SOURCES OF FINANCE FOR SMALL AND MEDIUM ENTERPRISE IN NIGERIA (A CASE STUDY OF SME’S IN LAGOS STATE)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Nigeria is one of the developing countries of the world today, and her speed of development is of serious concern to both the Public and Private Sector analysts. One aspect of this development that is of fundamental importance to it is in the field of entrepreneurship. This is because of the great role that entrepreneurship activities play in the economy in terms of productive activities, employment generation and overall development of the quality of life of the citizenry. However, it is very imperative to mention that Nigeria still has a long way to go in terms of entrepreneurial development effort. Entrepreneurship development tends to propel growth and quicken the achievement of structural transformation and diversification of the economy. In view of this development, Obasanjo in 2010 set an ambitious goal. “Nigerian President wants the country to become one of the world top 20 economies during the next two decades. In order to hit the target by 2020, Nigeria will need to increasingly globalize education in two key areas: Information and Communication Technology and entrepreneurship” Oshionya (2008). Early entrepreneurship is characterized with production or manufacturing in which case the producer most often started with a small capital, mostly acquired from his own savings. Early Entrepreneurship started with trade by barter even before the advent of any form of money, Gartner (2005). It is also worthy of note that the small scale entrepreneurial sector is seen as the bedrock of industrialization based on its expected impact and potential contribution towards the diversification of our production base. However in Nigeria we observe that the small scale entrepreneurial sector is characterized by low productivity and high rate of business failure even when government has put in place many specialized schemes to provide their financial needs. As a result, the flow of Entrepreneurship in the country was slowed down but with more people being educated and the fact that Government could no longer employ most school leavers, economic programmes to encourage individual to go into private business and self reliant activities were initiated. Such economic programmes that are geared towards self reliance for individuals are programmes as Open Apprenticeship Scheme, Graduate Employment Programme. Other policies that encourage or make it easier for Entrepreneurs to acquire funds were the establishment of People’s Bank of Nigeria, Funds for Small Scale Industries (FUSSI), National Poverty Eradication Programme (NAPEP). This new understanding and concept of building an Entrepreneurial skills and attitude in Nigeria flowed out of the realization that sustainable economic growth and development could only result from conscious and deliberate effort at establishing small scale businesses. This position is confirmed by the Nigerian Investment Promotion Commission NIPC (2013) when it stated thus: “the advent of Small and Medium Enterprises (SME) in Nigeria was necessitated to stimulate the establishment and growth of industries. Industrial development involves the development of technical arrangement that moves an economy from traditional method of production to a more complex system of mass manufacture of goods and services involving technology and management techniques. This technical arrangement includes entrepreneurial effort, Kasimu (2013). In developing countries like Nigeria, it is a known fact that small scale Entrepreneurship development serves as a requisite for the attainment of economic growth and development, as well as the bedrock upon which industrial development could be based. This is because a small scale Entrepreneur promotes stable industrial base and ensure balance distribution of industrial development of any nation – either developed or developing. The small scale Entrepreneurs through their small scale firms performs vital roles in economic development of any nation. The Great Britain and Japan for instance, owed their early industrial and economic expansion to their broad based small business establishments, Olla (2010). Some of the features of underdevelopment or developing economies are the problem of low income, low savings, inadequate investment, high population growth rate, and infrastructure deficiencies. As evident in Nigeria, the problem of limited resources and the host of socio-economic problems, which have to be tackled by most developing countries, emphasize the promotion of Small Scale Enterprises (SSE) as the engine of growth. The low elasticity of demand for primary products and the worsening of terms of trade against them, the need for developing countries to diversify their economies become expedient, the need to conserve developing countries‟ foreign exchange and be fairly self sufficient compels this countries to promote industrialization by encouraging the expansion of small scale enterprises, Kasimu (2013). While the importance of the industrial sector is universally accepted, the developing countries have since the 1970’s shown greater interest in the promotion and growth of small scale Enterprises, which eventually results in Entrepreneurship development. Anyanwu (2013), advances three main reasons for this industrial development strategy; These include, the failure of past industrial policies, which were anchored on the establishment of large firms to generate efficient self sustaining growth, and Secondly, because of the small scale Enterprises flexibility, adaptability and regenerative tendencies to propel economic development. The third reason rests on the fact that growing and dynamic small enterprises elsewhere have grown into large ones and have contributed substantially to national development objectives. Given the paramount role of small scale Enterprises, their survival and growth are most desired in the economy; thus the need for effective Entrepreneurship development programme. Finance is one of the main factors that influence the survival and growth of entrepreneurial activities. Pandey (2013), for any business (be it small or large) to survive, it must have at its disposal all key resources. These resources are what is referred to as the “3M’s, namely: Men, Money and Materials; because of the close relationship between the 3M’s, it is difficult to say which one is the most important than the other, Nwankwo (2009). In view of the fact that most things in modern business world are reduced in the final analysis to money, finance must be seen as the most important. Johnson (2011) defined finance as “the provision of money at the time it is wanted”. Consequently a person must ensure that there is adequate finance for entrepreneur’s operations; hence sources of finance are of great concern to the Entrepreneur and in Entrepreneurship development efforts. Capital investment and industrial development are indispensable to the economic progress of any nation. Industrial development calls for capital investment, which cannot be realized in a capital scare economies, most especially that of developing nations of the world like Nigeria, Onyido (2013). In realization of the need to find better ways of making institutional finance available to small scale Enterprise, reasonable attention seemed to have been paid by the government at both federal and state levels. To this end, there have been proliferation of special financing programmes in recent years for small and medium scale enterprise, in spite of this; the sector seems to be generally unable to muster sufficient financial resources to aid its operation. From the foregoing, it is crystal clear that the sources and or availability of finance are of great importance to small scale Enterprise development in Nigeria. This is because; the extent to which Small and Medium Scale Enterprises (SME’s) can mobilize resources for their operation depends on the sources of finance available to them. Therefore an investigation into the sources of finance for Small and Medium Scale Enterprise Developments (SMED’s) in Nigeria is of great interest. This research work will attempt to evaluate the sources of finance available to small scale enterprises in Nigeria, in view of both the general and specific government development strategy channelled to the subsector.

