CHAPTER ONE

1.0 Introduction

1.1 Background to the Study

Perhaps, no other development strategy has enjoyed as much prominence in

Nigeria’s development plans as the Small and Medium Scale Enterprises (SMEs)

development strategy. In recent years, particularly since the adoption of the economic

reform programme in Nigeria in 1986, there has been a decisive switch of emphasis from

the grandiose, capital intensive, large scale industrial project based on the philosophy of

import substitution to micro and small scale enterprises with immense potentials for

developing domestic linkages for rapid, sustainable industrial development. Apart from

their potential for ensuring a self-reliant industrialization, in terms of ability to rely largely

on local raw materials, small and medium enterprise, are also in a better position to boost

employment, guarantee a more even distribution of industrial development in the country,

including the rural areas, and facilitate the growth of non-oil exports.

According to the National Council on Industry (1991) cited in Olajide, Ogundele,

Adeoye and Akinlabi (2008), micro/cottage industry is an industry whose total project

cost (excluding cost of land but including working capital) is not more than N500, 000:00

(i.e. US$50,000); while small scale industry is an industry whose total project cost

(excluding cost of land and including working capital) does not exceed N5m (i.e.

US$500,000).

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 Small scale business started gaining prominence in Nigeria in the early 1970s when

many personal enterprises started springing up. Before this time, agriculture dominated

the economy. There were a lot of agricultural small holdings before and during the

emergence of oil boom. Over 75 percent of agricultural holdings were managed by the

small farmers which comprise mainly of family business. Government agricultural

holdings were not more than 10 percent.

Small scale businesses are catalyst in the socio – economic development of any

country. They are a veritable vehicle for the achievement of national macroeconomic

objective in terms of employment generation at low investment cost and enhancement of

apprenticeship training. In Kenya, for instance, Kombo, Justus, Murumba and Makworo

(2011), submitted that “micro and small scale entrepreneurs who include agriculture and

rural businesses have contributed greatly to the growth of Kenyan economy”. The sector

contributes to the national objective of creating employment opportunities, training

entrepreneurs, generating income and providing a source of livelihoods for the majority of

low income households in the country accounting for 12-14% of GDP (Republic of

Kenya, 1982, 1989, 1992, 1994). The catalytic roles of micro and cottage businesses have

been displayed in many countries of the world such as Malaysia, Japan, South Korea,

Zambia, and India among other countries.

Small scale enterprises contribute substantially to the Gross Domestic production

(GDP), export earnings and employment opportunities of these countries. Small scale

enterprises (MSEs) have been widely acknowledged as the springboard for sustainable

2
economic development. Apart from the fact that it contributes to the increase in per capital

income and output, it also creates employment opportunities, encourage the development

of indigenous entrepreneurship, enhance regional economic balance through industrial

dispersal and generally promote effective resource utilization that are considered to be

critical in the area of engineering economic development (Tolentino, 1996; Oboh, 2004;

Odeh, 2005).

Small scale enterprises in Nigeria have not performed creditably well and they have

not played expected significant role in economic growth. With the realization of the

potentials of the small scale enterprise, governments at different level in Nigeria have put

up a lot of support programmes to promote and sustain their development. It is believed

that massive assistance; financial, technical, marketing and managerial from the

government are necessary for the SMEs to grow.

In order for the SME’s to continue to fulfil the above and much more, they need

access to finance to carry out their business operation and expansion. The seeming lack of

finance for SMEs is not only retarding their expansion but also the growth of the nation’s

economy. Macroeconomic conditions in Nigeria since the beginning of the 21 st century

has severely constrained private sector access to credit. High levels of government

borrowing pushed interest rates up and crowded the private sector out of the financial

markets.

In view of the perennial financing challenge faced by these SMEs, many

interventions have been made by the government through its recent monetary policy and

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financial sector reforms. These have substantially increased banks’ lending to the private

sector but limited access to credit, high interest rates and prohibitive collateral

requirements still pose significant constraints to the growth of many SME’s.

Another area of constraint, which tends to limit the assess to finance by SMEs, is

lack of information. Small business owners most often possess more information about

the potential of their own businesses but in some situations it can be difficult for business

owners to articulate and give detailed information about the business as the financiers

want. Additionally, some small business managers tend to be restrictive when it comes to

providing external financiers with detailed information about the core of the business,

since they believe in one way or the other, information about their business may leak

through to competitors (Winborg and Landstrom, 2000).

When SME sector does not have access to external funds for investment, the

capacity to raise investment per worker, and thereby improve productivity and wages, is

seriously impaired. The difficulties that SMEs experience can stem from several sources.

The domestic financial market may contain an incomplete range of financial products and

services. The lack of appropriate financing mechanisms could stem from a variety of

reasons, such as regulatory rigidities or gaps in the legal framework. Moreover,

development economists increasingly accept the proposition that, due to monitoring

difficulties such as

To evaluate the efficiency of schemes for promoting SME finance, an effectual

SME financing scheme should provide opportunities for SMEs to meet their financing

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needs and must maintain the profitability of the enterprise, or on the eventual sale of

investments or collection of loans that would provide cash for later investments. It is

worth noting that among the resources needed for the production of goods and services,

there are many things that set capital (finance) apart from the other inputs. Fixed Assets

such as machinery and equipments, land and buildings, just to mention a few, provide

benefits that derive from their physical characteristics. Unfortunately, the same thing

cannot be said about the financial resources used to run a business. The acquisition of

financial resources leads to contractual obligations. Small enterprises in developing

countries typically, lack access to finance as an important constraint on their operations.

This lack of access is often associated with financial policies and bank practices that make

it hard for banks to cover the high costs and risks involved in lending to small firms.

1.2 Statement of the Problem

Despite the role of SMEs in the Nigerian economy, the financial constraints they

face in their operations are daunting and this has had a negative impact on their

development and also limited their potential to drive the national economy as expected.

This is worrying for a developing economy without the requisite infrastructure and

technology to attract big businesses in large numbers.

Most SMEs in the country lack the capacity in terms of qualified personnel to

manage their activities. As a result, they are unable to publish the same quality of

financial information as those big firms and as such are not able to provide audited

financial statement, which is one of the essential requirements in accessing credit from the

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financial institution. This is buttressed by the statement that privately held firms do not

publish the same quantity or quality of financial information that publicly held firms are

required to produce. As a result, information on their financial condition, earnings, and

earnings prospect may be incomplete or inaccurate. Faced with this type of uncertainty, a

lender may deny credit, sometimes to the firms that are credit worthy but unable to report

their results (Coleman, 2000).

Another issue has to do with the inadequate capital base of most SMEs in the

country to meet the collateral requirement by the banks before credit is given out. In the

situation where some SMEs are able to provide collateral, they often end up being

inadequate for the amount they needed to embark on their projects as SMEs assets-

backed collateral are usually rated at ‘carcass value’ to ensure that the loan is realistically

covered in the case of default due to the uncertainty surrounding the survival and growth

of SMEs (Binks et al., 1992).

These are some of the factors already acknowledged by some researchers as

blocking most SMEs in accessing credit from the financial institution in the country.

SMEs in Nigeria do not also have the luxury of picking a financing scheme that

will be appropriate for their businesses. The major type of financing open to them is debt

financing from the financial institutions, which most often comes with a long list of

requirements that most SMEs find them difficult to meet. The other type that is Asset

financing, aside the long list of criteria also requires operators of SMEs to provide 50% of

the funds and the financing institution providing the other half to fund the purchases of

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the assets. This type of financing do not allow for growth of the SMEs sector since they

are all short term in nature.

1.3 Research Questions

The following are the research questions of this study

i. Do qualified financial personnel manage the financial activities of SMEs?.

ii. What are the sources of capital for SMEs

iii. Do SMEs meet up with the collateral requirements of financial institutions?

iv. Are all the financial schemes provided by government available to SMEs

1.4 Objectives of the Study

This study aims to examine the challenges of financing small scale business

enterprises in Nigeria. It also aims at finding ways of making small scale enterprises more

effective in order to enhance to economic development of the nation’s indigenous

technology.

Moreover, in this study, attempt will be made to achieve the following:

i. To examine the availability of qualified financial managers in SMEs in study area.

ii. To assess the sources of capital for SMEs

iii. To investigate the problems encountered by SMEs in meeting with collateral

requirements from financial institutions.

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iv. To ascertain the financial scheme available from government and other donor

agencies, and the schemes commonly embraced by SMEs

v. To recommend measures for reducing financial challenges associated with SMEs

1.5 Research Hypotheses

Two hypotheses are formulated and tested in this study:

Hypothesis 1

H0: There are no difficulties faced by SMEs when accessing finance from financial

institutions

H1: SMEs encounter numerous problems when accessing finance from financial

institutions.

Hypothesis 2

HO: Poor financing does not affect productivity of SMEs.

H1: Poor financing does affect productivity of SMEs.

