FINANCING SMALL AND MEDIUM SCALE ENTERPRISES (SMEs): A CHALLENGE FOR ENTREPRENEURIAL DEVELOPMENT IN GOMBE STATE.

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1 FINANCING SMALL AND MEDIUM SCALE ENTERPRISES (SMEs): A CHALLENGE FOR ENTREPRENEURIAL DEVELOPMENT IN GOMBE STATE. Musa Garba Gulani Department of Accounting Faculty Arts and Social Sciences Gombe State University, Gombe, Nigeria. musagln@yahoo.com Aisha Usman Department of Accounting Faculty Arts and Social Sciences Gombe State University, Gombe, Nigeria. ABSTRACT The paper evaluates the challenges Small and Medium Scale Enterprises (SMEs) face in financing new or existing businesses in Gombe State. The population of the study consists of all SMEs operating in Gombe State. However, the study adopted purposive and simple random sampling techniques to draw the sample from the population. SMEs were then randomly drawn from three (3) local government areas; namely, Akko, Dukku and Gombe. Out of ninety (90) questionnaires distributed, Sixty five (65) were returned and analyzed using chi-square method. The result of the analysis revealed that: There is no significant difference in the difficulties SMEs face when accessing finance from various sources, there is a significant difference in the level of awareness of MFIs by SMEs. The research however, recommends that government policy of initiating various intervention funds for entrepreneurial development should be encouraged; SMEs in the state should be sensitized on the activities of Micro Institutions (MFIs). Keywords: Microfinance, Entrepreneurial Development,, Entrepreneurship, Small and Medium-Scale Enterprises. INTRODUCTION Gombe state is one of the 36 states of the federal republic of Nigeria, located in the centre of the north east of the country on latitude 9 30 and N, longitude 8 5 and E. (Gombe State Official Website (2012). The state borders the following North Eastern States: Borno to the East, Yobe to the North, Adamawa and Taraba to the South and Bauchi to the West. The geographical location and the friendly economy of the state make it a commercial area where entrepreneurs even from neighboring states have their SMEs established. These SMEs have been the source of employment and income generation to many individuals. However, financing new businesses and/or expanding the activities of existing ones become a great challenge to so many entrepreneurs in Nigeria as it is very critical in the promotion of entrepreneurship development (Bharti and Shylendra, 2011). Similarly, Simtowe and Phiri, (2007) and Muktar, (2009) stated that credit is a precondition to the growth of enterprises (entrepreneurship). Therefore, to enhance the development of SMEs in Nigeria, various efforts have been made by the Government; among these efforts, is the micro finance policy of The policy Society for Business Research Promotion 17

2 provides for the establishment of microfinance institutions (MFIs) also known as microfinance banks (MFBs) to carter for the financing needs of small and micro enterprises as well as other non financial services (CBN, 2011). Gombe State Governments also in her effort to stimulate the economy initiated interest free intervention funds programmes for merchant. These programmes among others includes: Trade Intervention Fund, Agriculture Intervention Fund, Entrepreneurship Development Fund in partnership with Bank of Industry, also maintains the Directorate for Small and Medium Scale Industries under the Ministry of Commerce and Industry, which has the objective of developing the productive capacity of the economy and thus improving the living standard of the teeming populace through provision of credit for entrepreneurial development. However, even with the effort made by Nigerian and Gombe state Governments to stimulate entrepreneurial development by aiding SMEs financing, yet quite a number of entrepreneurs face the of problem finance in setting up or expanding their businesses. Several research studies were conducted on SMEs and the role of microfinance. Ojo (2009) for example, examined the impact of microfinance on entrepreneurial development in Nigeria. Oni, Paiko and Ormin, (2012) assessed the contribution of micro finance institutions (MFIs) to sustainable growth of small and medium scale enterprises (SMEs) in Nigeria. But none looked at financing SMEs as a challenge for entrepreneurial development in Gombe State. And that is the main objective of this paper. To achieve this broad objective therefore, the