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THE EFFECT
OF BORROWING ON THE PERFORMANCE OF MICRO ENTERPRISES IN NIGERIA
ABSTRACT
This study
sets out to examine the relationship between borrowing and the performance of
small and medium scale enterprises in Nigeria. The study reviewed some relevant
and related literatures. The descriptive survey research was applied for the
assessment of the opinions of the respondents with the use of the questionnaire
and the sampling technique. A total of 100 (one hundred) copies of
questionnaire were administered and all were retrieved duly completed. Finding
from the analysis of research questions and hypothesis revealed that SMEs
experience finance problems most and for this reason, they borrow money mainly
from banks. The fund raised is used to expand their scale of operation,
increase quantity of goods produced, purchased and supplied into the market.
The operators believed that with their financial problem solved, they do not
have anymore. However, the borrowing rather than helping them create additional
problem of repayment of both the principal and interest. This forces them to
sell their goods at very ridiculously low prices to increase sales turnover
thereby denying them of normal profit they should realise.
CHAPTER ONE
INTRODUCTION
1.1Background
of the Study
In the
present day economies of the world, small and medium scale enterprises have
come to be recognized as veritable engines of growth, employment, poverty
reduction and innovative development. Government of various nations and indeed,
world economic development and financial institutions such as the Brethonwood
Institution (International Monetary Fund and World Bank), the United Nations
have all in recognition of the potentials of SMEs embarked on deliberate
developmental policies aimed at creating a productive base for world economies
(Englama, et al, 1997).
Lofty as
these aims and aspirations are, the problem of finance has remained
insurmountable. For instance, Fatunla and Adebayo (1985) note that inadequate
finance has always been a constraint to the develompent of small-scale
industries. Oshunbiyi (1989) equally noted the critical role of finance at
every stage in an organization’s life and the restricted access of small
industrialists to the capital market and opines that they could improve their
financial position through exploitation of institutional credit sources or
borrowing from banks.
As
emphasized by Harper (1995), with the large increase in world population
(especially Nigerian and many developing countries) “governments can certainly
not afford to employ many more, and larger scale industry as this has
dramatically failed to absorb more than a tiny fraction of the multitudes who
need jobs. In many countries small enterprises are, therefore, possibly the
hope of employment creation, and it is hardly surprising that policy-makers in
developing nations and almost everywhere else have so eagerly strived to
promote and encourage them”. The availability of efficient infrastructural
services is a key requirement for the take-off of private investment (CBN,
2000). The take-off and efficient performance of any enterprise, be it small or
large, will require the provision of funds for its capitalization, working
capital and rehabilitation needs, as well as for creation of new investments
(Nnanna, 2001).
Reflecting
countries experiences, SMEs employ more than 50 percent of the industrial
workforce in Columbia, India, Indonesia, Kenya, Philippines, Tanzania and
Zambia. They are the real job creators in the European Union (EU) accounting
for 99.9 percent of 11.6 million enterprises (excluding enterprises in
agriculture, fishing and other sectors, 72 per cent employment of the 80.7
million persons employed by all enterprises, and generate 69.7% percent of
turn-over in EU (Deloittee, Touche and Tohmatsu, 1995). SMEs were equally
responsible for more than 50 per cent of total employment in Canada (Government
of Ontario, 1995).
Studies have
shown that, SMEs have in many countries, provided the mechanism for stimulating
indigenous entreprenuership, enhancing greater employment opportunities per
unit of capital invested and aiding the development of local technology (Sule,
1986; World Bank, 1995). They help to mobilize savings for investment and
promote the use of local raw materials. Through their dispersal nation-wide,
they contribute to more equitable income distribution among individuals and
regions, as well as mitigate rural-urban migration.
In view of
these advantages, greater attention has been given to the promotion of SMEs
globally as tool for poverty alleviation and economic development. Even in the
most buoyant economies, such as the United State of America, small scale
enterprises have played an important role in her transition from the industrial
age of the post industrial information technology era. Also, in other countries
like Japan and South Korea, the use of sophisticated technology has reduced to
the minimum efficient scale of production in industries known for product
innovation, such as the electronics and computer industries (Olorunshola,
2000).
In the same
vein, the Nigeria budget for 2003 was designed among other things to reduce
poverty. According to Sanusi (2003) it is “to pursue macroeconomic policies and
sector growth strategy that will achieve fiscal stability, improve non-oil
sector competitiveness, lower levels of inflation, stable and competitive
exchange rate in order to engender growth and reduce poverty through increased
employment”. Specifically, attention has been directed at the development of
small medium scale enterprises with the aim of turning them into engines of
growth for the various economies.
