The Role of Insurance in Minimizing Business Risk in Small and Medium Scale Enterprises
CHAPTER ONE
Objectives of the Study
The research broadly sought to assess the extent to which SMEs adopt insurance as a risk management and minimizing tool and the benefits there in. Specifically, the research intended to achieve the following objectives to:
- Identify what business risk(s) SMEs face;
- Examine the response of SMEs towards the use of non-life insurance to mitigate pure risk(s);
- Assess the benefits SMEs derive from using insurance as a risk management tool;
- Identify any problems SMEs encounter in using insurance; and
- Find out solutions to the challenges that SMEs encounter in using insurance.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
This chapter reviews the literature on the role of insurance in minimizing business risk in small and medium scale enterprises. It discusses issues arising from the topic of interest as viewed from different perspectives, with a view of giving a theoretical and empirical foundation to the study.
LITERATURE REVIEW
DEFINING SMALL AND MEDIUM ENTERPRISES (SMEs)
Although the term SME or SMME is used interchangeably worldwide, there is no common definition of these terms. The geographical placement of SMEs as well as country specific legislation influences the numerous SME definitions (Leopoulos, 2006). In South Africa, the National Small Business Act 102 of 1996 (South Africa, 1996) amended by Act 29 of 2004 (South Africa, 2004) categorise small organisations into four categories namely micro enterprises, including survivalist enterprises; very small enterprises; small enterprises; and medium enterprises. The differentiating factor between these categories, excluding micro enterprises, is the number of employees. For micro enterprises, the criterion is turnover level (South Africa, 1996, 2004; Von Broembsen, 2003).
Importance of small and medium enterprises (SMEs) to the economy
The importance of small businesses is recognised in numerous African countries such as Togo, Uganda, Ghana, Cote d’Lvoire, Nigeria, Kenya, Malawi, Burkina Faso, as well as others. According to Rwigema and Karungu (1999), SMEs are dominant in numbers in most economies. In First World countries like the United States of America and the United Kingdom, small enterprises play an important role in the economy, accounting for an estimated one third of industrial employment and a lower percentage of output. In Third World countries where SMEs dominate economically active enterprises, the SMEs prosperity is considered far more important than in First World countries (Rwigema and Karungu, 1999). The activities of SME enterprises in Africa (Rogerson, 2001a), is of vital importance for the promotion of economic growth, job creation and the mitigation of poverty. However, research conducted on SMEs in Africa by Mead and Liedholm (1998) confirmed that on average, there are more SME closures than expansions, with approximately only 1% of micro enterprises growing from five or less employees to ten or more. It has long been debated that SMEs are pivotal to employment creation and economic growth, particularly in countries such as South Africa that has a high unemployment rate, estimated at up to 40% (Friedrich, 2004; Watson, 2004). Upgrading the roles of the SME sector in the South African economy to improve economic growth through increasing competitiveness, and by generating employment and redistributing income (Rogerson, 2004, 2006), has been the focus of new development policies since the democratic transition (Berry et al., 2002; GCIS, 2002). In order to aid in the facilitation of the SME environment, the South African government tabled the National Small Business Act of 1996 amended with Act 29 of 2004 to provide equal standing to SME enterprises (Rwigema and Venter, 2004; Ntsika, 2001) in South Africa’s economy.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher made use of the survey method to generate primary data to achieve the objectives of the study because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to find out the role of insurance in minimizing business risk in small and medium scale enterprises.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
INTRODUCTION
It is important to reiterate that the objective of this study was the role of insurance in minimizing business risk in small and medium scale enterprises. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in evaluating examine the role of insurance in minimizing business risk in small and medium scale enterprises.
SUMMARY
This study was undertaken to examine the role of insurance in minimizing business risk in small and medium scale enterprises. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research questions were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables, the fifth chapter gives the study summary and conclusion.
CONCLUSION AND RECOMMENDATIONS
In conclusion, the study generally revealed that: business risk(s) exposures were identified and classified under three main themes; the level of insurance patronage was relatively low; however, insured businesses derived various benefits under the insurance covers. The insured also encountered some challenges, but made some suggestions to help overcome those problems. Which are that the best ingredient is to engage SMEs and Insurance companies as well as insurance intermediaries to encourage motivating business rapports where SMEs can easily have access to risk management information and insurance policy covers discussed to avert any unforeseen business operational calamities such as what occurred at the Western Steel and Forging Ltd in Tema (Daily Graphic, Tuesday April 26, 2011; page 33). Furthermore, an improved and monitored decentralized claim settlement system be incorporated to reduce the high level of bureaucracy and delays involved in claims processing by insurance companies.
An enforcement of the fire and liability insurance will have positive externalities on businesses and the economy at large. There will be increased comprehensive protection for SMEs and large businesses; premium income of the insurance industry will increase; tax revenue to government will increase; there will be an increase in corporate social responsibility offered to communities; employment level will be enhanced; and it will help increase and sustain the capitalization level of the insurance industry. Entrepreneurs of SMEs require to be educated on the need to have insurance and appropriate insurance to recover business losses associated with their operations. The need for periodic workshops to be organized by industry players for SMEs is vital to explaining the cost of insurance and measures by SMEs to reduce insurance cost. There is the need for SMEs to change their risk acceptance attitude to embrace insurance in other to avert using funds not allocated for business losses resulting from hazardous events. Failure to embrace insurance as a tool agreed by almost every SME may result in the business not being able to recover from crises. Such affects business reputation, survival and continuity or even the loss of customers thus affecting profit. Given the features of SMEs, their risks vary and the ability to afford the cost of insurance might be a challenge. Full needs assessment is therefore required to design customer made/customized policies that best suit the needs of SMEs independently since there are different potentials in different sectors of their operations. With regards to premium payment, a payment plan could be designed for special needs of SMEs over a period. The compulsory fire and liability insurance Act requires government and the umbrella body of insurance companies to enforce the laws as done for the motor traffic Act of 1985, (Act 42); and insurance stickers (certificate) designed for it. General insurance companies may form strategic alliance with financial institutions to educate and provide SMEs insurance covers and payment channelled through the financial institutions that are least likely to default.
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