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TOPIC : APPRAISAL OF SMALL AND MEDIUM SCALE ENTERPRISES
FINANCING IN NIGERIA
OF THE STUDY
The dynamic role of Small and Medium Enterprises (SMEs)
in developing countries as engines through which the
growth and development objectives of developing countries
can be achieved has long been recognized and stated
in the literature. The advantages claimed for Small
and Medium Enterprises (SMEs) are various, including:
the encouragement of entrepreneurship (Safiriyu and
Njogo, 2012; Ayozie and Latinwo, 2010; Ayesha, 2007);
the greater likelihood that SMEs will utilise labour
intensive technologies (Agwu and Emeti, 2014; Aremu
and Adeyemi, 2011; Salami, 2003; Muritala et al 2012)
and thus have an immediate impact on employment generation
(Ayozie and Latinwo, 2010; Agwu and Emeti, 2014; Etuk
et al. 2014; Aigboduwa and Oisamoje, 2013; Udechukwu,
2003; Aremu and Adeyemi, 2011); they can usually be
established rapidly and put into operation to produce
quick returns; SMEs development can encourage the process
of both inter- and intra-regional decentralization (Ogujiuba
et. al., 2004); and, they may well become a countervailing
force against the economic power of larger enterprises
(Salami, 2003). More generally the development of SMEs
is seen as accelerating the achievement of wider economic
and socio-economic objectives, including poverty alleviation
(Agwu and Emeti, 2014; Etuk et al. 2014; Safiriyu and
Njogo, 2012; Ayozie and Latinwo, 2010; Udechukwu, 2003).
Small and Medium Scale Enterprises have been acknowledged
to have huge potential for Sustainable Development.
Yet in Nigeria, the Small and Medium Scale Enterprises
sub-sector has stagnated and remains relatively small
in terms of its contribution to the Gross Domestic Product
(GDP) (Gbandi and Amissah, 2014). Activity mix in the
sector is also quite limited - dominated by import dependent
processes and factors. Although there is no precise
data, imprecise indicators show that capacity utilization
in the sector has improved perceptibly since 1999 due
to the return of democratic rule and the economic reforms
of the government. But the sub-sector is still faced
with a number of constraints with inadequate financial
facilities as the principal constraint (Oduyoye et al,
Finance has been viewed as a critical element for the
development of Small and Medium Scale Enterprises (SMEs).
Previous studies have decried the limited access to
financial resources available to smaller enterprises
compared to larger organisations and the consequences
for their growth and development ((Gbandi and Amissah,
2014; Omika, 2014; Berger and Udell, 2004; Wattanapruttipaisan,
2003; Ogujiuba et al., 2004 etc). Typically, Small and
Medium Scale Enterprises (SMEs) face higher transactions
costs than larger enterprises in obtaining credit (Lee,
2004). Poor management and accounting practices have
hampered the ability of Small and Medium Scale Enterprises
(SMEs) to raise finance (Lee, 2004). Information asymmetries
associated with lending to small-scale borrowers have
restricted the flow of finance to SMEs (Berger and Udell,
(2004). In spite of these claims however, some studies
show a large number of Small and Medium Scale Enterprises
(SMEs) fail because of non-financial reasons (Asaolu
et al, 2005; Lawrence, 2003; Wattanapruttipaisan, 2003).
is obviously not the only problem militating against
the development of the Small and Medium Scale Enterprises
(SMEs), it is certainly the most formidable (Lawrence,
2003). Like any other investment in the real sector
of the economy, investment in Small and Medium Scale
Enterprises (SMEs) is relatively bulky because of the
need for fixed assets such as land, civil works, buildings,
machinery and equipment and movable assets. Invariably,
loans to Small and Medium Scale Enterprises for capital
investment must be long-term in order to avoid a fatal
mismatch between project gestation and loan maturity.
Consequently, the cost of funds is a critical factor
in the sense that it impacts significantly on the competitiveness
and survival of these enterprises. Long gestation in
an unstable environment coupled with unsound financial
packaging tends to subject SMEs to a high failure rate,
which in turn makes the sector relatively risky and
unattractive to the banking system’s credit.
