EFFECT OF FINANCIAL INCLUSION ON MICRO, SMALL, AND MEDIUM ENTERPRISES (MSMES) PERFORMANCE IN SOUTH WESTERN NIGERIA
This study examines the impact of financial inclusion on the performance of micro, small, and medium-sized businesses in Nigeria’s south-western states. The population of the study consists of all micro, small, and medium-sized firms (MSMEs) operating in the south western states of Nigeria, from which a sample of one thousand twenty-eight (1,028) MSMEs in the three specified Local Government Areas in Lagos, Oyo, and Ogun States was drawn. The method of data analysis known as multiple regression was utilized. The study’s findings reveal that Financial Literacy, Microfinance Banking Services, Government Intervention, and Credit Facilities have a favorable and significant impact on the performance of micro, small, and medium-sized businesses operating in the south-western states of Nigeria. The study’s findings led to the following recommendations: the owners and managers of micro, small, and medium-sized businesses in the south-western states of Nigeria should embrace financial literacy, save a portion of their profits, use their Microfinance Banking Services to transact, and access and patronize various credit facilities packages, as they were found to play a prominent role in enhancing the performance of micro, small, and medium-sized businesses.
1.1 Context Of The Study
Micro, Small, and Medium-Sized Enterprises (MSMEs) are widely recognized as the lubricant necessary for the socioeconomic change of every nation. Small businesses are essential for economic growth because they foster entrepreneurship, create jobs, alleviate poverty, and provide enough means of subsistence.
In developing economies, micro, small, and medium-sized enterprises (MSMEs) play a critical role in fostering growth, innovation, and prosperity. In this regard, Palmarudi and Agussalim (2013) assert that traditionally, MSMEs have been the principal actors in domestic economic activity, particularly as providers of employment opportunities and, consequently, as primary and secondary income producers for numerous households. Ojokuku and Sajuyigbe (2014) affirmed that micro, small, and medium-sized enterprises (MSMEs) are acknowledged globally as the engine of economic growth and development. MSMEs are the answer to the challenge of sluggish economic growth in emerging nations.
The National Policy on Micro, Small, and Medium-Sized Firms defines MSMEs (which, according to SMEDAN, comprise 90% of Nigeria’s enterprises) from the twin perspectives of employment and assets (excluding land and buildings) (SMEDAN, 2009). According to this policy, a micro enterprise is an organization with fewer than ten employees and assets worth less than five million naira, whereas a small enterprise has between 10 and 49 employees and assets worth between five and fifty million naira, and a medium enterprise has between 50 and 199 employees and assets worth between N50 and N500 million.
Micro, small, and medium-sized companies (MSMEs) play a significant part in the Nigerian and global economies. MSMEs outnumber major corporations by a substantial percentage and also employ a greater number of individuals. SMEs are also credited with encouraging innovation and competitiveness in a variety of economic sectors.
According to SMEDAN and National Bureau of Statistics (NBS) Collaborative Survey (2013), the total number of MSMEs in 2013 was 37,067,416 (Micro-36,994,578, Small- 68,168, and Medium-4,670), with 9,628,993 (Micro- 9,602,249, Small- 25,157 and Medium- 1,587) located in South West Nigeria (Ekiti- 965,208, Lagos-3,235,987, Ogun According to the Ministry of Industry, Trade, and Investment, MSMEs in Nigeria account for more than 84 percent of all jobs in the country, around 48.5% of the Gross Domestic Product (GDP), and 7.27% of all goods and services exported from the country.
The 2017 National Survey of Micro, Small, and Medium-Sized Enterprises (MSMEs) was done in all 36 states of the federation and in Abuja, the country’s Federal Capital Territory. According to the statistics, the number of MSMEs increased to 41,543,028 in 2017 (Micro-41,469,947, Small- 71,288 and Medium-1,793), with South West Nigeria having 9,886,473 (Micro- 9,863,183, Small- 22,720 and Medium- 570), that is, Ekiti- 1,018,438, Lagos-3,337,552, Ogun-1,180,574, Ondo- 1,057,
According to Olowe, Moradeyo, and Babalola (2013), many micro, small, and medium-sized enterprises in Nigeria were unable to reach the growth phase of their life cycle due to a lack of access to capital. Collectively, MSMEs are the greatest employers in many low-income countries, but their viability can be jeopardized by limited access to risk-management tools such as savings, insurance, and credit. Their expansion is frequently hampered by limited access to credit, equity, and payment services.
