ABSTRACT
The dynamic role of small and medium scale enterprises (SMEs) in developing countries have been highly emphasised. These enterprises have been identified as the means through which the rapid industrialisation and other developmental goals of these countries can be realised. This paper looks at the features of small and medium scale enterprises (SMEs), it economic importance, the contributions of SMEs to the economy and makes useful recommendations.
CHAPTER I
INTRODUCTION
Background of the Study
Small and medium scale enterprises (SMEs) in developing countries have been seen as engines through which the3 growth objectives can be achieved (kayanula and Quartey, 2000). These enterprises have been identified as the means through which the rapid industrialization and other developmental goals of these countries can be realized. Within the context of this research undertaking, small and medium scale enterprises are generally identified with the following variables; capital investment (fixed assets), annual turnover, gross output and employment (Osuala, 2000). He stated that the classification of enterprises as ‘medium’ and ‘small’ varies from one economy to another and from one period to another in the same economy.
Defining small scale enterprise, Adekunle (2005) viewed small scale enterprises as those enterprises with total cost inclusive of working capital but excluding cost of land
,of above N 1 million and having manpower strength (labour size) of 11 and 35 workers. Similarly , he viewed medium scale enterprises as those having labour strength of between
36 and 100 workers and total cost inclusive of working capital but excluding cost of land s of N40 million. Osuala, (2004), also defined small and medium scale enterprises using the number of employees criterion as those enterprises whose number of workers ranges from
5-300 workers. Also using the same criterion (number of workers) UNIDO in the 1990s defined SME for developing countries as those enterprises with workers ranging from 5-
99 workers.
The Central Bank of Nigeria (CBN) defined small and medium scale enterprise (SME) as any enterprise with a maximum asset base of N200 million, excluding land and working capital, with number of staff employed by the enterprise of not less than 10 and not
more than 300 (Osuala, 2004). This definition is considered most appropriate because it highlights certain salient elements considered essential for this study. Such elements include asset base, and the number of employees.Osuala (2004) emphasized that the number of employees is the most frequently used criterion.
Small and medium scale enterprise in Ebonyi State are classified under the following sectors: mining and agriculture, manufacturing, wholesaling, retailing, service industries, finance and insurance, construction, transportation, communication and utilities. Each classification is made up of different types of small and medium scale business activities in Ebonyi state.
Mining and agriculture include such business activities as quarry, crop farming, piggery farming, and poultry farming. These enterprises also engage themselves in mineral deposits, which they extract and put into use.
Manufacturing activities in Ebony state comprises such areas as printing, furniture works, steel fabrication, and garri processing industries. Wholesaling, which has been expanding rapidly in recent years in Ebonyi state serves as a critical link in the chain between producers and ultimate consumers. In Ebonyi state, their activities include distribution of spare parts, pharmaceuticals, foodstuffs, rice and yam, clothing materials and so on.
In Ebony state, retailing activities constitute a reasonable percentage of small scale enterprise. Retailing covers such items as clothing materials, food stuffs, spare parts, books, petrol, drugs, furniture stores, electronics and it is found everywhere in the state since it is the most prominent of all the sectors.
Service industries cover such areas as medical attention, overnight accommodation, private education, repairs, laundering, hair salons, accounting firms, catering, electricity, plumbing, tailoring among others.
Finance and insurance covers such traceable areas as mobile bank, money lenders, savings and loan firms, agents, selling agents, and many others.
Construction industries covers such businesses as architecture, electrical works, painting, surveying, plumbing, and general contracting.
In the area of transportation, communications and utilities, their business activities include buses and taxis that ply within and outside Ebonyi state, local radio stations, courier services. However, all these businesses are in traceable positions as Ebonyi State is still a growing state except for retailing that is deeply rooted.
The role of small and medium scale enterprise in Ebonyi state can not be over emphasized. Kayanula and Quartey, (2000), contend that small scale rural and urban enterprises have been one of the major areas of concern to many policy makers in an attempt to accelerate the rate of growth in low income countries. They stated that these enterprises have been recognized as the engine through which the growth objectives of the developing countries could be achieved. They are potential sources of employment and income generation in developing countries like Nigeria viz-a-viz Ebonyi State.