Small and Medium Scale Enterprises (SMEs) often operate
at such a low scale that is unattractive to banks (Ugoani
and Dike, 2013). Many of them are unincorporated and
banks are not forthcoming in investing in a multiplicity
of small ventures that are scattered all over the country.
Besides, Small and Medium Scale Enterprises are mostly
family businesses and they are therefore reluctant to
open their businesses up, especially to the banks that
they regard as intruders. The concomitant effect is
that less financial facilities are made available to
Small and Medium Scale Enterprises (SMEs) by banks.
Firms depend on a variety of sources of financing, both
internal and external (Terungwa, 2012). The relationships
among these sources and their effects on investment,
however, remain unclear in the literature. In the case
of SMEs, bank credit or loan is major alternative of
external funding (James and Ashamu, 2014). According
to Valverde et al (2005) bank credit play a crucial
role in providing external financing to Small and Medium
Scale Enterprises (SMEs). But in Nigerian context, this
crucial source of finance for Small and Medium Scale
Enterprises is apparently non-functional (Kadiri, 2012).
This is evident in the ratio of loans to Small Scale
Enterprises to Commercial banks’ total credit,
which shows that a meager 0.13% of commercial banks’
total credit was granted to Small Scale Enterprises
in the last quarter of 2013 (CBN, 2013). More worrisome
is the fact that this ratio has been falling over the
years and continued unabated in the post-consolidation
era (Iorpev, 2012). Berg and Fuchs (2013) attribute
this trend to the high interest rates on Government
securities which serves as a disincentive to intensify
lending to Small Scale Enterprises (SMEs).
OF THE PROBLEM
Several studies have identified financial constraint
as the major obstacle to Small and Medium Scale Enterprises
Development in developing countries including Nigeria.
For instance, Adelaja (2003) argues that the access
to institutional finance has always constituted a pandemic
problem for SME development in Nigeria. He recalled
that in the past, a number of schemes have been put
in place to provide special credit lines/windows for
SMEs but this achieved very limited impact. Agwu and
Emeti (2014) examined the issues, challenges and prospects
of Small and Medium Scale Enterprises (SMEs) in Port-HarcourtCity,
Nigeria and found that that poor financing, inadequate
social infrastructures, lack of managerial skills and
multiple taxation were major challenges confronting
SMEs in Port-Harcourt City. Also, ADB–OECD (2014)
revealed that the 2008 global financial crisis impacted
SMEs and entrepreneurs disproportionately, exacerbating
their traditional financing constraints.
The primary focus of this study emanates from the fact
that small scale enterprises owners do not have sufficient
finance to carry on their due to the low saving culture
of the people in this part of the world. The reason
for this is not far fetch: low level of income basically.
While it is an established fact that Small and Medium
Scale Enterprises face financial challenges, no research
has been conducted to investigate the effect the financial
problem on their contribution to economic development.
Asaolu et al (2005) and many other authors and researchers
have deduced that the financial challenges mar the developmental
role of Small and Medium Scale Enterprises. But this
may not be true especially in the case of Nigeria where
the informal sector, which is constituted largely by
the Small and Medium Scale Enterprises play a very important
role in the development of the nation’s economy
providing gainful employment for about 70% of the Nigerian
population in spite of the exploitation of petroleum
oil (Eniola, 2014). Therefore, this study seeks to evaluating
the Small and Medium Scale Enterprises (SMEs) financing
OF THE STUDY
The main purpose of this study is to identify and consequently
analyze the most effective and efficient way through
which Small and Medium Scale Enterprises could be financed.
In so doing, the researcher intends giving an in-depth
information and analysis on the various strategies through
which Small and Medium Scale Enterprises can be financed.
In view of the above, the researcher intends to find
out the following:
(i) to examine the trend of financial support given
to Small and Medium Scale Enterprises.
(ii) to examine the contribution of Small and Medium
Scale Enterprises to the economy of Nigeria.
(iii) to appraise the contribution of commercial banks
to the funding of Small and Medium Scale Enterprises
(iv) to identify the constraints confronting the financing
of Small and Medium Scale Enterprises in Nigeria.
(v) to find suitable strategies that will improve the
financing, growth and development, and survival of Small
and Medium Scale Enterprises in Nigeria.
The study would examine the following questions:
1. What is the trend of financial support given to Small
and Medium Scale Enterprises in Nigeria?
