CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

The impact of manufacturing industry in everyeconomy cannot be overemphasized as it goes a long way to enhance production,create jobs, reduce imports, increase exports and hence increase Nationalrevenue and income. In Nigeria, the growth pattern has been quite sluggish overthe last decades. This fact is connected to the high increase in the level ofpoverty, which is further exacerbated by the pandemic problem of lowproductivity (Sulaiman, 2005). Nigeria as a nation is blessed with both humanand material resources, but Maduagwu (2000) posits that poverty in the midst ofabundance is a popular paradox characterizing the Nigerian economy. Accordingto the Central Bank of Nigeria (CBN) (2006), foreign exchange inflow andoutflow through the Central Bank of Nigeria amounted to United States (US)$3.25 billion and US $ 1.16 billion respectively resulting to net inflow of US$2.09 billion. Despite this huge amount of foreign reserves, Nigerian citizenssuffer from widespread poverty.

Micro enterprises have been referred toas the arm of the industry that could be used to reach out to relatively lowscale investors and develop the home industries. The roles of micro enterprisescannot be overemphasized in economic development, accordingly, Chibundu (2006),states “it is encouraging to note that research findings and empiricalevidences show that significant poverty reduction is possible and has occurredin many countries where micro enterprises are encouraged”. They stimulateprivate consumption, ownership and entrepreneurial ability; generateemployment, help diversify economic activities and make significantcontribution to export and domestic trade while utilizing local raw materials.

Microand Small Enterprises (MSEs) are globally acknowledged as a potentiallycritical economic sector. They contribute about 30 per cent of global GrossDomestic Product (GDP) and account for about 58 per cent of global workingpopulation (Kushnir, Mirmulstein, and Ramalho, 2010). They arenumerically dominant, providing the majority of employment and are the primesources of new jobs. They play a critical role as safety net for the bulk ofthe population in developing economies including Nigeria. In addition, theyprovide amenable avenue for creating new jobs in the economy.

In Nigeria, theCorporate Affairs Commission (CAC) estimates that about 90% of all Nigerianbusinesses in 2007 employed less than 200 persons. From the clusterdevelopment programme in Eastern Nigeria, that is, administrative andinfrastructure costs’ survey of the manufacturing sector (Abia and AnambraStates), prepared by Skoup and Company Ltd for the International FinanceCorporation and the World Bank, February 2003, Nigeria envisions MSEssector that can deliver maximum benefits of employment generation, wealthcreation, poverty reduction and sustainable economic growth. Towards realizingthis goal, the Nigeria’s Vision 20:2020 advocates measures to enhance theability of MSEs to compete effectively in local, regional and global markets, throughincreased productivity, greater technological efficiency and reduced cost ofdoing business. In this context, growth and competitiveness of MSEs are,therefore, the key objects of the national policy on MSEs. In the same vein,the national policy seeks to enhance MSEs’ contribution to GDP and employmentand realize its potentials as a principal determinant of the prospects for thegrowth and sustainability of Nigeria’s non-oil economy. 

Oneof the major achievements towards MSEs development in Nigeria is theinstitutionalization of a policy regime that is stable, supportive andconsistent with national economic reform agenda – the Vision 20:2020, NewPartnership for Africa Development (NEPAD) of the African Union (AU) – as wellas being geared towards realising the United Nations’ Millennium DevelopmentGoals (MDGs). For the above to be achieved, there is the need to remember thatwe live in a globalizing andincreasingly interdependent world. For developing countries like Nigeria,dependence on rich nations remains a stark fact of economic life. At the sametime, the developed world, which once prided itself on its apparent economicself-sufficiency, has come to realize that in an age of dramatically increasedcapital flows, diminishing natural and mineral resources, global environmentalthreats, accelerated international migration, bourgeoning world trade inmanufactured products and services, and new forms of geopolitical tensions, itis becoming even more economically dependent on the developing world.

