ABSTRACT
The study analyzed effect of formal financing and investment on the performance on bakery enterprises in Abia State, Nigeria. Multi-stage random sampling techniques were employed in the selection of 120 respondents. Primary data were collected with the use of questionnaires using enumerators. Relevant descriptive and inferential statistics such as frequencies, percentages, means, multiple regression models were used for data analysis. The result shows that 53.3 percent of the bakery enterprise operators in Abia state were females while 46.7 percent were males and their average age was 39 years. Majority (92.5%) of the respondents in the study area had one form of formal education or the other and about 65.8% were married. The mean household size was 6 persons and the mean baking experience in their line of business was of 19 years. Majority of the respondents (66.7%) belonged to one association or the other. The average amount of credit accessed by the respondents was N139,583.00. The major condition for accessing loan was secured and realizable collateral. The gross profit and net profit for an average enterprise per month were N86,852.91 and N82,533.93 respectively. The result showed that the average investment and amount of loan received were N 178,579.93 and N139,583.00 respectively, while the owners ‘equity was N38,996.93. Also the debt to equity ratio of the bakers is 3.58. A positive (direct) and significant relationship between loan amount with corporative membership, interest payment, equity capital and loan duration while a negative and significant relationship exists between leverage ratio, cost of supervision and marketing expenses. Amount of loan (1%), revenue from sales (10%), number of bakery product (10%) all move in the same direction (positive) with level of investment while volume of investment was negatively related to depreciation of farm equipment. Furthermore performance was positively related to amount of loan, location of business, number of bakery product, while transportation and levies were negative and significant variable that influence the performance of bakery enterprise. Furthermore, a positive (direct) and significant relationship exist between amount invested, size of business and frequency of processing while a negative and significant relationship exist between price of product and performance. The major problems associated with loan access were delayed approval (0.817), long protocols (0.713) and poor government policy (0.68). The study recommends that conscious efforts should be geared towards increased encouragement of the bakery enterprise in order to meet the demands of bakery businesses for food security in both the study area and the country (Nigeria) in general.
TABLE OF CONTENTS
Title
Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table
of contents vi
List
of Tables vi
List
of figures xi
Abstract xii
CHAPTER 1: INTRODUCTION 1
1.1 Background
of the Study 1
1.2
Problem Statement 7
1.3. Objectives
of the Study 9
1.4 Research
Hypotheses 10
1.5. Justification
for the Study 10
CHAPTER 2: LITERATURE REVIEW 12
2.1 Conceptual
Review 12
2.1.1 Formal
financing 12
2.1.2 Demand
and use of formal finance by bakery enterprise 17
2.1.3 Bakery enterprises 19
2.1.4 Investment behaviour in bakery enterprises 22
2.1.4.1 Pattern of
investment of enterprise. 24
2.1.5 Performance of bakery
enterprise 26
2.1.6
Access to finance and performance of
investment 27
2.1.7 Economic importance of bakery
enterprise
28
2.1.8 Formal financing and investment behaviour
31
2.1.9
Investment and financial behavior
33
2.1.10 Investment
and finance decisions 34
2.1.11 The influence of formal finance on investment
of bakery enterprise 35
2.1.12 Factors influencing access to finance by
bakery enterprise 36
2.1.13
Concept and causes of bakery enterprise financing gap 42
2.1.14 Imperatives
of good banking habits for successful bakery enterprise operations 43
2.1.15 Relevance
of bakery enterprise in economic development 44
2.1.16 Significance of the bakery
sub-sector in the Nigerian economy 46
2.2.17 Finance rationing and
constraint 47
2.2
THEORETICAL REVIEW 48
2.2.1 Demand
and supply of finance 48
2.2.2 Financial growth theory 49
2.2.3 Pecking order theory 50
2.2.4 Keynesian theory and accelerator theory of
investment 52
2.3 EMPIRICAL REVIEW 53
2.3.1 Sources
and types of finance 53
2.3.2 Contributions
of formal financing to the performance of bakery business 57
2.3.3 Determinants of formal financing, investment
and performance of bakery business 59
