SMALL AND MEDIUM ENTERPRISES (SMEs) IN NIGERIA: PROBLEMS AND PROSPECTS


SMALL AND MEDIUM ENTERPRISES (SMEs) IN NIGERIA: PROBLEMS AND PROSPECTS  

ABSTRACT

This study, Small and Medium Scale Enterprises (SMEs) in Nigeria: Problems and Prospects, was undertaken to find out if the SME sub-sector in Nigeria has performed its critical role of driving the country’s industrial transformation and development as it has done in other developed countries; and if not, why, and also to identify remedial measures.

The study thus investigated the performance of the Small and Medium Enterprises sub-sector of the Nigerian economy, its problems and prospects and recommended measures to make the sub-sector virile and vibrant in order to play the crucial role it is expected to play.

A total of 300 SMEs were randomly selected from a cross section of a population of 1,500 SMEs spread among all the states of Nigeria including Abuja and covering virtually all forms (Sole Proprietorship, Partnership, Private and Public Limited Companies etc) and kinds (Services, Manufacturing, Processing, Oil & Gas, Educational etc) of business took part in the study.

Eleven banks were also selected for the study. Participants were selected through a simple random sampling process. Two sets of questionnaires were constructed, one set for the SMEs and the other for the Banks and administered on the participants. The responses to the questionnaires were complemented with personal interviews of the key operators by the researcher. The responses of the participants were analyzed using the statistical package for social sciences (SPSS), which generated the frequency distributions, means, standard deviations, variances, standard errors, chi-square statistics, correlations, analyses of variance, t-statistics, etc of the responses

The main hypotheses of this research which were tested at 0.05 level of significance using chi-square statistics hinged on identifying the greatest problem which SMEs face in Nigeria, the identification and ranking of the top ten problems or challenges of SMEs in Nigeria and the relationship between the form and nature of the business enterprise and its sources of funding for its operations.

The major findings of this study include the following:

SMEs have played and continue to play significant roles in the growth, development and industrialization of many economies the world over. In the case of Nigeria, SMEs have performed below expectation due to a combination of problems which ranges from attitude and habits of SMEs themselves through environmental related factors, instability of governments and frequent government policy changes and somersaults.

The top ten problem areas of SMEs in Nigeria in decreasing order of intensity include: management, access to finance, infrastructure, government policy inconsistencies and bureaucracy, environmental factors, multiple taxes and levies, access to modern technology, unfair competition, marketing problems and non-availability of raw materials locally. Thus managerial problems represent the greatest problem facing SMEs in Nigeria while non- availability of raw materials locally is the least problem.

The potentials and opportunities for SMEs in Nigeria to rebound and play the crucial role of engine of growth, development and industrialization, wealth creation, poverty reduction and employment creation are enormous. The realization of this requires a paradigm shift from paying lip service to a practical radical approach and focus on this all-important sector of the economy by the government realistically addressing the identified problems. While SMEs themselves need to change their attitude and habits relating to entrepreneurship development, the governments (Local, State and Federal) need to involve the SMEs in policy formulation and execution for maximum effect. There is also the dire need to introduce entrepreneurial studies in our Universities in addition to emphasizing science, practical and technological studies at all levels of our educational system.

Promoters of SMEs should thus ensure the availability or possession of managerial capacity and acumen before pursuing financial resources for the development of the respective enterprise.

