CHAPTER ONE

INTRODUCTION
1.1 Background of the study
The financial performance which measures the overall financial health of small-scale
enterprise is dismal and can become worrisome to government and stakeholders in the private
sector of a nation’s economy (Musa et al., 2022). The significant contributions of micro,
small and medium enterprises (MSMEs) have endeared government in economies worldwide,
to concentrate on the development of the sector to enhance performance, economic growth
and development of their country. Consequently, several study’s objective has been to
investigate relative factors affecting SME’s enterprises of many owners and the relationship
between microcredit and financial performance of small and medium scale enterprises.
Microenterprises is majorly the dominant subsector of the MSME sector of the Nigerian
economy, representing 99.86 percent, playing critical role in the economy transformation of
the county in job and employment creation opportunities and poverty reduction,
advancements in product and process, and promotion of entrepreneurial spirit and innovation
(SMEDAN, 2017).

Small and medium scale enterprise performance generally, is the actual outcome measured
compared to inputs of the enterprise (Shamsuden, Kent & Hassan, 2016). Moreover,
performance is the outcome that is derived from efficiency and effectiveness in optimum
utilization of resources and productivity (Beny, Sweeting & Goto, 2016). Financial
performance however, indicates wellness of the usage of the firm’s assets to generate
revenues. It measures the overall financial health of firm over a given period of time, which
may be compared with similar firms in same industry or industries or sectors on aggregate
basis using financial ratios such as liquidity, solvency, profitability, repayment capacity and
financial efficiency (Marie, Florica& Catalina, 2001). Thus, Carland and Carland (2003)
describe financial performance to be an increase in business revenues, sales, profit or market
share.

According to Habibu (2022) access to finance (loan) plays an important role in boosting the
performance of SMEs in both developed and emerging economies. This implies that the
efficient performance of these firms depends on the adequate management and utilization of
the firms’ resources such as the man, machine and money. Additionally, Zeng, Xie, and Tam
(2010) added the need for training, organizational and technological innovations also
influenced SMEs performance. However, the processes of all business enterprise are not

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feasible without adequate financing, this is because without proper access and adequate
management capital many enterprises end up winding up (Habibu, 2022). This means that the
relativity of firm’s performance and its means of getting finances are directly correlated in the
sense that without adequate financing many firms end up winding up. Olatunji (2018) pointed
out that lack of financial inclusion is one of the major challenges facing SMEs in Nigeria. As
such several firms source for finances in other to increase their performance and survive in
the challenging economy.

Financial institution plays a vital role in the survival of many commercial firms over the
world (Ashta et al., 2016). This is as a result of the provision of startup capital and
operational(working) capital for these firms’ operations. Positive financial performance is a
springboard to small and micro enterprises’ growth and survival, that invariably offers
employment opportunities, stimulates economic growth by industrializing the economy
(Mnunka & Oyagi, 2020). However, Atueyi (2022) argued that SME’s that lack access to
financial services are unable to invest in their businesses, expand their operations and create
jobs. However, financial performance of the microenterprises in Zamfara metropolis is
observably dismal and worrisome particularly, to government and organized private sector
groups as stakeholders. This may be ascribed majorly to inadequate finance, because the
sources of their funding are individual resources and little from their family, government
intervention and traditional fund sources. The microenterprises rarely sought and obtained
finance from conventional banks due to the stringent loan requirements and unwillingness to
grant them loan as they are considered to be a high-risk bracket (SMEDAN, 2017). This
provides the platform opportunity for the microfinance banking institutions vying into the
financing equation of the microenterprises (Zhiri, 2017).

The Nigerian government realizing that the services of microfinance could have significant
effects on financial performance of small and microenterprises, as part of the 2005 Central
Bank of Nigeria (CBN) banking reform agenda, was to license the microfinance banking
Institutions (MFBIs) and the conversion of community banks to microfinance banks, to
provide financial services as microcredit, savings, business advisory among others, to the
microenterprises (Ozioko, 2010).

