Chapter one introduction 1 Background to the Study

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2.0 Introduction

This section is divided into; conceptual issues, theoretical literature, empirical literature and theoretical framework. Under the conceptual issues, the views of different authors in relation to SMEs, entrepreneurship, motivation, women entrepreneurship and government issues on SMEs. The theoretical literature looks at the theories of entrepreneurship, motivation and feminism, empirical literaure looks at the results and reports of previous works on the motivational patterns of women entrepreneurs and their performance, challenges, types of business ownership and environmental factors and women empowerment are reviewed while theoretical framework looked at theoretical underpin of the study.

2.1 Conceptual Issues

2.1.1 Definition, Classification, Size and Characteristics of SMEs Sector

The concept of SMEs is dynamic and relative (Otokiti, 1985; Olorunshola, 2004; Ogunleye, 2004). Several institutions and agencies defined SMEs differently with parameters such as employee’s size, asset base, turnover, financial strength, working capital and size of the business (Olutunla, 2001). Against expectation from most Nigerian literatures on the lack of a comprehensive definition on structure of industries particularly small scale industries, Otokiti (1987) had presented a differential definition between cottage and tiny, small industry and high small industries by comparing the position of South Korea, Hong Kong, Taiwan, some Arab countries. He also x-rayed OECD and UNCTAD concept to develop a more acceptable definition for Nigeria. According to Otokiti (1987)

The cottage and tiny industries are the traditional hand and light mechanically operated industry consisting of hand yarn producers, weavers of Aso-oke Kente and the Agbede (Iron Smith ), carpenter and handcrafts and mostly depending on non-imported technology, with little capital investment which normally does not exceed N1,000 or about $550 but employing not more than 10 persons and mostly located within the residential unit of the entrepreneurs. The small industry are those units having capital investment above N1,000 ($550) but not more than N500,000 or $277,778 having a factory shed normally located in the residential place of the entrepreneurs employing modern power operated equipment and machinery. In their activities, they employed more that 10 persons but not above 199 employees. The special class small industry ( not small scale) are those with investment capital exceeding N1 Million located in most of the industrial estate of Lagos, Ibadan, Kano, Kaduna Aba, and Benin employing more than 100 person. This criteria might have benefited from NIBD and and NBC financial assistance at various stages of these institution before 1984. it’s also stated that “Henceforth, only promoters and projects that are in tune with the bank new strategy will be entertained
Apart from the above definition, Nigerian Industrial Policy 1989 defined SMEs as ‘enterprise whose investment in working capital is between N100,000 and N2m excluding cost of land’. CBN Monetary Policy Circular No. 22 of 1998 defined SMEs as any enterprise whose investments including land and working capital is less than N300,000 and annual turnover is less than N5m. The Nigerian Industrial Development Bank (NIDB) also defined small enterprise as an enterprise that has investment and working capital not exceeding N750,000 and medium enterprise as one with N750,000 to N3m. The Federal Ministry of Industry Guidelines to Nigerian Bank for Commerce and Industries (NBCI) also defined it as business with a total cost not exceeding N500,000 (excluding cost of land but including working capital). Centre for Industrial Research and Development (CIRD) of the Obafemi Awolowo University, Ile-Ife defined SMEs as an enterprise with capital base not exceeding N250,000 and employing and employing on full time basis, 50 workers or less. Also, according to National Economic Reconstruction Fund (NERFUND), SMEs is an enterprise that has its investment to be less than N10m excluding the cost of land. NBCI defined SMEs as business with total capital not exceeding N750,000 (excluding cost of land but including working capital). New Industrial Policy for Nigeria also defined SMEs as enterprises with total investment of between N100,000 and N2m excluding cost of capital but including working capital (Guidelines for the Small- Scale Industries Investment Equity Scheme (SMIEIS) 2001; Ogunleye 2004).
Another definition of SMEs that worth adopting is that of National Council on Industry (NCI) which in 1992 streamlined the various definitions of SMEs and agreed to change it every 4 years. Before 1992, different government agencies in the country adopted different definitions for SMEs reflecting differences in the policy focus of the agencies (Olutunla, 2001; Olorunshola, 2003; Ojo, 2006). In 1992, NCI defined small scale business as enterprises with fixed assets above N1m but not exceeding N10m, excluding working capital and medium scale business as enterprises with fixed assets that is more than N10m and less than N40m including working capital but excluding cost of land. In 1996, it defined small scale business as enterprises with more than N1m but less than N10m excluding cost of land and including working capital and a labour size of between 11 and 35 workers while medium scale enterprises should have over N40m and less than N150m as fixed assets including working capital and excluding cost of land and labour size should be between 36 and 100 workers (Olorunshola, 2004). The 13th meeting of the National Council on Industry held in July 2003 adopted a conclusive definitions for micro-, small-, and medium-scale enterprises (Udechukwu, 2004).
In furtherance of this, NCI (2001) offered the following definitions for micro, small medium and large scale enterprises in Nigeria.

(i) Micro/Cottage Industry: An industry with a labour size of not more than 10 workers and total cost of not more than N1.50 million, including working capital but excluding cost of land.

(ii) Small-Scale Industry: An industry with a labour size of 11-100 workers or a total cost of not more than N50 million, including working capital but excluding cost of land.

(iii) Medium Scale Industry: An industry with a labour size of between 101-300 workers or a total cost of over N50 million but not more than N200 million, including working capital but excluding cost of land.

(iv) Large Scale: An industry with a labour size of over 300 workers or a total cost of over N200 million, including working capital but excluding cost of land.

National Council on Industry (2001) definition of micro, small, medium and large scale enterprises in Nigeria can be represented in the diagram as in figure 1.

Figure: 1 Definition of Enterprises

Definition of Enterprises


Micro/Cottage Industry

An industry with a labour size of not more than 10 workers, or total cost of not more than N1.50 million, including working capital but excluding cost of land.


Small-Scale Industry

An industry with a labour size of 11-100 workers or a total cost of not more than N50 million, including working capital but excluding cost of land


Medium-Scale Industry

An industry with a labour size of 101-300 workers or a total cost of over N50 million but not more than N200 million, including working capital but excluding cost of land.


