Thesis on The Effects of Microfinancing on the survival and growth of Small and Medium scale enterprises in Southwestern Nigeria.

INTRODUCTION

1.1 Background of the study

The traditional and informal sector was expected to disappear as the modern or formal sector grew and absorbed more labour in enhancing economic growth and development. But contrary to expectations, the informal sector and informal employment has continue to be a significant factor in our modern world gaining predominance (ILO, 2012; ILO, 2014). Many countries have not been able to develop a modern economy capable of providing adequate employment opportunities for their rapidly growing populations. With 53% of new employment generated in 2014, Nigeria’s informal sector, constituted by over 17 million businesses and enterprises, that has led to the growth in total job creation within the period reflecting the significant contribution of that segment to the labour market and the overall economy (NBS, 2015). The informal sector remains a major source of employment, income generation and expansion of small and medium businesses in many countries of the world in which Nigeria is not an exemption. The informal sector consists of own account or small and medium enterprises with little or no formal organization or capital, and with casual employment. The informal sector has positioned Small and Medium Scale Enterprises (SMEs) as an integral part of economic activities in facilitating economic growth with the success experiences in the Asian countries. The Asian countries are Indonesia, Thailand and India (Ojo, 2003). This is basically due to their great potential in ensuring diversification and expansion of industrial production as well as the attainment of the basic objectives of development. SMES utilize local raw materials and technology thereby aiding the realization of the goal of self-reliance Akingunola (2011). Globally, SMEs is perceived as a backbone of any economy. Hence, in a developing economy such as Nigeria, Micro, Small and Medium Enterprises play a remarkable role in revolving the socio-economic landscape of the country (SMEDAN, 2010).

This has raised concerns for small and medium scale industries, which has the potentials for developing domestic linkages for rapid and sustainable industrial development. It is believed that if incentives are given to the participants in these sectors, it tends in alleviating the problems encountered by industrialists in the country, thereby giving them opportunity to increase their contribution to the Gross Domestic Product (GDP). There is an increasing recognition of its pivotal role in employment generation, income redistribution and wealth creation (NISER, 2004, Kadiri, 2012; Olukayode & Somoye, 2013; Babajide, 2013). The contribution of MSMEs can’t be over-emphasized and accounted for 96 percent of all firms operating in Nigeria (Oyelaran-Oyeyinka, 2012). The MSME have accounted for over 25 per cent of total employment and 20 percent of the GDP (SMEDAN, 2007) compared to the cases of countries like Indonesia, Thailand and India where Micro, Small and Medium Enterprises (MSMEs) contribute almost 40 percent of the GDP (IFC, 2002). Whilst MSMEs are an important part of the business landscape in any country, they are faced with significant challenges that inhibit their ability to function and contribute optimally to the economic development of many African countries. The position in Nigeria is not different from what obtains in other African countries and most developing countries (NIPC, 2009).

MSMEs and SMEs are identified as a crucial part of industrial economies and their survival and growth is a prominent issue in any given economy (Ebrahim et. al, 2008). As the business environment keeps changing it tends to affect the SMEs operations and sometimes threating their existence due to new technology, policies and competitiveness. To survive in the global economy, SMEs have to improve on their products and process exploiting their intellectual capital in a dynamics network of knowledge intensive relations inside and outside borders. SME’s survival depended on their capacity to improve their performance and produce goods that could meet international standard. All of these are not achievable with-out financing.

Despite these contributions, the Nigerian SMEs and SMEDAN is faced with a number of constraints and challenges which include lack of access to credit facilities, low patronage, multiple taxations and levies, competition, infrastructure, taxes, accounting, management, marketing, economic, planning and finance, high cost of operations etc. It is pertinent to also note that the sector is often not recognized and protected under existing legal and regulatory framework of government and are characterized by a high degree of vulnerability. Of all the challenges identified facing SMEs in literature (Owualah, 1999; Carpenter, 2001; Anyawu, 2003; Mass and Herrington, 2006; Lawson, 2007; IBRD/World Bank, 2008; Ganbold, 2008), financing is most prominent and greatest and which might impede the survival and growth of SMEs. This has created a gap and vacuum that need to be fill because the ability of SMEs to grow depends strictly on their potential to invest in re-structuring and innovation. All these investments calls for capital and therefore access to funds might influences the growth and survival of SMEs.

Against this background, this has raised concerns that access to finance is of a huge priority to developing and supporting the SMEs sector in Nigeria.

1.2 Statement of Research Problems

It was observed that most of the micro and small enterprises (MSEs) in Nigeria are still at a low level of development, especially in terms of number of jobs, wealth and value creation. This is because about 65% of the active population, who are majorly entrepreneurs could have access to formal financial institutions according to Small and Medium Enterprise Development Agency of Nigeria (SMEDAN, 2010). In literature the challenges facing the SMEs have been identified but it varies across regions, countries and with time. One of the peculiar problem been faced my SMEs is access to funds and infrastructure which threaten the growth and survival of the SMEs. This is because most SMEs find it hard in meeting the conditionalities of the formal financial institutions. This has led to the emergence of Microfinance Banks in Nigeria. Microfinance was established in supporting the SMEs (CBN, 2005).

Despite the potential importance of MSMEs in any economy, high mortality rate among established MSMEs is a matter of major concern in developing economies. International Finance Corporation (IFC, 2002) stated that only 2 out of every 10 newly established businesses survive up to the fifth year. Is this statement true in Nigeria case? If this is true in Nigeria context, what are the factors mitigating against growth and survival in South West Nigeria? This has created a gap that need to be filled in literature, since SMEs are depending on microfinancing as a source of finance. The indispensable role of finance to the growth and survival of MSMEs cannot be over emphasized. It implies that with significant access to finance the long term growth and survival of SMEs remain uncertain and bleak in Nigeria. Therefore, how microfinance banks through their financing scheme has been able to support SMEs growth and survival form the essence of this study.

i. What has been the contribution of microfinancing in SMEs growth and survival in South Western Nigeria?

ii. To what extent has government policies influences microfinancing?

iii. What are the challenges faced in accessing funds over time?

1.3 Objectives of the study

The broad objective of this study is to examine the impacts of microfinancing on the growth and survival of small and medium scale enterprises in South West Nigeria. The specific objectives are

i. To examine the extent microfinancing has influences SMEs growth and survival in South western Nigeria.

ii. To evaluate the impact of government policies on SMEs microfinancing in South Western Nigeria.

iii. To identify the bottlenecks in access the funds over time

1.4 Statement of Hypotheses

i. H0: There is no significant relationship between Microfinancing and SMEs growth and survival in South western Nigeria.

ii. H0: There is no significant relationship between Government policies and SMEs microfinancing in South western Nigeria.

1.5 Justification for the study

SMEs have been seen as a strategic tool for empowerment, employment and income generation that enhance economic growth but yet their survival and development after maximum of five years cannot be guaranteed. This is huge puzzle that need to be resolved with the dominant challenges of SMEs been attributed to finance and funding. It’s obvious that most SMEs in Nigeria because of size and structure cannot meet the conventional banks requirement and conditionalities for loans but must look elsewhere for financial services (SMEDAN, 2010). The microfinance banks is well positioned on their mandate to support, assist SMEs for both financial and non-financial services. Thus, this study was necessitated on the followings convictions

Firstly, the empirical studies that exist on SMEs in developing countries are few and are majorly focused on economic growth and problems associated to their operation (see Hossain, 1988; Carpenter, 2001; Sanusi, 2003; Onugu, 2005; Ughulu, 2007; SMEDAN ,2010; Akingunola, 2011; Adetula, et al.2014; Etuk et.al, 2014). There is a scarcity of empirical studies on the SMEs and survival and growth in developing countries and especially in Nigeria. The vocal point of this study is to fill the gap identified by examining how microfinance banks financing has influences the survival and growth of small and medium scale enterprises in south western, Nigeria over time due to the fact that the most available source of funds to SMEs is through micro finance. Also, to examine the capability of Microfinance institutions in enhancing the expansion capacity of small businesses in Nigeria. The study also would contribute to the literature on microfinance and small business survival. It was observed that different successive governments in Nigeria have always had a policy programme for SMEs, but most of the programmes have failed to achieve sustainable growth in the SMEs sub-sector. Most of the government assisted-programmes have themselves become failures. Therefore, the findings of this study is expected to inform policy makers regarding the direction of further research into interventionist programmes for SMEs in South western zone that can be generalized for Nigeria.

In addition, most of these previous studies are mentioned earlier were done to reveal aggregated situation in a country with most of the focus on the national or aggregated levels. Some of the macro level studies have analyzed the SMEs in general using Nigeria context. The studies which have focused on the SMEs at the micro level that is one of the most industrialize zone in Nigeria that SMEs spring up at every interval. The few ones that exist focused on major cities in Nigeria such as Lagos, Abuja with less attention on emerging commercial zone in Nigeria such as the South West in Nigeria. So, this study would not only update the analysis of the performance of SMEs in recent times but also how microfinance has aided the survival and growth of SMEs in south west zone that can be replicated for all other state in Nigeria viz-a-viz studies carried out on Nigeria.

Furthermore, the study is also of great importance to Microfinance Institutions, in the sense that it is expected to assist the microfinance institutions in assessing the effectiveness of their programmes. The study is expected to assist the microfinance institutions in their credit policy formulation strategies. For owners and managers of micro and small businesses, access to a study like this can aid their understanding of current challenges and reveal the essential factors that promote small business growth and survival and thus enable them to focus on the relevant ones in an attempt to enhance their growth and performance. The study is expected to help the government to validate or reject the choice of microfinance as the main source of financing SMEs in Ibadan and also suggest ways of improving the existing financing arrangements, if need be.

To this end, this study aims to examine the conceivable implications of microfinancing on SMEs growth and survival in South West, Nigeria. The study intend to address the problem of why SMEs does not survival more than fifth year of existence? Is this statement true in Nigeria case? If this is true in Nigeria context, what are the factors mitigating against growth and survival in South West Nigeria? This has created a gap that need to be filled in literature and also contribute document of SMEs in Nigeria.

1.6 Scope of the study

This study aims to examine the conceivable implications of microfinancing on SMEs growth and survival in South West, Nigeria. In addition, the study will explore how government policies has influencing SMEs microfinancing in South Western, Nigeria. This study is limited only to the South Western Nigeria. The study would cover SMEs that have access to microfinance for a period of at least six years (2009 – 2014) in the South Western, Nigeria. The population for the study would include the clients of the selected Microfinance Banks in South western Zone that have obtained their final operating licenses as of the year 2009. These includes microfinance banks that emerged from community Banks into MFBs in 2005 that are spread across South West metropolis. The choice of the five years to be used as a yardstick for survival conforms to literature as opined by demographers (Alexander, Davern and Stevenson, 2010) to permit greater balancing of statistical power of test. The SMEs might cut across different categories of sector as long as they operate beyond five years of survival.

