Understanding the stock market
Stock Markets The term ‘Stock Market’ is commonly used to encompass both the physical location for buying and selling stocks as well as the overall activity of the market within a certain country.
When we hear an expression such as ‘The stock market was down today’ it refers to the combined activity of many stock exchanges. ‘Stock Exchange’ is the correct term for the physical location for trading stocks. Each country may have many different stock exchanges and usually a particular company’s stocks are traded on only one exchange, although large corporations may be listed in several different locations.
Stock exchanges exist throughout the world and it is possible to buy or sell stocks on any of them. The only restriction is the opening hours of each exchange. Stock markets closely follow the economic health of a country. When the economy is doing well the market is bullish. Bull markets occur during times of high economic production, low unemployment and low inflation. Bear markets, on the other hand, follow downtrends in the economy. Inflation and unemployment are rising and stock prices are falling.
Fluctuations in stock prices are also driven by supply and demand, which in turn are determined to a large extent on investor psychology. Seeing a stock rise in price may cause investors to jump on the bandwagon and this rush to buy drives the price even faster. A falling price can have the same effect. These are short term fluctuations. Stock prices tend to normalize after such runs.
The stock exchange is only one of many opportunities to invest. Other popular markets include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market.
The FOREX is the biggest (in terms of value of trades) investment market in the world. FOREX traders buy one currency against another and can profit from small changes in value. Most FOREX trades are entered and exited in one 24 hour span, and traders have to keep a close watch on the market in order to make profitable trades.
The Futures Market is a market of contracts to buy and sell goods at specified prices and times. It exists because buyers and sellers of goods wish to lock in prices for future delivery, but market conditions can make the actual futures contract fluctuate considerably in value. Most investors in the futures market are not interested in the actual goods – only in the profit that can be realized in trading the contracts.
The Options Market is similar to the Futures Market in that an option is a contract that gives you the right (but not the obligation) to trade a stock at a certain price before a specified date. They can be traded on their own or purchased as a form of insurance against price fluctuations within a certain time frame.
All three of these markets are quite risky and require considerable knowledge and experience to prevent substantial losses. They also require close attention to market movements. Stocks, on the other hand, are less risky because movements of the market are usually gradual. Although short term investment strategies are possible, most view stocks as long term investments.
Types of Trading
The stock market is a reliable indicator of the actual value of companies which issue stock. Values of stocks are based on verifiable financial data such as sales figures, assets and growth. This reliability makes the stock market a good choice for long term investing – well-run companies should continue to grow and provide dividends for their stockholders.
The stock market also provides opportunities for short-term investors. Market skittishness can cause prices to fluctuate quite rapidly and investor psychology can cause prices to fall or rise – even if there is no financial basis for these variations.
How does this happen? News reports, government announcements about the economy, and even rumours can cause investors to become nervous or to suspect that a company will increase in value. When the price starts to fall or rise, other investors will jump on the bandwagon, causing an even faster acceleration in price. Eventually the market will correct itself, but for savvy short-term investors who watch the market closely, these price changes can offer opportunities for profitable trading.
Short term traders are divided into 3 categories: Position Traders, Swing Traders, and Day
Traders.
Position Traders
Position trading is the longest term trading style of the three. Stocks could be held for a relatively long period of time compared with the other trading styles. Position traders expect to hold on to their stocks for anywhere from 5 days to 3 or 6 months. Position traders are watching for fundamental changes in value of a stock. This information can be gleaned from financial reports and industry analyses. Position trading does not require a great deal of time. An examination of daily reports is enough to plan trading strategies. This type of trading is ideal for those who inve
st in the stock market to supplement their income. The time needed to study the stock market can be as little as 30 minutes a day and can be done after regular work hours.
Swing Traders
Swing traders hold stocks for shorter periods than position traders – generally from one to five days. The swing trader is looking for changes in the market that are driven more by emotion than fundamental value. This type of trading requires more time than position trading but the payback is often greater. Swing traders usually spend about 2 hours a day researching stocks and executing orders. They need to be able to identify trends and pick out trading opportunities. They usually rely on daily and intraday charts to plot stock movements.
Day trading is commonly thought of as the most risky way to play the stock market. This may be true if the trader is uneducated, but those who know what they are doing know how to limit their risk and maximize their profit potential. Day trading refers to buying and selling stock in very short periods of time – less than a day but often as short as a few minutes. Day traders rely on information that can influence price moves and have to plot when to get in and out of a position. Day traders need to be rational and analytical. Emotional buyers will quickly lose money in this type of trading. Because of the close attention needed to market conditions, day trading is a full-time profession.
Stock Brokers
Brokers handle most of the buying and selling on the stock market, and the average investor will use a brokerage service to handle his trades. There is a broad range of brokerage services available. There are brokers who offer many services for aiding their clients meet their investment goals. These ‘full-service brokers’ can give advice about which stocks to buy and sell and often have full research facilities for analyzing market trends and predicting movements.
These perks are not free – full service brokers charge the highest commission rates in the industry. Whether or not you decide to use a full-service broker depends on your level of self-confidence, your knowledge of the stock market and the number of trades you regularly make.
Investors who wish to save on commission fees can use a ‘discount broker’. These brokers charge much lower commissions but don’t offer advice or analysis. Investors who like to make their own trading decisions and those who make many trades often use discount brokers for their transactions. Some traders may use both types – there is no reason why you can’t have two brokers.
The least expensive way to trade stocks is usually with an online brokerage. Both full-service and discount brokers usually offer discounts for orders placed online. Some brokers operate exclusively online and offer even better rates.
No matter what type of broker you choose, you must first open an account. Each broker sets their own requirements for maintaining an account balance but it is usually between $500 and $1000. When choosing a broker look at the fine print and find out about the fees involved. Some brokers charge an annual maintenance fee while other charge fees whenever your account balance falls below the minimum.
There are two basic types of brokerage accounts. A ‘cash account’ offers no credit – when you buy you pay the full amount of the stock price. A ‘margin’ account, on the other hand, allows you to buy stock ‘on margin’ – the brokerage will carry some of the cost of the stock. The amount of margin varies from broker to broker but the margin must be protected by the value of the client’s portfolio. If the portfolio falls below a specified amount the investor will have to add more funds or sell some stock. Margin accounts allow investors to buy more stock with less cash thereby realizing greater gains (and losses). Because they involve more risk than cash accounts, margin accounts are not recommended for inexperienced traders.
