PROVIDING OPERATIONAL FINANCING FOR SMALL BUSINESSES - CHALLENGES OPPORTUNITIES BY DR. MRS CECILIA IBRU MD

1. PROVIDING OPERATIONAL FINANCING FOR SMALL BUSINESSES - CHALLENGES & OPPORTUNITIESBYDR. (MRS) CECILIA IBRUMD/CEOOCEANIC BANK INTERNATIONAL PLCATCultural Centre (Main Auditorium)  Calabar8th November 2007

3. Definition A small business is a business which is independently owned and operated, with close control over operations and decisions held by the owners. Business equity is not publicly traded and business financing is personally guaranteed by the owners. The business should have less than twenty employees. There have generally been two broad defining categories, namely: quantitative and qualitative. 

4. Management and ownership is rarely separate. Control over business operations and decisions resides with one or two persons, who are usually family members or friends. The equity in the business is not publicly traded. The personal security of the owners is required to secure business debt. Limited liability is rarely present. The level and number of formal contractual relations are kept at a minimum level. Personal objectives of owners will guide and directly influence business decisions. Nature of Small Businesses

5. Employment Generation. Vehicle for rapid industrialization Catalyst of Poverty alleviation Competitive spur to large firms – being fast, flexible and close to customers Perform important sub-contract functions Perform an important import substitution role. Viable source of getting new ideas into the economy – through innovation and creation of new ventures The World Bank estimates that there are more than 500 million people who have directly or indirectly benefited from microfinance-related operations.  Roles of Small Businesses in Economic Development

6. Financing Needs of Small Businesses

7. 7 Introduction Importance of Microfinance in the Economy Sources of Micro Finance Services Features of Microfinance Policies In Nigeria Challenges of Microfinance In Nigeria Prospects of Microfinance In Nigeria Conclusion Providing Operational Financing for Small Businesses

8. 8 The Provision of financial services to the Small Businesses (grass-root entrepreneurs) and economically active poor who are traditionally not serviced by the conventional financial institutions is called Micro financing. Three features distinguish micro financing from other formal financial products: The smallness of loans advanced and/or savings collected, The absence of asset-based collateral; and Simplicity of operations. Providing Operational Financing for Small Businesses

9. 9 The Bangladesh Experience

10. 10 The Bangladesh Experience The winner of year 2006 Nobel Peace Prize, Bangladesh Microcredit Pioneer, Muhammad Yunus, shows how important and far-reaching micro financing could be. He founded Grameen Bank in Bangladesh in 1976. This involves lending small amount to grassroots entrepreneurs without collateral The idea has spread throughout the world; including Nigeria The system relies on trust and social interaction to secure repayment and clients are appraised based on character and cash flow. Yunus Said: “Eradicating poverty can give you real peace”

11. 11 The Bangladesh Experience Contd.. “There is no self-respect and status when you are burdened with poverty”. This means that there is a link between peace and development Poverty can undermine a state’s capacity to maintain law and order and inequality weakens social cohesion. Micro finance has helped Bangladesh in reducing poverty by 10 percentage points over the past five years to 40 per cent. This rate puts Bangladesh on track to meet its Millennium Development Goals of halving poverty by 2015.

12. 12 Sources of Micro Finance Services 1. Informal/Traditional reciprocal arrangements: Rotating Savings and Credit Associations (ROSCAs) e.g. “esusu”, “adashi”; Self-Help Groups (SHGs); moneylenders; pawnbrokers; thrift collectors; family members, friends and neighbors. This account for over 70% of total credit to the Microfinance Industry. 2. Semi-formal sources: credit unions; savings and credit co-operatives and multipurpose co-operatives; and Non-Governmental Organisations (NGOs), Poverty Alleviation Funds, and Government-sponsored programs. 3. Formal sources: Development Financial Institutions, Commercial Banks, and Licensed Micro Finance Institutions.

13. Micro Finance Policy In Nigeria To address the situation and provide sustainable finance services to micro entrepreneurs, the Microfinance Policy, Regulatory and Supervisory Framework was launched on December 15, 2005 by the former President of the Federal Republic of Nigeria and Commander-In-Chief of the Armed Forces, Chief Olusegun Obasanjo (GCFR). The Policy: Provides for the setting up of private sector driven microfinance banks (MFBs) to provide financial services for poor and low income groups.

14. 14 Features of Microfinance Policies In Nigeria Microfinance Policy Objectives Accessibility of financial services by potentially productive local entrepreneurs; Integration of the informal sub-sector into the national financial system; Enhancement of service delivery by microfinance institutions to micro, small and medium entrepreneurs; Facilitate rapid rural transformation and Encourage linkage programmes between universal/development banks, specialized institutions and microfinance banks.

15. 15 Features Of Microfinance Policies In Nigeria Microfinance Policy Targets: To cover the majority of the micro but economically active population by 2020 thereby creating millions of jobs and ultimately reducing poverty. To increase the share of micro credit as percentage of total credit to the economy from 0.9 percent in 2005 to at least 20 percent in 2020; To increase the share of micro credit as percentage of GDP from 0.2 percent in 2005 to at least 5 percent in 2020.

16. 16 Features Of Microfinance Policies In Nigeria Microfinance Policy Targets: To promote the participation of at least two-thirds of state and local governments in micro credit financing by 2015. To eliminate gender disparity by improving women’s access to Financial services by 5% annually; and To increase the number of linkages among universal banks, development banks, specialized finance institutions and microfinance banks by 10% annually.

17. 17 Challenges Of Microfinance In Nigeria Some of the challenges that confront Micro financing Virtual Monopolies that could be formed by a few Microfinance Industry players Proper regulation of Microfinance policies by the regulatory agencies Appropriate Government and Regulatory Agencies Evolving global business environment Financial transparency of Micro Enterprises Adequate domestic entrepreneurial capacity to facilitate rapid expansion of the Micro Finance Industry Legal framework surrounding Micro Enterprises

18. 18 Opportunities for Microfinance In Nigeria Organized Private Sector, Professional Groups and Associations lobbying the governments for improved operating environments. Capital market expanding facilities to make it cost effective for MSMEs to access funds via the market. New impetus toward the establishment of venture capital companies primarily targeted at developing MSMEs. Banks identifying a sure window through which SMEEIS funds could be invested. The market for microfinance is huge and estimated to be about 100 million people in Nigeria.

19. 19 Conclusion There exist many profitable small and micro enterprises that have little or no access to funds. Lots of people and groups make money from lending to small scale borrowers Moneylenders Esusu Retailers etc Microfinance therefore remains a Niche market for Nigerian Banks Proactive banks are beginning to set up structures to capture the huge potentials in Microfinance Others are still “testing the waters”

20. But what is clear is that Microfinance is the growth strategy for Nigerian real sector “The Poor can be as reliable in borrowing as the rich, but only if the rules of lending are rewritten to replace traditional risk management with the power of trust” - Muhammad Yunus Conclusion