following two specific objectives were formulated, to: (i) assess the difficulties SMEs face when accessing finance from various sources. (ii) evaluate the awareness of MFIs by SMEs. RESEARCH HYPOTHESES: The following hypotheses were formulated: (a) There is no significant difference in the difficulties SMEs face when accessing finance from various sources. (b) There is no significant difference in the level of awareness of MFIs by SMEs. LITERATURE REVIEW SMALL AND MEDIUM SCALE ENTERPRISES (SMES) The term SMEs has no universally accepted definition. The definition and criteria for classification of an enterprise as small, medium or large varies from one country to another, depending on whether it is developed or developing country. A small business for example to one country may be a large-scale business to another. Chukwemeke (2004), defines small scale business as one whose total asset in capital, equipment, plant and working capital are less than N250,000 and employing fewer than 50 full time workers. The Central Bank of Nigeria (CBN, 2004) defines small-scale business as an enterprise whose annual turnover ranges between N25, 000-N50, 000. Ogundele (2007) defines SMEs as one who has a minimum of 5 employees with minimum capital outlay of not less than N5, ($33). For the purpose of this research therefore, SMEs are perceived as having the characteristics of Ogundeles definition stated above. RELEVANCE OF MICRO FINANCE INSTITUTIONS IN THE DEVELOPMENT OF SMALL AND MEDIUM SCALE ENTERPRISE Several researchers have evaluated the role of MFIs in the development of SMEs. Oni, Paiko and Ormin, (2012) assessed the contribution of micro finance institutions (MFIs) to sustainable growth of small and medium scale enterprises (SMEs) in Nigeria. Their research revealed that MFIs does and could contribute to the sustainable growth of SMEs in the country. Nevertheless, the study also found among others that MFIs services outreach to SMEs at present is poor. Ojo (2009) examined the impact of microfinance on entrepreneurial development in Nigeria. The researcher concludes that microfinance institutions world over and especially in Nigeria are identified to be one of the key players in the financial industry that have positively affected individuals, business organizations, other financial institutions, the government and the economy at large through the services Society for Business Research Promotion 18

3 they offer and the functions they perform in the economy. Oni, and Daniya, (2012) accessed the development of Small and Medium Scale Enterprises and the role of Government and other Financial Institutions, they discovered that financial institutions provide the necessary financial lubricant that facilitate the development of Small and Medium Scale Enterprises, they stressed that, a lot still need to be done by the government in terms of policy formulation in order to complement the efforts of financial institutions. They finally recommends among other things that establishment of micro finance institutions to serve the grass root financial needs should be encouraged. The importance of MFIs in the development of SMEs in Nigeria cannot be over emphasized as stressed by the above researchers. This paper however, assessed the challenges SMEs face when sourcing funds from various sources including MFIs. SMALL AND MEDIUM SCALE ENTERPRISE AND SOURCES OF FINANCING according to Muktar (2009) is a precondition to the growth of enterprises. The sources of finance available to SMEs were enumerated by Ewiwile, S. Azu, B. and Owa, F. (2011) as follows: i. The owner-savings and his or her associates including family and friends who may or may not be partners or shareholders in the venture. ii. Partners and shareholders in the venture iii. Banks and lending institutions iv. The small business administration and financial assistance programme. v. Small Business Administration licensed small business investment companies. vi. Members of the trade, including suppliers of materials such as manufacturers and wholesalers, and in some instances, customers who prepay their contracts. vii. Other businesses, local capitalist sales finance companies, factor and other sources. Among the sources mentioned above, personal savings is the most convenient source of financing to quite a number of people. In a study conducted by Aggarwa, S. Klapper, L. and Singer, D (2012) on financing businesses in Africa; the role of Microfinance, respondents were asked about the most important reason