CHAPTER ONE

1.1 INTRODUCTION

A well functioning and developed Small and Medium Enterprises (SMEs) sector is a function of economic growth, which is according to economic theory. According to Kalu (2013), this sector of Nigerian economy lacks the funds to finance its activities towards contributing to the growth and development of the Nigerian economy. This is a result of the fact that, the Micro, Small and Medium Enterprises (MSMEs) that are operating in this sector of the Nigerian economy are unable to access the financial services of the money deposit banks in the country. This is so because, these money deposit banks in the country (Nigeria) avoid doing businesses with these enterprises as they believe that, the risks and associated cost of doing businesses with theses enterprises are considerably high due to inability of these enterprises to supply the required collateral securities for money deposit banks loans and advances as well as, the associated costs of operating accounts and carrying out transactions with these enterprises.

Therefore, those enterprises are left at the mercy of the funds the entrepreneurs of these enterprises were able to raise themselves either through their personal savings or through borrowings from friends and relatives for the financing of their business activities. As such, the development of this sector is impaired due to this problem of lack of adequate funds to finance every viable business ideas that could contribute to the development and growth of the economy.

Microfinance Institutions (MFIs) according to Anyanwu (2014), exist primarily to meets the unsatisfied demand (needs) created by the mobility or unwillingness of the more financial institutions to offer credit facilities as well as other financial products to Micro, Small and Medium Enterprises (MSMEs) in Nigeria. According to Anyanwu (2014), microfinance institutions have therefore become the main source of funding micro, small and medium enterprises in Nigeria. Small and medium enterprises are believed to be the engine room for the development of any economy, because they form the bulk of business activities in a growing economy like that of Nigeria. This is manifested in the following ways, Employment generation, rural development, Economic growth and Industrialization, Better Utilization of Resources.

In the past, Nigeria’s over dependence on oil which really exposed the economy to unprecedented macro-economic instability resulting from the effects of external shocks to oil prices. The world economic recession and the sustained slump in oil prices posted a serious challenge on Nigeria economy which counted for a reduction in our external reserves and also diminished on the nation’s capacity to finance much of its needs. It was also observed that the real GDP growth slows to 2.2% from 2009; population growth rate with climb to 2.5%. Such situation could plunge the country into economic embarrassment and posed a major challenge to the government.

However, with the trend of those events, the Government under vision 20:2020 program came up with undoubtedly consolidated empowerment program called the National Economic and Empowerment Development Strategy (NEEDS) and other reforms which imperatively leads to the recognition given to the development of SMEs.

The SME sector is positioned to generate employment, create wealth, reduce the prevalence of poverty and sustain economic growth and development. 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.

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