Financial Inclusion is vital to the growth of MSMEs. Access to the utilization of broad, convenient, and inexpensive financial services is the classic definition of financial inclusion. The centre for financial inclusion defines financial inclusion as a condition in which all people who can use them have access to a suite of high-quality financial services that are delivered at reasonable costs, in a convenient manner, and with respect for the clients’ dignity. Therefore, access to financial services can promote job creation, income, minimize vulnerability, and boost human capital investments.
Financial inclusion, according to the Central Bank of Nigeria (CBN, 2019), is the delivery of formal financial services in a reliable, convenient, inexpensive, continuous, and flexible manner to those who might not otherwise have access to the regular financial services.
To achieve financial inclusion, the Central Bank of Nigeria (CBN) is in the driver’s seat. The bank’s policy acknowledges the significance of microfinance in providing financial access to MSMEs that are typically excluded from or badly supported by existing financial institutions. Therefore, financial exclusion would harm the growth and development of micro, small, and medium-sized businesses (MSMEs).
CBN’s National Financial Inclusion Strategy identifies Banking Services (Agent Banking, Linkage Banking, etc.), Know-Your-Customer Requirement, Financial Literacy, Consumer Protection, Implementation of MSME Development Fund, and Credit Enhancement Programmes as the key drivers of Financial Inclusion. This study will focus on Financial Literacy, Banking Services (primarily Micro Finance Banks), and Government Intervention (Credit Enhancement Programmes) as means of promoting Financial Inclusion among MSMEs.
In this study, Financial Inclusion refers to providing MSMEs in South West Nigeria with dependable and convenient access to necessary services.
Every business faces obstacles when it comes to making specific financial decisions and forming well-informed opinions about financial services that affect their financial activity. Such judgments necessitate financial literacy. Without financial literacy, financial inclusion is meaningless since stakeholders cannot comprehend the benefits/risks connected with financial services.
Financial Literacy is regarded as a crucial component for promoting financial inclusion, consumer protection, and ultimately, financial stability and competence, particularly among youth (CBN 2015). Since the recent adoption of required monetary policies in Nigeria aiming at increasing financial inclusion (CBN, 2011), it has become necessary to examine how financial literacy and inclusion influence entrepreneurial growth in Nigeria, taking company size and location into account. Financial Inclusion and Literacy are inseparable components that aid in understanding the requirements and benefits of the products and services offered by formal financial institutions. However, more emphasis appears to be placed on financial inclusion than on financial knowledge (EFInA, 2016; CBN 2011).
Microfinance, which was pioneered by Nobel Prize winner Muhammad Yunus, assists the financially disadvantaged by giving them with the funds needed to start a business and achieve financial independence. These loans are notable due to the fact that they are granted without collateral.
Microfinance, often known as microcredit, enables small business owners and entrepreneurs to gain access to money. Typically, these tiny and sole proprietorships lack access to typical financial resources from major institutions. This makes it more difficult for them to obtain loans, insurance, and investments that will help their businesses develop. Microfinance provides small business owners and entrepreneurs with loans, credit, access to savings accounts, and even insurance plans and money transfers.
The dominance of MFBs in the lending sector is a noteworthy characteristic of this industry. In 2017, 68% of all credit accounts were held by MFBs, compared to 11% of all deposit accounts. This disparity implies that while MFBs are the route that connects the highest number of customers with credit products, they are unable to increase their lending operations. The microfinance industry’s liquidity is an issue that must be addressed in order to have an impact on expanding loan access.
Government Intervention in enhancing financial inclusion for MSMEs as a vehicle for sustainable economic development and employment generation includes credit enhancement programmes such as sAgric- business Small and Medium Enterprises investment Scheme, 2% Micro, Small, and Medium Enterprises Development Fund (MSMEDF) to people with disabilities, General Enterprises and Empowerment Programme (GEEP), Micro Entrepreneurs loan for farmers, traders, etc., Graduat Entrepreneurship Programme.
