THE IMPACT OF MICRO-FINANCE INSTITUTION IN THE PROVISION OF SHORT-TERM LOAN TO SMALL SCALE ENTERPRISES
(A STUDY OF EKONDO MICROFINANCE BANKS LIMITED), CALABAR SOUTH LOCAL GOVERNMENT AREA.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1. Background of the study
2. Statement of the problem
3. Purpose of the study
4. Research questions
5. Research hypothesis
6. Scope of the study5
7. Significant of the study
8. Definition of terms
9. Historical Background
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 The concept of microfinance
2.2 Evolution of microfinance banking in Nigeria
2.3 Operational guideline for microfinance institutions
2.4 Microfinance Capital Formation on Small Scale Business
2.5 Microfinance Bank and its Impact on Small Scale Enterprises (SSEs) Growth
2.6 The maturity and repayment method of microfinance bank credit facilities.
CHAPTER THREE: METHODOLOGY
3.1 Research design
3.2 Area of study
3.3 Population of the study
3.4 Sampling technique
3.5 The sample
3.6.1 Validation of the instrument
3.6.2 Reliability of the instrument
3.7 Method of data collection
3.7.1 Method of data analysis
CHAPTER FOUR: PRESENTATION OF RESULTS
4.1. Data Presentation and analysis
4.2. Test of hypotheses
4.3. Discussion of finding
CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION
5.1 Summary of Major Finding
1.1 Background of the study
Entrepreneurship is the foundation for small scale enterprises. Small scale enterprises are the key for economic growth and development. They constitute the bedrock of many economies by providing the impetus opportunity for job creation and value added activities (Anyanwu, 2007). In Nigeria, small scale enterprises play crucial role in economic growth and development process. For instance, they are responsible for the establishment of a robust industrial sector by stimulating indigenous entrepreneurship and technology. They represent an essential link between primary production and large scale industrialization. Besides, they have enormous opportunities for growth due to their nature. But the worst hit is that most of them exist in rural areas. As such, they face myriad of problems that limit their positive contribution to the economy, summarily their major challenge is financial constraint.
To solve the problem of financial constraint, government over the years has put in place a number of economic schemes, programmes and policies. One of them is the rural banking programme (RBP) which was introduced in 1977. Under this progamme, banks were mandated to open a number of rural branches and bring banking services nearer to the rural dwellers. It was hoped that banking habits would be imbibed by the people and savings would also be mobilized. But this scheme was not successful because, it turned out to be costly and unprofitable for commercial banks (Akanj, 2008). Apart from the rural banking progamme, some development finance institutions were established by government to support and promote SSEs such as Nigeria Agricultural and Cooperative Bank(NACB), the People’s Bank of Nigeria, the Community Banks, Bank of industry (BOI), the Nigeria Export Import Bank (NEXIM) and the Nigeria Agricultural Cooperative and Rural Development Bank(NACRDB). In addition to these includes: The Agricultural Credit Guarantee Scheme (ACGS), Agricultural Credit Support Scheme (ACSS) and Small and Medium Enterprises Equity Investment Scheme (SMEEIS). Also some specialized poverty alleviation agencies were equally set up by government to ameliorate the problem and promote SSEs, such as the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), National Directorate of Employment (NDE) and National Poverty Eradicate Programme (NAPEP). All these institutions did not meet the expectations owing to lack of adequate government commitment and poor management.
Consequently, in December 2005, the microfinance policy, regulatory and supervisory framework for Nigeria was launched. The aim was to provide an appropriate menu of financial services by diverse institutions to meet the need of the poor and low income groups. The policy provides for participation of the deposit money banks, non-governmental organizations, and newly licensed microfinance banks in microfinance provision (CBN 2005).
