Abstract
This study examines the role of mortgage financial institutions in the development of small businesses in Nigeria, highlight their performances with a view to identify the challenges inhibiting the optimal performance of the mortgage financing structures in Nigeria and suggest way forward. The approach adopted is a survey analysis of the various components of the policy measures and comparative analysis with other jurisdictions. The study found that low awareness about existing mortgage financing arrangements, low financing capacity of the mortgage institutions and inefficient title/legal framework among others remain the major impediments to the growth of small businesses in Nigeria.
CHAPTER ONE
INTRODUCTION
- Background of the study
The term “mortgage” has been in existence since the 17th Century. It is a loan often associated with real estate. Indeed, the history of the word has been traced back to the legal interpretation by the old French to mean “dead” (mort), “contract” or “pledge” (gage). Mortgages, like other loans, have a fixed term to maturity, a date by which the loan must be fully repaid. Consequently, it was seen as the probability that the mortgagor will repay his debt but in the event of a default, the pledged property (in those days, land business enterprise) was taken over or seized from him and thus considered “dead” to him (mortgagor). If the incurred debt (loan) was repaid, then the business pledged was dead to the mortgagee. In the jurisdiction of finance and economics, it is an agreement under which an individual borrows money from a lender (usually a mortgage lending institution) to finance a business or property and pledges same business such that the lender takes possession of the said business if the borrower fails to repay the money back. The online dictionary defines the word mortgage as a “temporary, conditional pledge of property or business to a creditor as security for performance of an obligation or repayment of a debt”., The Longman Dictionary of Contemporary English (2005) defines the term „Mortgage‟ as “a legal arrangement by which someone borrows money from a bank or similar organization in order run a business and pay back the money over a stipulated period of time”. The word „mortgage‟ is simply defined in the Property and Conveyancing Law (1959) as “including any charge or lien on any property for securing money or money‟s worth.
An efficient and robust financial system acts as a powerful engine of economic development by mobilising resources and allocating the same to their productive uses. It reduces the transaction cost of the economy through provision of an efficient payment mechanism, helps in pooling of risks and making available long-term capital through maturity transformation. By making funds available for entrepreneurial activity and through its impact on economic efficiency and growth, a well-functioning financial sector also helps alleviate poverty both directly and indirectly. In both developed and developing countries, the need for efficient financial institutions in facilitating financial intermediation as a growth channel in the economy has been recognized in literature in recent years. Although, the lack of efficient financial intermediation in developing countries like Nigeria is widely evidenced by the mismatch between institutional savings, lending and investment. It is however clear that the need for investment in the real vibrant sectors of these countries resulted to the introduction of development finance institutions and other financial vehicles programmes to provide credit at below market rates for the purchase of capital. According to the Development Finance Forum (2004), the purchase of capital includes financial capital and other kinds of capital: land, water, and forests; infrastructure, utilities, and housing; education, skills, and training; and functioning institutions. All these forms of capital are termed “Capital Plus”. Also, the lack of functioning financial institutions to coordinate financial intermediation at its peak has resulted in post-independence African countries carrying out tightly regulated financial system which were motivated in principle by prudential considerations until the 80s. In a developing country like Nigeria, however, financial sectors are usually incomplete in as much as they lack a full range of markets and institutions that meet all the financing needs of the economy. For example, there is generally a lack of availability of long-term finance for infrastructure and industry, finance for small and medium enterprises (SME) development and financial products for certain sections of the people. The role of development finance is to identify the gaps in institutions and markets in a country’s financial sector and act as a ‘gap-filler’, principal motivation for developmental finance is, therefore, to make up for the failure of financial markets and institutions to provide certain kinds of finance to small scale businesses in Nigeria. The failure may arise because the expected return to the provider of finance is lower than the market-related return (notwithstanding the higher social return) or the credit risk involved cannot be covered by high risk premium as economic activity to be financed becomes unviable at such risk-based price. Development finance is, thus, targeted at economic agents, which are rationed out of market. The vehicle for extending development finance is called development financial institution (DFI) or development bank
- STATEMENT OF THE PROBLEM
According to the Development Finance Forum (2004), the purchase of capital includes financial capital and other kinds of capital: land, water, and forests; infrastructure, utilities, and housing; education, skills, and training; and functioning institutions. All these forms of capital are termed “Capital Plus”. Also, the lack of functioning financial institutions to coordinate financial intermediation at its peak has resulted in post-independence African countries carrying out tightly regulated financial system which were motivated in principle by prudential considerations until the 80s. In a developing country like Nigeria, however, financial sectors are usually incomplete in as much as they lack a full range of markets and institutions that meet all the financing needs of the economy. it is against this backdrop that the researcher intends to investigate the role of financial institutions in the development of small businesses.
- OBJECTIVE OF THE STUDY
The main objective of this study is to ascertain the role of mortgage financial institutions in the development of small businesses in Nigeria. To aid the effective completion of the study, the researcher intends to achieve the following specific objective;
- To ascertain the role of mortgage financial institution to the growth of small businesses in Nigeria
- To examine if there is any relationship between mortgage financial institutions and financing of small scale business in Nigeria
- To examine the role of development financial institution in financing small businesses in Nigeria.
- To examine the possible benefit in which mortgage financial institutions can derived in financing small businesses in Nigeria.
- SIGNIFICANCE OF THE STUDY
It is believed that at the completion of the study, the findings will be of great importance to the management of mortgage financial institution in their funding approach to small businesses as the industry is seen as an untapped gold mine, the study will also be of help to the management and entrepreneurs of these small businesses to keep appropriate financial record as this will help them in obtaining funds from these mortgage financial institutions, the study will also be useful to researchers who intend to embark on a study in a similar topic. Finally, the study will be beneficial to academia’s, researchers, teachers, lecturers, students and the general public as the study will add to the pool of existing literature on the subject matter.
- SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers, the role of financial institutions in the development of small businesses in Nigeria. But in the cause of the study, there were some factors which limited the scope of the study;
- a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study.
- b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
- c) FINANCE: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.
1.6 OPERATIONAL DEFINITION OF TERMS
Mortgage bank
Mortgage bank is a bank that specializes in originating and/or servicing mortgage loans. In the US a mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers.
Small businesses
Small businesses are privately owned corporations, partnerships, or sole proprietorships that have fewer employees and/or less annual revenue than a regular-sized business or corporation
Mortgage finance
A mortgage, or more precisely a mortgage loan, is a long-term loan used to finance the purchase of real estate.
