Financing Small and Medium Industries in Nigeria - Case Study of the Small and Medium Industries Equity Investment Scheme (Smieis) : Empirical Research Findings

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IntroductionFinancing small and medium-scale industries in Nigeria has remained an intractable problem to entrepreneurs, financial institutions and policy makers alike. The results of several studies over a period of four decades show that entrepreneurs persist in claiming that lack of finance is a major constraint on their ability to start and expand their businesses'13. Inadequate access to finance was ranked third among the constraints (after infrastructure problems and general uncertainty in the business environment) on the activities of private companies in the manufacturing. A World Bank Survey4 of 232 companies in the manufacturing sector, including larger firms and foreign firms, showed that 38.5 per cent felt they were credit constrained. The problem was more severe with microenterprises and small firms with 48.2 per cent and 38.6 per cent respectively claiming to be credit constrained. Abumere, Aigbokhan and Mabawonku1 reported that 52.4 per cent of the firms in the formal private sector that they surveyed claimed that shortage of finance was a major constraint on their operations. The Nigerian Institute of Social and Economic Research (NISER)6, on an annual basis, surveys business conditions, experiences and expectations of the manufacturing sector. During the 1997-2001 period, almost 80 per cent of the sample firms across the country reported that access to credit was not easy.This is inspite of the plethora of schemes designed by government to provide funds for small and medium enterprises in the hope that the elimination of financial constraint would enable the economy to realize the potentials of the businesses in accelerating economic growth, job creation, raising productivity and poverty reduction in the country. Policy in this direction had migrated from direct lending by various institutions set up for the purpose, through credit guidelines to banks to lend a minimum percentage of their loans portfolio to small enterprises, rural banking programme, to indirect lending through participating banks at concessionary interest rates. An analysis of the performance of these schemes by Inang and Ukpong7 indicate their limited impact.The establishment of the second-tier securities market of the Nigerian Stock Exchange has also not had any significant impact on small and medium enterprises in accessing relatively cheap long-term funds. The results of Aregbeyen's* study shows that the low patronage of the securities market was attributable mainly to lack of knowledge of the market, fear of losing control of the firm, costly procedures and rigour of listing their firms in the securities market. The most recent institution established to promote the growth and development of small and medium scale industries is the Bank of Industry. The Bank is the product of the merger of three development financial institutions (the Nigerian Bank of Commerce and Industry, the Nigerian Industrial Development Bank and the National Economic Reconstruction Fund) and its mandate is to provide cheap financing and business support services to existing and new businesses.SEMs Face Credit Access DifficultiesEven though banks are a major source of funds for small and medium enterprises in the developed world, in Nigeria, this is not the case. Levitsky9 summarized the reasons why small enterprises in developing countries have difficulty in accessing credit from formal banking system to include:* reluctance to lend due to perceived high risk of lending to small-scale enterprises.* bias of banking institutions in favour of lending to larger-scale businesses.* high transactions cost of lending to SMEs.* reluctance of small-scale entrepreneurs to borrow from banks because of the costly formalities involved in obtaining bank finance, and administrative set-up needed to deal with banking institutions.* inability or unwillingness of SMEs to present full accounting records and documentation needed by banks to appraise loan applications. …