FINANACING SMALL AND MEDIUM ENTERPRISES.

FINANCING SMALL AND MEDIUM ENTERPRISES
IN DELTA STATE
(A CASE STUDY OF ISOKO NORTH LOCAL GOVERNMENT AREA)




BY




AJAEGBA ONOS CHRISTIAN
MAT.NO: 40830



A RESEARCH WORK SUBMITTED TO THE DEPARTMENT OF BUSINESS ADMINISTRATION, DELTA STATE UNIVERSITY, ABRAKA, NIGERIA






IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF BACHELOR OF SCIENCE (B.Sc)



DECEMBER, 2004
CERTIFICATION

We the undersigned hereby certify that this research work was undertaken by Ajaegba, Onos Christian under our supervision and is adequate in scope and quality for the partial fulfillment of the requirement of the award of Bachelor of Science (B.Sc) in Business Administration of the Delta State University, Abraka, Nigeria.

_____________________ _________________
V.I.O. ODIRI DATE
(Project Supervisor)

_____________________ _________________
DR. F.A. ADIDU DATE
(Head of Department)


_____________________ _________________
External Supervisor DATE
DEDICATION

MRS FELICIA OGHENEKOME AJAEGBA. If not for the power of a praying mother, I wonder where I would have been today. Mum, you are a mother indeed.
ACKNOWLEDGEMENT
Special thanks to my brothers Paul, Emmanuel, Amos and Simeon who stood by me all through because they had so much belief and confidence in my abilities.
A big thank you to my sisters, Naomi, Faith and Justina who were so caring and full of understanding.
Rev (Dr.) A.A. Adams in particular saw great qualities in me and he appreciated my ingenuity and so did the entire congregation of Our Saviour Chapel, so I say thank you to them all.
My friend’s name, Walter O. Glory has been reoccurring, so I say thank you to him for challenging my intellect continually just as Ogbeta Igho and Iviero Bernard do. I want to appreciate Mrs. Joy Ajaegba who was always concerned about how fast I was making progress in this research, to Eto Enakeno whose guide was of paramount importance, to Augustina Edi who took time to type this research findings and to my project supervisor, V.I.O. Odiri who took out time despite his tight schedule to attend to me.
To you all, I say thank you, again and again and again…

ABSTRACT
The importance of small and medium enterprises in the development of a country cannot be underestimated neither can if be over-emphasized. Thus, this research seeks to unravel how these SMEs are financed with particular reference to SMEs in Isoko North Local Government Area of Delta State.
The researcher also took time to look at the problem of lack of information as well as lack of education which affect these SME operators and how it can be curbed. Information was sought through the use of structured questionnaire and personal interview from the respondents reached in Isoko North. These data collected was collated using the simple percentage statistical technique and the rank correlation method of data analysis. This is because it is a measure of the correlation that exists between ranks and a measure of the degree of association between variables that we would not have been able to calculate otherwise.
Chapter five which is the last chapter highlights some of the findings and attempts to make meaningful suggestions and feasible recommendations for improved productivity. These include government educating SME operators of sources of finance, banks providing venture capital to SMEs, classification of SME by types as a form of ranking in credit allocation, and some others which will be of meaningful help if implemented.
TABLE OF CONTENT
TITLE PAGE - - - - - - - i
CERTIFICATION- - - - - - - - ii
DEDICATION- - - - - - - - - iii
ACKNOWLEDGEMENT- - - - - - - iv
ABSTRACT - - - - - - - - - v
TABLE OF CONTENT- - - - - - - - vii

CHAPTER ONE
INTRODUCTION
1.1 Background to the study- - - - - - - 1
1.2 Statement of the problem- - - - - - 2
1.3 Objective of the study- - - - - - - 4
1.4 Significance of the study- - - - - - 5
1.5 Scope of the study- - - - - - - 6
1.6 Statement of hypothesis- - - - - - - 6
1.7 Methodology- - - - - - - - 7
1.8 Limitation of the study- - - - - - - 8
1.9 Definition of terms- - - - - - - 8

CHAPTER TWO
LITERATURE REVIEW
2.1 Historical Development of Small Enterprises- - - 12
2.2 Characteristics and Features of Small and Medium Enterprises 15
2.3 Characteristics of Small and Medium Enterprises - - 17
2.4 Importance of Small and Medium Enterprises- - - 23
2.5 Forms of Small and Medium Enterprises- - - - 24
2.6 Issues in Business Finance- - - - - - 31
2.7 Assessment of Financial Records- - - - - 32
2.8 Sources of Finance- - - - - - - 33
2.9 Requirements of Banks for Granting Loans - - - 37
2.10 Promotional Activities by Government - - - - 38
2.11 The Impact of National Development Plans
On Small and Medium Enterprises- - - - - 40
2.12 Problems of Managing Small and Medium
Enterprises in Nigeria - - - - - - 42

CHAPTER THREE
METHODOLOGY
3.1 Research Design - - - - - - - 43
3.2 Population Sample - - - - - - 43
3.3 Sampling Methods - - - - - - 44
3.4 Research Instruments - - - - - - 44
3.5 Validity and Reliability of Instrument - - - 45
3.6 Data Analysis Techniques - - - - - 45
3.7 Statement of Hypothesis - - - - - 46


CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
4.1 Introduction - - - - - - - 47
4.2 Data Analysis - - - - - - - 48
4.3 Testing of Hypothesis - - - - - - 53
CHAPTER FIVE
5.1 Summary of Findings - - - - - - 57
5.2 Conclusion - - - - - - - - 58
5.3 Recommendations - - - - - - 59
Bibliography - - - - - - - 63
Appendix- - - - - - - - 65
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Nigeria has always been a strategic country in Africa, with its enormous economic and political power. Unfortunately, a history of prolong military rule left the Nation’s civil institutions in ruin, the economy grossly mismanaged, and individual values completely misplaced thus preventing Nigeria from attaining its full potential. Consequently, due to this uncertainty, quite a number of investors have been wary of doing business in Nigeria and with Nigerians. With the successful transition to civil rule in 1999, the cloud of uncertainty cleared up a bit and in 2003 when the sustainability of its democracy was tested, a significant number of investors are expected to be interested in investing in the Nigerian economy.
As part of its strategies to revive the economy and uplift the standard of living of Nigerians, the government has identified sectors within the economy with potential for rapid growth. One of such sectored strategies is the development of Small and Medium Scale Enterprises (SMEs) SMEs are known to encourage people centered development, which helps in alleviating poverty, creating wealth and employment, and stemming rural – urban drift.
However without finance, SMEs cannot be a reality. To alleviate this problem of finance, the Federal Government of Nigeria set up a number of Development Banks.

