SME Financing And Economic Growth In Nigeria

SME Financing And Economic Growth In Nigeria
Abstract
This research work examined the effect of SME financing and economic growth in Nigeria. The research was done form chapter one to five. Chapter one which is the general introduction entails the background to the study, statement of research questions, objectives of the study, research hypothesis, significance of the study, scope of the study and chapter scheme. Chapter two of the research work is the literature review. It also entails the introduction of the chapter, definition of small and medium enterprises, small and medium enterprises and access to finance, sources of financing small and medium enterprises in Nigeria and challenges of Small and Medium Scale Enterprises Financing. Chapter three of the research work is the research methodology. It entails the introduction of the chapter, the research design, the population of the research, sample and sampling techniques adopted, sources of data, and method of the data analysis. Chapter four of the research work is the data presentation and analysis. This is where all the information and data collected in the course of the research are carefully presented and analyzed. It also entails the responses of the questionnaire given by respondents and also went further to test the research hypothesis. Chapter five which is the final chapter entails the summary of the research work, finding and conclusions made and the possible recommendations.
Chapter One
Introduction
1.1 Background to the Study
A realization in today’s economy world is that government cannot single-handedly ensure the development of a country. Development is seen as a direct function of the various function in the economy particularly private sector, international community and other micro and macro constituents. Noticeable in today’s economy are the activities of small and medium scale enterprises which are described as the fourth realm of economic development (Muhammad and Muzzaffer, 2011).
Alese and Alimi (2014) observed that all over the world a lot has been said and written on small and medium scale enterprises (SMEs), which has formed the subject of discussion in so many seminars and workshops both locally and internationally. In the same token governments at various levels (local, state, and federal) have in one way or the other focused on the small medium enterprise (SMEs). While some governments formulated policies aimed at facilitating and empowering the growth, development and performance of the SMEs, others have focused on assisting the SMEsto grow through soft loans and other fiscal incentives. For instance, the World Bank group approved more than $10 billion in SME support programs over the period 1998-2002 (World Bank, 2002)..
This pro-SME policy is based on three core arguments by Beck, Demirgue-kunt, L and Levine (2005); Kumar, Anthony, Singh, Tiwari and Perry (2006) and Collier (2009).Firstly, SME advocates argued that SMEs enhance competition and entrepreneurship and hence have external benefits on economy-wide efficiency, innovation, and aggregate productivity growth. Hence, direct government support of SMEs will help countries exploit the social benefits from greater competition and entrepreneurship. The second factprovided by the SMEs proponents is that SMEs are generally more productive than large firms, but financial market and other institutional failures impede their development. Thus, pending financial and institutional improvements, direct government financial support to SMEs can boosts economic growth and development.
Lastly, they argued that SME expansion boosts employment than large firm growth because SMEs are more labour intensive. Eferakeya (2014) observed thateconomic development of any nation depends largely on the existence, growth and survival of small and medium scale enterprises (SMEs). As a propeller of economic growth, SMEs require serious attention so that their developmental role and sustainability will provide the much needed sustainable development of a nation with regard to job and wealth creation.
Gulani and Usman (2012) stated that finance is a pre-condition to the growth of enterprises. The sources of finance available to SMEs are, the owners-savings and financial support of his or her associates including family and friends who may or may not be partners or shareholders in the venture, banking and lending institutions, small business administration, licensed small business investment companies, other businesses and local capitalist sales, finance companies, factor and other sources. Among the sources mentioned, personal savings is the most important reason people save money. In a study conducted by Aggarwal, Klapper and Singer (2012), respondent were asked about the most important reason people save money, 29 percent provide precautionary motive as the most important reason to save, stating saving for either “a rainy day” or “in-case we get sick”.
The second most important reason that people report saving is “to start a business” (almost 20%). These numbers suggests that 49% (almost half) of the people surveyed are actually using savings for purposes that credit was either supposed to or is billed to serve other sources of finance available to SMEs for example financial institutions loans are practically not accessible.
Ogechukwu, Oboreh, Umukoro, and Uche,(2013) posited that, a business whether small or big, simple or complex, private or public, is created to provide competitive prices. Businesses in Nigeria have been classified as small, medium and large. A small scale business can be explained by the criteria of project costs, capital, number of employees, sales volume, annual business turnover and the financial strength. The Federal and State ministries of Industry and Commerce have adopted the criterion of value of installed fixed capital to determine what a small scale business is. In this respect, the value has varied from N60,000 in 1972, N159,000 in 1975, N250,000 in 1979, N500,000 in 1986, to a fixed investment of not more than N2,000,000 in 1992 and N5,000,000 in 2003 and beyond.
