ABSTRACT

This study examines the impact of lease financing on the performance of Small and Medium Enterprises (SMEs) in Jigawa State, using Shemars Table Water Company as a case study. The research was motivated by the persistent challenges SMEs face in accessing traditional financing options, despite their critical role in economic development and poverty alleviation. The study adopted a survey research design, collecting primary data through questionnaires distributed to fifteen (15) randomly selected SMEs in Dutse Local Government. Simple percentage analytical tools were employed to analyze the data. The findings revealed that lease financing positively impacts SME performance by allowing investment in innovation capabilities, providing alternatives for capital asset acquisition, and enabling replacement of older assets with modern technology to enhance productivity and profitability. However, the study identified significant challenges affecting SMEs' access to lease financing, including low lease awareness, poor and incomplete financial records, corruption and lack of integrity among bank officials. Additionally, factors such as lack of adequate collateral, high interest rates, and stringent conditions before granting loans were found to hinder credit accessibility. The study recommends that government should create better loan terms for SMEs, ensure strict supervision of funded projects, set minimum conditions for loan access, and provide an enabling environment through tax reductions. Furthermore, banks should accept contract papers as collateral to facilitate SME access to lease financing.

Keywords: Lease Financing, Small and Medium Enterprises (SMEs), Financial Performance, Credit Accessibility, Jigawa State

TABLE OF CONTENTS

Title Page .............................................................................................................. i

Declaration ........................................................................................................... ii

Certification ......................................................................................................... iii

Dedication ............................................................................................................ iv

Acknowledgement ................................................................................................ v

Abstract ................................................................................................................ vi

Table of Contents ............................................................................................... vii

List of Tables ........................................................................................................ x

List of Appendices ............................................................................................... xi

Abbreviations ...................................................................................................... xii

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study .................................................................................... 1

1.2 Statement of the Research Problem ................................................................... 5

1.3 Objectives of the Study ...................................................................................... 7

1.4 Research Questions ............................................................................................ 7

1.5 Scope and Delimitation of the Study ................................................................. 8

1.6 Significance of the Study ................................................................................... 8

1.7 Historical Development of SMEs in Nigeria ..................................................... 9

1.8 Definition of Key Terms ................................................................................... 11

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction ...................................................................................................... 13

2.2 Conceptual Literature ...................................................................................... 13

2.2.1 Concepts of Leasing .................................................................................... 13

2.2.2 Types of Leases ........................................................................................... 17

2.2.3 Importance of Lease Financing .................................................................... 18

2.2.4 Concept of Small and Medium Enterprises (SMEs) .................................... 20

2.2.5 Characteristics/Features of SMEs ............................................................... 22

2.2.6 Sources of Funds for SMEs ......................................................................... 23

2.2.7 Challenges and Problems Facing SMEs in Nigeria .................................... 25

2.3 Empirical Literature ........................................................................................ 28

2.4 Theoretical Framework .................................................................................... 33

2.4.1 Traditional Theory (1963) .......................................................................... 33

2.4.2 Modigliani and Miller Hypothesis (1958) .................................................. 34

2.4.3 Trade-off Theory (1973) ............................................................................ 35

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction ...................................................................................................... 36

3.2 Research Design .............................................................................................. 36

3.3 Population of the Study ................................................................................... 36

3.4 Sample Size and Sampling Techniques ........................................................... 37

3.5 Sources and Method of Data Collection ......................................................... 38

3.6 Method of Data Analysis ................................................................................. 39

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Introduction ...................................................................................................... 40

4.2 Characteristics of Respondents ....................................................................... 40

4.3 Presentation of Data Analysis ......................................................................... 42

4.4 Answers to Research Questions ....................................................................... 50

4.5 Summary of Findings ....................................................................................... 52

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary .......................................................................................................... 53

5.2 Conclusions ...................................................................................................... 55

5.3 Recommendations ............................................................................................ 55

REFERENCES ........................................................................................................ 57

APPENDICES

Appendix I: Questionnaire .................................................................................... 61

Appendix II: List of SMEs in Dutse Local Government ...................................... 64

