PROBLEMS AND PROSPECTS OF SMALL-SCALE INDUSTRIES IN NIGERIA

ABSTRACT

In Nigeria the recognition of the economic significance of small-scale enterprises is only a recent phenomenon. Hitherto, the adopted industrialization strategy, which originated in the colonial era, encouraged the undistracted use of imported raw materials to produce import substitutes. To the extent that this strategy was biased towards large-scale production activities, it invariably undermined the growth and development of indigenous industries, most of which are small medium scale in size. The major criteria used in the definition of small-scale enterprises include member of employees, sales value, relative size, initial capital outlay, financial strength, compassion ownership and type of industry.

This study examines the subjects through comparative definitions of small/medium and large enterprises and states the purposes of small-scale enterprises in the task of building an economically viable in Nigeria. The myriad of problems faced by small and medium enterprise are discussed extensively.

To successfully cover this particular aspect of the project, both primary and secondary sources of acquiring the needed data are employed and the gathered data are sorted, organized, and arranged under different heading for a proper analyzing using a simple percentile method.

However, of an the various Challenges of small scale business highlighted sounds paramount because of a number of reasons, first, the peculiar situation small-scale industries inherently suggests a weak capital structure and constraints in respect of access to capital markets. Second, small-scale industries traditionally suffer discrimination in the distribution of credits in the conventional loan markets.

Lastly, inspite of policy declarations and measures in favour of small-scale industries by the government, uncertainties faced by financial institutions both public and private still lead them to concentrate lending on low-risk, large scale, corporate borrowers.

 

 

TABLE OF CONTENTS

CHAPTER ONE

1.0     Introduction

1.1     Background of Study

1.2     Problem of Study

1.3     Research Question

1.4     Means of Obtaining Data

1.5     Limitation of Study

1.6     Definition of Term

1.7     Purpose of Study

1.8     Significance of Study

1.9     Scope of Study

1.10   Organization of Study

 

CHAPTER TWO

LITERATURE REVIEW

2.1     Introduction

2.2     Definition of Small-Medium Scale Enterprise

2.3     Features of Small-Medium Enterprises

2.4     Roles of Small and l4edium Scale Enterprises

2.5     Problems of Small-Medium Scale Enterprises

2.6     Financial Problem

2.7     Deficient Entrepreneurial Capacity and Poor Business Orientation

2.8     Failure to take Advantage of Management Consultancy Services

2.9     Inadequate Physical Infrastructure

2.10   Competition

2.11   High Cost of Business Resources

2.12   Shortage of Technical Manpower

2.13   Public Relations

2.14   Shortage Facility

2.15   Advertising and Promotion

2.16   Characteristics, Values and Problems of Small Scale Enterprises

2.17   SMEs and Financing System

2.18   Financing Problem of Rural Small Enterprises

2.19   Examining the Problems of Financing Rural/Small Enterprises.

 

 

CHAPTER THREE

RESEARCH METHODOLOGY

3.1     Introduction

3.2     Hypothesis Testing

3.3     Restatement of Research Question

3.4     Characterization of Study Population

3.5     Research Instrument

3.6     Procedures and data

 

CHAPTER FOUR

ANALYSIS AND PRESENTATION OF DATA

4.1     Introduction,

4.2     Description of Respondents

 

CHAPTER FIVE

SUMMARY, RECOMMENDATION AND CONCLUSION

5.1     Summary of Findings

5.2     Recommendation 

5.3     Conclusion

Bibliography

Appendix

  1. Introductory Letter
  2. Questionnaire

 

 

CHAPTER ONE

INTRODUCTION

 

1.1    BACKGROUND OF STUDY

Small scale industries are vital sources of employment generation, development of indigenous technology; even dispersal of industrial set­-ups if increases production of manufacturing exports, and increasing local content of industrial output by fostering forward and backward industrial linkages to enhances the general level of economic activity.

Since the second National Development Plan (1970 - 1974) and third National Development (1975 - 1980), emphasis has been placed on the development and proliferation of small-medium scale enterprises (SMEs) for the purpose of using them as veritable engines for economic growth and development.