Before choosing a particular broker the investor should carefully consider his needs. Does he wish to receive advice about which stocks to buy? Is he uncomfortable making trades on the Internet? If so, he should go with a full-service broker. Technology savvy investors who have the knowledge and confidence to make their own trading decisions are better off with a discount broker.
After deciding which type, compare a few competitors. There can often be significant differences in costs when all the annual fees and brokerage rates are factored in. Try to gauge how many trades you expect to make in a year, how much cash you can deposit into your account, whether you wish to use margin accounts and which services you need. This information will allow you to compare the actual costs of various brokers.
Penny Stocks
Penny stocks are low-priced stocks All of these factors – low price, lack of standards, and lack of stability – make penny stocks one of the riskiest investments around. It is true that if a company succeeds the payoff will be great, but the vast majority of penny stocks end in bankruptcy. Other reasons why penny stocks are risky include...
- Lack of information about the company. Companies listed in the Pink Sheets or the OTCBB do not have to issue financial statements. Most companies also have little reportable history.
- Low liquidity. Penny stocks are infrequently traded, so finding a buyer may be difficult. The price may have to lowered substantially to interest someone in buying the stock.
- Potential fraud. Due to their unregulated nature, penny stocks are often used by con artists who sell them through spam email or off-shore brokers.
So penny stocks are risky but are there any benefits to them?
Not all penny stocks are frauds or companies facing bankruptcy. Some represent hard-working businesses that are struggling to meet the requirements to get listed on Nasdaq or the NYSE. Investing in these companies offers real growth potential – you have the opportunity to get in at the ground floor and ride all the way to the top.
The difficulty is finding which companies have this growth potential. Getting this information requires a lot of research and unless you are willing to take the time to personally investigate a company, you may again be the victim of fraud. Some companies specialize in offering ‘inside information’ about companies selling penny stock, but they may simply be fronts for pushing a particular stock on unsuspecting investors.
There are two ways to play the penny stocks – do research or play craps. The low cost of these stocks means that you will not lose a lot money if the company goes under, and as long as you are prepared to lose this money penny stocks can be an interesting and fun addition to any portfolio. It must be stressed, however, that penny stocks should only make up a small portion of any portfolio. The odds are that most penny stocks will end up in a total loss.
If you would like to buy penny stocks you need to find a broker that will place an order for you. Many brokers will not cover them because of the difficulties in tracking them, but some online brokers specialize in penny stocks. Regulations require brokers to receive written confirmation from the client concerning the transaction. The broker is also required to give the client a document outlining the risks of speculating with penny stocks.
Finally, the broker must disclose the current market price of the stock and the amount of compensation the firm receives for the trade. Monthly statements must be sent to the client detailing market value of each penny stock in the account.
Fundamental Analysis
Although the raw data of the Financial Statement has some useful information, much more can be understood about the value of a stock by applying a variety of tools to the financial data.
Earnings per Share
The overall earnings of a company is not in itself a useful indicator of a stock’s worth. Low earnings coupled with low outstanding shares can be more valuable than high earnings with a high number of outstanding shares. Earnings per share is much more useful information than earnings by itself. Earnings per share (EPS) is calculated by dividing the net earnings by the number of outstanding shares. For example: ABC company had net earnings of $1 million and 100,000 outstanding shares for an EPS of 10 (1,000,000 / 100,000 = 10). This information is useful for comparing two companies in a certain industry but should not be the deciding factor when choosing stocks.
Price to Earning Ratio
The Price to Earning Ratio (P/E) shows the relationship between stock price and company earnings. It is calculated by dividing the share price by the Earnings per Share. In our example above of ABC company the EPS is 10 so if it has a price per share of $50 the P/E is 5 (50 / 10 = 5). The P/E tells you how much investors are willing to pay for that particular company’s earnings. P/E’s can be read in a variety of ways. A high P/E could mean that the company is overpriced or it could mean that investors expect the company to continue to grow and generate profits. A low P/E could mean that investors are wary of the company or it could indicate a company that most investors have overlooked.
Either way, further analysis is needed to determine the true value of a particular stock.
Price to Sales Ratio
When a company has no earnings, there are other tools available to help investors judge its worth. New companies in particular often have no earnings, but that does not mean they are bad investments. The Price to Sales ratio (P/S) is a useful tool for judging new companies. It is calculated by dividing the market cap (stock price times number of outstanding shares) by total revenues. An alternate method is to divide current share price by sales per share. P/S indicates the value the market places on sales. The lower the P/S the better the value.
Price to Book Ratio
Book value is determined by subtracting liabilities from assets. The value of a growing company will always be more than book value because of the potential for future revenue. The price to book ratio (P/B) is the value the market places on the book value of the company. It is calculated by dividing the current price per share by the book value per share (book value / number of outstanding shares). Companies with a low P/B are good value and are often sought after by long term investors who see the potential of such companies.
Dividend Yield
Some investors are looking for stocks that can maximize dividend income. Dividend yield is useful for determining the percentage return a company pays in the form of dividends. It is calculated by dividing the annual dividend per share by the stock’s price per share. Usually it is the older, well-established companies that pay a higher percentage, and these companies also usually have a more consistent dividend history than younger companies.
The investor has many tools at hand when making decisions about which stocks to buy. One of the most useful of these is fundamental analysis – examining key ratios which show the worth of a stock and how a company is performing.
The goal of fundamental analysis is to determine how much money a company is making and what kind of earnings can be expected in the future. Although future earnings are always subject to interpretation, a good earning history creates confidence among investors. Stock prices increase and dividends may also be paid out.
Companies are required to report earnings on a regular basis and stock market analysts examine these figures to determine if a company is meeting its expected growth. If not, there is usually a downturn in the stock’s price.
There are many tools available to help determine a company’s earnings and its value on the stock market. Most of them rely on the financial statements provided by the company. Further fundamental analysis can be done to reveal details about the value of a company including its competitive advantages and the ratio of ownership between management and outside investors.
Financial Statements
Every publicly traded company must publish regular financial statements. These statements are available in printed form or on the Internet. All statements must include an income statement, a balance sheet, an auditor’s report, a statement of cash flow, a description of the business activities and the expected revenue for the coming year.
Auditor’s Report
The auditor’s report is one of the most important sections of the financial statement. The auditor is an independent Certified Public Accountant firm which examines the company’s financial activities to determine if the financial statement is an accurate description of the earnings. The auditor’s report contains the opinion of the auditor concerning the accuracy of the financial statement. A financial statement without an independent auditor’s report is essentially worthless because it could contain misleading or inaccurate information. An auditor’s report, although not a guarantee of accuracy, at least provides credibility to the financial statement.
