ABSTRACT
This
study was set to investigate the financial challenges of small scale
enterprises in Nigeria. The sources of materials for the study were primary,
and the data were collected by the use of structured questionnaires which were
designed and administered to SME operators. Sixty respondents were recruited
for the study and questionnaires were returned at a response rate of 85 per
cent. Data were represented in percentage and hypotheses were tested using
chi-square. The study showed that most of the SMEs were not managed by
professionals. It also showed that operators of SMEs had difficulties in
acquiring financial aids from banks hence most of the respondents turned to
family and friends as sources of financial assistance. Findings from this study
also showed that no standing government policies were helpful in their
small-scale business enterprises. This study proved that poor financing of SMEs
affects its productivity. In view of the findings, it was recommended that
banks and other financial institutions should organize educational workshops to
enlighten SME operators on ways to ensure efficient management. It was also
recommended that there should be a national policy on SMEs by the government in
respect of funding among others in order to sustain the SMEs to grow and
develop in Nigeria
CHAPTER ONE
1.0 Introduction
1.1
Background
to the Study
Perhaps, no other development strategy has enjoyed
as much prominence in Nigeria’s development plans as the Small and Medium Scale
Enterprises (SMEs) development strategy. In recent years, particularly since
the adoption of the economic reform programme in Nigeria in 1986, there has
been a decisive switch of emphasis from the grandiose, capital intensive, large
scale industrial project based on the philosophy of import substitution to
micro and small scale enterprises with immense potentials for developing
domestic linkages for rapid, sustainable industrial development. Apart from
their potential for ensuring a self-reliant industrialization, in terms of
ability to rely largely on local raw materials, small and medium enterprise,
are also in a better position to boost employment, guarantee a more even distribution
of industrial development in the country, including the rural areas, and
facilitate the growth of non-oil exports.
According
to the National Council on Industry (1991) cited in Olajide, Ogundele, Adeoye
and Akinlabi (2008), micro/cottage industry is an industry whose total project
cost (excluding cost of land but including working capital) is not more than
N500, 000:00 (i.e. US$50,000); while small scale industry is an industry whose
total project cost (excluding cost of land and including working capital) does
not exceed N5m (i.e. US$500,000).
Small
scale business started gaining prominence in Nigeria in the early 1970s when
many personal enterprises started springing up. Before this time, agriculture
dominated the economy. There were a lot of agricultural small holdings before
and during the emergence of oil boom. Over 75 percent of agricultural holdings
were managed by the small farmers which comprise mainly of family business.
Government agricultural holdings were not more than 10 percent.
Small
scale businesses are catalyst in the socio – economic development of any
country. They are a veritable vehicle for the achievement of national
macroeconomic objective in terms of employment generation at low investment
cost and enhancement of apprenticeship training. In Kenya, for instance, Kombo,
Justus, Murumba and Makworo (2011), submitted that “micro and small scale
entrepreneurs who include agriculture and rural businesses have contributed
greatly to the growth of Kenyan economy”. The sector contributes to the
national objective of creating employment opportunities, training
entrepreneurs, generating income and providing a source of livelihoods for the
majority of low income households in the country accounting for 12-14% of GDP
(Republic of Kenya, 1982, 1989, 1992, 1994). The catalytic roles of micro and
cottage businesses have been displayed in many countries of the world such as
Malaysia, Japan, South Korea, Zambia, and India among other countries.
Small
scale enterprises contribute substantially to the Gross Domestic production
(GDP), export earnings and employment opportunities of these countries. Small scale
enterprises (MSEs) have been widely acknowledged as the springboard for
sustainable economic development. Apart from the fact that it contributes to
the increase in per capital income and output, it also creates employment
opportunities, encourage the development of indigenous entrepreneurship,
enhance regional economic balance through industrial dispersal and generally
promote effective resource utilization that are considered to be critical in
the area of engineering economic development (Tolentino, 1996; Oboh, 2004;
Odeh, 2005).
Small
scale enterprises in Nigeria have not performed creditably well and they have
not played expected significant role in economic growth. With the realization
of the potentials of the small scale enterprise, governments at different level
in Nigeria have put up a lot of support programmes to promote and sustain their
development. It is believed that massive assistance; financial, technical,
marketing and managerial from the government are necessary for the SMEs to
grow.
In
order for the SME’s to continue to fulfil the above and much more, they need
access to finance to carry out their business operation and expansion. The
seeming lack of finance for SMEs is not only retarding their expansion but also
the growth of the nation’s economy. Macroeconomic conditions in Nigeria since
the beginning of the 21st century has severely constrained private
sector access to credit. High levels of government borrowing pushed interest
rates up and crowded the private sector out of the financial markets.
In
view of the perennial financing challenge faced by these SMEs, many
interventions have been made by the government through its recent monetary
policy and financial sector reforms. These have substantially increased banks’
lending to the private sector but limited access to credit, high interest rates
and prohibitive collateral requirements still pose significant constraints to the
growth of many SME’s.
