INFORMAL MICRO FINANCING AND SMALL SCALE BUSINESS

Introduction

1.1 Background Of The Study

The contribution of Micro, Small & Medium Enterprises (MSMEs) to economic growth and sustainable development is globally acknowledged (Central Bank of Nigeria (CBN), 2004). There is an increasing recognition of the small scale enterprises (SSEs) pivotal role in employment generation, income redistribution and wealth creation (NISER, 2004). The micro, small and medium enterprises (MSMEs) represent about 87 percent of all firms operating in Nigeria (United States Agency, for International Development (USAID), 2005). Non-farm micro, small and medium enterprises account for over 25 per cent of total employment and 20 percent of the GDP (SMEDAN, 2007) compared to the cases of countries like Indonesia, Thailand and India where Micro, MSMEs contribute a higher percent of GDP (IFC, 2002).

In Nigeria, credit has been recognized as an essential tool for promoting small scale Enterprises. About 70 percent of the population is engaged in the informal sector or in agricultural production and aquaculture sector by extension sources of funds to finance their business (Aderibigbe, 2001). The majority of the micro and small enterprises (MSEs) in Nigeria are still at a low level of development, especially in terms of number of jobs, wealth and value creation. This is because 65% of the active populations, who are majorly entrepreneurs, remain unserved by the formal financial institutions (Aderibigbe, 2001).

The wide variety of different types of finance available reflects the diversity of SME characteristics and their specific finance needs (Department for Business Innovation and Skills 2012). It shows that seeking for a type of financial source has something to do with each stage of the business development. Access to finance is a key determinant for business start-up, development and growth for small and medium sized enterprises (SMEs) and they have very different needs and face different challenges with regard to financing compared to large businesses European Commission (2013). Among the various nations’ economy of today, SMEs is considered as one of the pillars holding the nation’s economy together. It can be likened to propeller that is propelling the nation’s economy engine for the growth and development. Generally, in the years past, small and medium enterprises were given little or no attention by the government because of its small population and the discovery of crude oil (Oladele et al., 2014). However, giving recognition to SMEs started gaining the attention of both private and public shortly after the alarming in population which had increased beyond what the oil sector can absorb in terms of employment. Currently, ironically with oil money in the country, individuals have found it difficult to survive and at the peak of this, it becomes unavoidable for both the private and public not to pay serious attention to the issue of SMEs in the country (Nigeria). The importance of SMEs enterprise have been out-rightly recognized by the players (i.e. government, private, individuals and experts) in the field of the nation’s economy as the main engine room for sustainable growth and development (Oladele et al., 2014).

Although many Nigerian entrepreneurs have recorded successes in the area of business but the obvious is that more entrepreneurial dreams are aborted at conception due to financing constraints. Small businesses have been widely acknowledged as the spring board for sustainable economic development. In Nigeria, since the 1970’s there has been an increased interest in the promotion of small businesses due to the inability of government and mega organizations to employ the nation’s teeming populace. This has strengthened individuals’ self-sustaining and self-reliant perspective to the recognition that dynamic and growing small businesses can contribute substantially to a wide range of national developmental objectives.

Entrepreneurs for small business in developing countries often cite lack of capital as a major constraint to entrepreneurial development, a notion often referred to as “capital illusion”. This lack of access is often associated with financial policies and bank practice that make it hard for banks to cover the high costs and risks involved in lending to small business. By their nature, small and medium scale business require long term capital for investment, because they have long gestation periods. So any capital mismatch by these enterprises in terms of loans can have serious consequences, especially in an unstable economic environment (Osisioma 2004). Financing has also been identified in many small business surveys as one of the most important factors that determine the survival and growth of small enterprises (Moses, 2010). Mambula (2002) acknowledging this affirms that small businesses in Nigeria suffer from the dearth of funding as top most amidst other constraints.

Formal interventions for small scale businesses in the provision of financing has improved the access of micro credit. However, in the same environment, credit from informal sources has performed better, particularly in exhibiting very low loan default rates (Adedoyin, 2014). Informal finance mechanisms are as diverse as they are ubiquitous, including institutions such as rotating savings and credit associations (ROSCAs), accumulating savings and credit associations (ASCAs), informal moneylending, loan brokers, and burial societies, to name a few. Such mechanisms may or may not be ‘traditional’, and range from simple to complex (International Labour Organization, 2015). They attend to diverse needs such as consumption smoothing, enterprise financing, promoting savings discipline, and intermediation between savers and borrowers. Arguably, the core-identifying characteristic of informal financial institutions is that emphasize inter-personal relationships, rather than relying on anonymous interaction between a client and a formal institution (ILO, 2015).

