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The study was carried out to examine the effect of collateral on access to finance of small and medium enterprises in Kogi State with a particular reference to Kogi Micro-finance Bank, Logoja, Kogi State. To achieve this objective, three research questions and two research hypotheses were formulated to guide this study. The data collected were analyzed using simple percentages and tables to analyze research questions and Chi-square statistical tool was used for testing of research hypotheses using SPSS statistical software. A structured questionnaire was used as the major instrument for data collection from the staff of Ministry of Finance, Uyo. After the careful analysis of the data, the following findings were revealed that; finance plays a significant role in the growth of small and medium enterprises in Kogi State. The study was concluded with some recommendations that the government should establish special fund where SMEs can access soft and cheap loan to finance their businesses.
1.1 BACKGROUND OF THE STUDY
Finance is the life wire of any economy, whether developed or developing. Though human resources are the tools that propel any economic endeavour, but finance is very prominent after human resources. Finance is also known as capital, credit and so forth. Finance is to commercial pursuit as blood is to the human body. Finance is important to the survival and growth of SME, so it is to the small and medium scale enterprises or industry (Owenvbiugie & Igbinedion, 2015). Collateral is a property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Because collateral offers some security to the lender in case the borrower fails to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. In lending agreements, collateral is a borrower’s pledge of specific property to a lender, to secure repayment of a loan (O’ Sullivan, & Steven, 2003). The collateral serves as protection for a lender against a borrower’s default, that is, it can be used to offset the loan to any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral, with the lender then becoming the owner of the property. In a typical mortgage loan transaction, for instance, the real estate being acquired with the help of the loan serves as collateral.
Therefore, over a decade, government had played down its role as the major driving force of the economy by a process of commercialization and privatization. Emphasis, therefore, shifted from large-scale industries mainly to small and medium scale industries, which have the potentials for developing domestic linkages for rapid and sustainable industrial development. Government attention was focused on the organized private sector to spearhead subsequent industrialization programmes. Incentives given to encourage increased participation in these sectors were directed at solving and/or alleviating the problems encountered by industrialists in the country, thereby giving them greater leeway towards increasing their contribution to the national economy (Ojo, 2003).
The small and medium enterprises contributions to economic growth and development have been recognized globally, Nigeria inclusive. Ofoegbu, Akanbi and Joseph (2013) agree that SMEs are the panacea for the economic development of many developing countries including Nigeria. It is believe that interest on SMEs would contribute to creation of jobs, reduction in income disparity, production of goods and services in the economy, as well as providing a fertile ground for skill development and acquisition, serve as a mechanism for backward integration and a vehicle for technological innovation and development especially in modifying and perfecting emerging technological breakthroughs. SMEs contribute to improved living standards, bring about substantial local capital formation and achieve high level of productivity and capability. SMEs are recognized as the principal means of achieving equitable and sustainable industrial diversification and dispersal.
The microfinance arrangement makes it possible for small and medium enterprises to secure credit from Microfinance Banks (MFBs) and other Microfinance Institutions (MFIs) on more easy terms. It is on this platform that this study intends to examine the effect of collateral on access to finance of Small and Medium Enterprises in Kogi State.
1.2 STATEMENT OF THE PROBLEM
Lack of access to finance has been identified as one of the major constraints to small business growth (Carpenter, 2001; Anyanwu, 2003; Lawson, 2007). The reason is that provision of financial services is an important means for mobilizing resources for more productive use (Owenvbiugie & Igbinedion, 2015). The extent to which small enterprises could access fund is the extents to which small firms can save and accumulate own capital for further investment. However, small business enterprises in Nigeria find it difficult to access formal financial institutions such as commercial banks for funds. The inability of the SMEs to meet the standard of the formal financial institutions for loan consideration provides a platform for informal institutions to attempt to fill the gap usually based on informal social networks, and this is what gave birth to micro-financing. In many countries, people have relied on mutually supportive and benefit-sharing of the social networking of these sectors for the fulfillment of economic, social and cultural needs and the improvement of quality of life (Lawson, 2007). Therefore, this study is to examine the effect of collateral on access to finance of small and medium enterprises in Kogi State.
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to examine the effect of collateral on access to finance of small and medium enterprises in Kogi State. The specific objectives include the following:
1. To determine the role finance plays in the growth of small and medium enterprises in Kogi State.
2. To explore alternative source of financing small and medium- scale enterprises in Kogi State.
3. To determine the challenges facing small and medium enterprises in accessing loan in Micro-finance Banks.
4. To give suggestions for solving the identified challenges facing small and medium enterprises in accessing loan in Micro-finance Banks.
1.4 RESEARCH QUESTIONS
The following research questions were formulated to guide this study:
1. Does finance play any role in the growth of small and medium enterprises in Kogi State?
2. Is there any alternative source of financing small and medium- scale enterprises in Kogi State?
3. Are there any challenges facing small and medium enterprises in accessing loan in Micro-finance Banks?
1.5 RESEARCH HYPOTHESES
The following research hypotheses were formulated to guide this study:
H0: Finance does not play any significant role in the growth of small and medium enterprises in Kogi State.
H1: Finance plays a significant role in the growth of small and medium enterprises in Kogi State.
H0: There is no alternative source of financing small and medium- scale enterprises in Kogi State.
H1: There is an alternative source of financing small and medium- scale enterprises in Kogi State.
1.6 SIGNIFICANCE OF THE STUDY
The findings of this study will contribute to the body of knowledge and increase information in the area of loan assessment to small scale business owners. Therefore it will be of immense importance to small business operators, government, industrialists, and other stake holders in the industrial sub-sector.
To the academia, it will through more light to some minute but significant areas which previously were not considered as major factors in the management appraisal and study in the area of business management.
To the students, it would serve as a reference source to students (researchers) who might want to further studies in the similar topic.
1.7 SCOPE OF THE STUDY
This study is limited to Kogi Microfinance Bank Limited, Lokoja, Kogi State and upon the research topic which is the effect of collateral to access on Finance of Small and Medium Enterprises in Kogi State.
1.8 LIMITATION OF THE STUDY
The limitation of this study was inability of management/owners of small scale businesses to divulge certain information which they consider sensitive and fear of publication which might be detrimental to their operation.
Also, the outright inability of some respondents to complete and return the questionnaire to the researcher is one of the limitations of the study. Another limitation to the study was traffic congestion for the researcher to meet them in their offices and for possible return of the questionnaire.
Finally, the researcher observed the non-cooperative attitude of some workers of the organization to make information available for her.
1.9 DEFINITION OF TERMS
a) Collateral: Collateral is a property or other assets that a borrower offers a lender to securing a loan.
b) Access: It is a way or means of approaching or entering; an entrance or a passage of obtaining loan from the lender.
c) Finance: Finance is defined as the science of money management and assets.
d) Business: It is an activity of enterprise or organization established to provide goods and services at a profit, in order to satisfy human wants.
e) Business Decision: The choices made on matters relating to the allocation and/or use of business resources for making, buying, selling, or supplying goods or services at a profit.
f) Small and Medium Enterprises: Small and Medium Enterprises is defined as the one that is independently owned and operated and which is not dominant in its field of operation.
g) Profit: This is a sum in which the business made after the deduction of all the expenses and it can be withdrawn from a business while maintaining the capital that existed at the beginning of the business.
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