Large Scale Industry

An industry with a

labour size of over

300 workers or a

total cost of over

N200 million,

including working

capital but excluding

cost of land.

Source: Adopted from NCI (2001) and modified by the Researcher.
The above diagram shows the definitions of micro, small, medium and large industry according to National Council on Industry . The size cut-off point of SMEs for this study can also be based on a recommendation from the African Development Bank, which defines SMEs as having less than 50 employees.
The above definitions show that there is no universal definition of SMEs. However, for the purpose of this research work, the definition of SMEs given by NCI 2001 which defined SMEs as establishment with less than N20m (excluding cost of land and working capital) and has up to 10 employees and less than 300 employees (Oyekanmi, 2004) is adopted. Although different government agencies still utilize slightly different definitions as seen in Tables 1, 2 and 3 the definition adopted by the National Council on Industry appears to be broad enough to accommodate all the other definitions. The above definitions can be compared with those obtainable from developed countries which are summarized in Table 1 overleaf.

Table 1. Definition of SMEs in other Nations


Investment Ceiling

Employment Ceiling


$170,000 (N23.8m)

No Restriction


$ 85, 000 (N11.9m)

< 100


$800,000 (N112m)

300 employees

South Korea

$730,000 (N102.2m)

300 employees


$106,000 (N14m)

No Restriction


$45,000 (N6.3m)

99 employees


No Restriction

199 employees


No Restriction

< 500


$1,000 - $50,000

No Restriction

Source: (i) Confederation of Asia Pacific Chamber of Commerce and Industry – Journal of Commerce and Industry, Vol. 11, 1994. (ii) Oyekanmi (2004) Concepts of Equity Financing and its implication for SMIEIS.
The above definition of SMEs from different countries of the world can be compared with the definition of enterprises offered by International Finance Corportion (IFC), Central Bank of Nigeria, National Association of Small Scale Insdustries and National Counsel oo Industry.

Table 2. Definition of Enterprises by Number of Employees, Nigeria


Micro Ent.

Small Ent.

Medium Ent.

International Finance Corporation

< 10



Central Bank of Nigeria


< 50

< 100

National Association of Small Scale Industries


< 40





< 500

National Counsel on Industry

< 10



Among these institutions, the definition of SMEs offered by NCI will be adopted for this research work. The adoption of this definition is based on the fact that it is more comprehensive than others as it covers all the criteria and characteristics of small and medium businesses used by other institutions in defining SMEs.




International Finance Corporation

< $2.5 million -

Central Bank of Nigeria

< N1million

National Association of Small Scale Industries

< N40 million


Federal Ministry of Industry

< N 50 million

< N200 million

National Economic Reconstruction Fund

< N10 million


National Council on Industry

< N50 million

< N200 million

Source: International Finance Corporation (IFC) publications (2001) b. Alison (2006)

In a summary, Otokiti, (1987) gave a more detailed and comprehensive definition of small industry using the number of employees and amount of investment. This is presented in a tabular form as follows;

Table 4: Summary of International Definitions Used for Small Industries


Type of Business





(a) Tiny small scale


Up to 2 Lakh ($16,000)

Situated in towns and villages with less than 50,000 inhabitants.

(b) Small Industry

Up to 20 Lakhs in machinery and equipment ($ 200,000)

(b) Ancillary


Not relevant to scale

Engaged in (1) manufacturing of part, assemblies, (2) rendering of services (3) Depending by 50 percent or more on other units using their products/services, (4) Not being subsidiary of other units

Hong Kong

(a) Small Industry

No official definition on customary

(a) Up to 49 employees

Up to $50,000

Republic of Korea

(a) SSI in


5-200 employees

Up to50 million won ($)

(b) SSI Mining

5-300 3emplyees

Up to 50 million won


(a) SSI in MAN and processing sector and their mining enterprise

Less than 100 person

Up to NT $40,000,000


(a) In manufacturing


Less than 10 person

(b) In commerce



(b) Medium



(a) Small and

Medium sized

Not more than 3,600,000

Both small and medium are sized together

(b) Ancillary

Up to 12,000 million

Value of fixed assets equivalent to 8000 million Cruzeiros, in certain cases and firms with ($5-5million ) might also be included


(a) Industrial Sector

50,000 2.5 Million

(b) Non Industrial



(a) Tiny Sector of SI

10 or fewer

Not specify

(b) Small Industry

Not more than 15

Up to 20,000 pesos at (171.50 pesos= ($1.00)

Small Sales (dollar) less than 60,000 pesos.


(a) Tiny cottage


5-10 persons

Not exceeding $500.

Mostly in house production

(b) Small Scale


10 and above


Factory seed system

(c) Modern Small


Not more than persons

One Million $ and above

Modern Factory system


(a) Small Industry


Less than 300 persons

Up to 50 Million Yen or ($ 133,000)

Refer to those relatively small in term of scale, management and capital investment.

(b) Commerce and


Less than 50 persons

Up to Million Yen ($26,000)

Varies according to type of industries.



(a) Cottage


Mainly family and only hired labour

(a) -

Up to 20% of raw materials can be imported origin

(a) Small Industry


(b) Up to 30 Lakhs investment

(b) Like (a) yet exceptionally up to 40 percent


(a) Cottage


(a) Less than 4 employees

(a) less than 25,000

(b) Small Industry

(b) -

(b) 250,000 up to 2.5 Million


(a) Cottage


(a) 1-4 employees

(a) -

(a) -

(b) Small Industry

(b) 5-17 employees

(b) -

(b) -

(c) Small “HT”

Industry as per

degree or Ministry Industry -133/M/SK/8/1979

(c) Up to Rp 70 Million and investment per employee not exceeding Rs.625,000

(c) Owned by Indonesian Citizens.

Arab Region of Iran, Iraq

(a) Small Industry

(a) less than 10 persons.

