This study examines the performance of Micro finance Institutions (MFIS) in Lagos State, based on the development of small and medium Scale Industry. The findings indicate that the operations of MFIs have grown phenomenally in the last three years, driven largely by expanding informal sector activities, the conversion of the community banks to micro finance banks and the reluctance of banks to fund the emerging micro enterprises. The study also reveals the sub-sector faces a number of challenges, which have been addressed in this project. They include the urgent need to 'approved and implement a policy framework that would regulate and standardize the MFI· operations; -accessing medium to long term sustainable commercial sources of funds, such as SMIEIES. Commercial banks traditionally lend to medium and large enterprises, which are judged to be creditworthy. They avoid doing business with the small and medium scale industry because the associated cost and risks are considered to be relatively high. Microfinance institutions (MFls) have therefore become· the main sources of funding small and medium scale industry in Africa and in other developing regions.






1.1       Background to the study                                                                    

1.2       Statement of Problem                                                                        

1.3       Objectives of Study                                                                           

1.4       Research Hypothesis                                                                         

1.5       Research Hypothesis                                                                         

1.6       Methodology and Survey Execution                                                 

1.7       Scope of the study                                                                             

1.8       Limitation of the study                                                                      

1.9       Definition of Terms                                                                                       




2.1       Introduction                                                                                       

2.2       Operational Definition the Term Small Scale Business        

2.3       Summary of Legal and Regulatory Issues Affecting Microfinance    

2.4       Summary of Legal and Regulatory Issues Affecting Microfinance Banks

2.5       Principles for Effective Micro – Finance Institution            

2.6       Challenges to the Government and the Regulatory Environment     

2.7       Transformations of Micro-Finance Schemes from Subsistence        

2.8       Policy Options on small scale industry                                             

2.9       National Microfinance Policy                                                           

2.10     Proposed Changes to the SMIEIS program                                       

2.11     Prospects of Nigerian SMES under the small and Medium Industries Investment Schemes (SMIEIS) Basic Concepts in SMES              

2.12     Activities Covered By SMES                                                                  

2.13     Bilateral/ Multilateral Institutions Efforts                             

2.14     Potentials of SMES                                                                            

2.15     Historical Development Orientation of small scale Industry in Nigeria   

2.16     Marketing Problems of small Business Enterprises

2.17     The Nigerian Government Participation in Small Scale Industries

2.18     Government as a Business Regulator                                         

2.19     The Importance of a Small Business                                     

2.20     Special Causes of Small Scale Business Failure in Nigeria              

2.21     Financing of Small Scale Enterprises                                                




3.0       Financing of Small Scale Enterprises                                    

3.1       Research Design                                                                                            

3.2       Re-Statement of Research Questions                                                

3.3       Re-Statement of Research Hypothesis                                              

3.4       Data Collection Techniques                                                              

3.5       Population of Study                                                                           

3.6       Determination of study & Sampling Techniques                  

3.7       Validity & Reliability of Instrument                                    

3.8       Data Analysis Methods                                                                     

3.9       Limitations of study                                                                                      




4.1       Introduction                                                                                       

4.2       Data Analysis of Respondent Bio-Data                                             

4.3       Test of Hypotheses                                                                                  

4.4       Decision Rule                                                                                                




5.1       Summary of Findings                                                                        

5.2       Conclusion                                                                                         

5.3       Recommendations                                                                             


            Appendix 1

            Appendix 11







Microfinance is the provision of a broad range of financial services such as deposits loans, payment services, money transfers, and insurance to poor and low-income households and, their micro-enterprises. Microfinance services are provided by three types of sources:

  • Formal institutions, such as rural banks and cooperatives
  • Semiformal institutions, such as non-governmental organizations: and
  • Informal sources such as money lenders and shopkeepers

Institutional micro finance is defined to include micro finance services provided by both formal and semiformal institutions. Microfinance institutions are defined as institutions whose major business is the provision of microfinance services.