Narrowing down to Ebonyi state, people are compelled to channel their financial resources into business in other to satisfy their various needs and contribute to the growth of the economy through buying, selling and other small and medium scale investments in Ebonyi state. Many youths in Ebonyi state (educated and non educated) have joined small and medium industrialists and retailers as apprentice, artisans and traders. This serves as a means of skill acquisition. Through the various economic activities performed by small and medium scale business operators in Ebonyi state, large quantities of goods and services are made available thereby raising the standard of living of the people. A higher output and better standard of living will be achieved in the state if effective financing is embraced. Finance is the crux of any business.
Small and medium scale enterprises (SMEs) in Ebonyi state are faced with a lot of financial constraints. According to Hornby (2003), constraint means a thing that restricts or limits something. Relating this to business constraints means the factors that limit the operation of business activities. The problems that militate against the operations of small and medium scale enterprises are referred to as constraints to small and medium scale enterprises (Osuala, 2004).
Small and medium scale enterprises in Nigeria vis-à -vis Ebonyi state are faced with a lot of constraints, which inhibit its effective financing. These constraints include fluctuating and prohibitive interest rates which are characterized by mischievousness of banks; ineffectiveness of development finance institutions which is characterized by ill equipped and managerial inefficiencies; personal saving, characterized by Nigerians’ poor saving culture; inadequate information on the sources of funds which is characterized by limited knowledge on marketing, sources of finance and management of an enterprise; poor financial management practices which is characterized by poor record-keeping; and many other financial constraints.
The Nigerian Industrial Development Bank was established in 1964 under the first National Development plan to provide medium and long-term loans and equity investment to industries in Nigeria. The Nigerian bank for commerce and industry (NBCI) established under decree 22 of may, 1973 was mainly to provide financial services to indigenous small and medium business operators especially to buy shares of companies affected by indigenization decree, 1972. The Nigerian Agricultural Bank was established to make loans available to agricultural ventures including small and medium scale agriculture (Nnanna, 2001).
Small and medium industries Equity Investment scheme (SMIEIS) was approved on December 21, 1991 to assist in providing fund for SMEs. Others include SME Manager
Limited (SML) established to provide equity investment in Nigeria small and medium scale enterprises (SMEs), Bank of industry, the New partnership for Africa Development (NEPAD) (Nigeria business info, 2003.)
In December 2000, a new measure was adopted by the bankers’ committee and officials of Central Bank of Nigeria (CBN) to float a scheme in an effort to reinvigorate the ailing sector by providing funds to SMEs, mandating banks to identify, develop and package successful business with enterprising owners. Through the scheme, banks are expected to initiate and start the real sector of the economy by leading the restructuring and financing of SMEs. This would be achieved when banks set aside ten percent (10%) of their profit before tax to specifically fund small and medium scale enterprises. With all these bodies and agencies, Agu (2001) is of the opinion that a steady growth starting from the establishment point should be maintained. A pertinent question remains as to whether this has always been the case.
This study intends to identify the constraints to the effective financing faced by small and medium scale enterprises (SMEs) in Ebonyi state, with a view to making recommendations to the government.
Statement of the Problem
Small and medium scale enterprises in Nigeria, particularly in Ebonyi state, have been facing some set -backs. These set backs could be attributed to poor managerial skills, inadequate access to credit and other financial services from formal financial institutions, difficulty in acquiring machinery, poor policy implementation among others (Adekunle,
2005). Among all these problems, financing constitutes the greatest impeding factor in the growth of SMEs in Nigeria vis-Ã -vis Ebonyi State.
Osuala (2004) lamented that although commercial banks through small and medium industries equity investment scheme (SMIEIS) has been directed to set aside 10 percent of their profit before tax to specifically fund SMEs; the money has not been directed appropriately to SMEs by the banks. Fund sourcing has been a major problem to small and medium scale enterprise in Ebonyi state particularly when it involves the organized financial institutions, hence effective financing for optimal developmental goals has not been achieved.
