ANALYSIS OF DEMAND AND ACCESS TO CREDITS AMONG SMALL AND MEDIUM SCALE AGRIBUSINESS ENTERPRISES IN NIGERIA

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ABSTRACT

The study analyzed the demand and access to credit among Small and Medium Scale agribusiness enterprise in Abia State, Nigeria. Multi-stage random sampling techniques were employed to select 120 respondents in the state. Primary data were collected with the use of well-structured questionnaire through the aid of enumerators. Relevant descriptive and inferential statistics such as frequencies, percentages, means and standard deviation. Hackman double hurdle model regression were used for data analysis. The results showed that a good proportion (52.50%) of the agribusiness small and medium scale operators in the study area were male with mean ages of 50years. Majority of the respondents were married (63.33%), while about (96.7%) were literate having acquired one level of education or the other. On average, the agribusiness operators have spent about 19 years in business. About 68.3% of them belong to cooperative society. The mean income of the respondents were N201,666.67 for an average small and medium scale operator. The results showed that the respondents obtained their credit from both formal and informal sources, with majority (53.33%) from informal sources, (46.67%) were from formal source. Also, majority (90.83%) demanded for short-time credit, while the mean and standard deviation of credit demanded were N199,916.67 and N103,601.10 respectively for an average small and medium scale operators. The Hackman double stage model showed that interest amount, years of education, experience, enterprise’ age, income and membership of association of the agribusiness operators were significant determinants of volume of credit. Result on performance of the agribusiness small and medium scale enterprises showed a total revenue and net profit were N201,166.67 and N35,814.54. Furthermore, simple linear regression model on effect of demand of credit on performance of small and medium enterprises showed there was a positive relationship between performance and credit access. Also result further showed that major constraints of credit access were burdensome collateral (X=4.10), instability in government policy (X=4.02) and long protocols (X=3.95). The study therefore recommend that policy should also focus on ways to attract and encourage not only experienced but younger people willing in agribusiness small and medium scale enterprises, who are agile and strong in business drive through of credit to them, this group of operators would be able to put in a lot effort at raising the current level of performance.






TABLE OF CONTENTS

 

Title Page                                                                                                                                                         i

Declaration                                                                                                                                                     ii

Certification                                                                                                                                                    iii

Dedication                                                                                                                                                       iv

Acknowledgments                                                                                                                                       v

Table of Contents                                                                                                                                         vi

List of Tables                                                                                                                                                   x

Abstract                                                                                                                                                            xi

 

CHAPTER 1

1.0        Introduction                                                                                                                                     1

1.1        Background of the Study                                                                                                             1

1.2        Statement of Problem                                                                                                                                 5

1.3        Research Questions                                                                                                                       7

1.4        Objectives of the Study                                                                                                                7

1.5        Research Hypotheses                                                                                                                    8

1.6        Justification of the Study                                                                                                             8

 

CHAPTER 2

2.0        Review of Related Literature                                                                                                     10

2.1       Conceptual Review                                                                                                                         10

2.1.1    Nature and characteristics of SMEs                                                                           10

2.1.2   Importance of SMEs                                                                                                   11

2.1.3    SMEs in Nigeria                                                                                                         12

2.1.4    The State of Nigeria’s agribusiness Industries                                                           15

2.1.5    Economic contributions of SMEs in the economic development of the country 17

2.1.6    Agribusiness SMEs                                                                                                    20

2.1.7    Concept of credit, access and demand for credit                                                        21

2.1.7.1 Credit                                                                                                                          21

2.1.7.2 Access to credit                                                                                                                               21

2.1.3    Demand for credit                                                                                                                          22

2.1.8    Nigeria Credit Market                                                                                                23

2.1.9   Factors that affect credit access and demand                                                 27

2.1.9.1 Loan size                                                                                                                     28

2.1.9.2 Interest rate                                                                                                                 29

2.1.10 Sources of finance for Small and Medium Scale enterprises                                                          31

2.1.10.1   Small and Medium Scale enterprises financing issues and the Bank                   31

2.1.10.2  Concept and causes of Small and Medium Scale enterprises financing gap  32

2.1.10.3 Imperatives of good banking habits for successful Small and Medium Scale

  enterprises operations                                                                                                               33

2.1.11   The constraints faced by agribusiness Small and Medium Scale enterprises in

 accessing credit                                                                                                                              34

2.1.11.1    Inadequate fund                                                                                                                       34