1.6 Definition of Terms:

Micro enterprise: Micro-enterprise is the informally organized business activity undertaken by entrepreneurs; excluding crop production by convention, employing less than ten people and having assets less than N5 million excluding land and building.

Small enterprise: Small enterprise is any enterprise that employs between ten (10) to forty-nine (49) people and has asset worth (excluding land and building) between N5 million and N50 million.

Medium enterprise: Medium enterprise is any enterprise that employs between fifty (50) and one hundred and ninety–nine (199) people and has assets worth (excluding land and building) between N50 million and N500 million (SMEDAN, 2007).

Microfinance Banks: Microfinance Banks are licensed financial institutions meant to serve the un-served, but economically active clients in the rural and peri-urban areas by providing diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, which would enable them to undertake and develop long-term, sustainable entrepreneurial activities and mobilize savings for intermediation (CBN, 2005).

Microfinance Institutions: Microfinance Institutions are organizations whose activities consist wholly or in significant part, of the provision of financial services to micro entrepreneurs.

Microfinance: Microfinance denotes the provision of financial services adapted to the needs of low income people such as micro-entrepreneurs, especially the provision of small loans, acceptance of small savings deposits and simple payment services needed by micro-entrepreneurs and other poor people (USAID, 2005).

Microcredit: Microcredit is commonly defined in terms of loan amount as a percentage of average per capita income (USAID, 2005). In the context of Nigeria, with a GDP per capita of N42,000 (about $300) in 2003, loans up to N50,000 (around $350) will be regarded as micro loans. GDP per capital (PPP U$) in 2007 was U$1,969 (UNDP – HD Report, 2009).

Microsavings: Microsavings are defined as savings accounts with a balance of less than N8,400 (about $50), that is less than 20% of the average annual income per capita.

CHAPTER TWO

LITERATURE REVIEW

2.0

In this chapter, the researcher reviewed literature relating to microfinance and small business survival, growth and performance over time. This chapter also considered the conceptual and theoretical framework of microfinance and MSMEs in Nigeria. In addition, previous studies carried out on microfinance in Nigeria and other countries of the world would be critically examined.

2.1 Entrepreneurship and economic development

Economic development is what every country strive to attain but this is not possible without the development of the small entrepreneurship. This has distinguishes its self as an integral part of economic development to foster economic growth through labour empowerment, reduces poverty and serves as a means of income generation to the participants. The experiences of the developed and emerging economies have shown that the SMEs plays a critical role in an economy which cannot be overemphasized. This has positioned SMEs as an engine of growth and has help in reducing unemployment, reduction of crime rate, increase in per capita income as well as rapid growth in GDP. The SMEs has effectively help in curtailing rural-urban migration and resource utilization by producing intermediate products that are highly used and demanded by the large scale industries and companies. Therefore, the SMEs have contributed largely and strengthen the industrial inter-linkages and integration.

Many international financial institutions and financial intermediation has not only recognize the SMEs but are willing to partner and invest a significant share of their resource in them. The reason for this is not far fetch because they appreciate the great role been played by SMEs in reducing poverty alleviation and overall economic development. Over the last decades, the World Bank have invested a whopping $10bilion in SME as at 2013, with Africa getting a sizeable share of over $1billion. The fund was channeled through the four major development arms of the bank: the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). To complement this in Nigeria context, the Bank of Industry (BoI) generated over 60% of the entire loans it granted in 2012 to SMEs (BOI, 2013).

SMEs have no doubt been indeed recognized as the main engine of economic growth and development, a major variable for promoting private sector, development and partnership. Various governments, development agencies and experts as well as multilateral institutions do appreciate this fact such that they positively respond to any occasion and situations, which could permit their contributing to or creating opportunities for promoting the lot of SMEs. The SME sub-sector not only contributes significantly to improved living standards but they also bring about substantial local capital formation and achieve high levels of productivity and capability. From a planning perspective, SMEs are increasingly viewed as a major means for achieving equitable and sustainable industrial diversion and dispersal. Employment or job opportunity wise, SMEs account for well over half of the total share of employment, sales and value added in most countries. Thus, SMEs have remained as much important and relevant economic catalysts in industrialized countries as they are in the developing world.

2.2 Entrepreneurship in Nigeria

Even if there are controversies on definitions, what is not contestable is the contribution that MSMEs are making to the Ibadan and Oyo State economy. About 10% of the total manufacturing output and 70% of industrial employment are MSMES. MSMES also promote industrial and economic development through the utilization of local resources, production of intermediate goods and the transfer/transformation of rural technology. In fact MSMEs are generally regarded as the engine driving the growth of this and other economies and provide the best opportunity for job creation, redistributing income and rural development (SMEDAN, 2007& 2009)

In Nigeria, the Small and Medium Scale Enterprises (SMEs) constitute an important backbone of the Nigerian economy. Economically, this sector holds the key to sustainable development of the country. The importance of SMEs can be put in proper perspective in relation to the structure of the Nigerian economy. In spite of the importance of petroleum oil, agriculture remains the key sector, providing gainful employment for about 70% of the Nigerian population. Most of the operators in the agricultural sector in Ibadan are cottage type or small-scale self-employed individuals engaged in agro-allied processing. Activities in the agro-allied processing sub-sector also have some consequences for the role of small scale manufacturing enterprises in Oyo State.

Attention has been focused on small scale enterprises by government because it is perceived that they have the potentials of realizing the multiple goals of employment generation and poverty reduction. It is against this background that one needs to emphasize the desirability of doing all that is possible to enhance the orderly growth and development of SMEs in Nigeria. However, the realization of the potentials of SMEs at making the desired impact on the nation remains elusive. This has been attributed to several factors ranging from; lack of understanding of SMEs.

The importance of Micro, Small and Medium Enterprises (MSMEs) in employment generation, economic empowerment, poverty alleviation and even distribution of development has long been recognized. The importance of micro and small enterprises (MSEs) to the socio-economic development of low and middle-income economies is well documented (Daniels, 2003; UNIDO, 2003; ILO, 2002; King & McGrath, 1999; Daniels & Mead, 1998). In the poorest economies, MSEs, and microenterprises in particular, are a major source of employment and income (Mead & Liedholm, 1998), especially for the poorest members of society. Thus, there is a great deal of interest in the performance of firms in the microenterprise sector and its scope is to generate employment, both through new business start-ups and the expansion of existing businesses. Most microenterprises are characterized by low productive capacity which is manifested in low rates of growth and high mortality rate (ILO, 2002; Daniels & Mead, 1998; Mead & Liedholm, 1998; UNIDO, 2003).

In Nigeria, economic factors such as policy reversals, high and double taxations, difficulty in procuring business approvals, high inflation and unstable exchange rates are some of the areas of concern for the potential entrepreneur who is in most cases a greenhorn. The cost and procedure for establishing a company is prohibitive as the intending entrepreneur must engage a solicitor and an accountant to take care of the legal and financial aspects.

Politically, some of government‘s policies, it seems, are made to favour friends and associates. It seems, that, quite often, whatever one needs to do must be accompanied with some kind of favour to the person or authority granting the approval. This situation is almost frustrating and has kept many away from entrepreneurship; many youths prefer to be engaged in paid employment where they will be certain of receiving their pay salary packages at the end of every month without the worries associated with running a business.

Sanusi (2010) remarked that the CBN has done so much to boost domestic lending in the Nigerian economy, but that government should provide needed infrastructure to complement monetary measures in order to boost the economy. Sakar (2008) opines that the entrepreneurial spirit can exist anywhere in the world, but to operate successfully the entrepreneur need a favourable political and business environments. She further explains that factors such as bureaucratic red-tapism, corruption, complicated business regulations and suppression of local markets in many developing countries have forced much entrepreneurial energy to operate subversively in black market economies.

2.2.1 Concepts in Microfinance

Microfinance is the provision of financial services adapted to the needs of low income people such as micro-entrepreneurs, especially the provision of small loans, acceptance of small savings deposits, and simple payments services needed by micro-entrepreneurs and other poor people (USAID, 2000). It is the provision of financial services to the economically active poor who are hitherto un-served by the mainstream financial service provider. Microcredit is commonly defined in terms of loan amount as a percentage of average per capita income. In Nigeria context with a per capita GDP of N42, 000 (about $300) in 2003, loans up to N50, 000 (about $350) would be regarded as micro loans, while micro savings are defined as savings accounts with a balance of less than N8,400 (about $50), that is less than 20% of the average annual income per capita (USAID, 2004).

Microfinance is perceived as a movement that envisions a world such that low-income households has permanent access to a wide range of quality financial services to finance their income-producing activities and mitigate against minor investment risks (Gupta, 1996). In a similar, view microfinance is seen as the provision of financial services to the economically active poor and low income households. These services cut across credit, credit, savings, micro-leasing, micro-insurance and payment transfer, to enable them to engage in income generating activities. The Microfinance Policy defines the framework for the delivery of these financial services on sustainable basis to the Micro, Small and Medium Enterprises (MSMEs) through privately-owned Microfinance Banks (CBN, 2005).

Mosley (2001) defined microfinance as financial services for poor and low-income customers. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as microfinance institutions (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly.

The Economic and Social Commission of Western Asia (ESCWA, 2002) describes micro-financing as a financial system that enables poor micro entrepreneurs to raise income through productive activities and viable businesses. Its operations and its success depend on the support it gets from the government, the civil society and from the financial institutions. The country‘s investment policy, its economic management, the policy of the financial institutions and the role played by international organizations and NGOs in the country determine the environment in which it operates. Lack of work opportunities are, however, amongst the primary concerns of those in both rural and urban areas. Few people in developing countries have salaried, formal employment. The majority depend overwhelmingly upon earnings from occasional, low-paid labour or employment in small and medium enterprises or in running micro enterprises themselves. Micro enterprises are usually run from the home and can involve any type of income-generating work such as street-trading, dairy farming and carpentry. To set up or develop such micro enterprises, some amount of capital is required and for about 90% of people living in poverty, the only way is to borrow money from their family, friends or moneylenders. Commercial banks do not usually lend to small business owners because such loans are considered insecure, or unprofitable. Local moneylenders charge high interest rates sometimes between 10% and 100% a month and sometimes more (Opportunity international, 2002).

Yunus (2006) describes microfinance as an amazingly simple approach that has been proved to empower very poor people around the world to pull them out of poverty. It is a financial system that relies on the traditional skills and entrepreneurial instincts of the active poor people, mostly women, using small loans (usually less than US$200), other financial services, and support from local organizations called microfinance institutions (MFIs) to start, establish, sustain, or expand very small, self-supporting businesses. A key to microfinance is the recycling of loan. As each loan is repaid—usually within six months to a year—the money is recycled as another loan, thus multiplying the value of each loan in defeating global poverty and changing lives and communities. He further explains that microcredit refers specifically to loans and the credit needs of clients, while microfinance covers a broader range of financial services that create a wider range of opportunities for success. Examples of these additional financial services include savings, insurance, housing loans and remittance transfers. The local MFI might also offer microfinance in addition to activities such as entrepreneurial and life skills training, and advice on topics like health and nutrition, sanitation, improving living conditions and the importance of educating children.

