Background Information 

The attention of most countries to the importance of small and medium enterprise (SMEs) in the development of an economy was drawn by the end of the 19th century. Most governments realized that the SME‟s constitute the driving force and have great potentials in ensuring employment provision, business expansion diversification of industrial production and attainment to development.



The inherent competition in the birth and death, entry and exist of small firms, strongly influence productivity, growth and consequently economic growth of the economy. Less than half of small start up‟s survive for more than 5 years and some fractions develop into core groups of high performance firms, which drive industrial innovation and performance. This process involves high job turnover rates and churning in labour markets.

Developing countries like Tiwan, India, China and South Korea were built on dynamic SME sector. These economies encouraged and boosted SME‟s operation, through laws and supportive measures like infrastructural development, reservation of items for elite production and prioritized access to bank credit. Apart from governments private establishments, bank like the Grameen Bank of Bangladesh founded by Mohammed Yunus, through his group concept of informal lending to the poor encouraged many SME‟s. The program has since been linked to formal micro credit model and has been quite successful as bank for the poor facilitating active participation of the poor. As at 1999, the Grameen bank had 1.5 million, clients unified about 60,000 small village banks on the linkage process, and has advanced about $480 million to client (SME‟s).

In Nigeria, the economic benefits of SME‟s activities are muzzled because of these challenges – inadequate capital, credit facilities not accessible, too short credit period for any meaningful project and the SME‟s are considered high credit risk by most financial institutions.(more than 70% of SMEs rely on their own fund to finance their business and do not have access to relatively cheap and effective sources of fund).The inherent high interest rate, results in high operational cost amidst frequent fluctuation of government instability. Thus, the SME‟‟s found it difficult to attain their status as the engine growth of the Nigerian economy. In the mid 19 century, informal traditional microfinance institutions which existed  in  rural  and  urban  communities  sparingly met  the financial challenges of SME‟s. The informal financial institutions were built around group concept they were principal means for the poor to get credit facilities.

The informal Microfinance Institutions (MFI) helped to convert illiquid assets into liquid ones in event of emergencies. They are important in reducing vulnerability associated with uneven and unpredictable year to year agricultural changes.The informal MFI‟s are self help groups, rotating savings, farmers union, women groups, trade unions, various credit association, working together for mutual benefits of their members. The members make fixed contributions of money at regular intervals to assist in financing their small scale businesses. At each interval, one member collects the entire contribution of money. This revolving loan scheme which also serves as a savings mechanism to members goes by different names. The Yorubas call it “ESUSU” Hausas call it “ADASHI” while the Igbos call it “ISUSU”. The informal MFI„s had their limitations, hence the emergence of formal micro finance institutions with government backing

The introduction of structural adjustment backing programme in 1986 increased drop out from school, and also large number of labour on stood off. Thus a large proportion of the population was pushed into informal sector activities. The large Nigerian domestic market with over 140 million people in need of various goods and services caused small and medium enterprises (SME‟s) springing up in large number. The greatest hitch was financial support to boost these SMEs.

The Nigerian government initiated series of programmes and policies to back up microfinance institutions to assist SMEs and make them catalyst of economic development. Establishments like the People‟s Bank of Nigeria (PBN), Family Economic Advancement Programme (FEAP) were to facilitate SME‟s access to credit without stringent collateral requirements. The government also upgraded the community banks through the microfinance Policy Regulatory and Supervisory Framework (MPRSF).

This policy enabled weak Microfinance Bank (MFB) to merge, strengthen the capital base and financial services of larger segment of MFB. Despite this attempt by government to create a vibrant microfinance sector, their support on SME‟s is still low and the size of their credit still limited. The MFI interest rate is high and the lending period is far too short to pay off any sizeable project.

Another challenge being faced by the SMEs is that most of MFI funding went to the commercial sector to the detriment of agriculture and manufacturing sectors that are the foundation for sustainable growth and economic development. Currently only 14.1% and 3.5 % of the total MFB funding went to these two sectors respectively, while the bulk of 78.4% funding went to commerce.

Consequently this work aims at examining Microfinance Institutions and the survival of Medium Scale Enterprises in Nigeria

Statement of the Problem


Majority of the small and medium enterprises (SMEs) i 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 population, who are majorly entrepreneurs, remain not served by the formal financial institutions. The microfinance institutions available in the country prior to 2005 were not able to adequately address the gap in terms of credit, savings and other financial services. As reported by the CBN, the share of micro credit as a percentage of total credit was 0.9%, while SME contribution to GDP was mere 0.2% (CBN, 2005). The CBN in 2005 identified the unwillingness of conventional banks to support small enterprises, (paucity of loanable funds, absence of support institutions in the sector, as well as weak institutional and managerial capacity of existing microfinance institutions among other reasons, for the failure of past microfinance initiatives in the country).

