EVALUATING THE CONTRIBUTIONS OF SMALL AND MEDIUM ENTERPRISES EQUITY INVESTMENT SCHEME (SMEEIS) TO NIGERIAN ECONOMIC GROWTH IN THE MANUFACTURING SECTOR

ABSTRACT

This study examined the contributions of Small and medium enterprises equity investment scheme to Nigerian economic growth in the perspective of the manufacturing sector in Nigeria SMEEIS. A perfect research into the role of SMEEIS in the manufacturing sector cannot be carried out without an in-depth analysis, contributions roles and operations of SME . This study became necessary to the  Nigerian Entrepreneurs, who have assisted and contributed to the country’s gross national product and have also played vital roles in the lives of the people.   The Nigeria economy cannot be driven by the government and public sector alone hence the need for SMEEIS. The initiative was in response to the Federal Government’s concerns  and  policy  measures  for the  promotion  of Small and Medium Enterprises   (SMEs)   as  vehicles   for   rapid   industrialization,   sustainable   economic development, poverty alleviation and employment generation. SMEEIS is a voluntary initiative of the bankers committee approved at its 245th meeting held on 1st December,

1999.  SMEEIS  is  acronym  for  the    small  and  medium  enterprises  equity  investment scheme”, which requires all banks in Nigeria to set aside annually ten percent (10%) of their profit before tax for equity investment and promotion of small and medium enterprises in Nigeria.  The objective of the study was to determine the role of small and medium enterprises equity investment scheme in the manufacturing sector and to ascertain the contribution  of  SMEEIS  in  manufacturing  sector.  The  study  used  both  primary  and secondary sources of data collection. The statistical tools used were frequency distribution, tables, percentages and chi-square (2)  in the analysis of data.  Test of hypotheses shows That the weaknesses and threats of SMEEIS  are not greater than the  strengths  and opportunities;  that  SMEEIS  has  been  able  to  contribute  meaningful  to  manufacturing sector; That SMEEIS does not lack the skill to manage organizational changes that SMEEIS does not hinder creativity and innovation. The study  shows that lack  critical infrastructure affected the smooth running and operations of SMEEIS, The research made the following recommendations. The CBN should  review its policies on  SMEEIS by liaising with the National Assembly to put in place a very good legislation to support and sustain SMEEIS. For SMEEIS to be a driving force in the Nigeria economy, critical infrastructure such as good access roads, energy and good telecommunication network must be in place. Moreover, the CBN should also support the banks by putting in place a standardised policy framework on its intervention  fund  on  bailout,  restructure  and  refinancing  of SME  especially in  the manufacturing sector through the use of banks of industries and AMCON to purchase ailing credits that are given to the manufacturing sector from banks at a concessionary rate.

CHAPTER ONE INTRODUCTION

1.1    BACKGROUND OF THE STUDY

The Small and Medium Enterprises Equity Investment Scheme (SMEEIS) is an initiative of the bankers’ committee comprising Managing Directors and Chief Executives of Banking Institutions in Nigeria, and it requires all licensed banks in the country to set aside 10% of their Profit Before Tax (PBT) annually for Small and Medium Enterprises

The core thinking behind the scheme is the recognition of the need to assist the manufacturing sector, which is acknowledged as the veritable vehicle   for economic growth by  meeting their financial requirements through  private  equity  participation.  According  to  Ademola  (2010), “despite the widely acknowledged role of small and medium scale enterprises in fostering economic growth and development, they have continued to face a variety of constraints”. some of the challenges they face are inadequate infrastructural facilities, shortage of skilled manpower, high rate of enterprise mortality, low level of entrepreneurial skills, lack of conducive operating environment, restricted market access and cumbersome regulatory requirements for those that are quoted on the Nigerian Stock Exchange.

SMEs are vital to economic growth and development in both the industrialised and developing countries, by playing a key role in creating jobs, improving living standards and contributing to the economy.

According to the Oteh (2010A), the capital market should be seen as an important alternative source of finance for SMEs, through equity debt financing, and venture capital funds. Equity financing is a strategy for obtaining capital that involves selling a partial interest in the company to investors. The equity or ownership or ownership position that investors receive in exchange for their funds usually take the form of stock in the company  (Oteh,  2010B). This  provides  small business  owners  with  a broader scope in terms of financing, as they gain access to  multiple funding sources.

Equity financing does not involve a direct obligation to repay the funds. Instead,  equity  investors  become  part-owners  and  partners  in  the business, and thus are able to exercise some degree of control over how it is run. Venture capital firms can be key financing vehicles for SMES. Venture capital funds value the possibility of monitoring the performance of the business, giving advice when needed and following-up on such

advice. Capital markets provide important exit opportunities for venture capital firms, thus enabling them to put their capital at risk to finance other SME opportunities. Venture capital has the potential of offering a valuable source of finance, complementing the  more traditional credit finance provided by commercial banks.

