks are required to set aside 10 percent of their Profit after Tax
(PAT) for loans to or equity investment or a combination of both in eligible SMEs. The
scheme covered the following activities: manufacturing, information technology and
telecommunications; Agro-allied, Tourism and leisure, Educational, solid mineral,
construction, service (Financial and Insurance services) and other legal activities as may

31. 31
be determined by the Bankers’ committee. The maximum amount a participating bank
can invest in an enterprise is limited to 20% of the total funds set aside by the banks
subject to a maximum of N500 million.
Small and Medium Enterprises Development Agency of Nigeria (SMEDAN): It was
established by the SMEDAN act of 2003, to promote the development of Micro, small,
and medium Enterprises (MSME). Its functions are: to stimulate, monitor and co-ordinate
development of MSME sector, to initiate and articulate policy ideas for MSME growth,
to promote and facilitate development program, instrument and support services, to
accelerate the development and modernization of MSME operations, serving as a
vanguard for rural industrialization, poverty reduction, job creation and enhanced
sustainable livelihood, link MSME to internal and external service of finance, technology
and technical skills, among others.
The National Poverty Eradication Programme (NAPEP)
Ike (1996) explained that before the introduction of National Poverty Eradication
Programme (NAPEP), a temporary poverty Alteration Programme (PEP) in year 2000
was put in place to cushion the effect of terrible economic hardship faced by large
number of unemployed people in the country. The intent was to provide monthly stipends
to 200,000 unemployed people across the country so that they could start up small
businesses and be self-reliant. The programme was structured to benefit three categories
of people namely:
- Skilled unemployed

32. 32
- Unskilled and semi-skilled unemployed
- Unskilled and uneducated
The skilled unemployed people were provided with a micro-credit to enable them
established a viable venture. The second category were trained for a period of 3-12
months or attached to a relevant construction and manufacturing companies for a period
of 2 years to enable them acquire additional skills after which they will be provided with
micro credit to enable them start-up a businesses of their own. The third and final
category were to either acquire formal education through Universal Basic Education
(UBE) or be provided with permanent menial jobs in the areas of agriculture, road
maintenance, tree planting etc.
It was reported in Tell newspaper by Musa (2002) that the National Poverty Eradication
Programme (NAPEP) was designed to eradicate poverty absolutely among Nigerians
through strategies that provide for the participation of all registered political parties,
traditional rulers as well as community leaders.
Community Banks: These are self-sustaining financial institutions owned and managed
by local communities such as community development associations, town unions,
cooperative societies, farmers group social clubs, etc to provide financial services to the
respective communities. They are to promote rural development and enhance economic
development at the grassroots level (CBN, 2004).

33. 33
2.1.3 Objectives of Microfinance Banks
The Microfinance Policy, Regulatory and Supervisory Framework for Nigeria were
launched on 15th December, 2005. The frame work of micro finance scheme in Nigeria is
centered on three elements. They are: policy objectives, policy targets and policy
strategies. The objectives of the micro finance scheme, as noted by the Central Bank of
Nigeria (2005) are:
a) To make financial services accessible to a large segment of the potentially
productive Nigerian population which otherwise would have little or no access to
financial services.
b) Promote synergy and main streaming of the informal sub-sector into the natural
financial system.
c) Contribute to rural transformation.
d) Enhance service delivery by microfinance institutions to micro, small and
medium entrepreneurs.
e) Promote linkage programme between universal/development banks, specialized
institutions and microfinance banks.
Other objectives of microfinance banks are:
· To increase the productivity and income of vulnerable groups, especially women
and the poor. To reduce rural families dependence on drought prone crops

34. 34
through diversification of their income generating active (Yaron, Benjamin and
Piperk, 1997).
· To create employment and income opportunities through the creation and
expansion of SMEs.
· To encourage the development of a new business or projects.
· To help existing business grow or diversify their business activities.
2.1.4 Concept of Small and Medium Enterprises
Small and medium enterprises (SMEs) are considered the backbone of economic growth
in all countries. They play an important role in Nigerian’s economic growth, as they
constitute 97.2% of the companies in Nigeria. They also contribute to national
development by positively influencing the distribution of income in both functional and
nominal terms. In emphasizing the importance of SMEs, Rogers (2002) stated that: they
enhance capacity building as they serve as entrepreneurial training avenues; they create
more employment opportunities per unit of investment because of their labour intensive
operations; they achieve a much more relative high value added operations because they
are propelled by basic economic activities that depend mostly on locally sourced raw
materials; they provide feeder industry services as they serve as major suppliers of
intermediate goods and components to large-scale industries as well as major agents for
the distribution of final products of such industries; they provide opportunities for the
development of local skills and technology acquisition through adaptation.

35. 35
Baumback (1983) contends that most problems of small and medium scale enterprises
including manufacturing ones are external to it. Despite the catalytic role of SMEs in the
economic emancipation of countries, some of their major operational challenges in
Nigeria Include:
a) Lack of Basic Infrastructure: The SMEs sector in Nigeria operates in an
environment with very poor infrastructure which constitutes a barrier to entry and
hinders international competitiveness. In many states in the country, non-existent
of infrastructure, inability to access market communication, power, water among
others prevents the development of small and medium scale enterprises in
Nigeria. Government has not done enough to create the best conducive
environment for the striving of SMEs in Nigeria. Thus, businesses have to provide
for themselves expensive parallel infrastructure.
b) Management Problem: It is now crystal clear that lack of trained manpower and
management skill also constitute a major challenge to the survival of SMEs in
Nigeria. According to West and Wood (1972), “…90% of all these business
failures result from lack of experience and competence.” Rogers also added that
inefficiency in overall business management and poor keeping record is also a
major feature of most SMEs; technical problems/competence and lack of essential
and required expertise in production, procurement, maintenance, marketing and
finances have always led to funds misapplication, wrong and costly decision
making.

36. 36
c) Poor Accounting Systems: The accounting system of most SMEs lack standards
hence, there is no proper assessment of their performances. This creates
opportunity for mismanagement and eventually leads to the downfall of the
establishment. The entrepreneurs of the small scale businesses in Nigeria do not
also see the need to employ qualified Accountant who will prepare the financial
statements of the enterprises at any given time. Rather, they choose to employ a
book clerk from members of their family. They see employing professional as a
waste of money. The aftermath is that the feasibility reports which the banks
needed to access the credit worthiness of the enterprise to grant them loan is not
there. The difficulties in obtaining loan from banks have in no small measure
thwarted the development of small scale enterprises in Nigeria.
d) Poor and Inadequate Start-up Process: the start-up process of a business is
important to its failure or success. Nzelibe (1996) opined that business especially
small ones are started by the entrepreneurs and are usually guided by a vision, an
intuitively experienced image of what is to be achieved and how to get there. The
way an entrepreneur structures and creates his business reflects his personality,
and cannot be transferred to his successors. The severity of the succession
problems in family businesses is significant in their success and any future
combination.
e) Multiple Taxations: This has become a major problem especially given the role
of tax consultants and agents hired by local governments. They are often crude in