Germany, Sweden, Norway Scandinavian Countries

(a) Cottage Industry


(a) Less than 10 employees

(b) Small Industry

(b) 10-49 employees


(a) Small Industry

(a) 10 or more fewer than 100

Source: Otokiti (1987) pp. 119

Classification of SMEs

The International Labour Organization (ILO) (2004) distinguished four types of enterprise models. These include; pre-entrepreneurial activities or survivalists, micro-enterprises, small enterprises; and medium enterprises. These enterprise can further be classified into survivalists or informal operators and formal enterprises. Survivalists or informal operators engage in entrepreneurial activities for the purpose of generating enough income for day-to-day consumption and not for business growth for the generation of sustainable stream of income. According to ILO (2004) survivalists or informal operators usually do not distinguish between business and personal finances, do not keep records, do not pay taxes and are not registered with any authority. Money from sales or services rendered is predominantly consumed immediately for private purposes (same day, week or month). A micro enterprise grows business for both personal consumption and for generating sustainable stream of income, they keep records to some extent, do not pay tax and most of them are not registered with authorities. Small enterprise on the contrast has some degree of formality. This might include operating a business bank account, formal work contracts for employees, have a physical address with contact details, registration with receivers of revenue and other authorities and so forth.

Medium enterprises like small enterprises usually have full degree of formality, operate bank accounts, and have physical business address and properly registered with required legal system. The difference between women entrepreneurs under pre-entrepreneurial activities or survivalist, micro, small and medium enterprises or between informal and formal enterprises varies based on the variables used by the institutions, organizations and countries in defining these enterprises. The distinction between formal and informal businesses also vary depending on different authors’ views on criteria such as number of employees, physical assets, independence, sales volume, revenue generation and others. However, International Standard Trade Classification (ISTC) criteria for industrial and trade classification has been recognized to be more authentic but could be supplemented by the Harmonized System of Classification (HSC) (Otokiti, 2005).
According to Otokiti (2005), the International Standard Trade Classification is a form of trade nomenclature that is usually used for international classification of all business operations of countries, regions and institutions. It is developed by the United Nations and available for use through out the world as basis for trade comparison and arithmetic of world business volume. ISTC has widely been used both nationally and internationally in classifying data according to kind of economic activity in the fields of production, employment, gross domestic product and other statistical areas. It is a basic tool for studying economic phenomena, fostering international comparability of data, providing guidance for development of national classifications and for promoting the development of sound national statistical systems. The ISTC incorporates all of physical elements that include food and live animals, vegetable products and fat, animal foods and products, beverages, tobacco, plastics, wood, textiles and clothing, shoes and all forms of leathers, rubber (Alison, 2006; Otokiti, 2005). The list of industries and trade under ISTC contains trade items categorized under different sections but usually from 0-9.
Alison (2006) in an attempted to present different basis of classification, specified the difference between informal, semi-formal and formal classification of enterprises. According to Alison (2006) the term enterprise could also be based on legality and skill levels. This he described using variables such as registration with revenue and tax authorities; employees’ employment written contract; separation of business income from personal income; keeping of accounting and financial records etc.

Table 5. Sample Distribution- of Industries using ISTC Adjusted List

ISTC Classification



Food and Live animals


Beverages and Tobacco


Crude Materials inedible, except fuels.


Mineral Fuels, Lubricants and Related Materials


Animal and Vegetable oils, Fat and Waxes


Chemical and Related Products


Manufactured goods


Machinery, Transport Equipment and Construction


Miscellaneous Manufactured Articles: Building Materials etc




Wholesale and retail trade, repair of motor vehicles, motorcycles,

personal and household goods


Hotels and restaurants


Transport, storage and communications


Financial intermediation & real estate, renting and business activities


Education, health, social work, other community, social and personal service activities

Sources: Complied from Otokiti (2005) with modification from Alison (2006) on item 10-14.
Size of the SMEs Sector

Despite the fact that the exact number of registered firms in the country remains unknown, it is estimated that about 87% of all firms operating in Nigeria are SMEs. Out of this figure, it was further estimated that the number of micro-enterprises is close to 80% of the total number of potential SMEs, whilst small businesses account for about 15% and medium enterprises 5% of the total estimated figure of 420,000 (World Bank 2003; Chemonics, 2005; Alison, 2006). However, there is an incomplete statistical data on the number, distribution and activities of SMEs in Nigeria and this makes the available data on Nigeria SMEs very unreliable (Oyekanmi, 2004; Chemonics, 2005; Ojo, 2006). Using data on poverty, statistics available from the Federal Office of Statistics (FOS), conservatively estimates that 75% of the total number of poor households depends on farm and non-farm SMEs for their livelihood. The majority of the SMEs, particularly the larger ones, are located in the country’s populous centres such as Lagos, (31%); Port-Harcourt (14%); Abuja (12%), Ibadan (8%); Benin (8%); Asaba (5%) and others (22%) but very many micro and small enterprises operate throughout the country, located along secondary, tertiary and quaternary roads in and around village market centres (Chemonics, 2005). For a detailed analysis of this position, a tabulated picture is shown overleaf.

Figure 2 . Source: Cooperate Affairs Commission (CAC), (2004) Registered Business Names in Nigeria on a scale of 360%.

The table below shows the breakdown of registered establishments (micro, small, medium and large) by employment and size

Table 6: Breakdown of Registered Establishments by Sector, Employment and Size.


Small Enterprises

Medium Enterprises

Large Enterprises

Total Enterprises

Percentage (%)

Activity Group












Other Services







Wholesale & Retail Trade







Private Professional Services







Hotel & Restaurant







Agriculture and Forestry







Building &Construction







Total Number of establishments







Total in % of establishment






Total Contribution to employment in %






Sources: Otokiti, (1987) ; Ajayi, (2002)
Characteristics of SMEs

The peculiar characteristics of SMEs have helped in determining their performance in the Nigerian economy. By their nature, SMEs constitute the most viable and veritable vehicle for self-sustaining industrial development. They possess common capability to grow an indigenous enterprise culture more than any other strategy (Udechukwu, 2004). Adeleja (2005) enumerated the following as the peculiar attributes of SMEs; creativity, provision of inputs and or material components for large enterprises, they are mainly found everywhere especially in the local communities and fastest tools for job creation. Olorunshola (2004) in his work, identified simple management structure result from the fusion of ownership and management by one man as another characteristic of SMEs. According to Udechukwu (2004); Ojo (2006) SMEs are characterized by labour intensive production processes, centralized management, have limited access to long term capital, use local resources, and closely attached to the products that launched them.

