Challenges Faced by Small and Medium Scale Enterprises in Nigeria - Dissertation Example

? THE CHALLENGES FACED BY SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA Proposed research question What are the challenges faced by small and medium scale enterprises in Nigeria? 2. Objectives of the study The principal objective of the study is to identify the challenges faced by the SMEs of Nigeria. In order to do the same, the study will take into consideration some other factors, which will help in the process of identifying those challenges. The factors to be considered are the characteristics of the SMEs, sources of funds for SMEs, the importance of micro and small scale enterprises in Nigeria and also the government policies which have negative impact on the development of the SMEs. The study will therefore cover these topics and will try to determine the issues faced by the SMEs in Nigeria. 3. Aims of the dissertation To identify the issues and the challenges faced by the SMEs in Nigeria. To recognize how the SMEs of Nigeria are presently dealing with it To provide recommendations regarding how the situation of SMEs in Nigeria can be improved 4. Dissertation’s position in the existing literature Small and Medium Enterprises (SMEs) are the small firms or companies whose numbers of employees are considerably less and operate independently (Analoui and Karami, 2003). Moreover, the yearly turnover of these companies is less as and when compared with a large organization. However, in many countries SMEs outnumber large organizations by a broad margin. According to reports, every year around 600,000 new SMEs are registered throughout the world. However, only 10 % of them sustains in the market. The remaining 90 % close down within two years of operation (Teall, 2012). Throughout the world small scale and micro enterprises are considered as an instrument of driving the economic growth (Johnson and Turner, 2010). Apart from that, they also play a crucial role in creating employment opportunities in a country. For this reason, especially government of most of the developing nations have put in tremendous efforts to enhance the competences of small and medium scale enterprises. However, despite the government’s effort and cooperation from financial institutions, SMEs have fallen short of expectations in many countries of the world. Similarly, in the context of Nigeria, SMEs have failed to meet the government’s expectation and have not played a vibrant role in the economic prosperity of Nigeria. This has caused serious concerns that whether SMEs have the capacity to bring economic development in Nigeria. SMEs have to deal with several challenges which reduce their capability to function and contribute substantially to the national economy (Onugu, 2005). This study will identify and examine the challenges faced by small and medium scale enterprises in Nigeria. Once the challenges are identified, the study will also recommend some of the possible ways by which the challenges can be surmounted. 4.1 Characteristics of SMEs in Nigeria As such, there is no definition of an SME, as the classification of businesses into small scale and large scale is based on qualitative judgement and is also subjective in nature. in addition, different countries have set different criteria for judging and classifying a SME. In order to cite an example, countries such as UK, USA and Canada consider the number of paid employees and annual turnover to categorize businesses (Ayyagari, Beck and Demirguc-Kunt, 2005). In the context of UK, a business is said to fall under the SMEs, if it has an annual turnover of ?2 million or less and cumulative employee strength of less than 200. On the other hand in Japan, small scale enterprises are defined in terms of paid up capital, type of industry and the number of paid employees. Consequently, in Japan the manufacturing companies are tagged as SMEs if they have ? 100 million as the paid up capital and around 300 employees. The wholesalers are classified as SMEs if they have ? 30 million as paid up capital and 100 employees. The services and retail trade are considered SMEs if they embraces ? 10 million as the paid-up capital and 50 employees (Ababa, 2009). Meanwhile, in Nigeria there is hardly any criterion or set standard that distinguishes SMEs from large scale organizations. According to the central bank of Nigeria, a company can be tagged as SME if its annual turnover is equal to or less than 500,000 naira (Central Bank of Nigeria, 2011). However, several organizations have defined SMEs according to their guidelines for providing financial assistances. Hence, the biggest problem of the SMEs lies in their identity as the government has yet failed define or criteria for SMEs. In addition, some of the other general characteristics of SMEs in Nigeria are as follows: - The production process is labour intensive. Limited access to long term loans (Ogbo and Nwachukwu, 2012). Poor product quality Lack of managerial skills High mortality rate. Unavailability of research and development programs. Inadequate training opportunities. Poor capital structure. Poor succession plan and limited access to the vital resources and information (Oyelaran-Oyeyinka, 2006). 