CHAPTER ONE

INTRODUCTION

1.1              Background of the Study

Small and Medium Scale enterprises are important in the economic development of many  countries (Braun, 2003a, Eunni, Brush & Kasuganti, 2007; Golding, Donaldson, Tennant & Black, 2008; Berisha-Namani, 2009).

Small and medium scale enterprises aid economic developments of nations given its role in employment generation at low investment cost and also the development of entrepreneurial capabilities and indigenous technology (Gunu, 2004).  Aside from these, Aremu (2010) notes that SMEs growth are associated with reduced flow of people from rural area to urban areas

Against this backdrop, successive governments decided to take a major rethink to this public sector domination of the economy and therefore embarked on systematic deregulation of the economy. The ultimate goal is to make the sector amenable for others to come in, participate and compete. The expectation is that through the process, small and medium scale enterprises will come on stream. Analysis of some developed and industrialized nations were traced to the activities of small and medium scale enterprises. For instance, emerging industrialized and developed countries such as China, India, South Korea, Taiwan, Hong Kong etc. achieved their fortune through enabling environment accorded small and medium- scale enterprises in those countries. In fully industrialized and developed countries, the stories are the same.

Osuntogun and Oramah (1992) observed that “at least 80% of all the parts of automobile in the United States are manufactured by several small firms for the larger plants where they are assembled into finished goods”. They also noted that Philips International, the Dutch electrical and electronics giant, started in a small room in a back street in Einhoven and today, has metamorphosed into a giant firm employing workers in hundreds of thousands.  In the same vain, Akachukwu (2004) observed that the Asian Tigers derive much strength from SMEs. There are over 3000 cement mini-plants in China and over 2000 such plants in India, all producing at full capacity unlike a few large scale cement factories in Nigeria which do not produce up to half of their installed capacities and do not meet our market demand. As at 1970, over 690 small scale enterprises had already been registered.  Osuntagon and Oramah (1992) noted that by 1980 over 3718 of such enterprises were registered. SMEs account for over 95%  of non oil productive sector  outside agriculture. During the 44th Annual General Meeting of Nigerian Employers Consultative Association (NECA), held in Lagos, Jamodu (2001) pointed out that the contribution of SMEs to the industrialization process in Nigeria is still generally low in contrast to their counterparts in South East Asia and elsewhere.

The inability of SMEs to promote industrialization and economic development in Nigeria has been constrained by a number of factors; such as lack of effective financial support systems, unstable macro-economic environment, inconsistent government policies, low level of technical skills, managerial and strategic capabilities, poor implementation and co-ordination of efforts on SMEs and absence of sustainable mechanisms, poor infrastructural facilities, multiplicity of regulatory agencies and heavy tax, poor quality products that cannot compete favourably in international markets and lack of technological know-how.

Even though the federal government has over the time been actively involved in the provision of finance to SMEs sub-sector through various financial intermediaries, the impact are yet to be felt by this sub-sector because of the inability of the sub-sector to accelerate the industrialization and economic development of the country.

1.2       Statement of the Problem

Finance has been identified as the major underlying requirement and an important input factor in the development and industrialization effort.  Plant, machinery and equipment must be paid for as well as the development of managerial and technical expertise. The need for finance is seen as essential in the creation of a general economic environment conducive to sustained economic development. The task of development therefore, must involve the conversion of finance into the requisite factor inputs and the efficient deployment of such inputs.

In the absence of formal credit markets, there exist the informal sources for the provision of finance to the SMEs sub-sector. Such sources for the provision of finance to the SMEs sub-sector include savings/retained earnings, contribution from friends and relatives, isusu, co-operative and thrift societies etc. Though notwithstanding both the formal and informal sources of finance to the sub-sector, these sources could not satisfy their financial demands to the impediments we have noted before militating against securing loans by the SMEs. Today in Nigeria, both the existing and emerging indigenous entrepreneurs are in dire need of financial resources from both the international and domestic sources. Poor funding of SMEs has been one of the factors responsible for the country’s sluggish economic growth and development.