Microfinance has emerged as an effective strategy for poverty reduction. Across developing countries (Nigeria for example) micro, small and medium enterprises are turning to microfinance institutions (MFIS) for an array of financial service-microfinance is acknowledged as one of the prime strategies to achieve the millennium development goals (MDGs) access to sustainable financial service enable owners of micro enterprises to increase their capital base, build assets and reduce their vulnerability to external stocks. Access to financial services enable poor household to move from everyday struggle for survival to planning for the future. However, the potency of microfinance as a development strategy is contingent upon the existence of microfinance institutions which:
· Have adequate outreach and more impact on poverty
· Achieve financial and operating self-sufficient
· Deliver responsive services to micro and small enterprise
Microfinance is the study of loans, savings and other basic financial services to the poor who are traditionally not served by the conventional financial institution. These owners of micro and small enterprise require a diverse range of financial instruments to meet working capital requirement, build assets, stabilize consumption and shield themselves against risk. According to Essence (2008) microfinance primarily focuses on alleviating poverty through provision of financial services to the poor or owners of micro enterprises. Services users include artisans, small holder farmers, food processors petty traders and other persons who operate micro enterprises according to (Okereke, 2009). The financial services include working capital loans, consumer credit, savings pension etc. in practice, microfinance is much more than disbursement management and collection of little bits of loans.
Microfinance is not charity organization despite its application as “poverty lending”. Primarily microfinance seeks to create access to credit for the poor who ordinarily are locked out of financial services in the formal financial market for reasons of their poverty that is lack of command over assets.
Despite these attempts, the small scale entrepreneurs are yet to achieve their optimal potential in the economic equation of the nation. However, the trust of this study is to examine the impact of microfinance banks in provision of short -term loans to small scale businesses. Besides, the rate at which microfinance banks finance small scale businesses, the types of credit facilities available to small scale businesses, the maturity structure of such credit facilities, the repayment schedule of such credit facilities, the collateral policies of such credit facilities and the general efficiency level of microfinance banks in financing small scale businesses, a study of Ekondo microfinance banks.
1. Statement of the Problem
Small and Medium Scale Enterprises (SMEs) play an important role in the economy. They bring together the other factors of production; land, labour and capital for production to take place and also provide employment opportunities, goods and services and free competitive market environments. It increases Gross Domestic Product (GDP), promotes entrepreneurship and indigenous technology and a link between primary production and large scale industrialization.
Although microfinance banks is about providing financial services to the poor (youth, women especially) who are into Small and Medium Scale Enterprises (SMEs), and are not served by the conventional financial institutions, their impact on the economic activities of the beneficiaries still remain low due to its high operating cost, repayment problem, in adequate experienced credit staff, client apathy and internal control challenges (Akpan, 2004).
However, the Small and Medium Scale Enterprises (SMEs) have registered a low return on capital employed, low net profit margin and kept a small capital size and some of them fail to run their daily operations because they do not have the capacity to maintain adequate liquidity levels (Baumann, 2008).
1. Objective of the Study
The purpose of this study is to investigate the impact of micro-finance bank on entrepreneurship development in Cross River State (a case study of Ekondo Microfinance Bank Limited), Calabar South Local Government Area. The specific objectives are as follows;
1. To find out the level at which the microfinance banks (MFBS) fund small scale enterprises (SSEs);
2. To examine the collateral structure of the credit facilities;
3. To establish whether microfinance banks provide favourable credit terms to entrepreneurs in Cross River State
1.4 Research Questions
For the purpose of this study, the following questions have been posed.
1. To what extent does the level of funding given to small scale enterprise by the microfinance bank affect their development?
2. To what extent does the collateral structure of microfinance bank credit facilities affect the development of small scale enterprise in the economy?
3. How does the maturity and repayment method of microfinance bank credit facilities affect the development of small scale enterprise?
1.5 Research Hypothesis
1. There is no significant relationship between microfinance bank level of funding on entrepreneurship development in Cross River State
2. There is no significant relationship between the collateral structure of microfinance bank credit facilities and on entrepreneurship development in Cross River State
3. There is no significant relationship between microfinance bank credit terms on entrepreneurship development in Cross River State
1.6 Scope and limitation of the study
Basically, this study aims at evaluating the impact of micro finance banks in Nigeria in provision of short-term loans to Small Scale Enterprises (SSEs). Thus in this study, the scope will be funding of Small Scale Enterprises (SSEs) through Microfinance Bank with special reference to collateral, maturity and repayment structures.
However, this study is limited to Ekondo microfinance bank in Calabar, due to unavailability of time and finance.
1.7 Significant of the Study
The significant of this study include.