2.1.11.2     Financial indiscipline                                                                                                              35

2.1.11.3     Poor location                                                                                                                            36

2.1.11.4     Lack of planning and budgeting                                                                                         36

2.1.8.4      General state of the economy                                                                                             36

2.1.11.5    Unfavorable government policies:                                                                                                   37

2.1.11. 6   Multiple taxation                                                                                                                      38

2.1.11.7    Unwise competition with the big firm                                                                             38

2.1.12  Small and Medium Scale’s performance                                                                    38

2.1.12.1 Review of Literature Firm characteristics and business performance of

   Small and Medium Scale enterprises                                                                      39

2.1.13 Challenges of the small and medium scale enterprises                                              41

2.1.14 Role of the Small and Medium Scale enterprises Sub-Sector in the Economy         42

2.1.15  Relevance of Small and Medium Scale enterprises in economic development  44

2.1.16 Significance of the small and medium scale sub-sector in the Nigerian economy      46

2.2       Theoretical Literature                                                                                              48

2.2.1    Theoretical framework on demand and supply theory                                               48

2.2.2    Theoretical framework on the pecking order theory                                                  49

2.3.3    The signaling theory                                                                                                   50

2.2.4    Theory of credit rationing and constraint                                                                   51

2.2.5    Theoretical issues of credit market                                                                             52

2.3        Empirical Framework                                                                                       53

2.3.1      Credit access, sources, types and demand for credit                                                  53

2.3.2      Determinants of credit access by farmers                                                                  57

2.3.3      Determinants of access to credit and demand for credit by SMEs                                     60

2.3.3      Constraints to credit access and demand by Small and Medium Scale Enterprise          61

2.4       Analytical literature                                                                                                    63

2.4.1    Modeling binary response                                                                                          63

2.4.1.1 Logit model                                                                                                                64

2.4.1.2 Modeling limited outcomes: Censored regression models                                         65

 

CHAPTER 3

3.0        Research Methodology                                                                                                                70

3.1       Research Design                                                                                                                              70

3.2        Study area                                                                                                                                         70

3.3        Method of Selection of Respondents                                                                                                    71

3.4        Method of data Collection                                                                                                          72

3.6        Model specification                                                                                              73

3.6.1      Heckman double hurdle model                                                                                  73

3.5.2   Performance Analysis:                                                                                              74

3.5.4    Ordinary least square regression analysis                                                                  75

 

CHAPTER 4

4.0       Results and Discussion                                                                                            76

4.1       Socioeconomics Characteristics Of Small And Medium Scale’s Operators                    76

4.1.1    Sex                                                                                                                              77

4.1.1    Age                                                                                                                             77

4.1.3    Marital Status                                                                                                             77

4.1.4    Level of Education                                                                                                     78

4.1.5    Experience                                                                                                                  79

4.1.6    Cooperative Membership                                                                                           79

4.1.7    Level of Income                                                                                                          80

4.2       Sources, Types, Level of Access for Credits by the SMEs                                     81

4.2.1    Source of credit by respondent                                                                                   81

4.2.2    Type of Credit.                                                                                                            82

4.2.3    Amount of credit                                                                                                        82

4.3       Determinants of Access To Credit And Demand For Credit By Small and

Medium Scale Enterprises                                                                                                          83

4.4       Performance of The Agribusiness Small And Medium Scale Enterprises in

the Study Area                                                                                                            87

4.4        Effect of demand of credit on performance of small and medium scale

enterprises in the study area.                                                                                                                   88

4.6        Constraining factors to credit access and demand by small and medium scale

enterprises                                                                                                           90

 

Chapter Five

5.0       Summary, Conclusion and Recommendations                                                          91

5.1        Summary                                                                                                              91

5.2       Conclusion                                                                                                                  92

5.3       Recommendations                                                                                                      93

 

REFERENCE                                                                                                                        95











 

LIST OF TABLES

Table                                                                           Page

 

4.1:      Distributions of Respondents according to socioeconomic characteristics 76

4.2       Sources, types of credit accessed by the agribusiness operators                     81

4.3       Parameter estimates of the Heckman Double Hurdle Model for

determinants of access to credit and demand for credit by small and

medium scale enterprises                                                                                            84

4.4       Performance indicator of the small and medium scale’s Operators in the

study area per month                                                                                      87

4.5:      Simple Linear regression estimate of effect of demand of credit on

performance of small and medium scale’s in the study area                             88

