small and medium scale enterprises and economic growth in
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Small and Medium Scale Enterprises and Economic Growth in Nigeria: An Assessment of Financing Options
Akingunola, Richard Oreoluwa*
* [PhD], [Department of Banking and Finance, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Nigeria], [
Pakistan Journal of Business and Economic Review Vol. 2, Number 1 (2011).
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Small and Medium Scale Enterprises and Economic Growth in Nigeria: An Assessment of
Financing Options Akingunola, Richard Oreoluwa
Abstract
The contribution of Small and Medium Scale Enterprises (SMEs) has been recognized as main
sustenance of the economy because of their capacity in enhancing the economy output and
enhance human welfare. Although, the SMEs lack of access to relative cheap and effective
source of finance have been identified as the major factors hindering their contribution to
economic growth. On this basis, this paper assesses specific financing options available to SMEs
in Nigeria and contribution with economic growth via investment level. The Spearman’s Rho
correlation test is employed to determine the relationship between SMEs financing and
investment level. The analysis reported a significant Rho value of 0.643 at 10%. This indicated
that there is significant positive relationship between SMEs financing and economic growth in
Nigeria via investment level. Descriptive statistics were also used to appraisal certain financing
indicators. The paper later proffer that accessibility to relative low interest rate finances should
be provided to small and medium enterprises in Nigeria in order enhance economic growth.
Keywords: Small & Medium Scale Enterprises, Financing Options, Economic Growth, Nigeria
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I. Introduction
The development of Small and Medium
Enterprises (SMEs) via effective financing options
have stem debate and growing interest among
researchers, policy makers and entrepreneurs,
recognizing the immense contribution of the sub-
sector to economic growth. Small and Medium
Scale Enterprises (SMES) constitute the driving
force of such industrial growth and development.
This is basically due to their great potential in
ensuring diversification and expansion of industrial
production as well as the attainment of the basic
objectives of development. SMES utilize local raw
materials and technology thereby aiding the
realization of the goal of self-reliance. Also,
governments at various levels (local, state and
federal levels) have in one way or the other focused
on the performance of Small and Medium Scale
Enterprises for economic gains. While some
governments had formulated policies aimed at
facilitating and empowering the growth and
development and performance of the SMEs, others
had focused on assisting the SMEs to grow through
soft loans and other fiscal incentives in order to
enhance the socio-economic development of the
economy like alleviating poverty, employment
generation, enhance human development, and
improve social welfare of the people.
Empirical evidences have show that prior to
the late 19th century, cottage industries, and mostly
small and medium scale businesses controlled the
economy of world giants like Europe and America.
The industrial revolution changed the status quo and
introduced mass production. The Small and Medium
Scale Enterprises (SMEs) development facilitates
the mobilization of human and capital resources
towards economic development, in general, and the
rural sector, in particular. They have been identified
as a vehicle for employment generation and
providing opportunities for entrepreneurial sourcing,
training, development and empowerment.
Developing nations such as Nigeria
characterized as low income earners by the World
Bank, value small and medium scale enterprises
(SMEs) for several reasons. Viewed in static terms,
the main argument is that SMEs, on average achieve
decent levels of productivity especially of capital
and factors taken together (that is, total productivity
factor) while also generating relatively large amount
of socio-economic development. In dynamic terms,
the SMEs sector is viewed as being populated by
firms most of which have considerable growth
potential. SMEs in developing countries achieve
productivity increases to a great extent simply by
borrowing from the shelf of technologies available
in the world (Christopoulos and Tsionas, 2004).
However, there is no denying the fact that
the sector is a sine qua non in ensuring the
attainment of the goals of the federal government’s
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National Economic Empowerment Development
Strategy (NEEDS) aside from the SMES possessing
the potential for stimulating industrial growth,
which are mainly poverty reduction, employment
generation, wealth creation and value orientation.
What distinguish, small and medium scale
enterprises (SMES) from the larger enterprises are
the high entry and exit rates and their flexibility
relative to the latter. SMEs are highly valued,
especially in developing economies, for many
reasons. One of such is that SMES achieve decent
levels of productivity especially of capital and all
factors taken together than large firms
(Christopoulos & Tsionas, 2004).
The abundance of capital and the range of
technologies available in the world expands, SMEs
need productivity increases through adequate
financing if they are to maintain or increase their
contribution to overall socio-economic development
in developing countries like Nigeria. However, this
signifies the importance of capital and its cost of
sourcing for SMEs development, among other
factors like infrastructure and enabling environment,
cheap source of funds, availability of production
equipment, efficient manpower, disciplined
management and availability of markets (both local
and international) that enhance their operations in
ensuring sustainable socio-economic development.
