Efficiency of Microfinance Banks and Performance of Micro, Small and Medium Enterprises in South-West Nigeria

Abstract

Abstract The study examines the relationship between the efficiency of microfinance banks and performance of Micro, Small and Medium Enterprises (MSMEs) in South-West Nigeria during the first six years period of the commencement from 2012 to 2017 of regulatory reforms. Using panel vector autoregressive (PVAR) approach and Granger causality test, it is found that the present level of efficiency of microfinance banks has an insignificant impact on the performance of MSMEs, suggesting a negligible role in the activities of MSMEs. Put differently, the efficiency of microfinance banks does not significantly influence the performance of MSMEs. Further evidence indicates that no direction of causality found to be existing between the efficiency of microfinance banks and performance of the MSMEs. Put differently, past efficiency level of microfinance banks could not explain the present level of performance of small businesses (PSB) and vice versa, suggesting that low level of efficiency of microfinance banks contributes to the poor performance of MSMEs. It is therefore suggested that microfinance banks should adopt a suitable lending methodology such as proprietary lending technology and effective risk-based supervision to address the problem of high credit risks associated with business lending. Policy makers should also promote financial inclusion strategy and agent banking relationship more effectively. Keywords: Microfinance Bank, Micro, Small and Medium Enterprises (MSMEs), Efficiency, Business Performance, Nigeria. JEL Classifications: G21, L25, H21, L26.