From the 1970s, therefore different definition have been given as to what should be regarded as a small of medium scale industry. The Central Bank of Nigeria (CBN) discuses small scale enterprises, in its credit guidelines to banks as those enterprises with annual turnover not exceeding N500.000 in the guidelines to commercial banks and enterprises with capital investment not exceeding N2 million excluding cost of land; or with a maximum turnover not exceeding N5 million in the' case of guidelines to' merchant banks. Similarly, the federal ministry of industry's guidelines to the Nigerian bank for commerce and industry (NBCI) regard small scale industries as those enterprises cost of land, but including working capital.  In practice, the Nigerian Bank for Commerce and Industry accepts small scale industries as those enterprises with capital not exceeding N750,000 excluding the cost of land but including working capital.

The Nigerian Industrial Development Bank (NIDB) regards small scale enterprises as those project cost, i.e. investment and working capital not exceeding N750,OOO and medium scale enterprises as those with project cost ranging between N750,000 and N3 million.

The Center of Industrial Research and Development (CIRD) at the Obafemi Awolowo University, Ile-Ife defines small scale enterprises as those with total assets in capital not exceeding N250,000 and employing not more than 50 full time workers.

From the various definitions one will notice that emphasis has often been placed on certain financial ceilings in capital investment.

The frequency of formation (and death) of small-scale enterprises are usually explained by the desires of the owner-manager to own his personal business. Thus, the small-scale enterprises being the lengthened shadow of its owner reflect his or her strength as well as weaknesses. Thus; the small-scale enterprises entrepreneur begins to its unique animation, abilities, work experience, advantages and attitudes. In tum, the performance of the small scale is determined by the personality characteristics of the owners, viz responsibility, vigour, initiative, persistence and health thinking ability, human relation ability, communication ability and technical knowledge.

Government in both industrialized and developing countries provide a wide variety of programmes to assist small and medium scale enterprises. Despite the success of SME strategies in a few countries (e.g. Taiwan Northern Italy and Ireland), and majority of developing countries have found impact of their SME development programs on enterprise performance has been less satisfactory.  Underlying the search for best practice are some basic question:

i.        What is the justification for pubic intervention on the first place?

ii.       Why should SMEs be singled out for assistance?

iii.      If there is justification for government intervention, what form should that intervention take?

 

1.2    PROBLEMS OF STUDY

The problems of facing small-medium scale enterprises in Nigeria are not insurmountable since Nigeria is well placed to provide the sources to solve these problems.  In the main, the problem range from inadequate financing, lack of accountability to lack of infrastructure.

 

Most small business are a one-man proprietorship and the proprietor, through having to give his attention to various managerial function in his business soon loses full grip.  This is why it makes for efficient management to spread the responsibilities within the business or seek the external assistance of a management consultant.  The small-medium scale enterprises also invariably require a high technical inputs and the cost of this technical inputs and the cost of this technical expertise is usually high.

 

The issues of inadequate financing usually derive form inadequate proprietorship equity participation.  A strong capital base and financial outlook are required for a successful business.  It therefore makes for sound financial management to seek for more business partners who could bring in more funds to finance the activities of the enterprises.  However, small scale enterprises are usually reluctant to bring in partners, even at the risk of under capitalization.  The underfunding of small-scale enterprises has led government to formulate measures aimed at assisting this sector.  Loan packages of the World Bank, National Directorate to employment and in more funds to finance the activities of the enterprises.  However, small-scale enterprises are usually reluctant to bring in partners, even at the risk of under capitalization.  The underfunding of small-scale enterprises has led government to formulate measures aimed at assisting this sector.  Loan packages of the World Bank, National Directorate to employment and NERFUND are among such assistance scheme.  The one-man proprietorship syndrome of small scale enterprises is not only sad for their financial profile but can also discourage accountability which is the foundation of a successful business. Accountability ensures adequate control over the appropriate financial strategies.

