CHAPTER ONE

INTRODUCTION

1.1            BACKGROUND OF THE STUDY

In recent years, particularly since the adoption of the economic reform programme in Nigeria in 1986, there has been a decisive switch of emphasis from the grandiose, capital intensive, large scale industrial project based on the philosophy of import substitution to small scale industries with immense potentials for developing domestic linkages for rapid, sustainable industrial development. Apart from their potential for ensuring a self reliant industrialization, in terms of ability to rely largely on local raw materials, small and medium scale enterprises are also in a better position to boost employ raw materials, employment, guarantee a more even distribution of industrial development in the country, including the rural areas, and facilitate the growth of non-oil exports.

In Nigeria, the definition of small and medium enterprises also varies from time to time and according to institutions, for instance, the Central Bank of Nigeria’s (CBN) monetary policy circular No: 27 of 1988 define small scale enterprises (excluding general commerce) as enterprises in which total investment (including land and working capital) did not exceed #500,000 and or the annual turn-over did not exceed #5.0 million.

Medium enterprise (excluding general commerce) as enterprises in which total investment did not exceed #1,000,000 (1 million) and the annual turnover did not exceed #1.2 million. Small scale enterprises are one of the modern strategies underdeveloped countries are employing to break into the “league” of developed countries. Fasua (2006:85) categorized businesses that fall under small scale are firewood supply, plantain production, restaurant services, small scale poultry raising, operating a nursery for children, home laundry services and host of others. Business grouped under medium scale according to Fasusa are; soap production, hair/body cream production, chemical production, commercial poultry, profession associate (law, accountancy, education) food and beverage production among others.

Consequently, both the federal and state governments and recently, local governments, have stepped up efforts to promote the development of small scale enterprises through increased incentive scheme, including enhanced budgetary allocations for technical, assistance programmes. New lending schemes and credits institutions for technical assistance programme New lending schemes and credit institutions such as the National Economic Reconstruction found (NERFOUND), World Bank-assisted small-scale enterprises loan scheme (SMES), Nigeria Export and Import Bank (NEXIM), the people’s Bank of Nigeria (PBN) and the Community Bank have also emerged at both the national and local levels to boost the flow of development finance of small scale enterprises which have so far depended largely on personal funds and credit. From informal sources for both their investments and working capital.

Unfortunately, all these formal credit scheme have not been able to adequately redress the fundamental problems which have constrained small scale enterprises access to credit. The low credit rating of this class of enterprises, is attributable largely to their weak capital, base, high mortality rate, low productivity and shortage of managerial skills. Indeed, the problem of weak capital base, high mortality rate, low productivity and shortage of managerial skills. Indeed, the problems, of weak capital base, and poor access to finance appear to have developed into some vicious circle, leading to slow growth, stagnation and even rapid demise of the small scale enterprises. The impact of all existing credit scheme in terms of providing funds for meaningful and sustained development among the small scale enterprise, had medium enterprise to serve the expected role of catalyst for rapid industrial development, there is need for a more innovative strategy for improved access to development finance for the small and medium enterprise that would address their inability to provide collateral securities for loans formal credit institutions.

1.2            STATEMENT OF THE PROBLEM

Small and medium enterprise are mostly in managed by owners and relations. The financing in most cases is normally provided by the owners. The owners fail to realize the importance of external source of capital in order to affect expansion in the business by the owner, members of the family and friends in most cases.

In another development, small and medium enterprise experiences difficulties in raising equity capital from the finance houses or individuals. Even when the finance house agrees to provide  equity  capital, the conditions are always dreadful.  All the result to inadequate capital available to the sector and thus lead to poor financing. This is the bane of most cottage industries in Nigeria. About 80% of small and medium enterprises are stifled because of this problem of poor financing and other problems associated with it (Chukwuemeka, 2006). The problems that emanated from poor financing include:

a)                 Lack of competent management which is the consequence of inability of owners to employ the services of experts.

b)                Use of obsolete equipment and methods of production because of owner’s inability to access new technology.

c)                 Excessive competition which resulted from sales which is a consequence of poor finance to cope with increased competition in the industry.

In spite of the different measures since 1960 to increase industrialization, small medium enterprises are still facing hard conditions. This is as a result of some constraining factors.

1)                The high cost of available raw materials effects the prices of good food. This only has adverse affect on the turnover of the enterprise but also on the profitability.

2)                To what extent has the finance house strict conditions affected the development of small scale.

3)                Does poor financing actually affect small and medium business operation?

1.3            OBJECTIVES OF THE STUDY

The specific objectives of the study are:-

1)                To determine the role of small and medium enterprises in economic growth in Nigeria

2)                To determine factors influencing small and medium enterprise in Nigeria

3)                To determine the extent finance house strict conditions have affected the development of small and medium enterprise in Nigeria

4)                To assess the extent poor financing has affected small and medium business operation in Nigeria.

5)                To examine how small and medium scale enterprise contribute to development of the economy

1.4            HYPOTHESIS OF THE STUDY

The following hypothesis is formulated to provide the lead for this study:           

Hypothesis I

Ho:    The phenomenal growth in the number of small and medium enterprise is not due to quest for self employment.

Hi:    The phenomenal growth in the number of small and medium enterprise is due to guest for self employment.

Hypothesis II

Ho:    The profitability of the business has not encouraged people involved       in the business.

Hi:     The profitability of the business has encouraged people involved in         the business.

1.5 SIGNIFICANCE OF THE STUDY

 This study is aimed at showing the role of small and medium scale enterprises on the development of Nigerian economy, small and medium scale enterprises are, how to set up small and medium scale enterprises, how to raise funds for setting up small and medium scale enterprises, a technique of decision making, a system of performance measurement and reporting which is vital in business growth and expansion.

It is the desire of the researcher to inquire and report specific areas in which financial base shortage can be identified among small and medium scale enterprises, highlight the solution to the problem of small and medium scale enterprises.

It could also serve as a useful insight to business consultants, accountants and government small and medium scale enterprises extension services, staff, banking and so on, who offer advice to small and medium scale enterprises.

1.6 SCOPE OF THE STUDY

The study is limited to the role of small and medium scale enterprises in economic growth in Nigeria. The data to be collected would be restricted to Oredo Local Government Area of Edo State.

1.7             LIMITATION OF THE STUDY

The researcher encountered some difficulties while carrying out this study. These affected the study in one way or the other.

1        Scarcity of Data

Not much has been written on small and medium enterprise and so the researcher depended to a great extent on primary sources. But some of the staff of these ventures approached for information where not cooperative and so, the researcher used the little information made available to him.

  2.     Financial Constraints

          The study could have been more extensive if the researcher has move       resources at his disposal she should have traveled to other towns         outside Edo for data and information but because of limited finance,          the study was concentrated.
3.       Time Constraint

          The researcher conducted this study within a limited period to time.         This is because the demand place on him by other academic work did not afford him much time to carryout study.

1.8 OPERATIONAL DEFINITION OF TERMS

Efficiency: This is a fact of performance which relate to the rate of resource utilization (i.e. cost incurred in the course of the work. Ovuorie G (1997).

Policies: Koontz, O Donnell and Weihrich (1980) define policies as a general statement or understanding which guide thinking in decision making; the essence of policies is the existence of discretion, within certain limits in guiding decision making.

Inadequate: It is a situation where there is an insufficient or inappropriate amount of something in relation to another.

Financial Capacity: It is the level of finance or amount of money available for an organization, individual or government.

Economic development: According to Aigbomian D.O et al (2008), Economic development is defined as the full utilization of all the available resources in every sector in an economy in such a way that will increase the standard of living and enhance economic growth of the economy.