ABSTRACT
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.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
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).
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