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Effect Of Financial Inclusion On The Performance Of Micro, Small And Medium Enterprises (MSMES) In South Western Nigeria


This study investigates the effect of financial inclusion on the performance of micro, small and medium size enterprises in south western states of Nigeria. The population of the study comprise all the micro small and medium size enterprises operating in south western states of Nigeria out of which one thousand and twenty- eight (1,028) MSMEs in the three selected Local Government Ares each in Lagos, Oyo and Ogun States were selected as the sample size of the study. Multiple regression technique of data analysis was employed as a technique of data analysis. The findings of the study indicates that Financial Literacy, Microfinance Banking Services, Government Intervention and credit facilities have a positive and significant effect on the performance of micro, small and medium size enterprises operating in south western states of Nigeria. Based on the findings of the study, the research therefore recommended that: the owners as well as managers of micro, small and medium size enterprises in south western states of Nigeria should embrace financial literacy, save part of their profit, use their Microfinance Banking Services to transact and access and patronize different credit facilities packages as they were found playing prominent role in improving the performance of micro, small and medium size enterprises.





1.1 Background To The Study

Micro, Small and Medium Enterprises (MSMEs) have been largely acknowledged as the oil required for lubricating the engine of socio-economic transformation of any Nation. Small enterprises are vital for economic development because they encourage entrepreneurship, generate employment, reduce poverty and provide suitable livelihood.

MSMEs are fundamental as part of the economies fabric in developing countries, and they play a crucial role in furthering growth, innovation and prosperity. In this sense, Palmarudi and Agussalim (2013), state that MSMEs have historically been the main players in domestic economic activities, especially as providers of employment opportunities, and hence generators of primary and secondary sources of income for many households. Ojokuku and Sajuyigbe (2014) confirmed that MSMEs has been recognized globally as the engine of economy growth and development. MSMEs are the solutions to the problem of slow economic development among developing countries.

The National Policy on MSMEs defines MSMEs (which, according to SMEDAN, represents 90% of the enterprises in Nigeria) based on the dual perspective of employment and assets (excluding land and buildings) (SMEDAN, 2009). According to this policy, a micro enterprise is defined as an entity employing less than ten persons with less than five million naira value of assets while a small enterprise has 10 to 49 employees and between five and fifty million Naira assets and a medium enterprise employs 50 – 199 persons and posts assets worth of between N50 and N500 million.

Micro, small and medium enterprises (MSMEs) play a big role in the Nigerian economy and economies around the globe. MSMEs outnumber large companies by a wide margin and also employ many more people. MSMEs are also said to be responsible for driving innovation and competition in many economic sectors.

According to SMEDAN and National Bureau of Statistic (NBS) Collaborative Survey (2013), The total number of MSMEs as at 2013 stood at 37,067,416 (Micro-36,994,578, Small- 68,168, and Medium-4,670) out of which South West Nigeria has 9,628,993 ( Micro- 9,602,249, Small- 25,157 and Medium- 1,587) ,that is, Ekiti- 965,208, Lagos-3,235,987, Ogun-1,167,642, Ondo- 1,028,769,  Osun- 1,358,446, Oyo- 1,872,941 . The Ministry of Industry, Trade and Investment claimed that MSMEs in Nigeria account for more than 84 percent of total jobs in the country, also account for about 48.5 percent of the Gross Domestic Product, GDP, as well as about 7.27 percent of goods and services exported out of the country.

The 2017 National Survey of MSMEs covered enterprises in Nigeria employing below 200 persons, which are MSMEs and was conducted in all the 36 states of the federation and Nigeria’s Federal Capital Territory, Abuja. From the statistics, it showed that MSMEs has increased to 41,543,028 in 2017, (Micro-41,469,947, Small- 71,288, and Medium-1,793) out of which South West Nigeria has 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- 1,060,388,  Osun- 1,373,915, Oyo- 1,915,606 , most of the businesses are located in Lagos , Nigeria’s largest commercial city.