1.6 Significance of the Study

Development and growth of the Nigeria’s economy through the small scale

enterprises is crucial at this era, hence the nature of this study is timely. This study will be

of immense benefits to cottage enterprises as well as other small and medium scale

enterprise. Investigating challenges of financing SMEs in Nigeria especially with

accessing credit or funding from financial institutions from the perspective of the

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operators of these SMEs is crucial since it would present the problem from the perspective

of the SMEs thereby making it a base line study for policy interventions by state agencies,

development partners and non-governmental organisation with missions to develop the

SME sector. Furthermore, this study will serve as a secondary data to future researches on

small and medium scale enterprises.

1.7 Scope of the Study

The scope of this study is restricted to small and medium scale enterprises. Selected

SMEs in the rural areas of Edo Central Senatorial District served as the small and medium

scale enterprise employed for this study. Data for the study will be harnessed within a

period of two weeks.

The researcher will place emphasis on objective of the study, and other related matters as

they affect the small scale enterprises

1.8 Limitations of the Study

A good number of factors made the study difficult. Notably, is; 1.The time factor,

due to the limited time, 2; Small sample size - the researcher based this study only on few

selected small business enterprises in the study area.

However, the researcher within the limits of the above constraints was able to

source for and obtain sufficient date for the study. The expected result of the study will be

robust and significantly representative of the population.

1.9 Organisation of the Study

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The first chapter contains the background which introduces the topic and touched on some

of the issues with regards to SME and its financial challenges. The literature review that

forms the second chapter looks at SMEs , various financing schemes available to SMEs

and the challenges these SMEs faced in accessing credit in Nigeria. Thirdly, the method

used in gathering the data forms the third chapter. Chapter four contains the data analysis,

presentation and discussion of the findings. The conclusion and recommendations will

form the chapter five of this thesis.

1.10 Operational Definitions of Terms

Small Scale Enterprise: - The definition of small scale enterprise varies with people and

countries such that it is better defined based on the characteristics. In the Nigerian context,

small scale enterprise is any processing, serving or manufacturing industry with an

investment in machinery and equipment above N500,000 [Waboi, 1987]. According to the

centre for management development in a policy proposal to Federal Government in 1982,

A small scale enterprise is a manufacturing, processing or service enterprise involved in a

factory or production type operation employing up to 50 full time employees, investment

in plant machinery are utilized in its operation.

Management: - According to Akpala [1990] Management is the process of combing and

utilizing an organization input [men, materials and money] by planning, organizing,

directing and controlling for the purpose of producing output [goods and services].

Entrepreneur: - According to Hagen, an entrepreneur is an individual who conceives the

idea of business, design the organization of the firm, accumulates capital, recruits labour,
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establishes relations with supplies, customers and the government and converts the

conception into a functioning organization business.

Opportunity: An opportunity is a potential gainful situation that must be recognized and

exploited, an opportunity has the qualities of being attractive, durable and timely. It is

anchored in product or services which creates or adds value for its buyers or end users.

Development: This entails growth of the business, increases in goods and services and t

he improvement of lives of the citizen.

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 REFERENCES
Binks, M.R., Ennew, C.T. and Reed, G.V. (1992). Information Asymmetries and the
Provision of Finance to Small Firms. International Small Business Journal, 11(1).
35-46.
Coleman, S. (2000). Access to Capital and Terms of Credit: A Comparison of Men and
Women-Owned Small Businesses. Journal of Small Business Management, 38(3).
37-52.
Kombo, A., Justus, W., Murumba, N. and Makworo E. (2011), An Evaluation of the
Impact of Risk management Strategies on Micro-Finance Institutions’ Financial
Sustainability: A case of Selected Micro finance institutions in Kisii Municipality,
Kenya”. Educational Research, 2 (5) 1149-1153.
Oboh, G.A. (2004) Contemporary Approaches for Financing Micro, Small and Medium
Enterprises”. Conference on SME held at the International Conference Centre,
Abuja, Nigeria. 2-15.
Odeh, O. (2005). The Impact of Federal Government Reform Programme on the
Development of the SMEs Sector. A paper presented at the National Seminar on
“Facilitating Easy Accessibility to the SMEEIS Funds by SME operators. Lagos, 10
– 11.
Olajide, O.T., Ogundele, O.J.K., Adeoye, S.O. and Akinlabi, B.H. (2008). Small and
Medium Enterprises (SMEs): An Appropriate Medication for Nigeria’s Economic
Predicament in the Global Competitive Economy”. Akungba Journal of of
Management, 1 (1& 2). 173-193.
Tolentino, A. (1996), Guidelines for the Analysis of Policies and Programs for Small and
Medium Enterprise Development Enterprise and Management Development. ILO
Working Paper.
Winborg, J and Landstrom, H (2000). Financial Bootstrapping in Small Businesses:
Examining Small Business Managers’ Resource Acquisition behaviour – Journal of
business venturing 16, 235-254.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptional Frame Work of Small and Medium Scale Enterprises Financing.

There is no unique international or national identification of small-scale business.

Therefore, the meaning of small-scale business varies from one country to another from

one industry to another even within the same country. Accordingly some people

undoubtedly consider all business that led no more than a specified number of employees

of (5) or (10) to be small. Other believe that a small business is one that operates only in

the local market area. Still others classify business as small by the kind of firm such as the

local stores, dress shop, shoe makers at the corner of the street. Most people agree that the

neighboring beer parlours and provision stores are small business while Bottling

Company, UAC groups of Companies and Nigeria Breweries Plc are big businesses. The

above views of people gave rise to controversy as to where to draw the line between big

and small businesses.

According to Cole (1971), small scale business “Is a business that is owned, managed,

controlled by one or two persons, is firmly influenced in decision making, has an

undifferentiated organizational structure, has a relatively small share of the market and

employs less than 50 people. The small scale business Act 1953 (USA) provides that a

small business concern is one which is independently

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owned and operated and dominant in its field of operation (Broom and Long Recker

1986).The Committee on Economic Development of the United State of America offers a

definition which states that a business will be classified as small if it meets two or more of

the following criteria (Broom and Longrecker 1986:12). They are:

1. Management is independent. Usually the managers are also owners.

2. Capital is supplied and ownership is held by an individual or a small group.

3. The area of operation is mainly local workers and owners are in one home or

community, markets used not be local.

4. The size of the firm is small relative to industry.

In Nigeria, the Nigerian Bank for Commerce and Industry (NBCI) defines small scale

business as one with total capital not exceeding N750,000, excluding cost of land but

including working capital. Only one common term-number of employees is common in

all the above definitions. While other definitions in the industrialized nations emphasize

the term –annual turnover-measuring earned income, the Nigerian definition emphasize

the term capital invested. This shows the trend of government effort in making only

capital or fund available to small scale business in Nigeria to the neglect of other vital

complementary environmental facto

2.2 Features of Small and Medium Scale Enterprises

Mohammed and Nzelibe (2014) opined that in a report publish in 1994 by the

Center for Management Development (CMD) Lagos, noted that in order to create a clear

14
picture of what SMEs is, certain characteristics associated with firms need to be identified

and discussed. The report shows the following features of SMEs business: Ownership and

Management to SMEs, the chief executive, generally participates actively in the decision-

making process and day to day operation of the firm with little or no adequate specialist

support, The chief executive can be known by all employees of the company or

organization, The chief executive is the owner, founder and manager as well as the

controller of the business

2.3 Types of Small Scale Business Enterprises

According to Asaolu (2005) and Oyelara (2012), some types of small scale business

enterprises are identified. These include:

(i) Sole proprietorship: A number of small scale enterprise identified by different scholars,

amongst them are: The sole proprietorship is the simplest business form under which one

can operate a business. The sole proprietorship is not a legal entity. It simply refers to a

person who owns the business and is personally responsible for its debts. A sole

proprietorship can operate under the name of its owner or it can do business under a

fictitious name, such as Ayoade’s beauty Salon. The fictitious name is simply a trade name

and it does not create a legal entity separate from the sole proprietor owner. A sole

proprietorship is a business owned, established, and managed by one person. The

advantage of a sole proprietorship is that setting up and administering the business is

comparatively easy and inexpensive. One disadvantage of operating a sole proprietorship

form of business is that the liability of the business is always unlimited. In this case the

15
personal properties of the owner and the properties of the business is usually the same so

when the liability of the business is to be settled the personal properties of the owner will

be used up. A sole proprietorship business at times lacks continuity when the owner dies.

(ii) Partnership: A partnership is defined by section 3(1) of the partnership act as the

relation which subsists between persons carrying on a business in common with a view of

profit. The legal definition of a partnership is generally stated as "an association of two or

more persons to carry on as coowners of a business for profit" (Revised Uniform

Partnership Act 101 [1994]). Partnership can be in two forms which are general

partnership and limited partnership. In a general partnership, the partners manage the

company and assume responsibility for the partnership's debts and other obligations.

The limited partners serve as investors only they have no control over the company and

are not subject to the same liabilities as the general partners. Persons can form a

partnership by written or oral agreement, and a partnership agreement often governs the

partners' relations to each other and to the partnership. A type of business organization in

which two or more individual spool money, skills, other resources, and share profit and

loss in accordance with terms of the partnership agreement is called a partnership

business. The disadvantage of a partnership business is that profits must be shared with

others; you have to decide on how you value each other’s time and skills and what

happens if one partner can put in less time due to personal circumstances. Also since

decisions are shared, disagreements can occur. A partnership is for the long term, and

expectations and situations can change, which can lead to dramatic and traumatic split

16
ups. Another major disadvantage of a partnership is unlimited liability. General partners

are liable without limit for all debts contracted and errors made by the partnership (Oluba,

2009).

