1.1 Background to the Study
The Nigerian government had in recent past deepened her drive towards revamping the Small and Medium Enterprises (SMEs) sub-sector. The enthusiasm that greeted the 1989 industrial policy was to the extent that the policy was often desirable as representing the beginning of a comprehensive and systematic approach to Nigeria's industrial development through SMEs (Oesterdickhoft, 1991).
Previous initiatives designed to assist small and medium scale industries in Nigeria include, mandatory minimum credit allocation by banks to small scale enterprises, and micro finance have not yielded any reasonable result (Uche-2007).
The Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) was also formed with a view to facilitating access to credit, technology and market for the SMEs. The participating banks are expected to liaise with SMEDAN. This is in consonance with the adoption of private sector-led development strategy. It is therefore expected that the flow of funds to this vital sub-sector of the economy will increase.
The extent to which the opportunities offered by SMEs are exploited and their contributions maximized in any economy depends on the enabling environment created through the provision of requisite infrastructures. These include roads, telecommunications, power, ports, finance facilities, and the introduction and pursuit of policies such as concessionary financing to encourage and strengthen their growth (Adeolu, 2002).
The government has to begun to address the financial constraints that impede the growth of SMEs by taking the following steps: Merge all SME/Industry financing agencies comprising the Nigerian Bank for Commerce and Industry (NBCI), NERFUND, and the Nigerian Industrial Development Bank (NIDB) into one agency – The Bank of Industry - to administer loan schemes to SMEs at lower than commercial rates. Set up a Small and Medium Industries Development Agency (SMIDA), an umbrella agency to coordinate the development of the SME sector. Establish a National Credit Guarantee Scheme for SMEs to facilitate this access to credit without stringent collateral requirements. Revive the Entrepreneurship Development Programme. Increased budgetary allocations for SMEs development
SMEs are variously defined in Nigeria, as in other economies, on the basis of the size or amount of investment in assets, total annual turnover, and the number of employees. Within this framework, the classification of enterprises as 'medium' and 'small' naturally varies from one economy to another and from one period to another. In Nigeria, the National Council of Industry, under the Federal Ministry of Industries, periodically revises the classification of SMEs. Other institutions, such as the Central Bank of Nigeria and the Nigerian Association of Small Scale Industries (NASSI), adopt classifications that vary from those of the Federal Ministry of Industries. There is however, greater concurrence of opinion when it comes to defining SMEs in terms of assets' value than on any other basis. Because in case of an economic downturn, the impact on turnover and the number of people employed is greater than the impact on assets' value.
SMEs are divided into Medium Scale (MSE), Small Scale (SSE) and Micro Enterprises (ME). The Federal Ministry of Industries defines a medium scale enterprise as any company with operating assets less than 200 million, and employing less than 300 persons. A small-scale enterprise, on the hand, is one that has total assets less than 50 million, with less than 100 employees. Annual turnover is not considered in its definition of an SME.
Federal government of Nigeria has mandated banks to set aside 10 percent of their profit before tax for equity financing in SMEs through the Small and Medium Scale Industries Equity Investment The small and medium scale operators on the other hand, do not seem to understand the procedures to follow in order to access funds from the banks. Even when they do, the procedures are normally too cumbersome. A wide gulf is therefore created.
This study will, at the end lead to the identification of the basic challenges faced by the small and medium scale producers, the majority of whom still remain as only potential beneficiaries of both external and internal source of financing SMEs on the one hand, and measures that will ensure their survival as the future engines of growth in Nigeria.
1.2 Statement of the Problem
In the world over, small businesses face more constraints at start up developmental phases than when established (Ekpenyong 1992). In Africa, for example, the failure rate of SMEs is 85% out of every 100 companies due to lack of skills and access to capital (Fadahunsi, 1997). It is typical of SMEs in Africa to be lacking in business skills, track record and collateral to meet the existing lending criteria of risk-averse banks (World Bank, 2000). This according to World Bank has created a "finance gap" in most markets between US$50,000 to US$1 million. The small businesses are able to source and obtain micro finance mostly from the informal sector like friends and relations while large or medium enterprises, access these funds from banks. This unequal access to finance by SMEs and large enterprises has undermined the role of small scale business firms in the economic development of African countries at large and Nigerian economy in particular.
The problems of SMEs in Nigeria have been enduring but most of the reforms have exacerbated some of them (Jachson Ackah, 2011). As far back as 1977, the Federal Government in its publication 'Small Scale Industries Credit Scheme' identified the basic problems that affected SMEs to be lack of adequate capital and credit facilities for sustaining their growth and development (Ekpenyong, 1997; Utomi, 1997). Institutional credit was known not to be available to SMEs because they are generally considered high credit risks by financial institutions.
A widespread concern is that banking systems in the region (which suppose to be the major financier of SMEs) are not providing enough support to new economic initiatives and in particular to the expansion of SMEs and agriculture sector (Sacerdoti, 2005). It is therefore argued that faster economic growth will not be possible without a deepening of the financial system and in particular, more financial support from the banking sector to the SMEs (Rewilak-2019). It is noted that banks remain highly liquid in many countries and reluctant to expand credit other than to the most credit worthy borrowers which in most cases excludes the SMEs. While Micro Finance Institutions (MFIs) have expanded vigorously in a number of countries, the size of their credit remains limited, so that their support is not on the scale needed for many small projects.
1.3 The Research of problem
In view of the problems that the SMEs will have to contain within Nigeria, the following basic research questions are raised:
What is responsible for financial policy inconsistencies in the regulation and operations of SMEs?
What are the sources of funds available to the SMEs (both internal and external) in Nigeria?
What are the appropriate funding mechanisms for SMEs sustainability in Nigeria?
Are the available funds, accessible and affordable for the SMEs?
How can the constraints encountered by SMEs in the process of accessing funds be addressed?
1.4 Objective of the Study
The main objective of this study is to evaluate the funding arrangements available to SMEs in Nigeria. The specific objectives are to:
i. To determine the sources of funds available to the SMEs (both internal and external) in Nigeria
ii To harmonize appropriate funding mechanisms for SMEs sustainability.
Identify ways of improving credit availability and delivery to SMEs sub-sector
1.5 Research Hypothesis
(ii) Ho: Funding arrangements for SMEs in Nigeria do not contribute significantly to their growth and expansion
Hi: Funding arrangements for SMEs in Nigeria contribute significantly to their growth and expansion
1.6. Significance of the Study
The importance of funding arrangement available to the SMEs sector identifies the sector as the key to unlocking the economic potentials of Nigeria. Adopting this shows the relative process of industrialization which may be very compatible with the desire to “catch up” with the industrial countries.
1.7 Scope of the Study
The study evaluates the funding arrangements for SMEs in Nigeria with more focus on Benin City on Edo State with a view to explore a more sustainable way of credit delivery to SMEs in the State. The scope of this study spread across SMEs businesses across Nigeria especially in the business of furniture making, iron benders, poultry and fisheries, soap and detergent making among others.
1.8 Limitation of the Study
There are two variables that limit the scope of this work, which is controlled and uncontrolled variable, they include the followings:
a) Unavailability of formidable experts can be traced to the lack of competent management
b) Difficulties in accessing of loans through the new method has forced the owners into embarking in production with the use of substandard equipments
c) There is a negative impact from excessive competition on the results from sales been made therefore making it difficult to cope with rising competition in the industry.
d) Poor response from respondents
e) Bias on the part of respondent
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