THE IMPACT OF CAPITAL MARKET IN FINANCING SMALL AND MEDIUM ENTERPRISES
This study on “Impact of the Nigerian Capital market in Financing Small and Medium Scale Enterprises (SMEs) in Nigeria” is intended to identify and consequently analyze the financial incentives available to SMEs in the Nigerian capital market. It provides solution to the financial gap existing between large enterprises and small and medium scale enterprises in terms of availability of financial resources referred to as the missing middle. The methodology adopted in conducting the research was a survey design. The independent variable of the study was the Nigerian capital market while the dependent variable was small and medium scale enterprises. A disproportionate stratified random sampling technique was adopted to select a representative sample SMEs. Questionnaire was used as instrument for data collection. The questionnaire was developed on a four-likert scale ranging from one to four (i.e. from strongly disagree to strongly agree) while, the hypothesis developed was tested using Chi-square (X2). Tables and percentage was adopted to analyze the hypotheses of the study. Base on the findings, it was concluded that SMEs always see the Nigerian Capital Market as a good source of capital for them since equity financing is always cheaper for long-term financing. Yet, many SMEs still entertain some fears in approaching the Nigeria capital market such as: the fear of losing their total control over their companies, and the fear of sharing their profit with other investors as well as hostile takeover of their companies by other investors. The study recommended that the cost of borrowing should be reviewed in order to encourage more enterprises to come into the market so as to expand and deepen the market. The Nigerian stock market needed to be built up with mass participation of SMEs to attain a meaningful sustainable growth and development. There are also needs to formulate investment friendly regulations; keep low inflationary rate; provide favorable government policies and provide stable macroeconomic framework for the sustainability of informal and SMEs sector in the developing countries.
1.1 Background to the Study
Production of goods and services in the most efficient manner has continued to be the only viable and reliable option for growth, development, and survival of world economies. Despite the importance of production, it is impossible for a sustained high productive level to be attained without a well-developed industrial sector. Industries normally operate either on a large or small scale both in the public and private sector. In Nigeria, the private sector enterprises cover a wide range of different types of industries as distinguished by various criteria such as size, sector, ownership structure, employment and technology.
The small-scale industries cover the entire range of economic activity sectors and are very heterogeneous groups (Hallberg, 2011) They include a wide variety of firms – village handicraft, restaurants, bakeries, poultry farming, hair dressing, barbers shops just to mention a few. The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), (2011) classify industries into small and medium scale enterprises (SMEs).
The significance of small and medium scale enterprises to growth, productivity and competitiveness of the economies of developing countries is universally recognized. Small and medium scale enterprises are generally acknowledged in (Kasekende& Opondo, 2003) as the bedrock of the industrial development of world economies. They are more innovative than larger firms are. Small and medium scale enterprises usually provide training grounds for entrepreneurs even as they generally rely more on the use of local materials. SMEs development can play a key role in entrepreneurs’ development through their contributions to economic advancement and social empowerment.
In Oteh (2011), the Global Entrepreneurship Monitor 2009, a research program aimed at assessing the national level of entrepreneurial activity in selected countries, conducted an entrepreneurship and economic growth study on 37 countries. According to the study, the economic growth of a country is directly correlated with its level of entrepreneurial activity. The study reveals that, there is a high correlation between economic growth and entrepreneurial activity in industrialized countries, hence to achieve Nigeria Vision 20:20 then greater attentions should be paid on very vibrant and robust enterprises. Entrepreneurs create new enterprises, new commercial activities and new sectors, which have a positive multiplier effect on the economy. Entrepreneurial activities are very crucial to fostering economic and social progress in the country. The development of SMEs in Nigeria is therefore an essential element in the growth strategy. Notwithstanding the widely acknowledged role of SMEs in fostering economic growth and development, SMEs have continued to face a variety of constraints (Adelaja, 2004) and majorly that of finance.
This is quite common in many African countries, including Nigeria, where access to finance was the second most important constraint to doing business after inadequate supply of infrastructure. This is because; the conditions for financing SMEs are more restrictive to those of large enterprises. This has also confirmed the fact that, inadequate finance is a serious challenge that must be tackled before there could be any meaningful progress in the SMEs sub-sector.