TABLE OF CONTENTS

Title page I

Declaration III

Approval IV

Dedication V

Acknowledgement VI

Abstract VII

Table of contents X

List of tables XII

List of figures XIV

List of appendices XV

CHAPTER ONE - INTRODUCTION

STATEMENT OF GENERAL PROBLEM 1

BACKGROUND TO THE SUBJECT MATTER 13

CHARACTERISTICS OF SMEs IN NIGERIA 16

CHALLENGES OF THE SMEs 17

E. THE OBJECTIVES AND RATIONALE FOR THE RESEARCH 19

LIMITATIONS OF THE STUDY 22

DEFINITION OF TERMS 23

CHAPTER TWO – LITERATURE REVIEW

INTRODUCTION 26

B. ROLE OF SME SUB-SECTOR IN THE ECONOMY 30

C. SIGNIFICANCE OF THE SME SUB-SECTOR IN THE

NIGERIAN ECONOMY 32

D. PROBLEMS OF SMEs IN NIGERIA 34

E. PROSPECTS OF SMEs IN NIGERIA 37

F. A COMPARATIVE ANALYSIS BETWEEN INDIA’S SMALL SCALE INDUSTRIES (SSIs) AND NIGERIA’S SMEs 45

G. RESEARCH QUESTIONS 51

CHAPTER THREE - METHODOLOGY

A. RESEARCH METHODS AND APPROACHES USED 55

B. JUSTIFICATION OF THE METHODS 59

C. INSTRUMENTS/TOOLS USED 61

D. RESEARCH POPULATION AND SAMPLE SIZE 63

E. SAMPLING PROCEDURES EMPLOYED 64

F. JUSTIFICATION FOR SAMPLE SELECTION PROCEDURE/ SAMPLE SIZE AND FOR USING THE SAMPLE SELECTED 66

G. STATEMENT OF HYPOTHESES 67

H. STATISTICAL TECHNIQUES USED IN THE ANALYSIS 69 CHAPTER FOUR – PRESENTATION AND ANALYSIS OF DATA 70 CHAPTER FIVE – DISCUSSION OF THE RESULTS

A. INTRODUCTION 85

B. WHY SMEs IN NIGERIA HAVE PERFORMED BELOW STANDARD 87

C. PROOF OF HYPOTHESES 94

CHAPTER SIX – SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

A. SUMMARY OF FINDINGS 100

B. CONCLUSIONS 103

C. RECOMMENDATIONS 105

References 114

Appendix I 117

Appendix II 120

LIST OF TABLES

I. Millennium Declaration Goals for 2015

II. Human Development Indicators: Nigeria and Other Countries’ Illiteracy Rate, Adult Males and Females (% of Ages 15 and Above)

III. Human Development Indicators: Nigeria and Other Countries’ Illiteracy Rate, Youth Males and Females (% of Males and Females Age 15-24)