(iii) Cooperative enterprise: A cooperative enterprise is an association or corporation

established for the purpose of providing services on a nonprofit basis to its shareholders or

members who own and control it. It is established for their mutual benefit and for the sale

of their products at the maximum possible price. It is an autonomous association of

persons who voluntarily cooperate for their mutual, social, economic, and cultural benefit.

Cooperatives include non-profit community organizations and businesses that are owned

and managed by the people who use its services. A co-operative enterprise is an

autonomous association of persons who are united voluntarily to meet their common

economic, social, and cultural needs and aspirations through a jointly owned and

democratically controlled enterprise. The formation of a cooperative society is very

simple as compared to the formation of any other form of business organizations. Any ten

adults can join together and form a cooperative society.

2.4 Problems of small scale business enterprise:

Small scale businesses have certain advantages over large scale businesses such as the

ability in many cases to form close relationships with customers and clients, but small

scale business also face several notable problems. Small businesses often focus on a niche

or specialty that differentiates their goods or services from larger competitors. Some of the

problems facing small scale business enterprise are:

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a. Inability to produce under economy of scale: Economies of scale is a concept in

economics that describes a situation where the marginal cost of making a certain

product falls as a company makes more of the product. In other words, when economies

of scale exist, the cost of producing a certain product is lower per unit if the product is

produced in large quantities. A small scale business production is usually limited

because they produce for a limited market. For example, the cost per unit of making

cars might be lower for a manufacturer that produces 100 cars a day than a

manufacturer that produces one or two cars a day. Large scale businesses allow

manufacturers to employ systems such as assembly lines that can increase productivity

and reduce costs. Small businesses may have difficulty competing with large scale

businesses that are able to mass produce products inexpensively (Harris and Sauzor,

2006).

b. Difficulty in attracting customers: Small scale business enterprise typically has a more

difficult time attracting customers than larger business enterprise. They have smaller

marketing and advertising budgets. Also, some potential customers are reluctant to do

business with small businesses especially new businesses without loyal followers, since

they believe that these businesses may not be around for a long time or that they will

not be able to provide the appropriate level of service. A challenge for small scale

businesses is to make sure that they provide excellent customer service and in still

confidence in their customers (Oyelaran, 2012).

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c. Competition from large scale business enterprise: Possibly one of the biggest problems

facing small scale businesses is that they have to compete with much larger companies.

Larger companies have bigger budgets and can usually provide products and services at

much lower costs. A small business must be able to either match the prices charged by

larger businesses or provide extra benefits to the customer such as better customer

service. It is unarguable that some small scale businesses are good innovators. Most of

the products available in the market today were developed by small businesses.

However, these new product idea or processes are always high jacked by large scale

companies which subsequently make it difficult for small businesses to profit from their

innovations. In cases where the small scale innovators takes up patent, the larger

business skirt such patent thus destroying the continued existence of the small scale

niches (MOPFED Report, 2010).

d. Changing government policies and regulations: Government policies seem to have

constituted a serious problem area for small scale business enterprise. The beginning of

harsh government policies toward small scale business can be traced back to 1982 with

the introduction of "stabilization measures" which resulted in import controls and

drastic budget cuts. These, in turn, adversely affected the subvention to the financial

institutions established to provide financial assistance to the small scale business. For

example, in 1983, out of a total of 8,380 applications for loans received from the small

scale business for a total of 559.13 million naira, only 18 per cent (1,470 projects) for a

total of 46.66 million naira was disbursed.

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e. Financial challenges: Small scale businesses face challenges obtaining money for

expansions. Larger corporation have many more resources available to them to obtain

capital to expand even banks and lenders are much more willing to lend money to a

large company with tangible assets that can be used for collateral. Adelaja (2003)

argued that the access to institutional finance has always constituted a pandemic

problem for small scale business development in Nigeria (Oyelaran, 2012).

f. Inadequate infrastructural facilities: Small scale businesses in Nigeria are affected

due to the poor infrastructures that exist in the country. Many small scale business

operates on a small scale mostly in rural areas and these rural areas have poor

infrastructures like bad transportation network, Good roads will not only encourage

people to patronize a business but will equally reduce cost of transportation and

carriages of raw materials and finished goods to retailers or sales outlets. In the same

way regular supply of electricity can enhance maximum satisfaction of customers and

reduction of operating costs such as diesel or any other fueling cost. When there in

definition of words, concepts and ideas are always subject to controversies in social

sciences as authors and scholars define such words, or conce3pts based on their

assumptions or understanding of such concepts. Therefore, the concept of small and

medium scale enterprise has not escaped such controversy. The definition of asmall

scale enterprise may vary in different economies of the world, but the underlying

concept is the same. Small scale business enterprise can be defined in terms of annual

sales, asset valuation, net profit, balance sheet totals and the size of the business

including the numbers of employees available in the business. Different authors,

20
 scholars, and schools have different ideas as to the variation in capital outlay, number

of employees, sales turnover, fixed capital investment, available plant and machinery,

market share and the level of development, these features equally vary from one

country to the other. In Nigeria, the Third National Development plan defined a small

scale business as a manufacturing establishment which employs not more than ten

people, or whose investment in machinery and equipment does not exceed six hundred

thousand naira. When these facilities are very poor small scale businesses might not be

able to survive or even if they do it might be for a short period of time.

g. Inadequate information: Small scale business managers at times usually have limited

knowledge and ability of running the business. Most of these small scale business

managers might just be primary or a secondary school dropout who doesn’t care of

anything that is going on in the economy, they are only concerned in making sales and

making their profits.Every business undertaking requires it own peculiar information,

skills, abilities and basic experience. Entering into a strange line of business without

information that will keep the business current and efficient is like testing a river depth

with both legs. Most small business owners that have excelled had the required

information in their lines of businesses (Asaolu, 2005).

h. Likely cessation of business after death of the owner: A number of small scale

businesses cannot outlive their founders. Most of such businesses stop to exist

immediately after the owner dies. Such problems exists in most small scale businesses

21
 such as Welding, Tailoring, Bread Baking, Furniture Making, etc. This is more so when

the children of such owners refused to take up the businesses of their parents

2.5 Classification of Small Scale

As earlier stated, small scale enterprise does not have any clear-cut definition, because

it varies from one countries economy to another, so its classification. However, according

to Nnenna Ani, some of the main criteria used to classify small scale business include;

i. According to Initial Capital Outlay: The third national development plan (1975-

1980) small scale was classified as any industry with one hundred and fifty thousand

naira capital investment, while the federal ministry of industries in 1973 classified as

small business as one with not less than sixty thousand naira.

ii. According to Management Style: In classifying a small-scale according to the

management style (Drucker) says it requires at least one man that is not engaged in

any other functional work but spends all his time and finance in it. He knows other

members who may not be active (e.g. partnership).

iii. According to Number Of Employee: Drucker summed this pattern of classification

up by asserting that regardless of titles and position, the maximum number for an

organization to quality, as a small scale business should hardly exceed twelve (12)

fifteen (15) men. Why the bottom committee (BC) in their contribution says that a

small-scale in one with not more than three (3) persons.

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iv. According to Market Share: The bottom committee in one of its characteristics to

hard defining small scale and making it significantly different from large firms says

for an enterprise to quality as small it must have a relatively small share and its

owners or part owners must also be its customers.

v. Other forms of classification according to Ani includes total asset of firm, type of

industry, relative position of firm within its industry or a combination of two or more

of the above criterion.

2.6 Factors That Affect Small Scale Business

The problems facing small-scale enterprises can be categorized conveniently as

financial, managerial, technical, commercial and infrastructural. The financial problems

have their origin in the humble circumstances of the small-scale industrialist and his

disabilities in making maximum use of the resources of the organized financial sector.

Another financial problem is the rigors bureaucratic red-tapirs involved in procuring

finance from banks and other government sources such that only the very preserving ones

can afford to go through. The situation assures wider dimensions that most small-scale

industrialists tend to use them as last resort.

Oghunbiyi (1999), also saw key problem facing most small-business in Nigeria as

that of lack of finance according to him, this lack is whether for the establishment of new

industries or to carry out expansion plans. The inability to attract financial credit has

stifled the growth of this sub-sector. In his view, commercial banks which were expected

to be the launch pad for the development of small-scale industries through the provision
23
of loans them. Stiff collateral security demanded by banks often means that small-scale

industrialists are unable to meet these provisions, consequently losing the chance to obtain

loans. In addition, high interest rates changed on loans scared off potential small-scale

entrepreneurs.

Banks on their own part, have argued that they are discouraged to lend to this sub-

sector since many potential and existing small-scale entrepreneurs draw up feasibility

reports that are not viable, lack managerial skill and do not maintain adequate finance or

accounting records about their business. High percentage of default on repayment of loans

is among the reasons that led to this sub-sector to be regarded as high risk for lending

purposes.