Small and medium scale enterprises in Nigeria suffer from lack of access to appropriate (term and cost) funds from both the money and capital markets. This is due in part to the perception of higher risk resulting in high mortality rate of the business, information asymmetry, poorly prepared project proposals, inadequate collateral, absence of, or unverified history of past credit(s) obtained and lack of adequate accounting records of the company’s transaction. In some cases, there are virtual absence of capital market facilities and instruments that SMEs can access. (Bates, 2010) The capital market in Nigeria is still evolving while other conventional sources have no confidence in the credit worthiness of SMEs. Non-bank financial intermediaries such as micro credit institutions could play a greater role in lending to SMEs. Nevertheless, some of these institutions may not consider SMEs credit worthy. .
Small and medium scale enterprises therefore rely on their retained earnings, informal savings and loan associations, which are unpredictable and insecure with little scope for risk sharing as their major source of capital. Many African countries have to deal with this chasm between the role of micro credit institutions and that of larger financial institutions. This is the space where SMEs operate and is referred to in the African Commission’s Report as the missing middle. (Oteh, 2011). Yet, the panacea for solving problems of economic growth in Nigeria often resides in adequate financing of small-scale industries. The missing middle or financial gap is a serious challenge in a fast-changing knowledge based economy because of the speed of innovation. Innovative SMEs with high growth potential, many in high- technology sectors, have played a pivotal role in raising productivity and maintaining competitiveness in recent years. Nonetheless, innovative product and services need investment to flourish, however great their potential might be. SMEs depend on capital accumulation, and capital accumulation requires investment and an equivalent amount of saving to match it. Two of the most important issues in developing countries, are how to stimulate investment, and how to bring about an increase in the level of saving to fund increased investment.
Most importantly, well functioning financial systems are heavily based on trust. An investor who deposits money in the bank or contacts his/her broker to buy stocks place his/her money and trust in the hands of the financial institution that provides her with advice and transaction services (Madura, 1996).
No wonder, Kneown (1996) stressed that, one reason why underdeveloped countries are underdeveloped is because, they lack a financial system that has the confidence of those who must use it. Particularly, the stock market crash of 2008 affected the Nigeria financial sector adversely. It generated a pessimistic outlook on the economy that led to a decline in the demand for loans and higher percentage of loan defaults, causing a consequent decline in the stock prices. Despite all these illicit practices in the financial sector, the Nigerian capital market is potentially the most viable source of capital for industries in Nigeria.
The primary focus of this research work emanates from the fact that, there exist a wide financial gap between the capacity of micro financial institutions and that of larger financial institutions. While large loans are available to a certain degree for large-scale industries, there is an evident lack of access to medium and small-scale finance for SMEs. In trying to bring a solution to this problem, the Central Bank stipulated that 20% of banks’ credit should be granted as loan to Small Scale Enterprises. This was not adhered to because, most loans granted to small scale holders were not repaid and so the banks did not consider them as creditworthy. In the light of these, the research has explored the financial incentives available to small-scale enterprises especially in the Nigerian capital market in order to provide the financial information needed by entrepreneurs.
THE IMPACT OF CAPITAL MARKET IN FINANCING SMALL AND MEDIUM ENTERPRISES
1.2 Statement of Problem
In Nigeria, most small and medium enterprise ownership is indigenous. In major countries small and medium enterprises contribute close to half of the net output of the private sector and a significant proportion of the Gross Domestic product (GDP). In Nigeria however, it is being postulated that there are no adequate records to show for such growth by the small and medium enterprises. Considering the socio-economic importance and advantages to the nation, which include provision of employment, consumer and producer goods, promotion of indigenous technology, raw materials utilization, entrepreneurial Spirit, rural and industrial development.
Unfortunately, small and medium scale enterprises have relatively limited access to loan capital. They depend highly on financial resources of their owners and sometimes from friends and relatives, and retained earnings from the business as it expands. Most times all these proved grossly inadequate for finance needed projects as small scale enterprises grows further, market funds become imperative. The statements of problem that shall be addressed by this work are essentially:
- What is the impact of the Capital Market in financing small and medium enterprises (SMEs)
- How well small and medium enterprises benefited from the activities of the capital market in Nigeria
- What is the relationship between capital market and other sources of finance for small and medium enterprise
Has the performance of small and medium enterprises impacted in the increase of Gross Domestic Product