study sets out to examine the relationship between borrowing and the
performance of small and medium scale enterprises in Nigeria. The study reviewed some
relevant and related literatures. The descriptive survey research was applied
for the assessment of the opinions of the respondents with the use of the
questionnaire and the sampling technique. A total of 100 (one hundred) copies of
questionnaire were administered and all were retrieved duly completed. Finding
from the analysis of research questions and hypothesis revealed that SMEs
experience finance problems most and for this reason, they borrow money mainly
from banks. The fund raised is used to expand their scale of operation,
increase quantity of goods produced, purchased and supplied into the market.
The operators believed that with their financial problem solved, they do not
have anymore. However, the borrowing rather than helping them create additional
problem of repayment of both the principal and interest. This forces them to
sell their goods at very ridiculously low prices to increase sales turnover
thereby denying them of normal profit they should realise.
Title page i
Table of Contents vi
ONE: INTRODUCTION 1
of the Study 1
of Problem 4
of the Study 5
of Hypotheses 6
of the Study 6
of the Study 7
of Terms 7
TWO: REVIEW OF RELATED
2.1 An Overview of Small and Medium Enterprises
in Nigeria 8
Problems Militating Against the
Development of Small and
Enterprises in Nigeria 10
Factors affecting the Growth of Firms 13
An Overview of SMEs Financing and
Environment in Nigeria 19
Sources of Financing SMEs 27
Effective Financing of Small and Medium
(SMEs) as an Impetus
for Poverty Alleviation in
An Analytical Approach 29
THREE: Research Design and
Research Design 31
Population of the Study 31
Sample and Sampling Technique 32
Sources of Data 32
The Instrument 32
Procedure for Data Collection 33
Procedure for Data Analysis Method 33
CHAPTER FOUR: Data Presentation and
of Research Questions 37
CHAPTER FIVE: Summary,
Conclusion and Recommendations 43
of Findings 43
Background of the Study
the present day economies of the world, small and medium scale enterprises have
come to be recognized as veritable engines of growth, employment, poverty reduction and innovative
development. Government of various
nations and indeed, world economic development and financial institutions such
as the Brethonwood Institution (International Monetary Fund and World Bank),
the United Nations have all in recognition of the potentials of SMEs embarked
on deliberate developmental policies aimed at creating a productive base for
world economies (Englama, et al, 1997).
as these aims and aspirations are, the problem of finance has remained
insurmountable. For instance, Fatunla and Adebayo (1985) note that inadequate
finance has always been a constraint to the development of small-scale
industries. Oshunbiyi (1989) equally noted the critical role of finance at
every stage in an organization’s life and the restricted access of small
industrialists to the capital market and opines that they could improve their
financial position through exploitation of institutional credit sources or
borrowing from banks.
emphasized by Harper (1995), with the large increase in world population
(especially Nigerian and many developing countries) “governments can certainly
not afford to employ many more, and larger scale industry as this has
dramatically failed to absorb more than a tiny fraction of the multitudes who
need jobs. In many countries small enterprises are, therefore, possibly the
hope of employment creation, and it is hardly surprising that policy-makers in
developing nations and almost everywhere else have so eagerly strived to
promote and encourage them”. The availability of efficient infrastructural
services is a key requirement for the take-off of private investment (CBN,
2000). The take-off and efficient performance of any enterprise, be it small or
large, will require the provision of funds for its capitalization, working
capital and rehabilitation needs, as well as for creation of new investments
countries experiences, SMEs employ more than 50 percent of the industrial
workforce in Columbia, India, Indonesia,
Kenya, Philippines, Tanzania
They are the real job creators in the European Union (EU) accounting for 99.9
percent of 11.6 million enterprises (excluding enterprises in agriculture,
fishing and other sectors, 72 per cent employment of the 80.7 million persons
employed by all enterprises, and generate 69.7% percent of turn-over in EU
(Deloittee, Touche and Tohmatsu, 1995). SMEs were equally responsible for more
than 50 per cent of total employment in Canada (Government of Ontario,
have shown that, SMEs have in many countries, provided the mechanism for
stimulating indigenous entreprenuership, enhancing greater employment
opportunities per unit of capital invested and aiding the development of local
technology (Sule, 1986; World Bank, 1995). They help to mobilize savings for
investment and promote the use of local raw materials. Through their dispersal
nation-wide, they contribute to more equitable income distribution among
individuals and regions, as well as mitigate rural-urban migration.
view of these advantages, greater attention has been given to the promotion of
SMEs globally as tool for poverty alleviation and economic development. Even in
the most buoyant economies, such as the United
State of America, small scale enterprises
have played an important role in her transition from the industrial age of the
post industrial information technology era. Also, in other countries like Japan and South Korea, the use of
sophisticated technology has reduced to the minimum efficient scale of
production in industries known for product innovation, such as the electronics
and computer industries (Olorunshola, 2000).
