AN EVALUATION OF CONSTRAINTS TO CREDIT ACCESS

BY A SELECTED NEW SMALL AND MEDIUM SCALE

ENTERPRISES IN BENUE STATE

TABLE OF CONTENTS

Title Page

Declaration

Approval Page

Dedication

Acknowledgement

Table of contents

Abstract

CHAPTER ONE: INTRODUCTION

1.1 Background to the study 1

1.2 Statement of the Problem4

1.3 Objectives of the Study 7

1.4 Research Questions 8

1.5 Research Hypotheses 8

1.6 Significance of the Study9

1.7 Scope of the study 10

1.8 Operational Definition of Terms10

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Introduction 12

2.2 Conceptual Framework 12

2.2.1 The Concept of Small Scale Business12

2.3 Historical Development of Small Scale Businesses inNigeria

17

2.4 The Benefits of Small Scale Businesses to theEconomic Development of Nigeria

21

2.5 Government Measures in Promoting Small ScaleBusinesses in Nigeria

27

2.6 Factors Constraining Small and Medium ScaleBusinesses to Credit Access in Nigeria

31

2.7 Prospects of Small Scale businesses in Nigeria36

2.8 Empirical Review of Past Literature40

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction 46

3.2 Research Design 46

3.3 Population of the Study 47

3.4 Sample and Sampling Techniques 47

3.5 Techniques of Data Analysis 48

3.6 Justification for the use of the Techniques48

3.7 Model Specification49

3.8 Sources of Data 50

3.9 Weaknesses of the Methodology51

CHAPTER: DATA PRESENTATION AND ANALYSIS

4.1 Introduction

4.2 Data Presentation and Analysis

4.2.1 Data Validity Test

4.3 Testing of Research Hypotheses

4.4 Interpretation of Findings

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATION

5.1 Summary of Findings

5.2 Conclusions

5.3 Recommendations

5.4 Limitations

5.5 Areas for Further Research

Bibliography

Appendix

ABSTRACTThe rising failure rate of small scale businesses in Nigeria is a seriousproblem demanding for urgent attention. In respect of this, the researchproject seek to evaluate the constraints to credit access by new small andmedium scale businesses in Benue state, and in relation to this, explorethose challenges which dampen the ability of small scale businesses fromrealizing their full potentials. This study also looks at their prospects forp o s s i b l e improvement and development. The chi-square (x2) modeltest was applied on the data obtained through questionnaires from someselected small scale businesses in B e n u e s t a t e . The findings indicate

that inadequate infrastructure, paucity of finance, lack ofqualified personnel ,and poor accounting records, in that order, are themajor challenges affecting small scale businesses in Nigeria. Out of the 20respondents that participated, 41%, 28%, 17% and 14% respectivelyconsidered poor infrastructure, paucity of finance, unqualified personneland poor accounting records as the greatest impediments to credit accessand survival of new small scale businesses, respectively. It is suggestedtherefore that nurturing the small scale businesses with doggedcommitment could, place the state on the path to economic reform thatwould be a turning point in facilitating the recovery of Nigerian economyand purposeful national development. The collective efforts of both the

government, Non-Governmental Organizations, other stakeholders, andespecially small scale business operators are strongly advocated.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Western economies realized long ago that Small and

Medium Enterprises Are the main drivers of the economy?

While big businesses are necessary to preserve and

maintain structure within the economy, they have

considerable problems of their own. Mega corporations of

the earlier era increasingly lost their edge to smaller

organizations which have sprouted all over the western

landscape. Nigeria, like any other nation has witnessed

dramatic changes in its industrial landscape. These

changes are largely due to the efforts of the government

to convert the economy from agricultural to an

industrialized one. This arises from the belief that

industrialization besides minimizing dependence on the

developed economies, increases the country‘s national

output, generates funds for the government, and leads to

the conservation of foreign exchange earnings. The path

towards industrialization in Nigeria has not been

easy because of the disparity in resources endowment of

the economic units and the low level of investment in

the economy. While some units have resources beyond

their immediate needs, others may have need for resources

beyond what they can presently generate. Pass and Pike

(2003) opined that the level of investment in an economy

is one of the major elements in determining its future

productive capacity and ultimately the growth in the real

living standards of its people. Also, other authors

(Ekpenyong & Nyong (2002), Adeyemi & Badmus (2000) argued

that shortage of finance is a critical limiting factor in

industrial growth and the realization of an

entrepreneur‘s dream.

