Informal Sources of Microfinance and Profitability of Micro and Small Enterprises Clusters in South-East Nigeria

Abstract

Micro and small enterprises (MSEs) have been found to be engines of growth, drivers of production, income generation, job creation, and tools for poverty reduction. The source of microfinance is important because at the center of every enterprise objective is profitability. MSEs in South-East Nigeria have not played these important roles effectively due to the challenges of access to finance and a host of other factors. The main thrust of this article is to evaluate the effectiveness of informal microfinance sources on the profitability of MSEs in Southeast Nigeria. The study employed a multistage sampling technique in cluster selection from three industrial cities and generated relevant data through questionnaires. A sample of 540 enterprises out of 1994 enterprises was selected across different clusters comprising enterprises under production, trade, and services in the three cities. Employing a regression technique, the study found that informal microfinance sources have impact on the profitability of MSEs. The study further found that enterprises patronized the informal source because of quick responses and personal relationship (social capital). The study recommends that microfinance policy framework and interventions should encourage official microfinance providers to have their location closer to the enterprise clusters with the appropriate regulatory guarantee for operators.