According to Olowe, Moradeyo and Babalola (2013), many MSMEs in Nigeriaa could not reach the growth stage of their life cycle due to lack of access to finance. MSMEs are, collectively, the largest employers in many low-income countries, yet their viability can be threatened by a lack of access to such risk-management tools as savings, insurance and credit. Their growth is often stifled by restricted access to credit, equity and payments services.

Financial Inclusion plays a crucial role on MSMEs development. The traditional idea of financial inclusion is the provision of access to and usage of diverse, convenient, affordable financial services.  The centre for financial inclusion defines financial inclusion as a state in which all people who can use them have access to suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Access to financial services can therefore boost job creation, raise income, reduce vulnerability and increase investments in human capital.

Central Bank of Nigeria (CBN, 2019) financial inclusion is the delivery of formal financial services in a reliable, convenient, affordable, continuous and flexible manner to those who may not ordinarily access the regular financial services.

Central Bank of Nigeria (CBN) is in the driving seat to achieve financial inclusion. The bank’s policy recognizes the role of Microfinance in providing financial access to the MSMEs operators that are usually excluded from or inadequately served by the available financial institutions. It follows that financial exclusion would be deleterious to the growth and development of Micro, Small and Medium Enterprises (MSMEs).

The National Financial Inclusion Strategy adopted by CBN identified the major tools for driving Financial Inclusion as Banking Services (Agent Banking, Linkage Banking etc), Know-Your-Customers Requirement, Financial Literacy, Consumer Protection, Implementation of MSME Development Fund, Credit Enhancement Programmes. In this study, focus will be on Financial Literacy, Banking Services (majorly Micro Finance Banks) and Government Intervention (Credit Enhancement Programmes) in enhancing Financial Inclusion for MSMEs.

In this study, Financial Inclusion means making available required services accessible in a reliable and convenient manner to MSMEs in South West Nigeria.

All Businesses face challenges in taking certain financial decisions and making informed judgments regarding financial services that impact on their financial activities. Making such decisions requires financial literacy. Financial literacy is the set of skills and knowledge that allows an individual to take appropriate financial decisions (Norman, 2010), without financial literacy, financial inclusion is baseless because stakeholders cannot understand the benefits/ risks associated with financial services.

Financial Literacy is viewed as a critical element for encouraging financial inclusion, consumer protection and ultimately, financial solidness and capability especially among young people (CBN 2015). Since the recent mandatory introduction of monetary policies in Nigeria aimed at boosting financial inclusion (CBN 2011), it has become imperative to study how financial literacy and inclusion boost entrepreneurial growth considering firm size and location in Nigeria. Financial Inclusion and Literacy is inseparable unit that helps to comprehend the requirements and advantages of the items and administrations offered by the formal financial institutions. However, more emphasis seems to be on financial inclusion, while financial literacy receives little attention (EFInA, 2016; CBN 2011).

Microfinance, pioneered by the Nobel-Prize winner Muhammad Yunus, helps the financially marginalized by providing them with the necessary capital to start a business and work toward financial independence. These loans are significant because they are given even though the borrower has no collateral.

Microfinance also called microcredit is a way to provide small business owners and entrepreneurs access to capital. Often these small and individual businesses do not have access to traditional financial resources from major institutions. This means it is harder to access loans, insurance, and investments that will help grow their businesses. Essentially, microfinance is providing loans, credit, access to savings accounts, even insurance policies and money transfers to the small business owner and entrepreneur.

One striking feature about the credit sector is the dominance of MFBs. In 2017, 68 per cent of all credit accounts were with MFBs, as opposed to 11 per cent of deposit accounts. This mismatch indicates that while MFBs are the channel that connects customers with credit products at the largest scale, they face constraints to expand their lending operations. Liquidity of the microfinance industry is an issue that will have to be addressed to make an impact in extending access to credit.

Government Intervention in enhancing financial inclusion for MSMEs as vehicle for sustainable economic development and employment generation includes credit enhancement programmes like sAgric- business Small and Medium Enterprises investment Scheme, two per cent Micro, Small and Medium enterprises Development Fund  (MSMEDF) to people living with disabilities, General Enterprises and Empowerment Programme ( GEEP), Micro Entrepreneurs loan for farmers, traders etc, Graduate Entrepreneur  Fund (GEF), National Women Empowerment Fund(NAWEF), Anchor Borrowers Programme,  among others.