Ojo (2004) described the SME as a vital sub-sector which is often an under rated sector though it harbours most enterprises in the Nigerian economy. Olutunla, (2001); Ojo (2004) further enumerated the main elements and characteristics of SMEs to include’ (i) easy entry into the economic activities (ii) reliance on indigenous resources such as finance and materials; (iii) It is a family-owned enterprise (iv) small scale of operation (v) labour intensive depending mainly on family and labour adopted; (vi) technology; skills to operate the business are required outside formal school system and (vii) there exists an unregulated and competitive market. The peculiarity of SMEs in enhancing economic development can be best described in this statement;

SMEs constitute the most dynamic segment of many transitional and developing economies. They are more innovative, faster growing, usually of family/individual ownership, subjective in decision making and possibly more profitable as compared to larger sized enterprises (World Bank, 2001; Ogunleye, 2004).

In support of this statement, Obitayo (1991) identified the characteristics of SMEs to include:

Characteristics of SMEs

(vii) Small-scale units are product-intensive; they tie their objectives closely to the product line than to other matters such as the use of capital.

(viii) The ownership structure is highly family centered.

(i) Greater concern with financial matters and greater difficulty in attracting funds for expansion.

(ii) The inability of proprietor to separate his private funds from the company’s funds contributes to the inefficiency and non-performance of most SMEs.

(iii) They are more reluctant about risk taking. The nature and origins of most firms arising as they do out of gamble of one or two men militate against the taking of risks on new ventures.

(iv)Less organizational differentiation.

(v) Small enterprises are more closely attached to the products that launched them. (vi)They find it difficult to shift from what they now produce to something radically different.

(ix) Employer-employee relationship tends to be more difficult especially when it comes to recognizing and correcting inefficiencies.

(x) Less sharing and more subjective

(xi)Lower employee turnover and higher labour investment ratio

(xii) Shorter cycles, product development or R and D cycle has to be considerably shorter in small units. A possible exception is the average age of

(xiii) Special problem with respect to growth in corporate size.

(xiv) Performance standards are almost impossible to establish and enforce under the kind of informality that prevails in SMEs.

(xv) The limited resources and financial vulnerability of SMEs usually increase rather than diminish the risks.

Figure 3. Characteristics of SMEs. Source: Adapted from Obitayo (1991).

The factors that make SMEs more amenable for assistance according to Obitayo (1991) are as follows:

  1. personal commitment of the proprietors whose life savings etc usually form the start-up capital;

  2. low initial capital outlay/requirements;

  3. easy entry and exit and the prevalence of just minimal legal constraints;

  4. amenability to business advisory services because of their small size which makes them more responsive to improvement suggestions;

  5. availability of less complex technology which can easily be managed by Nigerians without dependence on expatriate technical partners;

  6. high local value added and availability of locally sourced or searchable raw materials;

  7. high potential for employment opportunities and dispersal of industry and actions and

  8. SMEs are more amendable to competition unlike the near monopoly situations which exists with the multinationals, who are often times accused of pursuing their corporate capitalist interest.

2.1.2 Contributions of SMEs to Economic Development

The contributions of SMEs to economic development of both developed and less developed countries have been obvious in these nations’ Gross Domestic Product (GDP) industrial output, employment generation, poverty alleviation and export promotion. Statistically, the Nigerian GDP by sector shows that agriculture contributes about 32%, industry 41% and service 27% (Weller et al, 1999). In most cases, of the industry figure, SMEs usually dominate all other sub-sectors. For instance, in Japan, 80% of the total industrial labour force belongs to SMEs sector, 50% in Germany and 46% in USA are employed in SMEs. In USA, SMEs contribute nearly 39% to their national income (Udechukwu, 2003). Also in other countries such as India, Indonesia, Mali etc., SMEs have been identified to constitute more than 95% of establishments in the organized manufacturing sector and have become a vibrant core sub-sector making substantial contribution in terms of employment generation, industrial output and export. Table 7 shows the contribution of SMEs sector to employment generation.

Table 7: Contribution to Employment and Proportion of SMEs by Sector

Activity Group

Total No

Percentages (%)

SMEs (%)

Large Firms







Other Services





Wholesale & Retail Trade





Private Professional Services





Hotel & Restaurant





Agriculture and Forestry





Building &Construction





Land Transport





Electricity, gas & water





Mining & Quarrying





Other Transport








Sources: Otokiti, (1987) ; Africa Forum (2002)
This means that SMEs play important role in the economies of both developing and developed countries. In support of this, Ariyo (2005) reported that a study by the Federal Office of Statistics revealed that 97% of all businesses in Nigeria employ less than 100 people. This suggests that over 90% of the businesses falls into the class of SMEs who are responsible for more than over 50% of employment in the country and contribute not less than 50% to Nigeria’s industrial output. In essence, SMEs have consistently created greater employment opportunities per unit of capital invested than any other sector (Alison, 2006)

As a result, one can conclude that the Nigerian economic activities in terms of employment generation and value addition rest with the SMEs as well as the future of our industrial development (Ajayi, 2002). According to Soludo (2005) the sectoral contributions to the country’s GDP over a period of six years shows that about 97% of all businesses in Nigeria employ less than 100 people and this businesses are predominately in the agricultural, building and construction, transport, utilities, service and wholesale and retail trade sectors.

