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
1.2 Statement of the Research Problem
1.3 Objectives of the Study
1.4
Research Questions
1.5
Hypotheses of the
Study
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitations of the Study
1.9 Definition of Terms
CHAPTER TWO
REVIEW OF RELATED LITERATURE AND THEORETICAL FRAMEWORK
2.1 Literature Review
2.2 Theoretical Framework
CHAPTER THREE
RESEARCH METHODS
3.1 Research Design
3.2 Population of the Study
3.3 Sample Size and Sampling Technique
3.4 Method of Data Collection
3.5 Method of Data Analysis
CHAPTER FOUR
DATA PRESENTATION,
ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Descriptive Analysis of Responses to the Questions in the
Questionnaire
4.2 Test of hypotheses
4.3 Empirical Discussion of Findings
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary
5.2 Implication of the Study
5.3 Conclusions
5.4 Contribution to Knowledge
5.5 Recommendation
5.6 Areas for further Study
REFERENCES
APPENDIX:
QUESTIONNARE
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).
Theseefforts 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.
1.6
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:
1.7
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.
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