Over the years, studies have documented many constraints faced by firms especially in developing countries including infrastructure, energy, access to markets and macroeconomic instability. However, a fast growing literature has revealed financial constraints to firms as the most binding of these constraints (Carpenter et al ., 2002, Guariglia 2008, Beck et al., 2006, Beck et al., 2013, Ayyagari et al., 2006, Quartey, 2008). The issue of financial constraints may be especially serious for informal firms who may not have been in existence for long and may lack collateral. These firms may have two options; formal finance and informal finance. Informal finance may require less information to get funds from lenders due to less rigorous information requirement but is normally limited in supply and hence, come at a higher interest rate. Formal finance on the other hand can help firms overcome financial constraints because of its abundance and expert advice on how to manage their firms, but may be difficult for informal firms to take advantage of given the collateral requirements. This makes access to finance quite complex for informal firms.

1.2 Statement Of The Problem

Given that informal financial institutions rely on strategies for minimizing transaction costs that are generally not available to most formal financial institutions. As an example, moneylenders and commercial banks adopt different strategies for trying to cope with the fundamental challenge of asymmetric information between lenders and would-be borrowers. Banks are apt to cope with asymmetric information by rationing according to objectively observable criteria such as occupation and financial history, which has the effect of reducing the transaction costs they incur at the expense of altogether screening out many lower-income applicants. Meanwhile, the application process imposes high transaction costs on credit applicants, i.e. waiting in bank queues, overcoming language and literacy obstacles, producing legal documents, and enduring lengthy delays while they wait for a verdict on their application. By contrast, the forte of informal moneylending is to exploit personal acquaintance with the applicant, as with loans from shopkeepers or input suppliers with whom the applicant is in frequent contact, or loans from one’s landlord or rich neighbor. The observation has thus been made over and over again, that even where they might succeed in qualifying for a bank loan, many people seeking credit will rather approach a local moneylender, even if this means paying higher interest rates (Rutherford, 2001). It is to this effect the present study seeks to assess micro financing and small scale businesses in Makurdi Local Government Area with a focus on daily contribution.

1.3 Research Objectives

The main objective is to examine the effect of micro financing on small scale businesses with a focus on daily contribution.

Specifically, the study seeks to:

1. Determine the factors that accounts for the preference of daily contribution by small scale businesses in Makurdi Local Government Area, Benue State
2. Examine the effort of daily contribution on the growth of small scale business in Makurdi Local Government Area, Benue State
3. Ascertain the challenges of daily contribution to the survival of small scale businesses in Makurdi Local Government Area, Benue State

1.4 Research Questions

In the course of this study, the following research questions were raised:

1. What are what are the factors that accounts for the preference for daily contribution as a main financial source?
2. What is the effort of daily contribution as a source of micro financing on the growth of small scale businesses in Makurdi Local Government Area, Benue state?
3. What are the challenges of daily contribution to the survival of small scale businesses in Makurdi Local Government Area, Benue State?

1.5 Research Hypotheses

A number of hypothesis were formulated by the researcher to enable her test the validity or otherwise of the information obtained from the research work.

H01: Factors that account for the preference for daily contribution does not have effect on small scale businesses financing

H02: Effort of daily contribution as a source of micro financing does not have effect on the growth of small scale businesses

1.6 Scope

The scope of this work covers the effect of daily contribution as an informal micro finance source on the growth and survival of small scale businesses Makurdi Local Government Area, Benue state.

1.7 Significance Of The Study

This study is of great significant value to many interested groups such as:

Small Scale Businesses

Government:

This study will be of great value to the different levels of government to enable them formulate policies that will affect the lives of people running small scale business.
Intellectual community

1.8 Operational Definition Of Terms

Micro finance:

Another term for microcredit.

Small Scale Business:

Business that employs a small number of workers and does not have a high volume of sales. Such enterprises are generally privately owned and operated sole proprietorships, corporations or partnerships.

Daily contribution:

It is also known as Esusu. It is a form of micro financing capital accumulation. Participants in the Esusu pays the thrift collector a participation fee depending on the rate to which they contribute money. If they contribute daily they owe the thrift collector one full days contribution every eighth day.