The study investigated the relationship between microfinance units and SMEs performance in Nigeria for the period of 35 years (1981 to 2015). The study adopted the time series data using the OLS estimation technique to analyze the data. The model was estimated using a linear specification methodology. It was discovered that microfinance unit has a significant effect on SMEs performance in Nigeria. Based on this, it is recommended that Microfinance banks should be encouraged and supported given that its finances are significantly related to SMEs productivity which has been proven to be a good determinate of economic growth in Nigeria.



  • Background of the Study

Microfinance and Small and Medium Enterprise (SMEs) play a crucial role of poverty reduction and increase economic activity in any country. They are often regarded as the back bone to economic growth and acceleration (Safiriyu and Njogo, 2012).

The microfinance units in Nigeria consist of thrift societies, credit union, microfinance banks, traditional credit system (including esusu, adashi, otataje, itutu etc) and host of others. The microfinance unit in Nigeria is comprised of well over 1000 registered micro finance banks. The potential of microfinance in poverty reduction, economic growth and development coupled with the emergence of fast growing Microfinance Institutions (MFIs), has effectively put the issue of microfinance on the political agenda of most developing countries. In Nigeria, the microfinance policy was established in 2005 following an attempt by the government to foster grass root fund mobilization and allocation for economic growth and poverty alleviation and since its inception it has been a major source of finance for SMEs in Nigeria.

The vast majority of developed and developing countries rely on the dynamism, resourcefulness and risk tasking of small and medium enterprises to trigger and sustain process of economic growth (Muritala, Awolaja and Bako, 2012).According to UNDP (1974) cited in Eze (2012), developing countries including Nigeria, have shown increased interest in the promotion of small and medium scale enterprises for three main reasons: the failure of past industrial policies to generate efficient self-sustaining growth; increased emphasis on self-reliant approach to development and the recognition that dynamic and growing SMEs can contribute substantially to a wide range of developmental objectives which includes efficient use of resources, employment creation; mobilization of domestic savings for investments; encouragement, expansion and development of indigenous entrepreneurship and technology as well as income distribution.

In Nigeria, one of the greatest obstacles that Small and Medium Enterprises (SMEs) have to grapple with is access to funds. This is further compounded by the fact that even where credit facilities are available, they may not be able to muster the required collateral to access such. This situation has led invariably to many of them closing shop, resulting in the loss of thousands of unskilled, semi and skilled jobs across the country. Microfinance emerged as a noble substitute for informal credit and an effective and powerful instrument for poverty reduction (Olowe, Moradeyo and Babalola, 2013).

The increasing importance of SMEs and microfinance in the Nigerian society can be seen in the findings of several empirical studies, according to Okafor, Uzuegbe and Ezeaku (2016); Folorunso, Abodunde and Kareem (2015); and Safiriyu and Njogo (2012) SMEs impacts positively to growth of Nigeria’s economy and it contributes to poverty alleviation and providing employment opportunities in Nigeria. SME’s makes up about 97% of businesses in Nigeria and provide on average 50% of Nigeria’s employment, and its industrial output (Ariyo, 2005; Taiwo, Ayodeji and Yusuf, 2012).

In SMEs, management techniques has been a major issue, more prominently in its financial management, according to Okafor (2012) the process of sourcing funds as well as the effective utilization and efficient management of the funds constitute major challenges to the managers of SMEs. Small and medium scaled enterprises (SMEs) are no longer exempt from environmental conditions that until recently were often the drivers of strategic decisions in large organizations Abosede, Obasan and Alese (2016). The SMEs managers are now subject to real threat and/or possibility that their firm/industry will be the one that is affected by these environmental discontinuities and as such, are agents of change to the traditional methods in which SMEs formulate and implement their strategic plans in order to prepare for and to deal with the rapidly changing environments that most of them face (Wheelen and Hunger, 1995 and David, 1999 cited in Abosede et al, 2016). In attempt to remain competitive and avoid being victims of unfavorable environmental discontinuities Gibb and Scott (1985)cited in Abosede et al, (2016) argued that as small business managers adopt a more formal planning process, reason being because the breadth of strategic planning can most certainly influence the growth and development pathway for the company and provide a framework for enhancing the existing size and capability of the firm.

Evidently management in SMEs and Microfinance is of great essence as it greatly influences the direction and success of any business, thus it is against this background that this study tends to investigate how management decisions of microfinance banks to provide funds for SMEs has affected economic growth in Nigeria and also how has management technique in SMEs affected the overall performance of the Nigerian economy with respect to growth.

  • Statement of the Problem

Over the years, microfinance has emerged as an effective strategy for enhancing economic growth across developing countries. In Nigeria, the formal financial system provides services to about 35% of the economically active population, while the remaining 65% are excluded from access to financial services Ayodele and Arogundade (2014). These set of people engage in micro, small and medium scale enterprises (MSMEs) that has long been recognized as the engine of growth for any economy. However, despite its importance, microfinance institution have not received the due attention and support it deserves. Emphasis and importance have overtime been placed more on the mainstream financial institutions like the commercial banks at the expense of microfinance banks that cater for more than half of Nigeria economically active population.

The Nigerian national economy is characterized by myriad of problems which has constituted a sleepless night to developmental oriented governance. The most disturbing thing in the country is the menace of unemployment. Nigeria is faced with the challenge of curbing increase in crime rate, unprecedented increase in prostitution, high mortality rate, and political thug activities among others which are traceable to youth unemployment. Moreso, dwindling economic growth and development attributable to insufficient number of economic activities call for people to engage in entrepreneurship in the form of small and medium scale enterprises especially at such a time as this which on the long run will translate to improve and sustainable economic growth and development otherwise, the country will suffer relegation in the committee of nations.The above constitute the problem this study tends to resolve.

  • Research Question

Above the problem statement gives rise to the following questions

  1. What is the relationship between micro-credit and SME’s in Nigeria?
  2. What is the relationship effective management of microfinance banks and economic growth in Nigeria?
  3. How has effective management of SMEs affected economic growth in Nigeria?
    • Research Objectives

The broad objective of this study is to investigate the how effective management of SMEs and microfinance unit in Nigeria has improved the performance of afore mentioned organizations in the Nigerian economy. The specific objectives are to;

  1. Determine the relationship between micro-credit and SME’s in Nigeria
  2. Investigate the relationship between effective management of micro-creditand the overall growth of the Nigerian economy.
  3. Investigate the effect of effective management of SMEs on the overall growth of the Nigerian economy.