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EFFECTS OF MICROFINANCING ON MICRO AND SMALL ENTERPRISES (MSEs) IN SOUTHWEST NIGERIA

BY

BABAJIDE, ABIOLA AYOPO (CU03PG003)

BEING A Ph.D THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF Ph.D BANKING & FINANCE OF THE DEPARTMENT OF BANKING & FINANCE, COLLEGE OF DEVELOPMENT STUDIES, COVENANT UNIVERSITY, OTA, NIGERIA

JUNE, 2011 CERTIFICATION

This is to certify that this thesis titled “Effects of Microfinancing on Micro and Small Enterprises (MSEs) in South-West Nigeria” is the original work of Mrs. Babajide, Abiola Ayopo and is hereby submitted for the award of the Degree of Doctor of Philosophy (Ph.D) in Banking & Finance. We also certify that this work has not been submitted for the award of the Ph.D or any other degree in this or any other University.

Prof. J. A.T. Ojo Date (Supervisor & Head, Department of Banking & Finance) Covenant University, Ota.

Prof. Esther, O. Adegbite, Ph.D Date (Co-supervisor) Department of Banking & Finance Faculty of Business Administration University of Lagos, Akoka, Nigeria.

ii DECLARATION It is hereby declared that this research work titled “Effects of Micro-financing on Micro and Small Enterprises (SMEs) in South-west Nigeria” was undertaken by Mrs. Abiola Ayopo Babajide and is based on her original study in the Department of Banking and Finance, School of Business, College of Development Studies, Covenant University, Ota, under the supervision of Distinguished Professor J. A. T. Ojo and Professor (Mrs.) Esther O. Adegbite. The ideas and views expressed in this research work are those of the researcher, and the views of other researchers have been duly acknowledged.

Abiola Ayopo Babajide Signature & Date (Researcher)

The above declaration is attested to by:

Prof. J. A.T. Ojo Signature & Date (Supervisor )

Prof. Esther, O. Adegbite Signature & Date (Co-supervisor)

Prof. J. A.T. Ojo Signature & Date HOD, Banking & Finance Covenant University, Ota.

Prof. K. Soremekun Signature &Date Dean, College of Development Studies, Covenant University, Ota.

Prof. C. A. Awonuga Signature &Date Dean, School of Post graduate Studies, Covenant University, Ota

iii DEDICATION

This work is dedicated to my Lord and Saviour Jesus Christ, my Glory and the Lifter of my head and to Bishop David Oyedepo whose inspiration has made this work a reality.

iv ACKNOWLEDGEMENTS

I have realized in life that a journey of a thousand kilometers begins with a step. Thank God for that step which was inspired by my parents during my formative years, the various mentors that I have come across in the journey of my academic pursuits. I have also realized that you fall off a bicycle only when you stop pedalling. Actualization of one’s dream does not come easy; it must be through doggedness and determination. It is only the grace of God that calms the troubled waters.

This academic journey has not been an easy one, particularly since December 2003 when I like others first registered as a Ph.D student at Covenant University. The myriads challenges or plethora of social and financial troubles that surfaced were enough to rock the boat of success. But for God, this ideal and the successes of today would have been unattainable. God in His infinite mercy has positioned quite a number of people on the path to achieving this greatness, to Him alone, I give all the Glory.

I appreciate the Visioner and Chancellor of Covenant University, Dr. David Oyedepo, who is unequivocal in his commitment to restoring the dignity of the black race, his wife, Pastor (Mrs.) Faith Oyedepo who stood staunchly by her husband in the pursuit of the vision. The environment was serene for growth and as a platform for development, it was superb. It is my sincere prayer that God will continue to be their Guide and Buckler. Fresh unction and anointing in Jesus’ name!

I would like to thank the Vice-Chancellor, Prof. Aize Obayan, who has been to me a true sister and a personal friend. I have been through many experiences while I work in Covenant University, she has always stood by me, shown me understanding and become an anchor of hope for tomorrow; I am very grateful to her.