4.6       Constraining factors to credit access and demand for credit                                     90


 






CHAPTER 1

1.0      INTRODUCTION       

1.1       Background of the Study

A productive resource such as credit is very vital for efficient and sustainable production activities among Small and Medium Scale Enterprises (SMEs). In developing countries, credit is among the essential factors needed for production, and with it, SMEs can secure inputs such as; equipment and hired labour and is widely recognized as one of the intermediating factors between adoption of technologies and increased income among SMEs in Nigeria (Omonona, Akinterinwa, Awoyinka, 2008, Akpan, Inimfon, Samuel, Edem, Uwemedimo 2013). It is one of the fundamental ingredients of sustainable production; as such its accessibility and demand is among the prerequisites for attaining the national goal of reducing poverty and ensuring self-sufficiency in production in the country (Nwaru, Ubem, and Robert 2013 and Akpan et al., 2013).

Credit is defined as the present and temporary transfer of purchasing power from a person who owns it to a person who wants it, allowing him an opportunity to command another person’s capital for agricultural purposes but with confidence in his willingness and ability to repay at a specified later date (Konu, 2013; Nwani, Tchokote, Obiora 2003). Credit facilities are provided for SMEs to enable them meet their fixed and variable cost needs while they cannot meet such needs with their personally generated/earned funds or retained earnings. Credit helps farmers to enhance their social relations and to keep them out of poverty as it equally enhances the livelihood status of the farmers (Akpan et al., 2013).

Credit is very beneficial in SMEs though it poses serious threat to most small-scale entrepreneur as they are mostly unable to meet up with the terms of many credit facilities due to the scale of their enterprises. Access to credit facilities is, therefore, limited to entrepreneurs (Munyambonera, Nampewo, Adong and Musa 2012). They lack the basic requirement and information for accessing such credit facilities as overdraft, which provide short-term loans to entrepreneur only when their cash accounts actually run dry, or provide short-term loans to companies when they need supplemental cash for various purposes (Oladele and Olagunju, 2013).

SMEs (SMEs) are non-subsidiary, independent firms which employ fewer than a given number of employee. The number varies across country, but the most frequent upper limit designating an Small and Medium Scale enterprise is 250 employee (OCED, 2005). A lot has been said and written about SMEs the world over. It has also formed the subject of discussions in so many seminars and workshops both locally and internationally. In the same token, governments at various levels (local, state and Federal levels) have in one way or the other focused on the Small and Medium Enterprises. While some governments had formulated policies aimed at facilitating and empowering the growth and development and performance of the SMEs, others had focused on assisting the SMEs to grow through soft credit and other fiscal incentives. (Dalberg, 2011).

In Nigeria, particularly Abia State, itself the role and contribution of SMEs in the national economic structure not only become one of the national priorities but also the hope for accelerated development. National SMEs firm is one of the pads that stabilize the national economy especially when there is a shocks or external pressure. If the current global economy worsens, SMEs firm act as a pillar of national economic growth and job creation (Dogan, 2013). The agribusiness SMEs in Abia State is widely recognized as having the potential to transform the economy through large-scale food manufacturing that will not only benefit consumers in the long run but provide future employment and export earning opportunities. Small and Medium Enterprises play key roles in transition and developing countries (OECD, 2005). These firms typically account for more than 90% of all firms outside the white-collar jobs sector, constituting a major source of employment and generates significant domestic and export earnings. OECD, (2005) stressed that SMEs development emerges as a key instrument in poverty reduction efforts, therefore, SMEs obviously contributes to economic, social development and poverty reduction.

Access to credit is one of the major factors that can develop agribusiness SMEs in any society. Access to credit is needed to ensure flexibility in resource allocation and reduce the impact of cash flow problems (Bigsten et al, 2003). Firms with access to credit will be able to build up inventories to avoid stocking out during crises, while the availability of credit increases the growth potential of the surviving firms during periods of macroeconomic instability (Atieno and Onoja, 2005).

Firms without access to bank funding are more vulnerable to external shocks as the lack of access to credit remains a major constraint for the business managers in developing economies (Nkurunziza, 2005). Without well-functioning financial markets, small scale firms may lack much prospects for increasing their productivity in many significant and sustainable ways (Nwaru, 2004). Based on these reasons, and the fact that traditional commercial banks typically have minimum interest in lending to SMEs due to their lack of viable collateral and high transaction costs associated with the small loans that suit them, most developing country governments, have set up credit programs aimed at improving access to credit  (Arene, and Nwagbo 2004; CBN, 2010). The demand for credit among agribusiness SMEs is strong in Nigeria but lack of collaterals and credit history seriously constrain their demand. As a result, they either resort to informal sources which are costly and risky on their own meager capital.

