An Investigation Into the Problem of Financing Small and Medium-Scale Enterprises in Nigeria

An Investigation Into the Problem of Financing Small and Medium-Scale Enterprises in Nigeria

Chapter One

PURPOSE OF THE STUDY

The purpose of this study include:

Examine the sources of fiancé of SMEs in Enugu State.
Determine the extent of financing from the government and banks to SMEs in Enugu State.
Determine the effect of use of existing financial strategy on the growth of SMEs.

CHAPTER TWO

LITERATURE REVIEW

Introduction

In this chapter, the researcher will review the works done by other scholars in the related area of study. This will help the researcher understand the direction of research by these scholars in this line of thought. The review of empirical studies will be presented in subheadings for a better understanding of the work.

Theoretical Framework

Entrepreneurship theory is adopted for this research work. The choice is because SMEs are off-shoot of entrepreneurs.

Economic Entrepreneurship Theory

The economic entrepreneurship theory has deep roots in the classical and neoclassical theories of Economics and the Austrian Market Process (AMP). These theories explore the economic factors that enhance entrepreneurial behaviour.

Classical Theory

The classical theory extolled the virtues of free trade, specialization, and competition (Ricardo, 1817). The theory was the result of Britain’s industrial revolution which took place in the mid 1700 and lasted until the 1830s.The classical movement described the directing role of the entrepreneur in the context of production and distribution of goods in a competitive marketplace (Say, 1803). Classical theorists articulated three modes of production: land; capital; and labour. There have been objections to the classical theory. These theorists failed to explain the dynamic upheaval generated by entrepreneurs of the industrial age.

Neo-classical Theory

The neo-classical model emerged from the criticisms of the classical model and indicated that economic phenomena could be relegated to instances of pure exchange, reflect an optimal ratio, and transpire in an economic system that was basically closed. The economic system consisted of exchange participants, exchange occurrences, and the impact of results of the exchange on other market actors. The importance of exchange coupled with diminishing marginal utility created enough impetus for entrepreneurship in the neoclassical movement. Some criticisms were raised against the neo-classical conjectures. The first is that aggregate demand ignores the uniqueness of individual-level entrepreneurial activity. Furthermore, neither use nor exchange value reflects the future value of innovation outcomes. Thirdly, rational resource allocation does not capture the complexity of market-based systems. The fourth point raised was that, efficiency- based performance does not subsume innovation and non-uniform outputs; known means/ends and perfect or semi-perfect knowledge does not describe uncertainty. In addition, perfect competition does not allow innovation and entrepreneurial activity. The fifth point is that, it is impossible to trace all inputs and outputs in a market system. Finally, entrepreneurial activity is destructive to the order of an economic system.

CHAPTER THREE

RESEARCH METHODOLOGY

Introduction

This chapter is concerned with the following subheadings: Area of study, Study design, Study population, Sample size, Sampling method, Data collection and Method of data Analysis.

Area of study

The study covers a garri processing industry at Abakpa Nike, Enugu. Enugu, The capital is Enugu, from which the state – created in 1991 from the old Anambra State – derives its name. There are seventeen (17) Local Government Areas and thirty nine (39) Development Centres in the State. The state shares borders with Abia and Imo States to the south, Ebonyi State to the East, Benue State to the North East, Kogi State to the North West and Anambra State to the West.

Economically, the state is predominantly rural and agrarian, with a substantial proportion of its working population engaged in farming, although trading and services are also important. In the urban areas trading is the dominant occupation, followed by services.

Study Design

The survey research method was utilized in this work. The importance of survey method in carrying out research is that it does not take decision for the researcher but rather provide information on which the author bases his/her decision.

Study Population

Our target population in this study consisted of all the working staffs at the garri processing industry at Abakpa Nike. In all, there are one hundred and two (102) working staffs and five (5) micro financial institutions in Enugu State.

CHAPTER FOUR

DATA PRESENTATION

Introduction

This Chapter is concerned with data presentation in line with the specific objectives of the study as well as the test of hypotheses.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

Conclusion

From all that has been presented in this work, we can conclude that lack of effective financial support is one of the most important problems being encountered by small and medium scale enterprises in Enugu state. The task of development involves the conversion of finance into the requisite factor inputs, and the efficient deployment of such inputs. Finance therefore, is the major underlying requirement and an important input factor in the development and industrialization effort. Plant, machinery and equipment must be procured and paid for, as well as the development and training of managerial and technical expertise.