It will help the bank to understand its impact in the provision of short-term loan to small scale enterprises. The general public has come to understand that the major challenge before SSEs in Nigeria is inadequate funding. Therefore microfinance banks were created to fund SSEs. Again, it reveals to the general public the rate at which MFBS finance SSEs, the type of credit facilities available to SSEs, the repayment schedule, maturity structure of such credit facilities, the collateral policies for such credit facilities and the general efficiency level of MFBS in financing SSEs.
1.8 Historical background Ekondo Microfinance Bank
The origins of Ekondo Microfinance Bank (EMFB) goes back to 1997, when an experienced banker, the current Chairman of the BOD and major shareholder, Mr. Asuquo, Ekpenyong, promoted the creation of a Community Bank in Calabar (Cross River State), called Ekondo, dedicated to attend the lowest segments of the population with financial services, which were not considered by commercial banks.
Community Banks in Nigeria, according to the Law for Community Bank introduced in 1995, used to be regulated and supervised by the National Board for Community Banks (independent body from the Central Bank of Nigeria) until 2001, when the Central Bank of Nigeria became the regulator and supervisor also for the Community Banks. After the introduction of a new regulatory framework for microfinance in December 2005, and the definition of the Microfinance Bank status, all Community Banks have been required to convert into Microfinance Bank. Ekondo obtained the final license in February 2007, and it was the first Community Bank in Nigeria to transform into a microfinance bank. As a microfinance bank, Ekondo reports to the Central Bank of Nigeria (CBN) and to the Nigerian Deposit Insurance Cooperation (NDIC).
Ekondo Microfinance Bank (EMFB) is part of a group of six companies, called Davandy Group, also founded and owned (major shareholder of each of them) by Mr. Ekpenyong. Besides EMFB, there is finance and Securities Company, an insurance company, and Investment Company, a hotel and a bureau de change.In January 2007 banking experienced Managing Director has been hired and during 2007 3 new branches (beside the Head Office branch) and three cash centers was activated. Ekondo Microfinance Bank (EMFB) is financing its assets with capital and deposits, and it has not yet accessed to external borrowings. The only external funds received and managed are those proceeding from the Federal Government, within the so called National Poverty Alleviation Program (NAPEP).
Ekondo Microfinance Bank (EMFB) is a company limited by shares, whose main shareholders are individuals and companies.The major shareholder is the founder and current Chairman of the Board of Directors, Mr. AsuquoEkpenyong, with 25.3% of shares, considering direct and indirect (through other participated company’s shareholder) shareholding. The other individual shareholders represent all together about 30% of the capital and three out of five sit in the BOD. The companies are subsidiaries of the Davandy Group (Davandy Investments and Channel View Hotels). TheBOD of EMFB consists of 5 members, presenting different professional profiles in banking, engineering, educational psychology, animal science. Despite the lack, among BOD members, of specific microfinance expertise their different professional profile and knowledge of the country contribute to addressing strategic issues and operational items. With regard to microfinance, members could increase their knowledge by attending specific microfinance trainings or events (e.g. every year a member of the BOD attends in turn a specific international training or conferences on microfinance together with the MD or top management).
1.9 Definition of Terms
Paucity: According to oxford advanced learner’s dictionary, paucity means a small amount of something, less than enough of something.
Innovation: The term “innovation” refers to advancements in an existing product to produce a new or revised salable item. It is the application of better solutions that meet new requirements
Entrepreneurship: According to Norbert m.lle (2001;1), entrepreneurship has been defined as the willingness and ability of an individual to seek out investment opportunities, establish and run an enterprise successfully.
Financial Exclusion: from July –Dec 2007, the Nigeria microfinance newsletter (Mrs. Lois Juma :31), it refers to situation where the poor, low income and other disadvantaged groups are unable to access formal financial services owing to their perceived vulnerability.
Entrepreneur: According to Norbert M. lle (2001; 1) an entrepreneur is a person who starts, organize, manages and assumes responsibility for a business or other enterprises.
Short-term loan-: According to Okoro, okoro (2004; 149), a short-term loan is a business loan from a commercial bank that will be repaid within one year.
Investment: investment is an asset or item that is purchased with the hope that it will generate income or appreciate in the future.