CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND STUDY

Small and medium-sized Enterprises, often known as small and medium-sized firms, are companies with less than 500 employees. International organizations such as the World Bank, the European Union, the United Nations, and the World Trade Organization use the abbreviation "SME."In recent years, both developed and developing countries have strengthened their support for the creation and expansion of small and medium-sized businesses. This is due to the contribution of small and medium-sized businesses to the generation of jobs. Evidence demonstrates that a vibrant and expanding small and medium-sized Enterprises sector may help achieve a variety of development goals, including income distribution and poverty reduction, job creation, savings mobilization, and the provision of goods and services that address the basic needs of the poor. Small and micro enterprises (SME) are the backbone of many economies in Sub-Saharan Africa (SSA), and they hold the key to long-term economic growth and poverty eradication. Despite their importance in Sub-Saharan Africa's economies, small and medium-sized businesses are denied governmental backing, particularly credit, from institutionalized financial service institutions that supply funding to firms. According to Wangwe and Semboja (1997), contributing between 12 percent and 34 percent of rural and urban employment activities in Nigeria, these firms account for more than half of the economic activities of the countries in the sub-region. Several evidences show that the number of these businesses in Nigeria is dropping at an alarming rate, and that despite numerous efforts to reduce poverty, little has been accomplished in Nigeria.

Access to finance is one of the most significant challenges that small businesses face in Nigeria. Following Nigeria's independence in 1960, the government made significant efforts to promote the country's industrial development. The first efforts were led by the government through large companies, but as a result of the success of small and medium firms in Asian countries' economic growth, the focus has recently turned to small and medium Enterprise (SMEs).Through a process of commercialization and privatization, the government has reduced its role as the economy's major driving force since 1986. As a result, the focus has switched away from large-scale enterprises and toward small and medium-sized firms, which have the ability to build domestic linkages for rapid and long-term industrial development, thereby boosting their growth.Small and medium firms, more than any other method, are the most practical and verifiable vehicle for self-sustaining industrial development because they have the ability to build an indigenous enterprise culture (NISER, 2004). Small companies are the subsector on which any effective economic restructuring program focusing on job creation, poverty reduction, food security, rapid industrialization, and reversing rural-urban migration should place a primary emphasis. Financial services are well-known for their relevance in a society's economic growth and development. These services give businesses access to finance as well as a way to save and invest money. Microfinance has been viewed as a significant tool for economic growth because credit plays such a significant part in the start-up and expansion of firms.

Any organization regulated by the Central Bank of Nigeria to provide financial services such as savings and deposits, loans, domestic money transfer, and non-financial services to microfinance clients is referred to as a microfinance institution.

Microcredit is a very tiny loan offered to people who do not have a regular source of income or collateral. It is used to acquire a loan and serves as a safeguard for the lender in the event that the borrower defaults on his payments. Or any credit history.

Despite all of these financial laws and programs geared at helping small and medium businesses get out of their financial quagmire, small and medium businesses continue to face a number of challenges. These issues range from difficulty obtaining credit to strict loan requirements, short loan repayment periods, and Micro Finance institutions' refusal to finance certain sectors of small and medium businesses, high input material costs, and interest rates. The existing structure of lending to the Nigerian economy is such that the majority of aggregate credit is directed primarily towards financial market operations and oil merchants, with crucial components of the real economy such as small and medium firms, among others, being overlooked. An economy with borrowing rates ranging between 9% and 17% per year is hardly encouraging for the real sector, much less for small and medium businesses, which are surviving despite the fact that the majority of them are not firmly established on the ground.

In recent decades, the importance of financial intermediation in the process of economic growth has occupied a significant position in the literature of financial economics (Andabai, 2016). Microfinance credit's impact on the growth of small and medium-sized businesses Of the financial economics literature, nexus has been highlighted as one of the areas that can accelerate the rate of growth and development in a country like Nigeria. Micro financial institutions assist in the provision of micro finance credit through intermediation, which entails diverting cash from the surplus to the economy's deficit units, converting bank deposits into loans or advances. The private sector development policy has been reoriented to sustain and improve the growth and development of small and medium sized companies (SMBs) investments in Nigeria since the commencement of the Structural Adjustment Program in 1986 (Andabai, 2016). This can also be accomplished by establishing dynamic microfinance institutions in Nigeria to support the growth and development of small and medium-sized enterprises. The study carried out by Dada (2014) governments appear to have undertaken a number of national reform plans and programs aimed at increasing productivity, as well as a focus on the expansion of the small and medium-scale sector of the economy via microcredits granted to entrepreneurs. Apart from the possibility for assuring self-reliance in terms of the ability to rely mostly on local raw materials, small-scale firms are two ways for boosting the home economy (Idowu, 2012). In Nigeria, microfinance institutions require some informal practices such as local money lending and savings activities; they also require credit from friends and family to attain government-owned institutional arrangements such as poverty reduction programs (Kadiri, 2012). According to a survey conducted by the Central Bank of Nigeria in 2016, microfinance activities in Nigeria are relatively new, as most of them have not registered since the deregulation era of 1986. Traditionally, commercial banks have lent to medium and large businesses that they deemed creditworthy. Therefore the study centers on the effect of micro finance credit on growth of small and medium scale enterprise in Maiduguri Metropolis.