Comparing the Nigerian SMEs with that of the other countries of the world, Ogunleye (2004) reported that

In USA, statistically the total enterprises registered as SMEs account for up to twenty- two million naira (N22m) of the total enterprises and they generate more than half (½) of the country’s GDP, employing more than 53% of the total private workforce. In China, the number of SMEs increased from 1.52m in 1978 to 19m in 1991 and the number of people employed by them also increased from 28m to 96m. In Iran, SMEs contributed up to 62% of the nation’s industrial output and more than 75% of total employment in 1996. In Israel, SMEs recorded for 97% of the nation’s enterprises in 1996, employing up to 50% of the country’s workforce. The country recently assisted over 50,000 people in establishing their own business. India also experienced the contribution of SMEs in their economic development recording a total of 3.1m as enterprises classified under SMEs in the period of 1998-1999. The SMEs contribution in India can be classified as 95% of the total industrial units, 40% of the total industrial output, 80% of employment in the industrial sector and 35% of the total export of the country (Ogunleye, 2004).

The above evidences confirmed the assertion that SMEs is believed to be the engine room for the development of many countries’ economy because they form the bulk of business activities in a growing economy. The contributions of SMEs to economic development have been identified in the following areas;
TABLE 8: Percentage Sectoral Contributions To GDP ( 1999- 2005)










1. Agriculture








a. Crop Production








b. Livestock








c. Forestry








d. Fishing








2. Industry








a. Crude Petroleum








b. Mining and Quarrying








c. Manufacturing








3. Building and Construction








4. Wholesale and Retail Trade








5. Services








a. Transport








b. Communication








c. Utilities








d. Hotel and Restaurants








e. Finance and Insurance








f. Real Estate and Business Services








g. Producers of Government Services








h. Commercial, Social and Personal Services








Source: Soludo (2005), Sectoral contributions to GDP
The table below shows the contributions of SMEs to industrial establishment, employment, production and value added in some countries including Nigeria.
Table 9: Contribution of SMEs in Selected Countries (Percentages) (1985-1998)

Industrial Characteristics

Malaysia (1985)



Korea Rep (1991)

India (1994)

Nigeria (1998)

Contribution to total number of industrial establishment






Contribution to total industrial employment






Contribution to total industrial production






Contribution to total industrial value addition






Sources (i) Confederation of Asia Pacific Chamber of Commerce and Industry – Journal of Commerce and Industry, Vol. 11, 1994.

(ii) Nigerian Agriculture/ Micro Enterprise Field Visit – A Summary report designed to assist in implementation of the USAID/Nigeria Transition Strategy SO2

Table 10: Contributions of SMEs To Overall Economy And on Employment

Generation ( In Percentages)


% SMEs


% Employed by SMEs

















Hong Kong




















South Korea










Source: Oyekanmi (2004) Concepts of Equity Financing and its implication for SMIEIS
The table above shows the performance of SMEs in developed and less developed countries which was identified as a result of the following reasons; well-defined and complementary roles of the private and public sectors in SMEs promotion, structure of credit/capital provided to the SMEs, nature of the incentives directed at SMEs, identification and implementation of factors driving such programs (Oyekanmi, 2004).
Table 11: Potentials of SMEs


Areas of Contribution

Business Activities


Employment Generation

(i) They have employment generation capacity of

about 58% of global working population

(ii) SMEs also play the critical role of principal

safety net for the bulk of the population in

developing economies.

(iii) Their labour intensity structure accounts for

their recognition as a job creation avenue.


Gross Domestic Product

(i) SMEs contribute more than 30% to global



Rural Development

(i) SMEs constitute major avenues for income

generation and participation in economic

activities in the lower income and rural

brackets of developing societies especially in

agriculture, manufacturing, trading and ser-


(ii) The employment opportunities offered

apparently reduces rural-urban migration and

allows for even development.


Economic Growth and Industrialization

(i) National economic development prospects

hinge on entrepreneurial energy of vibrant

SMEs as most big business concern grew

protect nations from the geographical cost-

benefit permutations of a few multinationals

who are ever prepared to close up their

businesses and relocate at the slightest

provocation or appearance of economic



Better Utilization of Indigenous Resources

(i) The considerable low capital outlay required

for setting up SMEs enables them to convert

minimal resources into productive ventures.

(ii) They also offer veritable outlets for

technological advancement especially in

businesses with rudimentary technology


Sources: Ogunleye (2004); Ajayi (2002) Potentials of SMEs

Challenges of SMEs

In spite of the potentials and contributions of SMEs to GDP and economic development, the activities of SMEs in Nigeria have been constrained by a lot of challenges. As Hagen (2004) rightly observed, “SMEs in Nigeria are associated with considerable risks, sacrifice and obstacles. These have been the cause of the failure of many SMEs in Nigeria”. As a result of this, one out of every five SMEs folds up between its first and fifth year. These challenges have been noted to be more rampart in the following areas;

(i) Insufficient personal savings/funds resulting in low initial promoters’ equity

(ii) Uncoordinated business ideas and plans

(iii) Non bankable projects by entrepreneurs

(iv) Inability of the customers to satisfy high credit risk standards, including security/collateral

(v) Inability of banks to provide long-term funds due to mismatch between tenor of bank deposits and loans being sought.

(vi) Fluctuating and prohibitive interest rate regime

(vii) Volatile exchange rate regime.

The above SMEs challenges can be summarized in the table below;

Table 12: Challenges Faced by SMEs

Area of Challenges

Challenges faced by SMEs

Access to Finance

Service companies face difficulties due to the nature of their businesses. Cost of capital relative to other countries

Access to Markets

Access to quality, up-to-date information.

Contacts through personal networks Small size of businesses

Access to Training

Technical training

Training on World Trade Organization (WTO) and trade policy and requirements

Access to Infrastructure

Need for reliable physical infrastructure (road transportation, air transportation)

Need for predicable trade support infrastructure (knowledgeable bureaucracy, supportive government mechanisms, etc.)

Access to Technology

Need for reliable telephone and Internet service

Potential for e-commerce and e-trade

Access to electronic banking and transfers

Use of English as the medium of communication through the Internet.

Access to Policymaker/Input into Trade Policy

Large companies and men can more easily influence policy and have access to policymakers who are their peers.

