IMPACT OF SMALL AND MEDIUM SCALE ENTERPRISES (SMES) FUNDING ON ECONOMIC GROWTH (A CASE STUDY OF ILORIN, KWARA STATE)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Rapid and continuous productivity growth of the domestic economy of Nigeria has since the political independence in 1960 been of supreme importance to succeeding governments within the country. Consequently, governments have since implemented various national improvement plans and programmes aimed towards boosting productivity, as well as, diversifying the domestic economic base and emphasizing on small and medium scale production [Imoughele & Ismaila, 2014]. Nigeria remains a country with very high potential but an equally high inertia to develop. The country is blessed with abundant supply of enormous human, agricultural, petroleum, gas, and large untapped solid mineral resources [Obadan, 2003]. Since her independence from British rule in 1960, the country has gone through decades of political instability and this has brought with it a climate of social tension and an unpredictable market for business. Mambula [2014] stated that since its independence, the Nigerian government has been spending an immense amount of money obtained from external funding institutions for entrepreneurial and small business development programs, which have generally yielded poor results. Unfortunately these funds hardly reach the desired business because they may be lost to bureaucratic bottle necks and end up in accounts of public office holders. Small and medium-sized enterprises (SMEs) are generally considered to lack appropriate finance and therefore require special attention because of their inherent informational opaqueness and limited finance sources available [Beck, Demirguc-Kunt & Maksimovic, 2018], with this imperfect ability to obtain finance often used to justify government intervention [Xiang  & Worthington, 2013]. Despite these setbacks, the role of small business owned by middle class Nigerians, set up by individual savings, gifts and loans and sometimes sustained by profit cannot be ignored. Small and Medium Enterprises play key roles in transition and developing countries [OECD, 2012]. These firms typically account for more than 90% of all firms outside the white-collar jobs sector, constituting a major source of employment and generates significant domestic and export earnings [Taiwo & Falohun, 2016]. The place of Small and Medium Enterprises (SMEs) in the achievement of economic growth especially in a developing country like Nigeria appeared apparent. SMEs remain the foundation as well as the building block in the realization of any meaningful and sustainable growth in an economy. SMEs constitute the driving force in the attainment of industrial growth and development. This is basically due to their great potential in ensuring diversification and expansion of industrial production as well as the attainment of the basic objectives of growth. For sustainable economy, SMEs have been stressed as capable of helping in bringing about positive economic turn around and complementing the effort of the existing medium and large scales industries [Osuagwu, 2011]. The recognition of the importance of the roles of the SMEs as catalyst and engine of growth has prompted the increased attention and specific education on the method and approach to build and sustain a truly viable private sector dominated by small and medium scale enterprise (SMEs). Such economic contributions are obvious in the mobilization of idle financial resources, the conservation of foreign exchange, utilization of local raw materials, specialist suppliers to large companies, adding varieties and choice for the consumers, checking the monopolistic tendency power, providing a source or innovation, breeding ground for new industries and above all employment creation [Bamidele, 2012]. Small and Medium Enterprises are expected to facilitate the growth and development of human and capital resources towards general economic development and the rural sector in particular. In view of these expected roles from SMEs, the Nigerian government had in the past devised policies and incentives for the development of small and medium scale Enterprises. Such efforts, according to Adebusuyi (2014), could be classified broadly into three, namely (i) Incentives (fiscal and export), (ii) Tariff regimes, and (iii) Financial support and technical assistance programme. The fiscal incentives include tax relief for small enterprises during the first six years of operation, granting of pioneer status for a period of five years with a possible extension of two years for enterprises located in economically disadvantaged areas, and provision of relief for investment in infrastructure capital allowances, and minimal local raw material utilization income of 20 percent. Government has adopted the use of high tariff rates to discourage importation of some of the industrial goods that could be produced domestically, and in some cases, complete ban on a variety of industrial and agricultural products, to provide funds to small and medium scale enterprises by way of commercial loans. In spite of all these efforts by the government, both at federal, state, and local government levels, to ensure the growth of SMEs in Nigeria, people such as Abereijo et al [2007] have identified key factors which they claimed were responsible for their perceived failure of SMEs in Nigeria. Sacerdoti [2015] observed that even banks with retained liquidity levels in excess of what is required by law have shown reluctance in extending loans to SMEs, especially on long term basis as they are considered highly vulnerable with high credit risk. Small and medium scale Enterprises do not have the muscle to compete with the multinationals in terms of marketing because of what it takes in real terms to market a product. In addition, the amount one needs to produce in order to engage in profitable marketing to break even is not there for the local manufacturers. The challenges confronting SMEs in Nigeria seems multifaceted. Ekpenyong [2014] and Utomi [2014] identified inadequate capital and inaccessible credit facilities as two major bane facing SMEs. There has been dearth of long term loans needed for adequate financing of SMEs. This unpleasant scenario has continued over time majorly because many financial institutions do not believe in the potentials and viability of SMEs and thus considered it risky extending credit to them. Evbuomwan, Ikpi, Okoruwa and Akinyosoye (2012) noted other constraints to include poor power supply and inadequate relevant infrastructure. Kuteyi [2012] stated that small and medium Enterprises drive their country’s development as they create employment and contribute to the gross domestic product (GDP). In the opinion of Ariyo, [2018]; Ayozie and Latinwo [2010] and Muntala, Awolaja, and Bako [2012], Nkwe [2012] and Akingunola (2011) stated that there is the greater likelihood that SMEs will utilize labour-intensive technologies thereby reducing unemployment particularly in developing countries and thus have an immediate impact on employment generation. On the other hand Azende (2011); Afolabi [2013]; Onokoya, Fasanya and Abdulrahman [2013] found that SMEs have no significant effect on economic growth of the country. This study is being motivated in the sense that the previous results were uncertain, hence some studies report negative and positive results on the contributions of SME to economic well-being of Nigeria.