Another
area of constraint, which tends to limit the assess to finance by SMEs, is lack
of information. Small business owners most often possess more information about
the potential of their own businesses but in some situations it can be
difficult for business owners to articulate and give detailed information about
the business as the financiers want. Additionally, some small business managers
tend to be restrictive when it comes to providing external financiers with
detailed information about the core of the business, since they believe in one
way or the other, information about their business may leak through to
competitors (Winborg and Landstrom, 2000).
When
SME sector does not have access to external funds for investment, the capacity
to raise investment per worker, and thereby improve productivity and wages, is
seriously impaired. The difficulties that SMEs experience can stem from several
sources. The domestic financial market may contain an incomplete range of
financial products and services. The lack of appropriate financing mechanisms
could stem from a variety of reasons, such as regulatory rigidities or gaps in
the legal framework. Moreover, development economists increasingly accept the
proposition that, due to monitoring difficulties such as
To
evaluate the efficiency of schemes for promoting SME finance, an effectual SME
financing scheme should provide opportunities for SMEs to meet their financing
needs and must maintain the profitability of the enterprise, or on the eventual
sale of investments or collection of loans that would provide cash for later
investments. It is worth noting that among the resources needed for the
production of goods and services, there are many things that set capital
(finance) apart from the other inputs. Fixed Assets such as machinery and
equipments, land and buildings, just to mention a few, provide benefits that
derive from their physical characteristics. Unfortunately, the same thing
cannot be said about the financial resources used to run a business. The
acquisition of financial resources leads to contractual obligations. Small
enterprises in developing countries typically, lack access to finance as an
important constraint on their operations. This lack of access is often
associated with financial policies and bank practices that make it hard for
banks to cover the high costs and risks involved in lending to small firms.
1.2 Statement of the Problem
Despite
the role of SMEs in the Nigerian economy, the financial constraints they face
in their operations are daunting and this has had a negative impact on their
development and also limited their potential to drive the national economy as
expected. This is worrying for a developing economy without the requisite
infrastructure and technology to attract big businesses in large numbers.
Most
SMEs in the country lack the capacity in terms of qualified personnel to manage
their activities. As a result, they are unable to publish the same quality of
financial information as those big firms and as such are not able to provide
audited financial statement, which is one of the essential requirements in
accessing credit from the financial institution. This is buttressed by the
statement that privately held firms do not publish the same quantity or quality
of financial information that publicly held firms are required to produce. As a
result, information on their financial condition, earnings, and earnings
prospect may be incomplete or inaccurate. Faced with this type of uncertainty,
a lender may deny credit, sometimes to the firms that are credit worthy but
unable to report their results (Coleman, 2000).
Another
issue has to do with the inadequate capital base of most SMEs in the country to
meet the collateral requirement by the banks before credit is given out. In the
situation where some SMEs are able to provide collateral, they often end up
being inadequate for the amount they needed to embark on their projects as SMEs
assets- backed collateral are usually rated at ‘carcass value’ to ensure that
the loan is realistically covered in the case of default due to the uncertainty
surrounding the survival and growth of SMEs (Binks et al., 1992).
These
are some of the factors already acknowledged by some researchers as blocking
most SMEs in accessing credit from the financial institution in the country.
SMEs
in Nigeria do not also have the luxury of picking a financing scheme that will
be appropriate for their businesses. The major type of financing open to them
is debt financing from the financial institutions, which most often comes with
a long list of requirements that most SMEs find them difficult to meet. The
other type that is Asset financing, aside the long list of criteria also
requires operators of SMEs to provide 50% of the funds and the financing institution
providing the other half to fund the purchases of the assets. This type of
financing do not allow for growth of the SMEs sector since they are all short
term in nature.
1.3 Research
Questions
The
following are the research questions of this study
i.
Do qualified financial
personnel manage the financial activities of SMEs?.
ii.
What are the sources of
capital for SMEs
iii.
Do SMEs meet up with
the collateral requirements of financial institutions?
iv.
Are all the financial
schemes provided by government available to SMEs
1.4 Objectives of the Study
This
study aims to examine the challenges of financing small scale business
enterprises in Nigeria. It also aims at finding ways of making small scale
enterprises more effective in order to enhance to economic development of the
nation’s indigenous technology.
Moreover,
in this study, attempt will be made to achieve the following:
i.
To examine the
availability of qualified financial managers in SMEs in study area.
ii.
To assess the sources
of capital for SMEs
iii.
To investigate the
problems encountered by SMEs in meeting with collateral requirements from
financial institutions.
iv.
To ascertain the
financial scheme available from government and other donor agencies, and the
schemes commonly embraced by SMEs
v.
To recommend measures
for reducing financial challenges associated with SMEs
1.5 Research Hypotheses
Two
hypotheses are formulated and tested in this study:
Hypothesis 1
H0:
There are no difficulties faced by SMEs when accessing finance from financial
institutions
H1: SMEs encounter numerous problems when
accessing finance from financial institutions.
Hypothesis 2
HO: Poor financing does not affect productivity
of SMEs.