4.2 Importance of Micro and Small Scale Enterprises in Nigeria Small firms are considered as the backbone of national economy. It is responsible for fostering growth, and development in the country. Moreover for a country to gain to its fullest potential regarding its social and economic development, the importance of its small and medium enterprises cannot be ignored. Their contribution to the country’s economy also cannot be ignored. In the context of Nigerian market, the importance of SMEs is the same. It also helps to increase the employment opportunities in a country. 4.3 Sources of Funds In order to uncover the challenges faced by the SMEs of Nigeria, it is important to identify the sources of funds for the SMEs. There is belief that in Nigeria, government policies are made in such a way that it favours formal sector more than the informal sector. Such situations greatly impact the SMEs. The formal sector of the country enjoys large number of benefits such as long term and short term credit access, foreign technology, restricted competition using trade barriers, and trade licensing among other hands. On the contrary companies belonging to the SMEs do not get these facilities. The SMEs in general operates outside the system of government regulations and benefits. This prohibits the SMEs to get access of the credit and other advantages provided by the government of Nigeria. Despite of that, SMEs find other sources of funds which help them to carry out their operation. The sources of funds are primarily categorised in three broad sections. They are detailed below. Formal financial Institutions: - One of the most common sources of funds is the formal financial institutions. It includes the merchant banks, commercial banks, insurance companies, development banks and savings banks (Nissanke and Aryeetey, 1998) Informal Financial Institutions: - The informal financial institutions are money lenders, savings and credit association, landlords, and sourcing fund from the known individuals. Personal savings: - This is probably the most popular and commonly used sources of fund in Nigeria. Most of the entrepreneurs in Nigeria initiate the new venture with their own savings. 4.4 Problems Faced by the SMEs in Nigeria SMEs in Nigeria are dealing with large number of issues. Some of the most common issues faced by them are inimical government rules, stringent regulations, poor marketing strategy, lack of proper planning, absence of superior technical knowledge and high rate of interest. In addition, the deficiencies of the entrepreneur’s knowledge often become a major cause of concern (Aftab and Rahim, 1989; Ekpenyong, 1983; Akamiokhor, 1983). The dispositions and attitudes of the entrepreneurs seriously impede the development of SMEs in Nigeria. According to Osotimehin, et al. (2012) most of the problems faced by small and medium scale enterprises occurs externally. The author also pointed out that the most important external factors are taxation and regulations, franchising abuses, capital shortage, and product liability patent. The study has mainly carried out secondary research to uncover the challenges faced by the SMEs of Nigeria. Based on the information following are the challenges faced by the SMEs in Nigeria. Government regulations: - According to some of the reports it has been observed that, stringent government regulations are also acting as a growth barrier for SMEs. Moreover, the Nigerian government has failed to categorise establish criteria for SMEs. Also, due to stiff regulations, the SMEs are not getting proper access to capital and resources (Muncherji, Gopalakrishnan and Dhar, 2009). Lack of Basic Infrastructure: - The SMEs of Nigeria operate in a very poor infrastructure. It comprises of restrictions to entry, and also impedes international competitiveness. In many states of Nigeria, there is non-existence of technical infrastructure, inability to access market, unavailability of proper water and power, absence of communication technologies, non-availability of technology and lack of proper transportation facilities. The aforementioned factors prevent the development of SMEs of Nigeria to a large extent (OECD, 2008). Limited Access to Credit Facilities: - The country is also characterized by the lack of medium, short and long term capital loans. Moreover due to derisory access to the credit facilities and financial resources are seriously affecting the growth of SMEs in Nigeria (Wilson and Abiola, 2003). The SMEs of Nigeria are also closing down or are lacking competitiveness as they are deprived of the required financial competency to execute their manufacturing activities. The companies are not getting credit facilities on a short and long term basis. In addition, discrimination in terms of offering credit facilities to firms also takes place in Nigeria. Even when the SMEs obtain loans, they are either short term or embrace high interest rates in comparison with large organizations. This practice has generated heated arguments among the SMEs and banks. Financial Problems: - The association of Nigerian development finance institutions in the year 2004, tried to identify the causes of failure of the SMEs in Nigeria. According to reports proper financing contributes to around 25 % of the successes of the SMEs. Despite of that, SMEs have to deal with financial problems. The problems come mainly in three formats. They are presented below: - Obtaining funds in small amount at the rates which are in comparison with the interest paid by