The study also found out that financial support is the major constraining factor limiting the growth and development of the SME sub-sector. In any proposal regarding financial strategy for small and medium-scale enterprises, one must look at the totality of constraining factors and enumerate solutions to address those limitations because SME sub-sector is a system which component units must function harmoniously in order to be result oriented. In this study, we have been able to examine the nature and sources of fiancé for the SME sub-sector. We have also been able to analyze the relative importance of government, banks, other financial institutions and SMEs themselves in financing the sub-sector and highlighted the problems of making adequate financial assistance available to SMEs. The conclusion, therefore, would be the itemization of recommendations, which if put together, will form a strategy for the revitalization of the embattled SME sub-sector in Enugu State.

It should be recalled that in our earlier paragraphs, economic development of a nation can best be accelerated through the SMEs and by the evolution of effective working relationships among the many players of the economy. Industrialization cannot be achieved through emphasis on large-scale enterprises activity alone and therefore, policies and measures must be taken to promote SMEs given the long-term benefits they render in economic development.

This project work has the belief that if government, banks, other financial institutions and the private sector team together in the area of infrastructural, technical and financial support facilities to SMEs, there is no doubt that the sub-sector will occupy their place of importance in developing the economy of Enugu State and indeed the country. This will be achieved through job creation, diversification of the country’s mono-product source of foreign earnings. They will also encourage backward integration through their roles as manufacturers of raw materials for large-scale industries and will effectively reduce regional economic imbalance through rural development which will forestall rural-urban migration and its attendant vices.

Recommendations

From the study, the researcher found out a lot of problems plaguing SMEs sub-sector and would want to make recommendations to ameliorate these problems. These recommendations will fall into three categories: for government, for banks/financial institutions and for small and medium scale enterprises (operators). This will enable each of them take appropriate steps work towards improving the lots of the sub-sector.

Recommendations for Government

The present democratic government has already effected major changes in the area of inconsistent policy measures, unpredictability, instability, greed and corruption. Government has also recognized the need for a comprehensive and integrated framework with sustainable systems, capable of addressing the problems of SMEs and promoting a virile SME sub-sector and as such has established several SME-oriented programmes and activities. These programmes of government if properly implemented will boost the activities of SMEs in the country, thereby contributing adequately to the nation’s economic and industrial development. They include:-

a) SME Policy Reforms: This is a sub-sector of the new industrial policy of Nigeria. It is designed to make interventions and support facilities more feasible and applicable in targeting the various groups of entrepreneurs within the SME sub-sector. This is in line with the recommendations that government should enact constitutional laws ensuring that SME roles are well defined and understood, that their sources of financing are well articulated and that tax, export and other incentives due to them are clearly spelt out.
b) Government should put in place measures to enhance the availability of finance to SMEs, particularly in the area of institutional credit that would provide affordable medium and long-term loans for expansion and working capital needs.
c) Government should establish federal and state-government affiliated institutions solely for SME financing and with financial initiatives geared towards meeting the peculiar needs of the SME sub-sector. The merger of NIDB, NBCI and NERFUND into one viable institution – Bank of Industry is a response to this recommendation. The major responsibility of bank of industry is to provide finance to the SME sub-sector with low interest rate.
d) Government should establish Credit Guarantee and Insurance Schemes to address the problem of SMEs providing collaterals to banks before loans are administered to the sub-sector.
e) Poor infrastructural facilities (water, power, roads etc.) remain a major constraint to SME development in the country. Government should improve the infrastructural facilities in the country in order to reduce the cost of SMEs operations and aid investment.
f) Government should revive Industrial Development Centres (IDCs) and Centre for Management Development (CMD) in every state and properly equipped where SMEs operators will receive training on certain skills such as business management, finance management, labour management, technology adaptation and information services that will sustain the sub-sector. Many entrepreneurs fail because of inability to manage their businesses well but the institutions above can help them to be successful.

