PROMOTION OF SMALL SCALE ENTERPRISES AND THEIR CONTRIBUTION TO THE ECONOMIC GROWTH OF NIGERIA
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Small Scale Enterprises
BACKGROUND OF THE STUDY
Interest in the role of Small and Medium Enterprises (SMEs) in the development process continues to be in the forefront of policy debates in developing countries. The dynamic role of Small and Medium Enterprises (SMEs) in developing countries as engines through which the growth and development objectives of developing countries can be achieved has long been recognized and stated in the literature. The advantages claimed for Small and Medium Enterprises (SMEs) are various, including: the encouragement of entrepreneurship (Safiriyu and Njogo, 2012; Ayozie and Latinwo, 2010; Ayesha, 2007); the greater likelihood that SMEs will utilise labour intensive technologies (Aremu and Adeyemi, 2011; Salami, 2003; Muritala et al 2012) and thus have an immediate impact on employment generation (Ayozie and Latinwo, 2010; Etuk et al. 2014; Aigboduwa and Oisamoje, 2013; Udechukwu, 2003; Aremu and Adeyemi, 2011); they can usually be established rapidly and put into operation to produce quick returns; SMEs development can encourage the process of both inter- and intra-regional decentralization (Ogujiuba et. al., 2004); and, they may well become a countervailing force against the economic power of larger enterprises (Salami, 2003). More generally the development of SMEs is seen as accelerating the achievement of wider economic and socio-economic objectives, including poverty alleviation (Safiriyu and Njogo, 2012; Ayozie and Latinwo, 2010; Udechukwu, 2003). But in Nigeria, the sub-sector is still faced with a number of constraints with inadequate financial facilities as the principal constraint (Oduyoye et al, 2013).
Finance has been viewed as a critical element for the development of Small and Medium Scale Enterprises (SMEs). Previous studies have decried the limited access to financial resources available to smaller enterprises compared to larger organisations and the consequences for their growth and development (Gbandi and Amissah, 2014; Berger and Udell, 2004; Wattanapruttipaisan, 2003; Ogujiuba et. al., 2004 etc). Typically, Small and Medium Scale Enterprises (SMEs) face higher transactions costs than larger enterprises in obtaining credit (Lee, 2004). Poor management and accounting practices have hampered the ability of Small and Medium Scale Enterprises (SMEs) to raise finance (Lee, 2004). Information asymmetries associated with lending to small-scale borrowers have restricted the flow of finance to SMEs (Berger and Udell, (2004).
While finance is obviously not the only problem militating against the development of the Small and Medium Scale Enterprises (SMEs), it is certainly the most formidable (Lawrence, 2003). Firms depend on a variety of sources of financing, both internal and external. The relationships among these sources and their effects on investment, however, remain unclear in the literature. In the case of SMEs, bank credit or loan is major alternative of external funding (James and Ashamu, 2014). According to Valverde et al (2005) bank credit play a crucial role in providing external financing to Small and Medium Scale Enterprises (SMEs).
But in Nigerian context, this crucial source of finance for Small and Medium Scale Enterprises is apparently non-functional (Kadiri, 2012). This is evident in the ratio of loans to Small Scale Enterprises to Commercial banks’ total credit, which shows that a meager 0.13% of commercial banks’ total credit was granted to Small Scale Enterprises in the last quarter of 2013 (CBN, 2013). More worrisome is the fact that this ratio has been falling over the years and continued unabated in the post-consolidation era (Iorpev, 2012). Berg and Fuchs (2013) attribute this trend to the high interest rates on Government securities which serves as a disincentive to intensify lending to Small Scale Enterprises (SMEs). In the case of the Development Finance Institutions (DFIs), the cumbersome procedure and stringent requirements for obtaining loans often deter small business owners from approaching them for financial assistance. It is against this background that this study seeks to appraise the promotion of Small and Medium Scale Enterprises in Nigeria and to evaluate the role of same in economic growth and development.