1.2 STATEMENT OF THE PROBLEM
The purpose of this research is related to the financing of SMEs.
SME is a global concept that can be seen from different points of view depending on the angle from where it is been considered; either from the developed or developing countries. The problems that are inherent with SMEs depends mainly either on the government of such a country where it is been managed or the entrepreneur that is managing such an enterprise.
For the growth and development of SMEs, it can be enhanced by the government through the schemes that has been put in place as it has been in Nigeria in general and in Delta State in particular. But there are some problems that equally hinder this growth and development of SMEs especially with reference to finance, and these among others are the reasons for this research. These problems include;

1. LACK OF FUND: - As a result of lack of finances for starting up of SMEs despite the government schemes, ideas of many entrepreneurs die and this has been one of the major problems hindering the growth and development of business in Isoko North.
2. LACK OF INFORMATION: - Apart from the fact that lack of funds hinders the growth and development of SMEs, lack of information also do. The government of Nigeria has put many schemes in place as it is been made available to these entrepreneurs through the commercial and development banks. But these schemes are not taken advantage of because of lack of information.
3. LACK OF EDUCATION: A great percentage of entrepreneurs are uneducated; and as a result, they often complain of the procedure they need to go through to obtain loans from banks.
Furthermore, as a result of their illiteracy, they also have the problem of accountability. They are hardy able to give proper account of how they make use of the available funds.
The research therefore is to make it know to them that obtaining loans from bank can be easier than they ever thought in addition to commercial banks helping to finance SMEs.

1.3 OBJECTIVE OF THE STUDY
The objective of this study is to acquaint existing and potential SMEs with the sources of funds available and problems arising from the establishment and growth of SMEs in Nigeria and particularly in rural areas and to offer possible means of ensuring efficient use of these funds so that SMEs can grow rapidly.

Some of the objectives of this research are;
i. To help those already in business to expand through better means of financing.
ii. To identify less risky sources of finance.
iii. To examine the ways and manners through which working capital funds are raised and managed for the operation of the enterprise.
iv. To make feasible recommendations to the government in terms of its involvement in the financial policy of small business with reference to rural areas this needs development.

1.4 SIGNIFICANCE OF THE STUDY
The outlay of this study is important because at this stage of development, the government of Nigeria is currently placing emphasis on the development of SMEs, since if has been discovered to possess the likely solution to the rural – urban drift of her citizens.
The study shall particularly probe into sources of fund to SMEs in Delta State with Isoko North Local Government in view.



1.5 SCOPE OF THE STUDY
Small and Medium Enterprises is fairly wide in scope, but in this study, we will take a look at it from the Nigerian perspective and how it affects the area of study.
The study also takes a look at the various forms and sources of business finance including the procedures for obtaining loans and on the future prospects of funding SMEs in our society despite the associated problems.

1.6 STATEMENT OF HYPOTHESIS
For the purpose of this research, hypothesis shall be formulated and tested on the following areas:-
i. The appropriate step to take in the procurement of funds depends largely on the type of fund being sourced for on the one hand and the capacity of the SME on the other hand.
ii. Loans sought for it granted by the financial houses or from where it is sought from would create the means of expansion and employment would be enhanced.
iii. The facilities provided by financial houses will stimulate entrepreneurs to invest.

1.7 METHODOLOGY
This study will be based on data collected from both primary and secondary sources. These will include the use of questionnaires, personal interview and observation as well as getting information from ready made reports.
The researcher hopes to use the simple percentage statistical tool in the course of this research because of its nature which is simply based on primary and secondary data and then the rank correlation.



1.8 LIMITATIONS OF THE STUDY
It is assumed that this research work has been carried out before. As a result, websites were consulted, textbooks, annual reports, seminars, workshops and conference materials which discussed the relevance of financing small and medium enterprises were also consulted.
Because this study was done intermittently with lectures, examination and private study, limited time was at my disposal for carrying out this study.
However, as the researcher, I will put in the best of my knowledge and understanding to capture and unravel the main purpose and objective of this study.

1.9 DEFINITION OF TERMS
(i) FINANCE: - According to the New Encyclopedia Britannica, “Business finance is concerned with the raising of funds and its management in business enterprise. The scope of such business finance may also include the making of policies that affect a firm’s financial status. i.e. its ability to raise funds through the sale of its securities. This act or process therefore can be or is referred to as Financing.
(ii) SOURCE OF FINANCE:- Source of finance refers to the various avenue and means through which businesses can raise fund for its activities either on a small or large scale.
(iii) FORMAL CAPITAL MARKET: - This refers to all modern financial institutions such as commercial banks, investment banks & government credit schemes from which businesses can get loan assistance.
(iv) INFORMAL CAPITAL MARKET: - This refers to all traditional financial institutions from which the small and medium enterprises can borrow funds. E.g. Relations, Business associates, personal savings etc.
(v) SMALL AND MEDIUM ENTERPRISES
The term SMEs differ from industry to industry, country to country and as a result there is no universally accepted definition for it.
Definition change over time and more importantly it depends on a country’s level of development. In the Nigerian context, as a result of the differences in policy focus, different government agencies supply different definitions for SMEs but all the definitions share common ideas that SMEs are generally low in terms of;
(a) Number of Persons Employed
(b) Amount of Capital Investment
(c) Annual Business Turnover
However, for the purpose of this study, we shall consider the definition Small and Medium Scale Industries and equity investments scheme (SMIEIS).
SMIEIS defines SME as “Any enterprise with a maximum asset base of two hundred million naira excluding land and working capital and with the number of staff employed not less than ten or more than three hundred.