37. 37
their operation, excessive in their assessment and destructive in their relationship
to the production process. Often some state governments also add their own
burden. They tax everything in their bid to generate revenue without considering
the net effect to household incomes and employment.
f) Non Availability of Raw Materials Locally: In line with the poor management
of small-scale businesses in Nigeria, most established small-scale enterprises have
no plan in place for the acquisition of raw materials that will feed their firms
internally from time to time. They often rely on importation of raw materials for
their businesses from overseas which more often than not is affected by one
government policy or in terms of non-availability or increase in price which the
small-scale enterprises could not afford to continue with. The resultant effect is
automatic fold up.
g) Financial problems: This is the most important and the major problem facing all
SMEs and they range from availability to accessibility of finance. The sources of
finance available to SMEs are his personal equity and, loans and grants from
relatives and friends [see Osamwonyi, 1988; Nwoye, 1994]; institutional sourcing
of funds which according to Roger (2002) include banking industry, Small-Scale
Industries Credit Scheme (SSICS), Small and Medium Industry Equity
Investment Scheme, the Bank for Industry; and the Capital Market. From the
above it seems clear that the problem with funding SMEs is not really how to
source for funds but the ease of accessibility to such funds. Factors identified

38. 38
inhibiting funds accessibility by the SMEs are the stringent conditions set by
financial institutions, the lack of adequate collateral and credit information, and
the cost of accessing funds (Oladele, 1985; Adepoju, 2003; Osamwonyi, 2004).
However, venture capital sources are virtually lacking in Nigeria. The mainstream
banks do not practice development banking and thus do not have the skill to fund
SMEs (Osamwonyi, 2005). About 80% of small and medium scale enterprises are
stifled because of poor financing and other associated problems.
From all the above problems, one can boldly say that finance is the backbone of all
businesses. Finance is the elixir that assists in the formation of a new business and allows
old businesses to take advantage of opportunities to grow, employ local workers and in
turn support other businesses. Business survival depends on constant cash injection.
Mbonyane (2006) noted that small businesses fail and did not succeed because more
often than not, cash flow is not properly managed. SMEs have to consider their finances
for so many purposes ranging from survival in bad times to bolstering the next success in
good ones. The inability of SMEs to raise funds to expand their business has been linked
to poor business history, high risks associated with starting a new business, which banks
tend to avoid, insufficient collaterals, inadequate record keeping and knowledge of the
risks facing their business.
It is therefore highly imperative that Microfinance banks live up to the expectations that
people have concerning them. This is because their primary function is to help raise

39. 39
finance for both the low income earners and small scale businesses irrespective of their
financial status.
2.1.5 The Performance of SMEs in Nigeria
Some of Nigeria SMEs succeed and some fail because there is a set of problems such as
the financial factor, strategic management factor, management experience factor,
marketing factor, and among others. Financial factor is related to resources that can
enhance the performance and growth for SMEs. The non-performance and high rate of
failure among SMEs in Nigeria are due to operating of SMEs in a non-conducive
financial planning environment through high interest rate, high collateral demand which
conventional banks demand from them. Also, the microfinance banks are not helping the
matter as they are also concerned about making profit instead of helping the SMEs that
comes to them for loans. If microfinance banks can help to make the financial planning
environment conducive for SMEs by providing finance to SMEs with low interest rate
and low collateral demand, SMEs in Nigeria will be performing and living up to the
expectations that the economy demands from them.
Small and medium enterprises (SME) performance forms a very important part of the
Nigerian economy. The SME sector is a major engine which encourages the growth of
jobs and wealth creation in the country’s economic system. SMEs performance act as a
significant part that is linked to the strengthening and enhancement of the development of
the country. The SME performance and growth in manufacturing, agriculture, services,

40. 40
and so on, has been considered as the engine drive and has contributed to the Nigeria
economy. SMEs play an important role as a breeding ground for entrepreneurs and a
provider of solutions to address the problems of unemployment, job creation, innovation
and long-term economic development (Baard & van den Berg, 2004; Molapo, 2007;
whitepaper, 1995; Storey, 1994). Their role is to provide jobs for the unemployed and
entrepreneurial opportunities for individuals who want to venture into businesses.
Performance is in the aspect of financial and non-financial, the main elements of which
consist of “sales-based and firm-based.” Profitability, growth, productivity, level of sales
revenue, market share and product, return on investments, product added value is used in
the measurement of sales-based performance (Falshaw et al., 2006; Murphy et al., 1996;
Wang and Lo, 2003; Brush and Vanderwerf, 1992; Neely, 2005; Spivey and McMillian,
2002). Firm-based performance is measured in terms of the emphasis on employee
development, customer satisfaction, job satisfaction and efficient organizational internal
processes (Murphy et al., 1996; Wang and Lo, 2003; Neely, 2005; Spivey and McMillian,
2002). SMEs have to recognize what their resources are and they need to know how to
utilize them, flex them into an advantage for their business. Nevertheless, in the frame of
the world-wide economy, SMEs cannot compete by simply looking at the cost and by just
cutting it; they must compete on the foundation of knowledge and the value added
(Bahiti, 2008). The development and performance of SMEs is an indispensable
component in the growth strategy of most economies and holds particular significance.

41. 41
2.1.6 Concept of the Role of Microfinance to SMEs
Microfinance has been seen as a tool for financial self sustainability and ensuring the
welfare of SMEs. Microfinance (MF) reaches 74% of all poor individuals in the world
and therefore, is a great potential empowerment channel (The Micro credit Summit
Campaign -2002) emphasizing on the necessity of empowering individuals. A majority of
microfinance programmes target SMEs with the explicit goal of empowering them. There
are varying underlying motivations for pursuing SMEs financial self sustainability.
Microfinance allows poor people to protect, diversify, and increase their sources of
income, the essential path out of poverty and hunger. The ability to borrow a small
amount of money to take advantage of a business opportunity, to pay for school fees, or
to bridge a cash-flow gap can be a first step in breaking the cycle of poverty. Similarly
poor households will use a safe, convenient savings account to accumulate enough cash
to buy assets such as inventory for a small business enterprise, to fix a leaky roof, to pay
for health care, or to send more children to school. Microfinance also helps safeguard
poor households against the extreme vulnerability that characterizes their everyday
existence. Loans, savings, and insurance help smooth out income fluctuations and
maintain consumption levels even during lean periods (Brockhaus, 2001). Various writers
have indicated microfinance as means of SMEs financial self sustainability. The rationale
for supporting microfinance and the targeting micro finance programs is that
microfinance is an effective means or entry point for empowering individuals (Cheston