Balance Sheet
Another important section of the financial statement is the balance sheet. This is a ‘snapshot’ as it were, of the financial condition of the company at a single point in time. The balance sheet shows the relationship between assets (cash, property and equipment), liabilities (debt) and equity (retained earnings and stock).
Income Statement
The income statement shows information about the revenue, net income, and earnings per share over a period of time. The top line of the income statement shows the amount of income generated by sales, underneath which the costs incurred in doing business are deducted. The bottom line show the net income (or loss) and the income per share.
Cash Flow
The statement of cash flow is similar to the income statement – it provides a picture of a company’s performance over time. The cash flow statement, however, does not use accounting procedures such as depreciation – it is simply an indicator of how a company handles income and expenses. A statement of cash flow shows incoming and outgoing cash from sales, investments, and financing. It is a good indicator about how the company is run on a day-to-day basis, how it handles creditors and from where it receives growth capital.
Technical Analysis
Technical analysis is the art and science of examining stock chart data and predicting future moves on the stock market. Investors who use this style of analysis are often unconcerned about the nature or value of the companies they trade stocks in. Their holdings are usually short-term – once their projected profit is reached they drop the stock.
The basis for technical analysis is the belief that stock prices move in predictable patterns. All the factors that influence price movement – company performance, the general state of the economy, natural disasters – are supposedly reflected in the stock market with great efficiency. This efficiency, coupled with historical trends produces movements that can be analyzed and applied to future stock market movements.
Technical analysis is not intended for long-term investments because fundamental information concerning a company’s potential for growth is not taken into account. Trades must be entered and exited at precise times, so technical analysts need to spend a great deal of time watching market movements.
Investors can take advantage of both upswings and downswings in price by going either long or short. Stop-loss orders limit losses in the event that the market does not move as expected.
There are many tools available to the technical analyst. Literally hundreds of stock patterns have been developed over time. Most of them, however, rely on the basic concepts of ‘support’ and ‘resistance’. Support is the level that downward prices are expected to rise from, and Resistance is the level that upward prices are expected to reach before falling again. In other words, prices tend to bounce once they have hit support or resistance levels.
Charts
Technical analysis relies heavily on charts for tracking market movements. Bar charts are the most commonly used. They consist of vertical bars representing a particular time period – weekly, daily, hourly, or even by the minute. The top of each bar shows the highest price for the period, the bottom is the lowest price, and the small bar to the right is the opening price and the small bar to the left is the closing price. A great deal of information can be seen in glancing at bar charts. Long bars indicate a large price spread and the position of the side bars shows whether the price rose or dropped and also the spread between opening and closing prices.
A variation on the bar chart is the candlestick chart. These charts use solid bodies to indicate the variation between opening and closing prices and the lines (shadows) that extend above and below the body indicate the highest and lowest prices respectively. Candlestick bodies are coloured black or red if the closing price was lower than the previous period or white or green if the price closed higher. Candlesticks form various shapes that can indicate market movement. A green body with short shadows is bullish – the stock opened near its low and closed near its high. Conversely, a red body with short shadows is bearish – the stock opened near the high and closed near the low. These are only two of the more than 20 patterns that can be formed by candlesticks.
Technical Analysis – Indicators and Patterns
When glancing at charts the untrained eye may simply see random movements from one day to the next. Trained analysts, however, see patterns that are used to predict future movements of stock prices. There are hundreds of different indicators and patterns that can be applied. There is no one single reliable indicator, but when taken into consideration with others, investors can be quite successful in predicting price movements.
Patterns
One of the most popular patterns is Cup and Handle. Prices start out relatively high then dip and come back up (the cup). They finally level out for a period (handle) before making a breakout – a sudden rise in price. Investors who buy on the handle can make good profits.
Another popular pattern is Head and Shoulders. This is formed by a peak (first shoulder) followed by a dip and then a higher peak (the head) followed again by a dip and a rise (the second shoulder). This is taken to be a bearish pattern with prices to fall substantially after the second shoulder.
Indicators
Moving Average
The most popular indicator is the moving average. This shows the average price over a period of time. For a 30 day moving average you add the closing prices for each of the 30 days and divide by 30. The most common averages are 20, 30, 50, 100, and 200 days. Longer time spans are less affected by daily price fluctuations. A moving average is plotted as a line on a graph of price changes. When prices fall below the moving average they have a tendency to keep on falling. Conversely, when prices rise above the moving average they tend to keep on rising.
Relative Strength Index (RSI)
This indicator compares the number of days a stock finishes up with the number of days it finishes down. It is calculated for a certain time span – usually between 9 and 15 days. The average number of up days is divided by the average number of down days. This number is added to one and the result is used to divide 100. This number is subtracted from 100. The RSI has a range between 0 and 100. A RSI of 70 or above can indicate a stock which is overbought and due for a fall in price. When the RSI falls below 30 the stock may be oversold and is a good time to buy. These numbers are not absolute – they can vary depending on whether the market is bullish or bearish. RSI charted over longer periods tend to show less extremes of movement. Looking at historical charts over a period of a year or so can give a good indicator of how a stock price moves in relation to its RSI.
Money Flow Index (MFI)
The RSI is calculated by following stock prices, but the Money Flow Index (MFI) takes into account the number of shares traded as well as the price. The range is from 0 to 100 and just like the RSI, an MFI of 70 is an indicator to sell and an MFI of 30 is an indicator to buy. Also like the RSI, when charted over longer periods of time the MFI can be more accurate as an indicator.
Bollinger Bands
This indicator is plotted as a grouping of 3 lines. The upper and lower lines are plotted according to market volatility. When the market is volatile the space between these lines widens and during times of less volatility the lines come closer together. The middle line is the simple moving average between the two outer lines (bands). As prices move closer to the lower band the stronger the indication is that the stock is oversold – the price should soon rise. As prices rise to the higher band the stock becomes more overbought meaning prices should fall. Bollinger bands are often used by investors to confirm other indicators. The wise technical analyst will always use a number of indicators before making a decision to trade a particular stock.
Bull Markets and Bear Markets
The stock market moves up and down every day, but when movements continue downwards for a period of time the market is referred to as a ‘bear market’. Upward moving markets are ‘bull markets’. If a particular stock is doing well, it is said to be bullish. If it is losing value it is bearish.
Bull and Bear are the terms to describe the general conditions of the stock market. These do not refer to short term fluctuations – a bear market is commonly understood as one where prices of key stocks have fallen in price by 20% or more over a period of at least 2 months. Even during a bear market, however, prices may increase temporarily. Bull markets are the opposite of bear markets – they are indicated by a rise in prices of key stocks over a certain period of time.