(iv) SMALL AND MEDIUM INDUSTRIES DEVELOPMENT AGENCY (SMIDA)
An umbrella agency with a mandate to coordinate and support the development of the SME sector in the economy.
CHAPTER TWO
LITERATURE REVIEW
2.1 HISTORICAL DEVELOPMENT OF SMALL SCALE ENTERPRISE
The development of modern business and of governments’ effort towards promoting industrialization in the country only started about five decades ago.
Before this time, the few industries that existed were the primitive rural and traditional industries with occupations such as pottery, weaving, basket making, cloth dyeing to mention but a few. These used to keep people employed. These industries were considered non – competitive and this limited the development of agricultural raw materials for their industries. Banks, most of which were also foreign owned only assisted businesses that promoted such interest and most of these businesses were foreign owned.
It was not until February 1972, that the disturbing trend described earlier was arrested by the promulgation of the Nigerian enterprises promotion decree popularly known as Indigenization.
Before the promulgation of the decree, the government had found it necessary to direct financial institutions through the central bank of Nigeria’s credit guidelines to extend certain percentage of their total loans and advances to indigenous borrowers that is, business in which Nigerian equity participation is not less than fifty percent.
As a result of the indigenization decree, most businesses became at least sixty percent owned by Nigerians. It was therefore possible for banks to achieve full compliance with the directive of lending to indigenous borrowers without necessarily extending facilities to small scale enterprises which were wholly owned by Nigerians and for which the policy was originally designed. Based on this, a sizeable number of small and medium enterprises are an essential ingredient for a competitive economy.
In 1979 banks were directed to extend at least ten percent of their lending to indigenous borrowers. For small and medium scale enterprises, from 1980’s fiscal year the percentage allocations was increased to 16% and this was shared on this basis.

TABLE 1
ANNUAL TURNOVER (N)
PERCENTAGE
25, 000 and Below
1.6%
25,000 – 50,000
2.0%
50,000 – 100,000
3.2%
100,000 – 200,000
4.0%
200,000 – 500,000
5.2%

Source: Central Bank of Nigerian Monetary Policy Guideline.

Although loan finance may often not be the most appropriate form of external capital for businesses, particularly during times of high dorminal interest rates, for many of them, it is the best that is available. The dominant suppliers of finance are the commercial banks, and it is most known form of overdrafts which are more flexible and convenient than long term loans and they are usually cheaper.
Other more specialized forms of finance, such as leasing, hire purchase and factoring are also available mostly from the merchant banks. While over the years, most banks have been able to meet the required level of lending to the indigenous borrowers, they were unable to meet the prescribed percentage reserved for small and medium enterprises.
According to CBN annual reports, actual lending by commercial banks to SMEs for the fiscal years of 1989, 1990 & 1991 were N185 million, N206.7 million and N351.3 million respectively. These compares with commercial bank aggregate loans and advances of N8.6 billion, N10.3 billion and N11.1 billion for 1989, 1991 respectively; representing a percentage allocation to SMEs for the 3 years of 21.5 percent, 20 percent and 3.16 percent respectively.

2.2 CHARACTERISTICS AND FEATURES OF SMES
There are a whole lot of enterprises which fall under small scale in Nigeria. They include;
1. Agro – Allied
2. Information and Communications Technology
3. Manufacturing
4. Educational establishment
5. Services
6. Tourism and leisure
7. Solid mineral
8. Construction
And any other activity that may be determined by the Bankers Committee from time to time.

FEATURES OF SMEs
1. It concentrates on the need of the immediate environment. By striving hard to satisfy the community in which it operates.
2. Rate of failure is high because it is mostly dominated by sole traders who are often reluctant to invest much in some profitable business ventures thereby retarding future growth.
3. The amount of capital available to the SMEs affects its expansion. They depend on loans from financial institution for the initial take off and running of business.
4. Due to the low level of education of the entrepreneur, business skill, marketing strategies and techniques are inadequately explored. They do not organize and attend managerial short
5. Courses to broaden their knowledge in business opportunities.
6. Organizational structure or hierarchy of SMEs is too short. Line of communication is one way only.

2.3 CHARACATERISATION OF SMALL AND MEDIUM
ENTERPRISES.
SMEs are variously defined in Nigeria, as in other economies, on the basis of one or all of the following:

(a) The size of amount of investments in assets, excluding real estate.
(b) Their total annual turnover, and
(c) The number of employees.
Within this framework, the characterization or the classification of enterprises as “medium” and “small” naturally varies from one economy to another. And from one period to another in the same economy. In Nigeria, the National Council of Industry, under the Federal Ministry of Industries, periodically revises the classification of SMEs. Bank of Nigeria and the Nigerian Association of Small Scale Industries (NASSI), adopt classifications that vary from those of the Federal Ministry of Industries. There is however, greater concurrence of opinion when it comes to defining SMEs in terms of assets values than on any other basis. This is because in case of an economic downturn, the impact on turnover and the number of people employed is greater than the impact on assets value. For instance, during a depression, there is a tendency for turnover to fall substantially and the number of employees to drop, but assets value may remain unchanged.
From table 2 below, SMEs are divided into Medium Scale (MSE), Small Scale (SSE) and Micro Enterprise (ME). The Federal Ministry of industries defines a medium scale enterprise as “Any company with operating assets less than 200 million, and employing less than 300 persons”.
A small – scale enterprise, on the other hand is one that has total assets less than 500 million, with less than 100 employees. Annual turnover is not considered in its definition of an SME.
The National Economic Reconstruction Fund (NERFUND) defines a SSE as one whose total assets is less than 10 million, but made no reference either to its annual turnover or the number of employees. These and other definition of NASSI, the National Association of Small and Medium Enterprises (NASME), the Central Bank of Nigeria (CBN) and other institutions are indicated in table 2.
TABLE 2:
Definition of SME by Nigerian Institutions