Klade (2001) added that commercial banks sometimes shun the small business owners

who on getting loan soon divert the finds into other used while they avoid the banks and

resist any investigation into their activities.

The problem related to management arises from the entrepreneur’s limited

education and training knowledge consists of facts and theories that enable people to

understand phenomena and to solve problem. A small-scale business owner who has not

acquired enough knowledge about business is likely to fail. Another management problem

is the refusal of these small-scale industrialists to team up and pool together available

resources, the lack of honesty and desire to develop self rather than business and the

import dependents nature of the business just as the large scale enterprises while the

24
technical ones are due to his limited know-how in project planning and appraisal and little

or no exposure to modern technology.

Vesper (1999) says that incompetence of management is another problem facing

managing a small business owner may know all the management principles and theories;

his management particle may jeopardize his business. He may not possess his leadership

qualities, be willing to delegate responsibilities, lack appropriate human relation ability

and may not possess the appropriate skills of management. Such a business operated by

small-scale owners may likely to fail. Good management ability is pre-requisite for

success in both large and small business firms alike.

Concretely, this means skill in handling men, money and inventory along with the

ability to formulate wise policies, select proper method, merchandize aggressively and

created good relationship with employees, customers and the general public.

The commercial problems consist of his ability to organize market surveys and

product distribution channels. However, Osayi enumerated three major problems of small-

scale business in Nigeria as finance and financial control, managerial capacity and

capability as well as technology. Another contribution, Osayi was of the view that

“development institutions are often established in less developed countries to assist in the

development process. Specifically, they are set to provide financial assistance to

indigenous companies likely to face problems seeking capital. However, it could be seen

that the institutions have failed in performing this function effectively on why such a

failure was that the development institutions have contributed to the existing structural

25
imbalance by neglecting the most important industrial sector of the economy that is small-

scale industries.

Many of the small-scale units are undercapitalized. They are unable to raise fund in

this, they suffer from inadequate working capital resource. They are unable to arise fund

in the capital market because they cannot fulfil the conditions which to them are rather

costly, nevertheless, a case can made for shortage of finance as constituting a major

obstacle to the growth of a viable small-scale enterprises in Nigeria.

Owuola wrote that “undoubtedly, shortage of finance is not the only problem of

small-scale enterprises in Nigeria, others including unfavourable government regulation

and policies (such as biased and lack of necessary fiscal incentive) and relatively

unsophisticated management.

One of the most serious problems of inhibiting the location of small-scale industry

is the shortage of finance capital. The small-scale industry suffers from a market lack of

access to institutional credit. The main reason for this is that only of them have enough

assets to satisfy the collateral requirements of institutional lenders such a commercial

bank in view of this, the already set up industries find it difficult to expand, let alone

setting up new ones.

Another problem which prevents accurate assessment of the role played by small-

scale enterprises in the definition for instance, as the term of size of employment but

difference in factor proportion among establishment, the complexity of capital and the

26
type of organization are some of the considerations which reduce the operational meaning

fullness of the meaning.

Teriba and kayoed wrote that “small-scale enterprises are not properly assessed

because of their definition. Government funds are not limitless, in the face of competing

needs for government resources; sufficient funds are not always available to promote the

needs of small-scale business. Credit facilities allowed by

2.7 Source of Fund To Small Businesses Sources Of Initial Capital

Traditionally, and with regards to sources, two types of capital are recognized,

equity and borrowed. Baumback is the view that the distinction between equity and debt

capital in a small business is blurred. In any case, one thing is clear; equity financing

denotes ownership while debt financing implies an obligation to repay the principal

amount plus interest. In providing initial capital, a small business enterprise has a good

normal source open to it. These include funds invested by the owner as well as funds

made available by creditors. Credit takes from the bank loans, trade credit, union loans

from individuals, friends and relative and credit union loans. It is noteworthy that these

and other sources of funds are made use of both at the beginning stage and in the

subsequent day-to-day financing of business operations. Those more closely related with

the growth of the business will be discussed later under “sources of development capital”

[a] Personal saving: To a beginning firm, personal savings of the founder constitute a

primary source of equity capital. Many writers are in support of this view. Broom says it

is not only difficult but also quite hazardous to borrow venture capital. He is of the
27
opinion that two third of initial should be form the owner. Dr. Nordi advices that the

starting of small business should not only be from borrowed funds if his personal

resources are inadequate. Baumback goes further to explain why initial capital should

necessary come form those who have created the business. He said that there is general

hatred for risk taking among human beings. The general public thus is usually hesitating

about investing in an unknown venture. Such recommended ownership equity is designed

mainly to provide a margin of safely for the new entrepreneur.

[b] Commercial Banks – commercial banks are a primary source for debt capital.

Although they tend to limit their learning to working capital needs of going concerns,

some initial capital dose some from this source. The commercial bank has considerably

changed from just supplying capital for an interest income to a more acceptable socio-

economic role. It has development”. Mr. Tina confirmed this when he said that have

increased the amounts given out for loans the 20 percent (proportion of deposits

government requires that should be set aside for small business loans are also given. One

of those is the installment loans which may not exceed certain amount. Such a loan is

repayable monthly or quarterly as prearranged but the maximum maturity period is one

year. Over draft for up to a period of two years is also given. In spite of the new interest in

small businesses, their problem with the banks has not changed. Their greatest problem is

to meet the requirement of the banks. The bank considers the mode and time of of

repayment of the principal amount plus the interest. Many small business may not be in a

position to start paying interest not to talk of the principal as and when due.

28
[c] Trade Credit- Credit – extended by suppliers’ plays an important role especially to the

beginning business. Trade credit tends to be widely used source of short tends funds to the

small firm. This according to Baumback often provides a major point of the small

business man’s working capital needs especially in the retail fields. The amount of credit

available to a particular firm depends upon the type of business and the supplier’s

confidence in the new firm. They extend credit more freely than the bankers.

Competitions for sales volume force them to reach out for new small and financially weak

customers by offering delayed payment. Even when such customer faulted in the credit

terms, the suppliers often hesitate to react for fear that they might loose a promising

customer.

[d] Friends and Relatives - very often, funds from friends and relatives are used to

supplement initial owner equity capital. This usually character as poor business practice

and in many cases based on erroneous assumptions may at times be necessary. This is

with cognizance of the fact that many and family owned. It should be noted that family

and business relationships are well as funds should not be mixed, if most desirable result

are be obtained. Loans from friends and relatives tend to create a highly personal

relationship such relationship may conflict with independence and business. The time for

the repayment of the loan may not be defined. Interest payment may be deferred too. But

the problem in these associates may feel it a duty to offer advice and even insist that

certain decisions be taken. These decisions may not be in harmony with the objectives of

the proprietor. However, this problem can be easily avoided. A business loan should be

taken as a business transaction and not a favour. In such case, the inexperienced
29
associate’s advice can be easily rejected. Terms of the loan should be clearly defined and

loans could be getting from lending institutions instead of from friends and relatives.

[e] Credit Unions – S. F. Arniel defined a credit union as “a group of people bound by

some intangible bond of association, perhaps the bond of the same employer, the same

religion, the same politics, the same profession, trade, hobby or the same type of

misfortune,” credit unions are cooperative that encourage saving and lending on attractive

terms. They also provide financial advice to members. The prime purpose of a credit

union is to teach thrift. People save with the credit union for various reasons. These may

include absence of banking house. The liberal lending polices of credit unions also attract

membership. Credit unions obtain most of their funds from savings of members. Many

small businessmen usually obtain loans which are eventually used up in business. Credit

unions thus constitute an important source of funds for small business especially in the

rural areas.

[f] Other Sources of Funds – in addition to the already discussed sources of funds for

initial capital, a good number of small businessmen still make use of some local sources.

Such include borrowings “isusu” (a group of persons who agree to make contributions

regularly). Members take turns to benefit from these contributions. Some of the funds got

from the “isusu” are used for small business operation.

2.8 Government Influence On Small Business Enterprises

Government tax policies generally make it difficult for the small businesses to exit.

In fact, government fiscal policies and the way they are designed are a major cause of
30
discontent among small businessmen. Tax problems of small concerns have not arisen

because the tax measures were directed at small business as such.

The central point is that the system weights disproportionately on them by virtue of

their sizes and character. Most businessmen fail to understand this and nurse the feeling

that government does not want them to survive.

This is wrong as the growth of small business organizations has become the concern of

many governments. In Nigeria, the government’s effort to promote small business was

materialized in national development plans. With the aid of international organizations, a

number of assistance centers to meet the technical and financial needs of small and

medium sized enterprises were created. To further show government interest emphasis is

laid on more effective use of the bodies responsible for the promotion and guidance of

small, and medium sized enterprises. These bodies include:

  The national directorate of employment

  Small industries corporation
  National economic reconstruction fund
  Nigeria industrial development bank
  The Nigerian Agricultural & cooperative Bank.