STATEMENT OF THE PROBLEM
Several studies have identified financial constraint as the major obstacle to Small and Medium Scale Enterprises Development in developing countries including Nigeria. For instance, Adelaja (2003) argued that the access to institutional finance has always constituted a pandemic problem for SME development in Nigeria. He recalled that in the past, a number of schemes have been put in place to provide special credit lines/windows for SMEs but this achieved very limited impact. Agwu and Emeti (2014) examined the issues, challenges and prospects of Small and Medium Scale Enterprises (SMEs) in Port-HarcourtCity, Nigeria and found that that poor financing, inadequate social infrastructures, lack of managerial skills and multiple taxation were major challenges confronting SMEs in Port-Harcourt City. Also, ADB–OECD (2014) revealed that the 2008 global financial crisis impacted SMEs and entrepreneurs disproportionately, exacerbating their traditional financing constraints.
The primary focus of this study emanates from the fact that small scale enterprises owners do not have sufficient finance to carry on their due to the low saving culture of the people in this part of the world. The reason for this is not far fetch: low level of income basically. While it is an established fact that Small and Medium Scale Enterprises face financial challenges, no research has been conducted to investigate the effect the financial problem on their contribution to economic development.
Asaolu et al (2005) and many other authors and researchers have deduced that the financial challenges mar the developmental role of Small and Medium Scale Enterprises. But this may not be true especially in the case of Nigeria where the informal sector, which is constituted largely by the Small and Medium Scale Enterprises play a very important role in the development of the nation’s economy providing gainful employment for about 70% of the Nigerian population in spite of the exploitation of petroleum oil (Eniola, 2014). Therefore, this study seeks to evaluate the promotion of Small and Medium Scale Enterprises (SMEs) in Nigeria and their contribution to economic growth.
OBJECTIVES OF THE STUDY
The main purpose of this study is to identify and consequently analyze the most effective and efficient way through which Small and Medium Scale Enterprises could be financed and promoted.
In view of the above, the researcher intends to find out the following:
(i) The role played by government towards promotion and development of Small and Medium scale Enterprises (SMEs).
(ii) To examine the contribution of Small and Medium scale Enterprises (SMEs) to the economy of Nigeria.
(iii) To identify the financial constraints confronting the promotion of Small and Medium scale Enterprises (SMEs).
(vi) To find suitable strategies that will improve the development, growth and survival of Small and Medium scale Enterprises (SMEs).
The study would examine the following questions:
1. What is the trend of financial support given to SMEs in Nigeria?
2. What impact do Small and Medium Scale Enterprises make to Nigeria’s economic growth?
3. What contribution has the financial system made to the growth of SMEs in Nigeria?
4. How could the growth of Small and Medium Scale Enterprises be enhanced in Nigeria?
H0 – That there is no relationship between Gross Domestic Product and the operations of Small and Medium Scale Enterprises
(SMEs) in Nigeria.
H1 – That there is relationship between Gross Domestic Product and the operations of Small and Medium Scale Enterprises (SMEs) in Nigeria.
H0 – That there is no relationship between the loan granted to Small and Medium Scale Enterprises (SMEs) and the interest rate in Nigeria.
H1 – That there is relationship between the loan granted to Small and Medium Scale Enterprises (SMEs) and the interest rate in Nigeria.
This research work intends to find out the role of Small and Medium scale Enterprises in the Nigerian economy in the light of the financing challenges that they face. The research work aims at reviewing the relationship that subsists between banks financing of the Small and Medium Scale Enterprises and the impact of the same on the economic growth of Nigeria using Ordinary Least Square estimation method with data covering 1986 to 2013. The data to be used shall be collected from the Central Bank of Nigeria (CBN)’s Annual Statistical Bulletin of various years.
SIGNIFICANCE OF THE STUDY
Small and Medium scale Enterprises (SMEs) in Africa rely largely on own savings, not only to grow but also to innovate, firms often need real services support and formal finance assistance, failing which under-investment in long term capabilities (training and R&D) may result, (Oyelaran-Oyeyinka, 2003).
Besides finance, there are critical elements (including: knowledge, skills and experience of staff; capacity and quality of internal facilities; information and knowledge of market; intellectual and managerial leadership; external infrastructure and the incentive system at the micro and macro levels) that lacking within technology support institutions themselves. These undermine the effectiveness of their support to Small and Medium scale Enterprises (SMEs). This study is significant because it would help to evaluate the operations of a vital segment of the industrial sector – Small and Medium Scale Enterprises (SMEs) , which have been identified as having very high potential in promoting economic growth and development (Oni and Daniya, 2012). The evaluation shall be done with special focus on their financing thereby adding to the existing literature on the subject matter.
