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According to Otero (2004), microfinance is “the provision of financial services to low-income and very poor self-employed individuals.” According to Ledgerwood (2004), these financial services normally comprise savings and credit, but may also include other financial products such as insurance and payment services. Schreiner and Colombet (2006) describe microfinance as “the effort to increase impoverished households’ access to modest deposits and small loans.” Thus, microfinance entails the provision of financial services such as savings, loans, and insurance to low-income individuals residing in urban and rural areas who are unable to access such services through the traditional banking sector.

Small and medium-sized firms are often thought to be the engine of economic development, as they account for the majority of commercial operations in a developing country like Nigeria. This is demonstrated by the following: job creation, rural development, economic growth and industrialization, and improved utilization of indigenous resources (Ashamu, 2014).

The microfinance movement’s origins are most closely identified with economist Muhammed Yunus, who was a professor in Bangladesh in the early 1970’s. During a countrywide famine, he began offering modest loans to impoverished people in adjacent villages in an attempt to break their cycle of poverty. Financial services that enable impoverished individuals to save during prosperous times and borrow or collect insurance when necessary enable them to maintain a steady level of consumption without surrendering income-generating assets. Microfinance can also be used to extend or pursue new business prospects, allowing underprivileged individuals to supplement or diversify their income sources.

While the words microcredit and microfinance are frequently used interchangeably, it is critical to emphasize the distinctions between the two because both terms are frequently misused. According to Sinha (2003), “microcredit refers to tiny loans, whereas microfinance is acceptable when NGOs and MFIs1 augment loans with other financial services (savings, insurance, and so on).” Thus, while microcredit is a subset of microfinance in that it provides credit to the poor, microfinance also include non-loans financial services such as savings, insurance, pensions, and payment services (Okiocredit, 2010).

According to Robinson (2006) and Otero, microcredit and microfinance are relatively recent terminology in the realm of development, having gained prominence in the 1970s (2004). Prior to that, from the 1950s through the 1970s, donors and governments mostly provided financial services through subsidized rural credit programs. These frequently resulted in significant loan default rates, substantial losses, and an inability to reach rural impoverished people (Robinson, 2006).

Robinson asserts that the 1980s were a watershed moment in microfinance history, when MFIs such as Grameen Bank and BRI2 demonstrated their ability to deliver modest loans and savings services economically on a wide scale. They received no ongoing subsidies, were self-sustaining and financially viable, and could reach a large number of people (Robinson, 2006). Additionally, it was during this time period that the phrase “microcredit” gained importance in development (MIX, 2010). The distinction between microcredit and the subsidized rural credit programs of the 1950s and 1960s was that microcredit required repayment, charged interest rates sufficient to cover the cost of credit delivery, and targeted consumers who relied on the informal sector for credit (ibid.). For the first time, it became obvious that microcredit could be used profitably to do large-scale outreach.


Microfinance is the provision of financial services such as credit, savings, microinsurance, remittances, and leasing to low-income customers, such as consumers and self-employed individuals, who have historically lacked access to banks and related services. Its primary purpose is to ensure that adequate financial services, such as insurance, savings, and capital transfer, are available on a permanent basis. It is, in fact, a critical weapon for poverty eradication. As microfinance becomes more broadly recognized and mainstream, the provision of services to the poor may rise as well, increasing efficiency and reach while decreasing costs. Mosley and Hulme (2003) concluded from a study of MFIs in seven countries that household income tends to decline when borrowers’ income and asset positions improve. In their study in Malawi, Diagne and Zeller (2006) conclude that microfinance has no meaningful influence on household income, implying that it has little effect on SME development. Investing in SME operations will have little influence on family income growth due to the lack of infrastructure and an established market.

Yasin (2013) adapted a study on the importance of microfinance lending to the growth of SMEs in Mogadishu, Somalia. The study reveals that small enterprises in Mogadishu face barriers to obtaining loans from MFIs, resulting in the closure of many small firms or the inability to establish new ones owing to a lack of ability to overcome the obstacles. The findings demonstrated how SMEs in Mogadishu must meet certain criteria in order to borrow money from microfinance providers. Additionally, the findings indicated that the rules impede the ability of small enterprises to borrow money from microfinance institutions in order to establish, run, or expand. This is because small business owners are unable to satisfy the conditions imposed by microfinance organizations.