This figure is exclusive of land and building and subject to government determination and prevailing objectives of public policy. In the wake of recent happenings the required capital for SMEs is N1million for micro-businesses, N1million-less than N40million for small businesses and N40million to less than N200million for medium scale. Furthermore, Kadiri (2012) explained that, small and medium enterprises development has continued to be a popularphrase in business world. This is because the sector serves as a catalyst for employment generation, national growth, poverty reduction and economic development. SMEs world over can boast of being the major industries including the multinationals.
In view of the foregoing argument put forth by Etuk, Etuk, and Baghebo (2014), it is imperative to note therefore that the growth and development of SMEs is a critical success factor for the overallwell-being of a nation. This therefore makes SME financing a subject of discourse in local and international terrain particularly among researchers. This research therefore examines the nexus between SME financing and economic growth in Nigeria.
1.2. Statement of the Problem
Agwu and Emeti (2014) pointed out that most of the problems of SMEs are external to it, among them are those related to capital shortage, taxation and regulations, product liability patent and franchising abuses. The internal problems of SMEs in Nigeria includes; inadequate working capital, stiff competition from large companies, difficulties in sourcing raw materials, low capacity utilization, lack of management strategies, poor educational background of operators and huge financial problems while the external problems include: policy inconsistencies, multiple taxation, harsh regulatory requirements and trade groups.
Taiwo, Ayodeji and Yusuf (2012) in their previous research had also revealed that the most common constraints hindering small and medium scale business growth in Nigeria are lack of financial support, poor management, lack of training and experience, poor infrastructure, insufficient profits and low demand for product and services. Hence it therefore recommends that government should as a matter of urgency assist prospective entrepreneurs to have access to finance and necessary information relating to business opportunities, modern technology, raw materials, market, plant and machinery which would enable them to reduce their operating cost and be more efficient to meet the market competitors to ensure efficient growth in the economy. Whereas, Onakoya,fasanya and abdulraham (2013) in a related view posited that the greatest or worst problem confronting SMEs in Nigeria is managerial capacity. They also identified access to capital or finance as being necessary but not a sufficient condition for successful entrepreneurial development in the economy.
A review of researchers on SME financing has shown lapses in identifying with the following challenges which affects the core essence and development of SMEs in the country and these include the following:
- Increase in the level of SME failures, regardless of increase in the number. it bring to fall the relevant issue where a good number of SMEs spring up only to collapse before their fifth year anniversary.
- Apparent lack of finance particularly from financial houses and government and this in turn affect the level of economic growth recorded by the country.
- Low productivity emanating from SMEs operation thus giving rise to low value of export, high inflation rate amongst others.
In reaction to the challenges highlighted by the researcher, Onakoya, et al(2013) identified inadequate capital, inaccessible credit facilities. Long term development institutional credit was known not to be available to SMEs because they are generally considered high credit risks by financial institutions.
The research is embarked upon by the researcher with a view to unearthing the extent to which SME financing, export value, interest rate and money supply affect the Gross Domestic Product (GDP) of the country.
1.3 Objective of the Study
Every research work should have objective(s) upon which it is being undertaking. This study attempts to examine the financing of small and medium scale enterprises for economic growth. The objectives of the study
are:
- To determine whether SMEs stimulates economic growth
- To investigate the extent to which financing of SMEs affects economic growth in Sokoto State.
- To investigate whether microfinance loans to SMEs actually leads to high effectiveness.
- To find out whether SMEs are able to access capital loans from micro institutions.
1.4 Research Hypotheses
These are tentative statements that test the validity of the research questions. For the purpose of the research work, the following hypothesis would be considered.
- Ho: Small and Medium Scale Enterprises do not stimulate economic growth.
Ho: Financing of Small and Medium Enterprises do not affect economic growth in Sokoto State. - Ho: Microfinance loans to small and medium scale enterprises do not lead to effective performance.
Ho: Small and Medium Enterprises do not access capital loans from microfinance institutions.
1.5 Significance of the Study
The significance of the research work is to add to the general body of knowledge. The research would serve as a reference literature for students of management especially students of business administration and banking and finance.
However the research also serves as a guide to the government in order to access how SMEs promotes economic growth. It also serves as a guide to SMEs operators on how they could access different sources of loans to finance their activities.
The research also serves as a guide to banks and other financial institutions of the various types of loans that could be given to SMEs practitioners.