Also, I would like to thank the former Registrar, Dr. Daniel Rotimi who has always been supportive and given necessary approval to ensure the success of this work.

v My special thanks also go to the first Registrar of Covenant University, Pastor Yemi Nathaniel, who gave me the opportunity to serve on the Faculty of Covenant University in 2002 and has always stood by me in my career pursuit in Covenant University.

I would like to express my profound gratitude to my supervisor, Prof. J. A. T. Ojo, who has stood by me through thick and thin in the Department and has undertaken the supervision of this work in a father - daughter relationship, painstakingly dotting the ‘i’s and crossing the ‘t’s; undoubtedly a father indeed, he has been available at all times, giving direction and spiritual support to ensure the success of this work. He monitored my career progression and brought me this far in my career pursuit. I do not know where I would be today without your guidance and deep rooted love for me. I am very grateful, Sir.

My Co-supervisor, Dr. E. O. Adegbite also supported my research work with passion. Her linking up and co-operation with my main Supervisor, have contributed immensely to the success of this work. God will continue to guide your steps Ma.

My special thanks also go to the Dean of the School of Postgraduate Studies, Prof. C. O. Awonuga who is always eager to see us postgraduate student successfully complete our Ph.D programme. And also to the Dean of my College, Prof. K. Shoremekun for his support and quick response on post graduate issues. My special thanks also goes to Prof. C. K. Ayo for his concern and became my advocate on my post graduate programme.

I am also very grateful to Prof. Matthew Rotimi Ajayi, the former Dean of my College, College of Development Studies (CDS), for constantly reminding me of the need to push harder and round off the programme. He is very understanding and very supportive of my work and academic career. I thank Prof. J. A. Bello, who at every opportunity asked, ‘How far with our work?’ His outstanding contribution has helped to enrich this work. My special thanks go to Prof. S.O. Otokiti, who was the HOD of the Department of Economics from 1988 to 1992 while I was an undergraduate in Lagos State University, and whose way destiny still brought me at Covenant University. I was fortunate because

vi without his help and constant encouragement, I do not know if the work would have been completed by now. He made the research work possible by giving relevant materials with directions and contributory corrections. Sir, I am very grateful to you.

My profound gratitude also goes to Professor Emmanuel Kwofie, who took of his valuable time to proof read the work line by line, commenting on every page and making useful suggestions that have helped to improve the work greatly. Prof. Fadayomi’s, deep insight and outstanding contributions have helped to reshape the topic and give a better direction to the study. Prof. J.A Oloyede is indeed a spiritual father in the Department; he took it upon himself to ensure the successful completion of the course-work and constantly sent messages and gave the word proclaiming the God’s blessings of success in the Department. God will reward you abundantly.

Dr. Ranti Ogunrinola, constantly reviewed the work especially my variables and statistical technique, drawing from his wealth of experience in field survey and thus helped to enrich the work. Dr. Wunmi Olayiwola, made useful contributions that helped to reshape the work and enrich its quality; for this, I am very grateful. Dr. Patrick Edewor and Dr. Olalekan Asikhia thoroughly read the work, and joyfully contributed useful suggestions and literature to buttress the work. Dr. G. O. Adejumo contributed to the statistical analysis and has thus helped to enhance the quality the work. Dr. T. Abioye, Dr. Akang Bassey and Dr. Mrs. Aretha Asakitipi read through the manuscript at the initial stage and helped to improve the quality of the work. Mr. Emmanuel Amoo, Mr Fashola Kazeem and Mr. Princely Osaro of Lagos Business School studied survival statistical technique in detail to enrich the work.

