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Product Category: Projects

Product Code: 00000924

No of Pages: 68

No of Chapters: 5

File Format: Microsoft Word

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This study on “Impact of the Nigerian Capital market in Financing Small and Medium Scale Enterprises (SMEs) in Nigeria” is intended to identify and consequently analyze the financial incentives available to SMEs in the Nigerian capital market. It provides solution to the financial gap existing between large enterprises and small and medium scale enterprises in terms of availability of financial resources referred to as the missing middle. The methodology adopted in conducting the research was a survey design. The independent variable of the study was the Nigerian capital market while the dependent variable was small and medium scale enterprises. A disproportionate stratified random sampling technique was adopted to select a representative sample SMEs. Questionnaire was used as instrument for data collection. The questionnaire was developed on a four-likert scale ranging from one to four (i.e. from strongly disagree to strongly agree) while, the hypothesis developed was tested using Chi-square (X2). Tables and percentage was adopted to analyze the hypotheses of the study. Base on the findings, it was concluded that SMEs always see the Nigerian Capital Market as a good source of capital for them since equity financing is always cheaper for long-term financing. Yet, many SMEs still entertain some fears in approaching the Nigeria capital market such as: the fear of losing their total control over their companies, and the fear of sharing their profit with other investors as well as hostile takeover of their companies by other investors. The study recommended that the cost of borrowing should be reviewed in order to encourage more enterprises to come into the market so as to expand and deepen the market. The Nigerian stock market needed to be built up with mass participation of SMEs to attain a meaningful sustainable growth and development. There are also needs to formulate investment friendly regulations; keep low inflationary rate; provide favorable government policies and provide stable macroeconomic framework for the sustainability of informal and SMEs sector in the developing countries.


Title Page                                                                                          i

Certification                                                                                                iii

Dedication                                                                                         iv

Acknowledgement                                                                                      v

Abstract                                                                                            vi

Table of Contents                                                                                      vii

Chapter One: Introduction                                                             1

1.1     Background to the Study                                                                            1

1.2     Statement of Problem                                                                       6

1.3     Research Question                                                                                      8

1.4     Objectives of the Study                                                                     8

1.5     Statement of Hypotheses                                                                            10

1.6     Significance of the Study                                                                            11

1.7     Scope of the Study                                                                                     12

1.8     Limitations of the Study                                                                             13

1.9     Definition of Terms                                                                           13


Chapter Two: Review of Related Literature                                  16

2.1     Introduction                                                                                                16

2.2       Definition of Small and Medium Scale Enterprises and Capital Market        17

2.3     The Nigeria Capital Market                                                              18

2.4     Types of Capital Markets                                                                           19

2.5     Capital Market and SMEs’ Growth in Nigeria                                 22

2.6     The Role of Nigerian Capital Market in Financing Small and

Medium Scale Enterprises                                                                24

2.7     Problems and Challenges Facing the Ineffectiveness of Small and Medium Scale Enterprises                                                           27

2.8     Instruments Traded in the Capital Market                                        29


Chapter Three: Research Method and Design                               35

3.1     Introduction                                                                                               35

3.2     Research Design                                                                               36

3.3     Description of Population of the Study                                            36

3.4     Sample Size                                                                                                37

3.5     Sampling Technique                                                                         37

3.6     Source of Data Collection                                                                 37

3.7     Method of Data Presentation                                                            38

3.8     Method of Data Analysis                                                                  38


Chapter Four: Data Presentation, Analysis and Interpretation    40

4.1     Introduction                                                                                                40

4.2     Presentation of Data                                                                          40

4.3     Data Analysis                                                                                   40

4.4     Hypotheses Testing                                                                          48


Chapter Five: Summary of Findings, Conclusion and Recommendations                                                                         55

5.1     Introduction                                                                                                55

5.2     Summary of Findings                                                                       55

5.3     Conclusion                                                                                        56

5.4     Recommendations                                                                                     56

References                                                                                        59

Appendix I                                                                                        61

Appendix II                                                                                                62




1.1     Background to the Study

Production of goods and services in the most efficient manner has continued to be the only viable and reliable option for growth, development, and survival of world economies. Despite the importance of production, it is impossible for a sustained high productive level to be attained without a well-developed industrial sector. Industries normally operate either on a large or small scale both in the public and private sector. In Nigeria, the private sector enterprises cover a wide range of different types of industries as distinguished by various criteria such as size, sector, ownership structure, employment and technology.