why people save money, 29 percent provide a precautionary motive behind their most important reason to save, stating saving for either a rainy day or in case we get sick. The second most important reason that people report saving is to start a business (almost 20%). These numbers suggest that almost half of the people surveyed are actually using savings for purposes that credit was either supposed to, or is billed to, serve. Other sources of finance available to SMEs for example financial institutions loans are practically not accessible. Banerjee and Duflo (2007) have documented that a huge proportion of the poor still lack access to formal banking services. Gaul (2011) calculates the absolute difference between the population living below the poverty line and the population with access to financial services, and finds that the numbers are as high as 80 million for Nigeria and 48 million for Congo. While this is a somewhat crude and imprecise way to measure financial inclusion, it does underline the fact that a vast majority of the very poor continue to be bypassed by financial institutions. Besley (1995) documents that money lenders in Western Africa have been successfully charging significant withdrawal fees on deposits. However, to provide solution to unemployment problems and enhanced the growth and development of the nation, various efforts had been made by the Nigerian government to spur entrepreneurship activities in the country. Such efforts include the promulgation and establishment of the National Directorate for Employment (NDE), Nigerian Industrial Development Bank, (NIDB), Nigerian Enterprises Promotion Decree, Peoples Bank of Nigeria, Community Banks, Family Economic Advancement Programme (FEAP), and National Poverty Eradication Programme (NAPEP) to mention but a few (Olagunju, 2004; Muktar, 2009; Ojo, 2009, and Oni et.al 2012). Micro Institutions (MFIs) in Nigeria were also established with the aim of assisting SMEs in providing capital for expansion, although poor assets base and demand for collateral by banks, denies most SMEs access to capital (Oni, Paiko and Ormin, 2012). This has been attributed in part to the failure of credit markets. The argument goes that the poor have so little to offer by way of collateral, and borrow such small amounts, that it is too risky and too expensive to lend to them (Aggarwal, S. Klapper, L. and Singer, D. 2012). Society for Business Research Promotion 19

4 The in ability of the poor to access credit for SMEs financing makes them unable to undertake profitable investments and hence remain poor. If this could be checked however, the greatest challenge of SMEs will be improved. This research investigates how financing SMEs could be improved. METHODOLOGY The study presented in this paper is an exploratory one based on both primary and secondary sources of information. The primary source is the field where data were collected by administering questionnaire, while the secondary sources include published books, journals, periodicals, reports, newspaper and websites. The population of the study consists of all SMEs operating in Gombe State. However, the study adopted purposive and simple random sampling techniques to draw the sample from the population. And the SMEs were randomly drawn from three (3) local government areas; namely, Akko, Dukku and Gombe. These local governments were chosen because they constitute the main commercial areas hence have greater number of SMEs in the state. The interview method was also used to probe into some core issues raised on the questionnaire. A total of 10 respondents were interviewed face to face at random across the study area by the co-author. A total of 90 questionnaires were distributed to operators of SMEs in the study area (30 questionnaires to each Local Government Area) via research assistants. However, only 65 of the administered questionnaires were returned for analysis (25 from Gombe, 20 from Akko and 20 from Dukku). This implies that 65 SMEs were included for the study. The collected study data was analyzed using chi-square method of analysis with the aid of Statistical Package for Social Sciences (SPSS). Data Presentation and Analysis Table 1: Responses as to the opinion of the respondents of the difficulties SMEs face when accessing finance from various sources. (H1: There is no significant difference in the difficulties SMEs face when accessing finance from various sources.) Sources Gombe State Akko Dukku Gombe Total of family and friends Count (26.2%) 35.3% 29.4% 35.3% 100.0% personal loan Count (49.2%) 31.2% 37.5% 31.2% 100.0% Banks Count (9.2%) micro institutions 16.7% 33.3% 50.0% 100.0% finance Count (3.1%).0%.0% 100.0% 100.0% money lenders Count (12.3%) 37.5% 12.5% 50.0% 100.0% Total Count % 30.8% 38.5% 100.0% Society for Business Research Promotion 20