I cannot but be grateful to my colleagues in the Department who peer reviewed the work and made suggestions that helped to improve the quality of the thesis. Mr. Kehinde Adetiloye, a brother and a friend indeed, Mrs. Wunmi Olokoyo, Mrs. Folashade Adegboye, Mr. Segun Olowe, Mr. Alex Ehimare and Mr. Ochei Ikpefan; to you all I am very grateful. I also thank other Department staff for running around at every stage of the

vii work to assist in one way or another, Mr. Taiwo Urhue, Mrs. Regina Tobi-Davies, Mr. David Obaoye and Miss Gift Madu, who is really a gift to the Department indeed. Mr. Christopher Nkiko, Director, Centre for Learning Resources(CLR), and Mrs. Yussuf Felicia, took it upon themselves to shop round the globe to get me good quality textbooks on Survival Analysis Techniques; I am very grateful to them for the help. Sis. Ronke and Mercy Ijungho and other Centre for Learning Resources staff contributed immensely in the sourcing of materials; my sincere thanks go to them all. Similarly, key members of the Centre for Systems and Information System, (CSIS), Mrs. Mary Aboyade, and Pastor Afolabi Abolade, along with Miss Bimbo Babalola, and Miss Abolarin Adenike are highly appreciated for the supportive roles they played. God will support projects of their lives. Messrs Raphel Oloruntele, Sis. Bunmi, Miss Adenike, infact the dean’s office staff are wonderful indeed. Friends from other departments, who by doing their own part of other assignment have made the success of this work a reality are worth mentioning, first among the list is Mr. Mayowa Agboola and Mr. Samuel Epetimehin, if I fail to acknowledge you guys at this point, it will be a great injustice and I won’t be able to forgive myself. I don’t know how you come about your work ethics but you are indeed incredible, thank you.

Also, I would like to appreciate the following people for their contributions; Mr. Francis Iyoha, Dr. Mrs. A. Umoren, Mr Fola Adegbie, Mrs. Dorcas Oyerinde, Mrs. Nike Adeniji, Mrs. Owolabi, Mrs. Mathew, Dr. A. Enahoro, Dr. Samson Ibidunni, Dr. Chinoye Okafor, Dr. Mrs. A. Shobola, Dr. Dan Gberevie, Mr. Roland Worlu, Mr. A. Adegbuyi.

This study would not have been possible without the immense contributions of the following people in the Microfinance and SMEs industrial Executives and Managers who assisted and ensured that the research instrument used got to the selected Banks in South- West Nigeria: first person in this category is Mr. Johnson Osho of Farmers’ Develoment Union (FADU) Ibadan who used his connection in the Microfinance Industry to connect me with the Loan Officers training programme organized by the CBN in Ibadan, and talked many of the loan officers into embracing the research as a development tool in the industry and supporting the study; Mr. Kingsley Imafidon, Divisional Manager for LAPO

viii Bank for coordinating the distribution of copies of questionnaire in Lagos and Ogun State; Also, Mr. O. Roland of Accion Microfinance Bank Limited for the interview session, Mr. Jegede Adebayo Biztrust Micro finance Bank, Mr. Iyamu of BOI Microfinance Bank, Mr. Oluwande, Covenant Micro-finance Bank, Pastor Adebiyi of SMEDAN, Abuja, Executive Director National Association of Small and Medium Enterprises in Nigeria, Mr.Mobolaji of Lagos State Microfinance Institution (LASMI); Mr. Ladipo of Estate Microfinance Bank, Mr. Odubanjo, Elim Micro-finance Bank, Mr. Oduga, Hebron Microfinance Bank and Mr. Alalade of Hybrid Microfinance Bank.

My husband, Mr. Kassim Michel Babajide and my lovely daughter Anjolaoluwa Oyindamola Divine Babajide for their love, support and joy you brought into my life. I love you so dearly.

To my mum, Madame O. Omoniyi and my siblings Mrs. Olayinka Izegbu, Mrs. Bola Olaribigbe, Mrs. Funmilayo Sanusi, Mr. Olakunle Olokodana and Mr. Olawale Olokodana. I say “Thank you all” for your support.

