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Chapter one

1.0 Introduction

1.1 Background of the Study

Small and medium-sized enterprises (SMEs) play a critical role in driving growth in developing countries. According to Ukeje (2004), it has a well-documented accelerative effect in achieving macroeconomic objectives such as full employment, income distribution, local technology development, management skill diffusion, and indigenous entrepreneurship stimulation.

SMEs in Nigeria make for a significant portion of total industrial employment, production, and value-added in Nigerian businesses (Osuagwu, 2001).

Okongwu (2001) believes that SMEs generate Nigeria’s industrial wealth while also playing an important role in the country’s economic, technological, social, and political growth and development, despite the presence of multinational corporations and other large firms in Nigeria.

According to Deen (2003), governments around the world have developed extensive public policies to stimulate, support, and subsidise the establishment and expansion of SMEs.

Furthermore, successive Nigerian governments have had some role in fostering the creation, growth, survival, and expansion of SMEs (Osuagwu, 2001).

However, while playing their function as a stimulant of economic growth and development, SMEs in Nigeria face a myriad of challenges, including:

1. Lack of appropriate funding

2. Incompetent Management

3. High operational costs.

4. Poor location.

5. Unstable socioeconomic climate.

6. High labour turnover, among others.

Of all the issues that SMEs face in their daily struggle for existence, a lack of adequate financing appears to be the most significant. Nwana (1995) believes that one of the most pressing issues confronting SMEs is their inability to generate sufficient funds to finance their activities. Osuagwu (2001) agrees with this, stating that a lack of enough capital is a common cause of SMEs failure.

Personal funds, organised private sector funds, informal financial institution funds, government funds, consumer financing, and trade credit from suppliers and others are all funding options available to SMEs.

The most readily available of these funds to SMEs is the owner’s cash, which is typically insufficient to continue the business, necessitating the need for external funding. Experience has demonstrated that SMEs have challenges in raising external finance.

The reasons behind this are extensively documented in economic literature, including the fact that financing institutions see them as high-risk undertakings and avoid them (Okeke, 2001). Mbadiwe (2005) claims that Nigeria’s financial system is biassed against small and medium-sized enterprises.

However, in Nigeria, the Federal Government has implemented a number of fiscal policies and incentives to encourage the development, growth, and survival of SMEs (Adebusuyi, 1997).

The government provides financial assistance to SMEs through a range of schemes aimed at supporting small and medium-sized businesses, including the issuance of “soft loans” by government-owned development financial institutions.

It also includes instructions to commercial banks on the supply of soft loans to SMEs. Furthermore, new lending schemes and credit institutions, such as the Small and Medium Industries Equity Investment Scheme (SMIEIS),

Bank of Industry (BOI), National Economic Reconstruction Fund (NERFUND), Nigerian Export and Import Bank (NEXIM), National Directorate of Employment (NDE), Nigeria Agricultural and Cooperative Bank (NACB), among others, and the World Bank SMEs assisted loan scheme, have emerged at both the state and national levels to boost the flow of

Unfortunately, despite all of the available financial institutions and the government’s attempts to ensure the flow of funds to SMEs, finance has proven to be a major challenge for SMEs in fulfilling their role as an engine of economic development.

Many enterprises in this group have either ceased operations or are running at less than full capacity due to a lack of suitable capital, among other reasons.

In light of this, the researcher seeks to determine the impact of funding on the survival, growth, and development of SMEs in Nigeria’s tough and dynamic business climate.

Poor capitalization, which appears to be responsible for the failure of the majority of SMEs in Lagos State, according to the researcher, is the result of low owner capital and a lack of access to external investment.

As a result, there is an urgent need to analyse SMEs’ access to external capital. This indicates that they have access to organised commercial sector money, as well as government institutional funds and credit schemes.

Despite the well-publicized efforts of the organised business sector and the government to channel financing to SMEs, there is little tangible evidence of their success. This is confirmed in light of the SMEs’ dismal performance and their ongoing need for financial support from both the organised private sector and the government.

This condition prompted the conduct of this study to examine SMEs’ access to capital from the organised sector as well as government institutional funds and credit schemes.

1.2 Statement of the Problem

SMEs face a variety of challenges in their daily quest for survival, but financial issues often eclipse others. The many financial windows available to SMEs for sourcing funding do not appear to alleviate their problem of access to funds, resulting in the collapse of many SMEs.

The government’s and the organised private sector’s claims of channelling cash to SMEs appear to contradict on-the-spot assessments of SMEs’ performance, as the majority of them have done poorly, and a large number of them have been liquidated as a result of inadequate financing. As a result, the challenge is determining whether SMEs can access external capital.

1.3 Objectives of the Study

The study’s aims include:

1. Determine the loan accessibility of SMEs in the organised private sector (commercial banks, merchant banks, finance houses, insurance firms, and community banks).

2. Determine the extent to which government institutional funds and credit schemes have improved fund accessibility for Nigerian SMEs.

3. Determine the influence of finance on the survival and growth of SMEs in the Nigerian business climate.

1.4 Significance of the Study

The study’s relevance includes the following:

1. The study’s findings can help the federal government improve its credit accessibility rules for SMEs.

2. It will also help the organised private sector improve its credit delivery system to make it more accessible to SMEs.

3. The findings would assist SME owners in identifying variables that contribute to their difficulty to obtain financing from both the organised private sector and various government credit sources.

4. The study will be used as a reference for future research projects.


This study focuses on answering the following questions:

1. To what extent have Nigerian SMEs had access to organised private sector lending facilities?

2. To what extent have government institutional funding and credit schemes been made available to SMEs in Nigeria?

3. What are the reasons limiting SMEs’ access to financing in Nigeria?

4. How does finance affect the survival and growth of small and medium-sized enterprises in Nigeria?

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