Although, set of factors hinders the performance of
SMEs for maximum contribution to the economy. In
this regard, Sangosanya (2010) identified ten key
factors and variables have been identified to
influence SMES’S failure in Nigeria. These include
disasters, competition, infrastructure, taxes,
accounting, management, marketing, economic,
planning and finance. In Nigeria, poor economic
conditions, which also implies poor finance and
inadequate infrastructure, have been identified as the
most crucial factors (Ihua, 2009). This position is
corroborated by other studies which identified
financial support as one of the main factors
responsible for small business failures in Nigeria
(Abereijo & Fayomi, 2005; Okpara & Pamela,
2007).
Inference can be drawn from the foregoing
that access to finance at relatively cheap cost is the
one of the most crucial problems hindering SMEs to
have significant contribution to national output in
Nigeria. Most of them faced with perennial problem
of shortage of working capital which hinders their
ability to produce efficiently. Consequently, most
SMEs resort to external funding which is
characterized by shortermism and high interest rate.
However, financial institutions are unwilling to lend
to them on long-term basis as they are considered
highly vulnerable with high credit risk (Akingunola,
1995). Government’s attempt at solving this
problem by creating specialized agricultural and
industrial based financial institutions such as Bank
of industry (BOI) to provide subsidized credit have
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shown to be just palliative as these institutions are
poorly capitalized with very weak linkages with the
sector and stifling bureaucratic bottlenecks.
The problem of inadequate finance affects
SMES effective performance of other ancillary
functions such as marketing, as they are unable to
offer competitive credit terms to distributors, delay
or cut in production resulting from raw materials
shortage thus causing sometimes sharp drop in sales
volume. These problems are compounded by the
unwillingness of entrepreneurs of SMES enterprises
to share ownership with individual or institutional
fund providers in order to raise needed equity
capital. The paper therefore appraises the patronage
and performance of government-assisted equity-
based fund sourcing arrangement for SMES and, by
extension, the altruistic behaviour expectation of
external fund providers toward for SMEs. The
remaining section of the paper is structured as
follows. The section two covers by theoretical frame
work and literature review. Section three deals with
methodology and data sources and the next section
cover results and discussion while, the last section
concludes the paper.
2.0 SMEs & Economic Growth: Conceptual
Framework & Literature Review
2.1 Conceptualization
Small and Medium Scale Enterprises
(SMEs) as defined by the National Council of
Industries (2009) refer to business enterprises whose
total costs excluding land is not more than two
hundred million naira (N200,000,000.00) only.
Although, there exists no consensus among policy
makers and scholars concerning the point at which a
business firm is deemed to be small or medium.
Indeed, there is no universally or even nationally
acceptable standard definition except that the scale
of business needs to be defined for a specific
purpose. The problem of SMES identification is
more acute in the developing countries because
apart from the fact that , small and medium scale
business are difficult to count, they are also difficult
to measure individually, hence statistics on the
number, size, geographical distribution and
activities of enterprises and the SME sub-sectors
are partial and highly unreliable (USAID,2004).
The United Nations Industrial Development
Organisation (UNIDO) identified fifty definitions of
small scale business in seventy-five different
countries based on parameters such as installed
capacity utilization, output, employment, capital,
type of country or other criteria, which have more
relevance to the industrial policies of the specific
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country. However, it has been suggested that the
SMEs sub-sector may comprise about 87 per cent of
all firms operating in Nigeria, excluding informal -
enterprises. This study adopted USAID definition of
-enterprises as informal businesses employing five
or fewer workers including unpaid family labour;
small enterprises as those operating in the formal
sector with five to twenty employees; and medium
enterprises as those employing 21 to 50 employees.
(Kayanula & Quartey, 1999).
In spite of its definitional problem, there
exists a high level of consensus on the importance of
SMES, especially the SMEs sub-sector to economic
growth and development. Oluba (2009) has,
however, observed that the importance of SMEs
varies with sectors and with the developmental stage
of a country. He opined that developing
characteristics such as the level of capital allocation
/requirements, management size and arrangement as
well as limited market access which make SMEs
less amenable to the disappointing results of
development strategies that focus on large, capital
intensive and high import dependent industrial
plants as well as failed public enterprises.
2.2 SMEs & Economic Growth: Evidence
from Developed Countries and Nigeria
The contribution of SMEs to gross
economic productivity and employment and other
economic development parameters in both
developed and developing countries is succinctly
summarized in this Table 2.1 below. Oluba (2009)
summarized the contribution of SMEs to an
economy, especially developing ones as: Greater
utilization of raw materials, employment generation,
encourage of rural development, development of
entrepreneurship, mobilization of local savings,
linkages with bigger industries, provision of
regional balance by spreading investments more
evenly, provision of avenue for self employment
and provision of opportunity for training managers
and semi-skilled workers.