I would like to thank the following people for their love and prayers, and concern for my work and progress. Pastor Dele Bamgboye, Pastor Dapo Adeleye, and Pastor Ubong Ntia. I am very grateful.

ix ABSTRACT This research work investigated the effects of micro-financing on Micro and Small Enterprises (MSEs) in South-west Nigeria. The study examined how micro-finance and non-financial micro-financing activities and features such as group membership, pre-loan training, cross guaranteeship, loan size, technical and managerial training, among others, impact on the survival, growth, productivity and performance of Micro and Small Enterprises in Southwest Nigeria. The hypotheses formulated were developed around the theories of financial growth model, pecking order theory, and contract theory. Variables were used to evolve a detailed analysis of the survival and growth models. The theoretical models were used in developing four different hypotheses that were investigated through the survey of four hundred and forty three (443) micro enterprises and one hundred and eighty (180) small enterprises which were randomly selected using multi-stage random sampling technique. Copies of well-structured questionnaire were administered to entrepreneurs sampled. The validity and reliability of the instrument were measured using Cronbach’s alpha which gave a result of 0.72, while predictive form validity was 0.84. Four hypotheses were raised and tested at 0.05 significant levels. The findings revealed that micro finance and micro-financing enhance survival of Micro and Small Enterprises (MSEs) but not sufficient for growth and expansion of such Micro and Small Enterprises. The result also revealed that microfinance has positive effects on productivity and performance of local entrepreneurs. The findings from the interview sessions revealed that micro financing is not effective and substantially being practiced in Nigeria as many MFBs grant more individual loans than group based loans, thereby increasing their running cost and putting their portfolio at risk. We therefore recommend a collective and cooperative support as a critical microfinance strategy in the form of solidarity groups at the local level; and at the national and regional level, a networking of groups among operators of MFBs. We also recommend that enterprises supported by MFBs should be linked up with larger financing window like the SMEEIS fund or Strategic Partners for expansion and growth funding after survival.

x TABLE OF CONTENTS Page (s) Title page …………………………………………………..…………….. ……… (i) Certification ………………………………………………………………………… (ii) Declaration ……………………………………………………….... ……………. (iii) Dedication…………………………………………………..…………………………(iv) Acknowledgements ……………………………………………...……. ……………... (v) Abstract ……………………………………………………………... ………………..(x) Table of Contents………………………………………………………………………(xi) List of Tables…………………………………………………………………………..(xvi) List of Figures………………………………………………………………...... (xix) List of Abbreviations………………………… ……………………………………..(xx)

