Full Project – THE ROLE OF MICROFINANCE BANKS ON THE PERFORMANCE OF SMALL SCALE BUSINESSES

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

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.

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