large companies. Manufacturing and building adequate economic reserves Acquiring long term equity capital. High Inflation Rate: - In spite of the fact that the cost of capital is more for small scale manufacturers, the impact gets augmented with the rising inflation rate. The increasing rate of inflation affects the purchasing power of the companies thereby reducing their productivity level. Apart from that, during the period when the inflation rate is high, business houses find it difficult to predict the return on investments. Also determination of prices of products also becomes a complex issue. Educational Background and Previous Work Experience: - The study revealed that one of the prime reasons for the failure of SMEs is the lack the sound educational background and less working experience of the business operators. According to reports, there are only few operators or owners who have tertiary education. Most of them either possess either primary or secondary education. Hence lack of education is one of the major problems faced by the SME sector of Nigeria. Apart from the educational background, lack of wok experience is also affecting the growth of SMEs. The study found that the operators lack proper working experience required to handle and run a business (Muritala, Awolaja and Bako, 2012). Most of the operators hardly have any working before getting engaged in their current businesses. However some of them have 5 years of experience and only a handful have more than 15 years of experience. Unsound Technology: - Unsound technology has always been a cause of concern for Nigeria. Due to poor technical infrastructure, the SMEs of the country are getting highly affected. The companies get less opportunity of using information technology in their operation. Apart from that the country also has poor infrastructure in the field of power, telecommunication, and data connectivity (Nwankwo and Aiyeku, 2002). If the companies had the chance of implementing IT in the operation, they would have been highly benefitted. Feasibility Study: - The study underpinned that there is hardly any operator who has considered feasibility study before initiating with their projects. Instead of that, most of respondents highlighted that, owners or operators mainly depends upon the past experience and do not consider the present market scenario. According to development experts, SMEs are the main drivers of economic growth in a country. Also SMEs plays a major role in fostering the development of private sector and partnership business. The growth of SME sector is therefore represented as an essential constituent in the development strategy of most of the economies. Likewise, for the Nigerian market it holds the similar importance for their growth. In general, a successful SME sector contribute towards improving the lifestyle and standard of living, increasing levels of capability and productivity poverty reduction, generation of employment opportunities, and bringing out substantial capital. In Nigeria, SMEs are dealing with stringent government regulations, lack of basic infrastructure, limited access to financing, financial problems, high inflation rate, educational background and previous work experience, unsound technology and failure to carryout feasibility study of the current venture. Due to these problems, unfortunately, the SME sector of Nigeria did not played the crucial and significant role towards the economic growth, industrialization and development of Nigeria (Kilby, 1969). 5. References & Bibliography Ababa, A., 2009. A Brief Introduction to SME policies of Japan. [pdf] Available at: < http://www.grips.ac.jp/forum/af-growth/support_ethiopia/document/Sep09_SME090828final_a.pdf> [Accessed 07 January 2013]. Aftab, K., and Rahim, E., 1989. Barriers to the Growth of Informal Sector Firms: A Case Study. Journal of Development Studies, 25(4), pp. 490-507. Akamiokhor, G. A., 1983. Financing Small-Scale Enterprises. Central Bank of Nigeria Bulletin, 8 (2). Analoui, F., and Karami, A., 2003. Strategic Management: In Small and Medium Enterprises. Connecticut: Cengage Learning EMEA. Ayyagari, M., Beck, T., and Demirguc-Kunt, A., 2005. Small and Medium Enterprises across the Globe. [pdf] Available at: [Accessed 07 January 2013]. Central Bank of Nigeria, 2011. Economic Report for the First Half Of 2011. [pdf] Available at: < http://www.cenbank.org/OUT/2011/PUBLICATIONS/REPORTS/RSD/2011%20CBN%20HALF%20YEAR%20REPORT.PDF> [Accessed 07 January 2013]. Ekpenyong, D. B., 1982. Problems of Small Businesses and Why they Fail. Journal of General Studies, 3(1). Johnson, D., and Turner, C., 2010. International Business: Themes and Issues in the Modern Global Economy. 