IV. Human Development Indicators: Nigeria and Other Countries; Fertility Rate, Total (Births per Woman)

V. Human Development Indicators: Nigeria and Other Countries’ Infant Mortality Rate (per 1,000 live births)

VI. Human Development Indicators: Nigeria and Other Countries’ Life Expectancy at Birth, Male and Female (Years)

VII. Human Development Indicators: Nigeria and Other Countries GDP Growth Rate

VIII. Contributions of SMEs in selected Asian economies (in percentages)

IX. Roles of SMEs in economies of selected countries

X. Some key indicators on the role of SMEs

XI. Frequency Table of Forms of Participant SMEs

XII. Distribution Of Nature/Kind Of Participant SMEs

XIII. Distribution of Rankings of Infrastructural Problems by Participant SMEs

XIV. Distribution Of Rankings Of Management Problems By Participant SMEs

XV. Distribution of Rankings of Access to Finance/Capital Problem by Participant SMEs

XVI. Distribution of Ranking of Government Policy Inconsistency and Bureaucracy Problems by Participant SMEs

XVII. Distribution of Rankings of Environmental Factors/Problems by Participant SMEs

XVIII. Distribution of Rankings of Multiple Taxes and Levies Problems by Participant SMEs

XIX. Distribution of Rankings of Access to Modern Technology Problems by Participant SMEs

XX. Distribution of Rankings of Unfair competition Problems by Participant SMEs

XXI. Distribution of Rankings of Marketing Problems by Participant SMEs

XXII. Distribution of Rankings of Non-Availability of Raw Materials Locally problems by Participant SMEs

XXIII. Distribution of Means of the Overall Rankings of the Ten Key Problem Areas Facing SMEs in Nigeria.

XXIV. Ranking of Problem Areas of SMEs

XXV. CHI-SQUARE TESTS

XXVI. CHI-SQUARE TESTS

LIST OF FIGURES

I. Regional Indicators of Primary and Secondary Education, 1990/91

II. Respondents rating of infrastructural problems for SMEs

III. Respondents rating of management problems for SMEs

IV. Respondents rating of access to finance/capital as a problem for SMEs

V. Respondents rating of policy inconsistencies and government bureaucracy problems for SMEs

VI. Respondents rating of environmental factors problems for SMEs

VII. Distribution of means of the ranking of problem areas in SMEs

VIII. Pie chart representation of problem areas of SMEs

LIST OF APPENDICES

I. Questionnaire for banks on SMEs utilization of SMIEIS funds

II. Questionnaire on Small and Medium Enterprises (SMEs)

CHAPTER ONE INTRODUCTION

A. STATEMENT OF GENERAL PROBLEM

Small and Medium Enterprises (SMEs) in Nigeria have not performed creditably well and hence have not played the expected vital and vibrant role in the economic growth and development of Nigeria. This situation has been of great concern to the government, citizenry, operators, practitioners and the organised private sector groups. Year in year out, the governments at federal, state and even local levels through budgetary allocations, policies and

pronouncements have signified interest and acknowledgement of the crucial role of the SME sub-sector of the economy and hence made policies for energizing the same. There have also been fiscal incentives, grants, bilateral and multilateral agencies support and aids as well as specialized institutions all geared towards making the SME sub-sector vibrant.

Just as it has been a great concern to all and sundry to promote the welfare of SMEs, it has also been a great cause of concern to all, the fact that the vital sub-sector has fallen short of expectation. The situation is more disturbing and worrying when compared with what other developing and developed countries have been able to achieve with their SMEs. It has been shown that there is a high correlation between the degree of poverty hunger, unemployment, economic well being (standard of living) of the citizens of countries and the degree of vibrancy of the respective country’s SMEs. If Nigeria were to achieve an appreciable success towards attaining the Millennium Declaration Goals for 2015, one of the sure ways would be to vigorously pursue the development of its SMEs. Some of the key Millennium Declaration Goals like halving the proportion of people living in extreme poverty, suffering from hunger, without access to safe water, reducing maternal and infant mortality by three-quarts and two thirds respectively and enrolment of all children in primary school by 2015 may indeed be a mirage unless there is a turnaround of our SMEs’ fortunes sooner than later. The time is now to do something surgical to the situation of our SMEs given the aggravating level of poverty in Nigeria and the need to meet up with the Millennium Declaration Goals.

The decreasing level of Nigeria’s per capita income, which declined from

$870 in 1981 to $260 in 1998, and $205 in2004 as well as a low level of agricultural, industrial and infrastructural development (irrigation, road and railway networks) all represent disturbing indices, which also contribute to the dismal performance and contribution of our SMEs.

Dr. Ade Oyedijo, a financial expert in a paper titled “Nigeria’s Economy and its Career Promise for the Mature Employee” affirmed that the plights of SMEs in Nigeria have to do with key variables and challenges that characterise the nation’s economy. These include but are not limited to a very high unemployment rate, which is expected to increase as a result of the current ongoing public sector reforms, high unemployment rate, high poverty level, disease, hunger, etc. Dr. Oyedijo also mentioned a drastic shift from the production of non-oil traded goods (mostly agricultural) to traded goods while about 95 million Nigerians are reported to be living below the poverty line even as 19 of her citizens are ranked among the 500 wealthiest men in modern capitalist economy as among the characteristics of our nation’s economy which aggravate the problems of Nigerian SMEs. He also opined that since independence, the main thrust of Nigeria’s development strategies and objectives have been the development of industrialization, education and a self-

reliant economy but regretted that the human capital which is expected to support the industrialisation process and propel other sectors to maturity has not exhibited the right mix of knowledge, attitude and skills required to achieve this purpose.