1.2 STATEMENT OF THE PROBLEM

Entrepreneurship has increasingly been held out as an alternative to traditional economic development strategies and polices. Advocates for entrepreneurship based policies suggest that entrepreneurial development generates greater return to the public than other alternative strategies, such as industrial recruitment or retention and expansion because the capital requirement and formation is very low thereby providing a source of livelihood to many of our populace. The facts that small scale enterprises are seen by many developing nations of the world, as a spring board for industrialization is not a subject of debate. In Nigeria, similar importance is greatly accorded to small scale enterprises. However, the growth and development of small scale Enterprises call for concern. Many problems could be responsible for this ugly scenario. In this regard we assumed that financing is one of the major problems confronting small scale enterprises and entrepreneurial development in Nigeria. In spite of the growing awareness of the role of small scale industries in the industrialization process for some reasons, the sector is generally unable to muster sufficient resources to aid its operation even when government has put in place many specialized scheme to provide their financial need.  It is therefore imperative to assume that there is a question mark on the effectiveness of the sources of finance available to the small scale entrepreneurs in Nigeria, even though finance is an indispensable factor in the small scale entrepreneurial development efforts. It is also worthy of note that the small scale entrepreneurial sector is seen as the bedrock of industrialization, based on its expected impact and potential contribution towards the diversification of our production base. It is on this premise that we are carrying out this investigation.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine sources of finance for small and medium enterprise in Nigeria. Other general objectives of the study are:

1. To examine whether small scale entrepreneurs wholesomely utilizes her sources of finance.
2. To examine the impact of stringent requirement by financial institution on the accessibility of funds by the small scale entrepreneur.
3. To examine the effect of financing on the performance of SMEs.
4. To examine how small scale entrepreneurs suffer discrimination from financial institutions in their quest for credit facility.
5. To examine the relationship between the performance of SMEs and economic development.
6. To examine if government policy towards the financing of small scale entrepreneurship development in Nigeria is effective.

1.3. RESEARCH QUESTION

1. To what extent do small scale entrepreneurs in Nigeria utilize the sources of finance available to them?
2. How has stringent requirement affected accessibility of funds for small scale entrepreneurship development effort in Nigeria?
3. What are the effects of financing on the performance of SMEs?
4. To what extent do discriminatory tendencies of financial institutions affect accessibility of funds for small scale entrepreneurs in Nigeria?
5. What is the relationship between the performance of SMEs and economic development?
6. How effective has Government policy towards financing small scale entrepreneurship activities being?

1.5 RESEARCH HYPOTHESIS

Hypothesis 1            

H0: There is no significant effect of financing on the performance of SMEs in Nigeria

H1: There is a significant effect of financing on the performance of SMEs in Nigeria.

1.6. SIGNIFICANCE OF THE STUDY

This study intends to examine the existing sources for financing Small Scale Enterprises in Nigeria. it will identify constraints associated with such schemes and put forward suggestions as to how to alleviate these constraints, thereby making institutional financing more readily available to the Small Scale Entrepreneur. The significance of the study to these different groups can be highlighted as follows: The Small Scale Industrialist will benefit tremendously from the research as suggestions put forward will facilitate easy access to institutional credits as well as the appropriateness of such credits to them. The government will find this study useful in her effort to industrialize the nation and put forward machineries of developing entrepreneurial activities in Nigeria. The various institutions that are involved in providing credit facilities to Small Scale Entrepreneurs, will find the study important on the premise that the study will proffer ways that will help to foster smooth financial relationship between the institutions and Small Scale Entrepreneurs. Also, lecturers and students of management and other related courses will benefit from this research work. This is because, the study will help to narrow the gap between theory and practice in their search for knowledge about business financing in the perspective of Small Scale Enterprises.

1.7    SCOPE OF THE STUDY 

The study is based on sources of finance for small and medium enterprise in Nigeria. A case study of SME’s in Lagos state

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.

1.8 DEFINITION OF TERMS

Small Scale Enterprise: An enterprise with a labour size of 11-1000 workers or a total cost of not more than 50 million including working capital but excluding cost of land (Sule, 2015).

Medium Scale Enterprise: An industry with a labour 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).

Sole Proprietorship: Is a business owned and conducted by one person presumably assisted by one or more persons for intakes wife and children.

Enterprises: It means any establishment engaged in production, repairs or services to satisfy human wants and make room for profits.

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

SMEs Finances: SMEs finances are the various sources of funding available to SMEs’ business operations. The sources comprise private and external sources (Abdulsaleh & Worthington, 2013).

Entrepreneur: This can be defined as a person who set and start his own new and small business enterprise

Capital Constraints: Capital constraints are the inability of a business or company with limited cash to fund required investments (Gorodnichenko & Schnitze, 2013).