Asset Value (M)
Asset Turnover (M)
No. of employees
Institution
MSE
SSE
ME
MSE
SSE
ME
MSE
SSE
ME
Fed. Min. of Indus.
<200
<50
n.a
n.a
n.a
n.a
<300
<100
<10
Central Bank
<150
<1
n.a
<150
<1
n.a
<100
<50
n.a
NERFUND
n.a
<10
n.a
n.a
n.a
n.a
n.a
n.a
n.a
NASSI
n.a
<40
<1
n.a
<40
n.a
n.a
3-35
n.a
NASME
<150
<50
<1
<500
<100
<100
<100
<50
<10

Source: World Bank, SME Country Mapping 2001.

For ease of definition and in other to cover all classes of SMEs, this research will adopt the Federal Ministry of Industries definition.
In addition to these definitions, the SME sector can also be categorized in terms of cluster classifications as summarized in table 3.
TABLE 3:
SME cluster classification

Informal clusters
Organized clusters
Innovative clusters
Size of firms
Micro
Small scale
Medium scale
Skills
Low
Medium
High
Technology
None
Low
Medium to high
Innovation
Little
Medium
Medium
Competition
High
High
Medium to high
Products
Retail, Arts and Crafts, Textiles services, e.g. – Salons, Tailoring.
Manufacturing, Chemicals and Pharmaceuticals Mining,Organized Retail
Telecom, IT, specialized retail service e.g. - restaurants, entertainment
Markets
Local
Local, National West Africa
Local and National
Links with Consulting Organizations and Support Institutions
None
Limited: in – house technical training and some routine functions e.g. – Legal, Management and Technical Consultancy.
Extensive
Characteristics
Uneducated but dynamic. Sole ownership
Have technology competence, engage in training and invest in apprenticeship system. Basic education at the very least. High School Leaving Certificate or Trade Technical Certificate
Undertake technology upgrading design adaptations in response to market. Highly educated, often with a University degree or higher.


2.4 IMPORTANCE OF SMALL AND MEDIUM ENTERPRISES
The importance of SMEs cannot be over emphasized. It could be described as the pivot of business venture as most industrialized Nations of the world today started from the scratch.
In Nigeria, small businesses are very important to both private and public sectors of the economy. To the former, it satisfies the immediate need of the potential consumers, and to the latter, it has laid the foundation that serves as a spring board for the formation of the medium and large businesses which has enhanced the society’s standard of living.
According to the Industrial Research Unit (IRU), the following are the importance of Small Scale Enterprises in Nigeria.

1. TOOLS FOR ECONOMIC GRWOTH: - The decision of a businessman is an effort to solve the problem(s) confronting the society on a small scale.
2. EMPLOYMENT OPPORTUNITY: - This helps to arrest unemployment problem. The rural – urban drift has been minimized as a result of SMEs.
3. SKILL ACQUISITION: - This is guaranteed through efficient management as it is often the deciding factor in the success or failure of a business.
4. INDEPENDENCE: - Less reliance on imported goods that can be produced locally. This serves the government from importation problems.
5. INNOVATION AND CREATIVITY: - SMEs are important source of innovation and creativity and they have lower cost of operation than large firm. This has served as a breeding ground for entrepreneurship.

2.5 FORMS OF SMALL SCALE ENTERPRISES
According to C.C.S. Okeke, there are basically four recognized forms of SMEs;
1. Sole Proprietorship
2. Partnership
3. Co – Operative Societies
4. Limited Liability Companies

1. SOLE PROPRIETORSHIP
This is a one man business. His functions includes one of organizing and decision making on the location of the business, capital procurement for the business and above all he bears the ultimate risk of the business.

ADVANTAGES
1. He enjoys privacy of his business. His record and account are not disclosed to the public.
2. He has an inter-personal relationship with his employees and can discuss his problems with them.
DISADVANTAGES
1. He bears the risk all alone.
2. limited expansion due to capital inadequacy.
3. No advantage of large scale production.
4. Business continuity is not guaranteed after his death.

2. PARTNERSHIP
One of the way through which a sole proprietor can expand his business is to turn it into partnership. The Partnership Act of 1890 set down in general terms the circumstances in which persons are regarded as been in partnership and the legal requirement of such arrangement .In setting up partnership, there must be at least two persons and at most twenty persons.

ADVANTAGES
1. There is more resources for expansion .This is because member contribute money for running the business. This is an added advantage over the sole proprietorship which’s chances of expansion is limited.
2. Risk of business is shared among the partner in their agreed profit and losses sharing ratio.
3. Since the administrative process is shared, the business stand a better chance of efficient running and management.

DISADVANTAGES
1. In case of business failure, there is the disadvantage of unlimited liability to be borne by the partner with the exemption of others whose liabilities are limited
2. Misunderstanding may arise as people of different business interest may come together to form partnership.
3. The business may not continue due to death of a member or the withdrawal of some members from the partnership.
3. CO-OPERATIVE SOCIETY

In Nigeria and in many other West African countries, there are many type of a co-operative society. There are the consumer’s and the producer’s co-operative society.
A consumer’s co-operative society is a business association of consumers who pull their resources together to purchase goods on wholesale basis, store and resell the goods to non – members at the prevailing retail prices.
A producer’s co-operative society on the other hand is an association of producers. They pull resources together to effect a large scale production. It is most common in the agricultural sector where farmers form these societies to effect large scale production.
A third however is the credit and thrift co-operative society where the low income earners who find difficulty in savings come together.