For such assistance to be given, the importance of the project has to be critically

confidence the socio-economic point of view. Obviously, there is evidence that with

proper guidance, most small scale industries that do not depend solely on personal income

have been known to have found it relatively easier to deal with these prescribed

government agencies than with the conventional profit oriented commercial and financial

institutions. But it has also been revealed that most of the small scale entrepreneurs have
31
not made use of these facilities because they are not equipped to deal with the

bureaucracies associated with procuring loans. This attitude of the small scale

entrepreneurs has the tendency of effect the efficiency of some of these lofty. Government

policies designed specifically for the growth of small scale business.

2.9 The Role Of Small Scale Business In The Development Of Nigeria Economy

Hardly, can any major industry succeed in isolation of the services and

contributions of small business enterprise. The relative strength of their importance and

role vary from one industry to another. In fact the importance of small scale business in

any economy cannot be over-estimated. Firstly, continuous growth in the economy of any

nation depends to a large extent on the start ups of small businesses. Even on a

recessionary economy, small scale enterprises are a legitimate and viable component in

any strategy for reconstructing the economy. Furthermore, it is emphasized that the small

scale enterprises make the possibility of the equitable distribution of national income

more realistic of providing employment opportunities on a large scale. By creating more

employment that help in mobilizing capital and human resources that would otherwise be

left idle.

Some small businesses no doubt, provide certain distinct services that in most cases

may not be matched success of large businesses. Implicitly, if the small businesses would

by and large find themselves over saddled with a myriad of activities that they would only

be able to manage minimally. The role of small scale businesses in the development of
32
Nigeria economy has made it very possible for firms to depend less on imported goods or

materials. They often rather depend on locally made machines and local raw materials as

inputs. One can buttress this point further by the fact that non dependence of small

businesses on imported raw materials as inputs leads to a reduction in the demand of

foreign raw materials thereby saving the foreign exchange earnings of the nation. Worthy

of mention also is the advantage of solving payment problems as a result of less

dependence on imported inputs. This has an attendant blessing of creating an interest in

the promotion or home made products. In this way small business ventures generate

revenues and strengthen the Nigeria economy.

Small industries have a shorter gestation period and as a result, yield quicker

returns on investment. They facilitate balanced industrial development in that only such

small scale ventures can easily be established in many rural areas. In this regard, that

present a potent means of reducing rural urban migration and its consequential urban

congestion, unemployment and other social vices. Small businesses also serve as a

training school for indigenous entrepreneurs and provide the opportunity for acquisition

of skills for a large number of workers. They facilitate a speedy development of Nigeria

economy.

2.10 Review of Empirical Studies

A key issue affecting the performance of the country’s SMEs is lack of easy access

to funds. In recent years, the federal government and the country’s Central Bank have

tried to alleviate the problems of funding by establishing many credit institutions with the

33
objective of improving access to finance by the SMEs. The most important of all these

problems is the financing problem. In Nigeria, about 80% of SMEs are rifled, because of

poor financing. The major challenge of financing SMEs lies in the lack of accessibility to

funds. The factors that are responsible for these poor financing are stringent conditions set

by financial institutions, lack of adequate collateral and credit information and cost of

accessing funds. Informal sources of finance still remain the major source of funding for

SMEs in Nigeria. This includes personal savings in addition to friends and family. The

formal financial institutions like Deposit money banks are still very unwilling to grant

credit to SMEs and the micro-finance banks have limited resources to go round. Other

challenges faced in financing SMEs in Nigeria are flabby fiscal and monetary measures,

implementation of high interest rate, high inflation rate and unstable exchange rate. All

these factors reduce the funding available for financing SMEs in Nigeria.

The SMEs face different challenges in the Nigerian economy and this caused a

large percentage of SMEs to die within their fifth year of existence and another smaller

percentage going to extinction within their sixth to tenth year, leaving only about 5% of

SMEs to survive and grow in Nigeria (Anthony, 2005). Key among this includes a lack of

focus, inadequate market structure, lack of succession planning, inexperience, lack of

proper records, lack of market for finished products and inability to separate business and

family finances among others. Some researchers held the believe that it is the uneconomic

deployment of available resources by the owners that caused inadequate access to funds

and that a lot of owners-managers- of SMEs take loans for business purposes but end up

34
using it for personal purposes such as marrying new wives or travelling abroad. This has

greatly affected the performance and the survival of SMEs in Nigeria.

35
 REFERENCES

Adelaja, O. (2003). Promotion of small scale enterprise and their contributions to the
economicgrowth.Retrived on February, 3, 2014, from www.nairaproject.com.
Asaolu, A. (2005). Promotion of small scale enterprise and their contributions to the
economicgrowth, Retrived on February, 3, 2014, from www.nairaproject.com.
Broom, H.N. and Longneeker, J.G. (1986), Small Business Management; Fifty Edition,
Ohio South Pub. Coy.
Harris,O. and Sauzer, D. (2006). The contribution of small scale industries to the
nationaleconomy, Standard research journal of business management, 1(2):60-71.
Mohammed, U. D., and Obeleagu-Nzelibe, C. G. (2014). Entrepreneurial Skills and
Profitability of Small and Medium Enterprises (SMEs): Resource Acquisition
Strategies for New Ventures in Nigeria. Proceedings of 25th International Business
Research Conference 13 -14 January, 2014, Taj Hotel, Cape Town, South Africa.
MOPFED Report, (2010). Performance and Contribution of Small Scale Enterprise in
Northern Uganda. Prime Journal of Business Administration and Management.
2:649-654.
Oluba, (2009). Small and medium enterprise and economic development, Pakistan Journal
OfBusiness And Economic Review, 2(1).
Oyeleran, O. 2012. Promoting Small and medium enterprise in Nigeria oil and gas
industry,European Scientific Journal. 9(1): 1 - 25

36
 CHAPTER THREE

METHODOLOGY OF THE RESEARCH

3.1 Introduction

This chapter focuses on the various methods and techniques employed by the

researcher collecting the data. This chapter therefore, deals with ways and methods by

which valid information on the subject matter of the research are collected, collated and

organized for proper analysis and interpretation.

It may be true that for any empirical study to be reliable and tue, such study must be

adequately supported with useful data. Against the backdrop, the researcher had decided

to state how a detailed step-by-step procedure which are employed in the research:

 Research design

 Data Collection

 Sampling Design

 Research Instrument

 Basis for selection samples

3.2 Area of Study

The SMEs used in the study were SME randomly drawn from three (3) local

government areas in Edo Central Senatorial District; namely, Esan West, Esan Central and

Igueben Local Government Areas. These local governments were chosen because they
37
constitute commercial areas and were identified to have high concentration of SMEs.. In

adopting a case study method in a research, the selection of the research site is most

important (Yin, 1994).

3.3 Sources of Data

The research employed two types of data in the course of this work. These are:

i. The primary data and

ii. The secondary data

3.3.1 Primary Data

This was collected the through responses from questionnaire and interviews 42

a. Questionnaire: A well-structured questionnaire was designed by the researcher for

service or an intermediate staff in the selected SME. The questionnaire was personally

presented to the respondents by the researcher. The questionnaire consisted of printed

questions in which the respondents have to fill in the answers. They researcher made use

of multiple choices in the questionnaire

b. Interview: The researcher also used oral/personal interview in collecting primary data.

This method served a very useful purpose in obtaining certain facts and data that were not

possible through the questionnaire method.

38
3.3.2 Secondary Data

The researcher also generated data from literature review from text books, and

journals including newspaper prints.

3.4 Research Design

In this research study, the researcher made use of both primary and secondary data.

Primary data were collected through a filed study of SMEs in Enugu urban. The

researcher also made use of personal interviews, observations and structured

questionnaires. This was to provide the researcher with information on the experience of

the customs in the SME industries. Additional information was gotten from management

journals, newspapers, magazines, write-ups, papers presented in symposia and also text

books. These sources make up secondary data and the research was designed in such a

way that points scores were awarded to respondents to know the performance of workers

in the selected SMEs in Enugu state. The workers from these SME industries were taken

as sample for study from the population. The data collected during the study were

analyzed with a view to establish how the performance of these workers contributes to

economic development of the country in their different industries.

3.5 Population of The Study

The population for this study was made up of different SMEs in three Local

Government Areas of Edo Central, Edo State. The population to be surveyed is made up

of SME workers. The universe of interest would comprise the totality of the SMEs and

their workers in Nigeria.

39
3.6 Sample Design and Determination of Sample Size

The sample size used in this study is 60 out of a population size of 70 using the

formula for the determination of the sample size from the population of the workers. To

get the sample size Taro Yamani method will be given:

n= N
1 + Ne2
Where:
n: Sample size
N: Population size
e: Level of significance (error)
1: A constant number
For the purpose of this study, our level of significance (e) = 5% or 0.05 that is 95%
confidence limit;

Since n = ?; N = 70 ; e = 0.05
Substituting the above values into the formula, we have that
n = 70
1 + 70(0.05)2

n = 70
1 + 70(0.0025)

n = 70
1 + 0.175

n = 70
1.175

40
 n = 60

The sample size of the population is 60 and the researcher issued the same number

of questionnaire to the staff of the SMEs to answer. The entire questionnaire issued to the

sample size was collected immediately because of the method of collection to determine

the minimum number of respondents from each of the section of work in the population.