the same vein, the Nigeria
budget for 2003 was designed among other things to reduce poverty. According to
Sanusi (2003) it is “to pursue macroeconomic policies and sector growth
strategy that will achieve fiscal stability, improve non-oil sector
competitiveness, lower levels of inflation, stable and competitive exchange
rate in order to engender growth and reduce poverty through increased
employment”. Specifically, attention has been directed at the development of
small medium scale enterprises with the aim of turning them into engines of
growth for the various economies.
of the major economic tools being used in combating slow economic growth and
poverty in various nations is the complete turn-around of the economy from
consumer economy to productive economy by rendering assistance to SMEs through
adequate financing and creation of enabling environment.
of the critical problems facing economic growth in African Sub-Saharan and
indeed the developing countries generally is the harnessing of resources to
achieve desired goals.
the case of the SMEs in Nigeria
in particular, various problems confront its growth and hence, the objective of
its establishment and management as engine of growth. These include among
others, market; raw materials; manpower, lack of information; lack of
management and technical skills; poor ethical values and lack of transparency;
proper policy formulation and implementation; and funding/financing.
issue of inadequate financing usually derives from inadequate proprietorship
and equity participation. A strong capital base and financial outlook are
required for successful business. However, small scale entreprenuers are
usually reluctant to bring in partners, even at the risk of
under-capitalization. The under-funding of SMEs has led government to formulate
measures aimed at assisting this sector in form of loan packages through World
Bank, National Directorate of Employment, National Economic Reconstruction Fund
(NERFUND) and other financial assistance schemes.
(2001) argues that, among the problems of small scale business whether by their
owners or by those interested in their well being, their financial problems
have tended to overshadow others which they also encounter in their daily
struggle for survival. In other words, their other problems in production,
marketing, personnel and even day-to-day management usually have a financial
colouration. The success of these enterprises however, will depend largely on
the efficiency of the financing strategies they employ.
of the Study
study sets out to investigate the effect of borrowing on Small and Medium Scale
specific objectives are:
establish the most difficult problem facing SMEs.
discover reasons for borrowing.
investigate how often borrowing is done.
establish the major source of borrowing.
determine the extent to which borrowing has negatively impacted on SMEs
make recommendations based on facts obtained from answers to the research
following research questions were raised in this study:
What is the most
difficult problem facing SMEs?
How often do
SMEs borrowing money?
What is the
major source of borrowing available to SMEs?
is associated with borrowing?
To what extent
has borrowing negatively impacted on the small and medium enterprises’
What will be the
state of SMEs performance if financial problem is solved?
The following research hypotheses were
formulated and tested in this study:
is no significant difference among respondents that borrowing has positively
impacted on the small and medium scale enterprises performance in Nigeria.
H1: There is a significant difference among
respondents that borrowing has positively impacted on the small and medium
scale enterprises performance in Nigeria.
no significant influence on the small and
medium scale enterprises performance in Nigeria.
significant influence on the small and
medium scale enterprises performance in Nigeria.
Commercial bank does not play any
significant role in the growth and development of SMEs in Nigeria.
Commercial bank play significant role in
the growth and development of SMEs in Nigeria.
of the Study
scope of the study is within the concept of SMEs and the place of finance in a
developing economy like Nigeria.
scope of the study is also limited to some SMEs
located in Mainland Local Government Area of Lagos State.
This study will
be constrained by time, finance and sourcing out of relevant materials and
respondents’ unreadiness to give out correct information on the subject-matter.
of the Study
significance of this research study on the contribution of SMEs in the
developing economy cannot be overestimated, as this study will be of benefit
to the management and operators of SMEs and the governments, the small and
medium scale entrepreneurs, and individual stake holders. The study will help
to define to the problems and challenges being faced by most SMEs. Governments
of both federal and states would have an insight through this study because it
will enable them to grant more funds to the SMEs in Nigeria so as to sustain their
growth and development for the improvement of the Nigerian economy.
Financial Institutions: This is referred as places where
funds are kept and lent out to prospective customs or individuals.
Capital Market: This is where stocks are bought
Borrowing: This means obtaining some loans (funds)
from a bank or other financial institutions in order to expand one’s business
CBN: Central Bank of Nigeria.
Small - Scale Industry: An industry with a labour size of 11-100 workers
or a total cost of not more than N50 million, including working capital but,
excluding cost of land.
Medium Scale Industry: An industry with a labour size of between 101-300
worker’s or a total cost of over N50million, but not more than N200million,
including working capital, but, excluding cost of land.