Costa (2007) explains microfinance as a field that focuses on providing a variety of financial services to the poor. Typically, individuals with very little income experience great difficulty in taking advantage of things like savings opportunities and insurance products. Often, low incomes go hand-in-hand with a lack of collateral and credit, making it difficult for the poor to obtain loans, invest and enjoy insurance protection. Microfinance seeks to eliminate this problem, providing micro-insurance, microloans, and other financial services to low-income people. Often, microfinance services are aimed at helping people to start their own businesses thus creating the opportunity for increased income and greater financial independence. For example, a microfinance loan of less than $100 United States Dollars (USD) could help an individual start a business, creating a new income stream for him and maybe even providing new job opportunities for others. Such a small loan could benefit the borrower in many ways, setting him up to provide food, shelter, and education for his dependents. That microfinance loan could even help the borrower to afford important medicines.

In another contribution, Ojo (2007) defined microfinance as small scale financial services that are provided to rural/informal small scale operators for farming, fishing, trading, and building of houses and to engage in any other productive and distributive activities. Microfinance and micro financial institutions are intended to fill a definite gap in the finance market and the financial system respectively, to assist the financing requirements of some neglected groups who may be unable to obtain finance from the formal financial system. These neglected groups that constitute the target users of such microfinance are mainly in the informal sector of the economy and are predominantly engaged in small scale farming, commercial/trading and industrial activities.

The Consultative Group to Assist the Poor (CGAP) (2009) reiterated that, microfinance allows poor people to protect, diversify, and increase their sources of income. Microfinance helps to cushion poor households against the extreme vulnerability that is a feature of their everyday existence and which can push a family into destitution. Loans, savings, transfers, and insurance help to smooth out income fluctuations and maintain consumption even during lean periods and emergencies. Microfinance is thus reported to be capable of giving more people more options, empowering them to make their own choices and build their own way out of poverty.

Despite, these various views and institutions the CBN (2012) have categories microfinance into three which are unit, state and National microfinance using different yardstick. The classification are shown below as:

Table 2.2: Classification Microfinance Bank in Nigeria

Source: CBN, 2012.

In conclusion, it can be deduced from the author’s views above that microfinance is a strategic tool of providing financial services to people and SMEs. Once, this is well small loans are effectively used it tends to improve the lives of the entrepreneurs, and help to launch new enterprises, create jobs and help the economies to flourish. After this section, I looked at works on microfinancing and its impact on income, wealth, educational status, health and empowerment. This will give better clues on how microfinancing can help in transforming SMEs and how it can guarantee SMEs survival and growth in Nigeria context.

2.3 Entrepreneurship experience in other countries

This section reviews the different studies carried out in relation to SMEs, its challenges, growth, survival and profitability from different countries of the world. The studies for other countries of the world were first considered followed by the once done in Nigeria. This gives better picture and reflection of how the SMEs have revolved across the globe.

Khandker (2005) examines the effects of microfinance on poverty reduction at both the participant in the informal activities and the aggregate levels in Bangladesh. The study focused on informal activities and employed panel data. The results revealed that access to microfinance has reduce poverty especially for female participants and on the overall poverty reduction at the village level. The study conclude that microfinance has not help poor participants in the informal activities but also the local economy. This suggest that since it works in Bangladesh it can work in other developing countries all things been equal.

Garmaise and Natiridada (2010) examines the impact of asymmetric information on both financing and operating activities of SMEs. This was carried out by evaluating the credit evaluations of microfinance institutions (MFIs). They used a regression discontinuity model that exploit the eligibility criteria of an evaluation subsidy offered by non-profit consortium. They observed that the evaluations help in reducing the cost of financing and also established a strong effect for commercial lenders and short-term MFI-lender relationship. They found out that the evaluation of the supply of finance by the banks which is the major lender to be mixed.

Matovu (2006) examine the impact of financing on women households in Uganda. They author employed the pooled data and found that women income increases which was reflected on their standard of living. This enable them to send their children to school, pay their medical bills, feed their families and cope with their immediate needs. This has significantly raised the savings and empowered women economically in Uganda. He reiterated that the financing option was successful because of the well-functioning market that exist, entrepreneurial skills and other infrastructural support given by the microfinance. The author stated the outcome should be taken with caution because it might not work like that in other economies of the world.

Khandker (2003) also conducted research on the long-run impacts of microfinance on household consumption and poverty in Bangladesh by identifying types of impact in six household outcomes as outlined below: per capita total expenditure; per capita food expenditure; per capita non-food expenditure; the incidence of moderate and extreme poverty; household non-land assets. The author found that the microfinance effects on male borrower were much weaker than the impact effect on female borrower and there was a decrease in return to borrowing all the time. Moreover, he noted that the impact on food expenditure was less pronounced than that on non-food expenditure. Besides, he showed that the poorest gained benefits from microfinance and that microfinance had a sustainable impact in terms of poverty reduction among programme participants. In addition, the author discovered that there was a spillover effect of microfinance to reduce poverty at the village level. In contrast, the impact was less noticeable in reducing moderate rather than extreme poverty.

Copestake (2002) conducted a case study of the Zambian Copperbelt, applying the village bank model to investigate the effect on income distribution at the household and enterprise levels. The study showed that the impact on income distribution depends on who obtains the loan, who moves on to larger loans and who exits the programme: group dynamics was also an important factor. He notes, some initial levelling up of business incomes was found, but the more marked overall effect among borrowers was of income polarization.

Montgomery et al. (1996) examined the performance and impact of two microfinance programmes in Bangladesh. They found that there were positive impacts of a microcredit programme on both enterprise and household assets. Clearly, even though total value of household assets had a slight increase after the borrowers obtained their last loans, they had a significant increase in the value of productive assets.

Coleman (1999) investigated the impact of a village bank on borrower welfare in Northeast Thailand. He found that there was a slight impact of programme loans on clients’ welfare. However, he discovered that the village bank had a positive and significant impact on the accumulation of women‘s wealth, particularly landed wealth but this result included bias from measured impact (discussed in methodology below).

Holvoet (2004) investigated the effects of microfinance on childhood education by examining two microfinance programmes in South India – one with direct bank-borrower credit, the other with group-mediated credit. The author showed that loans to women, through women‘s groups, had a significant positive impact on schooling and literacy for girls, whereas it remained mainly unchangeable in the case of boys. However, in the case of direct individual bank-borrower lending, there was no improvement in educational inputs and outputs for children.

Hashemi et al. (1996) studied two main microfinance programmes in Bangladesh, the Grameen Bank and the Bangladesh Rural Advancement Committee (BRAC). They noted that the participation of the programmes had important positive effects on eight different dimensions of women‘s empowerment: Mobility, Economic security, Ability to make small purchases, Ability to make larger purchases, Involvement in major household decisions, Relative freedom from domination as a result of ownership of productive asset, Political and legal awareness, Participation in public protest and political campaigning.

Atawodi and Ojeka (2012) investigate the relationship between tax policy, growth of SMEs and the Nigerian economy. The study emphasized business sustenance and expansion as indices of growth. The primary data was used through the administered questionnaire distributed in Zaria, North Central of Nigeria. The sampling survey was done using non-probability sampling method specifically judgmental sampling. The hypothesis was tested using Spearman’s Rank Correlation. Although there is a general perception that that tax is an important source of fund for development of the economy and provision of social services, the study revealed a significant negative relationship between taxes and the business’ ability to sustain itself and to expand. They concluded that to obtain a vibrant and flourishing SME sector, the tax policy needs to be appropriate such that it will not be an encumbrance to the growth of small and medium enterprises.

Abiola (2011) in his paper, Impact Analysis of Microcredit in Nigeria applies the financing constraints approach to study whether microcredit institutions improved access to credit for microenterprises in Nigeria or not. According to this approach, microenterprises with improved access to credit rely less on internal funds for their investments. Thus, investment sensitivity to internal funds of microenterprises in Lagos State (a municipal with significant presence of Microcredit Banks was compared to that of micro enterprises in Ekiti State (a municipal with no (or limited) presence of s) using a cross sectional survey method and Microcredit Institutions (MFI) branch location data. Results indicate that s alleviated micro businesses‟ financing constraints. This approach is applicable to evaluating microcredit impact in other countries. Based on the above contributions of scholars on this topic, this work however, tries to study the Nigerian environment, particularly the three senatorial districts of Anambra state.

Ndife (2013), worked on the effect of microcredit institutions on the development of small and medium scale enterprises in Anambra State. The study focused on determining the impact of microcredit institution in starting up, survival and growth of SMEs in relation to the effect of collateral requirements in obtaining loans from microcredit institutions. They study employed primary data that was sourced through the administered questionnaire to selected SMEs operations in Anambra state. The judgmental and systematic random sampling methods was used with a total sample size of 450 respondents. The author found out that, there exist a significant relationship between microcredit institutions and SMEs development, the small degree of association that exist suggests that capital (microcredit) is not the only factor that affect SMEs in the study population.

Liu and Pang (2012) examines the determinants of survival and growth of listed SMEs in China for the period of 1990 to 2003. They used proportional hazards cox model of survival analysis and dynamic panel of firm growth. They study findings are articulated as follows: Firm survival tends to increase with firm size, and firm growth tends to decrease with firm age but increase with firm size; firm performance and operation stability helps listed firms be more competitive and more likely to survive and grow; the type of activity in which the firm engages is an important determinant of its growth, but no evidence shows that it is likely to affect firm survival; state-ownership appears to increase the probability of large firm survival but not growth, indicating that it cannot help firms to increase their competitiveness to grow in the market; SMEs in inner and remote areas are more likely to survive, while the firms in coastal areas are more likely to grow; R&D activities have been found to influence firm survival but not growth, indicating the overwhelming problem of intellectual property protections in China; and finally and most importantly, seasoned equity offering (SEO) plays a crucial role in sustaining SME survival and growth, and a lack of seasoned equity raised in markets has proved to have weakened SME performance and become a major constraint on the growth of the Chinese listed SMEs, indicating that public listing does not facilitate SME survival and growth.

Bartlett and Bukvic (2005), examines the barriers to SME growth in Slovenia. They employed primary survey of 167 small firms between the period of 1997 to 1999 and they used a regression analysis model. They found that the key barriers identified in the research included factors linked to the institutional environment including bureaucracy, and to external financial constraints including the high cost of capital. Internal organization and resource issues, and social support through local development coalitions were found to be less important. Also, the result provided evidence that firms' growth was negatively linked to firms' size, and that growth was reduced by the presence of institutional and financial barriers. On the other hand employee benefits such as severance pay were positively linked to growth.

