IMPACT OF EFFECTIVE FINANCING OF SMALL SCALE INDUSTRIES ON THE NATIONAL ECONOMIC DEVELOPMENT

CHAPTER ONE

1.1     BACKGROUND OF THE STUDY

In most of the developing countries, the corporate world is usually characterized by low investment rate occasioned by inadequate of instable funds and poor economic condition. Many of such nations therefore feel the need to revitalize their economies by embarking on economics reform programs expected to boost the level of activity in the economy Olaleye, (2002).

The promotion of small and medium enterprises is cornerstone of economic policy for a large number of industrialization countries. Public support for small and medium enterprises appears to be based on the widely held perception that small business sector is an incubator of economic growth, a place where innovation takes place and new ideas become economically viable business enterprises Craig, Jackson and Thompson, (2005).

In line with this, the role of small and medium scale enterprises in fosters economic development has been well articulate in different form of government policies. The specific attention on them is based on their expected impact and potential contribution as well as accelerative effort in achieving macro objectives pertaining to full employment of local technology. They also serve as catalyst for increase national productivity and a veritable launching pad into the world export market.

Giving an insight into the small and medium scale enterprises phenomenon, the Nigerian economy does not seem to have been able to reap the advantages obtainable from the SMEs in the past. In the same vein, these industries complain about neglect or lack of government interest in their quest for rapid growth and development. The existing lukewarm relationship is not in the best interest of the economy.

It is for these reasons that the Nigerian government started to show interest in the affairs of SMEs in the 1970s to the present. Some of the positive actions taken by the government Include providing funds for some research into these industries, creating small scale industries division or departments, as well as small scale credit schemes in various states and at the federal level and giving the subject a pride of place in national development plans to the 1970s and 1980s particularly 1981-1985 plan.

Hence; in view of the growing public interest and governments realization of the many advantages of SMEs, the government has made some policies and distinct pronouncement with regards to the operation and promoting the sector (both economically and monetary). The monetary measures include the establishment of financial institutions to provided finance to the sector. Banks were also required to provide a specified proportion of their available credit to indigenous borrowers with particular emphasis to SMEs. In addition, various financial intermediaries were established by monetary authorities to provide incentives to these growing industries and business with the specific purpose of aiding them financing managing business problems.

In line with the above statements, it is obvious that the study of this nature cannot be overemphasized because of the new look of the Nigerian banks and other financial institutions in providing the needed funds to small and medium scale enterprises.

1.2     STATEMENT OF THE PROBLEM

It is a common knowledge that the small and medium scale enterprises have the potential of lifting the economy out of the doldrums in which it is presently languishing Ajonbadi, (2002). The opportunities are simply, enormous. However, the cry has been the lack of investible funds. Thus is moreso, when allegations have been raised against the Nigerian government and the Nigerian banks in particular, that business policies have been largely made to favour the large scale to the detriments of the SMEs sub-sector. Hence, SMEs does not have better access to funds.

SMEs are mostly likely to suffer severe problems of asymmetric, information because of their size and background and the lack of formal credit rating measures for firms. Many economists, 'mostly notably Slightz and Weiss (1981). Contend that private lending institutions may indeed fail to allocate loans efficiently because of fundamental information problems in the market for SMEs business loans. Slightz and Weiss (1981) argue that banks consider both the interest rate they receive on the loan and the riskness of the loan when deciding to make a loan. Thus, the inability to merge these two factors together hinders SMEs in accessing the needed funds.

Also, it has been observed that one of the reasons for the slow growth of SMEs in Nigeria is their limited access to long and medium term credit facilities for the acquisition of fixed assets and necessary expansion. The scarcity 'of funds for this purpose is mainly due to the short term nature of banks deposits which are the major sources of finance to the economy. Evidently in trying to reduce the risk inherent on the mismatch of the term of their deposits and loans, banks have been overtly cautions in selecting projects to be granted medium long term finance, while at the same time charging relatively high interest rates. Therefore, the study focuses on the problem of financing as it relate to small and medium enterprises.