42. 42
and Kuhn 2002). The three major roles performed by SMEs are credit, savings and
services. And they are:
2.1.6.1 Savings
The 2006 United Nations Human Development Index puts Nigeria at 159 out of 177
countries, with 70.8% living on less than $1 a day and 92.4% on less than $2 a day
(Human Development report, 2006). The task of smoothing consumption is made more
complicated if there is nowhere to store money safely. In an emergency, richer people
might choose between dipping into their savings and borrowing. The choice for the great
mass of the unbanked in the developing world is limited to whom to borrow from, often
at great cost (Cheston and Kuhn, 2001). That they can borrow at all is partly due to the
rapid growth of microfinance, which specializes in lending small amounts to poor people.
Several big microfinance institutions (MFIs) also offer savings accounts: Grameen Bank
in Bangladesh is a prominent example. But the industry remains dominated by credit, and
the ability to save through an MFI is often linked to customers' willingness to borrow
from it. Of 166 MFIs surveyed in 2009 by the Microfinance Information Exchange, a
think-tank, all offered credit but only 27% offered savings products. Advocates of a
greater variety of financial services for the poor argue for more balance (Guichandut,
2006).
This may be on the horizon. More MFIs are becoming interested in the potential of
savings, thanks partly to the global financial crisis. A majority of more than 400 MFI
managers surveyed last March by the Consultative Group to Assist the Poor (CGAP), a

43. 43
microfinance group based at the World Bank, said that they had faced liquidity problems
during the crisis (see chart). This, together with rising financing costs and exchange-rate
fluctuations for those MFIs that rely on external finance, has prompted many ―credit-
only MFIs to warm to the idea of funding at least part of their lending activity using local
savings (Guichandut, 2006).
2.1.6.2 Credit
Accessing credit is considered to be an important factor in increasing the development of
SMEs. It is thought that credit augment income levels, increases employment and thereby
alleviate poverty. It is believed that access to credit enables poor people to overcome
their liquidity constraints and undertake some investments such as the improvement of
farm technology inputs thereby leading to an increase in agricultural production
(Hiedhues, 1995). The main objective of microcredit according to Navajas et al, (2000) is
to improve the welfare of the poor as a result of better access to small loans that are not
offered by the formal financial institutions. Diagne and Zeller (2001) argue that
insufficient access to credit by the poor just below or just above the poverty line may
have negative consequences for SMEs and overall welfare. Access to credit further
increases SMEs risk-bearing abilities; improve risk-copying strategies and enables
consumption smoothing overtime. With these arguments, microfinance is assumed to
improve the welfare of the poor. It is argued that MFIs that are financially sustainable
with high outreach have a greater livelihood and also have a positive impact on SME

44. 44
development because they guarantee sustainable access to credit by the poor (Rhyne and
Otero, 1992).
Carrying out research in three countries; Kenya, Malawi and Ghana, Buckley (1997)
came to the conclusion that there was little evidence to suggest that any significant and
sustained impact of microfinance services on clients in terms of SME development,
increased income flows or level of employment. The focus in this augment is that
improvement to access to microfinance and market for the poor people was not sufficient
unless the change or improvement is accompanied by changes in technology and or
technique. Zeller and Sharma (1998) argue that microfinance can aid in the improvement
or establishment of family enterprise, potentially making the difference between
alleviating poverty and economically secure life. On the other hand, Burger (1989)
indicates that microfinance tends to stabilise rather than increase income and tends to
preserve rather than to create jobs. Facts by Coleman (1999) suggest that the village bank
credit did not have any significant and physical asset accumulation. The entrepreneurs
ended up in a vicious cycle of debt as they use the money from the village banks for
consumption purposes and were forced to borrow from money lenders at high interest
rate to repay the village bank loans so as to qualify for more loans. The main observation
from this study was that credit was not an effective tool to help the poor out of poverty or
enhance their economic condition. It also concluded that the poor are too poor because of
some other hindering factors such as lack of access to markets, price stocks, unequal land
distribution but not lack of access to credit. A study of thirteen MFIs in seven countries

45. 45
carried out by (Mosley and Hulme (1998) concludes that household income tends to
increase at a decreasing rate as the income and asset position of the debtors is improve.
Diagne and Zeller (2001) in their study in Malawi suggest that microfinance do not have
any significant effect in household income meaning no effect on SME development.
Investing in SME activities will have no effect in raising household income because the
infrastructure and market is not developed.
2.1.6.3 Services
Microfinance institutions need to supply services that fill the gaps and integrate the
undeserved group into the market (Guerin, 2006).Other than financial support,
professional advice can be given to microfinance banks and also conferences and
seminars can be organized to boost the performance of SMEs. This professional advice
will inform the SMEs on whether the amount it is requesting for a project is too much or
too less for it. Also, seminars and conferences can be organized to educate SMEs about
their policies and judicious use of funds. It is therefore necessary at this juncture to
undertake an assessment of the extent to which microfinance can impact entrepreneurial
development (Cheston and Kuhn, 2001).
2.2 Empirical Review
The two widely cited studies are Hashemi et al. (1996) and Khandker et al. (2003). Both
of these studies find significant positive effects of membership in microfinance banks on
the financing of SMEs. Hashemi et.al (1996) investigated whether entrepreneur’s access

46. 46
to credit has any impact on their lives, irrespective of who had the managerial control.
Their results suggest that entrepreneur‘s access to credit contributes significantly to the
magnitude of the economic contributions reported by entrepreneurs, to the likelihood of
an increase in asset holdings in their own names, to an increase in their exercise of
purchasing power, and in their political and legal awareness as well as in composite
financial self sustainability index. They also found that access to credit was also
associated with higher levels of mobility, political participation and involvement in major
decision making for particular credit organizations. In Indonesia borrowers increased
their incomes by 12.9 percent compared to increases of three (3) percent in control-group
incomes. Another study on Bank Rakyat Indonesia borrowers on the island of Lombok in
Indonesia reports that the average incomes of clients had increased by 112 percent and
that 90 percent of households had moved out of poverty (Panjaitan-Drioadisuryo, Rositan
and Kathleen, 1999). A comprehensive study of microfinance conducted by the World
Bank in the early 1990s on three of the largest programs in Bangladesh—Grameen Bank,
BRAC, and RD-12—found that clients increased household consumption by 18 takas for
every 100 takas borrowed, and that 5 percent of clients graduated out of poverty each
year by borrowing and participating in microfinance programs. More importantly
households were able to sustain these gains over time. There were also spillover effects in
the village economy. Average rural household incomes in program villages increased
even for non-program households. One of the programs even influenced village wage
rates. Increases in self-employment and subsequent withdrawals from informal labor