 

The small-scale enterprises even not shielded form or immune to the lack of infrastructure, which is the bane of all businesses in Nigeria.  On the contrary, small medium scale enterprises given more under the weight generating plant, high cost of telephone and electricity.  Needless to say, no business can survive without their facilities.

 

1.3    PURPOSE OF STUDY

The major purpose of this study are:

1.       To review how small-scale proprietors can make for efficient management by spreading the responsibilities within the business of the need to seek the external assistance of a management consultant.

2.       Appraise the issue of risk of under capitalization and related this to the reluctance of proprietors to bring in partners or adequate financing.

3.       Suggest ways by which the government could improve the infrastructural base of the economy such that the cost of development of small-scale enterprises would be reduced.

4.       Overview the situation where government could make foreign exchange affordable to small medium scale enterprises and allow the naira to float to find its true value.

5.       Review the strategy to be adopted by SMEs in adopting a courageous approach to developing new ideas.

6.       Analyze the inability of the owned-manager to acknowledge his own weakness and tap the resources of talents of employees.

 

1.4    RESEARCH QUESTION

The tentative research questions the study funds answer to are:

1.       To what extent has inadequate financing affected the growth and development of small-scale enterprises in Nigeria?

2.       To what extent has the one-man proprietorship syndrome of small-scale enterprises of a successful business?

3.       To what extent has small-scale enterprises being affected because of the lack of infrastructure which impede their level of development and growth?

4.      To what extent have the complexity and frustration involved in sourcing for foreign exchange to take care of the import needs lead to high rate of business?

5.       Failure to small-scale enterprises?

6.       To what extent have low productivity, poor management, poor accounting records and financial indiscipline have should the extent at which small-scale enterprises can go?

 

1.5    STATEMENT OF HYPOTHESES

This research tends to test the following hypotheses

HO:   Financing small scale business in Nigeria has a lot of problems which is not profitable.

HA:   Financing small-scale business Nigeria has prospects of which is profitable.

 

HO:   There’s no justification for government intervention in the growth of SMEs.

HA:   There's justification for government intervention in growth of SMEs.

 

 

1.6    METHODS OF DATA COLLECTION

There are two types of research data namely, primary and secondary data from primary secondary source.

Primary data: These are data collected specifically for the research needs. The sources: of these data for the study are administration of questionnaire given to a person about a topic of the research, interviewing person in relevant fields and personal observation of same activities and records kept by some small and medium scale enterprises. This source of data is advantageous because first and information is obtained and explanations are obtained concerning answer to question.

Secondary data: These are those data obtained from relevant reviewed literature which for the purpose of this search include textbook and journals management and financing of small and medium scale enterprises and other relevant publications.

 

1.7    LIMITATION OF STUDY

The methodology employed in this study faces some setbacks. These include inadequate and unnecessary delay in responses, inability to have direct access to some of the respondent cost of administering longer number of questionnaires.

The study also encountered sampling error because it is not everybody in the population is sampled. Response error is also a serious drawback to the study because respondents gave an insincere arid in appropriate response to enable -the ascertainment of the line position of thing considering the prospects, problems and position of small-scale enterprises in the country.

 

 

 

 

1.8    SIGNIFICANCE OF THE STUDY

The study is important because several advantages accrue to the macro society form small scale enterprises.  These include the development of the entrepreneurial spirit, employment generation for entrepreneurs; promotion of savings potential and investment ratio. Skill culture is increased as more people seek apprenticeship in preparation for self­-employment.

The study is also important as it proffers ways to which local law materials use are increased as low capital base might hinder the purchase of imported raw materials obtained at the foreign exchange market (FEM) as parallel market.

The study also affords the users the encouragement of developing local substitutes, and strengthens the capacity to estimate and supply societal and industrial needs through backward integration.

 

1.9    SCOPE OF THE STUDY

The study covers the problems accruing to the financing accountability, management, marketing and polities of small scale enterprises in Nigeria, bringing in practical illustrations as much as possible.

 

The study also delves into the problems which are confronted by SMEs in Nigeria ranging from behavioural, political, cultural, socio economic and country related.