In spite of the fact that SMEs have been regarded as the bulwark for employment generation and technological development in Nigeria, the sector nevertheless has had its own fair share of neglect with concomitant unsavoury impacts on the economy. In a seminar titled “Carer Crisis and Financial Distress- The Way Out”, the General Manager of Enterprise and Financial Support Company Limited, Mr. Oluseyi Oluboba, identified in his paper the following as the main problems of SMEs, which are however not insurmountable: low level of entrepreneurial skills, poor management practices, constrained access to money and capital markets, low equity participation from the promoters because of insufficient personal savings due to their level of poverty and low return on investment, inadequate equity capital, poor infrastructural facilities, high rate of enterprise mortality, shortages of skilled manpower, multiplicity of regulatory agencies and overbearing operating environment, societal and attitudinal problems, integrity and transparency problems, restricted market access, lack of skills in international trade; bureaucracy, lack of access to information given that it is costly, time consuming and complicated at times.

The problems and challenges that SMEs contend with are enormous no doubt but it is curious to know that some SMEs are able to overcome them. This gives hope and should provide a basis for optimism that there is a way out. There must be some survival strategies, which are not known to many SME promoters. This research is also intended to explore and unravel some of the key business survival strategies, which have worked for a few thriving SMEs.

The benefits of this could be tremendous in that other SMEs facing threats of extermination as well as new and proposed new ones could also borrow a leaf from them.

Many other countries have been able to energize and transform their SME sub-sector to such a vibrant one that they have been able to reduce to the barest minimum their unemployment and poverty level because of the immense contribution of the sub-sector to their economic growth and development.

It is expected that the outcome of this research will go a long way in ensuring a turnaround of Nigeria’s SME sub-sector. The research would come up with a set of recommendations for various stakeholders for implementations. With the concerted efforts of all and sundry including governments at all levels, SME promoters, Agencies and Departments of Governments involved in the SME sub-sector, Non Governmental Organisations (NGOs), Multilateral

Agencies, Banks, Financiers, Investors, etc, it is hoped that the fortunes of SMEs in Nigeria would dramatically improve.

From the above, the key areas of shortcomings of the Nigerian SME sub- sector could be summarised as:

i) Rate of survival: it is said that less than 5% of SMEs survive beyond their first year of existence.

ii) Contribution to Industrial employment: whereas in great and developed economies of Germany, United States of America and even South Korea, SMEs account for as high as 64% of industrial employment, a comparative figure in Nigeria is around 31%, less than half of those in developed countries. The 31% of SME contribution to industrial growth is rather disturbing given the high degree of unemployment rate in Nigeria as well as the poverty level in the country as measured by the following indices and figures on Nigeria’s Human Development Indicators: Illiteracy Rate, Infant Mortality Rate, Life expectancy at Birth and GDP Growth Rate as compared with other countries as exhibited in Tables I to VIII from Development Data Group, World Bank. It is expected that these developmental indices will increase with improvement in Nigeria’s SME sub-sector’s performance, as has been the case with economies whose SMEs have developed and grown steadily over the years.

iii) Contribution to Industrial Production in particular and GDP in general: in spite of the fact that there is hardly any well-documented, reliable and current data, it is rather obvious that the contributions of SMEs to the Nigerian Industrial output in particular and the Gross Domestic Product in general are less than satisfactory. Evidence for this poor performance is buttressed by the fact that most manufacturing enterprises in Nigeria had operated well below capacity in the last two decades. At times the capacity utilization has been as low as thirty percent (30%). Only the multinational businesses had thrived with many SMEs folding up and thus aggravating the unemployment situation in the country and its attendant high crime rate.

The constraints to full industrial capacity utilization have been enumerated to include limited access to financing, high costs of funds and equipment, infrastructural inadequacies, unpredictable and inconsistent government policies, low purchasing power of consumers, low quality of manufactured goods, multiple taxes and levies on manufacturing inputs and manufactured goods, inefficiencies of customs and ports administration, dumping of cheap finished products on the Nigerian market, inadequate legal framework and non patronage of locally produced goods by government and its agencies.

The government in The Nigerian Vision 2010 initiatives had envisioned an environment in which small and medium scale enterprises would contribute

about 34% (gross value of manufacturing to GDP ratio) to the national product and generate 60-70% employment with sustainable yearly growth, and a low mortality rate for businesses. The envisioned future for SMEs in Nigeria is that of “a strong and virile small and medium scale enterprise that enjoys strong institutional support, contributing significantly to the Gross National Product (GNP)”.

