THE IMPACT OF MICROFINANCE BANK ON SMALL AND MEDIUM ENTERPRISES DEVELOPMENT IN OYO STATE: A CASE STUDY OF THE POLYTECHNIC IBADAN MICROFINANCE BANK LIMITED

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ABSTRACT
Traditionally, commercial banks lend to some medium and large enterprises, which are judged to
be creditworthy. They avoid doing business with the poor and the micro enterprises because they
believed the associated cost and risks involved are relatively high. Microfinance institutions
(MFIs) are therefore saddled with the responsibilities of providing funds for micro, small and
medium enterprises in Oyo State. The study therefore, examines the impact of microfinance
Bank on small and medium enterprises development in Oyo State. However, the study reveals a
handful of challenges faced by this sub-sector that is, microfinance and how they are addressed
accordingly. Hence, the objectives and characteristics of microfinance are equally stated in this
study. The population used in the research was the Polytechnic Ibadan Microfinance Bank.
Nevertheless, the sampling used to justify the findings of the study is survey method. Data were
majorly collected from primary sources. The hypothesis testing in this research work was done
using Chi-Square. Amongst other proffered solutions, it was recommended that there is need for
development of a regulatory and supervisory framework for all forms of operations of the MFIs
in Nigeria in general and Lagos in particular so as to assist the development of small and
medium scale industry. It is not only desirable to regulate only Microfinance Banks, but also
others that mobilize savings for purposes of lending to their clients.
Keywords: Microfinance, Small Scale Enterprises, Micro Enterprises Economic Development,
Loans.

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TABLE OF CONTENTS
Page
Title Page………………………………………………………………………………………i
Declaration…………………………………………………………………………………….ii
Certification ……………………………………………………………………………………iii
Dedication………………………………………………………………………………………iv
Acknowledgements……………………………………………………………………………….v
Abstract ………………………………………………………………………………………..vi
Table of Contents………………………………………………………………………………vii
List of tables……………………………………………………………………………………x
CHAPTER ONE: INTRODUCTION
1.1 Introduction…………………………………………………………………………….1
1.2 Background to the study……………………………………………………………….3
1.3 Statement of the problem………………………………………………………………4
1.4 Objectives of the study………………………………….………………………………..4
1.5 Research questions……………………………………………………………………..4
1.6 Statement of the hypotheses…………………………………………………………..5
1.7 Significance of the study………………………………………………………………5
1.8 Justification of the study………………………………………………………………6
1.9 Scope of the study……………………………………………………………………..6
1.10 Definitions of terms ……………………………………………………………………6

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CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction……………………………………………………………………………8
2.1 Conceptual frame work………………………………………………………………….8
2.2 Theoretical frame work…….……………………………………………………………15
2.3 Literature on the subject matter…………………………………………………………19
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction………………………………………………………………………………37
3.1 Area of study……………………………………………………………………………37
3.2 Research design and Sources of Data….……………………………………………….37
3.3 Study Population and Determination of Sample Size.…………………………………..39
3.4 Instrumentation………………………………..…………………………………………39
3.5 Procedure for Data Collection and Data Analysis………………………………………40
3.6 Limitations of the study…………………………………………………………………41
CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION
4.0 Introduction………………………….………………………………………………….42
4.1 Presentation of Data ……………………………………………………………………42
4.2 Test of hypothesis.……………………………………………………………………….50
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CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 Summary of findings……………………………………………………………………53
5.1 Conclusion..……………………………………………………………………………54
5.2 Recommendations..…………………………………………………………………….55
References……………………………………………………………………………..58
Appendix……………………………………………………………………………….61

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LIST OF TABLES
4.1.1 Gender of the respondents………………………….…..…………………………………42
4.1.2 Age group of the respondents…………………….………………………………………43
4.1.3 Marital Status of the respondents………………………………………………………..43
4.1.4 Level of educational of the respondents………………………..………………………..44
4.1.5 The introduction of microfinance will improve the strategy of small-scale
development in Nigeria especially in Oyo State?……………………………………….44
4.1.6 Will small and medium scale enterprises improve economic development
in Nigeria?………………………………………………………………………………………45
4.1.7 The introduction of microfinance will contribute to the development of
small-scale in Oyo State?………………………………………………………………46
4.1.8 Will small and medium scale enterprises have effect on microfinance
bank deposit facilities in Nigeria?….…………………………………………………..47
4.1.9 Do you encounter problems in the implementation of the Microfinance
strategies?…………………………………………………….…………………………………47
4.1.10 Do you consider the interest rate charged by this microfinance bank as
reasonable? ……………………………………………….…………………………….48
4.1.11 Do you see small and medium scale enterprises playing a major role in
development of nation’s economy? ….…………………………………………………48
4.1.12 Do Microfinance banks contribute to the survival of small and medium
scale enterprises? ……………………………………………………………………..49
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4.1.13 Are you aware of any government policy towards the funding of small and
medium scale enterprise?..………………………………………………………………….49
4.1.14 Does the loan obtained from these financial institutions help in boasting
your business performance?……………………………………………………………50
4.2.1 Computation of the hypothesis..………………………………………………………52