1.2 Statement of the Problem

The contribution of MSMEs to Nigeria economy has not been heavily felt. In South Western, Nigeria, MSMEs are beset with a myriad of challenges which are in no small measure affecting their survival and performance, some of which are low income, lack of financial services awareness, lack of access to available sources of finance, inconsistency in Government policies, poor infrastructures, administrative bureaucracy, high charges and penalties. The most pronounced, however, is lack to access to finance/ capital. Access to Institutional Finance has always constituted a pandemic problem for MSMEs development in South West Nigeria. Credit to MSMEs is limited, particularly when compared to loans granted to larger firms. Figures obtained from the Central Bank of Nigeria (CBN) showed that out of the aggregate loans of N135.9 Trillion disbursed to the economy between 2011 and 2015, only N159.75 amounting to 0.1 per cent went to SMEs. (CBN Statistical Bulletin, 2015). This is because MSMEs are strongly restricted in accessing the capital that they require growing and expanding. Their inability to access finance from both deposit money banks and commercial banks is due to high administrative costs, high collateral requirements and lack of experience within financial intermediaries. Even banks with retained liquidity levels in excess of what is required by law have shown reluctance in extending loans to MSMEs especially on long term basis as they are considered highly vulnerable with credit risk. (Sacerdoti 2015)

Accordingly, countries are devising various regulatory strategies and frameworks to ensure that all populations excluded from financial services are reached and served. According to the CBN (2012), access to financial services mobilizes greater household savings (enabling such persons to invest in themselves and families), leverages capital for investments and expands the class of entrepreneurs. Financial inclusion offers incremental and complementary solutions to tackle poverty, promote inclusive development and achieve the UN Sustainable (Millennium) Development Goals (MDGs). It aims at drawing the unbanked population into the formal financial services net so they have the opportunity to access the whole gamut of appropriate financial services. The CBN believes that financial inclusion is achieved when financially excluded (MSMEs inclusive) have easy access to a broad range of formal financial services that meet their needs at an affordable cost. Such financial services include, but not limited to: payments, savings, loans, and insurance and pension products etc. Financial inclusion, which in this paper will be construed as access to appropriate, fair and affordable financial services, varies widely across the globe. In Nigeria, a total of 39.2 million adults, representing 46.3 per cent of adult population, were excluded from financial services. People that are mostly financially excluded are farmers, landless labourers, unorganized sector, migrants, ethnic minority, women and MSMEs According to Enhancing Financial Innovation & Access (EFInA) to Financial Services in Nigeria, 2018 Survey, 19.1% of the total 22Million Adult population were financially excluded in South West Nigeria, as at 11th December, 2018, representing 28.8% in Ondo, 22.8% in Oyo, 21.8% in Ogun, 17.6% in Ekiti, 14.7% in Lagos and 14.6% in Osun.

Therefore, to ensure that MSMEs’ performance is inclusive and sustained, financial inclusion is necessary. This is because financial inclusion refers to the totality of initiatives that make formal financial services available, accessible and affordable to all segments of the population (Triki and Faye, 2013). This position implies that financial inclusion dictates deliberate attention to the historically excluded portions of the population including MSMEs from financial services.

It is against this backdrop that the study intends to examine Financial Inclusion Concept through Financial Literacy, Microfinance Banking Services, and Government Intervention through Credit Enhancement Programmes on the performance of MSMEs in South Western Nigeria.

1.3 Aim and Objectives of the Study.

The main objective of this study is to examine the financial inclusion on the performance of MSMEs in Nigeria and the specific objectives of the study are to:

  1. Determine the impact of financial literacy of entrepreneurs on accessibility to finance in South West Nigeria.
  2. Examine the impact of Microfinance Banking Services on the Sustainability of MSMEs in South West Nigeria.
  3. Examine the impact of Government Intervention in terms of Provision of Credit Enhancement Programmes on the Performance of MSMEs in South West Nigeria.