M.S Robinson asserts that "if it were widely available institutional commercial micro finance could improve the economic activities and the quality of life of hundreds of millions of people in the: developing world". However it is generally agreed that micro-credit given to those of the poor who do not have a capacity to repay can increase their poverty.

The extensive reliance of poor households on informal arrangement reflects the importance of financial services for their lives.

Until the early 1960s many economists viewed the continued existence of small­ scale industries in less developed countries as justified by scarcity of capital and administrative experience. It was often argued that with economic growth the small traditional type of enterprise would in one sector after another be superseded by modern forms of large-scale production. I n order to ensure an orderly transition, small industries were seen to deserve support, but mainly in sectors where modem methods could not be immediately applied. In the mid- 1960s a new approach to small and medium-scale enterprise (SME) development began to emerge due to several factors. First there was growing concern over low employment elasticity of modem large-scale production. It was claimed that even with more optimal policies, this form of industrial organization was unable to absorb a significance proportion of the rapidly expanding labour force (Cherney et al 1974 ILO. 1973). Second, there was widespread recognition that the benefits of economic growth were not being fairly distributed, and that the use of large-scale capital intensive techniques was partly to blame (MctCormick. 1988; House. 1981; Cherney et al 1974). Third empirical studies revealed that the causes of poverty were not confined to unemployment and that most of the poor were employed in a large variety of small-scale production (Noormohamcd 1985).

This suggests a new role of small industries in what has come to be labeled "the urban informal sector". Small. labour-intensive industries were seen not only to increase employment but also to increase the living standards of the poor. They were also thought to be capable of providing a new dynamic of economic growth. The new objective was not just to stop to retreat but to promote the small-scale sector (House. 198I; Schmitze, 1982; Giamartino, 1991).

This change in approach was accompanied by a shift of focus towards a "rurally orientated smallholder" (ROSH) industrialization strategy, well-articulated in Kilby (1975). Child (1976), House (1978), Noormohamed (1'985) and Olofin (1990) among others. While the Word Bank (1992) and others have tended to favour the ROSH implementation strategy by assigning the major role to the private sector, there are those who favour its implementation by assigning a major role to government (Olefin 1990, Noorrnhamed, 1985). Assigning the major role to the private sector has its appeal in the fact that the private sector has the resources needed to implement the strategy. But the proponents of assigning the role to the government are aware that in many developing economies; government is the major mover of the: economy with only a small and sometimes weak private sector. Thus, they argue that assigning such an important role to the private sector would not work. Besides, for the strategy to produce an optimal effect on the well-being of the people, the social environment has to be considered something the private sector may not be willing to do.

Kilby (1969) Sees SMEs as a quasi-sponge for urban employment and a provider of inexpensive consumer goods with little or no import content, serving an important pressure-releasing and welfare-augmenting function. SMEs also contribute to long-run industrial growth by producing an increasing number of firms that grow up and-out of the small-sector.

Most previous studies throughout African treat the information sector as essentially homogenous in its characteristics (Morris and Pitt, 1995; Bewayo, 1995; Ekpenyong and Nyong; 1992). Recent research suggests that government policy should be more narrowly targeted to sub-sectors within the informal sector (Parker and Torres, 1994). This study examines survey data in order to evaluate the characteristics of small-scale manufacturers that make it more difficult for them to be profitable and the particular problems that they face which may have contributed to their poor performance.

Since her independent in 1960, Nigeria has been trying to meet the yearnings and aspirations of her teeming population, especially in the area of provision of employment. Unfortunately, not much has been achieved in this respect. Given the importance of 'small' and 'very small' enterprise in the creation of employment, this study seeks to evaluate the financing of microenterprises in Lagos State of Nigeria by identifying the problems of financing very small enterprises (VSE's).