3.7 Sample and Sampling Technique

A sample size of 60 respondents from various SMEs were selected for the study

made up of 3 managers and 57 staff of these SMEs. These are respondents involved in the

management and operations of these SMEs in the three local government covered in this

study.

In sampling technique, every member of the relevant population has an equal chance of

being selected and the probability of this selection is known, for example, if there are 70

staff of an organisation and each staff is qualified for selection, them the probability that a

particular staff will be selected is one out of 70.

The essential purpose of random selection is to avoid subjective bias arising from a

personal choice of sampling units. In simple random sampling, each member of the

population is given an equal chance of being selected.

3.8 Description of Instrument

41
 In view of the nature of the topic, it was realized that questionnaire would be the

main and the most appropriate instrument to use. Questionnaires are an inexpensive way

to gather data from a potentially large number of respondents. The researcher gave a

serious thought to the wording of individual questions. This was done to ensure that

respondents answer objectively to the questions in the questionnaire. The questions were

in closed or forced choice-format. In this closed format, respondents are forced to choose

between several given options. The closed or forced choice-format is easy and quick to fill

in. It minimizes discrimination against the less literate (in self administered questionnaire)

or the less articulate (in interview questionnaire). It will be easy to code, record, and

analyze results quantitatively and easy to report results (Leung, 2001).

3.9 Validity and Reliability of Instrument

Validity as used here is the degree or extent to which an instrument actually

measures what is it intended to measure. Therefore, an instrument is valid to the extent it

is tailored to achieve research objectives. Thus the instrument used for this research was

validated in a manner that will enable the researcher get information relevant to the

purpose and objective of the study.

3.10 Method of Data Collection and Questionnaire Distribution

Questionnaires sent out to respondents had a personalized covering letter explaining

briefly the purpose of the survey, the importance of the respondents' participation, who is

responsible for the survey, and a statement guaranteeing confidentiality. This cover letter

also expressed thanks to the respondents at the end. Questionnaires were self-administered
42
or read out by interviewers. Interview administered questionnaires were done face to face

(Leung, 2001). The self-administered questionnaires were cheap and easy to administer. It

preserved confidentiality and was completed at the respondent's convenience. It was

administered in a standard manner

The questionnaire of data collection was solely used. Therefore, a total sixty (60)

structured questionnaire of twenty-six (26) questions were administered among the

selected SMEs staff among. The questionnaires were personally distributed to the

employees by the researcher. The respondents were allowed three (3) days to respond to

the questions, after which the (questionnaire) were collected from the respondents.

However, some respondents returned their questionnaire the same day. The information

obtained through oral interview by the researcher was guided by interview guide where

the questions to be asked were listed so that the researcher won’t forget anyone.

3.11 Methods of Data Presentation and Analysis

There are various methods used in presenting data on a project. These various

methods are use of table, chart and graph but for the sake of this work, the researcher used

table to represent the data because of its preciseness. To facilitate accurate analysis of data

the researcher used percentage to analyze the data and chi-square will be used to test the

hypotheses. During the statistical test, a comparison is made between the expected

frequency and observed frequency.

CHAPTER FOUR

4.0 PRESENTATION, ANALYSIS AND DISCUSSION OF DATA

43
4.1 Introduction

The data collection for this study was done basically through the usage of questionnaire. A

population of 60 SMEs were targeted and copies of questionnaires were distributed. Out

of the 60 copies of questionnaires circulated, 51 were returned, representing about 85%

response rate. This response was deemed impressive.

4.2 Data Presentation and Analysis of Returned Questionnaires

Section A
Table 1: Nature of Organization
Option No. of Respondents % of
respondents
Private Limited Company 29 57
Public Limited Company 0 0
Partnership 5 10
Sole Proprietor 13 25
Family Owned Business 4 8
Total 51 100

As can be seen from table I, the bulk of the respondents SMEs are registered as Private
Limited Liability Companies. They accounted for 29 out of 51 respondents, representing
57%. None of the respondents were Public Limited Liability Company. It can be observed
that 13 respondents, representing 25% were Sole Proprietorship with 5 being Partnership.
The remaining 8% of the respondents SMEs were registered as family owned businesses

Table 2. Availability of professionals in managerial positions

Option No. of % of
Respondents respondents
Yes 24 47
No 27 53
Total 51 100
44
Record from this study shows availability of professional in managerial positions at

SMEs. It was gathered that a vast majority of respondents, comprising of 27 out of 51

respondents and 53% admitted that non-professionals held managerial positions at their

SMEs whereas 47% of respondents claimed that their SMEs were run by professionals.
Table 3. Qualification of management team
Option No. of % of
Respondents respondents
Senior Secondary School 3 6
certificates
HND 5 10
First Degree 26 51
MBA 17 33
Total 51 100

Table 3 showed the qualification of management team running the respondent SMEs. It

was also observed that majority of the respondents claimed that their management team

have a first degree, these number of respondents accounted for 51%. This was followed

by 33% whose management team had MBA degree. It was shown that 10% and 6% of

total respondents had management teams with HND and senior secondary school

certificates respectively.
Section B:
Table 4. Application for credit from a Bank
Option No. of % of
Respondents respondents
Yes 42 82
No 9 18
Total 51 100

45
The table above show the rate of application for loan or credit from banks. This study

show that 82% of respondents confirmed that at one time, they have applied for credit

from Bank or financial institutions, while the remaining 18% of respondents claimed they

never applied for bank credits.

Table 5. Refusal or Denial of credit from a bank
Option No. of % of
Respondents respondents
Yes 49 96
No 2 4
Total 51 100

This aspect of the study show the refusal and denial rate from banks to SMEs.

Furthermore, 96% comprising of 49 out of 51 respondents have had their application for

credit from bank denied.

Table 6. Reason Bankers refused offering loan
Option No. of % of
Respondents respondents
Default on previous loan 11 22
No Security to pledge 32 63
Too small equity base 3 6
Lack of experienced Management 5 10
Total 51 100

It was gathered from this study that, failure in providing security to pledge was the reason

for denial of bank loans for majority of the respondents, accounting for 63%. This was

followed by default on previous loan as claimed by 22% of the respondents. It was

observed that 10% of respondents had their loan denied due to lack of experienced

46
management, while the remaining 6% of respondent had too small equity base as reason

for bank loan refusal.

Table 7. Information requested by bank for loan

Option No. of % of
Respondents respondents
Collateral 19 37
Cash flow statement 10 20
Total Assets 2 4
Audited financial statement 17 33
(account)
Business plan 3 6
Total 51 100

The study also recorded that 33% of respondent claimed that banks requested for audited

financial statement before approval for loan. Similarly, 37% of respondents were as for

collateral by these banks. Cash flow statement was demanded from 20% of respondents

while 6% and 4 % of respondents were asked to provide business plan and total assets

respectively by the banks.

Table 8. Problem repaying a Bank loan
Options No. of % of
Respondents Respondents
Yes 37 73
No 14 27
Total 51 100

47
Table 8 showed if problems occurred during repayment of bank loan. It was recorded that

73% of respondents encountered problems repaying bank loans while the other 27% of

respondents didn’t find difficulty in paying back their loans.

Table 9. Source of problem
Options No. of % of
Respondents Respondents
Short duration 20 39
High monthly repayment amount 2 4
High interest rate 29 57
Low turnover 0 0
Total 51 100

This table above showed that 57% of respondents claimed that high interest rate was the

reason for failing to repay bank loans. It also showed that 39% felt short duration for

repayment was a problem. The remaining 4$ of respondents had high monthly repayment

amount as obstacle to repaying bank loans. Low turnover was never a problem for any of

the respondents

Table 10. Maturity period of the loan

Options No. of % of
Respondents Respondents
Up to 1 year 37 73
Up to 2 years 14 27
Up to 3 years 0 0
Above Three years 0 0
Total 51 100

48
In the above table, it was observed 73% of respondents had loans of maturing period up to

a year while 27% of respondents had their maturity period for two years. None of the

respondents had a maturity period for loan more than two years.
Table 11. Perceived lending rates
Options No. of % of
Respondents Respondents
Extremely High 36 71
High 13 25
Acceptable 2 4
Low 0 0
Total 51 100

The above table shows the opinion of respondents on the level of interest rates charges on

loans from the bank and non-bank financial institutions. 36 out of the 51 responses

received from participants saw the interest rates on loans to be extremely high. This

represented 71% of the total responses. 13 or 25% of the total respondent think the rates

are high with just 4% saying the rates are manageable.

Table 12. Finance for start up of business
Options No. of % of
Respondents Respondents
Personal Savings 19 37
Bank credit 7 14
Friends & Relations 25 49
Total 51 100

The above table shows the distribution of SMEs sources of funding in establishing their

businesses. It is clear from the table that 37% and 49% of the funds are generated from

49
personal savings and relatives and friend respectively with 14% of SMEs start-ups getting

their finances from the banks.

Table 13. Sources of funding for the business

Options No. of % of
Respondents Respondents
Bank loan 13 25
Personal savings 1 2
Retained profits 2 4
Private institutions 6 12
Family/friends 29 57
Total 51 100

Among the various sources in Table 13, 57% out of the total respondents ranked their

major sources of funding from family and friends followed by 25% getting their financing

from bank loans. The third ranked sources of funding for SMEs operation are from private

institutions with 12% and the fourth being retained profit with 4%. Personal savings was

ranked the fifth with 2% of respondents.

