Financing Small Business Law Outline

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  Cultural Centre (Main Auditorium)
            8th November 2007
• Definition

• Nature of Small Businesses

• Roles of Small Businesses in Economic Development

• Financing Needs of Small Businesses

• Providing Operational Financing for Small Businesses


• The Bangladesh Experience

• Challenges

• Conclusion
• 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.
    Nature of Small Businesses
• 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.
          Roles of Small Businesses in
            Economic Development
•    Employment Generation.

•    Vehicle for rapid industrialization

•    Catalyst of Poverty alleviation

•    Competitive spur to large firms – being fast, flexible and close to

•    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.
     Financing Needs of Small
1.    Start-up capital to help a new concern.
2.    Existing business need finance for two
       (a) Finance expansion of the business.
       (b) To adjust existing structure of the balance sheet,
       such as the proportion of equity to debt or the
       proportions of long term to short term debts.
    Providing Operational
Financing for Small Businesses
• 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
• 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.

             The Bangladesh Experience

Muhammad Yunus: Nobel Peace Prize Winner, Bangladesh Microcredit Pioneer

     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”

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
  • 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.

  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.
   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.
 Features of Microfinance Policies
            In Nigeria
• Microfinance Policy Objectives
   - Accessibility of financial services by potentially productive local
   - Integration of the informal sub-sector into the national financial
   - 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.
   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

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
   - 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.

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
   - 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

   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.
• 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
   - Proactive banks are beginning to set up structures to capture
     the huge potentials in Microfinance
   - Others are still “testing the waters”

• 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

Description: Financing Small Business Law Outline document sample