Table 2.1a: Contribution of SMEs to Economic Development (Developed Countries) COUNTRY ECONOMIC
OUTPUT EMPLOYMENT
USA 65% 80%
JAPAN 45% 80%
WESTERN EUROPE
45% 55%
Source: Sabah Almogyed (2003)
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Table 2.1b: Contribution of SMEs to Economic Development (Developed Countries) EXPORT VALUE
ADDITION COUNTRIBUTION TO GDP
PAKISTAN 18% 29% 5% INDIA 34% 40% 7% Source: Sabah Almogyed (2003)
Also, Oluba (2009) posited that there are about
8.4million SMES operating in Nigeria with -
enterprises comprise 80 per cent of the total
number (about 1.3 million), small business
constituting 15 percent (around 420,000) (Oluba,
2009). In terms of SMEs contribution to national
output in Nigeria. It has been reported that the
SMEs, by revenue, contribute about 75 per cent
all entrepreneurial activities that make up
Nigeria’s gross domestic output, 21 per cent
within the -enterprises while 4% belong to the
large complex organizations. It is also scored
high in entrepreneurial dominance because of its
potential in pooling skilled and semi-skilled
workers.
2.3 SMEs Financing: Challenges, Structure
and Options
2.3.1 Challenges of SMEs Financing in
Nigeria
The problem of lack of access of small
and medium scale enterprises to finance has
hampered their contribution to economic growth
and development as it has affected their
productivity and ancillary functions. In this
regard, Eriki and Inegbenebor (2009) noted that
the commonly adduced reasons for the inability
of SMEs to meet the expectations of government
in accelerating job creation, increasing the
production of goods and services, facilitating
technology transfer, creating more opportunities
for entrepreneurs and, in particular, increase the
local content component of the giant
multinational companies in Nigeria is due to lack
of access to credit facilities.
A related study by Abereijo and Fayomi
(2005) noted that paucity of capital for SMEs
especially their inability to raise external funding
due to the fact that
(i) they are regarded by creditors and
investors as high risk borrowers due to
insufficient assets and low capitalization,
vulnerability to market fluctuations and
high mortality rates;
(ii) The existence of information asymmetry
arising from SMEs lack of accounting
records, inadequate financial statements or
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business plans makes it difficult for
creditors and investors to assess the
creditworthiness of potential SMEs
proposal; and
(iii) high administrative/ transaction costs of
lending or investing small amount. They
averred that the combined effects of these
factors make SMEs financing an
unprofitable business.
Another study, Okpara and Pamela
(2007), did not corroborate some of the findings
above but proceeded t identify factors responsible
for small business failures in Nigeria to include
corruption, lack of financial support, management
experience, infrastructure, training, and
inadequate book and record keeping. Other
factors reported low demand for products or
services, withdrawing too much cash for personal
use and lack of market research.
2.3.2 Financing Options of SMEs in Nigeria
The major sources of financing SMEs can
be classified as debt and equity. The capital
structure of a business firm refers to the
composition of long-term sources of funds, viz
long-term debt-debenture, preference share and
equity shares. The finance literature recognizes
the importance of equity in business operations.
The existence of high rate of return on investment
will make the appeal to take the advantage on
lower cost borrowed fund plausible. Thus,
external funds are combined with owner’s fund to
earn much higher rate of return in excess of cost
of external fund employed. In this regard, there
are two opposing theoretical views and a practical
intermediate perspective.
Net income approach accepts that
leverage is a significant variable beneficial to an
operating business firm, hence may be applied in
perpetuity, thus it hypotheses that financial
decisions have important effect on the value of
the firm. Whereas its opposing school of thought,
net operating income approach, assumes cost of
equity to increase linearity with leverage, hence
financing decision does not matter in the
valuation of the firm. This approach is consistent
with the popular Modigliani and Miller (MM)
perspective. In this respect, it is possible to have
either an all-equity-financed firm or all-debt-
financed business; while the former abounds, the
latter is rare in the business world.
The intermediate perspective posited that
the cost of capital declines with leverage up to an
optimum level at which the value of firm would
have been maximized, beyond capital structure
schools of thought is the existence of equity
(owner’s capital) in the play in the financial
structure composition. It is widely known that
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larger firms are to potential financing media than
smaller firms that have difficulty marketing long-
term equity or debts issues. Thus, size may be
important for the following reasons: (i) it
determines access to capital market; (ii) it
influence firm’s credit rating and (iii) it influence
the cost at which a firm borrows. In respect of
business firms, large firms are properly classified
as operating in the formal sector while the
informal sector is characterized largely by small
scale enterprises.
