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ROLE OF MICROFINANCE BANKS AND FINTECH IN PROMOTING SME FINANCING AND ECONOMIC DEVELOPMENT IN NIGERIA

CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Small and Medium Enterprises (SMEs) represent a fundamental driver of economic activity in Nigeria, contributing significantly to employment creation, gross domestic product (GDP) growth, innovation, and poverty reduction. These enterprises, often operating in informal and rural sectors, face substantial barriers to accessing formal finance, including high collateral requirements, perceived credit risk, information asymmetry, and limited credit history from traditional banks (Sunday et al., 2025). This persistent financing gap constrains SME expansion, productivity, and overall contribution to national development.

Microfinance banks (MFBs) have been positioned as key institutions to address these challenges by providing accessible credit, savings products, and capacity-building services to underserved segments, including low-income entrepreneurs, women, youth, and rural operators. Empirical research demonstrates that MFBs positively influence SME growth through loan provision and financial inclusion efforts. For instance, microfinance loans exhibit a positive and significant effect on SME performance, enabling better record-keeping, financial planning, and profitability when supported by financial literacy (Baba & Audu, 2021, as cited in RSIS International, 2025). Studies using data from 2006 to 2023 further show that microfinance loans contribute to small business growth, although deposits and inflation can produce mixed outcomes due to factors like high interest rates and inadequate monitoring (Sunday et al., 2025). In specific contexts, such as Abuja’s Federal Capital Territory, access to MFB loans increases the likelihood of production capacity expansion by approximately 20% compared to non-customers, highlighting direct impacts on business performance (ResearchGate, 2025a).

Complementing MFBs, financial technology (fintech) platforms have transformed SME financing by introducing digital lending, alternative credit scoring, mobile payments, and crowdfunding solutions that reduce reliance on collateral and accelerate access. Qualitative explorations reveal that fintech addresses key barriers such as high interest rates and lengthy approval processes, improving credit availability and business efficiency for Nigerian SMEs (Aina, 2025). Adoption trends indicate substantial progress, with SME fintech usage rising from 6% in 2014 to 42% in 2024, particularly in agriculture, retail, and manufacturing sectors, although digital loan penetration remains limited at 12% and rural coverage lags (Akande, 2025). Fintech’s role extends to enhancing financial inclusion and economic growth, as innovations facilitate faster transactions and broader outreach (Aina, 2025).

The interplay between MFBs and fintech offers synergistic potential, where MFBs provide community-based trust and personalized support, while fintech delivers scalability, speed, and data-driven innovations. In analogous developing contexts, perceived value of microfinance fosters exploratory innovation enabling SMEs to pursue new opportunities which in turn mediates positive effects on performance (Sarfo et al., 2024). In Nigeria, this combined approach aligns with objectives of poverty alleviation and sustainable development by mobilizing resources, generating employment, and promoting inclusive growth (Okeke, 2025; Sunday et al., 2025).

Despite these advancements, challenges persist, including high default risks, limited financial literacy, infrastructure deficits, and regulatory hurdles, which limit full realization of benefits (Aina, 2025; Sunday et al., 2025). This study examines the roles of MFBs and fintech in SME financing and their implications for economic development in Nigeria.

1.2 Statement of the Problem

Small and medium enterprises (SMEs) in Nigeria persistently confront severe financing constraints that hinder their expansion, innovative capacity, and economic contributions. Conventional impediments, including stringent collateral requirements and risk-averse lending practices, systematically exclude SMEs from formal credit markets, thereby reinforcing patterns of underperformance and elevated failure rates (Aina, 2025). Microfinance banks (MFBs) ostensibly seek to alleviate these challenges; however, empirical findings reveal inconsistent outcomes. While access to credit positively correlates with SME growth, prohibitive interest rates, inefficient capital allocation, and inadequate financial literacy among borrowers frequently precipitate adverse effects on business performance (Sunday et al., 2025).

Similarly, fintech solutions exhibit potential but encounter substantial limitations. Low adoption rates of digital lending platforms (approximately 12%), disparities in rural accessibility, cybersecurity vulnerabilities, and fragmented regulatory frameworks impede their efficacy (Akande, 2025). These systemic deficiencies perpetuate regional economic disparities, obstructing national development objectives such as poverty alleviation and equitable growth (Okeke, 2025). Absent robust policy interventions to enhance institutional coordination, oversight mechanisms, and financial education, the transformative capacity of MFBs and fintech to address funding deficits and foster sustainable economic advancement remains unrealized (Sarfo et al., 2024; Aina, 2025).

1.3 Objectives of the Study

1. Determine role of microfinance banks in promoting SME financing in Nigeria.
2. Examine role of fintech in promoting SME financing in Nigeria.
3. Analyze implications of microfinance banks and fintech for economic development in Nigeria.

1.4 Research Questions

1. What role do microfinance banks play in promoting SME financing in Nigeria?
2. What role does fintech play in promoting SME financing in Nigeria?
3. What implications arise from microfinance banks and fintech for economic development in Nigeria?

1.5 Significance of the Study

This research offers evidence-based insights for policymakers, regulators like the Central Bank of Nigeria, MFBs, fintech providers, and SME stakeholders to refine strategies for improving credit access and financial inclusion (Aina, 2025). By highlighting mechanisms such as exploratory innovation and literacy’s moderating role, it supports interventions to enhance SME performance and sustainability (Sarfo et al., 2024). Academically, it enriches literature on financial inclusion in emerging markets, providing context-specific findings for future studies on development finance (Okeke, 2025; Sunday et al., 2025).

1.6 Scope and Limitations

The study covers the roles of MFBs and fintech in SME financing in Nigeria, primarily from 2015 to 2025, relying on scholarly secondary sources. It emphasizes key sectors like agriculture and retail but excludes informal non-digital mechanisms. Limitations include reliance on published data, potential methodological variations across studies, and challenges in generalizing qualitative insights.

1.7 Definition of Terms

• Small and Medium Enterprises (SMEs): Enterprises with limited scale, contributing to employment and GDP, often facing financing barriers.
• Microfinance Banks (MFBs): Regulated institutions offering small-scale loans and services to underserved groups for inclusion and growth.
• Fintech: Technology-enabled financial innovations, including digital lending and payments, enhancing access and efficiency.
• Economic Development: Sustained improvements in welfare, inclusion, and productive capacity.

References

Aina, A. T. (2025). Fintech and SME financing in Nigeria: A qualitative exploration into the challenges and potential of fintech in addressing the financing gaps faced by small and medium-sized enterprises (SMEs) in Nigeria. SSRN. https://doi.org/10.2139/ssrn.5250906

Akande, J. O. (2025). Exploring the role of financial technology in transforming small and medium enterprises in Nigeria. Wukari International Studies Journal, 9(4), 1–16. https://doi.org/10.64633/wissj.v9i4.01

Okeke, I. C. (2025). Microfinance banks and economic development in Nigeria (2013-2023). International Journal of Research and Innovation in Social Science, 8(1), 1424-1432. https://dx.doi.org/10.47772/IJRISS.2024.8120121

Sarfo, C., Zhang, J. A., O’Kane, C., & O’Kane, P. (2024). Perceived value of microfinance and SME performance: The role of exploratory innovation. International Journal of Innovation Studies, 8(2), 172-185. https://doi.org/10.1016/j.ijis.2024.100006

Sunday, T. G., Akinade, A. B., & Akanegbu, B. (2025). Impact of microfinance bank lending on the small business growth in Nigeria. Open Journal of Social Sciences, 13, 772-785. https://doi.org/10.4236/jss.2025.133050