2.3.4 Effect of formal financing on the investment
and performance of bakery business 62
2.3.5 Constraints to finance access and utilization
by farmers 64
2.2.6 Research
gaps 66
2.4 ANALYTICAL REVIEW
2.4.1 Descriptive statistics 67
2.4.2 Regression analysis 68
CHAPTER 3: METHODOLOGY 70
3.1 Study
Area 70
3.2: Sampling
Techniques 71
3.3 Method
of Data Collection 72
3.4 Method
of Data Analysis 72
CHAPTER 4: RESULT AND DISCUSSIONS 78
4.1 Socioeconomics characteristics of the bakery owners and profile
of the bakery enterprise in in Abia state 78
4.2 Conditions for accessing loans for
investment in the bakery enterprises. 85
4.3 Component of formal financing to financial
structure of bakery enterprise 86
4.4 Determinants of loan amount granted and
effect of formal financing on the amount of investment in baker 90
4.5 Effect of formal financing and investment
on the performance of bakery enterprise 96
4.6 Problems associated with loan access and
investment; 100
CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS 104
5.1 Summary of Findings 104
5.2 Conclusion 106
5.3 Recommendations 106
REFERENCES 109
LIST OF TABLES
4.1 Distributions of respondents according to
socioeconomic characteristics 78
4.2 Profile of Bakery enterprise 82
4.3 Baking enterprise 84
4.4 Conditions
for accessing loans for investment in the -bakery enterprises 85
4.5 Profitability
analysis of bakery enterprise in Abia State per Month 86
4.6: Financial structure of Bakery enterprise 87
4.7 Debt-equity-ratio. 88
4.8 Determinants
of loan amount granted 90
4.9 Effect of formal
financing on the amount of investment in bakery enterprise 94
4.10 Estimate
of effect of formal financing on the performance of bakery enterprises 96
4.11 Effect
of investment on the performance of bakery enterprises 98
4.12 Principal component analysis on problems
associated with loan access 100
4.13 Total variance explained on problems
associated with loan access 102
4.14 Communalities scores on problems associated
with loan access 102
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
Finance is an
important input in production as well as an enabler of the investment of every
enterprise. Business financing provides the needed take-off tool for business
venture (World Bank, 2013). This observation was supported by the United
Nations Commission on International Trade Law (UNCITRAC, 2020) who noted the
importance of secured finance by stating that all businesses require working
capital to operate, to grow and to compete favorably in the market place.
However, there are differences among various businesses in terms of access to
financial resources. Thus, access to finance (formal financing is a component
of financing) has been identified as a key element for any business
organization to be productive, to compete, create jobs, help in poverty
alleviation, especially in the developing nations and generally to succeed (Ahiawodzi and Adade, 2012).
Formal
financing refers to provision of financial services by registered financial
institutions that are licensed to offer financial services by the country’s
financial regulators (in case of Nigeria
it is the Central Bank of Nigeria (CBN). Examples of institutions offering
formal financial services are the commercial banks, insurance companies and
development banks (Mehrteab 2005). Financing includes all transactions, loans and deposits
occurring within the control of the central monetary authority, i.e. the CBN
(Idu and Sunday, 2016).
In consideration of the
importance of finance to the growth of Small and Medium – Size
Enterprises the Federal Government of Nigeria came up with several intervention
programs and policies to develop the Bakery enterprise. These programs include;
the establishment of Nigerian Industrial Development Bank (NIDB) in the year
1954, Small Scale Industrial Schemes (SSIS), (2001), Nigeria Bank for Commerce
and Industry (NBCI), (2001), Central Bank of Nigeria special finance program
(CBNSCP), (2017), National Economic Reconstruction Fund (NERFUND) (1989), People’s
Bank of Nigeria (PBN) (1990), Community Bank and Industrial Development Centre,
(1999) Commercial Banks, and the Micro Finance Banks (Ajagba and Bolaji, 2013).
Loan availability remains one of the pivotal keys to
building a sustainable enterprise. Businesses are majorly funded with equity
and loans. While it is most desirable to start and expand your business through
equity, sometimes it makes more financial sense to take a loan to support the
cash flow of your business, expand into a new market or buy an important asset.