� Debt Sources of Finance
Debt is outside finance (formal and
informal) employed in the business with
obligation of regular interest payment and
retirement of capital when the instrument
crystallizes. Formal sources of debt financing of
SMEs in Nigeria include the following: loans and
advances obtainable on short and medium term
bases from banks (commercial and development),
national agencies created to aid SMEs such as
Export Stimulation Loans (ESL) of the Central
Bank of Nigeria, the National Directorate of
Employment (NDE), National Poverty
Eradication Programme (NAPEP), etc and
cooperative credit societies.
The -enterprises are considered more
indigenous and informal in their entirety than
SMEs and hence may be unable to raise funds
from the formal sources. The informal debt
sources for SMES are considered more important
to this sector than the formal sources which
include friends and relations, clubs, esusu and
money lenders, which may constitute a major
source of more than 60% of total, owners capital
(Ojo, 1995).
� Owner’s Capital / Equity Sources of
Finance
Owner’s investment in the form of capital
in the business is the equity. Equity capital can be
increased through retention of profit through
operation. Equity is important as the take-off
capital to meet capital and preoperational
expenses. Finance theory argues that borrowed
fund is only appropriate for profitably operated
businesses with the rate of return on investment
higher than the cost of external funds. It is most
unexpected that borrowed funds would from the
bulk of neither initial capital nor more substantial
part of its total capital, thus exposing the business
to high financial risk with attendant high interest
payments and other attendant strains on the
business. Hence, the prevailing situation whereby
ownership of capital is very minimal to the
requirement of the business, especially industrial
based types thereby requiring such enterprises to
depend largely on externally sourced fund, is
unsatisfied.
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Moreover, promoters’ problem has been
compounded by inability to raise enough external
funds, since investors are skeptical of the viability
of such businesses, given their high credit risk.
However, as SMEs grow and their expansion
activities involve the spread of its assets over
wider field, its capital requirement may exceed
available financial resources of the promoters,
then external fund (borrowing) may be a veritable
choice. At this developmental stage, the business
is able to meet the demand of external fund
providers as well as fulfill its expected
obligations. As earlier asserted, the altruistic
behaviour expected of external fund providers
may remain a mirage. Thus reaping the benefits
of SMES in developing countries, especially in
Nigeria, depends on improving on existing
sources or sourcing for alternative equity sources
adaptable to the informal “culture”.
� Funds from Specialized Financial
Institution
It is pertinent to recognize government efforts at
improving the capital base of SMEs through
creation of specialized and developed institutions
and specific directives of these and other formal
financial institutions, as well as the Central Bank
of Nigeria (CBN), targeted towards increased
lending to indigenous (SMEs) borrowers. Other
efforts are the non-governmental organizations
(NGOs) finance supply targeted at the informal
sector especially the SMEs sector. The recent
government efforts at meeting the needs of the
sector include the following:
I. The reconstruction of the former NIDB in
the year 2001 to Bank of Industry (BOI)
and the merger of Nigerian Bank for
Commerce and Industry (NBCI) and the
National Economic Reconstruction Fund
(NERFUND) with the newly created Bank
of Industry.
II. As part of government efforts at
addressing the financing needs of micro-
entrepreneurs, a micro-finance policy was
launched by the Federal Government in
December, 2005.
III. The establishment in 2001 of the Small
and Medium Enterprises Equity
Investment Scheme (SMEEIS) was
recognition by government of the need to
improve SMEs equity capital.
Small and Medium Enterprises Equity Investment
Scheme (SMEEIS) was introduced to make
access to cheap source of fund possible. It is a
fund pooled together by the participating banks
with the objectives of:
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I. Facilitating the flow of funds for the
establishment of new and viable small and
medium industrial (SMI) projects;
II. Stimulating economic growth through
development of local technology for
capable and suitable Nigerians;
III. Generating employment;
IV. Eliminating/ reducing the burden of
interest and other financial charges for the
entrepreneurs;
V. Providing financial, advisory, technical
and managerial support;
VI. Consulting to the entrepreneurs; and
VII. Ensuring output expansion, income
redistribution and productivity of
intermediate goods meant to strengthen
inter and intra-industrial linkages.