Usually stock market conditions reflect the state of the economy. During bull markets the economy is doing well, unemployment is low and interest rates are reasonable. Bear markets usually occur during times of economic slowdown. Investors lose confidence and companies may begin laying off workers. At the extremes, an exaggerated bear market can lead to a crash brought on by panic selling. An exaggerated bull market can be caused by over-enthusiasm of investors. It leads to a market ‘bubble’ that will eventually burst.
Although most money can be made during bull markets, there are also opportunities during bear markets. Knowing the characteristics of each type of market allows investors to profit from them. As would be expected, when the market is bullish investors wish to buy up stock. The economy is doing well and people have extra money which they wish to invest in stocks. This creates a situation of short supply which drives up prices even higher. During bear markets, on the other hand, prices are falling so investors wish to unload their stocks and put their money in fixed-return instruments such as bonds. As money is withdrawn from the stock market, supply exceeds demand which drives prices down even further.
It is easiest to make money during a bull market. Getting in right at the beginning will allow you to make the most profits. During a bull market any dips in the market are temporary and should soon be corrected. The upward rising prices can’t go on forever, though, so the investor needs to be able to gauge when the market reaches its peak and sell at that time.
Bear markets represent opportunities to pick up stocks at bargain prices. Getting in near the end of a bear market offers the greatest chance for profit. The prices will most likely fall before they recover, so the investor should be prepared for some short term loss. Short-selling is also an investment strategy during bear markets. Short selling involves selling stock that you do not own in the anticipation of further price drops, so that when it comes time to deliver you can buy the stock for less than you sold it.
Fixed return investments such as CAs and bonds can be used to generate income during a bear market. So called ‘defensive stocks’ are also safe to buy at any time. These include government owned utilities that provide necessities no matter what state the economy is in.
Trading Strategies
There are two basic ways to trade the stock market – shooting in the barrel or using strategies to determine which stocks to buy, when to sell, and how to protect your investment dollars. Needless to say, strategies outperform barrel shooting by a large margin. There are, however, hundreds of trading strategies to choose from. Of all of these there are a couple of tried and trued methods that have worked well for investors over many years. The beginning investor is advised to investigate some of these basic strategies and see for himself how they perform. New strategies can be explored once the basic ones are well-understood.
Hedging
Hedging is a way of protecting an investment by reducing the risks involved in holding a particular stock. The risk that the price of the stock will drop can be offset by buying a put option that allows you to sell at the stock at a particular price within a certain time frame. If the price of the stock falls, the value of the put option will increase.
Buying put options against individual stocks is the most expensive hedging strategy. If you have a broad portfolio a better option may be to buy a put option on the stock market itself. This protects you against general market declines. Another way to hedge against market declines is to sell financial futures like the S&P 500 futures.
Dogs of the Dow
This is a strategy that became popular during the 1990s. The idea is to buy the best-value stocks in the Dow Industrial Average by choosing the 10 stocks that have the lowest P/E ratios and the highest dividend yields. The companies on the Dow Index are mature companies that offer reliable investment performance. The idea is that the lowest 10 on the Dow have the most potential for growth over the coming year. A new twist on the Dogs of the Dow is the Pigs of the Dow. This strategy selects the worst 5 Dow stocks by looking at the percentage of price decline in the previous year. As with the Dogs, the idea is that the Pigs stand to rebound more than the others.
Buying on Margin
Buying on margin means to buy stocks with borrowed money – usually from your broker. Margin gives you more return than if you were to pay the full cost outright because you receive more stock for a lower initial investment. Margin buying can also be risky because if the stock loses value your losses will be correspondingly greater. When buying on margin the investor should have stop-loss orders in place to limit losses in the case of market reversal. The amount of margin should be limited to about 10% of the value of your total account.
Dollar Cost and Value Averaging
Dollar cost averaging involves investing a fixed dollar amount on a regular basis. An example would be buying shares of a mutual fund on a monthly basis. If the fund drops in price the investor will receive more shares for his money. Conversely, when the price is higher, the fixed amount will buy fewer shares. An alternative to this is value averaging. The investor decides on a regular value he wishes to invest. For example, he may wish to invest $100 a month in a mutual fund. When the price of the fund is high he puts a higher dollar amount in the fund and when the price is low he spends less money. This averages out his investment to the original $100 per month. Value averaging almost always outperforms dollar cost averaging as a percentage return on the money invested. When used as part of a broader trading strategy it can help secure the growth of your investment fund.
Monday, September 24, 2007
Tuesday, August 7, 2007
TEENS AND THEIR FINANCES
TEENS AND THEIR FINANCES!
Today, teenagers are contributing significantly to the growth of the Nigerian economy. They have access to much more money than previous generations and are better placed to lead more successful lives financially. They spend, save, earn, and borrow millions of naira each day and are responsible for the success of many businesses today. Many of the spending or savings habits that teenagers develop are most influenced by their peers, parents and the media and unfortunately, too few teenagers are exposed to a curriculum
in financial planning. Teenagers have developed the grandiose lifestyles of many adults as they insist on designer item and have little or no urge to begin to contribute towards their future financial success.
Although the dreams of today’s teenagers are very tall, many have failed to appreciate the need to work hard and to save regularly towards those dreams. The question “what can I do from now to achieve my dreams” is left unanswered till late. While skills and talents are left in teenagers untapped, saving and planning for financial success are left entirely to parents to handle. It is imperative that planning for your children is part of your overall financial strategy and introducing children to the principles of good financial planning at an early age keeps you safe in the knowledge that the wealth that you are creating can continue into future generations. Teenagers who are able to get lessons in financial planning, and money management are more likely to become adults who can make sound financial decisions, avoid excessive debts and manage income and expenses to reach their financial goals. Indeed, equipped teenagers are Nigeria’s hope to sustainable development.
WHAT CAN I DO IN MY YOUTH TO ENSURE THAT I AM WEALTHY?
1. Increase Your Knowledge Of Investing. Teenagers should be encouraged to read books and articles on money management and finances. An example of such books is “Rich Dad, Poor Dad” by Robert Kiyosaki, in which he advocates financial independence by means of investing. Knowledge is progressive and the more we acquire, the better prepared we are for the challenges that life brings.
2. Curb Frivolous Spending. We can choose to spend, save or invest our money. Spending is inevitable but basic questions must be asked before money is spent. Some of the questions that we might consider before buying/spending (irrespective of our ages) are:
Why do I want the item?
Will I use it more that once?