47. 47
pools led to a 21 percent increase in wages in the program villages (Zaman, 2000).
Holvoet (2005) finds that in direct bank-borrower minimal credit, entrepreneurs do not
gain much in terms of decision-making patterns. However, when loans are channeled
through entrepreneurs groups and are combined with more investment in social
intermediation, substantial shifts in decision-making pattern are observed. This involves a
remarkable shift in norm-following and male decision making to more bargaining and
sole decision-making. She finds that the effects are even more striking when
entrepreneurs have been members of a group for a longer period and especially when
greater emphasis has been laid on genuine social intermediation.
Mayoux (2001) argues that the impact of microfinance programmes on entrepreneurs
owned SMEs is not always positive. Entrepreneurs that have set up enterprises benefit not
only from small increases in income at the cost of heavier workloads and repayment
pressures. Sometimes their loans are used by men in the family to set up enterprises, or
sometimes entrepreneurs end up being employed as unpaid family workers with little
benefit. She further points that in some cases entrepreneurs increased autonomy has been
temporary and has led to the withdrawal of male support. It has also been observed that
small increases in entrepreneurs income are also leading to a decrease in male
contribution to certain types of household expenditure. Mayoux (2001) also warns about
the inherent dangers in using social capital to cut costs in the context of other policies for
financial sustainability. The reliance on peer pressure rather than individual incentives
and penalties may create disincentives and corruption within groups. Reliance on social

48. 48
capital of entrepreneurs clients along with increasing emphasis on ideals on strict
economic accounting at the programme level require increased voluntary contribution by
the members in terms of time and effort. It has been noted that those putting in voluntary
contributions also expect to be repaid in the form of leadership of the group. Kiiru (2009)
conducted a study on the impact of microfinance on rural poor households' income and
vulnerability to poverty in Makueni district. The main objective of the thesis was to
analyze the impact of microfinance on household income as well as measure household
vulnerability to poverty after access to microfinance. The study was an experimental case
of Makueni district where participants in microfinance programmes and non participant
households were studied over time; thus yielding a rich pooled data for analysis.
On integrating time dynamics in the analysis, the results indicate a positive and
significant impact of microfinance on household income. To this end the thesis argues
that there is a role of microfinance on the improvement of household incomes. The thesis
also re asserts that providing affordable financial services to the rural population still
remains to be an important component of development strategy. On the other hand the
thesis emphasizes that there is need to come up with innovative microfinance institutions
that are supportive of their own role in assets accumulation and wealth creation for their
clients. This will involve innovative targeting of potential clients, as well as streamlined
microfinance regulations to protect their clients. In particular the study cautions that the
ability of households to begin informal sole micro entrepreneurships should not be
assumed to be adequate for the improvement of household income. There is need to

49. 49
create a policy framework to spur growth not only in the micro enterprises but also in the
overall rural economy that would lead to the creation of employment opportunities and an
increment in the agricultural output. This is quite a big task to accomplish and may
require more than one particular policy intervention. In essence this calls for both private
(microfinance) and public partnerships to create the environment where such poverty
reduction objectives could be realized.
Abiola (2002) conducted a study on the impact analysis of microfinance in Nigeria. This
paper applies the financing constraints approach to study whether microfinance
institutions improved access to credit for microenterprises in Nigeria or not. According to
this approach, microenterprises with improved access to credit rely less on internal funds
for their investments. Thus, investment sensitivity to internal funds of micro enterprises
in Lagos State (a municipal with significant presence of Microfinance Banks (MFBs) was
compared to that of micro enterprises in Ekiti State (a municipal with no (or limited)
presence of MFBs) using a cross sectional survey method and Microfinance Institutions
(MFI) branch location data. Results indicate that MFBs alleviated micro businesses
financing constraints.
2.3 Theoretical Review
2.3.1 Micro Credit Theory
Micro credit has emerged as a hugely popular tool all over the developing world for
helping poor people to help themselves by engaging in self-employed income-earning

50. 50
activities. By developing innovative ways of providing the poor with access to credit, the
‘micro credit revolution’, as it has come to be called, has seriously challenged many
traditional assumptions about both poverty reduction strategies and financial markets.
While this has encouraged new theorizing about how micro credit works, the evolution of
the practice of micro credit has outpaced the development of theory. The psychological
component of the micro credit theory which is known as social consciousness-Driven
capitalism have been advanced by the most ardent promoter of microfinance who are
Muhammad Navajas, Conning and Gonzalez-Vega in 2003. Their theory argues that a
species of profit-making private venture that cares about the welfare of its customers can
be conceived.
According to Heidhues, Belle-Essoh and Buchenrieder, (2002), the gist of the economic
argument is that success in any business venture, including MFIs, is determined by the
entrepreneurs' ability to deliver appropriate services and profitably. However, studies
conducted in different parts of the world show that there are no successful MFIs by this
definition. At best, some MFIs cover their operating costs while some of the better known
among them are able to cover in part the subsidized cost of capital employed. This
situation suggests that the MFIs will not become financially viable in the long run. One
solution to this problem is to treat MFIs as infant industries, so that micro-lending
businesses can be subsidized during their initial stages of operation. This subsidization
would be beneficial to both the economy and society because this will help micro lenders
realize economies of scale and the productivity fillip that comes with profitability.

51. 51
2.3.2 The Bicycle Tire Theory of Microcredit Market Stability
According to David Roodman (2012), the big worry these days is that more micro credit
markets will blow up, not that such episodes are generally fatal to an industry, but they do
hurt institutions and clients, arguably unnecessarily. He suggested that the question of
whether a micro credit market will blow up is like that of whether a bicycle tire will blow
up. It depends on the amount of air in the tire and the strength of the tire. If the tire goes,
you can with equal logic blame excess pumping or the frailty of the fibers in the tire wall.
Thus a debate about causes can run in circles forever. The practical context specific
question is what you can do to prevent blow-outs going forward. If you are unable to
influence tire quality, your best hope lies in limiting the pressure; and vice versa.
Just so with financial crisis, why did Canada come through the global crisis so much
better than the US? A conference and a report from the Atlantic Council cite both kinds
of factors in the tire metaphor. In the U.S., Greenspan's Fed kept rates low for much of
the 2000's, making for easy money: too much air. And whereas teasers rates became an
ignominious household term in the U.S. after the crisis broke, Canada regulated its retail
lenders, its banks, more tightly: tougher rubber in those tires. So to reduce the risk of a
micro credit explosion, we can strengthen the tires, regulate lending to prevent profligacy
or bleed out some air that is providing less finance for microfinance. It's not that useful to
argue about which is more important and implicitly, whether overeager microfinance

52. 52
investors are more to blame for past troubles. What matters is what "we" can do going
forward to influence either factor, which depends on who "we" is. Notably, one of these
factors is primarily the responsibility of the investors while the other is primarily the job
of micro lenders (and their regulators). Presumably the best strategy is to work on both
aspects since each party's influence on either is limited.
2.3.3 The Grameen Bank Theory
Micro credit programs were initiated in Bangladesh, by Yunus, a former economics
professor who claimed to want to “learn economics from the poor in the village next door
to the university campus” (Yunus, 2003). The elegant theories of economics” did not
seem to reflect the daily lives of the rural poor in Bangladesh, whereby the “problems of
life and death were posed in terms of pennies” and not in the millions of dollars used to
theorize economics (Ibid, p48). The problem of the poorest of the poor seems to be far
less theoretical and economic theory seemed to have little effect on their daily struggles.
Muhammed Yunus observed that most of the villagers were unable to obtain credit at
reasonable rates that would enable them to buy materials for projects like weaving
bamboo stools and making pots. Yunus argues that credit creates economic power which
quickly translates into social power (Yunus, 2007). A project that began with humble
beginnings slowly turned out to be the present day Grameen Bank lending $2.3 billion in
its 21 years history (1982-present). The success story of the Grameen Bank has made
headlines across the globe. Numerous films have also been made on the subject. The film