In the light of the above and in realization of the

fact that industrialization is required for rapid

economic development, successive governments in Nigeria

formulated many policies and sometimes reversing earlier

ones to ease industrialization. To solve the financing

problems, particularly of Small and Medium Enterprises

(SMEs), a number of specialized financial institutions

like the Bank of industry (BOI), which is a product of

the former Nigeria Industrial Development Bank (NIDB);

the Nigerian Bank for Commerce and Industry (NBCI);

alongside the newly introduced Microfinance Banks have

been established besides the formulation of many

favourable credit policies. It is pertinent to state that

Nigeria like many Less Developed Economies (LDEs) has an

economy that is characterized by many micro firms.

Micro, small and medium enterprises in Nigeria account

for 95 percent of non-oil productive activities outside

agriculture (Jamodu, 2001). Thus, the Small and Medium

Enterprises are accorded high priority and resource

commitments by government

The SMEs are well suited to the factor endowment of

the Nigerian economy. This is because they promote the

use of local raw materials, low technologies, light

industries that employ greater number of persons per unit

of capital employed than Large Scale Enterprises (LSEs),

serve as entrepreneurial development centres and can

facilitate balanced development since they can be

operated at remote and rural areas in addition to having

short gestation period.

As a result of the immense potential contributions of

the SMEs to the industrialization of a country as seen in

the middle east, especially the Gulf region led by Dubai

which has become a role model and reference point in

industrial and trade development to many nations of the

world, Nigeria is not left out in the scheme of

activities aimed at developing the Small and Medium Scale

Enterprises. It is in the light of the above, and

contributing to the various insights and knowledge of the

factors that militate against the success of the SMEs

that the research work focus on evaluating the

constraints to credit facilities by small and medium

scale enterprises in Benue State, Nigeria, with the aim

of proffering practicable suggestion on how to alleviate

this problem.

1.2 Statement of the Problem

The association of Nigerian development finance

institutions in 2004 issued a statement in relation to

why SMEs performed poorly in Nigeria. They opined that

finance is usually a constraint to SMEs. The most

pervasive constraints for SMEs has been and will remain

the lack of finance at reasonable conditions especially

form external sources (Egbon, 2004; CBN, 2005).

While this may be true, empirical evidence shows that

finance contributes to only about 25 percent of the

success of SMEs (Ogujuiba 2004). Thus the creation of

other appropriate support system and enabling environment

are indispensable for the success of SMEs in Nigeria.

While the contributions of small scale businesses

into development are generally acknowledged,

entrepreneurs in this sector face many obstacles that

limit their long term survival and development. Scholars

have indicated that starting a business is a risky

venture and warn that chances of small business owners

making it past the five year mark are very slim (ILO,

2005). Some researches into small business development

have also shown the rate of development of small scale

businesses in developing countries is higher than the

developed world (Marlow, 2009).

In Nigeria in particular, despite the support and

incentive programmes to small scale businesses, Akabueze

(2002), succinctly stated that it seems unreasonable to

expect that small scale businesses will grow and

flourish, but the rate of business failure continues to

increase because of the obstacles affecting business

performance, which finance is attributed as the main

factor. Most of these enterprises cannot access loan on a

long and short term basis. In a World Bank report in

2001, it was reported that almost 50 percent of micro, 39

and 37 percent of the small and medium scale firm are

financially constrained in Nigeria as oppose to 25

percent of the very large firm (World Bank, 2001). The

implication of this shows that small and medium scale

enterprises are either discriminated against or cannot

access funds at the credit market.