Getting a loan through banks sometimes may be difficult as there are always
some stringent conditions precedents to accessing such loans. The Nigerian
government over the past decade has become more interested in boosting
activities in the SME space and filling the financial gap left open by the
private financial institutions. The most
recent of the programs being the N220 Billion earmarked by the Central Bank of
Nigeria for the Micro, Small and Medium Enterprises (Bakery enterprise). These
include: Bank of Industry (BOI) Intervention funds - BOI is a development financial institution created by the
Federal government to aid the development of the country’s industrial sector as
well as intervene financially in developing sustainable enterprises. The
institution over the years has provided intervention funds to various sector of
the Nigerian economy including agriculture, power, mining and many others. The
BOI also administers various funds on behalf of states governments, CBN, other
government agencies and a number of private institutions. There are over twenty
funds that SMEs can take advantage of. These include the following:
Agricultural and Small Medium
Enterprise Scheme (AGSMEIS) was formed 2017.
It is a financing programme created by the CBN in
collaboration with the bankers’ committee to support the Federal Government’s
effort and policy measures for the promotion of agricultural businesses and
small and medium enterprises (SMEs) as a vehicle for sustainable economic
development and employment generation. It is a scheme that requires all banks
to set aside five percent of their profit after tax (PAT) annually to fund
small businesses. The scheme can fund an SME up to two billion Naira for a
maximum period of ten years. Application for this type of funding is through
any commercial bank in Nigeria, where the financing request is more than Ten
million Naira. Under the same scheme, CBN also licensed Nigeria Incentive Based
Risk Sharing system for Agricultural Lending (NIRSAL) Microfinance Bank (NMFB)
to disburse maximum of Ten million Naira to SMEs
Development Bank of Nigeria ( DBN ) Loans was formed in
2014 .DBN was a creation of the Federal Government of Nigeria in collaboration
with some global development partners including the World Bank and African
Development Bank. It is created to address financing challenges faced by SMEs
in Nigeria. Micro, Small and Medium Enterprises Development Fund (MSMEDF-formed
2013)- It is a CBN initiative launched in 2013 to bridge the existing financial
gap in the SME sub-sector of the economy. SMEs can access loans from Five
hundred thousand to fifty million Naira to fund their businesses. Sixty percent
of the N220 billion funds is expected to fund women-owned businesses while ten
percent will fund startups. Applicants are to approach participating financial
institutions- commercial banks, microfinance banks, finance houses and
financial cooperatives- to apply for the fund.
CBN Creative Industry Fund- As part of its efforts to
boost job creation, particularly amongst the youth in the country, the Central
Bank of Nigeria, in collaboration with the Bankers’ Committee, introduced the
Creative Industry Financing Initiative (CIFI). It is done with a view to
improving access to long term financing by entrepreneurs and investors in
fashion, information technology and entertainment industries. However, the
amount each applicants can access ranges from N3 million to N500 million
depending on the capacity of the applicant.
COVID-19 Intervention Funds was the scheme, which is to
be financed out of the CBN’s N220 billion Micro, Small and Medium Enterprises
Development Fund (MSMEDF), earmarked a maximum facility of up to Twenty Five
million Naira for MSMEs while households can access up to N3 million based on
the activity, cash flow, and industry/segment size of a beneficiary.
However, despite all these, the World Bank (2020) ranked
Nigeria as 131st position out of 185 economies in the world on the
ease of doing Micro, Small and Medium Enterprises. With respect to having access
to finances, Nigeria was ranked 23rd position out of 195 countries
of the world.This is an improvement from the 38th position in 2012
by the World Bank summit (2015) conducted in 195 countries of the world
(Osagie, 2016).
Small and Medium Size Enterprises (SME)
constitute about 90% of business in the Nigerian Industrial Sector (Akingwola,
2011). SMEs such as bakery enterprises are faced with many challenges such as
inability to function well and contribute optimally to the economy due to lack
of short, medium and long – term capital financing, inadequate access to
financial resources and finance facilities, poor management and lack of proper
accounting practices, Other challenges are inability to access loan and limited
equity fund (Cook and Nixson, 2000).Thus, Kauffmann, C. (2005) noted that
access to formal finance by Bakery enterprise is poor because of high risk of
default among business organizations, stringent collateral instruments and
conditions and inadequate financial facilities.
Investment behavior
refers to the various ways investors judge, predict, analyze and review the
procedures for finance taking/making. The entire process includes investment
psychology, information gathering, defining and understanding decision in
business and research analysis in such a way as to determine the investor’s
investment decision in business ventures (United Nations Conference on Trade
and Development (UNCTAD), 2014). This shows that SMEs such as bakery operators
take necessary precautions before accessing formal loan or finance. This is because of the existence of both good and bad bargain in finance contract
agreement.