The scheme was initiated to provide
solution to dearth of long-term finances to SMEs
in Nigeria. Through the scheme, banks are
expected to jump-start the development of the
real sector of the economy by financing SMEs
excluding trading from equity investment fund
pooled from 10 per cent of the profit before tax of
commercial banks. The scheme covered
enterprises in the following sectors- Agro-allied,
information technology and telecommunications,
manufacturing, educational, service, tourism,
solid minerals and construction.
The scheme provides that a firm would be
eligible to equity funding by registering with
Corporate Affairs Commission, complying with
all relevant regulations of the Companies as
Allied Matter Act (1990) as well as tax laws and
regulation. The participating banks are free to
invest the fund in eligible industries in the form
of equity investment. Equity investment could be
in form of fresh cash injection and/or conversion
of existing debts owned to a participating bank.
Also, eligible firms could obtain more funds in
form of loans from the banks in addition to equity
investment outside the scheme arrangement.
� Finance from Venture Capitalist
A venture capitalist provides financing for
a new business, expansion of existing firm or
bail-out for ailing company. Venture capital is
some cases involves investment in a company
whereby the venture capitalist acquires an agreed
proportion of the share capital of the company.
Venture capital is often exposed to high
risk as it is not secured and thus exposed to
danger of business failure just like other
shareholders. A venture capitalist participates in
the success of the company through individual
and capital gain realized upon selling of his
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investment or upon gaining floatation on the
stock market. An attractive feature for the venture
capitalist lies in his right to participate in the
management of the project/business and being
involved in the company business decision.
Small and Medium Enterprises Equity
Investment Scheme (SMEEIS) and venture
capital, often provide owners with opportunity to
exercise redemption right by re-acquiring the
shares. Another is through planned or phased
exist in the shares. Also, another is via planned or
phased exit in tranches over Period of time, or
through listing on the exchange. A related
financing method is the business angel which is a
business mentoring approaching whereby
successful business moguls mentor an
entrepreneur in business area of interest and
experience. In business angels financing, both
parties benefit from the arrangement; this is
because it allows for the capitalization of the
(original) idea or patent, while the capital
provider waits until the business is floated on the
stock exchange where his reward are reaped in
form of capital gain while exit option exit option
benefit to the business is exploited.
2.4 SMEs Financing and Economic
Growth: Empirical Review
Extant studies lend credence to the
significant role played by finance in firms’
survival, performance and growth. For example,
khalizadeen-Shirazi (1971) indicated that
difference in firms’ performance could be linked
with differences in their capital major factors
affecting the ability of a business to grow. Butter
and Linter (1945) found that growth of firms,
especially small and young firms, is constraint
theory is complemented by a recent study which
indicated how access to finance affects firm
formation, survival and growth. In this regard,
Oliveira and Fortunata (2005) investigation,
which utilized unbalanced panel data in
Portuguese manufacturing (surviving) firms over
the period 1990-2001 to estimate a dynamic panel
data model of firm growth that include serial
correlation and financing constraint using the
pooled OLS and GMM-system techniques,
reported an overall result which suggests that the
growth of Portuguese manufacturing firms is
finance constrained.
Gavin (2000) investigated the dynamics of
small business financial structure using empirical
evidence from three years of detailed primary
soured data on one hundred and fifty new
business start-ups in Scotland. The investigation
tested the dynamic theory of small firms with
emphasis on debt and equity relationships, and
their modification, as the small firm goes through
various stage of growth. The research concluded
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that predicted trajectories for key financial
variables depend largely on both debt and equity.
Carl’s (2001) study on the survival and
growth among and micro-enterprises in Africa
and Latin America revealed that have survived in
the first three years or that have grown even
slightly appear to be more likely candidates for
assistance. Godfried and Song (2000)
investigated into the mode of financing small
scale manufacturing firms in Ghana. The panel
data, which provides a comprehensive source of
credit at various levels of establishment,
employed econometric model (linear regression
and probit models) to inquire into access to the
various forms of finance and ownership
characteristics.
In respect of finance, he found that a
greater proportion of SSEs utilized informal loans
than formal loans. A considerable proportion used
overdraft while formal credit is the least form of
external capital employed. Importantly, the study
revealed that a great number of SSEs in the
survey used international sources of finance,
mainly personal savings and retained earnings in
the financing of capital equipment. The
econometric results further indicated that high
profit small firms are more likely to have access
to loans from the formal financial institutions and
government credit scheme.
Godfried and Song’s (2000) result is
consistent with Ojo’s (1995) findings in his
investigation into the role of informal finance in
the development of SMEs. From the response to
the questionnaire administered in 1993 to various
small business firms in Lagos State owner’s
savings/retained earnings, friends and relatives,
clubs, esusu and money lenders the informal
sources, constituted about sixty per cent of the
total.