The microfinance institutions are described as formal financial institutions, secured and
conveniently located, that provide access with little or no barriers, to the poor in obtaining
financial services that includes funds disbursement and deposits for business enterprise and to

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improve their living standards (Obi, 2015). The financial services specifically, which include
microcredit/loan; micro-savings; business advisory; transfer/receive payment, and micro
insurance among others, are also provided to enterprises located in the different sectors of the
economy (Otero & Rhyne, 2007), and the microcredit component of microfinance, a major
financial service by the microfinance banking, is small loan extended to low-income
individuals typically lacking collateral, steady employment, and a veritable history of access
to finance from the traditional source, which has been identified as the key to an enterprise’s
financial performance (Kurma & Sharma, 2018; Edeme &Nkalu, 2019).

The microcredit enhances financial performance if it is innovatively applied. Innovation and

microcredit have effects on the financial inclusion of the small and microenterprises. Because

innovation, aside serving a principal purpose in starting a business venture (Thomas,

Ambross& Denis, 2016), has a momentous consequence on business performance (Dankor,
Dankor, Kankam-Kwanteng & Aidoo, 2018). Innovation increase enterprise’s revenue and
improve competitiveness (Dankor et al, 2018). Hence, there is a linkage between the firm’s
innovation and financial performance. However, acknowledgement and application of
innovation by the microenterprises is minimal, which also could account for their dismal
financial performance (Abubakar, Ibrahim &Yazeed, 2018). Studies conducted (Zhiri, 2017;
Kanyare & Mungai, 2017; Toromo, 2020; Amsi, Ngare, Imo & Gashie, 2017), to ascertain the
relationship between the microcredit and financial performance of microenterprises, produced
mixed findings. Hence, this study introduced innovation to moderate the balance and to
strengthen the relationship in line with (Barone & Kenny, 1986) submission that whenever
weak or inconsistent relationship exists between independent variable and dependent
variable, a typical moderating variable can be introduced.

Therefore, there arises the need to revisit such a contributing sector to the economy of
Nigeria by studying the relationship of financial inclusion and how it could enhance
microenterprises’ financial performance in the Zamfara metropolis. This addressed variable
inclusion and environmental gaps. Consequently, this study examines the effects of financial
assess difficulty on the relationship between microcredit and financial inclusion of
microenterprises in the Zamfara metropolis.

1.2 Statement of the Problem

The evolution of microfinance initiative as established in Nigeria dates back to several
decades with the establishment of numerous alleviation programs such as Agricultural Credit

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Guarantee Scheme Funds (ACGSF), National Poverty Eradication Programs (NAPEP),
Better life for Rural Women, People’s Bank and Community Banks amongst others which
Federal Government of Nigeria pursued during the period of 1978 – 1999 (Ofeimun 2020).
Microfinance has proven to be a “potent tool for poverty reduction by helping the poor
increase their income, smooth consumption, build assets and reduce their vulnerabilities in
times of contingencies and economic shocks (Karlan and Zinman, 2010).

The Nigerian government has long recognized the critical role of microfinance in its poverty
reduction efforts. As a result, the Central Bank of Nigeria initiated the microfinance policy to
create an environment of financial inclusion to enhance capacity of micro, small and medium
enterprises (MSMEs) thereby contributing to the economic growth and development of the
living standard of the populace. (Central Bank of Nigeria CBN, 2015). According to Ofeimun
(2020) the policy framework as envisaged by the CBN was to increase the financial inclusion
of rural dwellers and operators of micro, small and medium enterprises. He further exxlaimed
that in order to achieve economic growth through the use of microfinance banks’ financial
inclusion strategies, CBN in 2014 allowed microfinance banks (MFBs) to open at least one
branch within each Local Government Area across Nigerian Federation. Also, empirical
studies such as (Mbutor and Uba, 2013; Migap et al., 2015; Nkwede, 2015) have reported
that the institutional and policy frameworks employed by monetary authorities have given an
enabling environment for microfinance services to strive. In spite of the long existence of
these institutions and programs in Nigeria, it has been almost impossible for the rural active
poor, low-income households and micro, small and medium enterprises (MSMEs) to assess
credit from these institutions. According to Agu et al. (2016), “although all the programs were
directed at improving the production base for sustainable growth, most of the efforts at
purveying micro credit to alleviate poverty were largely inappropriate, urban structured from
the stand point of the realities of (who is the poor) – understanding the poor.