53. 53
16 decisions for instance presents a very vivid illustration of the life of the Third world
women, the poverty they face and microcredit innovative way of alleviating poverty to
ultimately create a poverty-free society.
One of the main differences between the Grameen Bank and traditional commercial
banks is that commercial banks rely on giving out large amount as loan to few clients
whereas, the Grameen bank gives out micro-loans to a large number of people. The
Grameen Bank model involves voluntary group formation where although the loans are
made out to individuals, all the members in the group are responsible for the repayment.
The group consist of five borrowers each with lending first to two, then to the next two
and then to the fifth member of the group. Furthermore, if one member ever defaults, all
the members are denied subsequent loans. By doing so, the contract takes advantage of
“local information and the Social Assets” mechanisms that rely on informal insurance
relationships and threats, ranging from social isolation to physical retribution, that
facilitates borrowing for households lacking collateral” (Morduch, 2000). Most of the
Grameen Bank loans are generally for one year with interest.
2.4 Conceptual Framework
Conceptual framework for this study shows the relationship between microfinance banks
credit and the financing of SMEs. The essence of this study is to show how microfinance
banks can perform their roles of financing SMEs efficiently in Nigeria using Osun State
as a case study. The diagram explains the variables of which the independent variable is

54. 54
the microfinance banks and its major roles can be measured in terms of savings and
credits while the dependent variable is the SMEs financing. The arrow shows the
relationship between the different variables.
Figure 2.1: Analytical Framework of the Roles of Microfinance Banks on the
Financing of SMEs
Services
· Advisory Services
· Seminars and
Conferences
Credits
· Amount Received
· Repayment Terms
· Frequency
· Required Security
Savings
· Amount Saved
· Duration of Saving
· Frequency of saving
SMEs
Financing

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CHAPTER SUMMARY
In conclusion, the review of literature and the theoretical framework provides a backing
for the research hypothesis made in chapter one. The relationship between Microfinance
Banks and the financing of Small and Medium Scale Enterprises in Nigeria was
discussed. The credit scheme of Microfinance Banks and their impact on the performance
of SMEs in Nigeria as well as suggested ways through which Microfinance Banks can
help to improve SMEs were fully discussed in this chapter.

56. 56
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter discusses the methodology that was employed in carrying out the study. In
this section, the research identified the procedures and techniques that were used in the
collection, processing and data analysis.
3.1 Research Design
This research problem was studied through the use of a survey research design. Survey
research method studies the whole population by selecting samples from which
inferences will be drawn. Survey is used when element of any class vary among
themselves and the interest is to know the extent to which different conditions affect
them. In this case the researcher is interested in discovering if microfinance banks play a
major in the financing of SMEs as well as its impact on SMEs performance.
3.2 Sources and Collection of Data
For the purpose of this research work, the source of data used by the researcher is
Primary source of data. Primary data are first hand data obtained from the source
regarded as the original. Primary sources of data is defined by Bordens and Abbot (2000),
as those data containing the full research report including all details necessary to
duplicate the study. The source guarantees the authenticity of the information obtained
and it is collected for a specific purpose. The source of the primary data used by the

57. 57
researcher was gathered using questionnaire. This questionnaire consists of structured
questions.
3.3 Population, Sampling Technique and Sample Size
Polit and Hungler (1999) refer to the population as an aggregate or totality of all objects,
subjects or members that conform to a set of specifications. Okeke (2002) defines
population as the collection of elements, units or individual for which information is
sought. Population in research statistics is the target of the study for the collection of
data. The study is to be carried out in Osun State.
A sample size is a subset of the population. The portion of the population that is selected
for the analysis is the sample. The use of purposive sampling technique and specifically
the judgmental sampling method was used to select the state capital Oshogbo and also
Ile-Ife. In all, a total of 100 SMEs are purposely selected in both Oshogbo and Ile-Ife of
which more questionnaires will be distributed in Oshogbo because of the presence of
many microfinance banks. The purposive sampling method is used because it helps to
have a good representation of the targeted population. The purposive sampling technique
might have limited the generalizability of the findings but it gives a good representation
of the population.
3.4 Measurement of Variables
There are two key variables in this study, namely the independent and dependent
variables. The independent variable are credit, savings and services while the dependent

58. 58
variable is the SMEs performance. The simple linear regression analysis was chosen as
the approach to analyze the data.
The regression model is developed as follows:
Y = β0 + β1X1 + β2X2 + β3X3 + ε.
Where:
Y= Financial Performance
β0= Constant Term
β1, β2, β3 = Beta or Regression coefficients
X1 = Credit
X2 = Savings
X3 = Services (advice, seminars and workshops)
ε = Error term.
3.5 Research Instrument
The Primary data was gathered through structured questionnaires. In order to ensure
uniformity in response and to encourage participation, the questionnaire was kept short
and structured with mostly multiple-choice selections in a likert scale. The questionnaires
were preferred in this study because respondents of the study are literate and quite able to
answer questions asked adequately. According to Mugenda and Mugenda (2003),
questionnaires are commonly used to obtain important information about a population

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under study. The questionnaire was divided into three sections: A, B, C and D with each
section focusing on the variable of interest.
Section A: Socio-Demographic Information
This section of the questionnaire obtains relevant socio-demographic information of the
participants which consist of age, sex, academic and professional qualification, legal
status of company, qualifications etc.
Section B: Credits
This section is about the credit offered by the microfinance banks, the frequency, their
repayment terms and how consistent they pay back and how effective is their credit
scheme compared to other sources of finance.
Section C: Savings
This section is to inquire if the firm has any saving scheme and also to know the impact
of the microfinance banks saving scheme on the performance of SMEs.
Section D: Services
This section is to inquire about the services provided by MFBs and also to know the
impact of the services provided on the performance of SMEs.
3.6 Validation of Research Instrument and Testing
Validity is defined as the measure of the truth or falsity of the data obtained through
using the research instrument. According to Saunders, Lewis and Thornhill (2003),
validity and the reliability of the data collected, as well as the response rate achieve,

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depend to a large extent on the design and structure of the questionnaire. The validity of
the instrument will be determined through face, content, and construct validity. Thus,
questionnaires will be sent to the professional experts in the field to evaluate this
questions which will then erase the problem that might prevent the right kind of
information for this research.
Also, in order to determine the reliability of the instrument, a pre-test shall be carried out
to evaluate consistency of the instrument. This will help the researcher to restructure the
question if need be, in order to generate appropriate responses.
3.7 Data Analytical Techniques
Data from questionnaires was compiled, sorted, edited, classified and coded into coding
sheet. The descriptive statistical tools (SPSS V.17.0 and Excel) helped the researcher to
describe the data frequency distribution, percentage, arithmetic mean, and standard
deviation. Inferential statistics such as the multiple regression analysis was chosen as the
approach to analyze the data and to determine the extent to which microfinance banks
credit is used to finance SMEs as well as the rate at which other forms of credit are used
to finance SMEs. Coefficient of determination will also be used to explain the extent by
which SMEs performance can be explained with credit, savings and services.