Dauda (2006) investigated financial
intermediation and real sector growth in an
deregulated economy in Nigeria. Using Pearson
Correlation Analysis and Pair-wise Granger
Causality test, she found that financial sector
reforms positively impacted on the performance
of the real sector form the secondary data of
variables between 1986 and 2003. The Pair wise
Granger Causality test revealed that bank loans
and advances granger-cause real sector growth in
general. Impliedly, for profitably operating firms,
banks loans and advances determine real sector
output growth performance in the Nigerian
economy. This is indicative of the fact that term-
loans and advances meet working capital needs of
efficiently operated manufacturing firms.
3.0 Methodology
The study utilized secondary data
collected from Central Bank of Nigeria (CBN)
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publications such as Statistical Bulletin and
Annual Report and Statement of Accounts. The
first aspect of the analysis is the assessment of
performance of the SMEs sector in relation to
finance, using Spearman’ Rho test and its t-test,
while descriptive analysis of the performance of
commercial banks in SMEs financing and Central
Bank of Nigeria (CBN) equity provision
programme is carried out.
The Spearman’s (1904) Rho test is
employed to analyze the time series described
above. This test is the nonparametric equivalent
of a test of correlation for matched pairs of data.
If Xi represents economic growth rate series and
Yi is the rate of financial development, then one
can consider the following bivariate random
sample of size n, (X1, Y1), (X2, Y2), ..., (Xn,
Yn). Let R(Xi) be the rank of Xi compared with
the other values of X, for i=1,2, .......,n. For
example, R(Xi) = 1 if Xi is the smallest number
in the series. By the same token, let R(Yi) be the
rank of Yi for i=1,2,3,........, n. The Spearman’s
Rho is mathematically defined as in Equations (1)
and (2):
( ) ( )
( )12
1
2
1
2
1
2
1
−
+−
+−=∑
=
nn
nYR
nXR
n
iii
ρ (1)
Where: p= Spearman’s correlation co-efficient
R(Xi) = The rank of variables Xi
R(Yi) = The rank of variable Yi
n = Sample size
An equivalent but computationally convenient
form is given by:
( )[ ] ( )[ ]( )
−−=∑
=
11
21
nn
YRXRn
iii
ρ (2)
Nijsse (1988) contains the justification
and use of t-test application to the Spearman Rho
(p). According, the t-test is defined as:
2
12
21
−
−=
n
t
ρ
ρ (3)
The t-test represented by Equation (3) is based on
n-2 degrees of freedom. As Conover (1980)
notes, the Spearman’s rho (p ) is insensitive to
some types of dependence in the data; thus, a
researcher is allowed to be specific as to the
nature of the dependence that may be detected.
Under this test, the null hypothesis is that
variables Xi and Yi are mutually independent. In
other words, there is no monotonic relation
between the two variables. The alternative
hypothesis is that there is a tendency for the
smaller values of X to be paired with the larger
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values of Y, and vice versa. The null hypothesis
is rejected if the calculated t falls outside the
acceptance region based on the level of
significance chosen.
4.0 Results and Discussion
4.1. Evaluation of relationship between
SMEs Financing and Investment Growth
In tracing the importance of finance to
SMEs performance and hence economic growth
and development of the country, a simple
Spearman’s rank correlation test between funding
and growth in investment as well as t-value
significant test were estimated for the periods
(2002-2009) of data availability.
Table 4.1: SMES Financing and Investment Growth
Year Credits to SMEs (N’b)
Investment (N’b)
2002 955.76 306.62
2003 1211.99 310.02
2004 1534.45 326.02
2005 2007.36 359.11
2006 2650.82 387.74
2007 5056.72 259.24
2008 8059.55 731.18
2009 10206.09 775.4
Sources: CBN Statement of Accounts (2009)
Table 4.2: Spearman’s Rho Correlation Coefficient Results
Correlations
1.000 .643
. .086
8 8
.643 1.000
.086 .
8 8
Correlation Coefficient
Sig. (2-tailed)
N
Correlation Coefficient
Sig. (2-tailed)
N
Investment
SMEsFinancing
Spearman's rhoInvestment
SMEsFinancing
Source: Author’s Computation
The correlation co-efficient result represented in
table 4.2 revealed that the Spearman’s Rho value
is 0.643 which is positive. This implies that there
high positive relationship between Small and
Medium Scale Enterprises (SMEs) and
investment growth level. Also, the two tailed t-
statistic test result revealed that the probability
value (p-value) is 0.086 and this indicates
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significance at 10% level. Therefore, the
analysis revealed that there exist significant
positive relationship between SMEs financing
and SMEs investment level within the reviewed
period. Since, the financing translate to growth
investment, this consequently enhance the
economy output growth level. Inference can be
drawn from the analysis that SMEs financing
has significant contribution to economic growth
level in Nigeria via investment growth.