Recently in Nigeria, problems such as the aftermath of covid 19 and the continuous rise in
inflation as well as the financial distress has affected the financial inclusion of many SME’s
leadings to closure of business operation and winding up of this firms. This has necessitated
the evaluation of microfinance programs on the financial inclusion of Small and Medium
Enterprises (SMEs) is as an area of research in Zamfara metropolis. Numerous studies see
(Oseghale et al. (2020); Akpan et al. (2021); Adebayo et al. (2019) have examined the impact
of microfinance on various aspects of financial inclusion, but there is still a need for a

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comprehensive analysis that considers multiple factors affecting its effectiveness. For
instance, as highlighted by Zuzanna et al. (2014) small and medium-sized enterprises (SMEs)
in developing countries face a number of challenges in accessing financial services, including
high interest rates, collateral requirements, and lack of information.

While microfinance has been widely recognized as a tool for poverty alleviation and
economic development, its impact on SMEs' financial inclusion remains inconclusive.
Although Klapper et al. (2013) found that microfinance institutions can help to reduce
poverty and inequality by providing access to financial services to the poor and underbanked.
However, to Allen et al. (2012) suggest that greater financial inclusion is positively correlated
with lower banking costs, greater proximity to bank branch offices, and reduced
documentation requirements. Demirgüç-Kunt and Klapper (2012) found that microfinance
institutions play a significant role in financial inclusion, especially in developing countries.
There is a lack of consensus regarding the extent to which microfinance interventions
contribute to SMEs' access to financial services, such as credit, savings, insurance, and
financial literacy.

Furthermore, various factors can influence the effectiveness of microfinance programs in

promoting financial inclusion for SMEs (Thathsarani, Jianguo & Alariqi, 2023). These factors
may include the regulatory environment, institutional characteristics, loan size and terms,
interest rates, repayment mechanisms, borrower characteristics, socioeconomic conditions,
and cultural factors see Ojo & Adegboyega (2019); Odewole & Okunola (2019); Okunlola &
Abiodun (2018); & Nwaogu & Ogbuabor (2016).

The region of Zamfara in Nigeria, like many other developing areas, is characterized by a
high concentration of Small and Medium Enterprises (SMEs) that play a vital role in the
economic development of Nigeria (Sani 2022). However, the accessibility and effectiveness
of microfinance institutions in facilitating financial inclusion for these SMEs remains a
critical concern. To address this issue, this study seeks to evaluate the micro finance and
financial inclusion among SME’s managers in gusau metropolis. In order to cover the
research gap, it is crucial to conduct an in-depth evaluation of microfinance's impact on
SMEs' financial inclusion, considering the multifaceted factors that influence its
effectiveness.

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This research aims to provide a comprehensive understanding of the relationship between
microfinance and SMEs' financial inclusion and identify key determinants that shape the
outcomes. By conducting a meticulous analysis of existing literature and empirical studies,
this research will contribute to the existing knowledge on microfinance and financial
inclusion. This statement is in line with most literature which identified shortage of access to
finance (loan) as among the main factors that impede the performance of SMEs (e.g., Kpodar
& Andrianaivo, 2011; Okpara, 2011). Other factors that continue to tackle the performance of
SMEs include lack of innovative technology, high rate of acquiring loan, and inadequate
personal saving. Therefore, this study investigates the influence of microfinance services, and
financial inclusion received by SMEs in Nigeria. The findings will inform policymakers,
microfinance institutions, and other stakeholders in designing effective strategies and
interventions to enhance SMEs' access to financial services and promote their financial
inclusion