Recommendations for Banks/Financial Institutions

Finance had been the bane of the SMEs sub-sector. Banks and financial institutions have not been able alleviate the financial problems of the sub-sector because of their stringent measures in loan administration to the operators. These recommendations will go a long way in solving the financial needs of the sub-sector if banks and financial institutions will soft-pedal in their excess demands on the operators before loans are administered.

a) Banks should offer financial advisory services to the sub-sector. In this case, banks and financial institutions should set up desks where technical financial advisory services will be rendered to the operators of SMEs. This will ensure that the sub-sector will utilize their loans in such a manner that will ensure repayment when due.
b) Small and Medium Industries Equity Investment Scheme (SMIEIS) is a new initiative of the Bankers Committee designed to set apart #5 billion annually for equity investment in SMEs. Under this scheme, SMEs operators will have access to credit facilities at below market rates for investment in their businesses. Banks should identify genuine industrialists and provide the financial, technical and managerial support to them and desist from the making the scheme ‘white elephant project’ which manifest in principles and not in practice.
c) Banks to have equity participation in indigenous manufacturing companies. Banks should venture more into the terrain of venture capital. Venture capital financing is the financing of a new business enterprise or young company by subscription to the equity of the company. It is the willingness – on the part of the venture capitalist – to undertake a major risk in a new company through the purchase of shares, with the hope of making capital gain by selling off the investment once it becomes profitable.
d) SMEs require medium to long-term loans to set up infrastructure, and short- term loans for working capital purposes; however, banks have long insisted on adequate collateral before lending to SMEs for these purposes. This of course has constituted a barrier to SMEs obtaining loans from financial institutions. Therefore, it is proposed that banks consider equipment leasing and other innovative financing options whereby the leased assets secure the loans and provide the needed collateral security.
e) Financial institutions should also reduce the turn-around time in project appraisal and subsequent disbursement to avoid unnecessary delays which often impact negatively on project cost and take-off on such projects.
f) Finally, CBN, the apex bank of the country in recognition of the importance and contribution of SMEs to the nation’s economic/industrial development should encourage commercial banks and other financial institutions to lend to the SME sub-sector with ease.

Recommendations for SMEs

The problems of small and medium scale enterprises have been identified to range from lack of entrepreneurial and managerial skills, poor record of loan repayment, lack of proper feasibility studies, misappropriation of loan through ostentatious living etc. SMEs operators should know that time has come for the sub-sector to understand and appreciate that present business environment calls for sincerity of purpose, expert managerial ability, proper book-keeping and manufacturing of quality products to stand the test of time. This is because industrialization had been identified as the mainstay of any economy that wants to grow. Based on the foregoing, the following recommendations are made for the SME operators.

a) Small and medium scale enterprises should try as much as possible to minimize those self created problems if they want to remain in business and excel. They should also establish a voice of their own to act as a pressure group and lobby for the cause of their members. There are various associations formed by this sub-sector such as Nigerian Association of Small Scale Industries (NASSI), Nigerian Association of Women Entrepreneurs (NAWE), National Association of Nigerian Traders (NANTS), All Farmers Association of Nigeria (AFAN), Business and Professional Women Association (BPWA), Nigerian Association of Small and Medium Scale Enterprises (NASME) etc. These associations tend to confuse government and financial institutions with their multiplicity of demands which are often not in harmony with each other. It is therefore recommended that the SMEs should have an umbrella that would promote collaboration and establish channels of communication with all tiers of government, the private sector and the finance industry. Mordi (2002) believes if this is done, it will promote education and training for SMEs, facilitate acquisition and introduction of modern technology in the sub-sector and would work with the financial industry in the implementation of Small and Medium Industries Equity Investment Scheme (SMIEIS) in order to ensure the provision of adequate funding for the SMEs.
b) The SMEs operators should be prepared to open up ownership of their companies to other investors to encourage inflow of capital into their businesses. Otiti (1998) observed that the era of sole proprietorships or over-dorminant shareholding is fading out because the capital investment outlay required for many businesses today demand joint ownership. With the introduction of venture capitalism under the SMIEIS Scheme, investors will inject capital into the businesses in return for ownership. Entrepreneurs stand a good chance of growing their businesses if they allow others to inject capital as well as the input of managerial expertise.

The recommendations of this study indicate that there must of necessity be a congruence of government, the financial institutions, the private sector as well as the SMEs to effect the development of the sub-sector in order to make meaningful contributions to the overall economic and industrial development of Nigeria.

REFERENCES

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