4.2. Assessment of Formal External
Funding
Small and Medium Scale Enterprises
(SMEs) have extremely limited access to
financial products and services. This is because
commercial banks lending principle only favour
blue chip enterprises with strong bargaining
power to negotiate their borrowing terms.
The negative bias of commercial banks
against MSMEs when the Central Bank’s credit
guidelines were enforceable, because of their
perception of the sector as highly risky. The
abolition of the guidelines in 1994 led
commercial banks to seriously reduce their
lending to the SSEs sector, the micro enterprises
having suffered total neglect hitherto.
Table 4.3: Share of Small Scale Enterprise (SSES) in the Loans and Advances of Commercial Banks in Nigeria (1992-2009)
Year Commercial Banks Loan to
SSEs (% of Total)
Year Commercial Banks Loan to SSEs (%
of Total)
1992 48.8 2001 6.6
1993 32.2 2002 8.6
1994 22.2 2003 7.5
1995 22.9 2004 3.6
1996 25 2005 2.7
1997 17 2006 1
1998 15.5 2007 0.9
1999 13.3 2008 1.2
2000 9.7 2009 1.1
Source: CBN Statistical Bulletin, Vol. 21, 2009
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Table 4.3 above aptly corroborates the position of
commercial banks’ response to lending to SMEs
sector. Commercial banking almost completely
abandoned lending to SMEs, even after
consolidation of the banking sector occasioned by
astronomical increase in its capital requirement
from N2.0b to N25b and the reported excess
liquidity in the banking sector, as indicated by
paltry 0.9% of its total loans to the economy. This
is often blamed on the commercial banks
commercial loan to matching principle doctrines.
In fact, the maturity structure of commercial
banks’ credit has not been substantially different
from its 1996 position when lending to the sector
became obligatory.
Table 4.4: Maturity Structure of Commercial Bank’s Credit
Year 12 months & under 1-5 years(%) Over 5 years
1991 82.3 1.8 4.9
1992 82.7 11.5 5.8
1993 83.1 11.6 5.3
1994 84.4 11 4.6
1995 84 11.3 4.7
1996 83 12 5
1997-2006 N.A N.A N.A
2 years & Under % Medium formation 153 yrs Long term loan
2007 75.8 13.5 10.7
2008 75.4 14.5 10.1
Source; Central Bank of Nigeria, Statistical Bulletin and Annual reports (various issues)
The maturity structure of commercial banks
credit showed its preponderance towards short-
term than long-term and may therefore not be
available as start-up capital or equity to be
utilized in fixed assests acquisition. It is at best
useful as working capital where such funds are
available at all; however, its high cost is not only
discouraging but prohibitive to most micro-
entrepreneurs.
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4.3 Assessment of Government’s Equity
Assisted Fund (SMEEIS)
The CBN recognition of the importance
of the MSMES to the national economic growth
and development (as highlighted in the literature)
led to the creation of SMEs Equity Investment
Scheme (SMEEIS) at the inception of the decade.
An assessment of the performance of the
scheme so far will reveal its ability to solve the
equity finance requirement of SMEs, thus
performing the feat un-accomplishable by the
defunct SMEII and National Economic
Reconstruction Fund (NERFUND).
Table 4.5: Sectoral Distribution of Investments under SMEEIS Year Real Sector % of total Service
Sector % of total Micro-
enterprises Total
2003 66 62 41 38 - 107 2004 120 69 53 31 - 173 2005 134 66 69 34 - 203 2006 145 64 80 36 - 225 2007 163 63 95 37 - 258 2008 205 62 128 38 - 333
Source: Central Bank of Nigeria, Statistical Bulletin, Annual Reports (Various issues)
It is interesting to note that the manufacturing
sub-sector of the sector has been reported as
being best favored in financing but it is
disheartening to note that the micro-enterprises
which constitute the largest in terms of number
as well as its employment-providing role
suffered complete abandonment in the scheme.
Educational (establishment) sector is the least
patronized, followed by sticky growth in the
solid mineral sub-sector, and
telecommunications enjoy appreciable at
inception, subsequently became sticky in the
upward swing.
The statistics on the performance of the
SMEEIS funds (table 4.6) is quite revealing.