Do I really need the item I want to buy?
Will a different purchase make me just happy?
How will this purchase affect my long –term financial goals?
Is the price reasonable or can I get it cheaper / on sale?
Will I be better of saving /investing the money?
3. Avoid Peer Pressure. Many teenagers want things because their peers have those items. If the questions above were considered honestly, many purchases may be averted. Avoid shopaholic friends, they probably have more money than you or are not aiming at the great future that you are. Your long term goals are very important and people always want to associate with others who are successful, so become successful yourself and people would want to adapt to your style. Forget about what is in vogue, style constantly changes. Buy an item because you like it, can afford it and it’s purchase does not diminish your ability it save. Do not try to keep up with the Jones’, they will always be there.
4. Get Holiday Jobs. Holiday jobs provide income, which could be invested long term. Teenagers would get the opportunity to earn money and would have the choice to spend, save or invest portions of that income. This teaches teenagers how to manage their own money based on their needs, wants, and goals. Holiday jobs also give teenagers the opportunity to try out what they could be doing for the better part of their lives. I know of a girl who wanted to become a Doctor and after working at a hospital during a particular summer holiday, changed her mind. She fainted at the sight of blood and and found the smell of medicine overwhelming. Her experience helped to set her
5. Use Your Skills And Talents. Athletes today give us a clearer picture of the opportunity available to those who use their skills / talent. I doubt that as a little boy, Kanu Nwankwo imagined that his skills would make him a phenomenal success, his talent would be the gateway for his fortunes and his passion for children would make him a mentor to many people. Teenagers are pregnant with potentials. Some of them can bake, cook, play the piano, type, ride horses, braid hair, draw, paint, the list is endless. Teenagers should not bury their skills or wait much longer to use them; they should be encouraged to develop and to earn income from the talent they have.
6. Get Started. So, what is holding that teenager back? Parents should encourage their children not to consume all the money they receive either as allowances or as income. A portion of the money that children receive should be invested. Parents and guardians should also give gifts of investments rather than toys. Monetary gifts should be invested, as children do not need to use these in the short term.
7. Invest. Do something! There are so many more investment opportunities in the market place than one can decide to survey. However little money is available to each, there is an opportunity to invest your money without hassle. There are short-term instruments mainly in the money market and long- term instruments in both the capital market and in real estate. Begin with a saving account and then invest at regular intervals. Every bank has a savings product for children and parents should be encouraged to save for their children. At IBTC Chartered Bank, we have an account called “The IBTC CHESS”, which is a children education savings scheme (money market instrument) offering a higher interest rate than is obtainable on an ordinary savings account. With as little as N5, 000, children can open the IBTC CHESS which allows them multiple withdrawals. IBTC has capital market instruments, which children can invest in. These are essentially long term instruments such as “The IBTC CHESS Portfolio”, which is a portfolio of stocks held in trust for children and managed by IBTC Asset Management Limited on their behalf. IBTC also provide mutual funds – The IBTC Nigerian Equity Fund and The IBTC Ethical Fund, which are investments vehicles that pool investors fund to purchase a variety of securities with each investor owning units (a part) of the entire investment portfolio. Children and teenagers may invest in these instruments for the long term growth of their funds. These investments would give them both growth and income on their funds.
The benefits of investing in these capital markets instruments like the mutual fund, which IBTC offers, are numerous. Among them are: Full-time professional management of fund; Diversified portfolio (between different asset classes); Liquidity; New investors can join easily; Convenience; Easy exit; Ease of monitoring investment (availability of on-line portfolio viewing) e.t.c.
Conclusion. Wealth must be trans-generational. It is an absolute waste for parents to work hard, invest so much money and not equip their children with the tool of financial discipline.
While teenagers seem inexperienced, the foundations for their financial success can be laid now. From little savings and investments, millions of Naira can be returned and financial success can be promoted. Teenagers have longer time frames for investing but waiting one year could be the difference between being wealthy and just comfortable. Investing early could set teenagers above their peers. Teenagers have money, talents, and dreams; they should be encouraged to use their money to set the stage for their success, their talents to create wealth and their dreams to become more successful than their peers. Teenagers should actively participate in investing; they should use their finances wisely.
Today, teenagers are contributing significantly to the growth of the Nigerian economy. They have access to much more money than previous generations and are better placed to lead more successful lives financially. They spend, save, earn, and borrow millions of naira each day and are responsible for the success of many businesses today. Many of the spending or savings habits that teenagers develop are most influenced by their peers, parents and the media and unfortunately, too few teenagers are exposed to a curriculum
in financial planning. Teenagers have developed the grandiose lifestyles of many adults as they insist on designer item and have little or no urge to begin to contribute towards their future financial success.
Although the dreams of today’s teenagers are very tall, many have failed to appreciate the need to work hard and to save regularly towards those dreams. The question “what can I do from now to achieve my dreams” is left unanswered till late. While skills and talents are left in teenagers untapped, saving and planning for financial success are left entirely to parents to handle. It is imperative that planning for your children is part of your overall financial strategy and introducing children to the principles of good financial planning at an early age keeps you safe in the knowledge that the wealth that you are creating can continue into future generations. Teenagers who are able to get lessons in financial planning, and money management are more likely to become adults who can make sound financial decisions, avoid excessive debts and manage income and expenses to reach their financial goals. Indeed, equipped teenagers are Nigeria’s hope to sustainable development.
WHAT CAN I DO IN MY YOUTH TO ENSURE THAT I AM WEALTHY?
1. Increase Your Knowledge Of Investing. Teenagers should be encouraged to read books and articles on money management and finances. An example of such books is “Rich Dad, Poor Dad” by Robert Kiyosaki, in which he advocates financial independence by means of investing. Knowledge is progressive and the more we acquire, the better prepared we are for the challenges that life brings.
2. Curb Frivolous Spending. We can choose to spend, save or invest our money. Spending is inevitable but basic questions must be asked before money is spent. Some of the questions that we might consider before buying/spending (irrespective of our ages) are:
Why do I want the item?
Will I use it more that once?
Do I really need the item I want to buy?
Will a different purchase make me just happy?
How will this purchase affect my long –term financial goals?
Is the price reasonable or can I get it cheaper / on sale?
Will I be better of saving /investing the money?
3. Avoid Peer Pressure. Many teenagers want things because their peers have those items. If the questions above were considered honestly, many purchases may be averted. Avoid shopaholic friends, they probably have more money than you or are not aiming at the great future that you are. Your long term goals are very important and people always want to associate with others who are successful, so become successful yourself and people would want to adapt to your style. Forget about what is in vogue, style constantly changes. Buy an item because you like it, can afford it and it’s purchase does not diminish your ability it save. Do not try to keep up with the Jones’, they will always be there.
