FUND MANAGEMENT BY SMALL AND MEDIUM ENTERPRISES (SMES) IN FOUR STATES OF SOUTH SOUTH NIGERIA

FUND MANAGEMENT BY SMALL AND MEDIUM ENTERPRISES (SMES) IN FOUR STATES OF SOUTH SOUTH NIGERIA

Abstract 

Small and medium enterprises (SMEs), which account for 96% of businesses in Nigeria are often forced to close because they lack access to funds. The purpose of this multiple case study was to explore the sources of funds available for the development and growth of SMEs in Nigeria. The conceptual framework guiding this study was the pecking order theory. Data were gathered from company documents and through semistructured interviews of a target population of 3 leaders of 3 SMEs from the oil and gas industry in Abuja, Kano, and Lagos in Nigeria, with a capitalization of between N5 million to N500 million. Data were compiled and organized, disassembled into fragments, reassembled into a sequence of groups, and interpreted for meaning. Member checking and triangulation of sources between the interviews and company documents added to the trustworthiness of the findings. Two themes morphed from the study: sources of business finance for SMEs and constraints of sourcing of finance for business. The implications for positive social change include the potential to create employment opportunities for youths in the communities by enabling SMEs in Nigeria to succeed and expand through the identification of sources of funding.

TABLE OF CONTENTS

TITLE PAGE - - - - - - - ii

DECLARATION - - - - - - - - iii

CERTIFICATION - - - - - - - - iv

DEDICATION - - - - - - - - v

ACKNOWLEDGEMENTS - - - - - - vi

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study - - - - - 1

1.2 Statement of  Problem - - - - - - 8

1.3 Objective of the Study - - - - - - 10

1.4 Research Questions- - - - - - - 11

1.5 Statement of the Hypothesis - - - - - 12

1.6 Significance of  Study - - - - - - 13

1.7 Scope of the Study - - - - - - 14

1.8 Definition of Key Terms - - - - - 15

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction - - - - - - - - 18

2.2 Conceptual Framework - - - - - - 33

2.3 Theoretical Framework - - - - - - 45

2.4 Empirical Review - - - - - - - 50

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design - - - - - - 56

3.2 Population of the Study - - - - - - 57

3.3 Sample Size - - - - - - - - 57

3.4Sampling Technique - - - - - - 58

3.5 Method of Data Collection - - - - - 58

3.6 Technique for Data Analysis - - - - - 59

3.7 Model Specification and Variable Definition - - 59

3.8 Measurement of Variables - - - - - 59

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA

4.1 Presentation of Data - - - - - - 60

4.2 Discussion of Findings - - - - - - 79

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary - - - - - - - - 80

5.2 Conclusion - - - - - - - 80

5.3 Recommendations - - - - - - - 93

References - - - - - - -    - 95

Appendix - - - - -         - - - 98

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Nigeria is a country endowed with varieties of investment opportunities. This manifested itself during the pre-independence period, with the advent of many small and medium scale enterprises (SMEs) in form of agricultural farms like palm oil mills, cocoa, rubber, garri processing, as well as bicycle and shoe repairs, hide/skin production, cotton weaving, clay pot, sculptural and metal works.

The post- independence era witnessed improved technological applications by SMEs as a result of the various policies and programmes put up by the different levels of government towards the development and growth of SMEs in the country. This is informed by the fact that the government appreciates that small and medium scale enterprises (SMEs) are the catalyst for industrial growth and it is recognized globally as the bedrock of development in any nation.

They provide immediate large scale employment, comparatively higher capital ratio, and lower capital investment.  Besides SMEsensure a more equitable distribution of National Income and facilitate an effective mobilization of resources, capital and skill which might otherwise remain unutilized (Hakura, 2004).

It is the realization of this fact that made the government at all levels in Nigeria to put forth policies and programmes to facilitate the development and growth of SMEs. These policies and progammes ranged from monetary, fiscal and industrial at the macro level and financing at the micro level.

The focus of the above mentioned policies and programmes is to:

· Provide local finance through its agencies: Federal Ministry of Industry (FMI), Central Bank of Nigeria (CBN), Bank of Industry (BOI), Nigerian Bank for Commerce and Industry (NBCI), Nigeria Export-Import Bank (NEXIM), Micro Finance Bank.

· Financing and guaranteeing external finance through the World Bank, African Development Bank and other International Institutions willing and capable of assisting SMEs.

