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Small and Medium Enterprises (SMEs) have been recognised as critical to economic growth and poverty reduction in developing countries. Shipping businesses represent significant portion of SMEs and have dominated the private sector investments in developed nations. Existing studies have identified funding as a major constraint to SMEs in developing countries. The banking institution statutorily positioned to assist in SMEs funding in these countries are constrained by a host of factors. This paper investigates the factors affecting banks financing and development of SMEs in the maritime shipping sector of Nigeria. Data for this study were obtained from Likert scaled questionnaires which were administered to a randomly selected sample of commercial banks with shipping portfolios. Evidence from data analysis using ordered Logit regression model indicates that; risk perception attitude of banks, information constraints on SMEs, lack of skills in SMEs financing and unfavourable regulatory environment are significant factors affecting banks investments in SMEs in Nigeria’s shipping sector. Policy implications of the findings are discussed.
1.1 Background to Study
Shipping has existed in over 5000 years and the first sea trade network we know of was between Mesopotamia, Bahrain and Indus River. Shipping is constantly changing and shipping today is far from shipping 5000 years ago. Thanks to the discovery of the global sea routs in the late fifteenth century, the industrial revolution in the late eighteenth century and the dismantling of the colonies in the second half of the twentieth century, shipping went from slow and expensive by land to a tightly knit global business community (Stopford 2008, p. 45).
Access to capital is central in building a business community like the shipping industry. High investments cost, due to highly technological vessels, require ship-owners who know how to get funding. “Because shipping is such an old industry, with a history of continuous change, sometimes gradual and occasionally calamitous, we have a unique opportunity to learn from the past.” (Stopford 2008, p. 4)
Finding out how ship-owning companies finance their investments, by using historical data and learn from past years, is the objective of this study. Hopefully, the study will provide answers to financing in the ship-owning industry.
Financing is an important stage in starting an asset-based company such as ship-owning companies. Knowledge of financing and capital can be a prerequisite for the company to create innovative products and services. The CEO of Havila Shipping said in an interview with Sysla (Aadland 2014) that it is important to maintain the maritime cluster in Norway to keep a leading position in the shipping industry. Adjacent to this he mentioned finance as an area of focus among ship-owners, yards, classification-companies, suppliers, insurance and Norwegian mariners. The interview was given when the company flagged out one of their ships to Bahamas because sailing under the Norwegian flag led to inconvenience. This is unfortunate for the maritime industry in Norway.
The maritime industry, which ship-owning companies are a part of, is a knowledge-based industry and important for the Norwegian trade. Norway is a global leader in the field and almost 90 000 people are employed by the maritime industry directly (Fiskeri department et al, 2014). Flagging ships out to other nations is affecting the seafarers’ rights and obligations in the economic, social and welfare issues (Solhaug 2014). Flagging out ships can potentially lead to a defection in the maritime industry and a delay in the development of the knowledge-based industry, including ship-owning companies.
The industry is important to keep Norway’s gross domestic product on a high level. According to the Norwegian Ministry of Trade, Industry and Fishers, the Maritime industry represents 6-9 percent of the value creation in Norway (Fiskeri department et al 2014). Research and development in the financing field may help the ship-owning industry with acquiring capital and facilitate further growth. Understanding when and why one should use the different financing methods is important to make the growth that Norway has experienced sustainable. Therefore this research work is a study on ship financing in Nigeria and how it affects the development of this industry.
1.2 Statement of Problem
Small and Medium Enterprises (SMEs) have long been recognised by the World Bank and other multinational agencies as critical to economic growth and poverty reduction. They have increasingly attracted targeted assistance of these international organizations in their increasingly attracted targeted assistance of these international organizations in their interventions in developing countries. SMEs include a wide range of businesses, which differ in their dynamism, technical advancement and risk attitude. Many are relatively stable in their technology, market and scale, while others are more technically advanced, filling crucial product or service niches. Others can be dynamic but high-risk, high-tech “start-ups” (Darlberg Global Development Advisors, 2011). SMEs are critical to job creation, contribute to economic growth and provide a platform for the development of entrepreneurial capabilities including indigenous technology. Thus, national governments have been making efforts toward providing for sustainable growth and development of economy through private sector led initiatives. However, one area attracting increasing global attention in the quest for private sector led development is SMEs in maritime shipping sector.
Maritime shipping comprises a large variety of different businesses which according to UNCTAD (2011) can be categorised as follows: Shipping building, ship owning, ship operation (container ships), ship financing, ship scrapping, ship classification, ship registration, ship insurance (Protection & Indemnity), seafarer supply and port operation (container terminal operators). These areas of maritime activities have prospects for sustained growth as supported by the positive trends in value of exports on ships, floating structures and the world seaborne trade.