Based on the foregoing and in view of the perennial problems of financing SMEs, this study seeks to investigate the better ways and effective strategies that SMEs in Enugu use in financing their operations and the effects on their businesses.

1.3       Objectives of the Study

The objectives of the study are as follows:

i.                    Examine the sources of fiancé of SMEs in Enugu State.

ii.      Determine the extent of financing from the government and banks to SMEs in Enugu State.

iii.                Determine the effect of use of existing financial strategy on the growth of SMEs.

1.4       Research Questions

Based on the foregoing, the research questions for this study includes the following:-

(i)         How did small and medium scale enterprises fund their start-up operations?

(ii)        What financial problems do they encounter in the formal financing sector?

(iii)       How has inadequate funding of their operations hindered their growth?

(iv)       To what extent has the government and banks funded SMEs in Enugu State?

(v)        How has the existing financing of SMEs enhanced or impeded the growth of SMEs in Enugu State?

1.5       Research Hypotheses

To guide inquiry, the following null hypotheses were formulated:

Ho1:     SMEs in Enugu State do not have problems to fund their start-up operations.

Ho2:     Government and banks have not funded SMEs properly in Enugu State.

1.6       Scope of the Study

The geographical scope of the study is Enugu State. The population of Enugu State in 2006 is 3,267,837 people (National Population Commission). In 2012, population of the state is estimated to 3.8 million people (National Population Commission). Enugu State is in the South-east geo-graphical zone of Nigeria. It was created on August 27, 1991 with Enugu city as its capital.  The state derives its name (Enu Ugwu) (Hill Top) from the capital city which was established in 1909 as small coal mining town.                                                                                                                                                                                                                                                                                         

From being the capital of the southern Province, Enugu became the capital of the Eastern Region (now divided into nine States), and Capital of the defunct Republic of Biafra, thereafter it became the capital of East Central State, Anambra State, (old) Enugu State, and now the present Enugu State through a process of state creation and diffusion of administrative authority.

The State is predominately occupied by the Igbo ethnic group with some pockets of Igala speaking communities of Ette in Igbo-Eze-North LGA, Ogurugu and Ojjor in Uzo-Uwani LGA respectively.

Enugu State shares boarders with Abia State and Imo State to South, Ebonyi State to the east, Benue State to the northeast, Kogi State to the North West and Anambra state to the west.

The state is located in a tropical rain forest zone with humid climate. The mean daily temperature is 26.7 °C (80.1 °F). As in the rest of West Africa, the rainy season and dry season are the only weather periods that recurs in the State.

There are 17 Local Government Area in Enugu State. These are Aninri, Agwu, Enugu East, Enugu North, Enugu South, Ezeagu, Igbo Etiti, Igbo-Eze North, Igboeze South, Isi-Uzo, Nkanu East, Nkanu West, Nsukka, Oji-River, Udenu, Udi, Uzo-Uwani.

The content scope of the study is financing Small and Medium Scale enterprises in Enugu State.

Finance has been viewed as the critical element for the development of Small and medium scale enterprises (SMEs) but because of unavailability of finance and other infrastructural facilities for this subsector not withstanding their roles in industrialization and economic development of Nigeria, gingered the author to delve into how SMEs are funded both by the government and other financial institutions.

1.7       Significance of the Study

The findings of this study will enlighten the government on how to make policies that will be favourable to the sub sector. It will educate banks and other financial institutions on the need to adequately finance SMEs  because of the vital role the subsector plays in the nation’s economic development. The study will also reveal to the SMEs operators the best financing options available to them to tap on. The findings of the study will open the eyes of SMEs operators to realize that loans advanced for business is not for pleasure and should not be diverted to other uses such as marrying many wives, taking chieftaincy titles, riding luxurious cars etc. It will help operators use bank loans judiciously. This study will contribute to the existing body of knowledge and will therefore broaden the minds of scholars intending to carry out research in the related area of study. The work will help intending businessmen and women on the right steps to take while establishing their businesses in order to excel. The findings of the study will also encourage local industrialists to develop indigenous technology for maximum benefits.

Finally, the work will no doubt be useful to the general public as a source of literature.

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