Table 4.6: Analysis of SMEEIS Funds
Year SMEEIS Funds (N’billion)
Amount Invested (Disbursement) %
2002 13.1 2.2 2003 10.7 4.89 2004 28.8 9.3 2005 40.7 10.54 2006 41.4 14.8 2007 37.4 56.5 2008 42.02 67.1 2009 40.1 60.1
Source: Central bank of Nigeria annual report (various issues)
The SMEEIS suffered dismal
disbursement/investment of amount set aside by
participating banks at inception, with slight
improvement over time in spite of dearth of
finance in the SME sector .the inability of SMES
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entrepreneurs to draw the funds might not be
unconnected with the requirement for
benefitting. This is because majority of them
may yet required training on non – financial
services such as business plan development ,
feasibility study preparation, keeping of records
and accounts, etc.
However, increase in awareness and
business knowledge of entrepreneur may be
responsible for the leap in disbursement in 2007
and 2008. Comparison with the sectoral target
set or the scheme showed that the service sector
over perform the set target of not more than 30%
the real sector adequately satisfies the set target
of at least 60%, while the micro-enterprises of
target of up to 10% indicate non
performance(zero-performance).
In fact, the precarious financing need of the
micro-enterprises partly led to the
conceptualization of the micro-finance bank as a
community (rural) based financial institution,
with the transformation of the erstwhile
community banks into the former, which kick
started in 2006. However, if the picture of the
maturity structure of its loan in 2008 as shown
below (table4.7) is used as the basis of
assessment, the financing problem, especially of
equity type, may be far from being solved.
Table 4.7: Maturity structure of micro-financial banks credits in 2008
Tenor/ Period Loan and Advances %
Short term 0-180 days 83.8
Above 1day < 1 year 29.7
Long-term (Above 1 year) 16.2
Sources: CBN Annual Report (2008)
In fact, the maturity structure of the micro
finance banks (MFB) credit is almost
synonymous with what of the commercial banks
and hence averse to risky and credit of long time
tenor. Their current operating framework may
incapacitate MFB in meeting the financing
needs of MSMEs.
From the forgoing, it is evident the
equity(longtime) financing mode of MSMEs is
not being met, thus the economic growth
potential may be satisfied through high failure of
micro-enterprises.
5.0 Summary, Conclusion and
Recommendation
Summary of Findings
The study reveals the important role played
by finance in the performance of small scale
business as indicate by the high correlation
between capital availability and profit making
prosperity of small scale business. An
assessment of the role of the deposit money
bank (DMBs) in meeting the finance needs of
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MSMEs may have been frustrated by its
stringent requirements in conformity with its
commercial (real0 loan or real bill doctrine and
the matching principle. Its performance was
dismissal low (deteriorated) on long-term
(equity) finance except for some improvement
on recent times on the SMEEIS funding
programme of the centre bank of Nigeria (CBN).
Also there is demand supply gap of micro-loans
that is supplied to a more limited extent by
micro finance banks (MFBs), capital constrained
nongovernmental organization (NGOs), micro
finance institutions (MFI), and others such as
targeted subsidized credit programme through
weak subsidy- dependent state development
finance institutions (DPFI).
Conclusion and Policy Recommendations
The important of MSMES in the economic
growth and development of the country cannot
be overemphasized. The formal financial sector
has dismally satisfied the financing need of the
SMEs sub-sector, while its micro enterprises
counterpart has been completely abandoned.
There is therefore the need for alternative
financing mode especially of equity type in
order to improve on the survival and
performance of micro enterprise to meet the ever
–increasing employment and income needs of
the economy and its citizenry.
The study reveals the existing gap in the
financing of MSMEs for the benefit of the
populace and the economy, that is, the “absence”
of long-term funding of equity type. There is
therefore the need to restructure as well as
strengthen policy to ensure the rapid growth and
development of the MSMEs sector.
Government should provide a congenial
environment for the operation of venture capital
and business angels financing (business
entrepreneurial monitoring) so as to enable them
to provide risky start-up capital for small
business. These may take place on the “third
window” of the stock exchange with practicable
exit package for benefactors to preserve the
egoistic ownership tendency of some Nigerian
small business entrepreneurs. The subscribers to
the share of the “third window” small firms
would include Pension Fund Administration
(PFAs) and the Nigeria Stock Exchange on
behalf of holders of unclaimed dividends.
Government should also ensure active
operation of the SME Credit Guarantee Scheme
to improve credit providers’ exposure to longer
term debt issued by small firm managers, in such
areas as business plan development, feasibility
studies, project monitoring and analysis, book
keeping and accounting, performance evaluation
etc. this could be organized before entry into
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business or early in the business when it is
having access to equity finance. This is essential
in order to facilitate the qualification of the
business for credits to leverage its equity capital
as going-on concern.
References