Buckley (2002) conducted a study on the effect of MFI lending on the growth of SMEs and discovered that the indicators of microcredit program success, such as high repayment rate, outreach, and financial sustainability, ignore the impact of microcredit programs on micro enterprise operations, instead focusing exclusively on “microfinance evangelism.”

Buckley (2002) concluded after doing study in three countries, Kenya, Malawi, and Ghana, that there was no evidence of a meaningful and sustained benefit of microfinance services on customers in terms of SME development, improved income flows, or level of employment.

Markowski (2007) performed a research on the contribution of MFIs to entrepreneurship, concluding that their project designs fall short of meeting the requirements of the extremely poor and destitute, who do have a need for microfinance services, particularly savings (Littlefield and Rosenberg, 2009 and Dichter, 2004). They are disregarded, despite the fact that one of the


The general objective is to examine the role of microfinance institutions in finance small scale businesses in Oyo metropolis. Apart from the general objective, the research work also aimed at the following objectives:

  1. To find out extent to which micro finance institutions have supported the small scale business?
  2. To find out the extent to which the small scale businesses benefited from the credit scheme designed for them by micro finance institutions.
  3. iii. To find out if the small scale business are making good use of their advances.
  4. To find out if the loan given by microfinance institutions have improved the general productivity of small scale business


In other to fulfill the objectives of the study, the researcher attempt to answer the following questions.

  1. To what extent have the micro finance institutions supported the operations of small scale business?
  2. To what extent have small scale businesses benefited from the credit scheme designed for them?
  3. iii. Are the small scale businesses making good use of their advances?
  4. Will this loan given by microfinance institutions improve the general productivity of the small scale business?


A hypothesis is a preposition that is stated in a testable form and predicts a particular relationship between two or more variables. By test we mean either to confirm it or to prove it wrong (Baily, 2002). The hypotheses in this case are:

Hypothesis One

HO:     Microfinance Institutions does not support the operations of small scale businesses in Ibadan metropolis.

H1:      Microfinance Institutions support the operations of small scale businesses in Ibadan metropolis.

Hypothesis Two

HO:     Small scale businesses have not benefited from the credit scheme designed for them by microfinance institutions Ibadan metropolis.

H1:      Small scale businesses have benefited from the credit scheme designed for them by microfinance institutions Ibadan metropolis.


The relevance of the roles played by modern microfinance institutions cannot be overlooked. When the objectives of this study are achieved it will go a long way to create awareness among small and medium entrepreneurs about the existence of MFIs as well as correct the perceptions of small and medium entrepreneurs that have unfounded reservations about the operations of the modem MFIs.

The study may provide solutions to the challenges faced by modern MFIs in services delivery and provide a platform for the improvement of their services which the state economy undoubtedly needs to attain the millennium development goals.

The research may help entrepreneurs and managers understand the major role of microfinance institutions in financing small scale businesses as well as how to benefit from the loans given to them by these institutions. It will also serve as a guide or reference to scholars and writers who need to know more about microfinance role in financing small scale businesses.


The study attempts to find out the evaluation  of microfinance institutions and small scale business productivity in Nigeria. The small scale businesses that covered; Hair dressing industry, oil and gas business and agricultural industry.


The need to define some of the key terms that were frequently used in this study cannot be over looked.

1.9.1 Microfinance institutions (MFIs): are designated financial institutions dedicated to assisting small enterprises, the poor, and the households who have no access to the more institutionalizes financial systems, in mobilizing savings, and obtaining access to financial services. (Elahi et al 2004).

1.9.2 Micro finance: is defined as the provisions of very small loans (micro – credit) to the poor, to help them engage in new productive business activities and/or to grow/expand existing ones. (Kimotho, 2005).

1.9.3 Small and medium enterprises: this is an outline which requires small amount of capital and has some reasonable number of employees. (Anderson 1998).

1.9.4 Microcredit is broadly recognized as the practice of offering small, collateral – free loans to members of cooperation’s who otherwise would not have access to the capital necessary to begin small businesses (Hossain, 2002).


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