CHAPTER ONE

INTRODUCTION

1.1      Background to the Study

All over the world, small and medium scale industries are known to exist in countries of the world and most of them were established since the mid-1980s, with the inception of the structural adjustment program (SAP). Small and medium enterprises (SMEs) vary in definition ranging from reference to number of employees, value of total assets, value of capital, and value of sales (Ayyagari et al., 2003 as cited in  Ekpeyong and Nyong, 2020). However in the case of Nigeria, the definition of small and medium scale enterprises in general is that of the National Council of Industries, which defines small and medium enterprises as business enterprises whose total costs excluding land is not more than two hundred million naira (N200, 000,000.00). In Nigeria, the genesis of small and medium scale enterprises is traceable to the year 1945 when the essential paper number 24 of 1945 titled “A Ten year plan of development and welfare of Nigeria 1946” was presented (Aremu and Adeyemi, 2019). Since then, small and medium scale enterprises have risen in prominence over the years, with their importance expected to increase even further in the future. In resolving the problems of poverty and unemployment in most developing countries Small and medium scale enterprises (SMEs) have proved to be a major intervention (Aremu and Adeyemi, 2019).  Despite the numerous factors that challenge the survival and growth of SMEs in both developing and developed countries, finance has been identified as one of the most important factor (UNCTAD, 2001; SBA, 2013).

One of the most prominent issues in the corporate and financial world today is the issue of leasing (Abashiya, 2015). In the developed countries, it is almost an integral part of the overall financial system and often advocated as the least expensive and most advantageous form of funding (Afzal, 2003). As Olusoga, (2018) indicates, the most generally accepted method of financing capital investment throughout the world is equipment lease financing option. In Nigeria, although lease volume remains relatively insignificant in terms of world rankings, the concept is fast gaining recognition and has been influencing some major decisions in the various sectors of the economy. With the paucity of capital in the continent, many African countries such as South Africa, Zimbabwe, Ghana, Nigeria and recently Egypt have used leasing as a major anchor of their economic development policy with considerable success. In these countries, lessors are fully involved in investments in the extractives industries, transport, agriculture, construction and telecommunications (Olakunle, 2018).

Leasing has been used extensively in the financing of ships, aircraft containers, heavy-duty machines, plants and machineries, vehicles, cranes and bulldozers and assets of substantial value. The concept of leasing is applicable to both medium and long term financing. The essence of a lease contract is that the user and owner remains separate and the former pays the latter a regular rental for the use of the asset (Higson, 2012). Firms use buildings and equipment in the production of goods and services. One way of obtaining these is to buy them, but an alternative way is to lease them. Prior to the 1950s, leasing was most often associated with real estate, land and building. A lease is a legally enforceable contract which defines the relationship between an owner, the lessor, and a renter, the lessee. A typical lease spells out all of the terms involved in a land or merchandise rental agreement, including the length of time a lessee may use it and what condition it must be in upon return to the lessor. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred. An operating lease is a lease other than a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. The legal form of a finance lease is that the lessor is the legal owner of the leased asset. The economic substance of a finance lease is that the lessee has all the benefits and costs associated with ownership of the asset. The finance lessee is in the same position as it would have been if it had borrowed money to buy the asset itself.

Having access to finance gives SMEs 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 (2019) notes that the majority of commercial bank 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 government rather than private sector borrowers because the risk involved is lesser and higher returns are offered (Levitsky, 1997, as cited in Mahmud et al., 2020). Such apathy for the SMES have crowded out most private sector borrowers and increased the cost of capital for them.

1.2   Statement of the Research Problem

Contrary to what obtains in many development nations, leasing is relatively a new financing option in Nigeria. If we look at the existing financing device or option open to small-scale enterprises, it was observe that small-scale enterprise experience a chronic shortage of institutional credit which ordinarily should form the bulk of their finance. This situation calls for remedy, and the researcher believes that leasing could be encouraged and promoted to satisfy the financing needs of small enterprises which helps in the growth of a nations economy. For instance, in Jigawa state, the government has evolved measured to alleviate poverty through various agricultural projects, upgrading the status of some markets, providing and developing skills acquisition and empowerment of people. On observation of the entire state, it is discovered that small businesses are on the increase, ranging from G.S.M operators, POS operators, barbing and hairdressing salons, to mention but few. But it is shocking that their gains are not easily recognized or felt in the economic advancement of the state. This can be attributed to some bottleneck, such as difficulty in accessing micro finances, inadequate management, lack of experience and skill personnel especially in compiling a convincing feasibility study and work plan, market competition, inadequate capital and many other problems.

Oko and Aham (2019) identify poor performance of the Nigeria lease market attributed inadequacies in government policy and their impact on leasing and established that the level and number of firms and industries that are on equipment leasing based in Nigeria are significantly low compared to other developing and developed economies of the world.