According to www.smecapitalmarket.net Oct 6,2010, a financial system that is built on both the banking and capital markets is better than a system that is built on the banking system alone. Flowing capital to SMEs is key to economic prosperity. Policy makers in most countries recognise the economic development benefits of SMEs, and the problems they face accessing start-up capital or funds to expand their businesses. They have however, provided an alternative market for SMEs to source for funds, which the companies are really tapping into.

The scheme gives banks the opportunity of exploring ways and means of assisting especially the manufacturing sector of the economy in dire need of funds, reviving other ailing or dead projects, and sustaining the profitability of other good ones. Funding to be provided under the scheme is inform of equity investment in eligible enterprises and as such attracts zero interest. The participating banks fund the manufacturing sector and receive their returns by way of profit sharing (dividend at the end of the

year towards the end of the tenor) for 5 years. These banks are expected to divest through private placement, second tier securities market or the Nigeria Stock Exchange.

In spite of the reforms and the persistent cry for increased funding of SME, The introduction of SMEEIS programme was therefore part of the financial sector  restructuring processes aimed  at  enhancing  access  to  banking system investment funds through equity financing programme for the promotion of micro, small and medium scale enterprises.

1.2    STATEMENT OF THE PROBLEM

This research is concerned with the evaluation of the contribution of SMEEIS to the Nigeria economic growth, especially the manufacturing sector. Olutunla and Obamuyi (2008) conducted empirical research on factors associated with profitability of SME in Nigeria. Isa and Terungwa (2011) empirically examined the performance of SME equity investment scheme in Nigeria. From the above there is scarcity of empirical research on  SMEEIS. In  addition, there is  no  known existing  research on  the implication  of  SMEIIS  on  economic  growth  looking  at  manufacturing sector. This study is meant to close these gaps in theoretical and empirical study. Many entrepreneurs especially, in the manufacturing sector have closed  shops  because  of   lack   of   critical  infrastructure  especially,

inadequate working capital. The government had through the CBN and the commercial banks resolved that the 10% of each bank’s profit before tax is set aside and invested for the development of SMEs.

However, because of past relationship with the SMEs by the banks which resulted in loan repayment default this has resulted in the poor implementation of the SMEEIS policy and has further endangered the sustainability of the scheme in the manufacturing sector.

A survey on SMEEIS globally shows that most developing countries that are now on the threshold of industrialisation are known to have conducted baseline economic survey to provide investment information on SMEEIS as tool for industrial growth. Countries such as China, Taiwan, South Korea and India have strong information network on their SMEEIS activities. The recent case studies on SMEEIS operating countries focus on Indonesia and Malaysia. Borrowing from Indonesia, the  Central Bank  of  Nigeria has concluded her study on the baseline economic survey of SMEEIS in Nigeria which has identified and provided useful information on industrial raw materials and solid minerals, their location uses and quantities available for industrial production. The India high commissioner in Nigeria, Mr. S.K. Uppal, in a lecture titled “The Impact of Industrialisation” said that SMEEIS

should form the fulcrum of Nigeria’s industrial policy.  Even in the United States Small Business Administration (SBA) is the largest single financial banker for small businesses in the USA.   It is estimated that about 25 million small businesses in the USA provide 75 percent of new jobs. The growth of Asian economies in the 80’s were largely driven by exports from SMEs.

However, in Nigeria there is lack of critical infrastructure, poorly prepared project proposals, inadequate collaterals, cumbersome regulatory requirements, lack of adequate historical records, financial indiscipline, and shortage of skilled manpower these are problems that confront SMEs in Nigeria which prevent economic development and growth. This study is meant to look at these problems that confront SMEs which affect the manufacturing sector and which prevent the SMEEIS from working properly.

Other problems which impede successful operation of SMEEIS include high cost  of  operations,  unstable  business  environment, less  than  optimal utilisation of capacities, high cost of funds, weak technological support, low level of innovation, inconsistent Government policies, negative effects of globalisation as a result of unfair competition with foreign manufactured

goods and energy problems. This study is intended to  look at these problems and how to resolve them.

The Banking Sector tends to be lukewarm in meeting the credit requirements of SMEs. This is because project proposals are poorly prepared. The incidence of inadequate working capital, which constrains productive capacities of the SME as well as absence of succession plan in the event of death of the proprietor, leads in many cases to frequent early demise of the operators in SMEEIS. Other problems which are the concern of this study include inadequate capital, as well as desire to operate with limited openness on the part of proprietors lead many SMEs to employ semi-skilled labour, this of course, affects productivity in SMEEIS. These myriad problems which affect the operation of SMEs and the workability of SMEEIS will be examined in this study.