Chijoriga (2000) evaluated the performance and financial sustainability of MFIs in Tanzania, in terms of the overall institutional and organizational strength, client outreach, and operational and financial performance.28 MFIs and 194 MSEs were randomly selected and visited in Dar es Salaam, Arusha, Morogoro, Mbeya and Zanzibar regions. The findings of this revealed that, the overall performance of MFIs in Tanzania is poor and only few of them have clear objectives, or a strong organizational structure. It was further observed that MFIs in Tanzania lack participatory ownership and many are donor driven. Although client outreach is increasing, with branches opening in almost all regions of the Tanzanian mainland, still MFIs activities remain in and around urban areas. Their operational performance demonstrates low loan repayment rates. In conclusion, the author pointed to low population density, poor infrastructures and low house hold income levels as constraints to the MFIs‟ performance.

In a case study of Ghana, Inkoun (2003) found out that SMEs performance is closely linked to entrepreneurial skills of the proprietor. The author adopted primary data source through the administered questionnaire and used descriptive statistics in analyzing the data. He found out that proprietors with business related qualifications tended to survive by 30% more than non-qualified proprietors. This raised concerns that entrepreneurial skills and how intellectually equipped the proprietors of SMEs will have a significant impact on the survival of the business. Similarly, Ramis (2002) found out that although management training for proprietors is important for SMEs in Peru, it is more important when the company has higher growth potential than it is when the growth potential is low. He however, found out that competition from both domestic and foreign firms is more predatory than entrepreneurial skills. In his study, SMEs faced with competition were three times more prone to collapse than those without competition.

Ebrahim et al (2008) focused on virtual research and development teams as a means of sustainable infrastructure for promoting SMEs in Malaysia. They stated that the role of Small and medium size enterprises in economies cannot be overemphasized. They articulated that technology and new innovation might enhance the profit and competitiveness of SMEs. The competitiveness of the SMEs tends to increase their capacity to improve their performance and produce goods that could meet international standards. This will ensure the survival and growth of the SMEs. Their study identified intellectual capital as a vital ingredients to complement the other resources to promote economic activities. They concluded that SMEs managers should intensify effort into research and development that will transform future output, profit and business competitiveness.

Tambunan (2008) explored the linkages on how economic development and government have led to SMEs development in Indonesia. The study concentrated on the survival of SMEs in the course of economic development and how government policies has promoted SMES development. The author used quarterly secondary data on SMEs from 1994 to 2006 and employed a simple regression (OLS) model. The result of the study revealed that real gross domestic product (GDP) per capita and government development expenditure (in which part of it is used to finance SMEs development promotion programs) have positive correlations with SMEs share in GDP. The author suggested that SMEs in less developed countries have a chance to survive and even to grow in the long-run due to the three reasons: (a) they have a niche market for themselves; (b) these enterprises act as a 'last resort' for the poor; and (c) the production linkages between SMEs and large-enterprises (LEs) in the form of subcontracting have become increasingly important, and thus, they will grow along with the growth of LEs.

Jasra et .al (2011) examines the determinants of business success of small and medium enterprises in Pakistan. The stated that the success of SMEs depends on a number of factors and the study investigates the relationship between SMEs success and its determinants. They used data from the primary source in which the targeted population was the SMEs operators in different lines of business from service to manufacturing. The Sample size of used was 520 small and medium lines of businesses through the administered questionnaires. SPSS software is used for analysis. The results shows that there is a significant relationship between business success and its determinants. The result also shows that financial resources are the most important factor in the success of business perceived by small and medium enterprises. They concluded that success of small and medium enterprises can contribute significantly in the development of the country.

Mwania, (2011) on the effect of Biashara Boresha Loan (BBL) on Performance of Micro and Small enterprises owned by Kenya Commercial Bank (KCB) Ruiru branch customers with objectives to review the lending procedures of biashara boresha loan, to assess the effect of BBL on MSEs performance and to find out the challenges faced in lending to SMEs, found out that besides BBL, there are other factors believed to have an effect on business performance. It also found no conclusive results on the relationship between entrepreneurs’ level of education and business performance. Of the 51% respondents who received training in their areas of business, 49.5% reported that their businesses were doing well, concluding that relevant training can produce positive results in the running of businesses. Mwania concluded that infant businesses need support in their early years when their motivation is high and innovation is low and that collateral requirements at KCB Ruiru should be made a bit flexible and repayment period should be increased to at least a year because SMEs only manage to access a small amount of loan due to short repayment periods. 53% of BBL customers interviewed felt the process was cumbersome. Some felt that after availing all the required documentation, the turnaround time was not acceptable. 52% of the entrepreneurs utilized the loan advanced 100% for working capital and their revenue increased from previous thus boosting the business performance. 11.9% diverted the amounts advanced and they confessed as having difficulties in meeting their repayments on time. They also saw their sales turnover decrease from the previous due to the increase in operating costs brought about by the interest rates on the loans advanced.

The study also found a positive correlation between BBL and entrepreneurs business performance and concluded that young businesses require more support financially to supplement their working capital. The study recommended that Kenya Commercial bank had a few issues to address such as lending procedures, collateral requirements and repayment period to ensure better customer satisfaction and that further research should be done on entrepreneur’s competencies, competition, government regulations etc

Mudavanhu et .al (2011) examined the determinants of small and medium enterprises failure in Zimbabwe. The study focused on Bindura which is one of the major hub city in the country and primary data was used that cut across 37 firms in Bindura Urban for the period of one year that lies between 2008 to 2009. The firms considered were clustered into five different clusters which are manufacturing, transport, processing, construction and retailing. They adopted Ordinary Least Square (OLS) estimation techniques to estimate the change in return on investment function which was assumed for SME failure. They employed primary sources of data collection through administered questionnaires, interviews and focus group discussions with SMEs. They participates was randomly selected from different clusters that cut across different sectors of the economy in which SMEs operate. They found out the level of education of the entrepreneur, availability of credit, the degree of foreign competition are huge in determining the survival and growth of SMEs. They suggested that most SMEs are faced with lack basic skills and knowledge on business management, lack of financial credit, foreign competition and high cost of raw materials which were identified as the major challenges attributed to the major shut down or SMEs in Zimbabwe. This study was supported by the works of SEDCO (2004) that stated that about 60% of SMEs in Zimbabwe failure in their first year of establishment, 25% fall within the first three years and the remaining 15% are likely to survive. This revealed that about 85% of the SMEs might likely collapse in first three years of their operations. This is a high statistic which is a major drawback to economic development and hence it is important to determine the major causes of SME failure so as to reduce the damage caused by SME failure.

Mazanai and Fatoki (2012) explored the access to finance in the SME sector in South Africa. The study emphasized the need for the SMEs to have access to finance so as to flourish in the same view with the works of Mass and Herrington (2006). They stated that financing has been one of the major challenges facing SMEs which have the likelihood in impending the survival and growth in South Africa. The study reiterated the fact that SMEs serves as an engine of eradicating poverty, employment creation and foster economic growth at large. They claimed that the ability of SMEs to grow and survive depends highly on their availability to funds to invest in infrastructure and embrace innovation in terms of technology meant to increase output, reduces cost of production and ensure it meet international standards. It is seen as the tool that has the huge potentials in transform the economy around and solving the problem of unemployment. They concluded that if the issue of financing is not well address it tends to compromise the growth and survival SMEs.

Vu et al. (2012) examines private manufacturing SMEs survival and growth in Vietnam with focus on the linkage between export participation and SME performance in terms of survival and profit growth. This study was an extension of the work of Hansen et al (2009). They used unbalanced panel dataset from 2005 to 2009 sourced from the microdata set of non-state domestic small and medium enterprises. The study revealed show no difference in the survival probability between exporters and non-exporters. In digging further to different stages of export, the results indicated that continuous exporters have a positive association with probability of survival whereas export stoppers indicate negative relationship.

Deo (2013) examines the impact of globalization on small Business Enterprises (SBEs) and SMEs in Australia. The author perceived globalization as an independent factor that can influence the growth and survival of SMEs. The study used exploratory and qualitative research in explaining the impact of globalization on the performance of SBEs. The author found that although SBEs make business decisions quickly, have knowledge, technology and finance but are resource constraints that have prelude them from investing in new innovations and approaches. These might have limited the competitiveness of SMEs and compromise their growth and survival to operate in a globalizing environment. How the SBEs and SMEs tapped into the global environment will go a long way in influencing their growth and survival. The study reiterated that foreign direct investment has a huge potential for both positive and negative to spillover effects and linkage effects on the survival of new business start-ups and SMEs and SBEs. Hence, globalization is seen as tool that has opened up new opportunities for SBEs and SMEs in terms of international exchange of goods and services.

Amegashie-Viglo and Bokor (2014) study in Ghana indicate that the major constraints confronting local artisan/entrepreneurs include financial/capital (44.1%), lack of market/poor patronage (23.7%), high cost of inputs (10.2%) and lack of tools/equipment (10.2%). Also the same study reveals that low level of education, business ownership being mostly sole proprietorship, low level of technology with the majority still using traditional/rudimentary methods of production which results in low production, high cost for available raw materials and lack of business training are constraints facing entrepreneurs in Ghana.

Kamunge et al (2014) examines the factors affecting the performance of small and micro enterprises in Limuru town market of Kiambu in Kenya. The study encountered by the SMEs firms might have hindered the growth and compromise the survival of such SMEs. They opined that SMEs are high in mortality rate which makes them more vulnerable after the first two years. The study employed a descriptive research design to achieve the stated objectives. The study used a targeted population of about 965 licensed SMEs by Limuru sub-county operating in Limuru Market in 2014. The study used a questionnaire to collect the required data from a sample of 274 SMEs. The data collected was coded, quantified and analyzed quantitatively and qualitatively. Quantitative data was analyzed by the use of statistical package for social sciences (SPSS). The study found that access to finance and availability of management experience are the key socio-economic factors affecting the performance of businesses in Limuru Town Market. The other key factors that were found to affecting businesses in Limuru Town Market positively are: access to business information, access to infrastructure and government policy and regulations. The study concluded that the government should start offering basic business and financial management skills that will enable entrepreneurs to make informed investment decisions as well as enhance their entrepreneurial skills to enable them to recognize and exploit the available business opportunities.

Kinyua (2014), researching on factors affecting the performance of small and medium enterprises in the Jua Kali Sector in Nakuru town, Kenya with objectives to investigate the role of finance, management skills, macro-environment factors and infrastructure on performance of small and medium-sized enterprises in the Jua Kali sector in Nakuru town. The findings indicated that; that access to finance had the potential to positively affect performance of SMEs; management skills were found to positively and significantly affect performance of SMEs; macro environment factors were found to significantly affect performance and Infrastructure did not significantly affect performance of SMEs in the study area. The study results also indicated that as number of years in operations increased the performance in SMEs increased. The study recommended that banks should improve access to finance through offering better lending terms and conditions and collateral requirements; focus on acquiring appropriate management skills such as financial, marketing and entrepreneurial skills and effectively strengthen the macro environment in order to increase SMEs performance.