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3.8 Expected Contribution to Knowledge
The result of this study will assist owners and managers of SMEs to have more
understanding on the various means of financing their business so as to help improve
their performance. If further study is to be carried out in Nigeria, the Researcher believes
that this study will be a solid foundation for other researchers in focusing more on the
role of MFBs in the financing Of SMEs in other States in Nigeria even though there have
been other related researches on this topic, it has always been based on SMEs
performance. Thus, attention will be focused more on financing of SMEs in Osun State,
Nigeria.

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CHAPTER FOUR
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
This chapter of the study presents analysis and interpretation of data collected from the
respondents towards the investigation of the Role of Microfinance banks on the
Financing of SMEs in Osun State. This chapter is structured according to the research
objectives.
The result of the research work presented in tables in line with the research questions
stated in chapter one. One hundred questionnaires were distributed and all were filled and
returned by the respondents due to the data collection procedure where the researcher
personally administered the questionnaires and waited for respondents to fill them while
the researcher distributed some and went back after some hours to collect them.
4.1 Socio-demographic Characteristic of Respondents
The analysis in Table 4.1 below shows that the male respondents was 54 giving a
percentage of 54% of the total 100 respondents while the female respondents were 46
also giving a percentage of 46%. Of the total population, 28% were within the age of 21
and 30 years while 27% were over 50 years. Also, 21% of the total population were
within the age of 31 and 40 years, 13% was between the age of 41 and 50 years and just
only 11% was below 20 years of age.
The level of education of respondents showed that 57% of the population either has a
university degree or Certificate/Diploma as their highest formal qualification while a
further 2% finished with a master degree. Of the remaining 41%, 37 respondents finished

63. 63
with a secondary school leaving certificate while just only 4% did not go to secondary
school and finished in primary school.
Of the total 100 respondents, 29% have been operating their business for more than 15
years now while only 5% have been operational for less than a year. Of the remaining
66%, 27% of the respondents have been operational within six 6 to 10 years, 25% have
been operational from within 1 to 5 years and just only 14% have been in operation from
within 11 to 15 years.
From the study, it was discovered that 68% of the total population has a minimum of one
(1) employee and a maximum of 5 employees. Also, it was discovered that 16% has
between 6 to 10 employees, 4% has from 11 to 15 employees, 6% of the respondents has
from 16-20 employees while the remaining 6% has above 21 employees. It was thus
discovered that just only 16% of the total population has above 10 employees.
Of the total respondents, 89% was privately owned and registered while 5 SMEs were
jointly owned and the remaining 6% are privately owned but not registered. Therefore,
94% of the total respondents are legally registered SMEs while the remaining 6% are not
registered.

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Table 4.1: Socio-Demographic Characteristics of respondents
Characteristics Category Frequency Percentage Mean Standard
Deviation
SEX Male 54 54
1.46 0.501Female 46 46
AGE
Below 20 years 11 11
3.17 1.386
21-30 years 28 28
31-40 years 21 21
41-50 years 13 13
Over 50 years 27 27
HIGHEST
FORMAL
QUALIFICATION
Primary School 4 4
2.86 0.932
Secondary School 37 37
Certificate/Diploma 30 30
University Degree 27 27

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Masters Degree 2 2
Range of Years the
SMEs have been
Operational
Less than 1 year 5 5
3.37 1.276
1-5 years 25 25
6-10 years 27 27
11-15 years 14 14
0ver 15 years 29 29
Legal Status of the
SMEs
Private Owned 89 89
Jointly Owned 5 5

66. 66
Others e.g.
unregistered SMEs
6 6
1.28 0.817
Number of
employees number
1-5 employees 68 68
1.66 1.183
6-10 Employees 16 16
11-15 Employees 4 4
16-20 Employees 6 6
21 Employees and
Above
6 6

67. 67
4.2 The Role of Microfinance Banks in the Financing of SMEs
4.2.1 Credit
The respondents were asked if they benefit loans from microfinance banks and the
following results in table 4.2, it shows that out of the total respondents, just only 39
SMEs receive loans from microfinance banks while the remaining 61 SMEs do not enjoy
loans from microfinance banks with a mean of 1.61 and a standard deviation of 0.490.
Table 4.2 The Number of SMEs that Receive Loans from Microfinance Banks
Do you benefit loans from Microfinance
Institutions?
Frequency Percentage Mean Standard
Deviation
Yes 39 39 1.61 0.490
No 61 61
In Table 4.3, As regards the Role of Microfinance Banks in Increasing Access to
Credits for Consumption and Production, 14% respondents strongly disagree with that
statement while 16% disagree with it making a total of 30% that disagreed. Of the
remaining 70%, 20% are indifferent as to whether they help in increasing access to
credits for consumption and production while the remaining 50% of the respondents both
agree and strongly agree that they help in increasing access to credits for consumption
and Production. This is evident with the mean of 3.12 and a standard deviation of 1.183
that they help in increasing access to credits for consumption and production
As regards whether Microfinance Banks are a Reliable Source of Financial Backup,
32% of the respondents both strongly disagree and disagree that they are a reliable source

68. 68
of financial backup while 29% were indifferent. Majority of 39% both strongly agree and
agree that they are a reliable source of financial backup with a mean of 3.08 and a
standard deviation of 1.079.
Table 4.3: The Role of Microfinance Banks in Providing Credit
Role of Microfinance banks in
providing CREDITS
Strongly
Disagree
Disagree
Indifferent
Agree
Strongly
Agree
Mean
Standard
Deviation
They help in increasing access to Credits
for consumption and production
14 16 20 44 6 3.12 1.183
They are a reliable source of financial
Backup
7 25 29 31 8 3.08 1.079
4.2.2 Savings
The respondents were asked if Microfinance Banks provide them access to savings and if
they actually save with them and the following results were attained in Table 4.4, 78% of
the respondents responded that Microfinance Banks provide them access to savings, 21%
believe that they do not provide access to savings and just only one person did not answer
this question with a mean of 1.21 and a standard deviation of 0.411. In Table 4.5, out of
the 78% that responded that microfinance banks provide them access to savings, 37

69. 69
respondents responded that they save with them, 60 respondents do not save with them
and the remaining 3 respondents did not answer this question which is probably because
they do not save with microfinance banks and a mean of 1.62 with standard deviation of
0.488 was generated.
Table 4.4 Do Microfinance Banks provide you Access to Savings?
Frequency Percentage Mean Standard
deviation
Yes 78 78
1.21 0.411No 21 21
Missing 1 1
Table 4.5 If your answer is yes, do you save with them?
Frequency Percentage Mean Standard
deviation
Yes 37 37
1.62 0.488No 60 60
Missing 3 3