1.2. STATEMENT OF THE PROBLEM

Small and Medium Enterprises {SMEs} in Nigeria have not performed creditably well and hence have not played the expected vital and vibrant role in the economic growth and development of Nigeria. This situation has been of great concern to the government, citizenry, operators, practitioners and the organized private sector groups. Year in year out, the governments at federal, state and even local levels through budgetary allocations, policies and pronouncements have signified interest and acknowledgement of the crucial role of the SME sub-sector of the economy and hence made policies for energizing the same. There have also been fiscal incentives, grants, bilateral and multilateral agencies support and aids as well as specialized institutions all geared towards making the SME sub-sector vibrant. Apart from the foregoing, Central Bank of Nigeria established a number of SME-financing schemes to encourage the growth of SMEs in Nigeria. Many other intervention schemes were established to provide long term or specialized funds for the promotion of SMEs in Nigeria. It is worrisome that the challenges of SMEs continue to prevail in spite of the government’s efforts and interventions designed to promote their contribution to economic growth (Onugu 2015 and Ogechukwu 2006). The sector is still characterized with a lot of challenges which include reluctance of banks to grant loans to SMEs due to unavailability of reliable information on borrowers, poor book keeping, poor accounting standard and low transparency of operations, lack of discipline in the use of credit facilities, the perception of the SME sector as risky, and difficulties in enforcing loan contracts, high rates of loan diversion, inability to carry out feasibility studies and absence of collateral security (Ogujiuba, et. al., 2014). These challenges are associated to the environmental factors and the characteristics of the small and medium scale industries (Onugu, 2015). It is disappointing that these challenges are still prevalent in the country as reflected by the prevailing decline in standard of living, low per capita income and high rate of unemployment. It is as the result of this, the study examined the impact of small and medium scale enterprises funding on economic growth in Illorin.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the impact of small and medium scale enterprises funding on economic growth in Illorin. Other general objectives of the study are:

1. To examine extent SMEs loans influence the economic growth of Illorin.
2. To examine the challenges and constraints militating against the funding of SMEs in Illorin
3. To examine the impact of small and medium scale enterprises funding on economic growth in Illorin
4. To examine the funding of SMEs in Nigeria and the various financing options available to the SMEs
5. To examine the relationship between small and medium scale enterprises funding and economic growth in Illorin
6. To examine the possible ways in which small and medium scale enterprises can help to enhance economic growth
   1. RESEARCH QUESTION

1. To what extent do SMEs loans influence the economic growth of Illorin?
2. What are the challenges and constraints militating against the funding of SMEs in Illorin?
3. What is the impact of small and medium scale enterprises funding on economic growth in Illorin?
4. How is the funding of SMEs in Nigeria and the various financing options available to the SMEs?
5. What is the relationship between small and medium scale enterprises funding and economic growth in Illorin?
6. What are the possible ways in which small and medium scale enterprises can help to enhance economic growth?

1.5 RESEARCH HYPOTHESIS

Hypothesis 1

H0: There is no significant impact of small and medium scale enterprises funding on economic growth in Illorin

H1: There is a significant impact of small and medium scale enterprises funding on economic growth in Illorin.

Hypothesis 2

H0: There is no significant relationship between small and medium scale enterprises funding and economic growth in Illorin.

H1: There is a significant relationship between small and medium scale enterprises funding and economic growth in Illorin

1.6 SIGNIFICANCE OF THE STUDY

This study will highlight problems associated with the role of small and medium scale industry in enhancing economic growth in Nigeria. It will give information on the possible areas for improvement. Furthermore, the study will help to assess the impact small and medium scale industry funding on economic growth in Nigeria. Moreover, suggestions and recommendations made in this paper will help policy makers formulate new economic policies to maintain or modify the existing one. It will equally serve as a guideline to researchers who may wish to research this study in the future. It will also help small scale entrepreneurs to make sufficient preparation in their request for credit assistance. It will guide the entrepreneurs in making credits demands that are in compliance with government monetary policy. The last but not the least it will help the entrepreneurs to display competency in preparing justification for their project. It is rear to see most of them coming up with cash projections, projected balance sheets.

1.7    SCOPE OF THE STUDY 

The study is based on the impact of small and medium scale enterprises (SMEs) funding on economic growth in Illorin.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 DEFINITION OF TERMS

Small Scale Enterprise: An enterprise with a labor size of 11-1000 workers or a total cost of not more than 50 million including working capital but excluding cost of land (Sule, 2016:207).

Medium Scale Enterprise: An industry with a labor size of between 10-300 workers or a total cost of over 50 million but not more than 200 million including working capital but excluding cost of land (Clifford, 1972:85).

Economic Growth: This is defined as a sustained increase in a nation’s gross national income per capital over a long time period.

Funding: This is the process of sourcing for fund or acquisition of funds for financial purpose

Small And Medium Scale Industries (Enterprises) SME: Small and medium scale enterprises are defined as those enterprises with fixed assets other than loan but including the cost of new investments not exceeding N36Million.