The study does not extend to the financing, accountability, management marketing as well as the policies of large-scale enterprises as that advantage much more than what this study can possibly address. Hence, the study covers the activities of some small-scale enterprises around Lagos metropolis, which are randomly selected to cover the study centers of the project.

 

 

1.10            ORGANIZATION OF STUDY

The study is divided into five chapters. Chapter one is the introductory part of the study which includes review of latest literature, problems of study, background of study, research questions, means of obtaining data, hypothesis testing, limitation of study, definition of terms, purpose of study, scope of study, significance of study.

Chapter two is captured "Literature Review" where several part works the subject matter are several reviewed to cover a well detailed theoretical framework of the study.

Chapter three is the research methodology of the study. It covers the research design employed, the research instrument, restatement off research question, data collection procedure and data analysis techniques.

Chapter four is the analysis, presentation of data using a simple percentile method of analysis.

Chapter five is the summary of findings, recommendation of the study as well as conclusion of the study. At the end of the study, suggestion for further study is offered for interested users and readers.

 

1.11   DEFINITION OF TERMS

It is well known fact that progress in organizing opinion about a subject is showed down until the terminology that is used means the same to all concerned.  Whereas small business defies easy definition, nevertheless, for the receiver to have a meeting of minds on this subjects matter requires the fulfillments of some definitions obligations. It is the contention of Siropolis (1997:04) that typically we apply the term “small business" to some type of stores such as neighourhood groceries and restaurants. Typically, we apply "big business" to such giants as Dupont and General motors. But within, these two extremes full these businesses that may be considered medium size depending on the yardstick and at off point used to measure size, among these common yardsticks for determining business are:

i.        Yearly sales revenue and

ii.       Numbers of employees

Siropolis, (1877:05) argues further that much that each yard stick has to advantages, the number of employees has more in its favour than any others for the following reasons;

Firstly, it is the inflation proof, and it is affected by changes in the purchasing power of the currency.

Secondly, it is comparable, that is, it allows for good comparison of size between businesses of the same industry group. Fourthly, this available that in, it is easy to get from business people.

In Nigeria, definitions of small-scale business have not been static. Rather they have constantly been revised from time to time in response to changing economic environment. But principally, the definitions have emphasized the investment components of business and the number of employees.

 

The operational definition of small-scale enterprises, in the context of study, are those prescribed by the Central bank and those adopted by the NERFUND. The Central bank considers an enterprises seeing small if it has capital investment of N2 million. However, National Economic Reconstruction Fund (NERFUND) stimulates capital investments with limits of N10 million in fixed assets (excluding cost of land) to cover medium enterprises.

 

No hand and fast ruler can guide the definition of SMEs; for example the galloping inflation, the government changing fiscal policy and monetary policies, the diminishing value of naira the escalating cost of raw materials and labour and the constant change in technology and among such factors that will continue to militate against any attempt at establishing static definition for what is small and what is medium enterprises in the country.

 

According to (Ex/Former) Governor of Central Bank of Nigeria, Chief (Dr.) Joseph Sanusi: The conception and definition of SMEs is dynamic in character and values with time and also values among institutions and among countries: However, the basic definition parameters are the same and include the number of employees, asset base; turnover, financial strength, relative size, among others.

 

Current definitions are based on a mix of local condition and valuables determine the choice of parameters to use in formulating a suitable definition.

For instance, the Central Bank of Nigeria Monetary Policy circular No. 22 of 1988 defined small scale enterprises as an organization whose investments (including land and working capital, do not exceed = 5m). In 1989 Nigerian Industrial Policy defined small scale industries as those with total investment of between N100,000 and N2 million, excluding land but including working capital. Micro and cottage industries Were similarly defined as those with investments not exceeding N1,000,000 excluding land but including working capital.