70. 70
4.2.3 Services
The services provided is divided into two major part and they are whether microfinance
banks provide advisory services to SMEs and also if they organize seminars and
conferences to SMEs. Of the total 100 respondents, just only one person did not fill this
entire section in the questionnaire.
From Table 4.6, on whether Microfinance Banks Offer Advisory Services, 54
respondents selected yes and 45 respondents selected no. On whether they have
organized any seminars or conferences, 42 respondents selected yes while 57 respondents
chose no.
Table 4.6 Microfinance Banks Services
Response Frequency Percent
Do Microfinance Banks offer advisory services to
you?
Yes 54 54.5
No 45 45.5
Have they organized any seminar or conferences
on business?
Yes 42 42.4
No 57 57.6
Based on our first research question and from our findings, we can say that the role of
microfinance banks in the financing of SMEs in Osun State, Nigeria is low especially in
the area of providing credit to finance SMEs. Therefore, we can rightly infer that in Osun
State, majority of the SMEs are not being financed by Microfinance banks credit and

71. 71
most of them are not saving with them most likely because more than half of the
respondents believe that they are not a reliable source of financial backup and only about
half of the respondents filled that they receive services from them, thus, they do not play
a major role in the financing of SMEs
4.3 The Effectiveness of Microfinance Credit Scheme on SMEs Performance
In Table 4.7, As regards whether Microfinance Banks Credit Scheme is not the best,
30% of the respondents agree to this statement while 14% strongly agree. Most of the
34% who were indifferent as regards this statement chose this because they have never
received loans from microfinance banks. The remaining 22% both strongly disagree and
disagree that microfinance bank credit is not the best. In conclusion, the vast majority of
SMEs owner believe that the credit scheme offered is not the best with a mean of 3.30
and a standard deviation of 1.087.
As regards whether Acquiring Loan from Microfinance Banks is Cheaper Compared
to Commercial Banks, 46% agree to this statement that their loan is cheaper compared
to commercial banks, 29% of the respondents were indifferent and the remaining 25%
both strongly disagree and disagree that acquiring loans from microfinance bank is
cheaper compared to commercial banks. In line with this as regards whether Acquiring
loan from Microfinance Bank is less Stressful than Commercial Banks, 37% agree
that they are less stressful while 9% strongly agree to this. Of the remaining 54%, 31%
are indifferent as to whether they are less stressful or not while the remaining 23% both

72. 72
strongly disagree and disagree that they are less stressful with a mean of 3.29 and a
standard deviation of 0.988.
Concerning whether Microfinance Credit can help to increase the efficiency of the
SMEs, 40% agree to this, 25% were indifferent while the remaining 35% disagree to this
statement. In line with this, 47% of the respondents chose that Reduced Loan Interest
cannot Increase Profitability, 25% disagreed to this statement while the remaining 28%
were indifferent as to whether reduced loan interest will either increase profitability or
not.
Also in line with the effectiveness of microfinance bank credit scheme, 33% both
strongly agree and agree that the Easy Loan Repayment Period Made Them Seek
Financial Assistance from Microfinance Banks. Of the remaining 67%, 36% both
strongly disagree and disagree that easy loan repayment made them seek financial
assistance and the remaining 31% where indifferent with a mean of 2.81 and a standard
deviation of 1.277.
Finally, on the effectiveness of microfinance banks credits Scheme on SMEs
performance, 37% of the respondents both agree and strongly agree that Interest Rate is
a Discouraging Factor from Obtaining Loans from Microfinance Banks, 32% were
indifferent and the remaining 31% both disagree and strongly disagree that interest rate is
a discouraging factor from obtaining loans from microfinance banks with a mean of 3.16
and a standard deviation of 1.204.

73. 73
Table 4.7 Microfinance banks Credit Scheme
Effectiveness of Microfinance Banks
Credit Scheme
Strongly
Disagree
Disagree
Indifferent
Agree
Strongly
Agree
Mean
Standard
Deviation
The credit scheme offered is not the best. 6 16 34 30 14 3.30 1.087
Acquiring loans from microfinance banks
is cheaper compared to commercial
banks.
7 18 29 37 9 3.23 1.072
Acquiring loans from Microfinance
banks is less stressful than commercial
banks.
3 20 31 37 9 3.29 0.988
Microfinance Credit can help to increase
the efficiency of the firm.
9 26 25 33 7 3.03 1.114
Reduced loan interest cannot increase
profitability.
5 20 28 28 19 3.36 1.150
Easy loan repayment period made you
seek financial assistance from them.
24 12 31 25 8 2.81 1.277

74. 74
Interest rate is a discouraging factor from
obtaining loans from Microfinance
Banks.
8 23 32 19 18 3.16 1.204
As regards the second research question on the effectiveness of the credit scheme of
microfinance banks on the performance of SMEs, from our findings, we can rightly infer
that their credit scheme is not the best and that a significant proportion believes that the
credit offered cannot increase the efficiency of the firm. Also, the interest rate is a
discouraging factor and with a reduced interest rate, a significant proportion filled that it
cannot increase their profitability. Although majority of the respondents believe that they
are cheaper and less stressful to commercial banks. Therefore, the credit scheme does not
have any significant effect on the performance of SMEs.
4.4 Microfinance Banks Saving Scheme and its Impact on SMEs Performance
As regards the Microfinance Banks Saving Scheme and its Impact on SMEs
performance, the following questions were asked in Table 4.8 with respondents giving
their answer as to whether they strongly disagree or just disagree, whether they are
indifferent and lastly if they strongly agree or just agree to the questions.
Concerning If all Microfinance Banks Provide Saving Scheme, it will Increase the
Liquidity of the Firm, 5% strongly disagree, 6% disagree making a total of 11% that
disagreed to this statement. Of the remaining 89%, 24% were indifferent and 51%

75. 75
majority agrees to this while the remaining 14% strongly agree with a mean of 3.63 and a
standard deviation of 0.971.
As regards whether Saving with Microfinance Banks is a Good Alternative to
Borrowing from Them, just only 12% both strongly disagree and disagree to this, 25%
were indifferent and of the remaining 63% that agree to this, 7% strongly agree and the
mean was 3.54 while the standard deviation was 0.892.
Also, 71% agree that Saving with Microfinance Banks Help to Accumulate Enough
Cash for Assets such as Inventory for SMEs, 19% were indifferent and the remaining
10% disagree to this with a mean of 3.72 and a standard deviation of 0.866.
On whether Access to Savings has Little Effect on SMEs Performance or its
Financing, a majority of 34% agree to this plus another 9% strongly agreeing to it. Of the
remaining 57%, 29% were indifferent to whether access to savings has little effect on
SMEs performance or its financing and the remaining 28% disagree to the statement with
a mean of 3.19 and a standard deviation of 1.051.
Finally, 50% of the respondents believe that the Interest Giving by Microfinance
Banks on Savings is not the Reason why they Save, 30% were indifferent and the
minority of 20% agree that the interest giving by microfinance bank is the major reason
why they save with a mean of 2.43 and a standard deviation of 1.225.