2. What impact do Small and Medium Scale Enterprises
make to Nigeria’s economic growth?
3. What contribution has commercial banks made to the
funding of Small and Medium Scale Enterprises in Nigeria?
4. What are the constraints confronting the financing
of Small and Medium Scale Enterprises in Nigeria?
5. How could the financing, growth and development of
Small and Medium Scale Enterprises be improved in Nigeria.
H0 - That there is no relationship between Gross Domestic
Product (GDP) and the operations of Small and Medium
Scale Enterprises (SMEs) in Nigeria.
H1 - That there is relationship between Gross Domestic
Product (GDP) and the operations of Small and Medium
Scale Enterprises (SMEs).
H0 - That there is no relationship between the loan
granted to Small and Medium Scale Enterprises (SMEs)
and the interest rate in Nigeria.
H1 - That there is relationship between the loan granted
to Small and Medium Scale Enterprises (SMEs) and the
interest rate in Nigeria.
OF THE STUDY
Small and Medium Scale Enterprises in Africa rely largely
on own savings, not only to grow but also to innovate,
firms often need real services support and formal finance
assistance, failing which under-investment in long term
capabilities (training and R & D) may result (Oyelaran-Oyeyinka,
2003). This study is significant because it would help
to evaluate the operations of a vital segment of the
industrial sector – Small and Medium Scale Enterprises,
which have been identified as having very high potential
in promoting economic growth and development (Oni and
Daniya, 2012). The evaluation shall be done with special
focus on their financing thereby adding to the existing
literature on the subject matter.
Annual data coverage of various years shall be used
for the empirical analysis in this research. The data
collected include: Loan granted to SMEs by Commercial
Banks, total credit granted by the Commercial Banks,
lending rate of Commercial Banks, amounts set aside
and invested under the Small and Medium Industries Equity
Investment Scheme (SMIEIS), loan and advances granted
by the Bank of Industry (BOI), and loan disbursements
of Nigerian Agricultural Cooperative, Rural Development
Bank (NACRDB) now Bank of Agriculture (BOA), and the
Gross Domestic Product (GDP). External financial support
to SMEs from international organizations including the
World Bank and the African Development Bank (ADB) shall
also be assessed.
The research method to be applied in this study is quantitative.
Besides, both the historical and ex-post facto research
design shall be adopted. While the former shall be used
to study and appraise the chronological level of financial
facilities available to Small and Medium Scale Enterprises
in Nigeria and the level of development of the country,
the latter shall be used to establish a cause and effect
relationship among the variables that correlate. Regression
analysis, tables, charts and ratio analysis shall also
be used to examine the pattern, trend and composition
of SME financing in Nigeria over the years.
OF THE STUDY
This research work focuses on the financing of Small
and Medium Scale Enterprises (SMEs) in Nigeria. This
study pays more attention on the loan granted to SMEs
by Commercial Banks, and the financial support given
by specialized banks, and schemes with the aim of evaluating
their availability, accessibility and adequacy for Small
and Medium Enterprises Development in Nigeria.
Most of the information and data needed for the study
would be gathered from existing literature and from
relevant government agencies such as the Central Bank
of Nigeria, National Bureau of Statistics (NBS) etc.
The hypotheses testing are restricted to the period
between 1986 and 2013 due to non-availability of needed
OF THE STUDY
This study shall be divided into five chapters. The
first chapter, which is the introduction, shall presents
the background to the study, statement of the problem,
objectives of the study and significance of the study
among others. Chapter two shall review existing literature
on the financing of Small and Medium Enterprises, the
constraints on their financing, their role in economic
development and so on. Chapter three shall explain the
research methodology to be applied in the study. Chapter
four shall focus on the data presentation and analysis
while the concluding part of the study is chapter five
where in a nutshell, the summary of the findings, the
conclusion, and recommendations shall be presented.
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Agwu, M. O. and Emeti, C. I. (2014) “Issues, Challenges
and Prospects of Small and Medium Scale Enterprises
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Aigboduwa, J. E. and Oisamoje, M. D. (2013) “Promoting
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Bank Market Power and SME Financing Constraints. Being
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Asian Development Review. Vol. 20, no. 2, pp.
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scale enterprises, financing of small and medium scale
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