ADVANTAGES
i. Members have their common interest to protect, so they work hard to achieve profit which still accrues to them.
ii. Purchases are made from the society by the members. The greater the purchase, the greater the share of profit to members.
iii. It is democratic in nature as each member has a right to vote. This gives them a sense of belonging.

DISADVANTAGES
i. Elected members may lack managerial skills required for efficient management.
ii. Non restriction of members may allow people with questionable character to gain membership. This can lead to the down fall of the society.

4. LIMITED LIABILITY COMPANY (JOINT STOCK)
This is a unified association of individuals for achieving a particular objective while carrying on business activities. It comprises mainly the shareholders who bear the business risk. It is a separate legal entity and its membership ranges from two to fifty for private, and seven people upwards for public companies.

ADVANTAGES
i) The shareholders enjoy the advantage of their properties not being sold in case of liquidation.
ii) Expansion is easier as capital is raised from different sources.
iii) There is perpetual succession as the death of a member does not affect the business continuity.

DISADVANTAGES
i) No privacy as all records and statement of accounts are made public.
ii) No tax advantage as with sole proprietorship
iii) Owners are devoid of management of the business.

2.6 ISSUES IN BUSINESS FINANCING
It is necessary to generally comment on some fundamental issues that affect the funding of business operations. Three of such issues that deserve attention in this research are;

i. Determining the amount and type of funds required
ii. Defining the relevant opportunity, set of sources, and instruments for funding available to a business.
iii. Determining the appropriate steps to take to procure the required fund.

2.7 ASSESSMENT OF FINANCIAL NEEDS
The first task in business financing is to access the financial requirement of the business both in terms of the amount and in terms of the structure of fund needed.
The typical business requires two types of funds. They are:
(1) Capital Investment Fund: - These are required for the acquisition of fixed assets like lands, buildings, plants, machinery and equipment.
(2) Working Capital Funds: - These are short term funds required to finance the routine operation of a business to buy raw materials, to pay salaries and wages and to procure office supplies. Adequate arrangement must be made for both types of funds, if project implementation difficulties are to be avoided.
Many businesses suffer in Delta State because of inadequate provision of working capital. Working capital is the blood stream which sustains life in business operations. If the flow of that blood is not maintained at optimum levels, corporate operations will grow anaemic and become vulnerable to all forms of avoidable difficulties.
2.8 SOURCES OF FINANCE
Sources of finance can either be internal or external. The former refers to personal saving whereas the latter are the savings of others.
In Nigerian and many other developing countries of the world, capital for investment is generally from traditional sources. More modern sources of finance are through the credit schemes, the commercial banks and other specialized institutions.

TRADITIONAL SOURCES OF FINANCE
i) Personal Savings: - In going into business for oneself, one source of money to invest will be from personal savings. An advantage of using this money is that no interest has to be paid on it.
One thing to note here is that personal savings consist of everything of value possessed by the individual. E.g. personal property, which can be used as collateral in obtaining loan from banks.
ii) Loan From Relatives: - This refers to funds obtained from relatives as well as friends and close associates. It usually comes in the form of interest free loans which are on short term basis. It can also be in the form of gifts both in cash and in kind directed at improving the working capital condition or improving the capital base of the business.
iii) Osusu (Thrift):- This is an association in which members contribute stipulated amount of money on a regular basis and money collected can be;
(a) Passed over to members in rotation until every member gets.
(b) Member can apply for interest free loan whenever the need arises.
(c) Amount collected less commission is returned to the members at the end of the stipulated period.

MODERN SOURCES OF FINANCE
i) Commercial Bank: - Banks endeavour to invest in projects which are economically feasible and viable. Unfortunately, most Small Scale enterprises are unable to meet up with these requirements. This is because most Small Scale businesses do not carry out feasibility studies and lack the necessary managerial expertise.
However, owing to government’s policies of rapid development and industrialization, the banks have been increasingly pressurized to lend long term loan to small scale enterprises.
ii) Credit Institutions: - They are in the form of credit schemes set up in all the state of the federation by the various governments in order to give loan to small scale enterprises. The procedure for the granting of the loan is so unnecessarily long that small scale business owners are discouraged.
iii) Hire Purchase: - This provides the hirer the use of an asset coupled with option to purchase. It has become a convenient form of finance for small scale enterprises created by the hire purchase act of 1965, and by this source, small scale enterprises can enter into hire purchase agreement whereby they can both obtain the use of an asset and make instalmental payments without having to incure a large capital outlay.
iv) Leasing: - This is a situation where a person known as the lessee pays rental to the owner known as the lessor for an asset and obtain the use of the asset for a period of time, without the right of ownership. Leasing as a method of procuring asset is probably the most significant development that has taken place in the field of finance. Originally, the emphasis was on real estate leasing, but during the past years, firms have been able to lease any type of asset. It is one of the major methods of external and modern financing being used by SMEs.
v) Specialized Institutions. (Development Banks: - In Nigeria, there are three specialized financial institutions from which small scale enterprises have benefited in varying degrees. These are;

a) Nigerian Industrial Development Bank (NIDB)
b) Nigerian Bank for Commerce and Industry (NBCI)
c) Nigerian Agricultural and Co-operative Bank (NACB)
2.9 REQUIREMENTS OF BANKS FOR GRANTING LOANS
The necessary requirements for the granting of loans to SMEs are as listed below.
a) Collaterals: - Business owners who have a high credit standing, do much of their borrowing in an unsecured basis. Collaterals may include improved real estate. Life insurance policies with cash surrender value or marketable securities are often used while securing loans.
b) Deposit Balance: - The amount of deposit balance standing to the customers’ credit will determine how much loan a banker can grant to SMEs. Most times, SMEs have some good deposit balance.
c) Economic Conditions: - The upward and downward turn of the society’s economic condition in most cases determine the lending rate and condition of giving loans to banks.
d) Past Experience: - This is one key factor that banks take into consideration when they have go give business owners loan.