76. 76
Table 4.8 Impact of MfBs Savings on SMEs performance
Strongly
Disagree
Disagree
Indifferent
Agree
Strongly
Agree
Mean
Standard
Deviation
If all Microfinance Banks can offer
saving scheme, it will increase the
liquidity of the firm.
5 6 24 51 14 3.63 0.971
Saving with MFBs is a good
alternative to borrowing from
them.
4 8 25 56 7 3.54 0.892
Saving with MFBs help to
accumulate enough cash for assets
such as inventory for SMEs.
2 8 19 58 13 3.72 0.866
Access to savings has little effect
on SMEs performance or its
financing.
5 23 29 34 9 3.19 1.051
Interest giving by MFBs on saving
is the major reason why you save. 32 18 30 15 5 2.43 1.225
From our findings, as regards the null hypothesis that savings provided by microfinance
banks has no impact on the performance of SMEs, it was discovered that the savings

77. 77
provided by microfinance banks will have an impact on the performance of SMEs, as
majority believe that it will increase the liquidity of the firm and the savings is also a
good alternative to borrowing even though most of them do not agree that the interest
giving on savings is an incentive for them to save.
4.5 The Impact of Services Provided by Microfinance Banks on SME
Performance
From Table 4.9, concerning whether Organizing Seminars and Conferences will
Improve Business Performance, 9% disagree to this and another 9% were indifferent.
The majority of 81% agree to this and just only 1% did not give any response. The mean
is 4.02 and the standard deviation is 0.969. Majority of 82% agree that organizing
seminars and conferences will improve business performance.
As regards if the Advice Given by Microfinance Banks cannot Boost SMEs
performance, 22% of the respondents strongly disagree, 45% disagree, 18% were
indifferent, 13% agree and just only 1% strongly agree. The mean is 2.25 and the
standard deviation is 0.983. Of the total respondents, a majority of 67% agree that advice
given by microfinance bank will boost SMEs performance.
As regards Microfinance Banks cannot Provide Services that will Boost
Entrepreneurial Development, 30% strongly disagree, 31% disagree, 22% were
indifferent, 14% agree and 2% strongly agree. The mean is 2.26 and the standard

78. 78
deviation is 1.103. Majority of 61% agree that services provided by microfinance banks
will boost entrepreneurial development.
Concerning if Their Advice or Seminars does not have any Effect on the Business,
28% strongly disagree, 37% disagree, 19% were indifferent, 13% agree and 2% strongly
agree. The mean is 2.23 and the standard deviation is 1.067. Also, a majority of 65%
agree that advice or seminars will have an effect on the business.
Finally, as regards if The Microfinance Banks Often Organize Seminars and
Conferences, 28% strongly disagree, 17% disagree, 14% were indifferent, 31% agree
and 9% strongly agree. The mean is 2.76 and the standard deviation is 1.393. Thus, 40%
agree that microfinance banks often organize seminars and conferences while 45% agree
that they do not often organize seminars and conferences.
Table 4.9 Services and Performance
Strongly
Disagree
Disagree
Indifferent
Agree
Strongly
Agree
Mean
Standard
Deviation
If MFBs can be organizing
seminars and conferences, it will
improve the business performance
3 6 9 49 32 4.02 0.969
The advice given by MFBs cannot
boost SMEs performance 22 45 18 13 1 2.25 0.983
MFBs cannot provide services that

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will boost entrepreneurial
development
30 31 22 14 2 2.26 1.103
Their advice or seminars does not
have any effect on the business. 28 37 19 13 2 2.23 1.067
The MFBs you know often
organize seminars and
conferences.
28 17 14 31 9 2.76 1.393
As regards our hypothesis that microfinance banks services has no effect on the
performance of SMEs, it was discovered that a significant majority of the respondents
filled that the seminars and conferences organized by microfinance banks as well as the
advice given by them will improve their business performance and majority of the
respondents filled that these services has an effect on the business. Therefore, the services
offered by microfinance banks have a significant effect on the performance of SMEs.
4.6 Inferential Analysis
To establish the relationship between the independent variables and the dependent
variable of the study the study conducted inferential analysis which involved a coefficient
of determination and a multiple regression analysis. Inferential analysis is utilized in this
study to determine if there is a relationship between an intervention and an outcome, as
well as the strength of that relationship. The independent variable is the financial

80. 80
performance of SMEs measured by strategic and financial planning, cashflow and
profitability while the independent variables are measured by credit, savings and services.
4.6.1 Coefficient of Determination
The coefficient of determination is a measure of how well a statistical model is likely to
predict future outcomes. The coefficient of determination (r2)
is the square of the sample
correlation coefficient between outcomes and predicted values. As such it explains the
extent to which changes in the dependent variable can be explained by the change in the
independent variables or the percentage of variation in the dependent variable.
Table 4.10 Coefficient of Determination
Model R R Square Adjusted R Square
Std. Error of the
Estimate
1 .266a
.070 .041 1.65087
a. Predictors: (Constant), Services, CREDIT, SAVINGS
From the findings, 7% of the financial performance of SMEs is explained by the independents
variable of credits, savings and services investigated in this study while the remaining 93% is
attributed to other factors not investigated in this study.
From our coefficient of determination, we can rightly infer that credit, savings and services
plays an insignificant role in the financial performance of SMEs.

81. 81
4.6.2 Multiple Regression Analysis
The researcher conducted a multiple regression analysis so as to determine the effect of
microfinance on financial performance of SMEs in Osun State, Nigeria. Multiple
regression is a statistical technique that allows us to predict a score of one variable (the
dependent variable) on several other variables (the independent variable).
Table 4.11 Regression Table
Model
Unstandardized
Coefficients
Standardized
Coefficients
T Sig.B Std. Error Beta
1 (Constant) 11.703 1.194 9.800 .000
CREDIT -.228 .094 -.259 -2.433 .017
SAVINGS .034 .112 .033 .306 .760
Services .043 .117 .039 .366 .715
a. Dependent Variable: Financial_Performance
The regression equation, Y = β0 + β1X1 + β2X2 + β3X3 + ε. Then becomes,
Y = 11.703 - 0.228 X1 + 0.034 X2 + 0.043 X3 + ε
Where Y is the dependent variable which is the Financial Performance of SMEs, β0=
Constant Term and β1, β2, β3 = Beta or Regression coefficients. The independent
variables or factors are; X1 = Credit, X2 = Savings X3 = Services and ε = Error term.
This means that when all the factors or independent variables are zero, the financial
performance of SMEs will be 11.703 if all other factor. Also, a unit increase in credits