In his address to the 2004 Annual General Meeting of the Lagos Chamber of Commerce and Industry (LCCI), the President, Chief Olusola Faleye, lamented that the real sector of the economy, comprising manufacturing, solid minerals and agriculture sectors, where most SMEs fall into, continued to experience difficult times during the year. Continuing, he said that the situation arose from the persistent problems of high energy cost, weak consumer demand, policy inconsistency, multiplicity of taxes and levies, institutional bottlenecks, high cost of funds and poor state of infrastructure among others. He cautioned that if something concrete is not done to address these constraints, the real sector of the economy especially the small and medium segment, would continue to experience a sluggish growth if not outright stagnation. The LCCI President also pointed out that the various poverty alleviation measures such as the Poverty Alleviation Programme (PAP), which later became Poverty Reduction Strategy Programme (PRSP) and currently National Poverty Eradication Programme (NAPEP) put in place by the Federal Government have yet to be felt by the masses. He stressed that these programmes do not touch the root of poverty problems in Nigeria as recent estimates put the percentage of Nigerians living in abject poverty at 70%. The LCCI was visibly concerned about the situation because of its wider implications for consumer purchasing power, the state of internal security, crime rate and the social and political stability of the country.

The government, as is evidenced by the following objectives and strategies many of which have been on going for a while, has indeed appreciated the above problems. The objectives hinge on creating a favourable and enabling environment for stimulating growth in the real sector of Nigeria especially the SMEs.

Federal Government Objectives:

The federal government has enunciated several policy thrusts in the year- to-year budget, which were aimed at improving the SME sub sector. Key among these include:

⦁ Restructuring the Nigerian economy to make it market-oriented, private sector led and technology driven

⦁ Reducing unemployment and increasing productivity

⦁ Maintaining price and exchange stability and a healthy balance of payments

⦁ Reducing lending rates and improving savings

⦁ Improving the performance of major infrastructural facilities such as power supply, communications and transportation

⦁ Entrenching probity, transparency and accountability in governance and

⦁ Improving credit delivery and extension services to small and medium scale enterprises

Key Strategies:

Towards realizing the above objectives, the Federal Government had adopted the following key strategies:

⦁ Priority attention to rural and urban water supply nationwide

⦁ Appreciate investments in power generation, implementation of an emergency power programme (EPP), encouragement of establishment of commercial power plant and focusing on transmission, distribution and rural electrification

⦁ Establishment of anti-corruption bodies such as Economic and Financial Crimes Commission (EFCC) and Independent Corrupt Practices Commission (ICPC)

⦁ Roads construction and rehabilitation, and the establishment of a road maintenance agency

⦁ Provision of N50 billion for the take off of the Bank of Industry

⦁ Implementation of the Small and Medium Industries Equity Investments Scheme (SMIEIS), which requires banks to set aside 10% of their profits before tax to improve availability of funds to SMEs

⦁ Enactment of the Pension Act, which could be an additional source of funding for SMEs

It is however important to mention that in spite of the above efforts and programmes, not much benefits have been substantially realized from them. This means that a lot more needs to be done including a paradigm shift in the focus and administration or implementation of the policies and programmes.

TABLE 1

Millennium Declaration Goals for 2015

⦁ Halve the proportion of people living in extreme poverty.

⦁ Halve the proportion of people suffering from hunger.

⦁ Halve the proportion of people without access to safe water.

⦁ Enrol all children in primary school. Achieving universal completion of primary schooling.

⦁ Empower women and eliminate gender disparities in primary and secondary education.

⦁ Reduce maternal mortality ratios by three- quarters.

⦁ Reduce infant mortality rates by two-thirds.

⦁ Reduce under-five mortality rates by two-thirds.

⦁ Halt and begin to reverse the spread of HIV/AIDS.

⦁ Provide access for all who want reproductive health service

⦁ Implement national strategies for sustainable development by 2005 to reverse the loss of environmental resources by 2015.

.

SMALL AND MEDIUM ENTERPRISES (SMEs) IN NIGERIA: PROBLEMS AND PROSPECTS



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