ABSTRACT
This study, The Challenges Inhibiting SME’s in Accessing Credit in Financial Institution in Nigeria, was undertaken to examine the issues facing SMEs in Oyo State in their quest to accessing bank credit (loans) from financial institutions (banks & non– banks) to undertake various activities; be it general business operations or carrying out expansion project all in the name of fulfilling the objectives as being job creators and helping to reduce poverty. In tackling this topic, the quantitative approach was adopted. Questionnaires were circulated to 120 respondents in the Oyo State metropolis selected through a technique of convenience sampling. Based on the responses received through these questionnaires, the following major findings came to the fore. There are institutions such as bank and non-bank financial institutions that are willing to provide funds to SMEs but Nigerian SMEs are not able to meet the requirements of these financial institutions. Chief among these requirements is the issue of collateral, which most SMEs cannot provide. Aside this is the other issue of small equity base of these SMEs among others. Secondly, those who are able to access this credit are also faced with high interest rates and short repayment periods making it very difficult to embark on any developmental or expansion projects. Another interesting revelation with regards to the high rate of defaults in repayment of loans contracted, relates to the tight Cash flow situations of these SMEs that is mostly due to difficulties in the management of the account receivables of the respective SMEs surveyed. The study concludes with some recommendations to help free up capital or credit to the SME sector. Among the recommendations are encouraging financial institutions (banks & nonbanks) to establish factoring services, enforcement of the credit reporting act and finally provision of tax incentives for banks that lend to SMEs to encourage others to do same.
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TABLE OF CONTENTS
Page
Title Page………………………………………………………………………………………i
Declaration…………………………………………………………………………………….ii
Certification ……………………………………………………………………………………iii
Dedication………………………………………………………………………………………iv
Acknowledgements……………………………………………………………………………….v
Abstract ………………………………………………………………………………………..vi
Table of Contents………………………………………………………………………………vii
List of tables……………………………………………………………………………………x
CHAPTER ONE: INTRODUCTION
1.1 Introduction…………………………………………………………………………….1
1.2 Background to the study……………………………………………………………….3
1.3 Statement of the problem………………………………………………………………4
1.4 Objectives of the study………………………………….………………………………..5
1.5 Research questions……………………………………………………………………..5
1.6 Statement of the hypotheses…………………………………………………………..6
1.7 Significance of the study……………………………………………………………….6
1.8 Justification of the study……………………………………………………………….7
1.9 Scope of the study………………………………………………………………………7
1.10 Definitions of terms ……………………………………………………………………8
CHAPTER TWO: LITERATURE REVIEW
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2.0 Introduction……………………………………………………………………………10
2.1 Conceptual frame work…………………………………………………………………..10
2.2 Theoretical frame work…….…………………………………………………………….19
2.3 Literature on the subject matter……………………………………………………………22
CHAPTER THREE: METHODOLOGY
3.0 Introduction………………………………………………………………………………31
3.1 Area of study……………………………………………………………………………31
3.2 Research design ………………………………………………………………………..31
3.3 Population of the study…………………………………………………………………..32
3.4 Sample size determination………………………………………………………………32
3.5 Instrumentation………………………………..………………………………………..33
3.6 Methods of data analysis………………………………………………………………34
3.7 Limitations of the study………………………………………………………………..34
CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION
4.0 Introduction………………………….………………………………………………….36
4.1 Findings of the study ……………………………………………………………………36
4.2 Test of hypothesis.……………………………………………………………………….45
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CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 Summary of findings……………………………………………………………………50
5.1 Conclusion..……………………………………………………………………………54
5.2 Recommendations..……………………………………………………………………55
5.3 Proposal for further studies……………………………………………………………..57
References……………………………………………………………………………..58
Appendix……………………………………………………………………………….63
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LIST OF TABLES
4.1.1 Gender of the respondents………………………….…..…………………………………36
4.1.2 Age group of the respondents…………………….……………………………………..37
4.1.3 Level of educational of the respondents………………………..……………………….38
4.1.4 Forms of participant SMEs………………………………………………………………38
4.1.5 Distribution of nature/kind of organization…….……………………………………….39
4.1.6 How long the company has been in operation…………………………………………..40
4.1.7 What does the company deals in ………………………………………………………..40
4.1.8 Do you do annual budgets….…………………………………………………………….41
4.1.9 Have you ever engage external consultant services……………………………………..41
4.1.10 Has your company ever applied to borrow money from bank……………………………42
4.1.11 If not why not….…………………………………………………………………………42
4.1.12 What was the highest amount your company ever borrowed from a bank.……………..43
4.1.13 Have you ever had problem repaying a bank loan..………………………………………43
4.1.14 Is financing really a set back to the growth of your organization……………………….44