To address the situation, the Microfinance Policy, Regulatory and Supervisory Framework (MPRSF) for Nigeria was launched by CBN in 2005 to provide sustainable financial services to micro entrepreneurs. This initiated an important turning point in the microfinance industry with the establishment of the Microfinance Bank (MFB) as an institutional vehicle for privately owned, deposit taking Microfinance Institution (MFI). The framework was designed to unite the best of the NGO credit organizations, and new MF1 initiatives under a common legal, regulatory and supervisory regime. Five years down the line, though microfinance has proven to be one of the ways of bridging the resource gap created in the Nigerian economy, there are still some undesirable problems experienced against its proper execution. The lack of documentation of the practice of microfinancing in Nigeria has made it difficult to formulate supportive programmes for the growth of the sector.

Despite the potential importance of SMEs in any economy, high mortality rate among established SMEs is a matter of major concern in developing economies. International Finance Corporation (1FC) reported in 2002 that only two out of every ten newly established businesses survive up to the fifth year in Nigeria. The report was corroborated by Small and Medium Enterprise Development Agency of Nigeria (SMDAN) that only 15% of newly established businesses survive the first five years in Nigeria. This is a pointer to the fact that there is a problem.

The indispensable role of finance to the growth and survival of SMEs and the adoption of microfinance as the main source of financing SMEs in Nigeria therefore makes it imperative to study the extent to which microfinance can enhance small business survival. The impact of microfinancing majorly should be seen in the multiplication of SMEs across Nigeria. The survival of these SMEs should reflect in employment generation, engagement of available local resources, local technology utilization, improved standard of living and growing gross domestic product (GDP). However, despite SMEs representing about 87% of all firms operating in Nigeria (USAID, 2005), they only account for 10% of total manufacturing output, 25% of total employment in the productive sector and 37% of GDP.


For the great majority of small and medium enterprise in Nigeria long term growth remains uncertain and bleak. The question is how many of these small businesses are transforming from the subsistence level at start-up to the stage of maturity and later expansion where they will, have to employ more hand? Total productive output of SMEs in Nigeria is also low compared to other emerging economies like India, SriLanka and Thailand where SMEs contribute 40%, 55% and 47% respectively in 2002 into the productive sectors of the economy (UNCTAD, 2003).

It is not uncommon to find in many microfinance programmes non financial services such as advisory services, managerial and technical training, weekly meetings and pre loan training to mention only a few, rendered as support services to SMEs. These services that are poorly provided in Nigeria  are mostly very costly to deliver (McKeman, 2002), yet many microfinance programmes consider them an integral part of the success of their programmes. Though the contribution of such non-financial services is not in doubt, the extent of the contributions is yet to be ascertained in Nigeria.

Against this background, this work aims at determining Microfinance Institutions and the survival of Medium Scale Enterprises in Nigeria

Objectives of the Study


The aim of this study is to estimate the Microfinance Institutions and the survival of Medium Scale Enterprises in Nigeria

The primary objectives are to;

  • Analyze the effects of microfinancing on SME growth and expansion capacity in
  • Ascertain the effects of microfinancing on the productivity of SME operators in Nigeria.
  • Examine the effects of non financial services of microfinance institutions on SMEs business performance in

Hypotheses Statement 

Three hypotheses were formed to test this study

Ho1:     Financing capacity of Microfinance Banks has no significant effect on the growth of small and medium businesses in Nigeria.

Ho2:     Injection of microfinance funds into small business operations has no significant effect on the productivity of SMEs in Nigeria.

Ho3:     Incorporation of non financial services of microfinance banks has no significant effect on the business performance of SMEs in Nigeria.

Justification of the Study


A significant amount of empirical research has been carried out both within and outside the country on the relationship between microfinance and micro enterprise development (Kotir & Obeg-odom, 2009; Ogunrinola & Alege, 2007; Pronyk, Hargreaves, &Morduch, 2007; Matouv, 2006; Khandker, 2013; Morduch & Haley, 2002). It has been observed from the literature, that most research works treated microfinance as a solution to poverty. To the best of our knowledge, the impact of microfinance on Small and medium Enterprise survival and growth has not been empirically tested in the literature, especially in Nigeria. Most researchers in Nigeria have also not taken time to document the nature, mode of operation and processes involved in microfinancing. This study therefore becomes significant in filling this observed gap by testing empirically the impact of both the financial and non-financial services offered by Microfinance Banks on small and medium business growth/survival and by examining the capability of Microfinance institutions in enhancing the expansion capacity of small business in Nigeria.

The study also contributes to the literature on microfinance and small and medium business survival. Successive governments in Nigeria have always had a policy programme for SMEs, but most of the programmes have failed to achieve sustainable growth in the SMEs sub-sector.



Most of the government assisted-programmes have themselves become failures. The findings of this study is expected to inform policy makers regarding the direction of further research into interventionist programmes for SMEs in Nigeria.

The study is also of great importance to Microfinance Institutions, in the sense that it is expected to assist the microfinance institutions in assessing the effectiveness of their programmes and to know which variables contribute most to small business growth and survival. The study is expected to assist the microfinance institutions in their credit policy formulation strategies. For owners and managers of small and medium business, access to a study like this can aid their understanding of current challenges and reveal the essential factors that promote small business growth and survival and thus enable them to focus on the relevant ones in an attempt to enhance their growth and performance

The study is expected to help the government to validate or reject the choice of microfinance as the main source of financing SMEs in Nigeria and also suggest ways of improving the existing financing arrangements, if need be