The small-scale industries cover the entire range of economic activity sectors and are very heterogeneous groups (Hallberg, 2011) They include a wide variety of firms – village handicraft, restaurants, bakeries, poultry farming, hair dressing, barbers shops just to mention a few. The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), (2011) classify industries into small and medium scale enterprises (SMEs).

The significance of small and medium scale enterprises to growth, productivity and competitiveness of the economies of developing countries is universally recognized. Small and medium scale enterprises are generally acknowledged in (Kasekende& Opondo, 2003) as the bedrock of the industrial development of world economies. They are more innovative than larger firms are. Small and medium scale enterprises usually provide training grounds for entrepreneurs even as they generally rely more on the use of local materials. SMEs development can play a key role in entrepreneurs’ development through their contributions to economic advancement and social empowerment.

In Oteh (2011), the Global Entrepreneurship Monitor 2009, a research program aimed at assessing the national level of entrepreneurial activity in selected countries, conducted an entrepreneurship and economic growth study on 37 countries. According to the study, the economic growth of a country is directly correlated with its level of entrepreneurial activity. The study reveals that, there is a high correlation between economic growth and entrepreneurial activity in industrialized countries, hence to achieve Nigeria Vision 20:20 then greater attentions should be paid on very vibrant and robust enterprises. Entrepreneurs create new enterprises, new commercial activities and new sectors, which have a positive multiplier effect on the economy. Entrepreneurial activities are very crucial to fostering economic and social progress in the country. The development of SMEs in Nigeria is therefore an essential element in the growth strategy. Notwithstanding the widely acknowledged role of SMEs in fostering economic growth and development, SMEs have continued to face a variety of constraints (Adelaja, 2004) and majorly that of finance.

This is quite common in many African countries, including Nigeria, where access to finance was the second most important constraint to doing business after inadequate supply of infrastructure. This is because; the conditions for financing SMEs are more restrictive to those of large enterprises. This has also confirmed the fact that, inadequate finance is a serious challenge that must be tackled before there could be any meaningful progress in the SMEs sub-sector.

Small and medium scale enterprises in Nigeria suffer from lack of access to appropriate (term and cost) funds from both the money and capital markets. This is due in part to the perception of higher risk resulting in high mortality rate of the business, information asymmetry, poorly prepared project proposals, inadequate collateral, absence of, or unverified history of past credit(s) obtained and lack of adequate accounting records of the company’s transaction. In some cases, there are virtual absence of capital market facilities and instruments that SMEs can access. (Bates, 2010) The capital market in Nigeria is still evolving while other conventional sources have no confidence in the credit worthiness of SMEs. Non-bank financial intermediaries such as micro credit institutions could play a greater role in lending to SMEs. Nevertheless, some of these institutions may not consider SMEs credit worthy. .

Small and medium scale enterprises therefore rely on their retained earnings, informal savings and loan associations, which are unpredictable and insecure with little scope for risk sharing as their major source of capital. Many African countries have to deal with this chasm between the role of micro credit institutions and that of larger financial institutions. This is the space where SMEs operate and is referred to in the African Commission’s Report as the missing middle. (Oteh, 2011). Yet, the panacea for solving problems of economic growth in Nigeria often resides in adequate financing of small-scale industries. The missing middle or financial gap is a serious challenge in a fast-changing knowledge based economy because of the speed of innovation. Innovative SMEs with high growth potential, many in high- technology sectors, have played a pivotal role in raising productivity and maintaining competitiveness in recent years. Nonetheless, innovative product and services need investment to flourish, however great their potential might be. SMEs depend on capital accumulation, and capital accumulation requires investment and an equivalent amount of saving to match it. Two of the most important issues in developing countries, are how to stimulate investment, and how to bring about an increase in the level of saving to fund increased investment.

Most importantly, well functioning financial systems are heavily based on trust. An investor who deposits money in the bank or contacts his/her broker to buy stocks place his/her money and trust in the hands of the financial institution that provides her with advice and transaction services (Madura, 1996).