Mashenene and Rumanyika (2014) examines the business constraints and potential growth of small and medium enterprises in Tanzania. The study emphasize that finance in a major constraints in most developing countries and Tanzania is not an exemption. They identified that business constraints is another key factor that influences the potential growth of SMEs in Tanzania. The quantitative approach through descriptive analysis was used in terms of frequency and percentages with important given to variables such as insufficient capital, inadequate business training, competition, culture, bureaucratic procedures, poor infrastructure, high taxes and technological barriers. They found out that inadequate business training, insufficient capital and culture have a significant constraints on SMEs growth potential. The suggested that entrepreneur should be given more adequate business training, skills and financial institutions should relax their lending policies to enable SMES access credit.

2.4 Small and Medium Scale Enterprises

The Monetary Policy Circular No. 22 of 1988 of the Central Bank of Nigeria defined small-scale enterprises as enterprises whose annual turnover was not more than #500, 000. In the 1990 budget, the Federal Government of Nigeria defined small-scale enterprises for purposes of commercial bank loans as those with an annual turnover not exceeding #500, 000, and for Merchant Bank Loans, those enterprises with capital investments not exceeding #2 million (excluding cost of land) or a maximum of #5 million. The National Economic Reconstruction Fund (NERFUND) put the ceiling for small-scale industries at #10 million. Section 37b(2) of the Companies and Allied Matters Decree of 1990 defines a small company as one with an annual turnover of not more than #2 million and net asset value of not more than #1 million. (Ekpenyong & Nyong, 1992). The Small and Medium Enterprise Equity Investment Scheme (SMEEIS) sees the SME as “any enterprise with a maximum asset base of #500 million (excluding land and working capital), and with no lower or upper limit of staff”.

In 1992, the National Council on Industry for the purposes of clarity as regards the definition of SMEs in Nigeria came up with a definition which was to be reviewed every four years, in essence taking care of the lack of uniformity that arose due to the many different definitions as suited the many different bodies making them. This definition divided the small and medium enterprise sector into micro, small and medium enterprises. These sub-categories were defined by the National Council on Industry at their 13th Council meeting. However for tax purposes, Section 40(6) of the Companies Income Tax Act Cap C21 LFN 2004 alludes to companies with a turnover of #1 million and below operating in the manufacturing, agricultural production, solid mineral mining, and export trade sectors as SMEs; While subsection 8 states that as from 1988 all companies engaged in trade or business with a turnover of #500,000 and below qualify as small and medium enterprises. (Iwuji, n.d)

2.5.1 Classification and category

Globally, the definition of small business and medium business has always been controversial and varies with different yardstick are considered. The concept of small have been loosely used in literature and the terms small business focused on variety of firms (Hertz, 1982). Similarly, the small business or enterprise is regarded as the one which is independently owned, operated and is not dominant in its field of operation (Peterson, Albaum and Kozmetsky, 1986). In literature different criteria and yardstick have been used in defining the operationalization of small and medium business that cut across value added, assets, annual sales and number of employees. Most studies and researchers often adopt the annual sales and number of employees despite the divergence in the concept.

The Investment Climate Assessment (ICA)(2009) stated that there is no universal acceptable definition of Micro, Small and Medium Enterprises (MSMEs) as the operation varies significantly across countries depending on some factors such as the country’s level of economic development, the size of MSMEs, the strength of the industrial and business sectors and the challenges experienced by the MSMEs (Harabi, 2003). According to Small and Medium Enterprise Development Agency of Nigeria (SMEDAN, 2010) which is the agency saddled with the responsibility of managing and regulating micro, small and medium enterprises in Nigeria define MSMEs using dual classification which are the number of employees and annual turnover (Assets) as a measuring rod.

In Nigeria, MSMEs can be classified into micro, small and medium enterprises (SMEDAN, 2010). The Federal Ministry of Industries defines a medium-scale enterprise as any company with operating assets less than N200 million, and employing less than 300 persons. A small-scale enterprise (SSE) on the other hand, is one that has total assets of less than N50 million, with less than 100 employees. Annual turnover is not considered in the definition of an SSE. The National Economic Reconstruction Fund (NERFUND) defines an SME as one whose total assets are less than N10 million, but makes no reference either to its annual turnover or the number of employees. These and other definitions of the National Association of Small Scale Industries (NASSI), the National Association of Small and Medium Enterprises (NASME), the Central Bank of Nigeria (CBN), Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) and other institutions are shown in the Table 2.1 below.

Table 2.1: Classification of SMEs and MSMEs by various Institutions

Source: World Bank, 2012; Country Mapping, 2010, SMEDAN, 2012.

The World Bank Group contributed to literature by defining MSMEs based on the three characteristics of number of employees, total assets and turnover. The classification is mention below as

i. Micro Enterprise: These are enterprises whose total assets are less than $100,000 with a workforce not exceeding 10 employees and turnover not exceeding $100,000.

ii. Small Enterprise: These are enterprises whose both total assets and turnover lies between $100,000 and not exceeding $3million and with a workforce not less than 10 and not exceeding 15 employees.

iii. Medium Enterprise: These are enterprises whose both total assets and turnover is above $3million but not exceeding $15 million and with a workforce of 51 but not exceeding 300 employees.

In addition, another private initiative scheme created by the Bankers committee is called the Small and Medium Enterprise Equity investment Scheme (SMEEIS). This scheme viewed MSMEs as an enterprise with an asset base not exceeding $3.85 million (#500 million) excluding land and working capital with the staff strength of not less than 10 and not exceeding 300 employees (Sanusi, 2003).

Table 2.2: Classification adopted by SMEDAN for National Policy on MSMEs

Source: SMEDAN, 2010.

It is obvious that there is no universal definition of MSMEs. Some countries define MSMEs according to number of employees; others define them based on the level of assets or turnover or both. However, most definitions are based on a mix of the above parameters. This creates a definite problem for MSME operators. Lack of proper definition makes it difficult for them to take advantage of government-assisted programmes meant for them. Despite, the different perception and divergent views there is exist some converge in the way small enterprises is defined. Most MSMEs are usually referred to as a small businesses which is managed by the owner or families in order to satisfy a needs either in the production of goods and services. It is usually characterized with lack of organizational structure as against what prevails in the organized institutions.

2.5.2 CHARACTERISTICS AND STRUCTURES

The concept of SMEs is relative and dynamic (Olorunshola, 2003). SMEs are characterized by uncertainty, innovation and evolution. A firm understanding of SMEs would require a good knowledge of its features.

Aderemi (2003) noted that the SMEs in Nigeria are usually small, owner or family managed business offering basic goods and services, which tend to lack organizational and management structures with the urban ones tending to be more structural than their rural counterparts. This is one of the most generic features of SMEs in Nigeria.

Udechukwu (2003) stated that they are mostly sole proprietorships or partnerships, although on the surface, they may be registered as Limited Liability, while Olorunshola (2003) suggested that this ownership style has led small and medium enterprises to have a simple management structure. Factors also contributing to the reasons small and medium enterprises have a simple management structure are few number of employees and the owners’ low level of education. Since there is no legal personality between the small and medium enterprise and its owners, it means the lifespan of the enterprise is dependent on the lifespan of its owners i.e. there is no perpetual continuity.

Furthermore, the production processes of SMEs are usually labour intensive and they usually serve as suppliers for the larger manufacturing firms with their operations being highly dependent on raw materials sourced locally (Hanefah, Ariff, & Kasipillai, 2002). They also require a lower startup capital than the larger companies (Akinsulire, 2010). While the decisions of the managers have a higher tendency to be subjective given that they are managed and controlled by the same individual. Also, the employee-employer relationship found in most SMEs is predominantly informal.

Another key feature of the SME sector in most countries is that it is heterogeneous, varying in size from small retail outlets to highly paid professionals, and substantial manufacturing enterprises. SMEs are also likely to vary in organizational form from sole proprietorships (with or without employees), small corporations (public or private), professionals and partnerships. This feature usually results in different obligations for record keeping for the enterprise.

In addition, the contribution SMEs usually make to tax revenue is lower than its contributions to output and employment (International Tax Dialogue, 2007). That fact notwithstanding, SMEs have not become competitive enough to increase their share of output even though they form three-fifths of the number of manufacturing firms where larger manufacturing companies rely on SMEs for their supplies (Hanefah et. al, 2002).

2.5.3 SOCIO-ECONOMIC CONTRIBUTIONS

SMEs have been an important tool of economic development for Nigeria. The future of any growing economy such as Nigeria’s depends on the entrepreneurial energy of vibrant SMEs because a lot of large businesses start out as SMEs. Many authors believe that they are the starting point of development in the economy towards industrialization. Udechukwu (2003) for example sees the SME sector as one that will enhance the contributions of the private sector and provide the critical building blocks for industrialization and sustainable economic growth. SMEs broaden the base of participation in society, decentralize economic power and give people a stake in the society’s future (Williams, 2006). SMEs have also been recognized as a channel for improving the efficiency of domestic markets and making productive use of scarce resources, and thus facilitating long-term economic growth in poor countries (Aryeetey & Ahene, 2004). Given that a large proportion of Nigeria’s population relies either directly or indirectly on small and medium enterprises for survival, their importance cannot be overemphasized.

A major contribution made by SMEs is in the area of employment as they offer a high amount of employment in casual, part-time, low training, low-skilled jobs (Yaobin, 2007). Being more labor intensive, SME expansion is more likely to boost employment than large enterprises where expansion means higher degree of automation and machining. Findings from a study carried out by Chu, Kara & Benzing (2008) suggest that Nigerians consider entrepreneurship an avenue leading to job security and improving their livelihood. This makes SMEs an important factor in the area of poverty alleviation (Beck, Demirguc-Kunt & Levine, 2005).

2.5.4 Problems and constraints

There are several problems that bedevil SMEs and stunt their growth over the years in most countries of the world. Though some of these problems are peculiar to a particular country, the challenges faced by SMEs in different countries and geopolitical divisions are basically the same. For instance, a survey of Turkish SMEs by Organization for Economic Co-operation and Development (OECD) in 2004 showed that they were suffering the consequences of policy inconsistency, poor access to finance, insufficient know-how and low level of technology, and so many others. Similar problems were reported for other regions like the Philippines, Malaysia, European states and the Sub-Saharan Africa, including, Nigeria. (Aderemi, 2003) (Jan, n.d.). Uzor (2004) suggested that the constraints faced by SMEs in developing countries are not only accentuated with ineffective policy design, but also by market failures in the region.

In addition, Areetey & Ahene, (2004) listed lack of access to land, utility installation and services, and import procedures as constraints to SME growth. In addition, lack of protection for property rights, which in turn limit SME access to foreign technologies and lack of capacity which affects the enterprise’s ability to handle problems of bureaucracy and other such complexities. Other factors are high inflation, and high import dependency, high debt burden on the nation, lack of access to technology, and best of breed business solutions, business services, consulting and training make for an unstable macro-economic environment. Other problems are astronomically high operating costs; lack of transparency and corruption; and the lack of interest and lasting support for the SMEs sector by government authorities, (Oboh 2002; Okpara 2000; Wale-Awe 2000). Nigerian entrepreneurs cite unreliable employees. Weak economy, unsafe location, undependable electricity supply and lack of management training are closely ranked behind (Chu, Kara & Benzing, 2008). In addition, because many SMEs produce non-standardized products and due to their lack of awareness of markets skills, they also have problems marketing these products. Yoabin, (2007) maintained that the asymmetry of financing information, high risk of investment and business operation.