Also, the decree establishing the National Economic Reconstruction Fund (NERFUND)in 1989, defined SMEs as these with fixed asset other than land but exceeding cost of investment project not exceeding Nl0 million. Currently, under SMEs, and SME is defined as an enterprise with an asset base not exceeding N200 million excluding land and working capital; and with a staff strength of not less than 10 and not more than 300. All these are the various definitions put forward by the different local institutions.­ The SME department of the World Bank Group prescribes the following definition:

Micro Enterprise

Employees:                              10 or less

Total Asset:                              N100,000 or less

Turnover:                                 N100,000 or less

Small Enterprise

Employees:                              10 - 50

Total Asset:                              N100,000 to N3 million

Turn over:                                N100,000 to N3 million

Medium Enterprise

Employees:                              50 - 300

Total Asset:                              N3 million to N5 million

Turn over:                                N3 million to N5 million

 

Distinguished participants, I have taken the trouble to go through the various definitional perspectives to underline the dynamic nature as well as-the variability are common to all the definitions such as the number of employees; total assets and the turnover. What has also emerged from these definitions is that many of the businesses that are currently regarded as small businesses in Nigeria are actually micro enterprises. And this is why 'some of the policies that had been put in place have not been beneficent to majority or the businesses in this category.

Some basic parameters are common to all the definition as explained such as the number of employees; total assets and the turnover. What has also emerged from these definitions is that many of the businesses that are currently regarded as small businesses in Nigeria are actually micro enterprises.

A.      ENTREPRENEURSHIP

This is an aspect of the complex management processes involved in the operations and summing of a company. It can be seen as management decision-making under situations of great uncertainty of results, of outcome; it applies to both large and small organization is dynamic and complex business organizations.

B.      ENTREPRENEURSHIP DEVELOPMENT

This category of business can be defined as demonstrated excellent ability to generate business, ideas, cost effective management, technical and managerial abilities as well as marketing know-how. Small-medium scale enterprises provide goods preparation ground for the development of indigenous entrepreneurs, which derive the wealth creation process at all levels.

C.      DOMESTIC SAVINGS

This could be defined as savings that individually could not have been made, available for investment.

D.      FLEXIBILITY OPERATIONS

This operations or their operation are easily adapted to changing market conditions i.e. (the flexibility and diversification of industrial production).

E.      INTERVENTION OPTIONS

This is the applied way to aid the development of small-medium scale enterprises and some of these models could be considered for adoption. These include the credit guarantee scheme, input subsidiary, compulsory and effective official patronage, inter-firm linkages, tax and incentives, tariff concession, policy and. institutional support, development of business parks with infrastructure, promotion of foreign direct investment and technological acquisition, macro-economic stability and an effective Small and Medium Industries Agency (SMIDA). ,

F.      CREDIT GUARANTEE SCHEME

This could be defined as a risk mitigating mechanism, which will make it more convenient for the banks to grant credit to the small medium enterprises. This scheme will be the small medium enterprises equivalent of the agricultural credit guarantee scheme, which, is currently being managed by the central bank.

G.     SMEIS

This scheme is an initiative from the bankers' committee to support the small medium enterprises through equity participation.

To note: As at April 2003, the sum of N14.6 billion has been set aside under the scheme out of which only N3.5 billion has been disclosed. This is a remarkable intervention novelty by the banks.

H.      BUSINESS PARKS WITH INFRASTRUCTURES

Banks, insurance companies and all turns of government should as a rule collaborate to development of business parks in all local government areas of the country, The term business parks with infrastructures are explained or definitely note as parts that should have necessary infrastructural facilities such as electricity, water Supply transportation, telecommunication, road waste management, warehouse, storage facilities etc. These parks generate economies of scale for the small medium enterprises and invariably bring down operating cost.

I.       TAX AND TARIFF CONCESSIONS

This is the legalized levied amount of money form the government on small medium enterprises, which has to be a considerable one. SMEs should be given Tax and Tariff concessions on their law materials input, machineries, profit etc. Capital allowance should be greatly enhanced and there should be capital grants for small medium enterprises, this will help bring down the operating cost of SMEs small medium scale enterprises and also enhance their competitiveness.

J.      FINANCE

This is the capital realized (either through the following dividend shares or share capital loan, investment of equity capital etc.) for the establishment or formation of small-medium scale enterprises.

 

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