No wonder, Kneown (1996) stressed that, one reason why underdeveloped countries are underdeveloped is because, they lack a financial system that has the confidence of those who must use it. Particularly, the stock market crash of 2008 affected the Nigeria financial sector adversely. It generated a pessimistic outlook on the economy that led to a decline in the demand for loans and higher percentage of loan defaults, causing a consequent decline in the stock prices. Despite all these illicit practices in the financial sector, the Nigerian capital market is potentially the most viable source of capital for industries in Nigeria.

The primary focus of this research work emanates from the fact that, there exist a wide financial gap between the capacity of micro financial institutions and that of larger financial institutions. While large loans are available to a certain degree for large-scale industries, there is an evident lack of access to medium and small-scale finance for SMEs. In trying to bring a solution to this problem, the Central Bank stipulated that 20% of banks’ credit should be granted as loan to Small Scale Enterprises. This was not adhered to because, most loans granted to small scale holders were not repaid and so the banks did not consider them as creditworthy. In the light of these, the research has explored the financial incentives available to small-scale enterprises especially in the Nigerian capital market in order to provide the financial information needed by entrepreneurs.

1.2     Statement of Problem

In Nigeria, most small and medium enterprise ownership is indigenous. In major countries small and medium enterprises contribute close to half of the net output of the private sector and a significant proportion of the Gross Domestic product (GDP). In Nigeria however, it is being postulated that there are no adequate records to show for such growth by the small and medium enterprises. Considering the socio-economic importance and advantages to the nation, which include provision of employment, consumer and producer goods, promotion of indigenous technology, raw materials utilization, entrepreneurial Spirit, rural and industrial development.

Unfortunately, small and medium scale enterprises have relatively limited access to loan capital. They depend highly on financial resources of their owners and sometimes from friends and relatives, and retained earnings from the business as it expands. Most times all these proved grossly inadequate for finance needed projects as small scale enterprises grows further, market funds become imperative. The statements of problem that shall be addressed by this work are essentially:

·                    What is the impact of the Capital Market in financing small and medium enterprises (SMEs)

·                    How well small and medium enterprises benefited from the activities of the capital market in Nigeria

·                    What is the relationship between capital market and other sources of finance for small and medium enterprise

·                    Has the performance of small and medium enterprises impacted in the increase of Gross Domestic Product

1.3     Research Questions

The researchable questions that come to bear on the study are

·                    What are implications of the listing requirements in the second tier capital market on the small and medium scale enterprises in Nigeria?

·                    What are the difficulties faced by Small and medium scale enterprises in raising capital in the Nigerian capital market?

·                    What are the financial constraints hindering the promotion of small-scale enterprises in Nigeria?

1.4     Objectives of the Study

The main purpose of this study is to identify and consequently analyze the financial incentives available to small and medium scale enterprises in the Nigerian capital market, thereby taking into consideration various conditions such as economic, political, social, psychological etc under which small and medium scale enterprises could be encouraged to operate. In so doing, the study provides an in-depth information and analysis on the various strategies through which small-scale enterprises can access the capital market for developmental funds. In view of the above, the researcher intends to analyze the following:

·                    The implication of the listing requirements in the second tier capital market on the small and medium scale enterprises in Nigeria

·                    The difficulties faced by Small and medium scale enterprises in raising capital in the Nigerian capital market

·                    The financial constraints hindering the promotion of small-scale enterprises in Nigeria.

This study is concerned with the importance of capital adequacy to the industrial sector as a whole. There is no gain saying in the crucial role of capital as a factor of production because with inadequate capital, there would be no inputs to be processed into output. The vital nature of capital is also evident from numerous efforts of the government in form of policies aimed at promoting SMEs sub-sector. Over the years, there have been a lot of plans and policy initiatives by the government in trying to position the SME sub-sector for better performance.

