- Background of the Study
SMEs are generally regarded as the engine of economic growth in developing economies (Agwu and Emeti, 2013) and developed nations (Alese, 2017). Specifically, Alese (2017) argues that this argument stems from the realization that almost all countries that have focused on SMEs sector have ended up in the significant reduction in poverty level and its attendant enhancement in the quality and standard of living, reduction in crime rate, increase in per capita income as well as rapid growth in national output among other salutary effects.
Similarly, small and medium enterprises (SMEs) have been largely acknowledged as the oil required for lubricating the engine of socio-economic transformation of any nation (Odah, 2005). Small enterprises are vital for economic development because they encourage entrepreneurship, generate employment, reduce poverty and provide suitable livelihood (Rogers, 2002) The SME sector is strategically positioned to absorb up to 80% of jobs, improve per capita income, increase value addition to raw materials supply, improve export earnings and step up capacity utilization in key industries.
The importance of SMEs in reducing poverty level and improving the nation’s economy necessitate a deep-self interest in the contemporary environment for the boosting of the Nigeria SMEs by the actors in the field. Report from CBN (2006) showed that the little progress recorded so far in the area of SMEs from the courageous efforts of the earliest indigenous were almost completely wiped out by the massive dislocations and traumatic devaluation under the structural Adjustment Programme (SAP). Remarkably, Fabayo, (2009) sees SMEs as the feeder services to small scale industries. Generally, it is observed that despite the priority accorded SMEs in Nigeria, there is a consistently decline in the business’ performance. Small and Medium Enterprises (SMEs) in the past years till now do not have consensus definitions. This is consistent with the study from International labour Organization (ILO 2005) which shows that over 50 definitions were identified in 75 countries and each definition was made to suit specific criterion of Enterprises and the stage of its industrial development of a particular country or state. It shows that the SMEs can be defined from the perspectives of the individuals, organisation, state or country. Ibrahim (2008) shows definitions by various bodies and that each definition has usually been made to suit a particular requirement of business and the level of industrial development of a particular country. From the contexts of the study, Small and Medium Enterprises can be defined as an organisation having range of 5-20 employees with operating capital of not less than N2m–N10m excluding cost of land. Source of financing Small and Medium Enterprises (SMEs) according to Ewiwile, Azu and Owa as cited in Gulani and Usman (2012) includes; owner’s savings, friends, family members, Banks, members of the trade, partners and shareholders.
Furthermore, financing SMEs is a major catalyst and a key success factor for the development, growth and sustenance of any economy. Most government and business circles have come to recognize the importance of financing SMEs and have consequently agreed that their growth constitutes one of the corner stone’s of economic development (Olutunla,2001; OECD, 2004). Despite the numerous factors that challenge the survival and growth of SMEs in both developing and developed countries, finance has been identified as one of the most important factor (UNCTAD, 2001; SBA, 2000). Having access to finance gives SMEs the chance to develop their businesses and to acquire better technologies for production, therefore ensuring their competiveness, however, there is a huge challenge for SMEs globally when it comes to sourcing for initial and expansion capital funds from traditional commercial banks. Abereijo and Fayomi (2005) notes that the majority of commercial bank loans offered to SMEs are often also limited to a period far too short to pay off any sizeable investment. In addition, banks in many developing countries prefer to lend to the government rather than private sector borrowers because the risk involved is lesser and higher returns are offered (Levitsky, 1997). Such apathy for the SMES have crowded out most private sector borrowers and increased the cost of capital for them.
However, despite the deluge of studies on the SME sector in Nigeria and Lagos specifically, few studies have critically investigated effect of how finance when acquired are used on the performance of SME since the skills needed to set up a business is not same as those needed to run a business (Edward, 2012). Most of the existing studies often focus on Commercial Banks’ Credit and SMEs Development (Dada, 2014), impact of micro-finance on small scale business (Ashamu, 2014); effect of SME financing on economic development (Taiwo, Falohun & Agwu, 2016) among others. This study therefore sets out to examine the effect of financial support on the performance of small and medium scale enterprise in Lagos Nigeria.