1.3     OBJECTIVES OF THE STUDY

The main objective of the study is to examine the effect of financing on the performance of small and medium scale enterprises in Lagos State. Thus, in order to achieve the above objective, the following specific objectives services as our guide:

·        To examine whether small and medium scale enterprises have better access to funds due to bank consolidation.

·        To examine whether government policies and reform programmes have impact on SMEs performance.

·        To examine whether adequate financing of SMEs by financial institution will enhance the growth of the sector.

·        To examine whether the interest rate charge by banks and other financial intermediaries on loan affects SMEs performance.

·        To enumerates possible recommendations and solutions that may prove useful in better financing of SMEs.

1.4     RESEARCH QUESTIONS

In order to achieve the objectives of this study, the study attempts to provide answers to the following research questions:

·        To what extent does finance has impact on the performance of SMEs?

·        Does SMEs have better access to funds due to bank consolidation?

·        Does government policies and reform programmes have impact on the performance of SMEs?

·        Does adequate financing or SMEs enhance the growth of the sector?

·        Does interest rate charge by banks and other financial intermediaries on loans affect SMEs performance?

1.5     RESEARCH HYPOTHESIS

Hypothesis is a tentative assumption made in order to draw out and test its logical or empirical consequences. A hypothesis is a tentative statement about relationships that exist between two or more variables (Osuagwu, 2002). Hypothesis is state in two forms, "Null" which is denoted by "Ho" and "Alternative" which is denoted by "Hi". As general rule null hypothesis is always negative, while the alternative is positive in relation to the variables of the research topic.

In order to provide answers to the research questions, the following are the hypothesis of this study:

1.       Ho: Finance does not hinder the growth of small and medium scale enterprises.

Hi: Finance hinders the growth of small and medium scale enterprises.

2.       Ho: SMEs does not have better access to funds due to bank consolidations.

Hi: SMEs has better access to funds due to bank consolidations.

3.       Ho: Government policies and reform programmes does not have impact on the performance of SMEs.

Hi: Government policies and reform programmes has impact on the performance of SMEs.

1.6     SIGNIFICANCE OF THE STUDY

The essence or significance of this research study can be seen in the expected goal the study is to achieve. This range from exposing the immense economic benefits derivable from SMEs when giving enough backing (financial) from the financial institution in terms of its contribution to the national economy and employment generation to the people.

This study will also delve into some other areas of sources of finance to SMEs. This is because some small scale entrepreneurs may not even be aware of some of these credit schemes to help and assist them.

This study also contributes to knowledge in terms of provisions of additional information in the form of ideas, opinions and views from the field (industry operators) to develop and move the sector forward by way of checking the relationship that exists between the financial institution and SMEs in Nigeria.

1.7     SCOPE AND LIMITATION OF THE STUDY

The study covers Financial Institutions and SMEs in Nigeria, particularly in Lagos State and does not extend to other sectors. This study is restricted to selected small scale enterprises in Ikeja Local Government of Lagos State. The study covers a representative numbers of the generality of SMEs. No special consideration is given to sex, age and nationality in collecting data from the respondents.

The level of accuracy of this study is proportional to the availability of information that the respondents are willing to give. Also, there is this uncertainty that information given is without bias. Also, undertaking a research study is a serious. business. It requires a commitment of time, money and energy, both intellectual and physical. Hence, balancing the study with academics and going to work is an Herculean task.

1.8     RESEARCH METHODOLOGY

The design of this research study is to investigate the effectiveness of financial institution on SMEs performance in Lagos State. The data that will be collected for this study will be obtained from both primary and secondary source of information. The primary data will be collected through questionnaire, while the secondary data will be collected from organization news, journals and other related publications.

Responses to the research questions will be analyzed using frequency, mean standard deviation and simple percentage analysis. Findings from the study will be comprehensively discussed in the light of the research problems, hypothesis, purposes, research questions, literature of the research, and other relevant issues to the research. Conclusions will be drawn and recommendations made.

1.9     DEFINITIONS OF TERMS 

Banks:This is a financial institution that aid in collection of deposit and granting loans and other auxiliary service to the public.