4. Get Holiday Jobs. Holiday jobs provide income, which could be invested long term. Teenagers would get the opportunity to earn money and would have the choice to spend, save or invest portions of that income. This teaches teenagers how to manage their own money based on their needs, wants, and goals. Holiday jobs also give teenagers the opportunity to try out what they could be doing for the better part of their lives. I know of a girl who wanted to become a Doctor and after working at a hospital during a particular summer holiday, changed her mind. She fainted at the sight of blood and and found the smell of medicine overwhelming. Her experience helped to set her
5. Use Your Skills And Talents. Athletes today give us a clearer picture of the opportunity available to those who use their skills / talent. I doubt that as a little boy, Kanu Nwankwo imagined that his skills would make him a phenomenal success, his talent would be the gateway for his fortunes and his passion for children would make him a mentor to many people. Teenagers are pregnant with potentials. Some of them can bake, cook, play the piano, type, ride horses, braid hair, draw, paint, the list is endless. Teenagers should not bury their skills or wait much longer to use them; they should be encouraged to develop and to earn income from the talent they have.
6. Get Started. So, what is holding that teenager back? Parents should encourage their children not to consume all the money they receive either as allowances or as income. A portion of the money that children receive should be invested. Parents and guardians should also give gifts of investments rather than toys. Monetary gifts should be invested, as children do not need to use these in the short term.
7. Invest. Do something! There are so many more investment opportunities in the market place than one can decide to survey. However little money is available to each, there is an opportunity to invest your money without hassle. There are short-term instruments mainly in the money market and long- term instruments in both the capital market and in real estate. Begin with a saving account and then invest at regular intervals. Every bank has a savings product for children and parents should be encouraged to save for their children. At IBTC Chartered Bank, we have an account called “The IBTC CHESS”, which is a children education savings scheme (money market instrument) offering a higher interest rate than is obtainable on an ordinary savings account. With as little as N5, 000, children can open the IBTC CHESS which allows them multiple withdrawals. IBTC has capital market instruments, which children can invest in. These are essentially long term instruments such as “The IBTC CHESS Portfolio”, which is a portfolio of stocks held in trust for children and managed by IBTC Asset Management Limited on their behalf. IBTC also provide mutual funds – The IBTC Nigerian Equity Fund and The IBTC Ethical Fund, which are investments vehicles that pool investors fund to purchase a variety of securities with each investor owning units (a part) of the entire investment portfolio. Children and teenagers may invest in these instruments for the long term growth of their funds. These investments would give them both growth and income on their funds.
The benefits of investing in these capital markets instruments like the mutual fund, which IBTC offers, are numerous. Among them are: Full-time professional management of fund; Diversified portfolio (between different asset classes); Liquidity; New investors can join easily; Convenience; Easy exit; Ease of monitoring investment (availability of on-line portfolio viewing) e.t.c.
Conclusion. Wealth must be trans-generational. It is an absolute waste for parents to work hard, invest so much money and not equip their children with the tool of financial discipline.
While teenagers seem inexperienced, the foundations for their financial success can be laid now. From little savings and investments, millions of Naira can be returned and financial success can be promoted. Teenagers have longer time frames for investing but waiting one year could be the difference between being wealthy and just comfortable. Investing early could set teenagers above their peers. Teenagers have money, talents, and dreams; they should be encouraged to use their money to set the stage for their success, their talents to create wealth and their dreams to become more successful than their peers. Teenagers should actively participate in investing; they should use their finances wisely.
DEVELOPING A SAVING HABIT IN A HARD ECONOMY
Developing a Saving Habit in a Hard Economy.
No matter what your achievement is in life, no matter what you have gathered as wealth, if you don’t have a saving and investment, you will end up in poverty.
No matter ho w small you savings and income is, if you don’t have a saving habit, you will die in poverty. I have a real life story to prove this, it goes thus:
“In 1923, a group of our greatest leaders and richest businessmen held a meeting at the Edgewater beach hotel in Chicago. Among them were Charles Schwab, head of the largest independent steel company; Samuel Insull, president of the world’s largest utility; Howard Hopson, head of the largest gas company; Ivar Kreuger; president of the International Match company; one of the world’s largest at that time; Leon Frazier; president of the bank of international settlement; Richard Whitney; president of the New York Stock Exchange; Arthur Cotton and Jesse Livermore, two of the biggest stock speculators; and Albert Fall, a member of President Harding’s cabinet. Twenty five years later, nine of them (those listed above) ended as follows. Schwab died penniless after living for five years on borrowed money. Insull died broke living in a foreign land, Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall were just released from prison. Fraser and Livermore committed suicide. I doubt if anyone can really say what happened to these men. If you look at the date1923, it was just before the 1929 market crash and the great depression, which I suspect had a great impact on these men and their lives. The point is this: Today we live in times of greater and faster change than these men did. I suspect there will be more booms and bursts in the next 25 years that will parallel the ups and downs these men faced. I am concerned that too many people are focused too much on money and not their greatest wealth, which is their education. If people are ready to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve problems, I am afraid those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.
Most people fail to realize that in life, it is not how much money you make; it is how much money you keep
It may really be hard, but for anyone whose future is more important to him than the present, then, it should be an adventure. As EXPENSES cater for your present, so also SAVINGS cater for your future, which is more important than your present. Savings is very important in the school of wealth creation. Anyone can hardly create wealth without savings. It is not important that you are not in a well paid job, but that you are a super saver and not a super spender. It is not what you collect as salary that matters, but what you save; because what you save will save you and what you keep will keep you. Savings is the first step in the ladder of wealth. A person that does not know how to save is working for the person who knows how to save in the long run, because no condition is permanent; there is no assurance that your well paid job will not leave you one day even if you don’t want to leave it and be left with what you have saved and the experiences that you have gathered from your job. Savings should be a compulsory lifestyle for anyone who wants to survive in a hard economy. There have been people that are wealthiest of men in a boom economy, but because they refuse to follow closely this cardinal principle of wealth creation: SAVINGS. No matter the amount of money you have now, if you don’t put aside savings for the future time, poverty will pay you a visit one day.