Also in Benue State, efforts are being made by

successive governments at revitalising and encouraging

potential investors to invest in SME’s in the State. This

could be inferred from a radio broadcast of May 29, 2012

(i.e Democracy day) by Governor Gabriel Suswam. He

reviewed that the state government has disbursed the sum

of N1 billion as a loan to those interested in starting

up small scale businesses in the state. In spite of all

these efforts by government at revitalising small scale

industries in the state, most of them if not all have

gone into extinction, while few surviving ones are on the

verge of collapse and are making frantic efforts to

survive. Experts most often attributed this to stringent

financial conditions attached to loans and credit which

they posited discourages industries from accessing credit

from the bank. This factor has largely undermined the

capacity of small and medium scale enterprises in

Nigeria. Even where SMEs can access the loan, it is

usually a short term loan and what SMEs requires in

building capacity is a long term loan which can be rolled

on investment overtime. This issue has generated heated

debate between the SMEs operator and the Banks. While SME

operators have been claiming that Banks request stringent

conditions and terms of approval, the Banks on the other

hand had claimed that SMEs operators don’t present

bankable projects. Nevertheless, Ogujuiba (2004) in a

report on SMEs claimed that 20percent of SMEs have

reported being constrained in receiving long term loan.

This has forced SMEs to use their internal financing

which is usually unsustainable and leads to the

vulnerability of SMEs as a result of low capital base.

Even at the establishment of the Second-Tier Security

Market of the Nigerian Stock Exchange as a palliative

measures to solve the financial problem of SMEs,

most SMEs shunned it because of the tight procedure

and administrative bottlenecks in the assessment of

credit facilities.

It is against this backdrop that this research work

intends to empirically evaluate and explore the

constraints to credit facilities that has hitherto

bedevilled small scale enterprises in Benue State,

Nigeria, over years and vis-à-vis proffer practicable

suggestion on how to alleviate, if not totally curtail

this financing problems.

1.3 Objectives of the Study

The main objective of this study is to evaluate the

constraints to credit facilities by small and medium

scale enterprise in Benue State and also proffer

practicable suggestion on how such financing challenges

could be alleviated, if not totally curtailed. Concisely

put, the study sets out clearly among other things to

achieve the following specific objectives.

I. To examine the effect of firms size on the ability to

access credit by SMEs in Benue state.

II. To examine the effect of poor accounting records on

the ability to access credit by SMEs in Benue state.

III. To examine the effect of poor managerial skills on

the ability to access credit by SMEs in Benue state’

1.4 Research Questions

Based on the prior stated objectives of this study,

the following research questions have been developed.

I. To what extent has the size of SMEs influenced its

ability to access credit in Benue state?

II. To what extent has poor accounting records of SMEs

influenced its ability to access credit in Benue

state?

III. To what extent has poor managerial skills of SMEs

influenced its ability to access credit in Benue

state?

1.5 Research Hypothesis

The hypothesis tested in this study will be stated in

null form.

The following hypothesis will be tested.

H01: The size of SMEs does not significantly influence its

ability to access credit.

H02: Poor accounting records do not significantly

influence the ability of SMEs to access credit.

H03: Poor managerial skills do not significantly influence

the ability of SMEs to access credit.

1.6 Significance of the Study

The study is important in a way that it avails all

stakeholders, not only on the Nigerian economic stage but

also on the global economic arena with the opportunity to

come to terms with how the various sources of start-up

capital of small scale owners influences their financing

problems and also to unravel some financing challenges

that has hitherto besieged small scale industries in

Benue State and Nigeria at large.

The research work will be relevant to the SMEs

operators, the government (Local, State and Federal),

non-governmental organizations as it may serve as a guide

to them as they engage in the tussle of revamping and

revitalizing the ailing SMEs.

Also to be benefited from this study is the

researcher’s practicable and in-depth suggestions on how

these financing challenges could be surmounted.

Since no research is an end to itself, this research

will in no small measure assist academia who desires to

carry out further meaningful research under similar

related topics.

1.7 Scope of the Study

The research is centred on the evaluation of

constraints to credit access by selected new Small and

Medium Scale Enterprises in Benue State. It can, however,

be recalled that Benue State is such a wide geographical

area that a research on all the Small and Medium Scale

Enterprises contained therein would be untenable, or, if

tenable, would be time consuming and capital involving.

Accordingly, particular emphasis is laid on the survey of

some selected Small and Medium Scale Enterprises in

Makurdi local government. It is intended that the result

gotten would be used to form generalizations concerning

the SMEs in Benue State. The justification for the

generalizations stems from the fact that Makurdi which is

the state capital has the highest number of Small and

Medium Scale Enterprises in the state.

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