1.3    OBJECTIVES OF STUDY

To be able to determine the role of Small and Medium Enterprises Equity Investment Scheme in manufacturing sector, the following objectives will be pursued:

1.   To ascertain the contribution of SMEEIS to the manufacturing sector.

2.   To compare the weaknesses and threats of SMEEIS to their strengths and opportunities

3.   To examine if SMEEIS is capable of managing organizational change.

4.   To  identify  the  significance  of  SMEEIS  in  the  economic  growth  and development.

5.   To examine if the management/leadership style of SMEEIS promotes or

hinders creativity and innovation.

1.4    RESEARCH QUESTIONS

1.    In what ways has SMEEIS contributed to the manufacturing sector?

2.    In what ways  the  weaknesses and threats of SMEEIS  greater than the strengths and opportunities?

3.    What skill has SMEEIS to manage organizational change?

4.    What  is  the  significance  of  SMEEIS  to  the  economic  growth  and development?

5.    The management/leadership style  of  SMEEIS does promote or hinder creativity and innovation?

1.5    HYPOTHESES OF THE STUDY

The following are the hypotheses for the study:

Hypothesis 1:

Ho:   SMEEIS has not been able to contribute meaningfully to the growth of the manufacturing sector survival in Nigeria.

H1:   SMEEIS  has   been   able  to   contribute  meaningfully  to   growth  of manufacturing sector survival in Nigeria.

Hypothesis 2:

Ho:    The weaknesses and threats of SMEEIS are not greater than the strengths and opportunities.

H1:  The weaknesses and threats of SMEEIS are greater than the strengths and opportunities.

Hypothesis 3:

Ho:   SMEEIS does not lack the skill to manage organizational change. H1:   SMEEIS lacks the skill to manage organizational change. Hypothesis 4:

Ho:   SMEEIS does not contribute to economic growth and development. H1:   SMEEIS contributes to economic growth and development

Hypothesis 5:

Ho:   Management/leadership style of SMEEIS does not promote creativity and innovation.

H1: Management/leadership style of SMEEIS promotes creativity and innovation.

1.6    SIGNIFICANCE OF THE STUDY

The significance of any study lies in the application of its findings for operational purpose. The importance of this study cannot be overemphasized because of its significance to different groups of people

that will immensely benefit from the findings of this research work. The findings of this research deserve the widest possible audience. The study will benefit the following people: the government in the area of economic development policies, financial practitioners/professionals in the area of consultancy services. Besides, students of Business Administration and academia will see the study as the new area of added knowledge to academics. It will also serve as secondary data source to those intending to carry out similar study in the same area.

1.7    SCOPE OF THE STUDY

The study fundamentally addresses and focuses on the Roles of Small and Medium Enterprise Equity Investment Scheme with particular emphasis on manufacturing sector (Dallas Hair Foods and Shawer Bottling Water) from

2006  to  2010 within their Lagos  area  operations. Lagos  was  chosen because   95 percent of their operations are centred in Lagos and by extension it is the commercial hub of economic activities in Nigeria.

1.8    Profiles of the Case Study Firms

1.8.1 Historical Background of Dallas Hair Foods Ltd:

Dallas Hair Foods which has its factory at Akume Rd Agidingbi Ikeja , Lagos, was initially established in 1986 as a one man business involved in

making of cosmetics .As the years progressed   the company business boomed and in 1989 was fully incorporated.

The Chairman and Managing Director  of the company is Eze Smart Nzeh eEdna Lolo Nzeh is also assisting the  husband  in no small measure in the day to day complete  running of  the company. As the business activities peaked , the company added cap to its feathers by engaging in the making of body creams , this resulted into the employment of more staff because its products are of high quality and have market acceptance .The staff are mostly from the same village with the Chairman; their dedication and loyalty is one of the driving factors for the company success .

1.8.2 Background of Shawer Bottling Water:

Shawer bottling water which has its factory at 3 Adaranijo Street Famos Bus Stop Pedro Shomolu Lagos was incorporated in 2006. The company is one of the top pure water businesses in Nigeria ,it has captured the Nigeria market cut across zones .  When i visited the factory the Manager told me that consumers (fast food & supermarkets)even book (pay) before products are produced. The Chairman/CEO is Mr John Amaefuna ,the company  has  neat  and  clean  compound  but  one  thing  that  got  me surprised again is that all the factory workers are young school leavers. Originally, the company started with sachet  water but when their product gained wide market acceptance , it swung into table water , this table

water business axis boomed operations of the company. In fact in Lagos you hardly see any family that does not drink shawer bottling water product.

1.9    LIMITATIONS OF THE STUDY

Time has been the major factor militating against any research work, hence, no amount of time may be adequate. This is so because there is always a new emergence of events/phenomenon in any field of study. Research and finance are inseparable as it requires a lot of money and material for the production of questionnaire or interview guide and transportation to nooks and crannies of the area covered by the research. Due to lack of sufficient funds, the researcher was incapacitated from collecting additional data for the purpose of this research.

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