Having access to finance gives SMEs and medium scale enterprises the chance to develop their businesses and to acquire better technologies for production, therefore ensuring their competiveness. However, there is a huge challenge for SMEs globally when it comes to sourcing for initial and expansion capital funds from traditional commercial banks. Abereijo and Fayomi, (2005) pointed out that the majority of financial institutions’ loans offered to SMEs are often also limited to a period far too short to pay off any sizeable investment. In addition, banks in many developing countries prefer to lend to the big company rather than private SMEs because the risk involved is less and higher returns are offered. Such apathy for the SMEs have crowded out most private sector borrowers and increased the cost of capital for them.

Furthermore, the demand for credit is increased as a result of increased economic activities in the informal sector (Tra and Lensink, 2004). This informs why credit has become a critical factor in modeling the growth of the economy, which consists mainly of agribusiness based economic activities (Nwaru et al., 2008). Apart from the inability of SMEs to access these relatively cheap funds, reducing the usurious rates of interest in the informal sector by lowering the cost of funds to the lenders is far from being achieved (Nwaru et al., 2008). Unregulated money supply, easy accessibility, easy liquidity and low administrative bottlenecks, collateral free lending, proximity, timely delivery and flexibility in loan transaction are some of the attractive features of informal credit sources to the farmers (Khandler and Farugee, 2001). Therefore, analyzing access and demand for credits by agribusiness SMEs in Abia State, Nigeria would have significant policy implications which would be helpful in redressing the relative decline from low patronage of credit facilities.

 

 

1.2   Statement of Problem

Many factors have been identified contributing to this premature death of SMEs. Most SMEs in Nigeria die within their first five years of existence, a smaller percentage goes into extinction between the sixth and tenth year while only about five to ten percent survive, thrive and grow to maturity (Aremu, and Adeyemi (2011). Key among them include: insufficient capital, irregular power supply, infrastructural inadequacies (water, roads etc.), lack of focus, inadequate market research, over-concentration on one or two markets for finished products, lack of succession plan, inexperience, lack of proper book keeping, lack of proper records or lack of any records at all, inability to separate business and family or personal finances, lack of business strategy, inability to distinguish between revenue and profit, inability to procure the right plant and machinery, inability to engage or employ the right caliber of staff, cut-throat competition of which information technology is inclusive (Basil, 2005).

Agribusiness SMEs lack access to capital and money markets. Despite efforts by financial institutions and public sector bodies to close funding gaps, SMEs continue to experience difficulties in accessing credits (Idu and Sunday 2016). The ability of SMEs, and medium scale enterprises to grow depends highly on their potentials to invest in restructuring, innovation to mention but a few. All of these investments need capital, and therefore access to credits. Access to credit is important for the growth and development of agribusiness SMEs. As such, access to credit remains the greatest challenge to SMEs, and it is still a key issue within both the private and public sectors (Nkuah, et al., 2013).

The availability of external finance for SMEs is a topic of significant research interest to academics and an important issue to policy makers around the globe (Berger and Udell, 2005). Most commercial banks do not define all SMEs in the same way, since this depends on the operational criteria and business strategy used by each institution. In addition, majority of SMEs are still considered not credit worthy by most commercial banks because of their inability to fulfill certain banking terms and conditions (Alhassan and Sakara, 2014). Therefore, to identify a way out, it is important to identify the access and demand for credit by agribusiness SMEs. Alhassan, and Sakara (2014) also stated that lack of credit is the greatest constraints which affects the performance, growth and development of SMEs.

According to Abereijo and Fayomi, (2005) majority of the studies focus on the factors influencing the performance of SMEs, and conclude that access to credit is utmost problem, which if solved can help mitigate the other factors. As such, most of these studies deviate from an in-depth analysis of the financial challenge facing SMEs. Instead, the studies give recommendations to SMEs, and other stakeholders how to mitigate or solve financing problem without analyzing the factors that influence access and demand for credit.  Based on the need to efficiently increase production with a view to meeting the economic and financial needs of the people of Abia State, Nigeria, and the increasing importance of credit in financing SMEs in the study area, this study seeks to examine the accessibility to credit and demand among Agribusiness SMEs in the study area. These problems either make them to die within their first two years of existence or perform below standard even after surviving in their early years. Availability of collateral, linked with minimum interest rate and decision-making skills influence the SMEs and demand for credit. In Abia State however, there is no reported research (to the knowledge of the researcher so far) on the access and demand for credits by agribusiness SMEs.

