This research work is aimed at determining available options of financing small and medium scale enterprises in Nigeria, in order to contribute to economic development. The sources of data collection were through primary and secondary source. The primary sources were collected through the use and administration of questionnaire while the secondary sources were collected from relevant textbooks, journals and so on. The techniques applied in analyzing the data collected included simple percentage analysis. The results of the study showed that SMEs are mostly financed through informal sources like personal savings, loan from friends and family etc. Also we got to know that SMEs do not contribute too much to grassroot development due to the problems of financing. This research work ends with recommendation which if taken into consideration would act as a guide to individuals, organizations, and government that would like to establish SMEs in Nigeria.
- BACKGROUND OF THE STUDY
In our nation formative years, and prior to the advent of the colonial masters, self employment was the tradition. This later gave way to paid employment following our colonial domination by British. Dating back to pre-independence, no economic soothsayer could have predicted the economic situation that confronts us today. Pre-independence and during the early 70’s, Nigeria export economy was based centrally on agricultural output. Agriculture then was comprised approximately 84% of our export. Like the agricultural sector, nearly all businesses were small, extractive, cottage and handicraft, manufacturing, constructional activities and even personal.
In a depressed economy like Nigeria, effective and efficient operation of a small scale business as well as creation of conducive operating atmosphere for these set of business is the only path through which economic survival can be achieved.
In 1986, the government drew up the structural programme which was to be the engine of growth in the economy. Realizing that finance is the engine of business policies through national development plans and annual budget as well as through its agencies to fund and provide necessary extension services to small and medium scale enterprises. The federal government has actively been involved in the development of small and medium scale enterprise by initiating many programmes such as the setting up and funding of National Directorate of Employment (NDE) for the purpose of generating employment and initiating the setting up of small-scale enterprises. In Nigeria, about 60% of the population are illiterate while about 20% are semi-illiterate. This greatly affects the awareness towards business and even where they tried small business, the business collapsed due to inadequate knowledge. The federal government has changed the orientation of illiterate population through introduction of Better Life for Rural Dweller (BLRD).
Undergraduates are also encouraged to be self reliant through the incorporation of Entrepreneurship Development Programme (EDP) into the tertiary institutions’ curriculum of studies.
Another contribution of the government is the appropriate funding arrangement involving the community banks and the people’s bank that have been scrapped. The community banks operating in rural areas will be given tax incentives, more so in the 1977 budget, the sum of N4.3 billion was voted as a revolving loan for the rural development programme. This is because there are more raw materials at the local levels for the operations of small and medium scale business. The Family Economic Advancement Programme (FEAP) is also concerned with the exploitation of the potentials of the rural communities so as to improve their economic life through production activities.
Finance is the study of managing money. At the basest level this involves determining where to get money and what to do with it. Clearly, finance is central to a wide variety of jobs discipline and activities. Bankers, accountants, financial planners and many others make their living using financial concepts on a daily basis. Still, other uses the concept less directly, but benefit from an understanding of the basic. It is difficult to talk of any job that does not require at least some understanding of financial principles. Even an artist must price art fairly and deal with estimating cash flows.
Also to strengthen the importance of financing in small and medium enterprises (SMES) in Nigeria. It is not debatable that one of the most fascinating subjects in today’s Nigeria is the issue of money for any businessman which includes small and medium enterprises operator, one area of particular concern lies in the effective management of financial matters, the sources and uses of funds.
It should be noted that small and medium enterprises generally have weak capital base since majority of them are either sole proprietorship or partnership. They have no opportunity to draw money from the capital market as big companies do. Consequently the only option is to borrow money and often turns on unfavourable terms. Small and medium business rely primarily on owners equity, bank financing, trade credit and lease financing to finance their business.
However, in recent years, small and medium scale industries in Nigeria were being given increasing policy attention and financing incentives. But before going into source of finance, it is important that the potential investor has an idea of estimated level of fund needed for his particular type of business. He needs to count how much money of his own (equity) he is prepared to put into the business before he thinks of borrowing and other financial assistance. To this end, budget becomes an absolute necessity. Proper budgeting helps to ensure that proper control and evaluative procedure are established in a business.
Therefore, for every business organization be it small or large business, needs finance to carryout business obligations in terms of fixed assets to generate profit either on long run or short run. To manage business resource effectively and efficiently, every business organization needs financial managers or manager or the purpose of making some crucial decisions on investment, financing and dividend. But for the purpose of this research work, we are concerned mainly with financing decision in line with small and medium enterprises (SMES).
- STATEMENT OF THE PROBLEM
The following research questions would be relevant to the problems’ investigation.
- Are small and medium scale enterprises mostly financed formally by bank?
- Does government play any role in financing small and medium scale enterprises in Nigeria?
- Does small and medium scale enterprise play any significant role in grass-root development?
- Does small and medium scale enterprises have much option in financing their activities?
- OBJECTIVES OF THE STUDY
The objectives of the study would be:
- To find out whether small and medium scale enterprises are mostly financed formally by banks.
- To examine the relevance of small and medium scale enterprises in grass root development.
- To determine other sources of financing small and medium scale enterprises
- To ascertain the role of government in financing small and medium scale enterprises in Nigeria.
- RESEARCH HYPOTHESIS
Hypothesis 1: Are SMEs financed formally by banks?
Ho: SMEs are not financed formally by banks.
H1: SMEs are mostly financed formally by banks.
- SIGNIFICANCE OF THE STUDY
At the time of the nation’s quest for economic recovery and self reliance, the role of SMEs in our economy cannot be overemphasized. Hence, the financing sources of enterprises must be given major consideration before its initial take off. There is no doubt that the result of this would be useful to existing and prospective entrepreneur to discover the sources of finance available in Nigeria and to discover the true reason behind the failure of some businesses in order for them to avoid such problem in generating their own business.
The study will be of importance to the government, thereby giving a direct measure and power in financing SMEs. Thereby bringing about economic growth and reducing unemployment.
The study will be of utmost importance to banks and finance houses as reference framework in the formulation of their credit guidance towards the financing of SMEs.
In addition, it is of paramount importance to the others who will use it as a stock of knowledge for further research work and small and medium business operators who want to establish for efficient management planning and decision making.
- SCOPE/LIMITATION OF THE STUDY
It has always been a problem to SMEs in Nigeria to raise fund to either start a business or expand the existing business in Nigeria. This is largely due to ignorance on the part of the people who are interested in floating business especially small ones in Nigeria. For the re-occurring problem, we think it is necessary to bring the knowledge of those who are interested in float a business, various ways or source or means by which funds can be raised. Therefore, the scope of this research work will cover the various sources of funds available to SMEs in Nigeria.
Although, there are numerous SMEs in Nigeria, but for the fact that Benin is one of the business nerve of Nigeria, the scope would be restricted to SMEs in this area.
The limitation is the possibility of delay of respondents not giving correct information as required by the researcher. This will affect the validity of data collection. Moreover, it may not be possible to collect all the questionnaires distributed to respondent – considering the Nigerian factors, the desired personnel may also be hindered as a result of rivalry competition in the industry. Also, because a random sample method will be used to administer the questionnaires on individual business owners and government agencies, only a few representation of the population might be obtained.