Bakery enterprise is
a business establishment or venture that produces and sells flour- based food
baked in an oven such as bread, cookies, cakes, pastries and pies (Ewung,
2008). Investment in bakery enterprise could be capital intensive and as such
the need for huge financial commitments always leads to high demand for formal
financing. Formal financing has played significant role in the investment
behavior of investors. Bakery owners’ decisions to invest and to produce are
closely influenced by access to finance. If available financial instruments do
not match bakery owners’ needs, they may be discouraged to adopt better
technologies, to purchase inputs, or to make other decisions that can improve
the efficiency of their businesses. The implication is that improving access to
formal finance can increase investment in the enterprise and provide bakery
enterprise with more effective tools to manage risks (Gertler and Karadi,
2012).
The importance of
bakery enterprises in Nigerian economy cannot be overemphasized. Bakery
enterprise serves as engines of economic growth and development, it is also
noted as a vehicle to achieve food security and provision of employment
opportunities. Furthermore, proper analysis of the effect of formal financing
on the investment and performance of bakery enterprises will help in achieving
local and international competitiveness.
In Abia State, available sources of formal financing for
small and medium enterprises include Central Bank of Nigeria(CBN), commercial
banks, development banks, merchant banks, insurance companies etc. These
financial institutions provide short, medium and long term financing needs for the
bakery enterprises.
Bakery enterprises include bread bakery (such as Santana
bakery, Dera bakery, shoprite bakery, MOUAU bakery etc), Fast food businesses
(such as Crunches, Bubbles, Mr. Biggs etc) .The availability and access to
finance influence investment decisions in the bakery industry. It is worthy to
also note that, the problem relating to lack of finances includes; stringent
conditions on access of loan facility, poor accounting practices and business
management. Other related problems are lack of financial assistance to start
business. The implication of lack of funding is that, when the investor makes
wrong investment decision, using his limited resources, the performance of this
business might be negatively affected.
Outstanding
performance is desirable for every investment and sustainability of business.
The lender is interested in the performance history of the borrower to guide
his decision during lending. This study addresses issues that relate to Bakery
owners’ access to formal financing, availability of information relating to
formal financing, investment and performance index such as net return.
Therefore, good judgment of the investors on loan conditions would result to
high performance, hence the need for this study.
1.2 STATEMENT
OF THE PROBLEM
The demand-supply gap of bakery products in
Nigeria and most countries in Sub-Saharan Africa is largely met by importation
(Mpuga, 2006). This is because, most of the vital inputs used in production
such as baking equipment, wheat, yeast and other ingredients are not always within the reach of the
enterprise owners (Briggeman et al., 2003), thus, crippling the return
on investment and discouraging the bakers from more investments. The above
problem has contributed to the slow growth in the bakery business in Nigeria
especially Abia State.
Over the years, the government has formulated
policies aimed at boosting bakery enterprise
in Nigeria. One of these policies is the inclusion of 40% cassava in
composite flour with effect from 15 July, 2012 despite that the prices of
bakery product in Nigeria continue to rise. Prices of bread, a major stable
food have risen in the past three years by an average of about 25% between N80
and N120, per family size loaf to between N120 and N150
amid increase in the prices of baking materials (NBS, 2022).
In Nigeria, according to Onwumere et al.
(2019) bakery enterprise is faced with the challenges of poor investment
consequently making the bakery production chain not competitive. This has led
to poor investment which is grossly affected by the fluctuating cost of inputs
together with rising operational and maintenance costs. The investment problem
is aggravated by the inability of formal institutions to lend to these enterprises due to lack of
appropriate records of the bakery enterprise, lack of tangible collateral such
as land, and lack of valuable assets. This situation is compounded by
inadequate policies to help speed up liquidation of assets for the benefit of
lending institutions when borrowers default. Therefore, if the bakery owners
are to invest into new production technologies, they have to either borrow more
money to acquire the modern inputs or commit a greater portion of their
personal resources to the enterprise.