1.2 Description of the Problem
The contribution of MSMEs to the Nigerian economy has not been felt to a significant degree. In South Western Nigeria, micro, small, and medium-sized enterprises (MSMEs) face a multitude of obstacles that have a significant impact on their survival and performance, including low income, lack of financial services awareness, lack of access to available sources of finance, inconsistency in government policies, poor infrastructures, administrative bureaucracy, and high fees and penalties. The most evident, though, is the absence of access to capital/finance. Access to Institutional Finance has always been a widespread obstacle to the development of MSMEs in South West Nigeria. The availability of credit to micro, small, and medium-sized enterprises (MSMEs) is restricted, particularly when compared to loans offered to bigger businesses. According to data received from the Central Bank of Nigeria (CBN), only N159.75, or 0.1%, of the N135.9 Trillion in total loans issued to the economy between 2011 and 2015 went to small and medium-sized enterprises (SMEs). (2015 CBN Statistical Bulletin). This is due to the fact that small and medium-sized enterprises are severely restricted in their access to the cash they need for growth and expansion. Due to high administrative costs, high collateral requirements, and a lack of competence among financial intermediaries, they are unable to obtain financing from both deposit money banks and commercial banks. Even banks with maintained cash levels in excess of what is required by law have shown reluctance to offer loans to MSMEs, particularly on a long-term basis, as they are regarded as extremely credit risk-vulnerable. (Sacerdoti 2015)
Consequently, nations are developing diverse regulatory policies and frameworks to ensure that all excluded people can access and benefit from financial services. According to the Central Bank of Nigeria (2012), access to financial services mobilizes more household savings (allowing individuals to invest in themselves and their families), leverages capital for investments, and broadens the class of entrepreneurs. Financial inclusion offers incremental and complementary solutions for combating poverty, promoting inclusive development, and achieving the United Nations’ (Millennium) Sustainable Development Goals (MDGs). It tries to get the unbanked people into the official financial services net so that they have access to the entire spectrum of suitable financial services. The Central Bank of Nigeria (CBN) thinks that financial inclusion is accomplished when the financially excluded (including MSMEs) have easy access to a wide variety of formal financial services that satisfy their needs at an affordable price. These services include, but are not limited to, payments, savings, loans, insurance, and retirement goods, etc. Financial inclusion, which shall be defined as access to suitable, fair, and affordable financial services for the purposes of this article, varies greatly around the globe. In Nigeria, an estimated 39.2 million adults, or 46.3% of the adult population, lacked access to financial services. Most financially excluded are farmers, landless laborers, the unorganized sector, migrants, ethnic minorities, women, and small and medium-sized enterprises. According to the Enhancing Financial Innovation & Access (EFInA) to Financial Services in Nigeria, 2018 Survey, 19.1% of the total 22Million Adult population in South West Nigeria were financially excluded as of December 11th, 2018, including 28.8% in Ondo, 22.8% in Oyo, 21.8% in Ogun, 17.6% in Ekiti, 14.7% in Lagos, and 14.7% in Osun.
Therefore, financial inclusion is vital to ensure that MSMEs’ success is inclusive and sustainable. This is due to the fact that financial inclusion encompasses all activities that make formal financial services available, accessible, and cheap to all demographic segments (Triki and Faye, 2013). This position argues that financial inclusion requires conscious attention to the previously excluded segments of the population, particularly micro, small, and medium-sized enterprises (MSMEs), from financial services.
In light of this, the purpose of this study is to assess the impact of the Financial Inclusion Concept via Financial Literacy, Microfinance Banking Services, and Government Intervention via Credit Enhancement Programmes on the performance of MSMEs in South Western Nigeria.
1.3 Objectives and Purpose of the Study.
This study’s primary purpose is to assess the impact of financial inclusion on the performance of micro, small, and medium-sized enterprises (MSMEs) in Nigeria, and its particular objectives are to:
Determine the influence of entrepreneurs’ financial literacy on access to capital in South West Nigeria.
Examine the influence of Microfinance Banking Services on the Sustainability of Micro, Small, and Medium-Sized Enterprises in South West Nigeria.
Examine the effect of government intervention in the form of credit enhancement programs on the performance of micro, small, and medium-sized enterprises (MSMEs) in South West Nigeria.
1.4. Research Concerns
What effect does the financial literacy of South West Nigerian entrepreneurs have on their access to capital?
How do Microfinance Banking Services affect the long-term viability of MSMEs in South West Nigeria?
Does Government Intervention in the form of Credit Enhancement Programs affect the Performance of Micro, Small, and Medium-Sized Enterprises in South West Nigeria?
1.5. The Proposition of Hypothesis
To accomplish the stated goals, the following assumptions were developed:
HO1: The financial literacy of South West Nigerian entrepreneurs has no substantial impact on their access to capital.
