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], [

[email protected] ]

Pakistan Journal of Business and Economic Review Vol. 2, Number 1 (2011).


78

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



79

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



80

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



81

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



82

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)



83

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



84

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



85

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.



86

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:



87

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



88

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



89

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)



90

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



91

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



92

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



93

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.



94

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



95

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



96

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



97

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

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