If you come from an average background, you need this habit of savings to succeed legitimately. Everybody is entitled to his own opinion, but this is a matter of principle and wealth creation. The truth is in every man’s life, there are high period in which the flow of money into your hands is uncontrollably much, the money is just coming left, right, central, back and front but there are also low periods for everybody when the cash is not coming as expected, it is what you have in savings that could possibly help out because in hard economy, everybody will be singing the song of no money, so there is hardly anybody that will want to borrow you money in a hard economy. It is not what you earn but what you save that matters. A man taking N7500 and then a man collecting N750000 are the same if both do not have savings as at the day they are both sacked from that paid employment because they will both come to square one. Cut your expenses and increase your savings.
You cannot manage your life without a reservoir. Savings is vital aspect of a man’s life, without it there cannot be meaningful investment. Once your income is equal to your expenditure, then there is a big problem at hand, because it means there is no savings and therefore the individual is not secured.
Many people in this part of the world believe that savings is for those people who earn fat, saving habit is sure, that is necessary for everybody.
The best time to cultivate the saving habit is during childhood. Olden day’s parents used to teach this unknowingly by making sure that their children kept the most part of whatever they earn in a safe called kolo in Yoruba. It is enclosed in such a way that it discourages the child from taking money from there. The child who grows up in the environment of this type of habit usually has a saving habit.
But no matter the environment under which you grow up, you can cultivate the habit of savings if you want to because what you save saves you and what you keep, keeps you.
No matter what your achievement is in life, no matter what you have gathered as wealth, if you don’t have a saving and investment, you will end up in poverty.
No matter ho w small you savings and income is, if you don’t have a saving habit, you will die in poverty. I have a real life story to prove this, it goes thus:
“In 1923, a group of our greatest leaders and richest businessmen held a meeting at the Edgewater beach hotel in Chicago. Among them were Charles Schwab, head of the largest independent steel company; Samuel Insull, president of the world’s largest utility; Howard Hopson, head of the largest gas company; Ivar Kreuger; president of the International Match company; one of the world’s largest at that time; Leon Frazier; president of the bank of international settlement; Richard Whitney; president of the New York Stock Exchange; Arthur Cotton and Jesse Livermore, two of the biggest stock speculators; and Albert Fall, a member of President Harding’s cabinet. Twenty five years later, nine of them (those listed above) ended as follows. Schwab died penniless after living for five years on borrowed money. Insull died broke living in a foreign land, Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall were just released from prison. Fraser and Livermore committed suicide. I doubt if anyone can really say what happened to these men. If you look at the date1923, it was just before the 1929 market crash and the great depression, which I suspect had a great impact on these men and their lives. The point is this: Today we live in times of greater and faster change than these men did. I suspect there will be more booms and bursts in the next 25 years that will parallel the ups and downs these men faced. I am concerned that too many people are focused too much on money and not their greatest wealth, which is their education. If people are ready to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve problems, I am afraid those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.
Most people fail to realize that in life, it is not how much money you make; it is how much money you keep
It may really be hard, but for anyone whose future is more important to him than the present, then, it should be an adventure. As EXPENSES cater for your present, so also SAVINGS cater for your future, which is more important than your present. Savings is very important in the school of wealth creation. Anyone can hardly create wealth without savings. It is not important that you are not in a well paid job, but that you are a super saver and not a super spender. It is not what you collect as salary that matters, but what you save; because what you save will save you and what you keep will keep you. Savings is the first step in the ladder of wealth. A person that does not know how to save is working for the person who knows how to save in the long run, because no condition is permanent; there is no assurance that your well paid job will not leave you one day even if you don’t want to leave it and be left with what you have saved and the experiences that you have gathered from your job. Savings should be a compulsory lifestyle for anyone who wants to survive in a hard economy. There have been people that are wealthiest of men in a boom economy, but because they refuse to follow closely this cardinal principle of wealth creation: SAVINGS. No matter the amount of money you have now, if you don’t put aside savings for the future time, poverty will pay you a visit one day.
If you come from an average background, you need this habit of savings to succeed legitimately. Everybody is entitled to his own opinion, but this is a matter of principle and wealth creation. The truth is in every man’s life, there are high period in which the flow of money into your hands is uncontrollably much, the money is just coming left, right, central, back and front but there are also low periods for everybody when the cash is not coming as expected, it is what you have in savings that could possibly help out because in hard economy, everybody will be singing the song of no money, so there is hardly anybody that will want to borrow you money in a hard economy. It is not what you earn but what you save that matters. A man taking N7500 and then a man collecting N750000 are the same if both do not have savings as at the day they are both sacked from that paid employment because they will both come to square one. Cut your expenses and increase your savings.
You cannot manage your life without a reservoir. Savings is vital aspect of a man’s life, without it there cannot be meaningful investment. Once your income is equal to your expenditure, then there is a big problem at hand, because it means there is no savings and therefore the individual is not secured.
Many people in this part of the world believe that savings is for those people who earn fat, saving habit is sure, that is necessary for everybody.
The best time to cultivate the saving habit is during childhood. Olden day’s parents used to teach this unknowingly by making sure that their children kept the most part of whatever they earn in a safe called kolo in Yoruba. It is enclosed in such a way that it discourages the child from taking money from there. The child who grows up in the environment of this type of habit usually has a saving habit.
But no matter the environment under which you grow up, you can cultivate the habit of savings if you want to because what you save saves you and what you keep, keeps you.
SECRETS OF MAKING YOUR CHILDREN MILLIONAIRES AT AGE 21
Secrets of making your children millionaires at Age 21.
Research shows that parents are the best teachers for their children. Your children requires a measure of financial education if the formal typical education you are spending so much on will not be useless in the long run. It is increasingly becoming clearer that the type of education our children are receiving is grossly out of tune with the financial realities of today. If we must drop the garment of poverty that has so much become second skin, we must begin to teach our children about wealth acquisitions and its management. Research shows that our children’s best chance of becoming millionaires is through owing his or her business and building it to a successful level. Do you know you can determine that your child will be struggling for money at 21 or will be in control of money? You can by following these simple rules:
Rule 1:
Teach your child about money from at least age three by making a small box for him to save part of the money given to him by anybody.
Rule 2:
Try and open a bank savings account for him or her with the money he has contributed by himself, then you may or you may not add to it (money).
Rule 3:
Buy shares you realize from his naming ceremony and birthday parties to hand over to him or her when he or she is 21 years old. (At least N15, 000 worth of shares)
Rule 4:
Teach him or her how to write and stick to a budget from age ten .
Rule 5:
Teach the child about stocks and shares at age thirteen
Rule 6:
Teach the child about real estate at age fifteen.
Rule 7:
Teach the child about business at age sixteen and seventeen and let him set up a small business at age eighteen.