5 Table 1 above shows the responses collected from the sample population represented by figures and percentages. It is seen that a total of 17 (26.2%) out of the sample (65), access money to finance SMEs from family and friends, representing 6 (35.3%), 5 (29.4%), and 6 (35.3%) for Akko, Dukku and Gombe respectively. Also a total of 32 (49.2%) respondents out of the sample, access money to finance SMEs from their personal savings, representing 10 (31.2%), 12 (37.5%), and 10 (31.2%), for Akko, Dukku and Gombe respectively. While a total of 6 (9.2%) respondents out of the sample, access money to finance SMEs from banks, representing 1 (16.7%), 2 (33.3%), and 3 (50%), for Akko, Dukku and Gombe respectively. Again a total of 2 (3.1%) respondents out of the sample, access money to finance SMEs from MFIs, representing 0 (0.0%), 0 (0.0%), and 2 (100%) for Akko, Dukku and Gombe respectively. Finally, a total of 8 (12.3%) respondents out of the sample, access money to finance SMEs from money lenders, representing 3 (37.5%), 1 (12.5%), and 4 (50%) for Akko, Dukku and Gombe respectively. It is understood therefore from the table that, personal savings has the highest total number of responses with 32, out of 65 analyzed. It could therefore be inferred from the analysis that, personal savings is the most accessible sources of finance to SMEs in the State. From the interview conducted, most of the SMEs operators stated that other sources of finance especially Banks and MFIs are not within their reach. Thus, they fall back on personal savings, and family and friends to meet their finance needs. This finding reiterates earlier submissions Nkamnebe (2008) that entrepreneurs look for credit from other sources like friends and tribal association than from MFIs. Oni, Paiko and Ormin, (2012) discovered that access to MFI services by SMEs is poor. Furthermore, Banerjee and Duflo (2007) have documented that a huge proportion of the poor still lack access to formal banking services. Table 2: Chi-Square Tests Value df Asymp. Sig. (2-sided) Pearson Chi-Square a Likelihood Ratio Linear-by-Linear Association N of Valid Cases 65 The result of the chi-square test in the table 2 above revealed significance value which is above 0.05 value set for alpha. Therefore, the hypothesis which says that, There is no significant difference in the difficulties SMEs face when accessing finance from various sources is accepted. This means that SMEs in the state face significant difficulties in accessing finance from various sources. Table 3: Responses as to whether or not there is a significance difference in the level of awareness of MFIs by SMEs. (H1 There is no significant difference in the level of awareness of MFIs by SMEs:) Level Gombe State Akko Dukku Gombe Total of Yes Count (44.6%) % within Level of 13.8% 17.2% 69.0% 100.0% No Count (55.4%) % within Level of 44.4% 41.7% 13.9% 100.0% Total Count % within Level of 30.8% 30.8% 38.5% 100.0% Society for Business Research Promotion 21

6 Table 3 above represents the responses collected from the sample population. It is seen that a total of twenty nine 29 (44.6%) out of the sample (65) are aware of the MFIs, representing 4 (13.8%), 5 (17.2%), 20 (69.0%) for Akko, Dukku and Gombe respectively. It is also clear that 36 (55.4%) out of the sample (65) are not aware of the MFIs, representing 16 (44.4%), 15 (41.7%), 5 (13.9%) for Akko, Dukku and Gombe respectively. It could be infer from the analysis that the awareness of MFIs by SMEs in the state is poor. It is only in Gombe the state capital that the highest number of respondents 20 out of 25 are aware of the presence of MFIs, but very small number in Akko and Dukku with only 4 and 5 responses respectively out of 20 total respondents each. However, from the interview conducted it was discovered that a percentage of those reporting that MFI is not available in their community, might also simply be unaware of its presence. This finding concur with the findings of the research conducted by (Aggarwal, S. Klapper, L. and Singer, D. 2012) in which respondents were asked if they are aware of any institutions in their community that help people to obtain small business loans, greater