2nd ed. Abingdon: Taylor & Francis. Kilby, P., 1969. Industrialization in an Open Economy: Nigeria 1945-66. Cambridge: Cambridge University Press. Muncherji, N., Gopalakrishnan, C., and Dhar, U., 2009. Partners in Success: Strategic HR and Entrepreneurship. New Delhi: Excel Books India. Muritala, T. A., Awolaja, A. M., and Bako, Y. A., 2012. Impact of Small and Medium Enterprises on Economic Growth and Development. American Journal of Business and Management, 1 (1), pp. 18-22. Nissanke, M., and Aryeetey, E., 1998. Financial Integration and Development: Liberalization and Reform in Sub-Saharan Africa. London: Routledge. Nwankwo, S., and Aiyeku, J. F., 2002. Dynamics of Marketing in African Nations. Westport: Greenwood Publishing Group. OECD, 2008. Enhancing the Role of SMEs in Global Value Chains. Paris: OECD Publishing. Ogbo, A., and Nwachukwu, A. C., 2012. The Role of Entrepreneurship in Economic Development: The Nigerian Perspective. European Journal of Business and Management, 4 (8), pp. 95-105. Onugu, B. A. N., 2005. Small and Medium Enterprises (SMEs) In Nigeria: Problems and Prospects. [pdf] Available at: < http://www.efiko.org/material/Small%20and%20Medium%20Enterprises%20(SMEs)%20in%20Nigeria-%20Problems%20and%20Prospects%20By%20Basil%20Anthony%20Ngwu.pdf> [Accessed 07 January 2013]. Osotimehin, K. O. et al., 2012. An Evaluation of the Challenges and Prospects of Micro and Small Scale Enterprises Development in Nigeria. American International Journal of Contemporary Research, 2 (4), pp. 174-185. Oyelaran-Oyeyinka, B., 2006. Learning to Compete in African Industry: Institutions and Technology in Development. Hampshire: Ashgate Publishing, Ltd. Teall, J. L., 2012. The Small and Medium Enterprise (SME), Success and Failure. [pdf] Available at: [Accessed 07 January 2013]. Wilson, J. S., and Abiola, V. O., 2003. Standards and global trade: a voice for Africa. Washington DC: World Bank Publications. 6. Methodology In order to get in-depth views about the problems and challenges faced by the SMEs in Nigeria, a thorough study will be carried out. The study will mainly depend upon the secondary sources to gather information regarding the issues. In addition, primary data will be also used. The secondary data will be collected from journal articles, books, electronic sources as well as newspapers and magazines. In order to get these data, university library and internet databases will be used. The secondary data, which will be gathered for the study, will be mainly used for conducting qualitative analysis. The study will also involve collection of data from the respondents, which indicates primary research. The primary data will be collected from the owners of the SMEs in Nigeria. In addition, the managers of SMEs will also be the respondents of the study. In order to record data, questionnaire and interviews will be used. The questionnaire will be meant for the owners whereas interview is intended for the managers. The sampling will be done on the basis of simple random sampling of probability. The sample size for the owners will be 10 and the sample size of managers will be 15. The advantage of simple random sampling is that it will ease the sampling method and is also free from any biasness. With this approach, it is believed that the major issues faced by the SMEs in Nigeria can be uncovered. Once the data is gathered a combination of qualitative approach and quantitative approach will be considered. The reason behind adopting a combination of qualitative and quantitative approach is that it will help to carry out in-depth analysis of the event. 7. Structure Introduction Literature Review Research Methodology Research design Sample and sampling technique Research instruments Data collection process Findings and Presentation of Data Data analysis Conclusion Recommendations Appendix. 8. Research timetable Activity Date Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Collecting literature                         Writing of literature review                         Determining the research Methods                         Completion of the first proposal                         Submit proposal                         Approval of the Subject                         Collecting Primary data                         Data Analysis                         Working with the 1st draft                         Submit the 1st draft                         Finish and submit final draft                         Final oral exam                         Approval of the research Project                         9. Ethics ANSWER THESE THREE QUESTIONS YES NO 1 I have gone through the documents pertaining to ethical guidelines located on the university and module webs, and in accordance to that I have designed my research study. v 2 I have prepared a checklist regarding the ethical guidelines to be followed. v 2 I have presented this checklist to my mentor and discussed the contents with him. v 3 Does the research involve higher, medium or no ethical risk? In order to assess the same, I have submitted my checklist to the mentor for inspecting it. Once the feedback is received, the ethical checklist will be adjusted (if needed). 10. How the supervisor will be utilised? I will be mainly using my supervisor as a guide. I believe that through his guidance, I will be able to complete my project successfully as well as on time. I will take help from him in many areas of the study. For example, I will be taking help of my supervisor regarding the section of respondents and sample size, designing the research, designing the questionnaire and also while analysing the data. In addition, I will take help of supervisor when I will have doubts regarding an action and will also ask for his permission to carry out certain activities. Most importantly, I will be taking help of my supervisor to complete the study in accordance with the ethical guidelines. Lastly, before submitting any of my draft as well as my final proposal, I will consult with my mentor to ensure that the write-up is free of errors. Read More