It is quite disheartening that an average Nigerian feeds on less that a dollar per day yet most does want theirs to suffer the same thing they are suffering, while not change and think about how to make your children better off not only by sending them to school, but by teaching what it takes to be rich.
When I was in the north, there was a boy that worked in my office, one day, he said he wants to sell his shares, lo and behold; the boy has the right to become an executive director in Wema Bank by the virtue of his value and the volume of his shares. I got into discussion with this young man and I quickly realized that his Dad had started buying shares for him when he was twenty three old.
To be more practical now, let’s take a look at Emmanuel’s parents who bought First bank’s share for him when he was five years old from the money realized from birthday party organized for him at that age.
How Emmanuel’s Parents turned him a Millionaire at 21.
Emmanuel’s parents (Not real name) bought N20, 000 worth of First Bank’s shares for him in 1992 the rate of N2. This indicates that Emmanuel started with 10,000 units of First Bank’s shares in 1992. This calculation excludes dividends which is an extra benefit.
By virtue of how the stock has grown in the stock market, Emmanuel now has a total share of 429,130 multiplied by the price of First Bank shares at September 7, 2006 which is N41, 10K, the total of Emanuel’s worth is N17,637,243 the total dividends Emmanuel collected throughout the fifteen years is over one million naira. Therefore Emmanuel became N17 million richer in life by just N20, 000 invested for him by his parents and Emmanuel is just twenty years old.
Why not be wise and invest for your children today in the stock market. Be money wise.
Research shows that parents are the best teachers for their children. Your children requires a measure of financial education if the formal typical education you are spending so much on will not be useless in the long run. It is increasingly becoming clearer that the type of education our children are receiving is grossly out of tune with the financial realities of today. If we must drop the garment of poverty that has so much become second skin, we must begin to teach our children about wealth acquisitions and its management. Research shows that our children’s best chance of becoming millionaires is through owing his or her business and building it to a successful level. Do you know you can determine that your child will be struggling for money at 21 or will be in control of money? You can by following these simple rules:
Rule 1:
Teach your child about money from at least age three by making a small box for him to save part of the money given to him by anybody.
Rule 2:
Try and open a bank savings account for him or her with the money he has contributed by himself, then you may or you may not add to it (money).
Rule 3:
Buy shares you realize from his naming ceremony and birthday parties to hand over to him or her when he or she is 21 years old. (At least N15, 000 worth of shares)
Rule 4:
Teach him or her how to write and stick to a budget from age ten .
Rule 5:
Teach the child about stocks and shares at age thirteen
Rule 6:
Teach the child about real estate at age fifteen.
Rule 7:
Teach the child about business at age sixteen and seventeen and let him set up a small business at age eighteen.
It is quite disheartening that an average Nigerian feeds on less that a dollar per day yet most does want theirs to suffer the same thing they are suffering, while not change and think about how to make your children better off not only by sending them to school, but by teaching what it takes to be rich.
When I was in the north, there was a boy that worked in my office, one day, he said he wants to sell his shares, lo and behold; the boy has the right to become an executive director in Wema Bank by the virtue of his value and the volume of his shares. I got into discussion with this young man and I quickly realized that his Dad had started buying shares for him when he was twenty three old.
To be more practical now, let’s take a look at Emmanuel’s parents who bought First bank’s share for him when he was five years old from the money realized from birthday party organized for him at that age.
How Emmanuel’s Parents turned him a Millionaire at 21.
Emmanuel’s parents (Not real name) bought N20, 000 worth of First Bank’s shares for him in 1992 the rate of N2. This indicates that Emmanuel started with 10,000 units of First Bank’s shares in 1992. This calculation excludes dividends which is an extra benefit.
By virtue of how the stock has grown in the stock market, Emmanuel now has a total share of 429,130 multiplied by the price of First Bank shares at September 7, 2006 which is N41, 10K, the total of Emanuel’s worth is N17,637,243 the total dividends Emmanuel collected throughout the fifteen years is over one million naira. Therefore Emmanuel became N17 million richer in life by just N20, 000 invested for him by his parents and Emmanuel is just twenty years old.
Why not be wise and invest for your children today in the stock market. Be money wise.
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.
Akeredolu – Ale, E.O. (1975). “The Underdevelopment of Indigenous Entrepreneurship in Nigeria”, Ibadan, Ibadan University Press.
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.
CBN: “Monetary and Credit Policy Guidelines for 1991 Fiscal Year”, (Monetary Policy Circular No. 25).
Ewelike, T. (1991), “Small Scale Business Finance: The Lending Consideration” The Nigerian Banker, Jan – March.
Fatunla, G.T. and Adebayo, J.J. (1985). “Financing Aspects of Small Scale Industries Development”, The Nigerian Economic Society Annual Conference, May 14 – 16.
Federal Government of Nigeria, (1989), “The National Economic Reconstruction Fund Decree” No. 2, Lagos, FGN Press.
Odife, O. (1988) “Structural Adjustment and Economic Revolution in Nigeria”, Ibadan, Heinemann Educated Books (Nig) Ltd.
Okafor, F.O. (1983) “Investment Decisions, Evaluation of Projects and Securities”, Ibadan, Chassell Limited.
Olayinde, O.S. (1978). “Economic Survey of Nigeria” (1960 – 1965), Aromolaran Publishing Company Ltd, Pp 53 – 57.
Owualah, S.I. (1999). “Entrepreneurship in Small Business Firms”, Lagos, G – Mac Investment Limited.
Philips, T. (1991) “The Role of Banking in Small Business Firms”, Lagos, G-Mac Investment Limited.
Sule, E.I.K. (1986). “Small scale Industries in Nigeria: Concepts, Appraisal of Some Government Policies and Suggested Solutions to Identified Problems”.
Van Horne J. C. (1985) “Financial Management and Policy”, Prentice Hall of India.
Warren C. S. and Fess, P. E. (1986). “Principles of Financial and Managerial Accounting” USA, South West Publishing Company.
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.
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.
Akeredolu – Ale, E.O. (1975). “The Underdevelopment of Indigenous Entrepreneurship in Nigeria”, Ibadan, Ibadan University Press.
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.
CBN: “Monetary and Credit Policy Guidelines for 1991 Fiscal Year”, (Monetary Policy Circular No. 25).
Ewelike, T. (1991), “Small Scale Business Finance: The Lending Consideration” The Nigerian Banker, Jan – March.
Fatunla, G.T. and Adebayo, J.J. (1985). “Financing Aspects of Small Scale Industries Development”, The Nigerian Economic Society Annual Conference, May 14 – 16.
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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.
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