4.1.15 How have you been financing the operation of the organization………………………..44
4.1.16 Does your organization have a good business relationship with the bankers..…………..45
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4.1.17 Are you aware of the existence of other avenues of funding your business.…………….45
4.2.1 Computation of the 1st hypothesis..………………………………………………………47
4.2.2 Computation of the 2nd hypothesis..……………………………………………………..49
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LIST OF FIGURE
Figure 2.1: Conceptual Framework……………………………………………………………..14
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CHAPTER ONE
INTRODUCTION
On a global scale, small and medium-size enterprises (SMEs) have exerted much influence on social-economic development based on its outstanding contribution to employment and GDP growth. According to the Ministry of Trade and Industry of Oyo State, Nigeria, as at August 2011, figures from the Registrar General’s Department suggest that 88% of registered businesses in the country are in the small and medium-size enterprises sector of the Nigerian economy (Adjei, 2012). Based on this information, it can be said that the Nigerian economy is largely dependent on the SMEs sector, creating jobs for hundreds and thousands of Nigerians. Yet the full potential of the SMEs sector in Nigeria is still unrealized (Adjei, 2012; Adomako-Ansah, 2012).
To some writers (Cofie, 2012; Ahiawodzi and Adade, 2014), the SMEs sector can do better with respect to its current contribution to GDP growth. Invariably, the sector can grow faster and better contribute to employment in Oyo State. These arguments are indirect ways of saying that the sector is not realizing its full potential logically as a result of some constraints. Ackah and Vuvor (2011) are among several writers who have acknowledged that some of these constraints are challenges faced by SMEs in having access to credit facilities from financial institutions ( banks, micro-finance firms, savings and loans companies among others), which are the sector’s financiers.
In the microfinance and SMEs literature, several challenges are identified as militating against access to credit facilities among SMEs. Some of these challenges are: SMEs lacking collateral security; poor records keeping; poor credit rating as a result of poor savings history , and stringent lending criteria used by financiers (Ackah and Vuvor, 2011; Cofie, 2012). The fact is
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that small firms have been found to have less access to external finance and to be more constrained in their operation and growth (Galindo and Schiantarelli, 2003).
Small and Medium Enterprises (SMEs) are viewed as a key driver of economic and social development in the African context. They represent a large number of businesses in a country, generate much wealth and employment and are widely considered to be vital to a country’s competitiveness. SMEs are hailed for their pivotal role in promoting grassroots economic growth and equitable sustainable development (Pelham 2000). SMEs tend to be large in number, accounting for about 90 percent of all enterprises in many African countries and over 80 percent of new jobs in a given country (Reinecke, 2002).
In Oyo State, Nigeria the small business sector has both the potential and the historic task of bringing millions of people from the survivalist level including the informal economy to the mainstream economy. According to the last comprehensive survey conducted in 1999, the sector was estimated to employ over 50 percent of the working population (accounting for 2.3 million people). As much as majority of the SMEs in Nigeria operate informally, there are over 35,000 formal SMEs that employ over 40 percent of the working population.
Recognizing the critical role small businesses play in the Oyo State, Nigeria economy, the government through Nigeria Vision 2020 envisages the strengthening of SMEs to become the key industries of tomorrow by improving their productivity and innovation. However, it is generally recognized that SMEs face unique challenges, which affect their growth and profitability and hence, diminish their ability to contribute effectively to sustainable development. The International Finance Corporation (IFC) (2011) has identified various challenges faced by SMEs including lack of innovative capacity, lack of managerial training and that these and other challenges have been consistently found in researches conducted in both
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developed and developing country contexts, making them strongly confirmed constraints faced by SMEs in the global SMEs industry. However, these challenges have been found in previous studies (Adjei, 2012; Cofie, 2012) only from the perspective of SMEs. Zairani and Zaimah (2013) are of the view that this situation is unwholesome and poses a major gap in the literature because some of the challenges faced by SMEs in accessing credit are best identified from the viewpoint of financiers. Thus they contend that a holistic framework of challenges associated with access to financial resources among SMEs in any jurisdiction comes from two sets of people: (1) employees of financial institutions; and (2) SMEs (i.e. SME owners and employees).