However the growth of the country's economy has not been without problems. For instance, Omopariola (1978) notes three successive phases can be discerned in the economic history of Nigeria. The first phase, dating back to 1900 "was the peasant economy characterized by static, agrarian and subsistence product" and a "high birth rate which was equally matched by high death rate" (P.15 resulting in a low population. growth rate. The second phase which occurred in the middle of the nineteenth century was' a dynamic export-oriented economy" (Ibid. p.16) Omopariola reports further that during this economic phase, "Nigeria had a steady growth in her economy which was stimulated primarily by agricultural exports during the first three decades of the twentieth century." (Ibid. p.16) the economic. Starting from the collapse of international trade during the world economic crisis grinded to a halt in its growth in 1929 and remained more or less stagnant until 1945. From 1954 until the outbreak of the war of unity (civil war) in 1967 and up to the end of the war in 1970. "Nigeria experienced steady economic growth" (Ibid. P. 16). The third Phase which has its roots in 1960 when the country attained political independence from the British colonialists has been described as the indigenized economy. This is still the phase under which the Nigerian economy is characterized.

Thus over the years the Nigerian economy has been going through a number of developmental stages and its growth has not been smooth. Although the economy continues to hold out a bright promise of growth, this has been hampered by factors such as under-productivity, unemployment heavily depreciated national currency inadequate infrastructure facilities and structural defects in the country's industrial framework. The scope of this study focuses on the latter factors, structural defects in the nation's industrial framework.

A business whether small or big, simple or complex, private or public etc. is created to provide competitive prices. Business in Nigeria has been classified as small medium and large. However, a small scale industry can be defined by the criteria of project costs, capital cost turnover by the employee etc. The federal and state ministries of industry and commerce have adopted the criterion of value of installed fixed capital to determine what a small scale industry is in this respect the value has varied from N60, 000 in 1972, N159. 000 in 1975. N250.000 in 1979. N500, 000 in 1986 to a fixed investment of not more than N2.000.000 (Two Million Naira) in 1992. This figure is exclusive of of building and subject to government determination and land prevailing objectives of public policy. In the wake of SFEM, and SAP, this value has now been reviewed and subsequently increased to five million naira. Since this happened. there may be a need to classify' the small scale industry into MICRO and SUPER MICRO business with a view to providing adequate incentives and protection for the former.

In the meantime, any business or enterprises below the upper limit of N250. 000 and whose annual turnover exceeds that of a cottage industry currently put at N5, 000per annum is a small scale industry. The National Directorate of Employment (NDE) concept of a small scale industry has been fixed to a maximum ofN35, 000.



Over the last five decades, the small-scale industries (SSI) sector has acquired a place of prominence in the economy .of the country. It has contributed significantly to the growth of the Gross Domestic Product (GDP), employment generation and exports. The sector now includes not only SSI units but also small scale services and business enterprise (SSSBEs) and is thus referred to as the small enterprises sectors.

The small enterprises sector, however, faces several problems which hamper it in achieving its full growth potential. Some of the major problems faced by the sector are access to timely and adequate credit, technological obsolescence infrastructural bottlenecks, marketing constraints and a plethora of rules and regulations. Some policy initiatives taken during the year may help promote and develop the small-scale and medium sector.

While one had to search for strength in most of the informal sector entrepreneurs, several did emerge. First, each micro-business provides an income for the owner and his family, and in many cases, a livelihood for his/her extended family. However one may ask, how easy will this small scale industry get equipped with necessary things to function well. Various strategy to improve small scale industry in Nigeria has' not yielded the desired result; it is believed that the micro finance strategy can be a better option. It is likely to improve on the National Directorate of Employment Scheme, however the earlier looks at some of the problems that can easily beset a successful microfinance strategy to the development of small-scale industry the better the solution can be. Such problems will includes:

- Genuineness of taking loan and utilizing for small scale industry development

- Needs to obtain loan with ease:

- Collateral security needed for the loan may be difficult to find

- The level of infrastructural development can hinder progress



The banks themselves are becoming more open to real sector investments that require long gestation ·periods. Then the purpose here is to find a possible way of adequate financing of small scale industry looking at the roles they play in Economic Development. The purpose of this project therefore is to look at the strategy of using micro finance in the development of small scale industry with emphasizes laid to Lagos State.

