THE EFFECT OF BORROWING ON THE PERFORMANCE OF MICRO ENTERPRISES IN NIGERIA
ABSTRACT
The purpose of this research is to look into the relationship between borrowing and the performance of small and medium-sized businesses in Nigeria. The research looked at some relevant and related literature. The descriptive survey research method was used to assess respondents’ opinions through the use of a questionnaire and a sampling technique.
A total of 100 (one hundred) questionnaires were distributed, and all were returned duly completed. The analysis of research questions and hypotheses revealed that SMEs have the most financial problems and, as a result, borrow money primarily from banks.
The funds raised will be used to expand their operation’s scale, as well as increase the quantity of goods produced, purchased, and supplied to the market. The operators believed that once their financial problems were resolved, they would no longer have any.
Borrowing, however, rather than assisting them, creates an additional problem of repayment of both the principal and interest. This forces them to sell their goods at ridiculously low prices in order to increase sales turnover, robbing them of the normal profit they should make.
CHAPTER ONE
INTRODUCTION
1.1The Study’s Background
Small and medium-sized enterprises have come to be recognized as veritable engines of growth, employment, poverty reduction, and innovative development in today’s world economies. Governments of various nations, as well as world economic development and financial institutions such as the Brethonwood Institution (International Monetary Fund and World Bank), and the United Nations, have all embarked on deliberate development policies aimed at creating a productive base for world economies in recognition of the potentials of SMEs (Englama, et al, 1997).
Regardless of how lofty these goals and aspirations are, the issue of finance has proven insurmountable. For example, Fatunla and Adebayo (1985) observe that insufficient finance has always been a barrier to the development of small-scale industries.
Oshunbiyi (1989) also noted the critical role of finance at every stage of an organization’s life, as well as the limited access of small industrialists to the capital market, and believes that they could improve their financial position by utilizing institutional credit sources or borrowing from banks.
As Harper (1995) emphasizes, with the large increase in world population (particularly in Nigeria and many developing countries), “governments cannot afford to employ many more, and larger scale industry as this has dramatically failed to absorb more than a tiny fraction of the multitudes who need jobs.
” Small businesses are thus potentially the hope of job creation in many countries, and it is hardly surprising that policymakers in developing countries and almost everywhere else have worked so hard to promote and encourage them.”
The availability of efficient infrastructure services is a critical prerequisite for the start-up of private investment (CBN, 2000). Any enterprise, large or small, will require funds for capitalization, working capital, and rehabilitation needs, as well as the creation of new investments, in order to take off and perform efficiently (Nnanna, 2001).
SMEs employ more than half of the industrial workforce in Columbia, India, Indonesia, Kenya, the Philippines, Tanzania, and Zambia, mirroring national experiences. They are the true job creators in the European Union (EU),
accounting for 99.9 percent of the 11.6 million enterprises (excluding agriculture, fishing, and other sectors), 72 percent of the 80.7 million people employed by all enterprises, and generating 69.7 percent of EU turnover (Deloittee, Touche and Tohmatsu, 1995). Small and medium-sized enterprises (SMEs) accounted for more than half of total employment in Canada (Government of Ontario, 1995).
According to studies, SMEs have provided a mechanism for stimulating indigenous entrepreneurship, increasing employment opportunities per unit of capital invested, and assisting in the development of local technology in many countries (Sule, 1986; World Bank, 1995).
They aid in the mobilization of savings for investment and promote the use of locally sourced raw materials. They contribute to more equitable income distribution among individuals and regions, as well as reducing rural-urban migration, by dispersing across the country.
Given these benefits, greater emphasis has been placed on the global promotion of SMEs as a tool for poverty alleviation and economic development. Even in the most prosperous economies, such as the United States of America, small and medium-sized businesses have played an important role in the country’s transition from the industrial age to the post-industrial information technology era.
Furthermore, in other countries, such as Japan and South Korea, the use of sophisticated technology has reduced to the most efficient scale of production in industries known for product innovation, such as the electronics and computer industries (Olorunshola, 2000).
Similarly, the Nigeria budget for 2003 was intended, among other things, to reduce poverty. According to Sanusi (2003), the goal is to “pursue macroeconomic policies and sector growth strategies that will achieve fiscal stability, improve non-oil sector competitiveness, lower levels of inflation,
and a stable and competitive exchange rate in order to engender growth and reduce poverty through increased employment.” Particular emphasis has been placed on the development of small and medium-sized enterprises with the goal of transforming them into engines of growth for the various economies.