SCOPE OF THE STUDY
This research work focuses on the promotion of Small and Medium Scale Enterprises (SMEs) in Nigeria paying special attention to the impact bank credit on the development of Small and Medium Scale Enterprises. Although there are other types of banks that grant credit facilities to Small and Medium Scale Enterprises in Nigeria, the analysis in this study focuses on commercial banks only. The research intends to study the essential problems encountered by Small and Medium Scale Enterprises and suggest ways by which they can be adequately and efficiently financed.
Most of the information and data needed for the study would be gathered from existing literature and from relevant government agencies such as the Central Bank of Nigeria, National Bureau of Statistics (NBS) etc. The estimation period is restricted to the period between 1986 and 2013 due to non-availability of needed data.
PLAN OF THE STUDY
The study shall commences by providing a background of the subject matter justifying the need for the study in chapter one. Chapter two shall present related literature concerning Small and Medium Scale Enterprises (SMEs). The research methodology shall then be outlined in chapter three while the chapter four focuses on the data presentation and analysis. Concluding comments in chapter five shall reflect on the summary, conclusion and recommendations.
Adelaja B. O. (2003) Financing Small and Medium Enterprises under SMIEIS. Being a paper presented at Central Bank of Nigeria (CBN) Seminar on Small and Medium Industries Equity Investments, August. Lagos: CBN, no. 4, pp.100-114.
Agwu, M. O. and Emeti, C. I. (2014) “Issues, Challenges and Prospects of Small and Medium Scale Enterprises (SMEs) in Port-Harcourt City, Nigeria”. European Journal of Sustainable Development. Vol. 3, no. 1, pp. 101-114.
Aigboduwa, J. E. and Oisamoje, M. D. (2013) “Promoting Small and Medium Enterprises in The Nigerian Oil and Gas Industry”. European Scientific Journal. Vol. 9, no. 1, pp. 244-261. Small Scale Enterprises
Aremu, M. A. and Adeyemi, S. L. (2011) “Small and Medium Scale Enterprises as A Survival Strategy for Employment Generation in Nigeria”. Journal of Sustainable Development. Vol. 4, no. 1, pp. 200-206.
Asaolu, T. O.; Oladoyin, A. M. and Oladele, P.O. (2005) “A consideration of the problems and prospects of revitalising the Small-Scale Sector in Nigeria”. European Journal of Scientific Research. Vol. 7, no. 3, pp. 5-11.
Asian Development Bank and Organization for Cooperation and Development (2014) ADB–OECD study on enhancing financial accessibility for SMEs: Lessons from recent crises. Mandaluyong City, Philippines: Asian Development Bank. Small Scale Enterprises
Ayesha, B. (2007) Entrepreneurship Development for competitive Small and Medium Enterprises. Tokyo: Asian Productivity Organization. Small Scale Enterprises
Ayozie, D. O. and Latinwo, H. K. (2010) “Entrepreneurial developments and small scale industry contribution to Nigerian national development- A marketing interface”. Information Management and Business Review. Vol. 1, no. 2, pp. 51-68.
Berg, G. and Fuchs, M. (2013) “Bank Financing of SMEs in Five Sub-Saharan African Countries: The Role of Competition, Innovation, and the Government”. World Bank Policy Research Working Paper. No. 6563, pp. 1-20.
Berger, A. N. and Udell, G. F. (2004) A More Complete Conceptual Framework for SME Finance. In: Small and Medium Enterprises: Overcoming Growth Constraints World Bank, MC 13-121, October 14-15.
Central Bank of Nigeria (2012) Statistical Bulletin. Abuja: Central Bank of Nigeria (CBN).
Eniola, A. A. (2014) “The Role of SME Firm Performance in Nigeria”. Arabian Journal of Business and Management Review (OMAN Chapter). Vol. 3, no. 12, pp. 33-47. Small Scale Enterprises
Etuk, R. U.; Etuk, G. R. and Baghebo, M. (2014) “Small and Medium Scale Enterprises (SMEs) and Nigeria’s Economic Development”. Mediterranean Journal of Social Sciences. Vol. 5, no. 7, pp. 656-662.
