Abstract
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.
TABLE
OF CONTENTS
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
CHAPTER
ONE
INTRODUCTION
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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