Organisation of Economic Community Development (OECD, 2012) stated that SMEs are important engines of growth, jobs and social cohesion. However, the creation, survival and growth of SMEs is often hampered by access to finance. The importance of SME finance is now widely recognized. At the Pittsburgh Summit in 2009, G20 Leaders acknowledged that access to finance provides growth opportunities for businesses and the economy as a whole. Financial Inclusion is a pillar of the G20 Multi-Year Action Plan on Development, and the G20 Global Platform for Financial Inclusion (GPFI) was launched in Korea in December 2010. The need to address the financing hurdles to SME growth was also underlined by G8 Leaders at the 2011 Deauville Summit, where the OECD was invited, in co-operation with other relevant international institutions, to identify impediments to SME growth, including the issue of private funding.

2.5.5 Entrepreneurship Growth and Profitability

2.4.1 The Firm and the Entrepreneur

2.4.2 Firm life cycle

Jovanovic (1982) addresses these deficiencies by developing a model of the firm life cycle based on learning. According to Jovanovic's life cycle model, individuals differ in their entrepreneurial abilities, but they are unsure of their abilities until they manage a business. Though, production technology is risky, individuals are uncertain about their abilities to manage a business because they lack prior knowledge and partly because production is inherently risky. In his model, he assumes that individuals learn about their abilities over time by observing how well they perform in a tough business world. Individuals who find out that they have underestimated their abilities

2.4.3 Organizational Capabilities

Organizational capabilities refer to the skills, experience, and abilities of the individuals within an organization. Capabilities also include decision making practices (Orser et al., 2000), competencies (Julien and Ramangalahy, 2003) and managerial capacity‘‘. This theory on organizational capabilities suggests that small firm development depends on the abilities of the firm owner‘s managers and employees to plan for and adapt to the business environment in which they operate. Successful small firms have been associated with greater skills in organizational learning (Chaston et al, 2001) and strategy development (Julien and Ramangalahy, 2003). Smallbone et al. (1995) document an association of a homogeneous set of organizational competencies with small businesses that have achieved high growth rate. Sadler– Smith et al (2003) identify a positive relationship between a homogeneous collection of organizational capabilities and small business performance, as well as a more heterogeneous set of practices associated with average performance of small firms.

2.4.4 Stages of Small Business Development

Since this pioneering work in 1972, a lot has been done in the area of firm development to date. Different factors have been attributed to development stages of firm. Lavoie and Gulbert (1978) reviewing many theories, emphasize the important role of the human factor in the development of an organization. According to them, organizational development is tied to progressively mature reasoning processes that characterize managers working at increasingly higher stages of the organization‘s evolution. Valid organizational change and development basically address the problem of getting managers and their employees to upgrade the values and logic underlying their patterns of decision-making.

Adizes (1979) concludes that the future oriented management of the attitudes and style of an organization‘s managers may provide a means for ensuring a long and effective life for an organization. At every life cycle passage, a typical pattern of behaviour emerges. At the courtship stage, the most pronounced role is that of selling the idea to others and reinforcing one‘s own commitment. At the next stage, risk becomes an issue due to the significant expenses involved. A significant change in behaviour is needed, as production is crucial. The following stage calls for vision and administrative systems of increasing importance. At the adolescent stage, more time should be spent on planning and coordinating. If the organization sails safely through adolescence, it may enter the prime stage of the organizational life cycle. An organization in its prime is result-oriented, has plans and procedures to achieve efficiency and keeps an open eye on its environment. The mature stage is characterized by institutionalized systems that is procedures and policies (systems) for accomplishing tasks.

Churchill and Lewis (1983) see growth as part of the natural evolution of a firm. They start by stating emphatically, that the traditional development frameworks are inappropriate for small businesses as the traditional model states that a company must grow and pass through all stages of development or expire in the process. They are of the view that this is not necessarily so for small business because the traditional model fails to recognize important stages in a company‘s origin and growth while emphasizing sales and employment as well as ignoring issues such as value added, number of locations and the complexity of the product line. They identify five stages of growth: existence, survival, success, take-off and resource maturity. Each stage is characterized by size, diversity, complexity and the following management factors: managerial style, organizational structure; extent of formal system; major strategic goal; and owner involvement. At the existence stage, the main problems are obtaining customers and delivering the product contracted for by them. At the survival stage, the firm has enough customers and is able to satisfy them. The main problem at this stage is managing the revenue and expenses of the organization to achieve a breakeven point. The organization is still simple at this stage; most of the supervision is carried out by the salesman or the foreman and not the entrepreneur any more.

The success stage is characterized by two possibilities: disengagement or growth. At the disengagement stage, the company is healthy, but ceases to grow. The professional staff comes on board. This can be the last development stage and may last long. The other possibility is to strive towards growth: at the success-growth stage, the entrepreneur marshals resources for growth. It becomes important to train managers to meet the need of the growing business. Once it has successfully passed through this stage, the company proceeds to the take-off stage, and the main focus then is on how to grow rapidly and how to finance that growth. The main concern at this stage borders on delegation, transferring responsibility and controls from the entrepreneur to others in order to improve managerial effectiveness. At the resource-maturity stage, the management is decentralized and the organization is adequately staffed. Systems are extensive and well developed. After this stage, two clear possibilities emerge: continued performance or suffocation.

Figure 2:2 Stages of Small Business Growth Characteristics

Source: Churchill and Lewis (1983)

In the above framework, there are 5 stages of business evolution and 5 characteristics that define each stage. According to Churchill and Lewis (1983), businesses with DNA that are suited to the environment and are competitive and rewarded by the sheer pleasure of reaching the next stage of the evolution. Those small businesses, in their evolutionary journey, that are not suited and not adaptable to the environment, and are not competitive in an industry segment are ―discarded

Only the strong survive.

In the model there are five stages of business evolution. They are Existence, Survival, Success (leading to a choice of disengagement or growth based on owner - psychology‖), Take-off (rapid growth), Resource Maturity and Ossification (Decline).

Each stage is characterized along the dimensions of: management style, organization, extent of formal systems and major strategy. At each of the 5 stages of small business evolution, there are challenges which must be overcome. Successful progression along the evolutionary path requires adaptation and specific changes to the 5 characteristics cited above. Failure of a business enterprise to adapt and makes those changes results in the death of the business. The interesting question is; what happens to the owner when a business fails? Is that the end of the line? Or does he/she learn from the past and try again?

The main focus of the work of Churchill and Lewis (1983) is in explaining further the success stage. At the success stage one of two things can happen; the owner/manager may maintain the present profit status quo by relying on internally generated fund for investment and essentially, maintain the status quo, or the owner manager may decide to grow the business; the owner consolidates the company and marshals resources for growth through the borrowing power of the company. In order words, he seeks for external loan in order to grow the company. Managers must be hired with a focus on the company‘s future rather than maintaining its current condition and status quo.

2.4.5 Small Business Development

Given the vulnerability of a small firm to changes in the environment, its survival depends to a large extent on how it interacts with its environment. Preston (1977) divides small businesses into five categories: the rare successes that have evolved from the small business and are still operated by the owner-manager; firms in small business industries in which the firm's optimum scale is small; firms built on successful specialization that is based on innovation and patent control; satellite firms that are dependent on either a single large firm or a group of large firms in a major industry; and turnover firms that operate in sectors in which entry and exit are relatively easy. He concludes that the success of each category depends on how it manages its interaction within the environment where it operates.

Deeks (1973) identifies three types of structure in terms of the source of company policy making: monocratic, in which overall company policy is in the hands of a majority shareholder who is supported by an average of two "specialist managers"; oligarchic, in which overall company policy is in the hands of two or more owner-managers, each of whom performs some specialized function; and patrician, in which owner-managers or family members do not participate in the formulation of company policy.

Filley and Aldag (1978) identify three patterns of organization (which have been incorporated into a global model): craft firms, promotion firms, and administrative firms. Barry (1978) proposes two simple distinctions: the traditional family business that is controlled by descendants of the founder and is marked by two social systems; the family and the business, and the entrepreneurial firm that is still controlled by the entrepreneur, the founder.

In determining the impact of the managerial characteristics on small business development, a distinction should be made between the owner manager and the entrepreneur. Toulouse (1979) defines entrepreneurship in relation to three axes: values, risk taking and action; the entrepreneur is individualistic, has a tendency to take considerable but calculated risk and leans towards developing activities within the firm. The entrepreneur is characterized as a person with high need for achievement.

Inspired by the work of Miller and Friesen (1982), D'Amboise (1983) supported the existence of two types of firms – the conservative and entrepreneurial. The predominant characteristic of the firm determines the extent to which it will take initiatives toward making new products or using new methods of production. Paolillo (1984)' using Mintzberg's (1975) managerial roles, concludes that the manager of the large firm is a negotiator, disturbance handler, liaison, and resource allocator, whereas the manager of a small firm is a figurehead, entrepreneur, spokesperson, and leader. Gasse (1979) shows that open-minded, as opposed to close-minded, owner-managers have more managerially-oriented business ideologies, more sophisticated attitudes, and more abstract concepts of small business; their approaches are more rational, and they place less emphasis on security and the short-term.

Amboise (1974), Amboise and Gasse (1980), Rice and Hamilton (1979) show that often the goals of the small business person are vague, inadequately defined, pragmatic, and short-ranged. Moreover, Rice and Hamilton note that Simon's (1955) concept of satisfying is a predominant factor in decision making; for the manager of the small business "the rational model seems to be much too ambitious an undertaking". Bamberger (1983) asserts that, generally, objectives are formulated at the highest level of the hierarchy, and they are strongly influenced by economic conditions. England and Lee (1973) and Bamberger (1983) found that small firms attach greater importance to employee wellbeing than large firms; however, the importance of productivity, profits, growth, and, to a lesser degree, leadership and efficiency increase with size. Sexton and Van Auken (1985) observed that only a minority of small businesses use strategic planning and for those that do, it is difficult to sustain over time. Robinson and Pearce (1984) attributed the non-use of strategic planning to lack of time, limited knowledge of the planning process, lack of expertise, and lack of trust and openness. According to Jauch and Osborn (1981), strategic actions are likely to be ratified to the extent that they fit management philosophy. An empirical study by Chevalier and Leynaud (1983) showed that firms that exhibit a good balance between the manager's competence and the product portfolio in terms of "stability, danger, and hope" develop rapidly. Robinson, Pearce, Vozikis, and Mescon (1984) empirically demonstrated that basic planning has a positive impact on the performance of the small firm.