One of the
major economic tools being used in combating slow economic growth and poverty
in various nations is the complete turn-around of the economy from consumer
economy to productive economy by rendering assistance to SMEs through adequate
financing and creation of enabling environment.
1.2 Statement of Problem
One of the
critical problems facing economic growth in African Sub-Saharan and indeed the
developing countries generally is the harnessing of resources to achieve
desired goals.
In the case
of the SMEs in Nigeria in particular, various problems confront its growth and
hence, the objective of its establishment and management as engine of growth.
These include among others, market; raw materials; manpower, lack of
information; lack of management and technical skills; poor ethical values and
lack of transparency; proper policy formulation and implementation; and
funding/financing.
The issue of
inadequate financing usually derives from inadequate proprietorship and equity
participation. A strong capital base and financial outlook are required for
successful business. However, small scale entreprenuers are usually reluctant
to bring in partners, even at the risk of under-capitalization. The
under-funding of SMEs has led government to formulate measures aimed at assisting
this sector in form of loan packages through World Bank, National Directorate
of Employment, National Economic Reconstruction Fund (NERFUND) and other
financial assistance schemes.
Owualah
(2001) argues that, among the problems of small scale business whether by their
owners or by those interested in their well being, their financial problems
have tended to overshadow others which they also encounter in their daily
struggle for survival. In other words, their other problems in production,
marketing, personnel and even day-to-day management usually have a financial
colouration. The success of these enterprises however, will depend largely on
the efficiency of the financing strategies they employ.
1.3 Purpose of the Study
This study
sets out to investigate the effect of borrowing on Small and Medium Scale
Enterprises.
Other
specific objectives are:
- To establish the most
difficult problem facing SMEs.
- To discover reasons for
borrowing.
- To investigate how often
borrowing is done.
- To establish the major
source of borrowing.
- To determine the extent to
which borrowing has negatively impacted on SMEs performance.
- To make recommendations
based on facts obtained from answers to the research questions.
1.4 Research Questions
The
following research questions were raised in this study:
- What is the most difficult problem
facing SMEs?
- How often do SMEs
borrowing money?
- What is the major source
of borrowing available to SMEs?
- What problem(s) is
associated with borrowing?
- To what extent has
borrowing negatively impacted on the small and medium enterprises’ performance?
- What will be the state of
SMEs performance if financial problem is solved?
1.5 Statement of Hypothesis
The
following research hypotheses were formulated and tested in this study:
H0: There is no significant difference among
respondents that borrowing has positively impacted on the small and medium
scale enterprises performance in Nigeria.
H1: There is a significant difference among
respondents that borrowing has positively impacted on the small and medium
scale enterprises performance in Nigeria.
Adequate
funding has no significant influence on the small and medium scale enterprises
performance in Nigeria.
Adequate
funding has significant influence on the small and medium scale enterprises
performance in Nigeria.
Commercial
bank does not play any significant role in the growth and development of SMEs
in Nigeria.
Commercial
bank play significant role in the growth and development of SMEs in Nigeria.
1.6 Scope of the Study
The scope of
the study is within the concept of SMEs and the place of finance in a
developing economy like Nigeria.
The scope of
the study is also limited to some SMEs
located in Mainland Local Government Area of Lagos State.
This study
will be constrained by time, finance and sourcing out of relevant materials and
respondents’ unreadiness to give out correct information on the subject-matter.
1.7 Significance of the Study
The
significance of this research study on the contribution of SMEs in the
developing economy cannot be overestimated, as this study will be of benefit
to the management and operators of SMEs and the governments, the small and
medium scale entrepreneurs, and individual stake holders. The study will help
to define to the problems and challenges being faced by most SMEs. Governments
of both federal and states would have an insight through this study because it
will enable them to grant more funds to the SMEs in Nigeria so as to sustain
their growth and development for the improvement of the Nigerian economy.
1.8Definition
of Terms
Financial
Institutions: This is referred as places where funds are kept and lent out to
prospective customs or individuals.
Capital
Market: This is where stocks are bought or sold.
Borrowing:
This means obtaining some loans (funds) from a bank or other financial
institutions in order to expand one’s business enterprise.
CBN: Central
Bank of Nigeria.
Small -
Scale Industry: An industry with a labour size of 11-100 workers or a total
cost of not more than N50 million, including working capital but, excluding
cost of land.
Medium Scale
Industry: An industry with a labour size of between 101-300 worker’s or a total
cost of over N50million, but not more than N200million, including working
capital, but, excluding cost of land.
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