1.6 Scope of the Study
The scope of the research is limited to Sokoto State metropolis. This is to enhance accurate and reliable data in order to achieve the objective of the study. Small and medium enterprises would be scontacted in Sokoto State metropolis.
1.7 Chapter Scheme
The research work comprised five chapters.
- The chapter one is the general introduction of the research work. It discuss the background of the study, statement of the research problem, objective of the study, research hypothesis, significance of the study and scope and limitations of the study.
- Chapter two of the research is the literature review. It discusses the various definitions given by different scholars on the subject matter, their sources of finance and the challenges faced by SMEs in accessing finance.
- Chapter three is the research methodology. It explains the research design to be adopted, the population, the sample size and the sampling techniques, data collection method and the data analysis technique.
- Chapter four is the data presentation and analysis. It explains how the data collected are presented and analyzed. It also explains the hypothesis testing.
- Chapter five is the final and concluding chapter of the research work. summarized the entire research work, proffers recommendation and concludes the research work.
Chapter Five
Summary, Findings and Conclusion and Recommendation
5.1 Introduction
This is the last and concluding chapter of the research project. The chapter entails the summary, findings made, conclusions drawn on the findings and the possible recommendations.
5.2 Summary
This section summarizes all the research work that the research has done form chapter one to five.
- Chapter one which is the general introduction entails the background to the study, statement of research questions, objectives of the study, research hypothesis, significance of the study, scope of the study and chapter scheme.
- Chapter two of the research work is the literature review. It also entails the introduction of the chapter, definition of small and medium enterprises, small and medium enterprises and access to finance, sources of financing small and medium enterprises in Nigeria and challenges of Small and Medium Scale Enterprises Financing.
- Chapter three of the research work is the research methodology. It entails the introduction of the chapter, the research design, the population of the research, sample and sampling techniques adopted, sources of data, and method of the data analysis.
- Chapter four of the research work is the data presentation and analysis. This is where all the information and data collected in the course of the research are carefully presented and analyzed. It also entails the responses of the questionnaire given by respondents and also went further to test the research hypothesis.
- Chapter five which is the final chapter entails the summary of the research work, finding and conclusions made and the possible recommendations.
5.3 Findings and Conclusion
Various sources of finance could be adopted by Small and medium scale enterprises either by debt or equity finance. Although the banking sector is the largest and most important source of financing for Small and Medium Enterprises, it is believed that, it is under serving the need of the sector. For the purpose of this research work, the followings findings were made.
- The research work found out that, financing Small and Medium Enterprises affect economic growth of the economy.
- The research work also found out that, there are various sources of financing small and medium enterprises but the major source of financing is the Central Bank of Nigeria Agriculture Credit Guarantee.
That is a joint finance contribution between the CBN and the Federal Government.
The following conclusions are also drawn from the research findings;
- The research findings also concludes that, majority of the staffs are BSc holders which shows that most of the staffs are knowledgeable about the subject matter.
- From the research findings it is also concluded that, majority of the staffs were in the industry within 1 year to 5 years.
- The research findings also conclude that, micro finance loans given to Small and Medium Enterprises do not lead to high effectiveness. That is, most Small and Medium Enterprises practitioners operate base on effectiveness than efficiency. That is achieving organization aims and objective irrespective of the cost implication.
- The research findings also conclude that, Small and Medium Enterprises faces various challenges. But the major challenges faced are the lack of access to capital.
- The research finding also concludes that, most Small and Medium Enterprises do not access capital loans from microfinance institutions.
5.4 Recommendations
Accessing finance has been identified as a key element of Small and Medium Enterprises to succeed in their drive to build productive capacity, to complete and create jobs and to contribute to poverty alleviation in developing countries. For the purpose of this research work, the following recommendations are made.
- The federal government should assist in financing the Small and Medium Enterprises as it stimulate economic growth.
- Small and Medium Scale enterprises practitioners should not only depend on the government for the rising of capital. Other sources could be adopted which are interest free. These sources include Rotating Savings and Credit Association, Business Angels etc.
- Small and Medium Scale enterprises should also adopt the access of capital loans so as to strengthen the capital structure of their enterprises.
- For every employee to perform well especially supervisors and managers there is need for constant training and development. The right employee training, development and education provides big pay offs for the employer in increased productivity, knowledge, loyalty and contribution to general growth of the firm.
- Government should give much consideration to Small and Medium Enterprises. This because it create job opportunity and also increase or improve economic stability.


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