Several studies have been conducted on leasing in respect to firms’ performance and profitability of different industries (Umar, Hannatu and Almustapha, 2016; Alazzam, 2015; Orabi, 2014; Salam, 2013; Aurangzeb and Shujaat, 2012; Jabbarzadeh, Motavasel and Mohammad, 2012; Hassan, 2009; Sama’ila, 2018 among others) in different countries. The outcomes of the researches show a mixed result, some researches established that leasing has positive impact on financial performance (e.g. Umar, Hannatu and Almustapha, 2016; Alazzam, 2015; Orabi, 2014; Munene, 2014; Salam, 2013; Hassan, 2009 and Sama’ila, 2018) while researches by other researchers (e.g. Aurangzeb and Shujaat, 2012; and Jabbarzadeh, Motavasel and Mohammad, 2012) maintained that leasing has a negative impact the financial performance. Therefore, this creates a gap and inconclusive findings.

Moreover, most of the researches in respect to leasing and financial performance of firms in Nigeria were carried out on different sector of the Nigerian economy. For instance, Umar, Hannatu and Almustapha carried out research in oil and gas industries in Nigeria (2016), Hassan, carried out research on Nigerian banks (2019), Sama’ila (2018) carried  out research on conglomerate companies (2018). But, to the best knowledge of the researcher none of the studies was ever conducted on Small and medium enterprises (SMEs) in Jigawa state.

Therefore, these study aim to provide unique and filled the gap created by other academician to assess the impact of lease financing on the performance of small and medium enterprises (SMEs) in Jigawa State.

1.3       Objective of the Study

The main objective of this study is to examine the impact of lease financing on the performance of small and medium enterprises (SMEs) in Jigawa State. A case study of Shemars Table water. Other specific objectives includes:

1.      To determine the impact of lease financing on the performance of small and medium enterprises (SMEs) in Jigawa State.

2.      To determine challenges affecting small and medium enterprises (SMEs) on accessing lease financing in Jigawa state

3.      To determine factors affecting credit accessibility by small and medium enterprises (SMEs) in Jigawa state

4.      To proffer possible solution to the problems of loan accessibility by small and medium enterprises (SMEs)  in Jigawa State

1.4       Research Questions

This study seeks to address the following fundamental questions:

1.      What is the impact of lease financing on the performance of small and medium enterprises (SMEs) in Jigawa State?.

2.      What are the challenges affecting small and medium enterprises (SMEs) on accessing lease financing in Jigawa state?.

3.      Are there factors affecting credit accessibility by small and medium enterprises (SMEs) in Jigawa state?.

4.      What are the possible solution to the problems of loan accessibility by small and medium enterprises (SMEs)  in Jigawa State?.

1.5 Scope and Delimitation of the Study

This study is going to cover and assess the impact of lease financing on the performance of small and medium enterprises (SMEs) in Jigawa State. A case study of Shemars Table water company Limawa town, Dutse local government, Jigawa State. Moreover, in undertaking a research work of this nature, there are many problems faced when the research is being carried out. Time constraint is one of the problems faced. The time required for the completion of this research work did not allow in-depth research findings. Likewise, the return of research questionnaires by the respondents was prolonged than necessary. Another problem faced is due to the sensitive nature of the topic which had made the respondents be unwilling to provide the actual answers.

1.6 Significance of the Study

Since many studies have been conducted on leasing and firms of different industries and most of the outcomes shows positive impact of leasing on the firms, this study will serve as a pioneering effort of assessing the impact of leasing on small and medium enterprises (SMEs) in Nigeria. This research will serve as a reference material for the academic community by enhancing the knowledge of readers and those interested in further research in the area of leasing. It will also be useful to shareholders of banks to know the impact of leasing on their fund.  The management of Shemars table would use this study because it highlighted the benefits of lease financing on the activities of their banks. Government and its agencies will also find this study useful, since it highlights the need to standardize the legal aspect of leasing in Nigeria.

To the government, this findings of would help government in identifying possible challenges affecting SMEs in accessing leasing as source of financing and used the recommendation to promote SMEs performance in  Nigeria.

Moreover, to the future researchers, this study would serve as referencing materials and guide for those who want further this research in future.

Finally, it ii most significant to the researcher, since it is part of the requirement for the award of Higher National Diploma in Accountancy from Jigawa state Polytechnic Dutse, Jigawa state.