· Setting up of the National Economic Reconstruction Fund (NERFUND) which was a source of medium to long term local and foreign loans for SMEs (Nnanna, 2001).

These efforts of the government in the development and promotion of SMEs have indeed encouraged the growth and spread of SMEs throughout the country. From the estimates provided by the World Bank in 2002 Micro, and SMEs comprise of 87 percent of all the firms operating in Nigeria.   75% of the poor citizens depend on a farm or non-farm Micro, Small and Medium Enterprises (MSMEs) for their day to day livelihood (Sanni, 2009).

However, others placed MSMEs in Nigeria to account for over 95% of non-oil productive activities outside agriculture (Ubom, 2002). The postulation here is that SMEs form the bulk of business operating in Nigeria and their contributions to the economy can best be appreciated in terms of utilization of local raw materials, high level of employment, output (production) and export.

It is hoped that in future efforts, Government will focus on the external factors in order to create better enabling environment for SMEs.  These external factors range from inadequate infrastructure like access roads, electricity, financing, water supply, community disturbances, foreign debt and government regulations.  At the same time it is hoped that promoters of SMEs shall facilitate the implementation of best practices that will reduce or eliminate internal factors. The internal factors on the other hand are installed Accounting Information Systems, quality of staff, financial management practices and managerial skills (Gupta, 2010).

Funds management is of immense importance to SMEs in attaining the desired best practices as well as the predetermined goals and objectives. With limited access to the long-term capital market, these firms tend to rely more heavily on owner financing, trade credit, short-term bank loans to finance their needed investment in non-current assets , working capital, accounts receivable and inventory (Chittended, et al, 1998; Saccurato, 1994). Most studies on SMEs have shown that weak financial base and inadequate long-term financing is a major cause of failure of these categories of businesses (Berryman, 1983, Dunn and Cheathan, 1993).

1.2 Statement of the Research Problem

 Sourcing for fund from banks, financial houses, capital market and obtaining same is generally not an easy task for any business, as lending bodies will require adequate collateral and accounting information on the activities of the borrowing organization before such loans can be granted. The same is to a large extent true of attempts to generate funds from friends and relations. In several cases, SME promoters have to rely on their personal savings to operate SME. Generating fund is one dimension of the problem, the ability to manage the acquired fund and appropriate it adequately for performance attainment is another dimension of the problem.

The various administrations in Nigeria have at one time or the other made positive pronouncement on promotion of SME by providing funds through established agencies.  If these funds are not only on budget and paper, why are SMEs still groaning about lack of finance?

The banks, on the other hand, look uninterested in providing credit facilities for SMEs as they are considered high risk ventures. The major reason given by banks is the inability of entrepreneurs to meet the minimum required management systems (documentations)that ensure transparency of business transactions. Various Central Bank and Commercial banks reports show that SMEs form over 80% of loan repayment defaulters thereby creating a very unhealthy business atmosphere for Banks.

There is also the argument that SMEs hardly keep records of their business activities. Reasons given include:  the belief by promoters that keeping of business secret will shade them from government agencies that may impose higher tax if their detailed transactions are known.  Also, competitors, with access to such secrets may be able to hinder or block their source of supply of raw materials and production techniques which can affect their performance and growth.  The low educational level of most proprietors of SMEs create  the misunderstanding of associating high cost of record keeping to the engagement of skilled workers.  In other words, there is a wrong impression that by employing unskilled workers in the organization, cost of record keeping will be reduced.

The unwilling attitude of banks and other financial institutions to finance SMEs proposals can be explained against this background.

Moreover, the funds available to commercial banks for loans are mainly short-term deposit funds. What SMEs usually apply for is long term loan. The problem that arises here is that it will be a commercial risk on the part of Banks to give long-term loans from short-term customer deposits. Probably, the intervention of Government to bridge this gap by providing long term funds may encourage Banks to have a second thought on the in-built financial risk.

Added to this is the tendency of SMEs to engage the services of unskilled workers to manage different units of their businesses. The most conspicuous is the absence of professional funds managers (e.g. qualified accountants) to head their treasury. This may have contributed to the absence of proper accounting records/information and poor investment appraisal of business undertakings.