Source: Commonwealth Secretariat for Business Women: Trade Matters, Best Practices and Success, (London), 2002.

Government Policies on SMEs

A number of monetary, fiscal, and industrial policy measures have been introduced by the Nigerian Government over the years, for the exploitation of established and potential benefits of SMEs. These policies are either changed or modified from time to time to suit the economic intentions and objectives of a particular government in administration. According to Olorunshola, (2003); Oyekanmi, (2004); Ariyo, (2005) and Ike (2006) some of the prominent of these measures include:

(i) Setting up and funding industrial zones as a means of reducing overhead costs. The objectives of establishing these Industrial Development Centers is to provide SMEs services which include technical appraisals for loans applications, entrepreneurship training, management of product development, production planning and control.

(ii) Provision of local finance through government agencies including the Central Bank of Nigeria (CBN), the Federal Ministry of Industries, (FMIs) and the Nigerian Industrial Development Bank (NIDB), which was established in 1964 to provide credit and other facilities to industrial enterprises in the small, medium- and large-scale category. For example, in 1971, the Small Industries Development Program was set up to provide technical and financial support to the SMEs. According to Ike (2006) this later led to the establishment of the Small Industries Credit Commission (SICC), and the associated Small Industries Credit Fund (SICF). Decree number 2 of 1986 established the National Economic Reconstruction Fund (NERFUND), with the main objective of providing soft, medium- to long-term loans to wholly Nigerian-owned SMEs in manufacturing and agro-allied enterprises, mining, quarrying, industrial support services, equipment leasing and other ancillary services. Under the provisions of the decree, SMEs with ‘fixed assets plus cost of new investment’ (excluding real estate) not exceeding N36 million (and who source not less than 60% of raw material inputs locally, in the case of manufacturing) are eligible for loans with interest rates significantly lower than going market rates, which are required to remain fixed for the duration of the loan. Participating banks are allowed rates limited to no more than 1% above NERFUND’s cost of borrowing, and they are allowed a spread of not more than 4% of the cost of funds

(iii) Facilitating and guaranteeing external finance through the World Bank, African Development Bank (ADB) and other similar institutions with interest in, and capability of assisting the SMEs. To ensure effective performance and contribution of SMEs to Nigerian economic and industrial development, many financial and monetary initiatives have been introduced by the Federal Government at different times. This led to the establishment of government schemes and institutions for financing SMEs. The purpose of these schemes is to ensure that funds are available to SMEs. The Federal Government has since 1970s continued to play pioneering and active roles in financing and stimulating the emergence of Nigerian entrepreneurs in SMEs. Ogunleye (2004) identified these roles to include provision of strong institutional support, ensuring easy access to credit facilities at reasonable rates, provision of industrial banks, provision of continuous training, research, development and provision of enablement monetary and fiscal policies. To harness these efforts, quite a number of institutions and schemes have been established to ensure that these objectives are fulfilled. These schemes include;

a) Central Bank of Nigeria’s Support and Schemes for SMEs Financing

The SMEs as the bedrock of the industrial development have many advantages which have been mentioned to include means of employment for both skilled and unskilled labour, serving as a training ground for entrepreneurs, provision of local materials for large scale industrials etc. Moreover, if well managed, the SMEs can gradually transform into the giant corporations of tomorrow. These contributions thus explain why Governments, local and International agencies mobilize efforts towards the realization of sustainable industrial growth and the creation of mass employment through the rapid growth and development of the small-scale enterprises. However, the SMEs have had limited access to institutionalized credit facilities due to factors such as; risky nature of the business, the biasness of the financial and other lending institutions in extending credit to small and medium entrepreneurs, inability to keep up to date accounting records for their businesses, inability to provide collateral security and so many other challenges. In recognition of these constraints and in order to ensure the realization of the potential benefits of virile SMEs in the economy, the Central Bank of Nigeria has remained committed to the growth and development of the small and medium scale enterprises in Nigeria. This stance has been successively reflected in the Bank’s policies over the years. In particular, the CBN has through its credit guidelines over the years, and until very recently, required that all commercial banks should reserve stipulated minimum credit to the SMEs involved in agriculture and manufacturing activities.

For instance, in 1979/1980, the CBN stipulated 10% as a minimum total credit for indigenous borrowers in SMEs (in real sectors). This figure was increased to 16% and 20% of total loans and advances in 1980 and 1989, respectively (Oyekanmi, 2004; Ogunleye, 2004). Where any bank defaults, the same percentage figure will be deducted at source from the bank’s deposits with the CBN and such amount will be given to the sector in question through one of the development banks. Due to the CBN stringent measures on the defaulting banks, majority of the banks were forced to comply with the stipulation and this resulted in the improvement of the banks’ lending to the SMEs sector. Evaluating the performance of the banks’ lending capacity to the SMEs, statistically, a total aggregate credit of N23.9 billion was disbursed to SMEs in 1992 which represents 45.1% of the total loans and advances. This figure rose to N41.5 in 1995 and N177.1 billion in 1997 representing 24.2% and 16% of the total banks loans and advances in 1995 and 1997 respectively (Oyekanmi, 2004; Ogunleye, 2004). In 1993, the liberalization of the financial sector as one condition for the use of the open market operation as the major policy instrument for CBN’s financial control. This also helped to make SMEs to be the focus of the government in credit allocation till date. The CBN apart from this also used the following financial support initiatives and schemes to ensure that SMEs receive a fair treatment as long credit allocation is concerned:

b) The National Economic Reconstruction Fund (NERFUND)

The inception of SAP in 1986 which resulted to the devaluation of the Naira worsened the SMEs access to financial institutions credit for both start up capital and capital for expansion of their businesses. The Federal Government in collaboration with the CBN in January, 1990 established the National Economic Reconstruction Fund (NERFUND), purposely to bridge the resource gap between SMEs and the financial institutions. The main purpose of establishing NERFUND is to provide relatively long term loans (of period between 5-10 years), to SMEs at a reduced rates of interest so as to enhance the SMEs development for economic growth and development. Record shows that between 1990 and 1998, NERFUND had disbursed US$144.9 million (Foreign Exchange) and N681.5million (Naira) to finance 218 projects. However, since its inception, NERFUND activities have been constrained mainly by the devaluation of the Naira coupled with the inability to service the loan by the borrowers. By 2001, NERFUND, the Nigerian Bank for Commerce and Industry (NBCI) and the Nigerian Industrial Development Bank (NIDB) were merged to form the Bank of Industry (BOI).