2.10 PROMOTIONAL ACTIVITIES BY GOVERNMENT
The government policy on SMEs was spelt out in the country’s second National Development Plan (1970 – 1974). Where it was stated that “In furtherance of government policy to increase rapidly the present level of indigenous ownership and participation in manufacturing active support will be given to the development of SMEs”.
However, the government promotional activities include those provided by its agencies and schemes such as;
a) Industrial Development Centre (IDC):- Their main aim is to provide free consultative and extension services as well as managerial skill training for proprietors, managers, and technical staff of SMEs.
b) Small Scale Industrial Credit Scheme: - The SSCI was established to ease financial problems of SMEs. Their funds are normally in form of advances from federal and state government. Their loans are usually given under liberal conditions.
c) Income Tax Relief Act: - This is in decree number 22 of 1971. This act encourages the establishment of industries considered to be beneficial to Nigerians. The act granted tax relief to pioneer industries. It attracts foreign capital to Nigeria in the development of her natural resources and expanding her industrial capital.
d) Small and Medium Industries Equities Invest. Scheme: - SMIEIS is a scheme whereby banks can contribute ten percent of their annual profit before tax (PBT) for ploughing into the financing of SMEs.
e) Small and Medium Industries Development Agency: - SMIDA is an umbrella body or agency that was formed to coordinate the development of the SME sector.
2.11 THE IMPACT OF NATIONAL DEVELOPMENT PLANS ON
SMALL AND MEDIUM ENTERPRISES.
Since 1946, small scale enterprises have been accorded high priority by the federal and state governments. For example, the ten - years plan of development. (1946 – 1955), the five – years national development plan: 1960 – 1964; 1970 – 1974; 1975 – 1980; 1981 – 1985; the structural adjustment programme (SAP) – 1986, the establishment of the national directorate of employment, (NDE) – 1987, the national economic reconstruction fund (NERFUND) 1989 and the establishment of financial institutions.
The above was seen as a sine-qua non in the fact that the Large Scale Enterprise (LSEs) have failed to accelerate the pace of economic development in Nigeria because of the multinational control and the recognition of the significant importance of SSEs in terms of employment opportunity generation, increased and intensive utilization of locally available raw materials, local technology development, the contribution to gross domestic product (GDP) etc.
Unfortunately, despite the above recognition and the various government’s effort at improving SMEs through the different development plans, economic programmes and policies, SSEs are still in a state of “POOR” and “EPILEPTIC” condition. It is as a result of this that we begin to wonder what the impact of these policies has been on the growth and survival of SMEs in order to help fine – tune future policies to constitute strategies for the achievement of its aims.
This essentially is the kernel of this research. The researcher attempts to find and answer to the attendant question as to whether policies in and all other schemes erected by the government constitute strategies for their achievement or whether the various hypothesis advanced, policies formulated and programme designed are mere academic exercises.
2.12 PROBLEMS OF MANAGING SMEs IN NIGERIA
1. An inadequate credit facility obstructs industrialization particularly for local producers. Commercial and merchant bankers are usually reluctant to lend to small businesses due to their inability to repay such loans.
2. Because of inadequate infrastructures, there is increase both in the initial and operational cost of running SMEs.
3. An inadequate local raw material forces the infant industries to depend on imported raw materials which are costly and which takes time to get to hand.
4. Usually, entrepreneurs who engage in SMEs do not have appreciable technological background or experience due to the lack of training or know – how.
5. Resistance of most proprietors to change and adapt to the dynamic nature of the society poses another problem. Managers and proprietors for example, may not appreciate the introduction of new machines for production.
6. Entrepreneurs find problems in marketing their products as well as the techniques to identify proper distribution channels.
CHAPTER THREE
METHODOLOGY
3.1 RESEARCH DESIGN
The research methodology focuses on the methods adopted in collecting and analyzing data in the course of the study.
This chapter presents the population sample, sampling methods, research instruments, validity and reliability of instruments and the data analysis techniques or methods as well as the designing of the questionnaire.

3.2 POPULATION SAMPLE
For the purpose of this study, the population is defined as all the operators of Small and Medium Enterprises (SMEs) in Isoko North Local Government Area.

3.3 SAMPLING METHODS
As a result of the need to make sure that the chosen sample represents the population and to achieve randomness the simple percentage method of analysis will be used or the descriptive analysis where necessary.
The size and nature of the population used makes it impossible for every one that operates a SME to have an equal chance of being selected. Although the probability sampling method would have been more accurate and scientific but the non-probability sampling method is however used because it is most suitable and practicable in this circumstance.
Furthermore, because of the number of SME operators that could not be reached the sample size and its element are based on personal judgment.

3.4 RESEARCH INSTRUMENT
Questionnaire is usually designed in two folds, comprising of open-ended and close ended questions. In close ended questions, the response called for are limited, this is because the questions has been structured and called for specific answers which must be chosen from the alternatives that respondents are provided with.
As for the open ended questions, respondents are at liberty to structure their responses to the questions as they choose.

3.5 VALIDITY AND RELIABILITY OF INSTRUMENT
We can have validity of findings and reliability of instruments. The two shall be made use of, especially the latter; thus ensuring adequate coverage by the instrument as well as designing questionnaire.
On the issue of reliability data that is collected for research, both primary and secondary must provide findings that will be consistent and that can provide similar result when reproduced. The measuring instrument must be stable, dependable and predictable for it to be reliable.

3.6 DATA ANALYSIS TECHNIQUE
For the purpose of this research, in the analysis of the data collected, the rank correlation method will be used. This is a measure of the correlation that exists between the two sets of ranks, a measure of the degree of association between the variables that we would not have been able to calculate otherwise.