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CHAPTER ONE
1.1 INTRODUCTION
A well functioning and developed Small and Medium Enterprises (SMEs) sector is a function of
economic growth, which is according to economic theory. According to Kalu (2013), this sector
of Nigerian economy lacks the funds to finance its activities towards contributing to the growth
and development of the Nigerian economy.
This is a result of the fact that, the Micro, Small and Medium Enterprises (MSMEs) that are
operating in this sector of the Nigerian economy are unable to access the financial services of the
money deposit banks in the country. This is so because, these money deposit banks in the
country (Nigeria) avoid doing businesses with these enterprises as they believe that, the risks and
associated cost of doing businesses with theses enterprises are considerably high due to inability
of these enterprises to supply the required collateral securities for money deposit banks loans and
advances as well as, the associated costs of operating accounts and carrying out transactions with
these enterprises.
Therefore, those enterprises are left at the mercy of the funds the entrepreneurs of these
enterprises were able to raise themselves either through their personal savings or through
borrowings from friends and relatives for the financing of their business activities.
As such, the development of this sector is impaired due to this problem of lack of adequate funds
to finance every viable business ideas that could contribute to the development and growth of the
economy.
Microfinance Institutions (MFIs) according to Anyanwu (2014), exist primarily to meets the
unsatisfied demand (needs) created by the mobility or unwillingness of the more financial
institutions to offer credit facilities as well as other financial products to Micro, Small and
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Medium Enterprises (MSMEs) in Nigeria. According to Anyanwu (2014), microfinance
institutions have therefore become the main source of funding micro, small and medium
enterprises in Nigeria.
Small and medium enterprises are believed to be the engine room for the development of any
economy, because they form the bulk of business activities in a growing economy like that of
Nigeria. This is manifested in the following ways, Employment generation, rural development,
Economic growth and Industrialization, Better Utilization of Resources.
In the past, Nigeria’s over dependence on oil which really exposed the economy to
unprecedented macro-economic instability resulting from the effects of external shocks to oil
prices. The world economic recession and the sustained slump in oil prices posted a serious
challenge on Nigeria economy which counted for a reduction in our external reserves and also
diminished on the nation’s capacity to finance much of its needs. It was also observed that the
real GDP growth slows to 2.2% from 2009; population growth rate with climb to 2.5%. Such
situation could plunge the country into economic embarrassment and posed a major challenge to
the government.
However, with the trend of those events, the Government under vision 20:2020 program came up
with undoubtedly consolidated empowerment program called the National Economic and
Empowerment Development Strategy (NEEDS) and other reforms which imperatively leads to
the recognition given to the development of SMEs.
The SME sector is positioned to generate employment, create wealth, reduce the prevalence of
poverty and sustain economic growth and development.
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Microfinance is the provision of a broad range of financial services such as deposits, loans,
payment services, money transfers and insurance to poor and low –income households and, their
micro-enterprises.
1.2 BACKGROUND TO THE STUDY
Microfinance institutions are defined as institutions whose major business is the provision of
microfinance services, which includes provision of small loans also known as microloans to
people or institutions who would otherwise have limited or no access to financial assistance,
transfer of money and payment services.
The contribution of Micro, Small and Medium Enterprises (MSMEs) to economic growth and
sustainable development is globally acknowledged (CBN, 2012). There is an increasing
recognition of its pivotal role in employment generation, income redistribution and wealth
creation (NISER, 2004). The Micro, Small and Medium Enterprises (MSMEs) represent about
87% of all firms operating in Nigeria (USAID, 2013). Despite Micro, Small and Medium
Enterprises (MSMEs) important contributions to economic growth, small enterprises are plagued
by many problems including stagnation and failure in most state of the country (Nigeria). The
problem is not limited to lack of long term financing and inadequate management skills and
entrepreneurial capacity alone, but also, includes the combined effects of low market access,
poor information flow, discriminatory legislation, poor access to land, weak linkage among
different segments of the operations in the sector, weak operating capacities in terms of skills,
knowledge and attitudes, as well as lack of infrastructure and an unfavorable economic climate.
The microfinance arrangement makes it possible for MSMEs to secure credit from microfinance
banks (MFBs) and other microfinance institutions (MFIs) on more liberal terms. It is on this
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platform that we intend to examine the impact of microfinance on small and medium enterprises
in Oyo State.
1.3 STATEMENT OF THE PROBLEM
The expectations of the smallest businesses to raise funds from the formal financial institutions
after taking-off with personal savings, assistance from friends or relatives and loans from
informal lenders are cut short. Adelaja (2012) stated the following as the problems the MSMEs
are facing in the hands of formal financial institutions; the perception of MSMEs as high risk,
Inability of the MSMEs to prepare acceptable/bankable business plans, Discriminating cultural
practices, which at times make it impossible for women to borrow and High transaction cost of
servicing small and medium enterprises often scattered loans.
Therefore, how then is the development of SMEs in Oyo State impaired by these listed factors?
Also, of what relevance are these listed factors to the topic of this project work?
1.4 OBJECTIVES OF THE STUDY
The main objective of this research study is to appraise the impact of Microfinance on Small and
Medium Enterprises Development in Oyo State.
Other objectives include the following;
i. To show microfinance as alternative to serve the poor enterprise that have no access to
formal financial service.
ii. To ascertain microfinance as a tool to develop MSMEs
iii. To ascertain microfinance as an effective tool
iv. To promote economic growth.