1.7 Historical Development of SMES In Nigeria

Small Scale Industry orientation is part and parcel of Nigeria. Evidence abound in our respective communities of what success our great grandparents made in their respective trading concerns; yam barns, iron smelting, farming, cottage industries and the likes. So the secret behind their success (of a self- reliant strategy) does not lie in any particular political philosophy, so much as in the people’s attitude to enterprise and in the right to which the right incentive is enough to make risk worth  taking are provided(Anyawu,2011).

Economic history is well stocked with enough insights into the humble beginning of present day giant Corporation. Evidence abound that almost all of the multinational giant corporations were cottage enterprises, growing as their industry grew, and through their own sheer ability either reproduce existing products more cheaply or improve their quality.

The respective government policies accorded and gave priority to the country’s small scale enterprise. Abudu (2009),said that they constitutes the fountain head of vitality for the variation economy and consequently their problems have been viewed as those of the nation, by virtue of their number, diversity, penetration in all sectors of production and marketing, contribution to employment and to the prosperity of the particular areas in which they operate.

In concrete terms, CBN (2010) stressed that small scale industries constitute a greater percentage of all registered companies in Nigeria, and they have been in existence for quite a long time, majority of the small scale industries developed from cottage industries and from small scale to medium and large scale enterprise. Prior to Nigeria’s Independence, the business climate was almost totally dominated by the Colonial and other European Multinational companies like United African company (UAC), GB Olivant, Uniliver Plc, Patterson Zechonics, Leventis, etc. These companies primarily engaged in bringing into Nigeria finished goods from their parent companies overseas. The government in those days encouraged them to become stronger by giving incentives at favourable terms and tax concessions (CBN, 2010).A major/remarkable breakthrough in small scale business came about through the indigenization Decree 2002 and later in Nigeria Enterprise Promotion Act 2007. These were genuine attempts by the Federal Government to make sure that Nigerians play an active and worthwhile role in the development of the economy. In the National Development Plan, the Federal government gave special attention to the development of small scale industries particularly in rural areas. This was in recognition of the roles of small and medium scale industries, as the seedbeds and training grounds for entrepreneurs (Mungcal, 2011). Nigerians need to take a cue from economic history, which is well stocked with enough insight into the humble beginnings of the present day giant conglomerates which started as small scale outfits. Within this decade, the government policy measures placed emphasis on the technological development of small scale industries in Nigeria. Various governments embarked on corrective measures to focus efforts towards the maximum exploitation of natural resources, and tried to discourage capital intensive mode of production in the light of the abundant resources available Mungcal et al (2011).

The federal and state governments have both contributed to the growth of small scale industries in Nigeria especially in the rural areas. In recent time, various fiscal and non-fiscal incentives have been established for investors and entrepreneurs in the small scale sectors of the economy. Of special mention was the strategy adopted by the federal government for the training and motivation of the unemployed graduates, to be gainfully employed in out of school entrepreneurship development programmes. Thus, on the presentation of viable feasible projects, approved loans are disbursed through pre-selected commercial banks assisted by the National Directorate of Employment CBN (2010).

To show its seriousness, the federal government through its educational agencies like the National Board for Technical Education (NBTE), the Nigerian University commission (NUC), and the National youths Service Corps (NYSC) programme gave directives that entrepreneurial development courses be incorporated into the curricular of tertiary institutions and NYSC programme. 

1.8 Definition of key Terms

Finance Lease: otherwise called Capital lease.  The lease has substantially all of the risks and reward of ownership. Finance lease are long-term, non-cancelable lease contracts (Kurfi, 2013).

Lease :is a transaction in which an owner of equipment (the lessor) allows another party (the lessee) to use equipment, and for that usage, the lessor charges rent

Lessor : is the person or party that issues the lease (allows the property to be rented)

Lessee:  is the person that the lease is granted to (the person paying rent to use the property). 

Leasing: is an alternative mode of financing to the traditional debt and equity capital for the acquisition of capital assets by firms.

Small and Medium Enterprises: These are organisations which employ the maximum number of 199 employees and total asset of #500,000,000.

Return on capital employed (ROCE): Return on capital employed (ROCE) is a financial ratio that measures company profitability and the efficiency with which its capital is employed

Return on Equity (ROE): Return On Equity - ROE' - The amount of net income returned as a percentage of Shareholders’ equity.

Return on Asset (ROA): ROA tells you what earnings were generated from invested capital (assets).