Table 14. Major constraint to the growth of SMEs

Options No. of % of
Respondents Respondents
Lack of finance 35 69
Competition 5 10
High interest on bank loans 9 18
Taxes 2 4
50
Total 51 100
Table 14 showed the major constraint to the growth of SMEs. It is a general knowledge

that SMEs encounter difficulties that affects the growth of their SMEs, hence the 69%

responses received attributed Lack of finance as reason for SMEs growth. This was

followed by high interest on bank loans accounted for 18% of the total responses as can

be seen in the above table. Competition as reason accounted for 5, representing 10%, and

Taxes accounting for 2 or 4%.

Table 15. Effect of Poor financing on SMEs productivity
Options No. of % of
Respondents Respondents
Agreed 46 90
Do not agree 5 10
Total 51 100

This part showed the effect poor financing on SMEs level of productivity. It was observed

that 46 out 51 respondents making up 90% of total respondents agreed that poor

financing is a major constraint to the growth of SMEs.

4.3 Testing of Research Hypothesis

The two-hypothesis stated in chapter one were tested as follows: the testing instrument to

be used is the chi-square(X²)

Hypothesis One

SMEs encounter numerous problems when accessing finance from financial institutions.

The respondents were asked if they were ever denied or refused credit from financial

institutions or banks.

Refer to table 5
51
Table 5. Refusal or Denial of credit from a bank
Option No. of % of
Respondents respondents
Yes 49 96
No 2 4
Total 51 100

This aspect of the study show the refusal and denial rate from banks to SMEs.
Furthermore, 96% comprising of 49 out of 51 respondents have had their application for
credit from bank denied.
From Table 5 we deduce Table 5.1 and 5.2

Table 5.1. Observed Frequency Used in Testing Hypothesis 1

Refusal or Denial of credit from a bank
Option Observed Frequency
Yes 96
No 4
Total 100

Table 5.2 Expected Frequency Used in Testing Hypothesis 1

Refusal or Denial of credit from a bank
Option Theoretical Frequency
Yes 50
No 50
Total 100

From here, we can combine the results of table 6.1 and table 6.2 to obtain table 6.3 as
shown below:

Table 6.3 Observed and Theoretical Frequency Used In Testing Hypothesis 1

Refusal or Denial of credit from a bank
Option Observed Frequency Theoretical Frequency
Yes 94 50
No 6 50
Total 100 100

52
We have to note that Chi-square is an important extension of hypothesis testing. It is used
when it is required to compare an actual/ observed frequency with a theoretical or
expected frequency.
The formula for the calculation of Chi-square (x2) is given by:
x2 = (fo-ft)2
ft
Where fo= observed frequency, and ft= theoretical frequency.
TESTING

We now state the null and alternative hypotheses and test accordingly.

H0: There are no difficulties faced by SMEs when accessing finance from financial

institutions

H1: SMEs encounter numerous problems when accessing finance from financial

institutions.

By computation, we have that Chi-square,

x2 = (fo-ft)2
ft
x2 = (94 - 50)2 + (6 - 50)2
50 50

= 38.72 + 38.72 = 77.44

Decision

The decision rule is to reject H o if the computed value of the test statistic is greater than
the critical value of the chi-square read from the table. Thus we reject the null hypotheses
(Ho) and accept the alternative hypotheses (H1)

Hypothesis Two

SMEs level of productivity is immensely affected by poor financing. The respondents

were asked if productivity of their SMEs were grossly affected by poor financing.
53
Refer to table 15

Table 15. Effect of Poor financing on SMEs productivity

Options No. of % of
Respondents Respondents
Agreed 46 90
Do not agree 5 10
Total 51 100

This part showed the effect poor financing on SMEs level of productivity. It was observed
that 46 out 51 respondents making up 90% of total respondents agreed that poor financing
is a major constraint to the growth of SMEs.
From Table 15 we deduce Table 15.1 and 15.2

Table 15.1 Observed Frequency Used In Testing Hypothesis II

Effect of Poor financing on SMEs productivity
Options Observed Frequency
Agreed 90
Do not agree 10
Total 100

Table 15.2 Expected Frequency used In Testing Hypothesis II

Effect of Poor financing on SMEs productivity
Options Theoretical Frequency
Agreed 50
Do not agree 50
Total 100

From here, we can combine the results of table 15.1 and table 15.2 to obtain table 15.3 as
shown below:

TABLE 15.3 Observed And Theoretical Frequency Used In Testing Hypothesis Ii

Effect of Poor financing on SMEs productivity
Option Observed Frequency Theoretical Frequency
Yes 90 50
No 10 50
54
Total 100 100

We have to note that Chi-square is an important extension of hypothesis testing. It is used

when it is required to compare an actual/ observed frequency with a theoretical or
expected frequency.
The formula for the calculation of Chi-square (x2) is given by:
x2 = (fo-ft)2
ft
Where fo= observed frequency, and ft= theoretical frequency.
Testing

We now state the null and alternative hypotheses and test accordingly.

HO: Poor financing does not affect productivity of SMEs.

H1: Poor financing does affect productivity of SMEs.

By computation, we have that Chi-square,

x2 = (fo-ft)2
ft
x2 = (90 - 50)2 + (10 - 50)2
50 50

= 32 + 32 = 64

Decision

The decision rule is to reject H o if the computed value of the test statistic is greater than

the critical value of the chi-square read from the table. Thus we reject the null hypotheses

(Ho) and accept the alternative hypotheses (H1)

55
 CHAPTER FIVE

5.0 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

A lot of findings were made in the course of carrying out this research work. They

are summarized thus.

Findings from this study show that greater percentage of SMEs are not managed by

professionals or managed by individuals lacking proper qualifications. Katindi et al.

(2007) concurs as they say business management information reduces information

asymmetry and a comprehensive business plan reduces risk perception and increases the

likelihood of getting loans. Shane and Stuart (2002) argue that inadequate managerial

skills are associated with small business venture failure. Report from this study have also

shown that SMEs rely on families and friends as source of funds following failure to

assess finance from financial institutions. This view is supported by Nyoni (2010) who

postulates that it is common for entrepreneurs to depend on personal savings, friends and

relatives to prop up their business. SMEs targeted in this study failed to meet up with

collateral requirements of financial institutions due to stringent or high interest rate. It can

also be summarized that denial of loans or credit, stringent policies from financial

institutions also contribute to financial challenges of SMEs. This observation is similar to

that of Kaufman et al (2003) who opined that cumbersome legal procedures and

unattractive tax regimes militates against the operations of SMEs in Africa. Findings from

56
this study showed that all the respondents had difficulties obtaining credits and loans from

financial institutions, this is partly down to government policy on SMEs.

It was decided from the hypothesis of the study, that SMEs encounter difficulties

assessing financial institutions and that poor financing affect SMEs productivity. This was

confimed by Ross (2005) and Daniels and Ngwira (1993) who opined that financial

challenges handicapped the operations of SMEs. Similarly

5.2 Conclusions

This study examined the challenges of financing small scale business enterprises in

Nigeria. Data were collected via questionnaire. They were analysed and represented by

chi square and percentage. The study revealed that that most SMEs were managed by

unqualified personnel. The responses indicate that SMEs were getting little financial

assistance from financial institutions hence also depended on family and friends for

financial sustenance. SMEs productivity were affected by poor financing.

5.3 Recommendations

In light of the above findings, the following recommendations are proposed:

Educational workshops and training should be organized by the government, banks or

other financial institutions for the SME operators to ensure efficient and effective

management of financial resources. Again lack of knowledge by most industrialists on the

activities and requirements of the established institution set up to help finance SME can

be eliminated through such education.

57
 The government should also make available enough loanable funds to the

institutions set up to help finance the small – scale industries. Again the government

should take bold initiative to introduce more financial schemes into the system with

appropriate policy objectives.

SMEs should engage government to formulate policies that enhance their business

operations. Entrepreneurs should undertake business management courses so that they

will appreciate the concept of running a viable business entity.

Government should take the lead in financing SME. A national policy for SME

including financing strategies should be formulated, implemented and monitored. It is

expected that the government should provide resources to create an incentive scheme for

financial institutions to make flexible loans available to SMEs in Nigeria

The insurance companies should be actively involved in SME financing by

providing credit guarantee for any credit delivery by the formal institutions. The insurance

companies must have a sense of partnership with the banks and SMEs in areas of credit

insurance and guarantee facilities.

The SMEs must keep proper accounting records so that when they approach

financial institutions seeking loans, they will be evaluated against their past performance

enhancing their chances of securing a loan. SMEs should network and pooling their

resources together as a way of circumventing the financial resource gap. SMEs to improve

on the quality of their products so as to penetrate new markets to make up for lost market

to cheap imported products.