percentage of them stated that such institutions are not available in their community. Therefore the research concludes that the greater percentage points to exceedingly low levels of awareness of MFIs. Table 4: Chi-Square Tests Value df Asymp. Sig. (2-sided) Pearson Chi-Square a Likelihood Ratio Linear-by-Linear Association N of Valid Cases 65 The result of the chi-square test in the table 4 above revealed 0.00 significance value which is below 0.05 value set for alpha. Therefore, the hypothesis which says that, There is no significant difference in the level of awareness of MFIs by SMEs is rejected. This means that there is a significant difference in the level of awareness of MFIs by SMEs. CONCLUSION AND RECOMMENDATIONS This paper has reviewed evidence from the literature of various researches in order to develop a better informed perspective on the pros and cons of the challenges SMEs face in financing new or an existing businesses. The review shows that finance is an inevitable tool for SMEs growth and development. However, financing SMEs in the state faces some challenges of where to source capital to set up new or expand an existing business, the problem has remarkably distort the development of entrepreneurship in the state. The presence of MFI in the state, was to be a magic bullet against the problem of finance that SMEs face, yet quite a number of entrepreneurs are not aware of it existence. To ensure effective SMEs financing for entrepreneurial development in the state, the state government interventions funds programmes aim to stimulate the economy and reduce poverty is encouraged. SMEs in the state should be sensitized on the operations of MFIs. This might be done through awareness creation on the purpose and activities of MFIs and where they can be reached. Society for Business Research Promotion 22

7 REFERENCES Aggarwa, S. Klapper, L. Singer, D (2012) Financing Businesses in Africa The Role of Microfinance. World Bank Policy Research Working Paper 5975 Banerjee, A. and Duflo, E. (2007) The Economic Lives of the Poor? Journal of Economic Perspectives 21 (1): Besley, T. (1995) Savings, Credit and Insurance? in J. Behrman and T.N. Srinivasan (ed.) Handbook of Development Economics, edition 1, volume 3, pp (Elsevier). Bharti, N. and Shylendra H. (2011). Microfinance and Sustainable Micro Entrepreneurship Development. Institute of Rural Management, Anand, Gujarat. Chukwuemeke, I. L. (2004). Problem of Financing Small Scale Business in Nigeria. An MBA Research Publications, University of Nigeria., Nsukka. CBN,(2011). Micro Policy, Regulatory and Supervisory Framework for Nigeria. A Publication of Central Bank of Nigeria, Abuja, Nigeria. Ewiwile, S. Azu, B. and Owa, F. (2011) effective financing and management of small scale businesses in delta state, Nigeria: a tool for sustainable economic growth International Journal of Economic Development Research and Investment Vol 2 No. 3, Dec Gaul, S. (2011) Mapping Africa Financial Inclusion Overview Washington D.C.: Microfinance Information Exchange. Gombe State Official websites (2012): retrieved from Muktar, M., (2009). The role of microfinance banks in the promotion and development of entrepreneurship in semi urban and rural areas. Nkamnebe, A. (2008). Women and micro credit financing in Nigeria: Implications for poverty alleviation and fight against vulnerability. Oni, K. Paiko, I. and Ormin, O. (2012) Assessment of the Contribution of Micro Institutions (MFIs) to Sustainable Growth of Small and Medium Scale Enterprises (SMEs) in Nigeria. Interdisciplinary Journal of Contemporary Research in Business, vol 3, no 9. Oni, O and Daniya, A. A. (2012) Development of Small and Medium Scale Enterprises: The role of Government and other Financial Institutions Arabian Journal of Business and Management Review (OMAN Chapter) Vol. 1, No.7; February 2012 Ojo, O., (2009). Impact of microfinance on entrepreneurship development: The case of Nigeria. Proceedings of the International Conference on Administration and Business, Nov , Faculty of Administration and Business, University of Bucharest, Romania. Available from Olagunju Y. A. (2004), Entrepreneurship and Small Scale Business Enterprises Development in Nigeria, Ibadan, University press plc. Simtowe, F.P. and A. Phiri, (2007). To what extent are credit constraints responsible for the non-separable behavior at household level? Evidence from tobacco growing households in rural Malawi. J. App. Sc., 7: Society for Business Research Promotion 23