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study...... 1

1.2 Statement of the Problems...... 6

1.3 Research Questions...... 7

1.4 Objectives of the Study...... 8

1.5 Statement of Hypotheses...... 8

1.6 Significance of the study...... 9

1.7 Scope of the study...... 10

1.8 Limitation of the study...... 10

1.9 Definition of Terms ...... 11

xi CHAPTER TWO LITERATURE REVIEW

2.1 Introduction...... 12

2.2 Review of Conceptual Issues...... 12

2.2.1 Concepts of Micro, Small and Medium Enterprises and Microfinance...... 12

2.2.2 Impact Assessment of Microfinance...... 20

2.2.3 Methods of Data Analysis Found In Literature...... 25

2.2.4 Measurement of Microfinance Impact...... 28

2.2.5 Enterprises Survival Prediction and Survival Analysis...... 30

2.2.6 Model Generation for Microfinance and MSMEs Survival...... 34

2.3 Theoretical Framework...... 38

2.3.1 Financial Growth Theory...... 38

2.3.2 Pecking Order Theory...... 39

2.3.3 Contract Theory...... 41

2.4 Entrepreneurship and Growth...... 41

2.4.1 The Firm and the Entrepreneur...... 41

2.4.2 Firm Life Cycle...... 42

2.4.3 Organizational Capabilities...... 43

2.4.4 Stages of Small Business Development...... 43

2.4.5 Small Business Development...... 49

2.4.6 Role of Enterpreneur in Business Formation and Growth...... 55

2.4.7 SMEs & Growth...... 57

2.4.8 MSMEs and Economic Development in Nigeria...... 58

xii 2.4.9 Microcredit and Microenterprise...... 60

2.4.10 Political & Social dimension to Entrepreneurship in Nigeria...... 68

2.5 Theoretical Findings...... 71

CHAPTER THREE - RESEARCH METHODOLOGY

3.1 Introduction...... 74

3.2 Research Methods...... 74

3.3 Research Design...... 75

3.4 Population of the Study...... 75

3.5 Sample Frame...... 77

3.6 Sampling Technique...... 78

3.7 Sample Size Determination ...... 79

3.8 Distribution of Questionnaire and Response Rate...... 81

3.9 Sources of Data Collection...... 83

3.10 Data Collection Method...... 84

3.11 Data Collection Instrument...... 84

3.11.1 The Questionnaire...... 84

3.11.2 Pre-Testing of Instrument...... 84

3.12 Method of Data Analysis ...... 85

3.12.1 Survival Analysis ...... 87

3.12. 2 Regression Based Estimation...... 88

3.12.3 Methods for Empirical Analysis...... 88

3.12.4 Multiple Regressions Analysis...... 90

xiii 3.13 Model Specification...... 93

3.14 Theoretical Justification of Variables Used in Study...... 103

3.15 Validity of Research Instrument...... 106

3.16 Reliability of Research Instrument...... 108

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS, AND INTERPRETATION

4.1 Introduction…………………………………………………………………...109 4.2 Profile of Respondents…………………….…………………………...……..109 4.3 Business Characteristics of Respondents………………………………...... 114 4.4 Business Characteristics of Respondents by Location (Urban).……………...116 4.5 Business Characteristics of Respondents by Location (Rural)………………..119 4.6 Cross Tabulation of Some Variables………………………………………….120 4.7 Survival Analysis………………………………………………………...... 127 4.7.1 Result Analysis…………………………………………………………...... 130 4.8 Multiple Regression Analysis………………………………………………....138 4.9 Operations, Process and Practice of Microfinance in Nigeria…………...... 173

Chapter Five: DISCUSSION, CONCLUSION AND RECOMMENDATION 5.1 Introduction…………………………………………………………………..178 5.2 Summary……………………………………………………………………..178 5.3 Findings………………………………………………………………………179 5.3.1 Microfinance and MSE Survival……………………………………………..179 5.3.2 Microfinance and MSE Growth……………………………………………...180 5.3.3 Microfinance and Entrepreneur’s Productivity……………………………….181 5.3.4 Non-Financial Services of Microfinance Banks and Business Performance....181 5.4 Hypothesis Testing……………………………………………………………183 5.5 Other Findings………………………………………………………………...183 5.6 Conclusion of Studies…………………………………………………………184

xiv 5.7 Recommendations……………………………………………………………..185 5.8 Contribution to Knowledge …………………………………………………..187 5.9 Suggestions for Further Studies…………………………………………...... 187 Bibliography…………………………………………………………………………..189

Appendix A 1 Distribution of MFB by geographical zone as at March 2009…….207 Appendix B 2. Business Characteristics of Respondents by Location …………....208 Appendix C 3. Questionnaire ……………………………………………………...210

xv LIST OF TABLES

Page(s) Table 2.1: Definitions of SMEs by Nigerian Institutions 12 Table 2.2: Classification adopted by National Policy On MSMEs 15 Table 2.3: Financial Growth Cycle Model 38 Table 3.4: License & Unlicense MFBs in Southwest Zone of Nigeria as at March 2009 76 Table 3.5: Distribution of MSMEs in Southwest Zone 77 Table 3.6: Distribution of SMEs operators users of Microfinance Bank 78 Table 3.7: Minimum Returned Sample Size table for Continuous/Categorical data 80 Table 3.8: Questionnaire distribution by State / Response rate of Micro & Small Enterprises Operator 82 Table 3.9: Measurement of Variables – Hypothesis 1 95 Table 3.10: Measurement of Variables – Hypothesis 2 97 Table 3.11: Measurement of Variables – Hypothesis 3 100 Table 3.12: Measurement of Variables – Hypothesis 4 102 Table 4.13: Profile of Respondents 110