Gbandi, E. C. and Amissah, G. (2014) “Financing Options for Small and Medium Enterprises (SMEs) in Nigeria”. European Scientific Journal. Vol. 10, no. 1, pp. 327-340. Small Scale Enterprises
Iorpev, L. (2012) “Does Bank Size Matter to Small and Medium Scale Enterprises (SMES) Financing In Nigeria?” International Journal of Business and Management Tomorrow. Vol. 2, no. 3, pp. 1-9.
James, S. K. and Ashamu, S. O. (2014) “Financial Structure Mix: Effect on Growth and Earning of Small and Medium Enterprises in Nigeria”. International Journal of Humanities and Social Science. Vol. 4, no. 4, pp. 132-137.
Kadiri, I. B. (2012) “Small and Medium Scale Enterprises and Employment Generation in Nigeria: The Role of Finance”. Kuwait Chapter of Arabian Journal of Business and Management Review. Vol. 1, no. 9, pp. 79-93.
Lawrence O. A. (2003) Critical Success Factors in the Implementation of SMIEIS. Being a paper presented at Central Bank of Nigeria (CBN) Seminar on Small and Medium Industries Equity Investments, August. Lagos: CBN, no. 4, pp. 86-99.
Lee, F. (2004) Financing innovative SMES in a global economy. In: 2nd OECD Conference of Ministers responsible for Small and Medium-Sized Enterprises (SMES) on Promoting Entrepreneurship and Innovative SMES in a Global Economy: Towards a more responsible and inclusive Globalisation, 3-5 June, Istanbul, Turkey: Organisation for Economic Co-Operation and Development (OECD).
Muritala, T. A.; Awolaja, A. M. and Bako, Yusuf. A. (2012) “Impact of Small and Medium Enterprises on Economic Growth and Development”. American Journal of Business and Management. Vol. 1, no. 1, pp. 18–22.
Oduyoye, O. O.; Adebola, S. A. and Binuyo, A. O. (2013) “Financing Small Business in Ogun State, Nigeria: the critical role of the Small And Medium Enterprises Development Agency of Nigeria (SMEDAN)”. International Journal of Accounting Research. Vol. 1, no. 1, pp. 32-43.
Ogujiuba, K. K.; Ohuche, F. K.; and Adenuga, A. O. (2004) “Credit Availability to Small and Medium Scale Enterprises in Nigeria: Importance of New Capital Base for Banks – Background and Issues”. AIAE Working Paper, pp. 1-25.
Omika, M. (2014) “Re-positioning Commercial Banks to enhance the productive capacities of Small and Medium – Scale Enterprises (SMEs) for Economic Growth of Developing Nations: A Focus on Nigeria”. International Journal of Public Administration and Management Research (IJPAMR). Vol. 2, no. 2, pp. 193-198.
Oni, E. O. and Daniya, A. A. (2012) “Development of Small and Medium Scale Enterprises: The role of Government and other Financial Institutions”. Arabian Journal of Business and Management Review. Vol. 1, no. 7, pp. 16-29.
Oyelaran-Oyeyinka, (2003) “Financing and Development of Small-sale industries in Nigeria”. Central Bank of Nigeria Economic and Financial Review. Vol. 24, no. 4, December. Small Scale Enterprises
Safiriyu, A. M. and Njogo, B. O. (2012) “Impact of Small and Medium Scale Enterprises in the generation of employment in Lagos State”. Kuwait Chapter of Arabian Journal of Business and Management Review. Vol. 1, no. 11, pp. 107-141. Small Scale Enterprises
Salami, A. T. (2003) Guidelines and Stakeholders Responsibilities in SMIEIS. Being a paper presented at Central Bank of Nigeria (CBN) Seminar on Small and Medium Industries Equity Investments, August. Lagos: CBN, no. 4, pp. 50-65. Small Scale Enterprises
Udechukwu, F. N. (2003) Survey of Small And Medium Scale Industries and their potentials in Nigeria. Being a paper presented at Central Bank of Nigeria (CBN) Seminar on Small and Medium Industries Equity Investments, August. Lagos: CBN, no. 4, pp. 6-18. Small Scale Enterprises
Valverde S. C., Fernandez F. R.and Udell G. F. (2005) Bank Market Power and SME Financing Constraints. Being a paper presented at the I Fall Workshop on Economics, October. Granada, pp. 1-62.
Wattanapruttipaisan, T. (2003) “Four Proposals for Improved Financing of SME Development in ASEAN”. Asian Development Review. Vol. 20, no. 2, pp. 1-45.