One of the major economic tools being used in various nations to combat slow economic growth and poverty is the complete transformation of the economy from a consumer to a productive economy by providing assistance to SMEs through adequate financing and the creation of an enabling environment.
1.2 Problem Statement
One of the most pressing issues confronting African Sub-Saharan Africa, and indeed developing countries in general, is the mobilization of resources to achieve desired outcomes.
In the case of SMEs in Nigeria, in particular, various problems confront their growth and, as a result, the goal of their establishment and management as a growth engine. Market; raw materials; manpower; lack of information; lack of management and technical skills; poor ethical values and lack of transparency; proper policy formulation and implementation; and funding/financing are some of these.
Inadequate financing is typically caused by insufficient proprietorship and equity participation. For a business to be successful, it must have a strong capital base and a positive financial outlook. Small-scale entrepreneurs, on the other hand, are often hesitant to bring in partners, even if it means risking undercapitalization.
Because of the underfunding of SMEs, the government has devised measures to assist this sector, such as loan packages through the World Bank, the National Directorate of Employment, the National Economic Reconstruction Fund (NERFUND), and other financial assistance schemes.
According to Owualah (2001), among the problems of small scale businesses, whether faced by their owners or those interested in their well-being, financial problems have tended to overshadow others that they face in their daily struggle for survival.
In other words, their other problems in production, marketing, personnel, and even day-to-day management are usually tainted with money. The success of these businesses, on the other hand, will be largely determined by the effectiveness of the financing strategies they employ.
1.3 The Study’s Purpose
The purpose of this research is to look into the impact of borrowing on Small and Medium-Sized Enterprises.
Other specific goals include:
– Determine the most difficult problem confronting SMEs.
– To discover the reasons for borrowing.
– Determine the frequency with which borrowing occurs.
– To identify the primary source of borrowing.
– To ascertain the extent to which borrowing has had a negative impact on the performance of SMEs.
– To make recommendations based on the facts gleaned from the answers to the research questions.
1.4 Research Concerns
In this study, the following research questions were raised:
– What is the most difficult issue confronting SMEs today?
– How frequently do small and medium-sized businesses borrow money?
– What is the primary source of borrowing available to SMEs?
– What is/are the problem(s) associated with borrowing?
– To what extent has borrowing had a negative impact on the performance of small and medium-sized businesses?
– How will the performance of SMEs change if the financial problem is resolved?
1.5 Hypothesis Statement
In this study, the following research hypotheses were developed and tested:
H0: There is no statistically significant difference among respondents who believe that borrowing has improved the performance of small and medium-sized businesses in Nigeria.
H1: There is a significant difference among respondents who believe that borrowing has a positive impact on the performance of small and medium-sized businesses in Nigeria.
Adequate funding has no discernible impact on the performance of Nigeria’s small and medium-sized enterprises.
Adequate funding has a significant impact on the performance of small and medium-sized businesses in Nigeria.
In Nigeria, commercial banks play no significant role in the growth and development of SMEs.
Commercial banks in Nigeria play an important role in the growth and development of SMEs.
1.6 The Study’s Scope
The study’s scope is limited to the concept of SMEs and the role of finance in a developing economy like Nigeria.
The study’s scope is also limited to some SMEs located in Lagos State’s Mainland Local Government Area.
This study will be limited by time, money, and the availability of relevant materials, as well as respondents’ unwillingness to provide accurate information on the subject.
1.7 Importance of the Research
The importance of this research study on the contribution of SMEs to the developing economy cannot be overstated, as it will benefit SMEs’ management and operators, governments, small and medium-sized entrepreneurs, and individual stakeholders.
The study will help to define the problems and challenges that most SMEs face. This study will provide insight to both federal and state governments, allowing them to grant more funds to Nigerian SMEs in order to sustain their growth and development for the benefit of the Nigerian economy.
1.8Terms Definition
Financial institutions are places where money is kept and lent out to prospective customers or individuals.
The capital market is where stocks are bought and sold.
Borrowing: Obtaining loans (funds) from a bank or other financial institutions in order to expand one’s business.
The Central Bank of Nigeria is abbreviated as CBN.
Small – Scale Industry: An industry with a labor force of 11-100 people or a total cost of less than N50 million, including working capital but excluding land costs.
Medium Scale Industry: An industry with a labor size of 101-300 workers or a total cost of more than N50 million but less than N200 million, including working capital but excluding land costs.
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