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ENHANCING AND PROMOTING THE FINANCING OF SMALL AND MEDIUM SCALE INDUSTRIES

CHAPTER ONE

INTRODUCTION

1.1.   BACKGROUND TO THE STUDY

The early days of trade by barter could be regarded as the origin of small and medium scale industries. Then, traders employed small amounts in carrying on business that in most cases were arts and crafts and they generated some level of profit for them. Small and medium scale enterprises have been identified as an engine for promotion of sustainable and enduring economic growth. This is so because small businesses grow to medium; and medium to large. The pivotal roles of SMEs in development arise from their characteristics and they are therefore likely to facilitate the development of indigenous entrepreneurial culture for the country and increase domestic production as highlighted below:· Sustainable employment generation: Since SMEs often employ simple technology and are generally labour intensive, they have a higher capacity to create employment, at least for the unskilled and uneducated members of the society. 

Development of entrepreneurial and management skills:  More people are exposed to the opportunity of owning and managing their own businesses since the capital outlay for SMEs is not so high.  SMEs may thus be regarded as a training ground for managers of bigger and more formal business organizations. Promotion of Innovation and technology development:  SMEs facilitate the development of both indigenous and adopted technology as new process, methods, machinery, raw materials and equipment are constantly being developed and improved upon.  Research and development are also encouraged as there are constant needs for improvement of processes and methods.  Creation of markets and generation of local demands for raw materials.  

Since SMEs create employment for people who otherwise would be unemployed, the  per capital income is increased and there is a general improvement in the standard of living. SMEs build  export capacity and encourage the optimal utilization of the country’s resources.It was in consideration of the above attributes of SMEs that it became imperative for the government to formulate appropriate policy framework for the promotion and development of SMEs. Prior to 1999, there had been some SME focused programmes initiated by government to encourage investment in SMEs and boost their development and contribution to the growth of the economy.  Some of the past initiatives are: Small- scale Industries Scheme 971 Agricultural Credit Guarantee Scheme  1973 Nigerian Agricultural & Co-operative Bank 1973· Nigerian Bank for Commerce and Industry 1973 Small and Medium Scale Enterprises Loan Scheme   1992. National Economic Reconstruction Fund 1994·   

Family Economic Advancement Program 1991In addition to the above, government also introduced the following specialized banks:  Peoples Bank   1989.  Community Banks 1992 Efforts by government to formulate policies that will encourage the growth of SMEs and alleviate their problems, made it apparent that financial problems constitute the toughest hinderance encountered by the sector.  Banks usually offer short-term financing, which is not suitable for SMEs.  Furthermore, demands are made for collaterals which small scale entrepreneurs seldom have. However, most of these initiatives failed due to lack of adequate funding. Clearly, an underfunded body is not well positioned to fund such a monumental project. The various initiatives were also bedevilled by nepotism, favoritism, red-tapism, unnecessary political meddling and corruption. Lack of adequate monitoring also contributed substantially to the failure of the initiatives. In order to ameliorate the above problems and add impetus to the growth of SMEs, that the Bankers’ Committee (a committee of Chief Executives of banks in Nigeria) at its 246th meeting held on 21st December, 1999 approved the Small and Medium SMEIS (The scheme is now known as Small and Medium Enterprise Equity Investment Scheme [SMEEIS] – by virtue of the revised guideline of April, 2006) The scheme requires all banks in Nigeria to set aside ten percent of their profit after tax (PAT) for equity investment in small and medium industries.

1.2    STATEMENT OF PROBLEM

Realities on ground have shown that in spite of the government initiatives aimed at encouraging small and medium scale entrepreneurs, SMEs are yet to fully exploit their potentials.  SMEs’ contribution to the gross domestic product has been negligible (A.T. Salami 2013). Presently, the problem of lack of adequate financing of SMEs seems to persist. Apart from the Small and Medium Enterprises industries Equity Investment Scheme (SMEEIS), the only formal sources of funding available to SMEs are the capital market and credit facilities from conventional banks which have not been favourably disposed to doing business with small enterprises.

1.3   SIGNIFICANCE OF THE STUDY

The pivotal roles of SMEs in the growth and development of the real sector have attracted a lot of attention to it in recent times.   However, lack of adequate funding through capital investment and credit facility has remained the bane of SMEs. In view of the foregoing, this research is aimed at assessing the adequacy of funding arrangements available to SMEs in the areas of study and generally in Nigeria. Shortcomings in the existing arrangement will be highlighted and remedial measures suggested.  These will be undertaking as a contribution towards ensuring that financial problems will not hinder the growth of this vital sector of the economy.

1.4    OBJECTIVES OF THE STUDY

The objectives of this study are:

i  To examine the various sources of finance available to SMEs in Ibadan South West and Ibadan North West Local government areas of Oyo State.

ii To appraise  the various government policies and incentives towards promoting SMEs in Nigeria and how these have impacted on the finances of SMEs within the areas of study.

iii To demonstrate through a survey, the contributions of both formal and informal sources of finance so that effective sources of finance to SME may be known.

iv To appraise the latest policy initiative of the Bankers’ Committee which makes it mandatory for banks to make ten percent of their profit after tax available for SME financing through equity investment.

1.5   SCOPE  OF  THE STUDY                                          

The location of this study is limited to Ibadan South West and  Ibadan North West local govt. areas of Oyo State.  The study was directed to some small and medium scale industrialists within the area through the use of questionnaires. The study is organized in chapters which were divided into five.  The first consists of general introduction to the study, statement of the problem, objectives and significance of the study.  Chapter Two deals with previous works, opinions and appraisal of works of different authors on the financing of small and medium scale industries while the third chapter explains the method used in order to show the relationship which exists between SMEs and the various sources of fund available to them.  Chapter Four focuses on the analysis and the effects of financing of small and medium scale industries while the last chapter summarizes the major findings and made some useful suggestions to enable small and medium scale industries conduct their financing on efficient and effective manner that will make for efficiency.

1.6    RESEARCH QUESTIONS AND HYPOTHESIS

The questions focused in this study are:

1. Are formal financing methods popular amongst small and medium industries?

2. How does finance affect small and medium industries?

3. Is there any nexus between the initial capital investments of small and medium scale industries and the level of their incomes?

4. Are small and medium scale industrialists aware of the existence    of SMEEIS and making adequate use of it?

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