The success of any organization requires a preoccupation with the financial situation of the firm. Welsch and White (1981), concentrating on financial problems and financial analysis models particular to the small business, pinpointed the principal concern such as cash flow. Kao (1982) emphasized the importance of budget planning, the contribution approach, performance measurement, and an investigative attitude that leads the manager to inquire into discrepancies between the budget and operations. In an empirical study, Khan and Rocha (1982) identified four problem areas for small business, they are: marketing, accounting, inventory, and cash flow. Chaganti and Chaganti (1983) studied the profile of the profitable business as opposed to the "not-so-profitable" one; again, a key factor for success is good cash management. An area of concern directly related to the issue of success-failure is the evaluation criteria for the firm's performance. Khan and Rocha (1982) identified four variables that affect performance as type of ownership, age of the company, annual sales, and worth of assets. Robinson (1983) identified four criteria for evaluating effectiveness of a firm as community involvement, customer satisfaction, owner return, and employee satisfaction. In addition, he recognized the importance of short-term profitability as measured by return on sales.

In terms of business failure, Dun and Bradstreet (1986), among others, attribute small business failure to "lack of managerial experience". Edmunds (1997) observed that this perception is shared by lenders, bankers, credit agencies, and the Small Business Administration because their criterion for lending is managerial expertise. Baumback and Lawyer (1999) stressed that "unsuccessful business owners . . . attribute their failure to many causes, rarely personal defect and only few business owners will admit that they are bad managers". Edmunds points out that the small business person blames unfair competition and government intervention. Some businesses are strictly parallel activities or hobbies; the failure of such businesses cannot be evaluated in the same vein. Although, few studies have been conducted on strategies for the turnaround of a small business, and little has been written on the social implications of bankruptcy, quite a lot of effort has been made to examine the model of a small business.

2.4.6 Role of the Entrepreneur in Business Formation and Growth.

These theories consider differences in attitudes and abilities among individuals as critical issues in determining why some small firms grow and others do not. Two schools of thought, the Austrian School and the Classical Economist were the first to acknowledge the role of the entrepreneur in small business development; they recognize the entrepreneur as an individual with special characteristics. Knight (1921) describes an entrepreneur as someone that has the willingness and superior ability to make decisions, raise capital and assume the risk of failure. In the same vein, Schumpeter (1939) adds among other things, that an entrepreneur has the superior ability to perceive new market opportunities. He sees the entrepreneur as an innovator.

2.4.7 SMEs and Growth

It is evident from the literature that not all small businesses are growth oriented and for certain firms’ growth is not a voluntary choice (Masurel and Montfort, 2006). An empirical study of SMEs growth pattern by Kolvereid and Bullvag (1996) concluded that growth intentions may be used to predict actual growth, that past intentions are related to later intentions, and that change in growth intentions are associated with changes in growth patterns. Arbaurgh and Sexton (1996) provide empirical evidence that most new firms do not grow into large ones and that there is no relationship between the age of a firm and its size. Chaston and Mangles (1997) opined that there is no single strategy to firm growth. Hence, the probability of achieving growth is increased by avoiding excessive emphasis on single–strategy transformation initiatives, and by giving different capabilities priority depending upon the development stage of the firm. They identify three factors that can limit the growth of small business; namely ability, need and opportunity. Kolveired (1992) concluded that small business entrepreneurs who want their firms to grow start their business in order to achieve just that. The process of mutual adjustment between proprietors and their employees was identified by Goffee and Scase (1995) as a major limiting factor of small business growth. Crises in small high tech firms is usually caused by poor financial records, weak general management, product competition, diversification and acquisition, changing capital demand, high overhead structure, manufacturing and operating problems, cancelation or delay of major contracts, poor marketing and price competition.

2.5.6 GROWTH AND SURVIVAL

It has been argued that SMEs need the support of the government and private sector in terms of cooperation and coordination to contribute their expected quota into the economy. The works of Altman (2003) and Persson (2004) suggested that SMEs need these supports to overcome the economic and competitive disadvantages that they face because of their size. It has shown that that is the major reasons many of these SMEs don not survive their first years in business. Therefore, the Macroeconomic conditions and firm-level characteristics, such as, size, age, resource-based arguments, management, governance, capacity to obtain external finance to start and expand, and stability in production and operations, are of fundamental importance in explaining a SME’s long-term survival and growth. Among these, financing is often cited as bottleneck restricted the development of SMEs in Nigeria. To help ease SME finance, the Nigerian government through CBN inaugurated Microfinance Banks to finance the SMEs in Nigeria. This was envisioned to complement the commercial bank in the economy and ease and reduce the complexities involved in securing financing and loans from commercial banks. This has now raised questions: Has Microfinance help the SMEs survival and growth and does the current environment facilitate SMEs to survive and grow?

The survival of SMEs is widely examined in developed economies, such as Mata et al. (1995) on Portuguese firms, Harhoff et al. (1998) and Audretsch et al. (1999) on Germany and Italy, Kimura and Fujii (2003) on Japan, Doms, Dunne and Roberts (1995) on America and Tveteras and Eide (2000) on Norway. These studies primarily find that the size of a firm seemed to positively affect its survival. Some studies have established the relationship between firm size and survival in the economies in transition (McPherson, 1995; Tybout, 2000). However, the relationships have not yet fully been confirmed. In addition, none of studies have analyzed the impact of microfinancing in the survival and growth of SMEs in Nigeria. The potential and significance of the SME sector in the national economy stand, therefore, in marked contrast to the lack of detailed understanding of the factors behind firm growth and survival in this fastest growing economy in the world. Moreover, for the Nigerian economy, the problems of SMEs are believed to be related to the existence of serious structural problems in the financial sector and macroeconomic management, and hence it’s interesting to examine how these constraints influence the existence and growth of SMEs.

Jovanovic (1982) models firm survival and growth as a function of the efficiency level of a firm. The firm learns about its own efficiency level after its market entry. And it takes time for the firm to learn about its ability to compete. Once the firm learns about themselves, the model predicts that firm survival will increase with its age and size. Supporting evidence to this hypothesis has been found by various researchers. Hall (1987), Evans (1987a, 1987b) and Dunne et al. (1988, 1989) find that larger firms have lower growth, but a larger probability of survival. Doms et al. (1995) show that older and larger firms in the US manufacturing sector have higher survival rates and lower growth rates. Sutton (1997),

Caves (1998), and Audretsch and Klepper (2000) find that small firms have a lower likelihood of survival, but firm size is found to be negatively related to growth. Most studies on firm survival find that age matters. Dunne et al. (1988) using census data of manufacturing, find a positive relation between firm age and survival throughout the observed age range. Baldwin and Gorecki (1991) consider entry in Canadian manufacturing industries, and find high infant mortality among entrants as new firms are taken to be unsure about exactly what their competencies are and how appropriate they will be prior to entry, but hazard rates generally decline with age. This result has been confirmed by Phillips and Kirchhoff (1989) and Audretsch (1991), who find small firm survival rates increase with age. The general consensus of these studies is that (i) firm survival tends to increase with firm age and firm size and (ii) firm growth tends to decrease with firm age and firm size.

Audretsch and Mahmood (1995) find that in industries where small firms have a relatively higher innovation rate as compared to larger firms, the survival rate of small firms is higher. Agarwal (1998) examine the relation between firm survival and technological activity, showing that technological activity can both help and hinder survival. While entrant survival is higher in a high-tech environment, the hazard rate is also higher, reflecting the adverse effects of technical uncertainty and obsolescence of incumbent knowledge. Klepper (1996) argues that firm size and the ability to appropriate returns from innovations may be related, and highlights the importance of firm size in appropriating returns from innovations and survival and growth.

The studies on SMEs in developing countries have identified various factors that are related to SME survival and growth. Legal system, institutions and financing are the most claimed factors that have impacts upon the survival and growth of firms. Thorsten et al. (2002) in a survey study of 54 countries, find that firm growth is determined by legal institutions, corruption and financing, and small firms are affected most. Perfect legal system facilitates firm growth, while corruption and lack of finance adversely affects firm survival and growth.

Their study suggests that countries, especially the developing countries where these problems are more prevalent, need to improve their financing environment and reform legal system as well as take proper measures to reduce corruptions to minimum to create an environment suitable for SME growth. Gonzalez (2002) examines the effect of economic control on firm growth, and finds that the economic development and efficient financial system are positively correlated with firm growth. He also looks at the relationship between firm growth and such factors as bank control, corporate law, bankruptcy law, accounting standards and fair market competition, and concludes that a highly effective legal environment not only can protect investors’ interests and help growing firms raise equity capital from the market, but also can influence the financial market development, which, in turn, facilitate firm growth.

Liedholm and Mead (1998, 1999) examine the data of eight African countries and confirm that firm age and firm size are important variables in analyzing the enterprise life cycle. Their results further show that location, composition of activities, labor force characteristics and gender of the entrepreneur also turn out as important determinants of firm survival and growth.

2.3 Theoretical framework

2.3.1 Financial Growth Theory

Berger and Udell (1998) propose a financial growth theory for small businesses where the financial needs and financing options change as the business grows, becomes more experienced and less informationally opaque. They further suggest that firms lie on a size/age/information range where the smaller/younger/more opaque firms lie near the left end of the range indicating that they must rely on initial insider finance, trade credit and/or angel finance. The growth cycle model predicts that as firm grows, it will gain access to venture capital (VC) as a source of intermediate equity and mid-term loans as a source of intermediate debt. At the final stage of the growth paradigm, as the firm becomes older, more experienced and more informationally transparent, it will likely gain access to public equity (PE) or long-term debt.

Problems related to financing are dominant in the literature with regard to small firms. There are numerous empirical studies describing inadequate financing as the primary cause of MSMEs failure (Jones, 1979; Wucinich, 1979; Welsch and White, 1981; Gaskil and Van Auken, 1993; Van Auken and Neeley, 1996; Coleman, 2000; Owualah, 2007). The capital structure of smalls firm differs significantly from larger firms because small firms rely more on informal financial market which limits the type of financing they can receive. The small firm‘s initial use of internal financing creates a unique situation in which capital structure decisions are made based on limited financing options. It is widely accepted that small firms have different optimal capital structures and are financed by various sources at different stages of their organizational lives (Berger and Udell, 1998). Researchers have found that certain attributes of small firms influence the type of funds available to finance the firm‘s operations (Van Auken and Neeley, 1996; Hall et al., 2000, Romano et al., 2001)

Angel financing is a type of microfinance where an individual or a corporate organization raises limited amount of capital for a micro entrepreneur at start up or for expansion with less stringent conditions for repayment. The expected rate of return on investment is usually very low but high enough to offset risk.