c)World Bank –Assisted SME II Loan Project

In order to further expand credit allocation to SMEs, the Federal Government in collaboration with World Bank agreed in 1989 to complement other sources of funding the SMEs. In line with this, a loan facility of US$270 million was to be made available for lending to SMEs through eligible participating banks. The CBN in order to administer the credit components and other related activities of the World Bank loan in 1990 established an SME Apex unit so as to facilitate the project’s proper implementation. The SME apex unit before it stopped has approved a total of 211 projects valued at US$132.8 million between 1990 and 1994. As at June 1996, records show that a total of US$ 107.1 million had been disbursed resulting to the establishment and modernization of 102 projects.

d) Rural Banking Scheme

Rural Banking Scheme was established in 1977 purposely to solve the rural underdevelopment and inadequacy of credit to the agricultural sector for the rural based small-scale industries. As a result of the establishment of this scheme, the commercial banks in Nigeria were mandated to establish their branches in the rural areas in Nigeria. A total of 756 new rural bank branches were recorded to have been established by 1989 with a total deposit in all the rural branches amounting to about N5.7 billion.

e) People’s Bank of Nigeria

In October 1989, the Federal Government commissioned the People’s Bank of Nigeria (PBN) with the primary objective of ensuring that the credit needs of the micro and small enterprises are met. Evaluating the activities of the PBN, in the process of meeting up with its target of 170 branches, it was evidence that by 1993, the bank had already been extended to all the states of the federation. A strategy of lending to groups of entrepreneurs rather than individuals was adopted as a deliberate policy based on the “peer pressure” concept. In 2000, PBN was merged with Nigerian Agriculture and Commerce Bank (NACB) and Family Economic Advancement Programme (FEAP) to form Nigerian Agricultural, Cooperative and Rural Development Bank (NACRCD).

f) Community Banks

Community Banks were established in 1991 by the CBN mainly to promote of rural development through the provision of financial and banking services to communities that have not been adequately supplied with such services. To ensure that the objective of the community bank is accomplished, it was meant to come under the surveillance activity of the Central Bank of Nigeria and their activities are therefore received adequate guidance from the CBN. The Community Bank reform of 2006 ensured that by December 2007, all community banks have been converted to microfinance banks and institutions.

g) The Nigerian Industrial Developmental Bank Ltd (NIDB)

The Nigerian Industrial Developmental Bank was established to lend long-term loans for investments in industrial activities. To ensure that the SMEs benefit from the service of NIDB, special units were established which are focused on rendering financial assistance to them. NIDB has a unique feature that it should have equity participation in the paid up share capital of the company which it is financing. Nigerian Industrial Development Bank was able to disburse a total sum of N174.6m, to Small and Medium enterprises during the period of 1980 -1988. For the effectiveness of NIDB, it was merged with other financial institutions that operate in the same class with the bank to form Bank of Industry (BOI).

h) The Nigerian Bank for Commerce and Industry (NBCI)

In order to provide financial services to the indigenous business community in SMEs, The Nigerian Bank for Commerce and Industry (NBCI) was established in 1973. The NBCI administered the SME I World Bank loan scheme as an apex financial body for SMEs. Between 1973 and 1986, the NBCI approved 797 projects that were valued at N965.5million and a total of sum N141.82 million was also disbursed between 1987 and 1988. The bank also financed projects under the World Bank loan scheme and a total of 126 projects were financed. Just like other financial institutions, the NBCI encountered administrative and operational problems, which frustrated its major objectives and led to restructuring of the bank to form part of the BOI.

i) Agricultural Credit Guarantee Scheme Fund (ACGSF)

To facilitate the accessibility of credit to the agricultural sector, in 1978, the Agricultural Credit Guarantee Scheme Fund was introduced. For the effective administration of the scheme, a lump sum amount of N100 Million was provided to be subscribed to by the Federal Government and the CBN at the ratio of 60% and 40% respectively. To ensure that there was enough coverage by the scheme, this figure was increased to N3 Billion in 2001. The ACGSF was mainly for the provision of guarantee in respect of loans granted by the commercial and merchant banks with regard to agricultural purposes to increase the level of banks’ credit to the agricultural sector. To ensure that the money collected was not misused by the borrowers, it was agreed that the scheme should settle the suppliers directly where the loans are used to purchase livestock, machinery or farming equipment and the supplier will be made to send a document to the bank as evidence that the items for the borrower have been duly delivered. Since its inception, the scheme has made an impact as long as credit extension to the Agricultural sector is concerned and over N3.3billion had so far been granted to different beneficiaries.

j) Nigerian Export Import Bank (NEXIM)

In order to provide finance, risk mitigating facilities and trade information as well as advisory services to Nigerian SMEs exporters, in 1991 the Nigerian Export-Import Bank (NEXIM) was established. The NEXIM’s Rediscounting and Refinancing Facility was introduced, to assist banks to provide pre and post shipment finance in support of non-oil exporters. In summary, though the schemes and programmes put in place to find solutions to the problems of credit delivery to the SMEs have achieved considerable successes, there still exists a huge gap which should be filled. The need to reduce the credit risks on loans to SMEs by the financial institutions has become more pronounced given the extremely slow rate of draw down on facilities like the World Bank- Assisted SME 11 Loan and NERFUND. In its analysis, the technical committee for the establishment of a National Credit Guarantee Scheme for Small and Medium Enterprises (NCGSMEs) in Nigeria established that not more than 50 percent of aggregate effective demand for investment loans in the manufacturing sector is currently being met. This therefore, necessitates further action aimed at enhancing the flow of financial resources to the SMEs sub - sector.