1.2. Statement of the problem
In spite of all these financial policies and programmes aimed at assisting SMEs to move out of their financial constraint, the same old song is on as they are still finding it hard to access credit for their operations. The financial problems include: Multiple taxation, difficulty in accessing credit, the financial institutions, including commercial banks, are very critical to national economic development, but they are not helping the SMEs. The current structure of lending to the Nigerian economy is such that the bulk of aggregate credit is channeled mainly towards financial market operations and oil traders to the neglect of the key aspects of the real economy such as the SMEs, amongst others. An economy where interest rate hovers between 19 and 25 per cent per annum is not encouraging for the real sector much less for the SMEs which are managing to survive as most of them are not firmly rooted on ground. Borrowing from the commercial banks is herculean to the SMEs. Besides the interest rates of between 22 and 35 per cent, there are other charges which include administrative/management fee, concession fee, processing fee, and too many others. The manner the Nigerian Agricultural Credit and Rural Development Bank (NACRB) is structured and focused seems not to favourable for the SMEs as its interest rate is capped at 8 per cent, while the cost of capital is more than 12 per cent. The bank does not also have the reach in terms of branches; neither does it have the capacity for lending, nor the information technology platforms and human resources requirement. The Bank does not even address the issue of how to get credit to the SMEs (Radwan, 2009).
1.3. Objective of the Study
The general objective of the study is to determine the effect of financial support on small and medium scale enterprise in Lagos state, Nigeria. The specific purposes of the study will be the following:
- To examine the effect of financial support given by formal institutions on the performance of SMEs.
- To determine the influence of financial support given by informal institutions on the business environment.
- To examine the extent of environment on the growth of SMEs in Lagos State, Nigeria.
- To examine the problems SMEs faces in term of sourcing for loan in formal and informal institutions
1.4. Research Questions
The following research questions were formulated to guide the study:
- What is the effect of financial support given by formal institutions on the performance of SMEs?
- What are the influence factors of financial support given by informal institutions on the business environment?
- To what extent has environment on the growth of SMEs in Lagos State, Nigeria?
- What are the problems SMEs faces in term of sourcing for loan in formal and informal institutions?
1.5. Research Hypotheses
To facilitate the study, the following hypotheses were formulated:
H01: There is no significant relationship between financial support given by the formal institutions and SMEs performance.
H02: There is no significant relationship between financial support given by the informal institutions and business environment.
H03: There is no significant effect of environment on the growth of SMEs in Lagos, Nigeria.
H04: There is no significant problem SMEs face in term of sourcing for loan from formal and informal institutions.
1.6 Significance of the Study
The findings of this study will contribute to a body of knowledge and increase information in the area of loan assessment to small scale business owners. Therefore it will be of immense importance to small business operators, government, management, practitioners, executive, corporate managers, industrialists, and other stakeholders in the industrial sub-sector.
1.7. Scope and Delimitation of the Study
The subject of financial support on SMEs performance in Lagos, Nigeria is wide and complex.
However, this study will focus on the role of financial support of formal and informal institutions in Lagos Nigeria. This research work is restricted to SMEs in Lagos, Nigeria. For the purpose of this study, other financing schemes that have been introduced by the government will not be analysed.
1.8 Limitations of the Study
There are several limitations to the study of this work. Limitations include the unavailability of some vital materials as they are considered highly confidential by government agencies; time constraint; financial constraint and also library facilities have been very inadequate in journals.
1.9 Definition of Terms
Small Medium Enterprises: In Nigeria’s Third National Development Plan, a small scale enterprise was defined as a manufacturing concern that employs less than ten people and whose investment on machinery and equipment do not exceed N600,000.00.
SME Development: This refers to the growth of an SME with the systematic use of scientific and technical knowledge to meet specific objectives or requirements of the organization.
Employee productivity: this is defined as production attributable to staff with the least effort.
Formal Financing: This refers to those financial institutions that are established by law to carry out financial business activities and at the same time are saddled with the responsibilities of assisting in growth, development and survival of SMEs by providing facilities after fulfilling a certain criterion like collateral security which is commonly used.
Informal Financing: This source of financing does not require serious paper works. Sources under informal provides financial assistance with or without demanding serious collateral security from SMEs’ owners; rather, it may base it on words of mouth or with simple agreement. Besides owners’ savings, informal source comes from friends, relatives and business angels.
Personal savings: This refers to the amount left over after subtracting the cost of person’s consumer expenditure from the amount of disposable income in a given period of time.
Performance: is the function of the ability of an organization to gain and manage the resources in several different ways to develop competitive advantage.
Business Policy: this is defined as plans or principles which guide the thinking and decision making and action of an organization.
SMEs finances: SMEs finances are the various sources of funding available to SMEs’ business operations. The sources comprise private and external sources
Economic Development: This is the process by which a nation improves the economic, political, and social well-being of its people.