1.2 BACKGROUND TO THE STUDY
According to African Development Bank Group Report (2012) Small and Medium Enterprises are the best candidates to achieve inclusive growth in Africa as they contribute significantly to the income generation and joint creation. However, financial access is consistently reported as one of the major obstacles to SME’s growth and development. Only 20 percent of African SMEs have a line of credit from a financial institution. There has been a growing recognition of the importance of the role that Small and Medium Enterprises (SMEs) play in the economic development globally and Nigeria in Particular. Small and Medium Enterprises (MSEs) are lifeblood of most economies. To be successful in this and other business sectors, finance plays a major role. As far as SMEs are concerned as part of business enterprises, they need finance to start up, expand, diversify and for working capital of the business firms. Without finance, no one business enterprise can achieve its objectives. Finance is the backbone of SMEs and any other business enterprise (McKernan & Chen, 2005). Both in the developing and developed world experience, inadequate education and skills, technological change, poor infrastructure, scanty market information and lack of access to credit.
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The catalytic roles of micro and cottage businesses have been displayed in many countries of the world such as Malaysia, Japan, South Korea, Zambia, and India among other countries. They contribute substantially to the Gross Domestic Production (GDP), export earnings and employment opportunities of these countries. SMEs have been widely acknowledged as the springboard for sustainable economic development (Osotimehin, Jegede, Akinlabi, & Olajide, 2012). Apart from the fact that it contributes to the increase in per capital income and output, it also creates employment opportunities, encourage the development of indigenous entrepreneurship, enhance regional economic balance through industrial dispersal and generally promote effective resource utilization that are considered to be critical in the area of engineering economic development (Oboh, 2004; Odeh, 2005).
1.3 STATEMENT OF THE PROBLEM
In almost all economies of the world especially in developing countries in Africa, micro and small enterprises are crucial and are a key factor for sustained growth and development. SMEs play pivotal roles in creating dynamic, market oriented economic growth, employing the growing workforce in developing countries, alleviating poverty and promoting democratization.
Though, small business owners often have more information about the potential of their own businesses, in some situations it can be difficult for business owners to articulate and give detailed information about the business as the financiers want (Aryeetey et al., 1994). In addition, some small business managers tend to be restrictive when it comes to providing external financiers with detailed information about the core of the business since they believe that information about their business may leak through to the competitors (Winborg and Landstrom, 2009).
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Lack of planning, improper financing and poor management have been reflected as the main cause of failure to small enterprises to obtain credit has been revealed by (Longenecker et al., 2006). This is yet to be evaluated in the context of a growing self-employment environment and SMEs platform such in Nigeria. Though shortage of credit facility has ever being identified as one of the most serious constraints, facing SMEs and hindering their development in Millennium Goals Reports.
1.4 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the challenges faced by SME’s in accessing credit in financial institutions of Oyo State. Others are:
i. To determine the accesses of finance/Capital which represent the greatest problem confronting SMEs in Nigeria
ii. To ascertain first hand, the opinions, feelings, and the pulse of some key SME operators as well as professionals in the SME sub-sector of the economy with respect to the unhealthy state of SMEs in Nigeria.
iii. To assess the top three greatest problems facing SMEs in Nigeria Management, Access to Finance/Capital and infrastructure in descending order of intensity
1.5 RESEARCH QUESTIONS
In view of the consequence of SMEs in obtaining credit facilities from financial Institutions, it is necessary to formulate some research question which will enable the researcher prefer solution to the identified problems.
i. What access of finance/capital does not represent the greatest problem confronting SMEs in Nigeria?
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ii. What management does not represent the greatest problem facing the manufacturing sub-sector of SMEs in Nigeria?
iii. What are the problems faced by SME’s in Nigeria Management, Access to Finance/Capital and infrastructure in descending order of intensity?
1.6 STATEMENT OF HYPOTHESES
In order to enable the researcher confirm the greatest drawback for SMEs in Oyo State, Nigeria and fully appreciate their respective relevant significance, he had to postulate the following hypotheses:
i. H0: Access to finance/Capital has no significant relationship with the greatest problem confronting SMEs in Nigeria.
ii. H0: Management has no significant relationship with the greatest problem facing the manufacturing sub-sector of SMEs in Nigeria.