Identifying the constraints to effective financing of small and medium scale enterprise is an important step towards achieving economic growth through SMEs. In Nigeria, most new small business enterprises are not very attractive prospects for banks as they want to minimize their risk profile (Nigeria Business info, 2003). Nnanna (2001), stated that recent studies by the United Nations Development Programme (UNDP) and the Federal ministry of Industry (FMI) revealed that 1036 out of the 1498 SMEs (or
69.2%) surveyed were funded by personal savings and only 3.6 percent obtained credit facilities from banks. Osuala (2004), maintained that finance is a major problem to SMEs. He stated that other problems to SMEs include poor capacity building, weak competitive advantage, shortage of technical expertise, vulnerability to dumping of foreign goods and others. These constraints have created room for unemployment, poor standard of living, prostitution, child-trafficking and many other economic and social vices. SME operators are immensely affected as they depend on the success of their business for survival.
Small and medium scale enterprises are not thriving well in Ebonyi state. Their growth appears to be stunted while many are closing down at an alarming rate; hence the researcher intends to identify the constraints to effective financing of small and medium scale enterprises in Ebonyi state, Nigeria and make recommendations.
Purpose of the Study
The major purpose of this study was to identify the constraints to effective financing of small and medium scale enterprises in Ebonyi State, Nigeria.
Specifically, the study sought to determine:
1) the extent to which high interest rate affects small and medium scale businesses in Ebonyi State.
2) contributions of Development Finance Institutions (DFI’s) in Ebonyi
State.
3) extent to which personal savings affect small and medium scale enterprises in Ebonyi State.
4) extent to which inadequate information on sources of finance affect small and medium scale enterprises in Ebonyi State.
5) extent to which poor financial management practices affects small and medium scale enterprises in Ebonyi State.
Significance of the Study
This study would be significant in the following ways:
The small and medium scale business operators will appreciate the need to undertake brief feasibility studies in order to have clearer focus of the nature and scope of the business and the caliber of personnel to be employed before embarking on such venture.
The information generated from this study will assist those intending to go into SME in identifying these possible constraints to effective financing and be able to make accurate forecast for their future business operations.
The identification of these constraints would enable the owners of enterprises and their managers to improve on their methods of sourcing funds for effective financing of their enterprises in Ebonyi State.
Small and medium scale enterprises operators and managers in Ebonyi State will modify their methods of production and services to enhance better quality of products, thus, increasing higher demand for their products by the consumers.
Identification of constraints to effective financing of SMEs will assist operators and managers to map out better strategies for financial control as a means of eliminating or reducing the effects of these constraints.
The findings would guide Ebonyi State government in making policies that will improve the conditions of small and medium scale enterprises.
The general public will benefit from improved services of SMEs when all the identified problems must have been properly handled by both the government and small and medium scale business operators. There will be increased production and employment opportunities for the teaming unemployed youths.
Research Questions
The study was be guided by five research questions formulated based on the five specific purposes of the study:
1) To what extent does high interest rate affect effective financing of small and medium scale enterprises in Ebonyi State?
2) What are the contributions of Development Finance Institutions (DFIs) on effective financing of small and medium scale enterprises in Ebonyi State?
3) To what extent does personal savings affect effective financing of small and medium scale enterprises in Ebonyi State?
4) To what extent does inadequate information on the sources of finance affect effective financing of small and medium scale enterprises in Ebonyi State?
5) To what extent do poor financial management practices affect effective financing of small and medium scale enterprises in Ebonyi State?
Hypothesis
The following three null hypotheses were formulated to guide the study, and is tested at .05 level of significance.
Ho1: There is no significant difference in the mean response of proprietors and managers on the constraints created by high interest rates of banks.
Ho2: There is no significant difference in the mean response of proprietors and managers on the constraints inherent in sourcing finance through information by the small and medium scale enterprises in Ebonyi state.
Ho3: There is no significant difference in the mean response of proprietors and managers on the constraints inherent in personal savings by small and medium scale enterprises.
Delimitation of the Study
This study was delimited to small and medium scale enterprises in the three senatorial zones of Ebonyi state. The study was further delimited to proprietors and managers of these small and medium scale enterprises.
Limitations of the Study
The questionnaire was the major instrument for the collection of data for this study. It is anticipated that the respondents will be unwilling to answer the questions truthfully. This
may introduce some elements of biases and prejudice in the findings of the study. However, the biases and prejudices will not invalidate the findings of the study.
This material content is developed to serve as a GUIDE for students to conduct academic research
IDENTIFICATION OF CONSTRAINTS TO EFFECTIVE FINANCING SMALL AND MEDIUM SCALE ENTERPRISES IN EBONYI STATE.
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