HO2: Microfinance banking services have no meaningful effect on the sustainability of MSMEs in South West Nigeria.
Government intervention in the form of credit enhancement programs had no influence on the performance of micro, small, and medium-sized enterprises (MSMEs) in South West Nigeria.
The Hypothesis will be tested at a significance level of 5% (0.05).
1.6. Importance of the Research
This study will benefit operators in the MSMEs Subsector by increasing their knowledge of available financial services and how to obtain them. They would have a greater understanding of the many sources of credit and be able to utilize them more effectively. They would also be aware that the government can safeguard them through SMEDAN, BOI, Nigerian Agricultural Cooperatives and Rural Development Bank (NACRAB), and other institutions. This study will assist the government in regulating the activities of financial institutions and recognizing the need to foster the growth of micro, small, and medium-sized enterprises in order for them to become the engine of our economic growth and development. The report informs the public that micro, small, and medium-sized enterprises (MSMEs) are a thriving industry that may be entered profitably, so making the nation’s economy the most viable and enviable to international investors.
The constraints impacting the provision and delivery of financial services by the banking industry will be better understood by MSMEs.
This study also emphasizes the significance of Microfinance Banking Services in light of the fact that they bring financial services closer to MSMEs and provide a platform for providing simple, diversified, and low-cost financial services to a wide range of excluded populations in Nigeria, particularly in South Western Nigeria. It will also contribute to the existing body of knowledge and serve as a repository for future academic research.
It is hoped that the recommendations given will boost advocacy by MSMEs and encourage the government to provide interventions that will improve the performance of MSMEs.
1.7 Scope of the Research
Examining the impact of financial inclusion on the performance of MSMEs in South Western Nigeria is the subject of this study. There are six states in Nigeria’s south-western region: Lagos, Oyo, Ogun, Osun, Ekiti, and Ondo. This study will be limited to MSMEs in Oyo state: Ibadan North Local Government, Akinyele Local Government, and Egbeda Local Government Area; Ogun State: Abeokuta South Local Government, Ijebu Ode Local Government, and Ado Odo Ota Local Government Area; and Lagos State: Oshodi/Isolo Local Government, Ikorodu Local Government, and Ifako Ijaiye Local Government Area. These three states were selected because to their size and concentration of MSMEs. As of 2017, Lagos had 3,337,552 (micro-3,329,156, small – 8,042, medium – 354) residents, while Ogun had 1,180,574 (micro-1,178,109, small – 2,394, medium-71) and Oyo had 1,915,601 (micro-1,915,602, small – 2,394, medium-71) (micro-1,909,475, small- 6,039, medium-92). This represented 65 percent of the 9,886,473 MSMEs in the South West states. (2017 SMEDAN Report)
Due to the large number of micro, small, and medium-sized enterprises (MSMEs) in South Western Nigeria, the study employs both primary and secondary methods of data collection. Additionally, the study will be limited to a seven-year time frame (2013-2019).
1.8 Definition of Operational Terms
1.8.1 Micro, small, and medium-sized businesses (MSMES)
The definition of MSMEs varies by country and by the individual establishing the terminology. In Nigeria, MSMEs are typically defined as businesses with fewer than 200 employees. Micro-Enterprises: 1 to 9 employees, Small-Enterprises: 10 to 49 employees, and Medium-Sized Businesses: 50 to 199 people. (SMEDAN 2017)
1.8.2 Financial Inclusion
Financial Inclusion is defined as the availability and timely delivery of affordable financial services to the disadvantaged and low income group, that is, a process where individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit, and insurance – delivered in a responsible and sustainable manner.
1.8.3 Financial Literacy
Financial Literacy is the possession of the set of skills and knowledge that enables a person to make educated and effective decisions with regard to all of their financial resources.
1.8.4 The Nigerian Small and Medium Enterprises Development Agency (SMEDAN)
It is a government agency founded in 2003 to facilitate the efficient and sustainable promotion and growth of the MSMEs sector in Nigeria.
1.8.5 Southern-Western Nigeria
It is one of Nigeria’s six geopolitical zones, comprised of the states of Oyo, Ogun, Lagos, Ekiti, Ondo, and Osun. It is primarily a Yoruba-speaking region, however multiple dialects exist within the same state.
EFFECT OF FINANCIAL INCLUSION ON MICRO, SMALL, AND MEDIUM ENTERPRISES (MSMES) PERFORMANCE IN SOUTH WESTERN NIGERIA