58
5.4 Suggestion for Further Research

From this study, every aspect of SME financing could not be studied let alone

taking some of the core variables of the SME industry and subjecting them to a more

analytical study to determine the extent to which they can withstand competition using

quantitative methods. As a result this other appropriate variables such as profit of the

SMEs and viability should be taken into consideration to determine the exact effect of the

challenges they face. A further study on this regard would be appropriate

59
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Daniels, L and Ngwira A, (1993), ‘Results of a Nation-Wide survey on Micro, Small and
Medium Scale Enterprises in Malawi, GEMINI Technical Report No 53. PACT
Publications, New York.
Katindi , EG, Magembe BAS, Setebe, A, (2007). Lending decision making and financial
information, the usefulness of corporate annual reports to lender in Botswana. Msc
Economics and Finance, Gaborone University , Botswana
Kaufman, D, Kraay, A, and Mastruzzi, M, (2003). Governance Matters 111: Governance
Indicators for 1996-2002.
Nyoni, S, (2010). Small, Micro and Medium Enterprises (SMMES), Policy Strategy
Framework. Jongwe Printers, Harare, Zimbabwe
Pack, H, (1993).Productivity and Industrial development in Sub-Saharan Africa. World
development, 21(1). 121 - 153
Ramis (2002). The impact of management training on SME performance in Peru.
International Economic Review. Vol 159: 136-141
Shane, S and Stuart, T. (2002). Organizational Endowments and Performance of
University Start-ups”. Management Science, 48, 154-170.

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economicgrowth.Retrived on February, 3, 2014, from www.nairaproject.com.
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economicgrowth, Retrived on February, 3, 2014, from www.nairaproject.com.
Binks, M.R., Ennew, C.T. and Reed, G.V. (1992). Information Asymmetries and the
Provision of Finance to Small Firms. International Small Business Journal, 11(1).
35-46.
Broom, H.N. and Longneeker, J.G. (1986), Small Business Management; Fifty Edition,
Ohio South Pub. Coy.
Coleman, S. (2000). Access to Capital and Terms of Credit: A Comparison of Men and
Women-Owned Small Businesses. Journal of Small Business Management, 38(3).
37-52.
Daniels, L and Ngwira A, (1993), ‘Results of a Nation-Wide survey on Micro, Small and
Medium Scale Enterprises in Malawi, GEMINI Technical Report No 53. PACT
Publications, New York.
Harris,O. and Sauzer, D. (2006). The contribution of small scale industries to the
nationaleconomy, Standard research journal of business management, 1(2):60-71.
Katindi , EG, Magembe BAS, Setebe, A, (2007). Lending decision making and financial
information, the usefulness of corporate annual reports to lender in Botswana. Msc
Economics and Finance, Gaborone University , Botswana
Kaufman, D, Kraay, A, and Mastruzzi, M, (2003). Governance Matters 111: Governance
Indicators for 1996-2002.
Kombo, A., Justus, W., Murumba, N. and Makworo E. (2011), An Evaluation of the
Impact of Risk management Strategies on Micro-Finance Institutions’ Financial
Sustainability: A case of Selected Micro finance institutions in Kisii Municipality,
Kenya”. Educational Research, 2 (5) 1149-1153.
Mohammed, U. D., and Obeleagu-Nzelibe, C. G. (2014). Entrepreneurial Skills and
Profitability of Small and Medium Enterprises (SMEs): Resource Acquisition
Strategies for New Ventures in Nigeria. Proceedings of 25th International Business
Research Conference 13 -14 January, 2014, Taj Hotel, Cape Town, South Africa.
MOPFED Report, (2010). Performance and Contribution of Small Scale Enterprise in
Northern Uganda. Prime Journal of Business Administration and Management.
2:649-654.

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Nyoni, S, (2010). Small, Micro and Medium Enterprises (SMMES), Policy Strategy
Framework. Jongwe Printers, Harare, Zimbabwe
Oboh, G.A. (2004) Contemporary Approaches for Financing Micro, Small and Medium
Enterprises”. Conference on SME held at the International Conference Centre,
Abuja, Nigeria. 2-15.
Odeh, O. (2005). The Impact of Federal Government Reform Programme on the
Development of the SMEs Sector. A paper presented at the National Seminar on
“Facilitating Easy Accessibility to the SMEEIS Funds by SME operators. Lagos,
10 – 11.
Olajide, O.T., Ogundele, O.J.K., Adeoye, S.O. and Akinlabi, B.H. (2008). Small and
Medium Enterprises (SMEs): An Appropriate Medication for Nigeria’s Economic
Predicament in the Global Competitive Economy”. Akungba Journal of of
Management, 1 (1& 2). 173-193.
Oluba, (2009). Small and medium enterprise and economic development, Pakistan Journal
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Oyeleran, O. 2012. Promoting Small and medium enterprise in Nigeria oil and gas
industry,European Scientific Journal. 9(1): 1 – 25.
Pack, H, (1993).Productivity and Industrial development in Sub-Saharan Africa. World
development, 21(1). 121 - 153
Ramis (2002). The impact of management training on SME performance in Peru.
International Economic Review. Vol 159: 136-141
Shane, S and Stuart, T. (2002). Organizational Endowments and Performance of
University Start-ups”. Management Science, 48, 154-170.
Tolentino, A. (1996), Guidelines for the Analysis of Policies and Programs for Small and
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62
 APPENDIX A

Department of Business Administration,

Ambrose Alli University,
Ekpoma,
Edo State

Dear respondent
This questionnaire is design and meant for collecting statistical data for a research
work “The Challenges of Financing Small Scale Business Enterprises”. This is in partial
fulfilment for the award of MBA (Management) degree in the Department of Business
Administration, Ambrose Alli University, Ekpoma. You are please required to tick where
appropriate. Be rest assured that all information provided by you will be handled with
utmost confidentiality.
Yours faithfully

Esther Ekhoye
SPS/BUS/MBA/04166

63
 APPENDIX B
QUESTIONNAIRE
Section A: General information of the company/Business Enterprise

1.Name of organization/Enterprise: …………………………………..

2. Nature of Organization. ( Please tick as appropriate)
i. Private Limited Company
ii. Public Limited Company
iii. Partnership
iv. Sole Proprietor
v. Family Owned Business
3. Nature/Kind of organization (please tick as appropriate)
i. Retail trading
ii. Export
iii. Manufacturing
iv. Services
4. For how long has your company been in operations (please tick as appropriate)
i. Less than one (1) year
ii. Between 1 and 5 years
iii. Between 6 and 10 years
iv. Between 11 and 15 years
v. Over 15 years
5. How many people are employed by your company
……………………………………..
6. Do you have professionals in managerial positions in your company?
i Yes
ii No
7. What is the qualification of your management team
i. Senior High School certificates
ii. HND
iii. First Degree
iv. MBA
v. Other (Specify)……………………………………………

Section B: The following questions relate to the financing issues of your company: the
difficulty in accessing credit, options your company is resulting to and future of your
business.

8. Has your company ever applied for credit from a Bank? Yes / No
9. If No, why not?
64
(i) Do not like Bank Loan
(ii) Interest Rate too high
(iii) No collateral to pledge
(iv) Others (specify) …………………………
10. How do you rate your relationship with your bankers?
i. Excellent
ii. Good
iii. Average
iv. Poor
11. Have you ever been refused or denied credit from a bank? Yes / No
12. What was the main reason your Bankers refused offering you loan?
(i) Default on previous loan
(ii) No Security to pledge
(iii) Too small equity base
(iv) Lack of experienced Management
13. What was the purpose of the loan?
i. Startup capital
ii. Working capital
iii. Expansion of business
14. What information did your bank asked for? ( tick all that apply)
i. Collateral
ii. Cash flow statement
iii. Total Assets
iv. Audited financial statement (account)
v. Business plan
15. Have you ever had problem repaying a Bank loan? Yes / No
15. If yes, what created the problem?
i. Short duration
ii. High monthly repayment amount
iii. High interest rate
iv. Low turnover
17. What was the maturity period of the loan?
i. Up to 1 year
ii. Up to 2 years
iii. Up to 3 years
iv. Other (specify)………………………..
18. How did you find the lending rates?
i. Extremely High
ii. High
iii. Acceptable
iv. Low
19. What percentage of interest is on the loan?
i. Less than 20%
65
ii. 21 – 30%
iii. 31‐40%
iv. Above 40%
20. How did you finance the start up of the business?
i. Personal Savings
ii. Bank credit
iii. Friends & Relations
iv. Others (Specify)……………………………………………….
21. What are your sources of funding for the business?(tick all that apply)
i. Bank loan
ii. Personal savings
iii. Retained profits
iv. Private institutions
v. Family/friends
22. In your opinion, what are the major constraint to the growth of your company?
(tick all that apply)
i. Lack of finance
ii. Competition
iii. High interest on bank loans
iv. Taxes
23. Have you accessed credit from other sources other than a bank? YES / NO
24. If Yes, Where?
i. Microfinance institution
ii. Microfinance and Small Loans Center
iv. Others (Specify)………………………………….
25. Would you say the nature of requirements demanded by these institutions is less
stringent? YES / NO
26. What information was requested? ( tick all that apply)
vii. Collateral
viii. Cash flow statement
ix. Total Assets
x. Audited financial statement (account)
xi. Business plan

66