Shipping as a service sector is an important component of the national economy. It makes a direct significant contribution to GDP, job creation and provides crucial inputs for the rest of the economy. Unfortunately, activities in this sector in Nigeria are dominated by a few foreign firms which afford the enormous capital required in this sector. For example, in terms of ship owning and operation, Okoroji and Ukpere (2011) document that only about eight (8) percent of the total number of vessels that called at the Nigerian port terminal between 1997 and 2006 are owned by Nigerians. Igbokwe (2006) finds that Nigeria has only three vessels duly certified for Cabotage shipping services out of one hundred and forty (140) needed by the oil industry. These statistics indicate negative implications on the growth and viability of indigenous SME’s in the maritime sector as they basically lack adequate capacity to operate competitively. Special intervention policies (albeit unproductive) have been initiated by the federal government in the past to correct this imbalance. These include direct funding through Ship Acquisition and Ship Building Fund (SASBF), Cabotage Vessel Financing Fund (CVFF), cargo reservation and outright Cabotage legislation. However, as is tradition in developed maritime nations, ship acquisition and fleet expansion is better done through debt finance which can only be provided by the banking institutions. This fact questions the commitment of the Nigeria’s banking institution especially the commercial banks in providing entrepreneurial finance to SME’s in the shipping sector.
Existing studies have identified funding as a major constraint to entrepreneurs in establishing and managing SMEs in developing countries; notable among such studies include: Abereijo and Fayomi (2005), Beck (2007), Hoff et al. and Gibson (2008). According to Dalberg Global Development Advisors (2011), SMEs which play a crucial role in furthering growth, innovation and prosperity in developing countries are unfortunately, strongly restricted in accessing the capital that they require to grow and expand, with nearly half of SMEs in these countries rating access to finance as a major constraint. A number of factors have been adduced to this development; at one extreme the government has been blamed for not providing direct funding or adequate legislative support for financial institutions to do so; see Cumming et al (2006), Lerner and Antoinette (2005); at the other extreme, financial institutions point to entrepreneurship related factor: lack of lender information, risk profile and legal environment etc.
1.3 Purpose of the study
The core thrust of this study is to investigate the ship financing structure in the Nigerian middle of the expedition. Nigerian companies face problems far more enormous than their inability to raise the capital is far more historic than others. The purpose of this study is to achieve the following objectives:
1. To know the concerns of the players in the shipping industry and the financial and relevant issues for both parties.
2. To assess restrictions, requirements and expectations of the maritime and financial companies to facilitate a mutually beneficial relationship between the two.
3. Coming up with an action plan based on the findings of the study to bridge the gap between shipping companies and financiers.
1.4 Research Questions
1. What are the concerns of the players in the shipping industry and the financial and relevant issues for both parties?
2. What are restrictions, requirements and expectations of the shipping companies and financial companies to facilitate a mutually beneficial relationship between the two?
3. What is the solution to bridge the gap between shipping companies and financiers?
1.5 Significance of Study
Thus, further research is needed to identify the constraints hindering banks funding in development of SMEs or the maritime businesses in the shipping sector. The outcome of this study would provide insight into factors affecting the commercial banking institutions in the provision of credit to private sector led SME development.
The study also contributes to the existing body of literature on the issue as well as provides policy recommendations towards the financing of shipping companies in Nigeria.
The findings from this study would also provide basis for designing intervention policies aimed at addressing the funding issues of shipping industry in the maritime/shipping sector.
1.6 Scope and Limitation of the Study
This study on ship financing is focused on the ways and strategies of developing the shipping companies in the industry with financing, and is within the confines of Nigeria.
This study is limited by Time constraints, financial constraints, availability of resources and material, and accessibility of materials for use of the study.
1.7 Definition of Terms
Ship Financing: is an arrangement that uses vessel charter fees as the principal source of repayment, while various forms of collateral structured around shipbuilding and charter agreements are assigned to mitigate credit risk.
Shipping Finance: provides clients in the maritime shipping markets with consistent support and customised lending solutions. ... The assets we finance include, among others, tankers (crude oil, gas, chemical, product), dry bulk vessels, container vessels, container boxes, car carriers, and ferries.
Ship: A ship is a large watercraft that travels the world's oceans and other sufficiently deep waterways, carrying passengers or goods, or in support of specialized missions, such as defense, research and fishing.
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