1.4. Research Questions

  1. What is the impact of financial literacy of entrepreneurs on their accessibility to finance in South West Nigeria?
  2. What is the impact of the Microfinance Banking Services on the sustainability of MSMEs in South West Nigeria?
  3. Does Government Intervention in terms of Credit Enhancement Programmes have impact on the Performance of MSMEs in South West Nigeria?

1.5. The Statement of Hypothesis

To achieve the aforementioned objectives, the following hypotheses were formulated:

HO1: There is no significant impact of financial literacy of entrepreneurs on accessibility to finance in South West Nigeria.

HO2: There is no significant impact of Microfinance Banking Services on the Sustainability of MSMEs in South West Nigeria.

Ho3: Government Intervention in terms of Credit Enhancement Programmes has no significant effect on the Performance of MSMEs in South West Nigeria.

The Hypothesis will be tested at 5% (0.05) level of significance.

1.6. Significance of the Study

This study will be beneficial to operators in the MSMEs Subsector by creating more awareness on financial services available to them and how to access the services. They would have more insight into the various sources of credit and tap them to achieve better result. They would also be aware that Government through her agencies SMEDAN, BOI,Nigerian Agricultural Cooperatives and Rural Development Bank (NACRAB), National Economic Agencies etc can protect them. This study will aid Government in moderating the affairs of Financial Institutions, and also see the need to provide enabling environment for MSMEs to thrive so as to actually become the driver of our economic growth and development. The study enlightens the general public to know that MSMEs is a vibrant one which can be gainfully ventured into and thus make the economy of the Nation most viable and enviable to foreign investors.

MSMEs will have a better understanding of the constraints affecting the banking sector in providing and supply of financial services.

This study also emphasizes the importance of Microfinance Banking Services in view of the fact that this bring financial services closer to the MSMEs and provide platform for offering simple diversified low cost financial services across the broad spectrum of excluded population in Nigeria especially South Western Nigeria. It will also add to the existing body of knowledge in the literature and serve as a repository for further academic research.

It is anticipated that recommendations made will improve advocacy by MSMEs and stimulate the provision of specific intervention by the Government that will strengthen MSMEs performance.

1.7       Scope of the Study

The study focus is to examine the effect of financial inclusion on the performance of MSMEs in South Western Nigeria. There are Six South Western States in Nigeria: Lagos, Oyo, Ogun, Osun, Ekiti and Ondo States. For the purpose of this study, it 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. The choice of these three states was based on size and concentration of MSMEs. As at 2017, Lagos had 3,337,552 (micro-3,329,156, small- 8,042, medium-354), while Ogun had 1,180,574 (micro-1,178,109, small- 2,394, medium-71) and Oyo had 1,915,606 (micro-1,909,475, small- 6,039, medium-92). This amounted to 65% of 9,886,473 MSMEs in the whole South West States. ( SMEDAN Report 2017)

The study is employing both primary and secondary method of data collection, similarly, this study will be limited to a period of 7years (2013-2019), this is due to the large numbers of MSMEs in South Western Nigeria.

1.8       Operational Definition of Terms

1.8.1    Micro, Small and Medium Enterprises (MSMES)

The definition of MSMEs depends on the country and who is defining the terms. In Nigeria, MSMEs are generally referred to as enterprises with up to 200 employees as follows:  Micro Enterprises: Between 1 and 9 employees, Small Enterprises: Between 10 and 49 employees, Medium Enterprises: Between 50 and 199 employees. (SMEDAN 2017)

1.8.2    Financial Inclusion

Financial Inclusion is defined as the availability and timely delivery of financial services to the disadvantaged and low income group at an affordable cost, 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 way.

1.8.3    Financial Literacy

Financial Literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.

1.8.4    Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)

It is an Agency of Government established in 2003 to facilitate the promotion and development of MSMEs sector in Nigeria in an efficient and sustainable manner.

1.8.5    South West Nigeria

It is one of the six Geo-political zones of Nigeria consisting of the following states; Oyo, Ogun, Lagos, Ekiti, Ondo and Osun states. It is majorly a Yoruba speaking area, although there are different dialects even within the same state.


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