To address the research gaps highlighted by scholars cited above, the study, seek to investigate access and demand for credits among Small and Medium Scale agribusiness in Abia State, Nigeria.

1.3   Research Questions

In order to realize the objectives of this study, answers to the following questions were sought:

      i.         What are the specific characteristics of SMEs agri-business enterprise in the area?

     ii.         What are the sources, types, level of access and demand for credits by the SMEs?

   iii.         What are the determinants of access to credit and demand for credit by SMEs?

   iv.         What is the performance of the agribusiness SMEs in the study area?

     v.         What is the effect of volume of credit on performance of SMEs in the study area?

   vi.         What are the constraining factors to credit access and demand by SMEs in the area?

1.4       Objectives of the Study

The aim of the study was to analyze demand and access to credit among Small and Medium Scale agribusiness enterprise in Abia State, Nigeria. The specific objectives were to:

i.               examine the socio-economic characteristics of SMEs agri-business enterprise operators in the area,

ii.              identify the sources, types, level of access and demand for credits by the SMEs,

iii.            analyze the determinants of access to credit and demand for credit by SMEs, and medium scale enterprises;

iv.            determine the performance of the agribusiness SMEs, and medium scale enterprises in the study area;

v.              determine the effect of demand of credit on performance of SMEs, and medium scale enterprises in the study area;

vi.            identify the constraining factors to credit access and demand by SMEs, and medium scale enterprises in the area.

1.5     Research Hypotheses

H01:    There is no significant difference between the volume of credit demanded and volume of credit access by the SMEs in the area.

H02:       Access to credits is positively influenced by enterprise age, enterprise’ size, guarantor, cooperative; and negatively influenced by income of firm, interest amount and collateral.

H03:       Demand for credit is positively influenced by enterprise age, enterprise’ size, guarantor, cooperative; and negatively influence by income of firm, interest amount and collateral.

H04:    Access to credits by the respondents has no significant effect on the performance of the SMEs.

1.6   Justification of the Study

Credit plays a crucial role in economic development in general and SMEs development in particular. It appears as a solution to the weakness of savings by allowing SMEs to cover the expenses related to production. Therefore, at different point in time, different researchers, authors and academics have carried out works on effect of credit demand, yet the present study will help build up more knowledge and thought on the effect of access and demand for credit by agribusiness SMEs in Abia State particularly and Nigeria in general.

The public will know that agribusiness SMEs Sub-sector is a vibrant one which they can gainfully venture into and thus make the economy of the nation most viable and enviable to foreign investors. In addition to moderating the affairs of financial institutions, government would see the need to provide enabling environment for SMEs to thrive so as to actually become the driver of our economic growth and development.

It is evidently clear that SMEs could play a catalytic role in the economic transformation of Nigeria. The role includes substantial contribution of the sector to the gross domestic product; employment generation; export; increasing local value addition and technological advancement. Given the crucial role played by SMEs in economic development, the study is expected to suggest initiatives aimed at promoting the operations of SMEs in the study area. The study is expected to help stakeholders adopt proactive measures required to ensure that SMEs better perform their roles of ensuring economic growth. The findings of this study, in addition, are expected to guide policy decisions generally on SMEs activities as well as, contribute to the improvement of entrepreneurial activities in the Nigerian SMEs sector.

This study will guide potential entrepreneurs in selecting the most profitable agribusiness SMEs to take part in, to ensure high quality and profitability delivery. This study will also be useful to the government at federal and state levels especially Abia state government. Based on this, government and other stakeholders would be able to mount effective policies and empowerment programmes that will be beneficial to entrepreneurs as well, for the effective allocation of resources.

Furthermore, this study aims to expose the usefulness of credit to not only SMEs in Abia state but government, financial institutions, students, researchers and people practicing other forms of agribusiness in other parts of Nigeria. Therefore, it is hoped that information from the study will form a source of reference material to students, institutions, and researchers and provide a basis for further studies on related issues.


 

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