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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