Pecking Order Theory

Another financing theory that is very familiar with the operations of the small business is the pecking order theory, proposed by Myers (1984). It sheds light on the incentives that drive SMEs capital structure decisions. This theory proposes that firms prefer to use internal sources of capital first and will resort to external sources only if internal sources are inadequate. This theory has been found to be relevant to the financing of SMEs. Most SMEs start with internal financing before looking for external sources. Older firms, by definition, have had more opportunities to accumulate retained earnings than younger companies and thus more funds are available to finance operational growth. Pecking order theory suggests that those funds should be used before external capital sources are tapped. Holmes and Kent (1991) found that small businesses experience a more intense version of pecking order in their decisions because access to appropriate external sources of capital is limited. It has been noted that small businesses differ in their capital structure but their reliance on pecking order is only one of the variables that small businesses financing decision unique. Small businesses rely on private capital markets, while larger firms are financed through public market. Information on small businesses is much less readily available than information on larger firms which can be picked up in the annual reports. Small businesses reliance on private markets limits the types of financing that they can receive; most small businesses rely on commercial banks and finance companies to provide capital (Berger and Udell, 1998). In most cases, the cost of capital for small businesses is usually higher than it is for larger firms. The size of the loan and lack of information on the quality of operation of the small firms force lenders to protect their investment by demanding higher rates of return, which come in the form of high interest rate and high cost of capital for the small firm. In an attempt to avoid higher cost of capital, smaller firms are then forced to use more short-term debt, which carries lower costs but raises the firm‘s risk (Chittenden et al., 1996). When loaning to small businesses, most financial institutions require the owners of the small businesses to personally guarantee the loan. These personal guarantees allow the institution recourse against the personal wealth of the small businesses owner in the event of default (Berger and Udell, 1998). These restrictions on the type of finance available to SMEs coupled with the small firm‘s insistence on first using internal sources of capital (Holmes and Kent, 1991), creates a unique structure for small business. Romano, et al., (2001) describe the situation as a complex array of factors that influence small to medium size enterprises (SME) owner-manager‘s financing decisions‘‘. This is supported by Hall et al. (2000) who found that firm‘s size is positively related to long-term debt and negatively related to short-term debt. In further support, Chittenden et al. (1996) suggest that a firm‘s size is correlated with the firm‘s reliance on pecking order theory in capital structure decisions. Thus, smaller firms are more likely to rely on internal funds. Romano et al. (2001) found a significant relationship between the size of the firm and the use of debt. Again, these results are consistent with pecking order theory and the Berger and Udell (1998) model.

In conclusion, the following observed were made in the literature reviewed above which are as follows:

1. That microfinance and financing has been one of the critical determinants of SMEs survival and growth without disregarding the skills of the entrepreneur, the ages of the business, level of education and their ability to make profit. Regular participation in microfinance enhances small business survival. This argument was supported by the work of Bekele and Zeleke (2008) found ability to convert profit into investment, good managerial ability, entrepreneur‘s level of education, ability to make profit and regular participation in microfinance to be major determinants of small business survival.

3. Lack of access to finance has been identified as one of the major constraints to small business growth (Carpenter, 2001; Anyanwu, 2003; Owualah, 1999, 2009; Lawson, 2007, SMEDAN, 2010).

4. Well-structured entrepreneurship training programmes facilitate the efficiency and productivity of entrepreneurs. (Fasoranti et al. 2006). Competitive pressure enhances productivity growth (Harding et al, 2004).

5. Growth-seeking SMEs have significantly different preconditions for growth than those which do not pursue further growth (Pasanen and Laukkanen, 2004).

6. Micro, Small & Medium Enterprises (MSMEs) contribute to economic growth and sustainable development through employment generation and wealth creation (CBN, 2004; NISER, 2004; SMEDAN, 2012).

7. Entrepreneurship in Nigeria is constrained by political and social factors (Onwubiko, 2009). Entrepreneurial spirit can exist anywhere in the world, but in order to operate successfully, the entrepreneur needs favourable political and business environments; factors such as bureaucratic red-tapism, corruption, complicated business regulations and suppression of local markets in many developing countries have forced much entrepreneurial energy to operate subversively in black market economies (Sakar, 2008).

CHAPTER THREE

RESEARCH METHODOLOGY

3.1

This chapter describes the methodological framework the researcher would use in achieving the stated objectives of the study. Also, it would allow the researcher to show the proposed research hypotheses and the steps and procedures in actualizing it. This section focus on the research design, the nature, type and sources of data, population description, sample size, sampling frame and its characteristics, sampling technique and a description of the choice of data collection instruments, questionnaire design, and methods of data measurement.

3.2 Area of Study

The study cut across all the states in the South West Nigeria which includes Oyo, Osun, Ogun, Ondo Lagos and Ekiti that are characterized with small enterprises and enjoy large number of people in terms of population. The study will be limited to the targeted respondents that falls between presumed definitions of the SMEs. The south west area would be divided into strata compromising of each state in the south west. This would enable me to explore and do state to state comparative analysis. A mixed-method strategy would be adopted for this study.

3.3 Research Design

For this study a stratified method strategy would be employed so as to enable me to provide answers to the research questions raised and the stated objectives. A stratified technique allows the researcher to divides the south western population into homogeneous separate state called a strata. After, the population is divided into strata, then the sampling is done. This given room for equal chances to the respondents of been part of the survey. The advantages inherent in this methods are stated as follows. Firstly, it reduces sampling errors and biasness. Secondly, the measurement become more manageable and most suitable for research of this nature. Literature have shown that different types of research methods have been widely used in business research are experiment, survey, case study, action process, grounded theory, ethnographic, archives, ipso facto, and observation according to Otokiti (2005). What inform the choice of the method to be adopted depends largely on the research questions and the objective of the study.

The study would combine primary survey-based data with secondary information from bank records. Both qualitative and quantitative data would be used in a variety of ways, including a detailed overview of survey results in terms of a general profile and a model of micro and small firms in South West, Nigeria on state bases. A well-structured questionnaire would be administered to operators and semi - structured interviews were conducted with Senior Bank Officials to document the practice and process of microfinancing in South West, Nigeria. Secondary data obtained and extracted from SMEDAN studies will also be utilized.

3.4 Population, Sample Size and Sampling Technique

The population of this study is the entire SMEs operating in the South western Nigeria that uses microfinance banks. Since, it is always impossible to capture the entire population, this has necessitated the need to draw sample from the population. The sample is expected to be a true representation and reflection of the population. Hence, a the sampling size will be drawn so as to meet the minimum required sample size based on statistical estimation theory and considering degree of confidence that is expected from this type of research.

In this study, the stratified random sampling technique would be adopted. This is because the study would divided the population into a group in form of a strata before questionnaire are administered. The strata are the states in South West (Oyo, Osun, Ogun, Ondo, Ekiti and Lagos) that banked with Microfinance Banks, their clients/customers operators of micro and small enterprises that have benefitted from financial and non-financial product offered by the Microfinance Banks for a period of not less than five years. Thus, for the purpose of the study I would selected our sample unit based on specific criteria. The generalization of results would be limited to those which satisfy the criteria.

3.5 Sources and Collection of data

This study would combined secondary and primary data. The primary data would be those that were sourced through the administered questionnaire. The researcher would utilized the questionnaire to obtain information needed on microfinance and small business survival, growth and performance. The secondary data would be obtained from the Microfinance Bank records through clients ‘membership cards. The membership card is a record of client‘s loan history and savings progression as well as his/her enterprise and welfare performance.

3.6 Research Instruments

The questionnaire would be used as the research instrument for this study. The questionnaire will help in collecting data and other socio-economic characteristics of the respondents. The data to be generated through the use of questionnaire is known as a primary data. This questionnaire is expected to reveal the views and opinion of the respondents on the subject matter. For the secondary data, selected relevant work such as dissertations, conferences and seminar papers, as well as online resources, periodicals and series of journals/textbooks were used. The major instrument used in this study for data collection is the survey questionnaire. It was divided into two sections: Section A: Socio-Economic Characteristics of the Respondent and Section (B) Questions relating to the research questions.

3.7 Measurement of variables

The variables to be used are going to be coined from the question in terms of dependent and independent variables. The microfinancing is regarded as the independent variables while SMEs growth and survival is the dependent variables. Intuitively, the amount of funds, government policies might influences the rate and level of growth and survival of the SMEs in south western Nigeria.

3.8 Method of Data Analysis

The data generated for the study would be analyzed using both descriptive and inferential analytical techniques using Statistical Package of Social Sciences (SPSS 22). In addition, tables, graph and percentages will be used to complement other tests that will be carried out. The contingency test and chi square test would be carried out to determine how microfinance funding has influence the survival and growth of SMEs in South West, Nigeria over time.

GOVERNMENT POLICIES OF FUNDING OF SMES

Despite, the funding and financing constraint facing SMEs in Nigeria, the government have made several attempts at addressing this problem. The Nigerian government has realized the potentials in SMEs as a one of the industrial tool of economic development. The government have introduced and adopted different policy measures and established agencies which are the Nigerian bank for commerce and industry (NBCI), National economic reconstruction fund (NERFUND), the Peoples bank of Nigeria (PBN) which has been referred to as government social lending, the community banks (CB) now microfinance banks, Nigerian export and import bank (NEXIM), and the Nigerian agricultural credit guarantee scheme. Others are the Small and Medium equity investment scheme (SMEEIS) which was actually a voluntary initiative in 1999 by the bankers’ committee through CBNS’ moral suasion, to assist in providing finance to the small enterprises, the small and medium enterprises credit guarantee scheme (SMECGS). In the 1980s, banks were mandated to set up branches in the rural areas. The objective of this policy was to improve access to financial services (Soludo, 2008).

The government have assisted SMEs in the following ways

i. Provision of grants: government have given grants and loans to small and medium scale enterprises through the Bank of Industry and SMEDAN. To ensure the success of these agencies, about #400 million was assigned to these agencies to assist them that are payable over time.

ii. Provision of tax breaks. This was done so as to give incentives to small and medium scale enterprises that are willing to take risk. This

iii. Providing advice – for instance, government to set up government-funded which provides assistance to those setting up and running a business, including advice on raising finance.

iv. Guaranteeing loans – for instance, for a small fee from the SME, a large proportion of any loan advanced by a bank is guaranteed by the government. As this significantly reduces the risk to the bank, they are potentially more willing to lend. This can be called ‘Enterprise Finance Guarantee’ scheme. Instead of commercial loss money to the defaulters.

Parameters

Nigerian InstitutionsMSESSEMEMSESSEMEMSESSEME

Fed.Min of Industries˂ 200˂ 50n.an.an.an.a˂ 300˂ 100˂ 10

Centrl Bank˂ 150˂ 1n.a˂ 150˂ 1n.a˂ 100˂ 50n.a

NERFUNDn.a˂ 10n.an.an.an.an.an.an.a

NASSIn.a˂ 40˂ 1n.a˂ 40n.an.a˂ 35n.a

NASME˂ 150˂ 50˂ 1˂ 500˂ 100˂ 10˂ 100˂ 50˂ 10

Nigeria Industrial Policyn.a˂ 2m˂ .1n.an.an.an.an.an.a

SMEDAN˂ 500˂ 50˂ 5n.an.an.a˂ 199˂ 49˂ 10

Foreign Institutions($'M)($'M)($'000)($'M)($'M)($'000)No.No.No.

World Bank˂ 15˂ 3˂ 100˂ 15˂ 3˂ 100˂ 300˂ 50˂ 10

Total Assest(N'M)Annual Turnover (N'M)No. of Employees