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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 (Aremu and Adeyemi, 2011; Salami,
2003; Muritala et al 2012) and thus have an immediate
impact on employment generation (Ayozie and Latinwo,
2010; 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
(Safiriyu and Njogo, 2012; Ayozie and Latinwo, 2010;
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). 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, 2013).
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 (Berger and Udell,
2004; Wattanapruttipaisan, 2003; Ogujiuba et. al., 2004;
Hossain, 1998 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. 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 2012
(CBN, 2012). More worrisome is the fact that this ratio
has been falling over the years and continued unabated
in the post-consolidation era.
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.
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.
Therefore, this study seeks to evaluating the Small
and Medium Scale Enterprises (SMEs) financing in Nigeria.
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 2011 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.
Adelaja B. O. (2003) Financing Small and Medium Enterprises
under SMIEIS. Being a paper presented at Central
Bank of Nigeria (CBN) Seminar on Small and Medium Industries
Equity Investments, August. Lagos: CBN, no. 4,
Aigboduwa, J. E. and Oisamoje, M. D. (2013) “Promoting
Small and Medium Enterprises in The Nigerian Oil and
Gas Industry”. European Scientific Journal.
Vol. 9, no. 1, pp. 244-261.
Aremu, M. A. and Adeyemi, S. L. (2011) “Small
and Medium Scale Enterprises as A Survival Strategy
for Employment Generation in Nigeria”. Journal
of Sustainable Development. Vol. 4, no. 1, pp.
Asaolu, T. O.; Oladoyin, A. M. and Oladele, P.O. (2005)
“A consideration of the problems and prospects
of revitalising the Small-Scale Sector in Nigeria”.
European Journal of Scientific Research. Vol.
7, no. 3, pp. 5-11.
Ayesha, B. (2007) Entrepreneurship Development for
competitive Small and Medium Enterprises. Tokyo:
Asian Productivity Organization.
Ayozie, D. O. and Latinwo, H. K. (2010) “Entrepreneurial
developments and small scale industry contribution to
Nigerian national development- A marketing interface”.
Information Management and Business Review.
Vol. 1, no. 2, pp. 51-68.
Berger, A. N. and Udell, G. F. (2004) A More Complete
Conceptual Framework for SME Finance. In: Small
and Medium Enterprises: Overcoming Growth Constraints
World Bank, MC 13-121, October 14-15.
Central Bank of Nigeria (2012) Statistical Bulletin.
Abuja: Central Bank of Nigeria (CBN).
Hossain, N. (1998) Constraints to SME Development in
Bangladesh. Job Opportunities and Business Support (JOBS)
Kadiri, I. B. (2012) “Small and Medium Scale Enterprises
and Employment Generation in Nigeria: The Role of Finance”.
Kuwait Chapter of Arabian Journal of Business and
Management Review. Vol. 1, no. 9, pp. 79-93.
Lawrence O. A. (2003) Critical Success Factors in the
Implementation of SMIEIS. Being a paper presented
at Central Bank of Nigeria (CBN) Seminar on Small and
Medium Industries Equity Investments, August. Lagos:
CBN, no. 4, pp. 86-99.
Lee, F. (2004) Financing innovative SMES in a global
economy. In: 2nd OECD Conference of Ministers responsible
for Small and Medium-Sized Enterprises (SMES) on Promoting
Entrepreneurship and Innovative SMES in a Global Economy:
Towards a more responsible and inclusive Globalisation,
3-5 June, Istanbul, Turkey: Organisation for Economic
Co-Operation and Development (OECD).
Muritala, T. A.; Awolaja, A. M. and Bako, Yusuf. A.
(2012) “Impact of Small and Medium Enterprises
on Economic Growth and Development”. American
Journal of Business and Management. Vol. 1, no.
1, pp. 18–22.
Oduyoye, O. O.; Adebola, S. A. and Binuyo, A. O. (2013)
“Financing Small Business in Ogun State, Nigeria:
the critical role of the Small And Medium Enterprises
Development Agency of Nigeria (SMEDAN)”. International
Journal of Accounting Research. Vol. 1, no. 1,
Ogujiuba, K. K.; Ohuche, F. K.; and Adenuga, A. O. (2004)
“Credit Availability to Small and Medium Scale
Enterprises in Nigeria: Importance of New Capital Base
for Banks – Background and Issues”. AIAE
Working Paper, pp. 1-25.
Oni, E. O. and Daniya, A. A. (2012) “Development
of Small and Medium Scale Enterprises: The role of Government
and other Financial Institutions”. Arabian
Journal of Business and Management Review. Vol.
1, no. 7, pp. 16-29.
Oyelaran-Oyeyinka, (2003) “Financing and Development
of Small-sale industries in Nigeria”. Central
Bank of Nigeria Economic and Financial Review.
Vol. 24, no. 4, December.
Safiriyu, A. M. and Njogo, B. O. (2012) “Impact
of Small and Medium Scale Enterprises in the generation
of employment in Lagos State”. Kuwait Chapter
of Arabian Journal of Business and Management Review.
Vol. 1, no. 11, pp. 107-141.
Salami, A. T. (2003) Guidelines and Stakeholders Responsibilities
in SMIEIS. Being a paper presented at Central Bank
of Nigeria (CBN) Seminar on Small and Medium Industries
Equity Investments, August. Lagos: CBN, no. 4,
Terungwa, A. (2012) “Risk Management and Insurance
of Small and Medium Scale Enterprises (SMES) in Nigeria”.
International Journal of Finance and Accounting.
Vol. 1, no. 1, pp. 8-17.
Udechukwu, F. N. (2003) Survey of Small And Medium Scale
Industries and their potentials in Nigeria. Being
a paper presented at Central Bank of Nigeria (CBN) Seminar
on Small and Medium Industries Equity Investments, August.
Lagos: CBN, no. 4, pp. 6-18.
Ugoani, J.N.N. and Dike, O. N. (2013) “Challenges
of Bank Credit among Small and Medium Enterprises (SMEs)
in Nigeria”. Journal of Economics and Sustainable
Development. Vol. 4, no.6, pp. 84-90.
Valverde S. C., Fernandez F. R.and Udell G. F. (2005)
Bank Market Power and SME Financing Constraints. Being
a paper presented at the I Fall Workshop on Economics,
October. Granada, pp. 1-62.
Wattanapruttipaisan, T. (2003) “Four Proposals
for Improved Financing of SME Development in ASEAN”.
Asian Development Review. Vol. 20, no. 2, pp.
Regression Data and Results are included
scale enterprises, financing of small and medium scale
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