Despite all these policies, the SMEs sub-sector is still grossly underdeveloped. Yet, it is believed that small and medium scale enterprises will propel the rationalism of economic independence that has long being expected after political independence. Thus, there is a need to evaluate hindrances in promoting small and medium scale enterprises. The research is meant to contribute to existing literatures on SMEs by providing a detailed analysis of the financing hindrances and the strategies available to small and medium scale industries especially in Nigeria capital market with the aim of improving their operations and effectiveness. Specifically, the study was conducted to find out:

How do the listing requirements in the second tier capital market affect the listing of SMEs on the Nigerian stock exchange:

·                    What are the difficulties faced by SMEs in raising capital in the Nigerian capital market; and

·                    What are the general financial constraints confronting the promotion of small-scale enterprises

1.5     Statement of Hypotheses

Hypotheses in research are of crucial effect and cannot be overemphasize as they are hypothetical statements that are yet to be tested for confirmation with or without empirical evidence. Hypothesis regulates the selection and weighing of observed factors and their conceptual ordering. Therefore in the course of this scientific investigation, the following amongst others will be hypothetical statements adapted:

Hypothesis I

HO:    The existing framework of Nigerian capital market does not give credit facilities to small and medium enterprises

HI:    The existing framework of Nigerian capital market gives facilities to small and medium enterprises

Hypothesis II

HO:    The concept of the Nigerian capital market does not give a future prospect to small and medium enterprises

HI:    The concept of the Nigerian capital market gives a future prospect to small and medium enterprises

Hypothesis III

HO:    The Nigerian capital market does not have impact on the financing of small and medium enterprises

HI:    The Nigerian capital market have impact on the financing of small and medium enterprises

1.6     Significance of the Study

The significance of the study can be viewed from the benefits this study hope to achieve at the end of this research. Until the evolution of the Second-tier Securities Market (SSM), the capital market was inaccessible to the small and medium enterprises as the listing requirements were too strict and demanding. This study hopes to correct the ignorance or lack of awareness on the part of promoters of SMEs to exploit the opportunities available to small and medium scale enterprises for their long term financing option. The capital market because of their dynamism in mobilization and allocation of the nation’s scarce capital resources and its role as one of the economic performance indicators is expected to initiate ideas to further encourage the growth of SMEs.

The vogue remains in the business world for an enabling environment for all forms of business to thrive hence the need to properly and with all sense of purpose and direction tie the fortune of SMEs to economic development. This will in turn give the investing world a good leverage to participate in our economic development.

Furthermore, the research problem will be beneficial to both the capital market operators and other financial institutions as a reference point in the formulation of credit policy guidelines towards the small and medium enterprise.

1.7     Scope of the Study

The scope of the study is the Nigerian capital market with focus on the Nigeria stock exchange (NSE) and specific attention on the second-tier securities market (SSM).

1.8     Limitations of the Study

The limitation of this research ranges from unavailability of timely information and data, financial constrains and time on the part of the researcher. There was also the problem of data gathering from various sources.

1.9     Definition of Terms

Capital Market: The capital market is a market were finance for long term projects are sourced for. It acts as the intermediary between the investors who provide the funds and the borrowers who source fir fund.

Nigeria Stock Exchange (NSE): The Nigeria stock exchange is one of the institutions in the capital market which is a network of individuals, institutions and instruments involve in the efficient channeling of funds from surplus to deficit economic units. The stock exchange regulates and coordinates the activities of all the operations in the Nigerian stock market.

First-tier Securities Market (FSM): This is the market for large business concern listed by the Nigeria stock exchange, they are companies that have operated for not more than ten years and have limitless opportunities to borrow or trade on the market; market on the financial capacity of its directors and shareholders.

Second-tier Securities Market (SSM): This is a market where small and medium enterprises source for fund. The stringent listing requirements of the stock exchange prevent most SMEs from being listed to trade on the stock exchange market.

Small and Medium Enterprises (SMEs): These are small and medium businesses that have characterized the economy of most developing countries. They are agents of economic growth and existence. Most times their growth and existence are enhanced by finance, managerial and technical skills, man power, etc before they are listed on the stock exchange of their countries upon meeting the requirements of the market.

Lender: A person or concern who lends money or funds temporarily for interest.

Borrower: A person or concern to whom money is loaned

Investor: A person who buys securities for investment as constricted with the trader or speculator who is primarily interested in short-term turnover at a profit.

Bonds: A fixed interest securities under which the issuer (government or business corporation) contracts to pay the lender a fixed principal amount at a stated date in the future and a series of interest payable either semi-annually or annually.

Ordinary Shares: This is a class of share which gives the investor voting right in a company to which he/she is subscribed to and the right to receive dividends.

Preference Share: This is a class of share with certain preference over other classes of shares. They have prior claim.

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