3.7 STATEMENT OF HYPOTHESIS
Ho: Ps = 0 Null Hypothesis:- There is no rank correlation in the population (negative); that is, SMEs have succeeded as a result of finances available to them other than government agencies, institutions and schemes.
Hi: Ps > 0 Alternative Hypothesis:- The population rank correlation is positive; that is, SMEs have succeeded as a result of finances available to them like government agencies, institutions and schemes.
CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
4.1 INTRODUCTION
This chapter presents the findings of the research conducted through the distribution of questionnaires to eighty (80) operators of SMEs from ten (10) different communities in Isoko North Local Government Areas. This is the sample of the population.
The first session presents a detailed analysis of the responses of some significant questions which is then followed by the application of the rank correlation data analysis technique to see the relationship between variables that has to do with the hypothesis that the researcher wants to test.

4.2 DATA ANALYSIS
QUESTION
What type of business are you operating?
TABLE I
OPTIONS
NO. OF RESPONDENTS
PERCENTAGE
Sole proprietorship
65
81.25
Partnership
15
18.75
Co-operative society
-
-
Total
80
100

From table 1, it can be deduced that a great percent of the operators of SMEs in Isoko North Local Government Area are Sole proprietors. Only 18.75 percentage of the population operates as Partnership ventures and this does not give room for expansion as the death of the Sole Proprietors in most cases is the end of such businesses.
QUESTION
What was the source of your initial capital?
TABLE II
OPTIONS
NO. OF RESPONDENTS
PERCENTAGE
Personal Savings
50
62.5
Loans from Friends and Relatives
20
25
Bank Loan
-

Loan from Government Agencies
10
12.5
Total
80
100

From table II, it can be deduced that 62.5% of the population got their initial source of capital from personal savings despite the fact that they were aware of the different government schemes and institutions from where they can get loans.
Furthermore, 25% of the population got their initial source of capital from friends and relatives and non of the respondents ever got a loan from the bank, though 10% got loans from government agencies.
QUESTION
Have you ever felt the need to expand? If yes, how?
TABLE III
OPTIONS
NO. OF RESPONDENTS
PERCENTAGE
Bank Loans
10
12.5
Personal Savings
42
52.5
Borrowing from Friends
28
35.0
Loan from Government Schemes
-
-
Total
80
100

From the above table, it can be seen that the operators of SMEs in Isoko North has felt the need to expand at one time or the other, and 52.5% of them intend to expand through the ploughing back of savings made from the business, and borrowing from friends come as the second most importance way through which they feel they can expand.
It is observed that getting loans from bank for the sake of expansion is not given much credence by SME operators and getting loans from government agencies and schemes is not worth considering at all.

QUESTION
Are you aware of government schemes as regarding SMEs in Delta State?
TABLE IV
OPTIONS
NO. OF RESPONDENTS
PERCENTAGE
Yes
61
76.25
No
19
23.75
Total
80
100

It can be seen from table IV that 76.25% of the population of SME operators in Isoko North is aware of the different schemes that have been put in place to assist them and 23.75% are not aware. But out of those that are aware, the researcher intends finding out why more has ever thought that getting loans from these schemes or agencies could serve as an avenue for expansion.



QUESTION
Have you ever gone to any of these government agencies, institutions or specialized schemes established to assist SMEs?
TABLE V
OPTIONS
NO. OF RESPONDENTS
PERCENTAGE
Yes
51
63.75
No
29
36.25
Total
80
100

Out of the entire population that was used for this research i.e. the sample population, the researcher discovered from the questionnaire administered that 63.75% of the operators of SMEs in Isoko North has gone to government agencies, institutions and specialized schemes at one time or the other to seek for loan and 36.25% has not attempted it at all. The researchers want further to discover the percent of these 63.75% that were successful and those that were not.


QUESTION
How much was your initial capital?
TABLE V
OPTIONS
NO. OF RESPONDENTS
PERCENTAGE
N500,000 and Below
30
37.5
M500,000 and Above
50
62.5
Total
80
100

4.3 TESTING OF HYPOTHESIS
To test for our hypothesis, the rank correlation data analysis technique will be used.
Rank correlation is a measure of the correlation that exists between the two set of ranks, a measure of the degree of association between the variables that we would not have been able to calculate otherwise.
To test the hypothesis stated, table V will be used which represent the ranking of the amount of initial capital into two ranks, N500, 000 and below and N500, 000 and above.
For the first rank of those whose initial capital was N500, 000 and below, the researcher discovered through the questionnaire that out of the 30 respondents, 20 of them got their source of capital from sources other than the government agencies. This therefore gives.

For the second rank, 35 of the 50 respondents whose initial source of capital is above N500, 000 got their money from sources outside government agencies. This gives us

Using rank correlation therefore, we have
Co-efficient of rank correlation
Where
rs = Co-efficient of rank correlation
n = Number of paired observation
= Notation meaning “the sum of”
d = Difference between the ranks for each pair of observation

Using table further, we have,
RANK I
RANK II
DIFF B/W RANKS
(DIFFERENCE)2
30
37.5
-7.5
56.25
50
56.0
-6.0
35.0
92.25

Using the data in the table above and the equation of rank correlation, the rank correlation co-efficient of this problem can be calculated thus;
A correlation coefficient that is negative represents a perfect universe correlation. This therefore verities the fact that SME operators have succeeded as a result of finances available to them other than government agencies institutions and schemes.
CHAPTER FIVE
5.1 SUMMARY OF FINDINGS
This research is summarized in five chapters. Chapter one focused on the introductory part of the research which includes background to the study, statement of the problem, objective of the study, significance of the study, scope of the study, statement of hypothesis, methodology, and limitation of the study and definition of terms.
The second chapter focused on review of related literature: historical development of SMEs, characteristics and features of SMEs, characterization of SMEs, importance of SMEs, forms of SMEs, issues in business, assessment of financial needs, sources of finance, requirement of banks for granting loans, promotional activities by government, the impact of national development plans on SMEs and the problems of managing SMEs in Nigeria.
Chapter three focused on the research methodology. Chapter four focused on the analysis of the data generated. The hypothesis was also tested in this chapter.
Chapter five contains the summary of the whole research, conclusion and recommendation.