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1.5 RESEARCH QUESTION
As a result of the inability of the MSMEs to access the financial service of the formal financial
institutions that is, the money deposit banks in Oyo State, this research work intends to find
answers or possible solution to the following research questions as regards the development of
SMEs in Oyo State;
i. What are the effects of the Microfinance Banks (MFBs) credit facilities on the development
of SMEs in Oyo State?
ii. What are the effects of the MFBs deposit facilities on the development of SMEs in Oyo
State?
iii. What are the effects of the MFBs insurance facilities on the development of SMEs in Oyo
State?
1.6 STATEMENT OF THE HYPOTHESIS
This research study shall be based on the following hypothesis/assumption:
Hi: Microfinance contributes to SMEs development in Oyo State
Ho: Microfinance does not contribute to SMEs development in Oyo State
Where,
Ho: Null hypothesis
Hi: Alternative hypothesis
1.7 SIGNIFICANCE OF THE STUDY
This research study will have a great significance to the development of Small and Medium
Enterprises in Oyo State. More also, it will provide information and help the small and medium
enterprises in Oyo State to know the impact of Microfinance on the development of their
business and enlighten them to the available opportunities provided by the microfinance banks.
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The study also contributes to the literature on microfinance and small business survival.
Successive governments in Oyo State have always had a policy programmed for SMEs, but most
of the programmes have failed to achieve sustainable growth in the SMEs sub sector. Most of the
government assisted programmes have themselves become failures. The findings of this study is
expected to inform policy makers regarding the direction of further research into interventionists
programmes for SMEs in Oyo State. This study is expected to help the government to validate or
reject the choice of microfinance as the main source of financing SMEs in Oyo State and also
suggests ways of improving the existing financing arrangements, if need be.
1.8 JUSTIFICATION OF THE STUDY
This study is a build up on the various investigations by various scholars and researcher on the
impact of Microfinance on Small and Medium Enterprises Development. It is aimed at building
up on the lapse on previous investigations. The importance of this study lies in identifying the
impact of Microfinance on Small and Medium Enterprises Development in Oyo State using the
case study of The Polytechnic of Ibadan Microfinance Bank. The findings of the research will
therefore, provide a veritable base for the effective functioning of microfinance to the
development of small and medium enterprises in Oyo State.
1.9 SCOPE OF THE STUDY
This study provides insight into microfinance on small and medium enterprises that brings about
the survival and growth, as well as provides a measure of the effects of micro financing on small
business performance and productivity in Oyo state. It covers MSEs that have access to
microfinance for a period of at least 5years (2010-2015).
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The scope of this study shall be limited to Oyo State experience, especially to The Polytechnic
Microfinance Bank. So, the needed primary data shall be sourced from this microfinance bank,
by administering questionnaire on this microfinance bank.
1.10 DEFINITION OF TERMS
 MICROFINANCE: It is defined as an array of financial services, including loans, savings
and insurance, available to poor entrepreneurs and small business owners who have no
collateral and would not otherwise qualify for a standard bank loan.
 ENTERPRISE: This can be defined as any institution or organization that is set up to carry
out business activities with the aim of making profit and satisfying public wants.
 SMALL AND MEDIUM ENTERPRISES: They are enterprises that employ a small
number of workers and do not high a high volume of sales. Such enterprises are mostly
privately owned and operated sole proprietorships, corporations or partnerships.
 MONEY DEPOSIT BANK: They are resident depository corporations and quasi
corporations which have any liabilities in the form of deposit payable on demand,
transferable by cheque otherwise usable for making payment.

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