According to Joe (2015), the bakery
enterprises have had poor performance over the years. This is partly as a
result of poor funding by the formal financial sector and the provisions in the
financial intervention program and policies of government to stimulate the
growth of bakery enterprise. CBN (2005) reported that the share of Microfinance
Bank’s allocation to bakery enterprise was grossly incapable of meeting their
massive demand for funding.
Furthermore,
according to the International Finance Cooperation (IFC) (2012), only ten (10)
out of every fifty (50) newly established bakery businesses survive up to the
fifth year in Nigeria. Other problems of the industry are poor and substandard
quality of the bakery products. These problems are numerous and as such have
led to winding up of some bakery industries. Financing problems include but are
not limited to inability of the bakery enterprises to access financial
resources, stringent collateral condition to access loans, lack of Government
assisted funding etc. Studies by Aremu & Adeyemi (2011) have shown that
more than 50% of bakery businesses are not making profit in their business due
to poor formal financing which has caused the closure of a good number of such
enterprise. In addition non-commitment on the part of these bakery owners, poor
managerial skills, lack of standardization of products, poor business
environment, unfriendly Government policies are some major issues that affect
performance of bakery enterprise. In order to solve these problems or issues,
the following research questions on how to close this gap were formulated:
i.
What are the socioeconomics
characteristics of the bakery owners and profiles of the bakery enterprise in
Abia State?
ii.
What are the conditions for
accessing loans for investment in the bakery enterprises?
iii.
What are the contributions
of formal financing to the financial structure of the bakery enterprise?
iv.
What are the determinants of
loan for bakery enterprises?
v.
What is the effect of loan
on performance in the bakery business?
vi.
What are the problems
associated with loans access and bakery investment?
vii.
What is the effect of loan
access investment on the performance of bakery enterprise?
1.4 OBJECTIVES
OF THE STUDY
The broad objective of this study was to
examine the effect of formal financing and investment on the performance of
bakery enterprises in Abia State, Nigeria
The specific objectives were to:
i.
describe the socioeconomic
characteristics of the bakery owners;
ii.
examine the conditions for
accessing loans for investment in the bakery enterprises in the study area;
iii.
ascertain the components of
formal financing to the bakery
enterprise in the study area;
iv.
estimate the determinants of
loan granted and the effect of formal financing on investment in bakery enterprise in the study
area;
v.
determine the effect of
formal financing on the performance of
bakery enterprises in the study area;
vi.
identify the constraints
associated with loan access and investment in bakery enterprise in the study
area.
1.5 HYPOTHESES
The following hypotheses stated in the
alternate form were tested to guide the
study:
HO1: Membership
of bakery association, experience, size of business, supervision/monitory,
production cost and loan duration are positively related to loan access while
leverage ratio, interest premium, equity capital were negatively related to
loan access
HO2: Loan
size is positively related to investment in the bakery business.
1.6 JUSTIFICATION OF THE STUDY
This study is
justifiable given the fact that the result will be useful in filling the
knowledge gap created in the literature on the effect of formal financing of
the Bakery enterprise and on the investment behavior of entrepreneurs. It was
deduced from literature, that most research works treated formal financing of
Bakery enterprise as part of the solution to poverty. To the best of my
knowledge, the impact of formal finance on investment and the corresponding
performance of bakery enterprise has not been empirically tested in the
literature, especially in Abia State. Most researchers in Nigeria have not
taken time to document the nature, mode of operation and processes involved in
financing of Bakery enterprise.
Recommendations will assist the policy makers when
formulating regulatory policies and guidelines aimed at overcoming the barrier
of access to finance by Bakery enterprise. These findings will be useful by
various stakeholders including financial institutions, small and medium
enterprises, managers and owners, government and general public, researchers
and academics. The result will serve as useful material for future
research. It is also expected that the findings of this
research will help in providing information and in identifying problem areas
for improvements in bakery enterprise in Abia State.
Furthermore, the research would serve as a
guide to governmental and non-governmental organizations in designing
appropriate measures in order to boost and improve the performances of baking
enterprise in Abia State.
The government and CBN would find useful
information from the outcome of this study that would help them in the
formulation of policies that will lead to improve credit delivery to bakers.
Furthermore, the outcome of this study will
provide empirical evidence that will be of benefit to financial institutions
and policy makers in designing, planning and implementing sustainable,
efficient and effective credit schemes that would help improve the operation of
bakery enterprise.
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