1.2 STATEMENT OF PROBLEM

Microfinance is the provision of financial services, notably microcredit, to persons who have previously been denied access to such services by established financial institutions (Consultative Group to Assist the poor (CGAP), 2012). Microloans in developing countries have a high cost of over 60% annual interest, high returns on capital are required to improve tangible outcomes of such business income; there is comparatively little convincing evidence in the grand claims about the success effects of microfinance on small businesses (Attefah, Mintah, & Amoako-Agyeman, 2014; Ngehnevu & Nembo (2010). In Cameroon, a study was conducted on a microfinance institution and its customers, and it was established that microfinance lending has a good impact on the development of Small Medium Enterprises. When it comes to commercial bank loans, small and medium businesses are at a disadvantage when compared to large corporations. Access to money is crucial for the growth of small and medium businesses (Pei-Wen, Zariyawati, Diana-Rose, & Annuar, 2016). Because of non-accessibility, excessive collateral, and high-interest rates, small business owners choose their savings and cooperative society’s credit over Micro Finance institutions and deposit banks loans. Customers have been observed defaulting as a result of the microfinance banks' high interest requests (Taiwo, Onasanya, Agwu, & Benson, 2016). Therefore this study centers on the effect of micro finance credit on small and medium scale enterprises in Maiduguri metropolis.

1.3      OBJECTIVE OF THE STUDY

In line with the statement of research problems the objectives of the study is effect of microfinance credit on growth of small and medium scale enterprise in Maiduguri Metropolis. Other specific objective includes:

1) To examine the type of products micro financial institutions offer to encourage the growth of small medium scale businesses in Maiduguri Metropolis

2) To examine the main sources of financing small medium enterprise in Nigeria

3) To examine the effect of micro finance credit on the growth of small and medium scale enterprises in Maiduguri Metropolis

4) To examine the factors that influence small medium scale enterprise access to micro finance credit in Maiduguri Metropolis.

5) To recommend ways of improving and encouraging the growth of small medium enterprise through micro finance credits in Nigeria

1.4 RESEARCH QUESTIONS

The following research questions shall guide this study and in the course of this research, we shall attempt to find answers to the following questions:

1) What are the types of products micro financial institutions offer to encourage the growth of small medium scale businesses inMaiduguri Metropolis?

2) What are the main sources of financing small medium enterprise in Nigeria?

3) What is the effect of micro finance credit on the growth of small and medium scale enterprises in Maiduguri Metropolis?

4)What are the factors that influence small medium scale enterprise access to micro finance credit in Maiduguri Metropolis?

5) What are the ways of improving and encouraging the growth of small medium enterprise through micro finance credits in Nigeria?

1.5HYPOTHESIS OF THE STUDY

In line with the statement of research problems and the objectives of this thesis, the following hypothesis will be tested:

HO: There is no effect of microfinance credit on growth of small and medium scale enterprise in Maiduguri metropolis

H1: There is a significant effect of microfinance credit on growth of small and medium scale enterprise in Maiduguri metropolis

1.6SIGNIFICANCE OF STUDY

This study would enable the researcher to pass their experience on the subject matter to the

Society: This study will be beneficial to the society because it will serve as a medium of creating awareness on the products and the impacts micro finance organizations offer to small and petty business owners in the society to help the poor in the society.

Law makers (political agents): This will serve as a tool to lawmakers in other to guide them make laws which favorable to the growth and development of both micro finance institutions and small and medium owners since the economy relies on entrepreneurs therefore making laws which has a positive impact on these business will burst the economy.

Small and medium enterprises: The study will benefit small business owners because it tend to shed more light on micro finance credit being the source of finance to small business owners in other words small business owners can easily get micro credits from micro finance agencies instead of going to conventional banks which is usually hectic to access their credit facilities.

1.7 SCOPE OF THE STUDY 

The study would cover the effect of microfinance credit on growth of small and medium scale enterprise, a case study of Maiduguri Metropolis.

1.8 LIMITATION OF THE STUDY

The researcher was faced with the following constraints in carrying out this study:

Time: The time within the researcher is too short to carry on the detail study on this topic.

Resources: Another constraint of the researcher is financial resources to carry on the detail study of this topic. Data: Another limitation to this study will be lack of data to make valid study on the research problem.

1.9 OPERATIONAL DEFINITION OF KEY TERMS

Micro Finance: Microfinance is a category of financial services targeting individuals and small businesses that lack access to conventional banking and related services

Micro Financial Institutions: A microfinance institution is an organization that offers financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services. A great scale of organizations is regarded as microfinance institutes.

Credits: Credit is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately, but promises either to repay or return those resources at a later date.

Small and Medium Scale Enterprise: Small and medium-sized enterprises or small and medium-sized businesses are businesses whose personnel numbers fall below certain limits