5.2 CONCLUSION
The research was on financing of Small and Medium Enterprises in Delta State with particular reference to operators of SMEs in Isoko North Local Government Area.
SMEs in general is found to be operated as sole proprietorship in this research, and some others as partnership and this does not give room for expansion as the death of the owner in most cases is the end of such business. Furthermore, because of the nature in which they are operated, their source of finance is usually very small and usually from personal savings and loans obtained from friends and relatives.
The researcher also discovered that though the operators of SMEs in Isoko North have felt the need to expand, they only intend to do so through the ploughing back of profit made from borrowing. Though they are aware of bank loans and other government schemes, they do not give it much credence, chiefly because of the negative outcome they have experienced at one time or the other.
A handful of the operators of SMEs in Isoko North are also uneducated and uninformed and as a result, still experience the problem of how SMEs can be financed for maximum productivity.
Based on the above stated conclusion, the researcher will want to make the following recommendation.

5.3 RECOMMENDATION
The researcher strongly believes that if the outlined recommendations are worked upon by the government agencies, banks, institutions and the operators of SMEs, financing SMEs in Delta State will be lot easier and more productivity will be achieved.
1. The government, stock exchange and financial institutions should be actively involved in educating SME promoters of the various sources of finance (especially equity type) and benefits accruable from these sources through seminars, conferences and workshops.
2. Bank should be involved in providing venture capital to SMEs. They should also be involved in building such enterprises from “cradle to conglomerates”.
Contemporary framework whereby banks exercise non-challant attitude to trouble enterprises and are only interested in appointing receiver when such business failed should be modified. Rather banks should be interested in bailing out such enterprises by injecting capital to help restore management problems.
3. The classification of the SMEs by type, viz: manufacturing, commercial and services should be made use of as a form of ranking in credit allocation. For instance, the manufacturing section should be given priority in credit allocation. This could be followed by services (technical, artisans and others) and commercial activities.
4. Existing SMEs and indigenous small manufacturing concerns with high growth potential (soap-making, paper/cellophane bags, kernel crushing firms, e.t.c.) should break away from present egocentric orientation of smallness by seeking quotation on the second-tier security market thereby requiring potential benefits arising from increased capital and listing. Entrepreneurs of small firms with slow growth rate would have to improve their performance before seeking to be listed.
5. Financial institutions that deal with SMEs should re-assess the variables by which they attempt to judge the credit worthiness of the enterprises. These institutions must recognize that rigid organizational structures in SME of about 100 employees could be a handicap rather than an asset.
6. Industrial development centres which was originally set in 1961 for the purpose of the promotion of SMEs in Nigeria should organize special follow-up training programmes for entrepreneurs that will enhance their performance.
7. Small and Medium Industries Development Agency (SMIDA) which was formed to co-ordinate the development of the SME sector should map out relevant training for SME along technical, accounting, legal, managerial and marketing lines.
8. The Delta State government should set up a unit in the Ministry of Commerce and Industry to be known as “Pre-investment Guidance Unit”. The unit should be charged with the responsibility of offering advice and guidance to new investors.
9. The government should give a wider publicity of the small scale industries credit scheme. More so, all the bureaucratic laws surrounding the scheme should be uplifted to encourage patronage by SME operators.

BIBLIOGRAPHY

Ade, O.T. (1995) “Management of Small and Medium Scale Enterprises in Nigeria”. Ibadan, Verity Printers Limited.

Adejube, M.A.(1987) “The Impact of Small Scale Industries on Nigerian Economy”. Ibadan Reprint Industries Press.

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Asiodu, P. (1972). “Industrial Policy and Incentives in Nigeria”, The Nigerian Journal of Economics and Social Studies, (NJESS), Vol 9, No. 2, Pp 161 – 164.

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Owualah, S.I. (1999). “Entrepreneurship in Small Business Firms”, Lagos, G – Mac Investment Limited.

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APPENDIX

QUESTIONNAIRE


Dept. of Bus. Admin.
Delsu, Abraka.
Nigeria.

This questionnaire is a part of a research project on the sources of finance available to operators of small and medium enterprises in Delta State.
You have been selected as one of the respondents for this purpose and you are to please answer the questions that follow honestly.
All information supplied would be treated as confidential and solely for this academic purpose.
Yours faithfully,

CHRIS AJAEGBA
INSTRUCTION

Please tick the right answer where appropriate, Yes or No, or fill in the blank space, as the case may be.

QUESTIONS
1. Date of filling:…….……………………………………………………
2. Gender: ………………………………………………………………...
3. What type of business are you operating? (a) Sole Proprietorship [ ]
(b) Partnership [ ] (c) Co-operative Society [ ].
4. How old is your business ?.....................................................................
5. What was the source of your initial capital? (a) Personal savings [ ]
(b) Loans from friends & relatives [ ] (c) Bank loan [ ] (d) Loan from government agencies [ ].
6. How much was your initial capital? (a) N500,000 and below [ ]
(b) Above N500,000 [ ].
7. Have you ever felt the need to expand? If Yes, through, (a) Bank loans [ ] (b) Personal Savings [ ] (c) Borrowing from Friends [ ]
(d) Loans from Government Agencies [ ].
8. Do you maintain any accounting system? Yes [ ] No [ ]
9. Are you aware of government schemes as regarding SMEs in Delta State? Yes [ ] No [ ]
10. Have you ever gone to any of the Government Agencies, Institution or Specialized Schemes established to assist Small Scale Business?
Yes [ ] No [ ]
What are some of the financial problems you normally face in your business?..................................................................................................
11. How do you hope to solve them?....................................……………...

Thank you.