CONTRIBUTION OF INSURANCE COMPANIES TO THE GROWTH OF SMALL AND MEDIUM BUSINESS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The insurance industry is a highly specialized industry that gives greater security to the fortunes of entrepreneurs and the whole society. It is one of the financial institutions in Nigeria today that could aid the growth of small and medium scale businesses. It is on this knowledge that Egeria (cited in Victor, 2013) describes insurance as handmade of commerce which plays a vital role in the going concern of humans (entrepreneurs) as an economic animal. Chikeleze and Echekoba (2008) defined insurance as a contract whereby one party, called the insurer, in return for a consideration, called the premium, undertakes to pay the other party, called the insured a sum of money or its equivalent in kind upon the happening of specified event that is contrary to the interest of the insured. Insurance represents a promise of future compensation relating to specific losses in exchange for periodic payments. Insurers are similar to banks and capital markets as they solve the need of business units and private households in financial intermediation (Victor, 2013).

The contribution of insurance industry to an economy‘s growth and efficiency is not the only entry point into its role in business development. The contribution of insurance to poverty alleviation and the welfare of the poor is also potentially of considerable importance. And also, case studies and other qualitative evidence make a persuasive case that the potential social value of insurance provision to the growth of small and medium scale business warrants a great deal of more experimentation with business models and products to develop scaleable approaches that combine commercial and philanthropic elements (Subba Rao and Srinivasulu, 2013).

The small and medium scale businesses’ contributions to economic growth and development have been recognized globally, Nigeria inclusive. Ofoegbu, Akanbi and Joseph (2013) agree that SMEs are the panacea for the economic development of many developing countries including Nigeria. They believe that interest on SMEs would contribute to creation of jobs, reduction in income disparity, production of goods and services in the economy, as well as providing a fertile ground for skill development and acquisition, serve as a mechanism for backward integration and a vehicle for technological innovation and development especially in modifying and perfecting emerging technological breakthroughs. SMEs contribute to improved living standards bring about substantial local capital formation and achieve high level of productivity and capability. SMEs are recognized as the principal means of achieving equitable and sustainable industrial diversification and dispersal.

Previous studies (Ogujiuba, Fadila and Stiegher, 2013; and Musa and Aisha, 2012) agree that SMEs account for well over half of the total share of employment sales and value added SMEs constitute the most viable and veritable vehicle for self -sustaining industrial development, as they possess the capability to grow an indigenous enterprise culture more than any other strategy. SMEs represent the sub sector of special focus in any meaningful economic restructuring program that targets employment generation, poverty alleviation, food security, rapid industrialization and reversing rural urban migration.

Micro-insurance for instance, covers a broad range of financial services including loans, deposits and payment services and insurance to the poor and low-income households and their micro enterprises. Insurance institutions have shown a significant contribution towards the poor in rural, semi urban or urban areas for enabling them to raise their income level and living standards in various countries (Sunitha, 2010). In summary, extending accessible insurance products to facilitate the growth of small and medium scale businesses should be a core part of the agenda of democratizing access to financial assets. When successful programs are taken to scale, it will not only add measurably to social welfare but also hold the promise of generating a more productive and higher growth mix of activities and investments – with a payoff perhaps greater than micro-credit.

1.2       STATEMENT OF THE PROBLEM

In Nigeria, one of the greatest obstacles that Small and Medium Enterprises (SMEs) have to grapple with is access to funds. This is further compounded by the fact that even where credit facilities are available, most SMEs may not be able to muster the required collateral to access such. This situation has led invariably to many of them closing shop, resulting in the loss of thousands of unskilled, semi and skilled jobs across the country. The presence of insurance companies is noted as a noble substitute for informal credit and an effective and powerful instrument for supporting SMEs entrepreneurs, who are economically active, but financially constrained and vulnerable in various countries.

Realizing the important role of insurance industry in supporting the growth of small and medium scale businesses, which is also seen as the engine of growth in the Nigerian economy, the government took some steps towards addressing the conditions that hinder their growth and survival. However, as argued by Ojo (2003), all these SME assistance programmes, whether in terms of insurance services have failed to promote the development of SMEs. This was echoed by Yumkella (2003) who observes that all these programmes could not achieve their expected goals due largely to abuses, poor project evaluation and monitoring as well as moral hazards involved in using public funds for the purpose of promoting private sector enterprises. Thus, when compared with other developing countries, Variyam and Kraybill (1994) observed that many programmes for assisting small businesses implemented in many Sub-Saharan African (SSA) countries through cooperative services, mutual aid groups, business planning, product and market development, and the adoption of technology, failed to realize sustained growth and development in these small enterprises. Among the reasons given were that the small-sized enterprises are quite vulnerable to economic failures arising from problems related to business and managerial skills, access to finance and macroeconomic policy.

Many of the studies on the contribution of insurance companies to business growth were done outside Nigeria. These studies particularly focus on large corporate entities. Research on contribution of insurance companies to the growth of small and medium scale businesses are very few. In Nigeria, most of the available studies on insurance and SMEs such as Terungwa (2012),Ofoegbu, Akanbi and Joseph (2013), Ogujiuba, Fadila and Stiegher, (2013), Musa and Aisha (2012) investigated both variables separately without linking them together. These researches were also theoretical studies whose findings were subjectively based on researchers’ personal opinions. It is noted that the past studies did not give attention to the link between insurance companies and growth of small and medium scale businesses in Nigeria, as well as highlighting effective policy recommendations that can stimulate the SMEs sector. Hence, the undertaking of this research work will fill in the gap by critically exploring the contributions of insurance companies to the growth of small and medium scale business in Nigeria with a special reference to small and medium scale businesses (SMEs) in Ojo Local Government Area of Lagos state.

1.3  OBJECTIVES OF THE STUDY

The major objective of this study is to examine the contributions of insurance companies to the growth of small and medium scale business in Nigeria. While other specific objectives are:

a. To examine the extent to which insurance companies support the growth of small and medium scale businesses in Nigeria

b.To determine the relationship between micro-insurance scheme and entrepreneurship development in the SMEs sector.

c.To assess the roles of insurance companies in managing risk in the SMEs sector

d.To find out the contribution of the insurance industry in financing SMEs in Nigeria

1.4  RESEARCH QUESTIONS

The undertaking of this research project will beam a searchlight on the following research questions;

1.To what extent does insurance companies support the growth of small and medium scale businesses in Nigeria?

2.What is the contribution of micro-insurance scheme to entrepreneurship development in the SMEs sector?

1.5   RESEARCH HYPOTHESES

The under listed hypotheses will be tested in the course of this research.

Hypothesis One:

Ho1: There is no significant impact of insurance companies on growth of small and    medium scale businesses in Nigeria.

Hypothesis Two:

Ho2: Micro-insurance scheme does not contribute to entrepreneurship development in the SMEs sector.

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