However, if small businesses are encouraged, some of these will be things of the past. Employment opportunity will abound with small business. There will be reduction in the demand for the scarce foreign exchange. If Nigerian produce such items as safety pins, blades etc. so that foreign exchange could be allocated to the priority sector.

In the long run, foreign exchange could be obtained if products made by small enterprises are exported to the neighboring countries. Another importance of small business in Nigeria is product variety and product accessibility. Some of the product manufactured by medium and large-scale business are limited in sizes and variety. If small business come to focus as we have in soap making the consumers will have varied opportunities to buy products at affordable price.

Small businesses also encourage and advance our social values. Those imported items did not take our cultural value into consideration. Nigeria is now a dumping ground for all kinds of product that are against our value product which constitute nuisance to them are now dumped on our grounds in the name of "Tokunbo".

However the importance of small scale to the owner cannot be overemphasized. It provides sense of independence to owner. More so, there is immediate chance for higher income than what you earn as a salary earner.



In order to examine these issues, the following research questions have been raised:

1)                  To ascertain whether micro finance will improve the strategy of small scale industry development in Lagos State.

2)                  To determine whether micro finance will improve accessibility to loan for small scale industry in Lagos State.

3)                To know how has micro finance faired in granting loan to small scale industry especially in Lagos State.

4)                To determine the extent to which government policy has affected the development of SMEs.



The statement of hypothesis seeks to determine the relationship between impact of Microfinance on Small and Medium Scale Industry in Lagos State. The hypothesis to be tested can be summarized as follows:

Hypothesis One Null Hypothesis (Ho): Small and Medium Scale Industry will not be improved with the introduction of microfinance.

Alternative Hypothesis (Hi): Small and Medium Scale Industry will be improved with the introduction of microfinance.

Hypothesis Two

Null Hypothesis (Ho): Small and Medium Scale Industry will not improve Economic Development in Lagos.

Alternative Hypothesis (Hi): Small and Medium Scale Industry will improved Economic Development in Lagos.



The data for the study was collected by employing face-to-face structured interviews with representatives of micro-enterprises. A census in the industrial areas or the three towns counted 2,626 small manufacturers with 20 or fewer workers. Since only percent of this population fell between 10 and 20 workers. We are ostensibly writing" about firms with 10 or fewer workers. The general category of textile work. Including tailoring, dressmaking. Knitting and sewing of textile products is the largest activity group. Woodworkers are the second largest group and are composed of carpenters mostly making wooden furniture. Supplying wooden doors and windows and doing repair work. The last category is the metal workers producing cooking utensils, charcoal stove, metal boxes, small hardware, metal furniture, metal door and window frames and iron gates.

The population of enterprises revealed roughly 20 percent women entrepreneurs but this hides the fact that roughly 90percent of that figure are in the textiles trade with very few women entrepreneurs in carpentry or metal work. This bias of women towards textiles pays on stereotypes of women as seamstresses who are barred from other areas of gainful employment.



The scope of the study is definitely wide, although the researchers descriptively explore necessary journals, magazines and textbooks and studies in the areas of Small and Medium Scale industry in general looked at the direct and indirect impact it has on the economy as a whole and the positive side that it has in the area of allowing other sector to improve generally. The scope therefore will analyze the operation of microfinance bank.



One of the limitation of the study is the weakness in the data as provided by the Nigerian agencies. Data generation and processing in Nigeria is still at its infancy. The major problems are those of data adequacy, reliable and timeliness which affect the overall quality of the data. However, these problems are partly eliminated in this study by using data largely published by the international organization and only complimented: with data from Nigeria agencies. This set of data is used in this study without giving way to perfectionist despair.



  1. SMEs: A Small and Medium Scale Enterprises with a working capital base not exceeding N250, 000 and employing on full time bases. Fifty (50) workers or less.

Microfinance: Denotes the provision of financial services adapted to the needs of low income people such as micro entrepreneurs especially the provisions of small loans, the acceptance of small savings deposits and simple payments services needed by micro-entrepreneurs and other poor people.

Micro Enterprises: Are very small-scale, informally organized business activities undertaken by low-income people that employ less than 10 workers.

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