The same applies to industries. They willneed to relate with one another at the national, regional and internationallevels in achieving the specific objectives and broad goals of trade, economicgrowth and development; hence, the popular industrial and labour maxim – “IndustrialRelations for Industrial Growth and Development”.  Isolation and barriers have never worked todevelop prosperity. According to Amobi (2006), they have been the key obstaclespreventing MSEs to boost theircompetitiveness. To the United Nations Industrial Development Organisation (UNIDO)(2006), “Firms or enterprises that have come together as a group (forming acluster) and which are located in close proximity have proved to be capable ofrapid economic growth, sustainable leadership in export markets, significantemployment generation and preservation of high-value added jobs”. Equally,studies from both developed and developing countries have shown that MSEs cluster development provides for economicdevelopment, poverty reduction and social equity (UNIDO, 2006).

The potentially networking gains of clusteredfirms or enterprises have led to the view that clusters offer a specific pathof regional, industrial and economic development, as well as the possibilitiesof technical innovation and growth. Clusters are also considered particularly relevantto developing countries since they motivate significant policy initiativeswithin industrial development strategies. This has fostered a growing academicliterature on clusters (Markusen, 1996; Scott, 1998; Malmberg, 1996 and 1997;Nadvi and Schmitz, 1999; Todaro and Smith, 2009).

From available literature, it is agreedthat providing a microfinance framework targeted at these clusters will createa more sustainable model to cushion the fears of conventional bankinginstitutions who would rather not lend money to individual firms.  This would then cultivate high confidence levelby the emerging microfinance institutions that are now expected to grant microcredits to such target markets on enterprise clusters.

Over the years, the Nigerian governmenthas embarked on series of policies and institutional reforms aimed at enhancingthe flow of finance from the banking system to Small and Medium Industries(SMIs) as well as those involved in the petty-business (micro) activities atthe informal level. The much talk on the need for government, financialinstitutions, corporate organizations and government agencies to support the establishmentand development of the small enterprises subsector has its merits and demerits.Although, it is not an indication that small business operators should foldtheir arms and wait for the almighty handout from these agencies, either in theform of loans or grants, getting such support could go a long way to transformingthe small business landscape in a number of ways and also help to strengthenthe economy of the nation.

According to Amagwu (2006), the focus ofmicrofinance has been on the poor in the society and the rural populace who arebelieved to be the most vulnerable. He opines that, making micro financeavailable to this group of people would not only guarantee that they are in asustainable employment but also contribute to the economic wellbeing of thenation. In line with this argument, existing community banks were mandated toupgrade to microfinance banks. They had to raise the minimum share capital orshareholders’ funds of one unit bank from N5million to N20 million with effect fromSeptember, 2006. The minimum capital of N20million, according to Godwin (2007), was to be deposited with the bank’s formalapplication before it can be issued a unit bank operating licence. Newinvestors into this area were encouraged to do so. Individuals, co-operativesocieties, corporate organizations, groups, investors are free to go into thisarea of investment.

Every year, the government at federal,state and even local and development centres through budgetary allocations, policiesand pronouncements express strong interest and appreciation of the crucial roleof this sub-sector of the economy and hence, made policies for energizing same.Even local and international donor agencies have been inundated with requestsfrom non-governmental agencies and organized private sector associations forgrants and other forms of assistance to the sector.

With the above interventions, it isnecessary to ascertain whether there have been some achievements (positive ornegative) among these MSEs in the South East Nigeria, following the various pronouncements by thegovernments. Among the group of people in South-Eastern Nigeria are theartisans, petty-traders, subsistence farmers, fishermen, traders, local textileproducers, intra-city transporters, cobblers etc. These people in the SouthEast, Nigeria region are found within the industrial clusters at Nnewi,Onitsha, Aba and other rural but emerging locations in the region.Interestingly, these clusters have the advantage of proximity to severalindustrial raw materials which makes it possible to produce associatedsemi-finished or finished goods cheaply. Thus, this study is expected to findhow effective microfinance from both formal and informal sources affect theprofitability of these micro and small enterprises.