The environments in which these SMEs operate have indirectly created additional cost of operation. It is a common knowledge that infrastructures like access roads, electricity, water supply, are either not in existence or in short supply; for example electricity supply is generally epileptic thereby constituting a major constraint to the operations of SMEs. By the studies carried out by the World Bank (1989), it was estimated that the attempt by SMEs to provide these essential services engulf their capital to between 15 to 20 percent of the cost of operation. With the attitude of non-maintenance of existing infrastructure, the current percentage may have escalated tremendously (Nnanna, 2001).  It is a common practice amongst the political class in Nigeria to abandon projects that were not concluded by their predecessors no matter how popular these infrastructure-in-progress maybe.  This has caused much set-back in the development of enabling environment for industrialization.

It is against this background that this study is undertaken to investigate the problems involved in fund management by SMEs and the extent to which proper fund management could bring about improved growth and development in this sector.

Government policies and legal framework under which SMEs operate are not encouraging.  The coming of multinationals sees Federal, States and Local Governments make provision for their stabilization through tax holidays, free or subsidized land, equity participation and many other incentives.  These are not in the case of SMEs rather the borders are opened for dumping of foreign produced goods which invariably are of better quality than those of the SMEs.  In other words, SMEs lack protection from various tiers of Government which if in place would have contributed to their growth.

1.3 Objectives of the Study

The main objective of this study is to identify the problems of funds management by small and medium scale enterprises in Nigeria and to avert solutions that can lead to their stabilization and growth.

The realization of this objective is predicated upon exploring the following specific objectives:

1. To investigate the nature of relationship between the provision of infrastructures and the cost of managing SMEs in Nigeria.

2. To ascertain the relationship between fund management and growth rate of SMEs in Nigeria.

3. To establish the link between banking apathy to fund the SMEs in Nigeria and their poor accounting information systems.

4. To establish how government policies and legal framework has contributed to the low development of SMEs in Nigeria.

5. To investigate the relationship between inadequate capital resources and the growth and prospect of SMEs in Nigeria.

1.4 Research Questions

1. Is there any relationship between the provision of infrastructure and the high cost of SMEs operations in Nigeria?

2. Is there any relationship between funds management and the level of growth rate of SMEs in Nigeria?

3. Does a relationship exist between the poor accounting records of SMEs and the reluctance of banks to grant them loans?

4. How do government policies and legal framework contribute to the low development of SMEs in Nigeria?

5. Is there any relationship between inadequate capital resources and the growth and prospect of SMEs in Nigeria?

Against this background, the study shall test the following hypotheses:

1.5 Hypotheses of the Study

Ho There is no significant relationship between the provision of enabling infrastructure and the cost of operating SMEs in Nigeria.

Ho There is no significant relationship between fund management in SMEs and the level of their growth rate.

Ho There is no significant relationship between the reluctance of banks to fund SMEs and the poor accounting records of the Small and Medium Scale Enterprises (SMEs).

Ho There is no significant relationship between government policies and legal framework and the low development of SMEs in Nigeria.

Ho There is no significant relationship between inadequate funds and the growth and prospect of SMEs in Nigeria.

1.6 Significance of the Study

Research works so far carried out on SMEs tended mostly towards working capital management, which is short term capital. This study will, however include long term capital.   The development of Information Technology (IT) has transformed the world economy into a global village such that what happens in the economy of one country tends to have a global effect on the economies of the other countries. Furthermore, with the development and use of highly efficient technology, the survival of any organization in a highly competitive global market shall depend among other things on its ability to effectively and efficiently manage its resources. The study seeks therefore to elaborately decipher the problems of fund management by small and medium enterprises in Nigeria. The findings and recommendations shall be of help to existing and prospective investors in SMEs, financial analyst, researchers and students at large. It shall also equip the government and her agencies in the formulation of policies that will aid the stabilization and growth of SMEs.

As global technology develops, the study shall form a basis for future research. The study shall help entrepreneur to appreciate the significance of fund management for the success of an organization and equally expose SMEs to techniques that will lead to profitability and growth.

The reasons are not far-fetched. Entrepreneurs concentrate more on the control of their revenue income and expenditure, which is working capital. A near-perfect working capital management is a panacea to continuous liquidity and prosperous growth, all things being equal. Fundmanagement, on the other hand,enables entrepreneur to formulate policies, generate information and planning the activities of the organization in the short, medium and long term on the best way to utilize the assets and liabilities. Since acquisition of non-current assets and liabilities cannot be done without the approval of management/directors, they become of less relevance for managerial attention in terms of verification and security.

