ENHANCING AND PROMOTING THE FINANCING OF SMALL AND MEDIUM SCALE INDUSTRIES
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ENHANCING AND PROMOTING THE FINANCING OF SMALL AND MEDIUM SCALE INDUSTRIES
Chapter one
INTRODUCTION
1.1. BACKGROUND FOR THE STUDY
Small and medium-sized industries can be traced back to the early days of barter commerce. Then, traders used tiny amounts of money to run their businesses, which were mostly arts and crafts, and they made a profit.
Small and medium-sized firms have been identified as a key driver of long-term economic growth. This is due to the fact that small firms expand into medium-sized businesses, and then into huge businesses.
Because of their qualities, SMEs play critical roles in development and are thus likely to support the development of the country’s indigenous entrepreneurial culture while also increasing domestic production, as mentioned below:
· Sustainable employment generation: Since SMEs commonly employ simple technologies and are generally labour demanding, they have a better capacity to provide work, at least for the unskilled and uneducated elements of the population.
· Development of entrepreneurial and management skills: With lower capital requirements for SMEs, more people are able to start and manage their own firms. SMEs can thus be viewed as a training ground for managers in larger and more formal commercial organisations.
· SMEs promote innovation and technological development by continuously developing and improving processes, methods, machinery, raw materials, and equipment. Research and development are also encouraged, as there is always room for improvement in procedures and systems.
· Develop markets and generate local demand for raw materials. Because SMEs create jobs for people who would otherwise be unemployed, per capita income rises and the standard of living improves overall.
· Small and medium-sized enterprises (SMEs) boost exports and maximise resource utilisation.
Given the aforementioned characteristics of SMEs, the government was compelled to build a suitable policy framework for their support and development.
Prior to 1999, the government had launched some SME-focused policies to encourage investment in SMEs, boost their development, and contribute to economic growth. Some of the previous initiatives were:
· Small-scale Industries Scheme, 1971.
· Agricultural Credit Guarantee Scheme 1973.
· Nigerian Agricultural & Co-operative Bank, 1973
· Nigerian Bank for Commerce and Industry (1973)
· Small and Medium Scale Enterprises Loan Scheme, 1992.
· National Economic Reconstruction Fund (1994)
· Family Economic Advancement Programme (1991)
In addition to the above, the government established the following specialised banks:
· Peoples Bank 1989
· Community Banks (1992)
Efforts by the government to develop policies that will encourage the expansion of SMEs and ease their concerns have revealed that financial issues are the most significant impediment to the sector.
Banks frequently provide short-term finance, which is unsuitable for SMEs. Furthermore, demands are made for collateral, which small-scale enterprises rarely possess.
However, the majority of these programmes failed because of insufficient funding. Clearly, an impoverished organisation is not well-suited to support such a big endeavour.
Nepotism, favouritism, red tape, unwarranted political intervention, and corruption plagued the numerous efforts as well. Inadequate monitoring had a significant role in the programmes’ failure.
In order to ameliorate the above problems and add impetus to the growth of SMEs, the Bankers’ Committee (a committee of Chief Executives of banks in Nigeria) approved the Small and Medium SMEIS at its 246th meeting held on December 21, 1999. The initiative compels all Nigerian banks to set aside 10% of their profits after tax (PAT) for equity investment in small and medium-sized businesses.
1.2 Statement of Problem
The reality on the ground is that, despite government measures targeted at supporting small and medium-sized companies, SMEs have yet to completely realise their potential. SMEs’ contribution to the GDP has been insignificant (A.T. Salami 2003).
Currently, the issue of inadequate finance for SMEs appears to be persistent.
Aside from the Small and Medium Enterprises Industries Equity Investment Scheme (SMEEIS), the only formal sources of finance accessible to SMEs are the capital market and credit facilities from traditional banks, who have not been inclined to do business with small businesses.
1.3 Significance of the Study
Small and medium-sized enterprises (SMEs) play critical roles in the growth and development of the real sector, which has recently received significant attention. However, SMEs continue to suffer from a lack of adequate funding in the form of capital investment and credit facilities.
In light of the preceding, the purpose of this research is to analyse the sufficiency of finance arrangements accessible to SMEs in the areas of study and throughout Nigeria. Shortcomings in the current structure will be identified and corrective solutions proposed. These initiatives will help to ensure that financial difficulties do not impede the expansion of this critical sector of the economy.
1.4 Objectives of the Study
The study’s aims are:
i. To investigate the various financing options available to SMEs in Oyo State’s Ibadan South West and Ibadan North West Local Government Areas.
ii To evaluate the various government policies and incentives aimed at encouraging SMEs in Nigeria, as well as how these have affected the finances of SMEs in the areas of study.
iii To demonstrate the contributions of both official and informal sources of financing through a survey, in order to identify effective sources of funding for SMEs.
iv To evaluate the Bankers’ Committee’s most recent policy initiative, which requires banks to set aside ten percent of their after-tax profits for SME finance through equity investment.
1.5 SCOPE.
This study is limited to the Ibadan South West and Ibadan North West local government areas in Oyo State. The investigation was aimed to certain small and medium-sized industrialists in the area using questionnaires.
The study is organised into five chapters. The first section includes a general introduction to the study, a summary of the problem, research aims, and the study’s importance.
Chapter Two discusses previous works, opinions, and appraisals of works by various authors on the financing of small and medium-sized industries, while Chapter Three explains the method used to demonstrate the relationship that exists between SMEs and the various sources of funding available to them
The fourth chapter focuses on the analysis and effects of financing for small and medium-sized industries, while the final chapter summarises the major findings and makes some useful suggestions to help small and medium-sized industries conduct their financing in an efficient and effective manner.
1.6 Research Questions and Hypothesis
This study focuses on the following questions:
1. Are formal financing methods prevalent in the small and medium-sized industries?
2. What impact does financing have on the small and medium-sized industries?
3. Is there a relationship between small and medium-sized industries’ initial capital investments and their income levels?
4. Are small and medium-sized industries aware of the availability of SMEEIS and making proper use of it?
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