1.7 SIGNIFICANCE OF THE STUDY
The study will be significant to the policy makers-especially in the Ministry of Industry and Trade to understand the challenges and prospects of enhancing SMEs to accessibility to financial credit not only Nigeria.
Additionally, to other researchers, the study will be useful since it will add knowledge to other researchers intending to study about SMEs financial credit accessibility, their strategies and operations. To Small and Medium Scale Enterprises, the present research will build an understanding of the challenges and prospects of SMEs in regard to financial credit markets. This will provide them with a high range choices, opportunities and knowledge of the challenges that are being faced by business entrepreneurs, especially the small and medium enterprises.
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The current study provides a way forward on how SMEs should be able to adapt themselves across changes in Nigeria and Global arena in this era of competitive business and economy. Furthermore the study germinates a clear view for researchers in the future to have a background for them to extend towards new frontiers of the study for the future-best of SMEs growth and operations.
Critical policy issues will benefit the current and future government and policy makers in understanding the challenges and needed solution for SMEs to serve socio-economic issues. To other sectors of the economy, a better understanding of SMEs and financial credit operations provide a chance for stakeholders and other sectors to utilize resources more rationally through linking the sectors of the economy efficiently. Oyo State, Nigeria needs SMEs for a common man livelihood and also linkage in the sectors development SMEs perspectives need to be understood clearly.
1.8 JUSTIFICATION OF THE STUDY
The outcome of this study will be a little guide for the SME’s on how to overcome the problem of accessing credits from financial institutions.
The research will also serve as a source base to other scholars and researchers interested in carrying out further research in this field in future. The study therefore will extend the frontiers of the existing literature by emphasizing the challenges inhibiting SME’s in accessing credit from the financial institutions in Nigeria.
1.9 SCOPE OF THE STUDY
The study focused on the study of challenges inhibits SMEs in accessing credit in financial institution in Oyo State, Nigeria which was used for the researcher’s analysis. All references therefore relate to Oyo States financial institutions in Nigeria. The structured questionnaire will
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be sampled in three (3) selected companies of SME’s in which One hundred and twenty (120) respondents will be administered. The collected samples will be analyzed with statistical package; secondary sources will also be used for review of related literature.
1.10 DEFINITION OF TERMS
Various bodies, organizations and institutions have defined SMEs differently depending upon their purpose, objective and use.
For this research, the following definitions have been adopted:
i. Micro Enterprise: A firm, whose total cost including working capital but excluding cost of land is not more than ten million naira (N10,000,000) and/or with a labour size of not more than thirty (30) full-time workers and/or a turnover of less than two million naira (N2,000,000) only.
ii. Small Enterprise: An enterprise whose total cost including working capital but excluding cost of land is between ten million naira (N10,000,000) and one hundred million naira (N100,000,000) and/or a workforce between eleven (11) and seventy (70) full-time staff and/or with a turnover of not more than ten million naira (N10,000,000) in a year.
iii. Medium Enterprise: A company with total cost including working capital but excluding cost of land of more than one hundred million naira (N100, 000,000) but less than three hundred million naira (N300, 000,000) and/or a staff strength of between seventy-one (71) and two hundred (200) full-time workers and/or with an annual turnover of not more than twenty million naira (N20, 000,000) only.
iv. Large Enterprise: Any enterprise whose total cost including working capital but excluding cost of land is above three hundred million naira (N300,000,000) and/or a
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labour force of over two hundred (200) workers and/or an annual turnover of more than twenty million naira (N20,000,000) only. Other abbreviations, terms and notations used in this study include but are not limited to the following:
v. NASME: Nigerian Association of Small and Medium Enterprises, which is an umbrella association of all SMEs
vi. MAN: Manufacturers Association of Nigeria is the official association of manufacturing companies in Nigeria
vii. NACCIMA: Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture is an association of various Chambers of Commerce in Nigeria
viii. NASSI: Nigerian Association of Small Scale Industries is the umbrella association of all the Small Scale Enterprises in Nigeria
ix. DFIs: Development Finance Institutions are companies involved in project and development finance such as the Bank of Industry (BOI)
x. SMEs: Small and Medium Enterprises are those firms, which satisfy the definitions given above
xi. CBN: Central Bank of Nigeria, the apex bank in Nigeria, which supervises other banks
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