1.7 Scope of the Study

The population of SMEs in Nigeria is estimated by the World Bank (2002) as 87% of the entire firms in existence in the country. SMEs which are scattered all over the country are as shown in appendix 1.

The three categories of enterprises, as defined in the attached appendix play different roles in the economy and are influenced by the characteristics of operators and the strictness of entry requirements.  By that estimate, and being 87% of firms in Nigeria, the later can be regarded as nine million, six hundred and seventy eight thousand, one hundred and sixty one (9,678,161).

This necessitates the need to concentrate special attention on their performance in order to assist in their development and growth as they are the greatest employers of labour outside government. From statistics available in the Federal Ministry of Commerce and Industry, the SMEs located in the South-South equals 20% of the entire SMEs in the country. Considering the cost, time and concentration required having a well- researched result on the subject matter, it becomes inevitable to limit the scope of the study to the four states in the South-South of Nigeria namely: Bayelsa, Delta, Edo and Rivers.   The choice of different types of SMEs is to establish whether the attitude of Government at all levels in provision of funds and policy pronouncements are the same.

The issue of easy communication using English language is another factor. The proprietors of SMEs may not necessarily be educated in a foreign language like spoken English outside their mother tongue. To avoid the engagement of an interpreter, which may give wrong interpretation to answers provided, the researcher decided to concentrate in the zones where such communication problems could be less. Nigeria is a nation divided into six (6) zones and South-South gives a representation of one-sixth of the country. Since the research is meant to investigate the problems involved in fundmanagement by SMEs in Nigeria, the scope chosen shall afford the researcher to generalize his findings on the other parts of the country – Nigeria, using four states in the South-South, as many of the operators of the SMEs are migrants from other parts of the country.

1.8 Limitations of the Study

The four states to be used are located in the Niger Delta region of Nigeria.  One common feature to the states is the terrain reminiscent of the entry of Rivers Niger and Benue distributaries into the Atlantic Ocean.  This makes movement to be difficult especially to areas classified as riverine.   The security situation in these states is also a case in point.   Existing data on SMEs in Nigeria are quite limited.  In most cases reliance had to be placed on operations of SMEs in India, Australia and America in order to establish a valuable decision.  Respondents generally are reluctant to release any information concerning their operations under the suspicion of being agents of Government.  Their fear is built around the leakage of such information that will facilitate imposition of high taxation on their income by government.  However, with patience and perseverance, skeletal but useful information were provided.  The time factor becomes relevant as most SMEs promoters and key staff may not be on site on visitation.  This necessitated booking and cancellation of appointments, at short notices at the instance of the promoters.  For the research to be meaningful, it has to be completed within acceptable time. As a result, the researcher tries to harmonize other activities with the demand of this research in order to have the best possible information,from SMEs operators.  On finance, the cost of research is quite high.  This is as a result of the distance (four states) covered by the research which requires much funds for transportation, feeding and accommodation.

The satisfaction is that at the end, whatever result that may be achieved will be useful to the generality of the human race.   

1.9 Definition of Terms

Collateral:  A valuable non-current asset used as a pledge to secure a loan.  It

is usually offered to lending financial institutions as an assurance to pay back a loan.

Financial Statement:  These are accounting reports of an organization covering a period of 12 months for an old and 18 months if new.  It states clearly the performance of the organization, during the period under review.

Fund: The money available to an individual or enterprise for a start-up and continuation of operation.

Management: The art of planning, directing and controlling in a manner that can lead to effective and efficient utilization of available resources to the accomplishment of organizational goal.  

Organization: A group of people who form a business, club, together in order

to achieve a particular aim (Oxford Advanced Dictionary of Current English Seventh edition 2010).  

Shareholders: These are the owners of shares in a company or business.  They

are empowered by statute to establish basic corporate policy of the company they have stake.

Short Term Loans: These are funds obtained from a financial house which

 must be repaid within a year e.g overdraft.

South South Nigeria: Politically, Nigeria is divided into six geo-political zones namely south south, south west, south east, north central, north west and north east. The south south is made up of six states- Akwa Ibom, Bayelsa, Cross Rivers, Delta, Edo and Rivers. Four of these south south state are being used as case study.  

Working Capital: The excess of current assets over current liabilities.  It is the

net of investment on assets, and liabilities incurred within a trading circle of 12 months.