k) Other Financing Initiatives

In order to make the SMEs sector more vibrant, the Central Bank of Nigeria evolved new initiatives, which were geared towards improving accessibility and availability of credit to the SMEs through the following schemes:

i) The Small and Medium Industries Equity Investment Scheme (SMIEIS)

Bothered by the persistent decline in the performance of the industrial sector and with the realization of the fact that the small and medium scale industries hold the key to the revival of the manufacturing sector and other productive sectors of the economy, the Central Bank of Nigeria successfully persuaded the Bankers’ Committee in 2000 to agree that each bank should set aside 10 percent of its annual profit before tax for equity investment in small and medium scale enterprises. To ensure the effectiveness of the programme, banks are expected to identify, guide and nurture enterprises to be financed under the scheme. The activities targeted under the scheme include agro-allied, information technology, telecommunications, manufacturing, educational establishments, services, tourism and leisure, solid minerals and construction. The scheme was formally launched in August 2001. With the introduction of the scheme, it is expected that improved funding of the SMEs will facilitate the achievement of higher economic growth. As at August 2002, the sum of N11.572 billion had been set aside by 77 banks. Out of this amount, N1.692 billion had been invested in the small and medium scale enterprises.

ii) Nigerian Agricultural, Cooperative and Rural Development Bank (NACRDB)

Nigerian Agricultural, Cooperative and Rural Development Bank (NACRDB) was established in October 2000 as an amalgamation of the Peoples Bank of Nigeria, Nigerian Agricultural and Cooperative Bank and the Family Economic Advancement Programme (FEAP). The primary aim for setting up this bank is to finance agriculture as well as small and medium enterprises. It is structured to accept deposits and offer loans /advances in which the interest rates are usually in proportion to the reason for taking the loan mainly to Nigerians and their business. Other services offered by the NACRDB include target savings; Loan for start – up ventures and smallholder loan schemes.

iii) The Bank of Industry (BOI)

The Bank of Industry (BOI) was established in 2001 as an amalgamation of the former Nigerian Industrial Development Bank(NIDB), the Nigerian Bank for Commerce and Industry (NBCI) and the National Economic Reconstruction Fund (NERFUND). The main objective for setting up BOI is to provide credit to the industrial sector, including the SMEs.

iv) Refinancing and Rediscounting Facility (RRF)

Refinancing and Rediscounting Facility (RRF) was introduced by the Central Bank of Nigeria in January 2002 to offer financial assistance at concessionary interest rate to support medium to long term bank lending to the real sectors of the economy. The primary objective of this programme is to provide liquidity to banks in support of their financing of the productive sector activities of Nigerian economy. This was meant to bridge the gap in financing projects that are mainly long term since banks mainly gives short term loans and loans for commerce and trade. The medium and long term business operators, who are involved in productive sectors of the economy, are to be encouraged through this facility. Banks that are facing liquidity problems as a result of having committed their resources to long term financing to the specified productive sectors are relieved through the activities of RRF. The following sectors are included for the RRF loan schemes; agricultural production, semi manufacturing and manufacturing, solid minerals and information technology. Under the facility, banks shall have access of up to 60 percent of qualifying loans. Qualifying loans must have been held for not less than one year

v) The Microfinance Regulatory Framework and Policy in Nigeria

Microfinance is an organized economic development strategy that offers several types of financial services aimed at assisting large numbers of low income people establish/grow their small and medium businesses in order to generate sustainable income for the reduction of poverty and achievement of quality life (Dsani, 2004). Microfinance refers to small loan packages supported with financial services provided to the poor. It is usually conducted through the intermediation of a financial institution with the specific objectives to enhance the capacity of the poor to access financial services and to enable them expand their businesses and increase their income to ensure a sustainable livelihood (Egwuatu 2004). The journey to the establishment of microfinance regulatory framework and policy started in 2000, when a National conference on Microfinance organized by the Federal Government of Nigeria and the World Bank recommended that the Central Bank of Nigeria should take up the responsibility of developing an appropriate policy as well as regulatory and supervisory for the operation of MFIs. To ensure an appropriate framework and policy for the administration of microfinance in Nigeria, in Novermber, 2005, the Citi-Group Foundation, Nigerian commercial banks, the CBN and United Nations Development Program (UNDP) held the first edition of the Nigerian Edition of the Global Micro - Entrepreneurship Award, in Abuja. This marked the 2005 International Year of Micro-Credit (IYMC) where outstanding Nigerian entrepreneurial activities, as well as microfinance opportunities were showcased. According to Anaro (2006), the major targets of the policy are to;

(i) Cover the majority of the poor but economically active population

by 2020 thereby creating millions of jobs and reducing poverty,

(ii) Increase the share of micro credit as percentage of total credit to the economy from 0.9% in 2005 to at least two-thirds (2/3) of state and local governments in micro credit financing by 2015,

(iii) Eliminate gender disparity by improving women’s access to financial services by 5% annually,

(iv) Increase the number of linkages among universal banks, development banks, specialized finance institutions and microfinance banks by 10% annually.
The microfinance policy in Nigeria is meant to provide the required window of opportunity and promote the development of appropriate saving products which will attract rural clients and in turn improve the savings level in the economy. To ensure that microfinance is adopted by both developed countries (DCs) and less developed countries (LDCs), the World Bank has issued numerous papers on the subject and set minimum standards of reporting from microfinance institutions. In this regard, the CBN and UNDP in November 2005 commenced a reinvigorated campaign in Nigeria to jump start the Micro Finance sub-sector of the economy (Ujah, 2005). The establishment of formal microfinance policy in Nigeria probably may have resulted from the discovery by CBN of the underutilization of the Small and Medium Enterprises Equity Investment Scheme (SMEEIS). According to CBN, by the end of 2005, only N8.5 billion, about 29.5% of the SMEEIS fund has been utilized of the N28.8 billion set aside by the banks for the purpose financing the small and medium industries, including micro-firms (Anaro, 2006).

Non Governmental Organisations as Business Support Services to SMEs

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