H1: Poor financing does affect productivity of
SMEs.
1.6 Significance of the Study
Development and growth of the Nigeria’s economy through
the small scale enterprises is crucial at this era, hence the nature of this
study is timely. This study will be of immense benefits to cottage enterprises
as well as other small and medium scale enterprise. Investigating challenges of
financing SMEs in Nigeria especially with accessing credit or funding from
financial institutions from the perspective of the operators of these SMEs is
crucial since it would present the problem from the perspective of the SMEs
thereby making it a base line study for policy interventions by state agencies,
development partners and non-governmental organisation with missions to develop
the SME sector. Furthermore, this study will serve as a secondary data to
future researches on small and medium scale enterprises.
1.7 Scope of the Study
The scope of this study is restricted to small and
medium scale enterprises. Selected SMEs in the rural areas of Edo Central
Senatorial District served as the small and medium scale enterprise employed
for this study. Data for the study will be harnessed within a period of two
weeks.
The
researcher will place emphasis on objective of the study, and other related
matters as they affect the small scale enterprises
1.8 Limitations of the Study
A
good number of factors made the study difficult. Notably, is; 1.The time factor,
due to the limited time, 2; Small sample size - the researcher based this study
only on few selected small business enterprises in the study area.
However,
the researcher within the limits of the above constraints was able to source
for and obtain sufficient date for the study. The expected result of the study
will be robust and significantly representative of the population.
1.9 Organisation of the Study
The
first chapter contains the background which introduces the topic and touched on
some of the issues with regards to SME and its financial challenges. The
literature review that forms the second chapter looks at SMEs , various financing
schemes available to SMEs and the challenges these SMEs faced in accessing
credit in Nigeria. Thirdly, the method used in gathering the data forms the
third chapter. Chapter four contains the data analysis, presentation and
discussion of the findings. The conclusion and recommendations will form the
chapter five of this thesis.
1.10 Operational Definitions of Terms
Small Scale Enterprise:
- The definition of small scale enterprise varies with people and countries
such that it is better defined based on the characteristics. In the Nigerian
context, small scale enterprise is any processing, serving or manufacturing
industry with an investment in machinery and equipment above N500,000 [Waboi,
1987]. According to the centre for management development in a policy proposal
to Federal Government in 1982, A small scale enterprise is a manufacturing,
processing or service enterprise involved in a factory or production type
operation employing up to 50 full time employees, investment in plant machinery
are utilized in its operation.
Management:
- According to Akpala [1990] Management is the process of combing and utilizing
an organization input [men, materials and money] by planning, organizing,
directing and controlling for the purpose of producing output [goods and
services].
Entrepreneur:
- According to Hagen, an entrepreneur is an individual who conceives the idea
of business, design the organization of the firm, accumulates capital, recruits
labour, establishes relations with supplies, customers and the government and
converts the conception into a functioning organization business.
Opportunity:
An opportunity is a potential gainful situation that must be recognized and
exploited, an opportunity has the qualities of being attractive, durable and
timely. It is anchored in product or services which creates or adds value for
its buyers or end users.
Development:
This entails growth of the business, increases in goods and services and t he
improvement of lives of the citizen.
REFERENCES
Binks, M.R., Ennew, C.T. and Reed,
G.V. (1992). Information Asymmetries and the Provision of Finance to Small
Firms. International Small Business Journal, 11(1). 35-46.
Coleman, S. (2000). Access to
Capital and Terms of Credit: A Comparison of Men and Women-Owned Small
Businesses. Journal of Small Business Management, 38(3). 37-52.
Kombo, A., Justus, W., Murumba, N.
and Makworo E. (2011), An Evaluation of the Impact of Risk management
Strategies on Micro-Finance Institutions’ Financial Sustainability: A case of
Selected Micro finance institutions in Kisii Municipality, Kenya”. Educational
Research, 2 (5) 1149-1153.
Oboh, G.A. (2004) Contemporary
Approaches for Financing Micro, Small and Medium Enterprises”. Conference on
SME held at the International Conference Centre, Abuja, Nigeria. 2-15.
Odeh, O. (2005). The Impact of
Federal Government Reform Programme on the Development of the SMEs Sector. A
paper presented at the National Seminar on “Facilitating Easy Accessibility to
the SMEEIS Funds by SME operators. Lagos, 10 – 11.
Olajide, O.T., Ogundele, O.J.K.,
Adeoye, S.O. and Akinlabi, B.H. (2008). Small and Medium Enterprises (SMEs): An
Appropriate Medication for Nigeria’s Economic Predicament in the Global
Competitive Economy”. Akungba Journal of of Management, 1 (1& 2). 173-193.
Tolentino, A. (1996), Guidelines
for the Analysis of Policies and Programs for Small and Medium Enterprise
Development Enterprise and Management Development. ILO Working Paper.
Winborg, J and Landstrom, H (2000).
Financial Bootstrapping in Small Businesses: Examining Small Business Managers’
Resource Acquisition behaviour – Journal of business venturing 16, 235-254.
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