1.3 Research Questions

The study seeks to provide answer to the following research questions

1. What is the impact of assess to microfinance programs on the financial inclusion of

SME’s in Zamfara?
2. What is the effect of loan repayment rate of microfinance institutions on financial
inclusion SME’s in Zamfara in this sector?
3. How does the Gender inclusiveness affect financial inclusion among SME’s in
Zamfara?

1.4 Objectives of the Study

The main objective of the study is to examine the effect of microfinance on financial
inclusion strategies of Zamfara in Nigeria. Specifically, the study seeks;

1. To assess the effect of assess to finance on the financial inclusion of SME’s of

Zamfara.
2. To determine impact of the loan repayment rate on the financial inclusion of SME’s of
Zamfara.
3. To Examine the Gender inclusiveness on the influence of financial inclusion of SME’s
of Zamfara.

1.5 Objectives of the Study

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In line with the objectives of the study, the following hypotheses were formulated in null
form:
H01: Assess to finance has no significant effect on the financial inclusion of SME’s of
Zamfara.

H02: The microfinance loan repayment rate does not have significant effect on financial
inclusion faced by SME’s Zamfara.

H03: Gender inclusiveness does not have significant influence on the effective promotion
of financial inclusion in SME’s Zamfara.

1.6 Scope of the Study

The study seeks to examine the effect of microfinance institutions on the financial inclusion
of Zamfara state metropolis as of 2023. The rationale behind the study is as a result of the
recent and ongoing financial crisis such as the increase in inflation the covid 19 aftermath and
high rate of obtaining credit in Nigeria. This study seeks to also provide relevant knowledge
to SME’s owners on providing knowhow on how to sustain their business in order to strive in
the mist of all the Nigerian problems that is being faced.

1.7 Significance of the Study

Studying the evaluation of microfinance and financial inclusion for SMEs in Zamfara holds
significant importance for several reasons:

1. Poverty Alleviation: Understanding how microfinance impacts SMEs can shed light
on its role in poverty reduction. It helps in assessing whether these financial services
contribute to increasing income levels and improving the livelihoods of individuals and
families in Zamfara.

2. Economic Development: SMEs are often seen as engines of economic growth.

Studying their access to finance and financial inclusion can provide insights into their
contributions to local and regional economic development in Zamfara.

3. Job Creation: SMEs are known for generating employment opportunities. study into
this area can reveal how microfinance programs impact job creation and unemployment rates
in the region.

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4. Financial Inclusion: Enhancing financial inclusion is a global goal. Studying this topic
can provide insights into how well financial services are reaching underserved and unbanked
populations, which can help in creating more inclusive financial systems.

5. Entrepreneurship Development: Evaluating microfinance programs can help identify

whether they contribute to the development of entrepreneurial skills and business acumen
among SME owners in Zamfara, potentially leading to the growth of more sustainable
businesses.

6. Women Empowerment: Studying the gender-specific can highlight the role of

microfinance in empowering women entrepreneurs and promoting gender equality in
business and finance.

7. Investment Decisions: For investors and donors, knowledge about the effectiveness of
microfinance in Zamfara can influence their funding and investment decisions, supporting
initiatives that prove to be impactful.

8. Sustainable Development Goals: Evaluating microfinance and financial inclusion

aligns with global sustainable development goals, particularly those related to poverty
reduction, economic growth, and reduced inequalities.

In summary, studying the evaluation of microfinance and financial inclusion for SMEs in
Zamfara is crucial for assessing the impact of these programs on economic and social
development, poverty reduction, and the overall well-being of the population in the region. It
provides valuable insights for policymakers, practitioners, and researchers to design more
effective strategies and interventions in the field of microfinance and financial inclusion.