Table 4.14: Business Characteristics of Respondents 113 Table 4.15: Business Characteristics of Respondents by Location –Urban Table 4.16: Business characteristics of Respondents by Location – Rural Table 4.17: Business Resident and Kind of Business 120 Table 4.18: Education and Business Resident 121 Table 4.19: kind of Business and Form of Business 122 Table 4.20: Level of Education and Source of Initial Capital 123 Table 4.21: Level of Education and Category of Business 124 Table 4.22: Kind of Business and Category of Business 125 Table 4.23: Sources of Capital and Composition of Capital 126 Table 4.24: Business Group and Enterpreneurial Training 127 Table 4.25: Group Proportion with Regard to Long-term Survival 132

xvi Table 4.26: Kaplan Meier Survival Estimate by Category 133 Table 4.27: Diagonistic Test Kaplan Meier Estimate 133 Table 4.28: Kaplan Meier Survival Estimate by Kind of Business 134 Table 4.29: Diagonistic Test Kaplan Meier Estimate 135 Table 4.30: Adjusted Hazard Ratio for Cox Proportional Hazard Model 135 Table 4.31: Omnibus Test of Model Coefficient 1 38 Table 4.32: Multiple Regression Analysis of Effect of Microfinance on Small Business Growth by Category of Business 144 Table 4.33: Multiple Regression Analysis of Effect of Microfinance on Small Business Growth by Legal Status of Business 148 Table 4.34: Multiple Regression Analysis of Effect of Microfinance on Small Business Growth by Category of Kind of business Business Activities 151 Table 4.35: Multiple Regression Analysis of Effect of Microfinance on Small Business Operators Productivity by Category 155 Table 4.36: Multiple Regression Analysis of Effect of Microfinance on Small Business Operators Productivity by Legal Status of Business 159 Table 4.37: Multiple Regression Analysis of Effect of Microfinance on Small Business Operators Productivity by Kind of Business 162 Table 4.38: Multiple Regression Analysis of Effect of Non- Statutory Activities of Microfinance Bank on Small Business Performance by Category 165 Table 4.39: Multiple Regression Analysis of Effect of Non- Statutory Activities of Microfinance Bank on Small Business Performance by Legal Status of Business 169 Table 4.40: Multiple Regression Analysis of Effect of Non- Statutory Activities of Microfinance Bank on Small Business Performance by Kind of business 172

xvii LIST OF FIGURES

Page(s) Figure 2.1: Conceptual Model for Microfinance and SMEs Survival………………………………..……………………….37 Figure 2.2: Stages of Small Business Growth Characteristics…………………………48 Figure 2.3: Stages of Small Business Growth Characteristics and Failure & Exit Modes...... 48

Figure 2.4: Conceptual Framework and Hypotheses………………………………...... 73

xviii LIST OF ABBREVIATIONS  CBs - Community Banks  CBN – Central Bank of Nigeria

 GDP – Gross Domestic Product

 MDF - Microfinance Development Fund

 MDGs – Millennium Development Goals

 MFBs – Microfinance Banks

 MSMEDEF - Micro, Small and Medium Enterprises Development Fund

 MSMEs – Micro, Small and Medium Enterprises

 NACCIMA – National Association of Chambers of Commerce, Industry, Mines and Agriculture

 NACRDB – Nigerian Agricultural, Cooperative and Rural Development Bank

 NAFDAC – National Agency for Food and Drug Administration and Control

 NAPEP – National Poverty Eradication Programme

 NASME – National Association of Small and Medium Enterprise

 NASENI – National Agency for Science and Engineering Infrastructure

 NASSI – National Association of Small Scale Industrialists

 NCIS - National Council on Industrial Standard

 NDE – National Directorate of Employment

 NEEDS - National Economic Empowerment and Development Strategy

 NERFUND – National Economic Reconstruction Fund

 NEPAD – National Economic Partnership for African Development

 NGO – Non-Governmental Organisation

xix  NIPC – Nigerian Investment Promotion Commission

 MAN - Manufacturers’ Association of Nigeria.

 SA - Survival Analysis

 SEEDS - State Economic Empowerment and Development Strategy

 SSI - Small Scale Industries

 SSE – Small Scale Enterprise

 SMEDAN – Small and Medium Enterprise Development Agency of Nigeria

Appendices

1. Distribution of Microfinance Banks by Geopolitical Zone in Nigeria 2. Business Characteristics of Respondents by location Tables 4.14 and 4.15 3. Questionnaire

xx

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