The Evaluation of Financing of Micro-Enterprises

in Osun State of Nigeria

D. O. Elumilade

T. O. Asaolu

P. O. Oladele

Since her independence in 1960, Nigeria has been trying to meet the yearnings and aspirations of her teeming population, especially in the area of provision of employment.  Unfortunately, not much has been achieved in this respect. Given the importance of ‘small’ and ‘very small’ enterprises in the creation of employment, this study seeks to evaluate the financing of micro-enterprises in Osun State of Nigeria by identifying the problems of financing very small enterprises (VSE’s).

The study reveals that micro-enterprises in Osun State of Nigeria were generally inadequately financed due to factors such as unfavorable government policies, money lenders' high rate of interest and low personal savings, among others. It also reveals that micro-enterprises are poorly financed because most of the entrepreneurs do not have access to bank services as a result of their inability to produce necessary documents. It concludes that this low funding is responsible for the poor performance of micro-enterprises in Osun State. The study, therefore, suggests that government should provide an enabling environment, finance and policy guidelines for micro-enterprise development in the state.

Background

In spite of her vast population and abundant opportunities and potential for global greatness, Nigeria is still struggling to survive. In other to expedite its growth, the country’s resources must be properly harnessed.

When looking at Nigeria carefully, one sees a collection of different classes of people, human settlement and human organizations. The diversity of the country is also reflected in the diversity of the production sector. There are large-scale businesses, as well as the medium and small scale enterprises engaged in various productive activities. If properly harnessed, these diverse enterprises are a formidable springboard to economic greatness for the nation.

However, the growth of the country’s economy has not been without problems. For instance, Omopariola (1978) notes three successive phases can be discerned in the economic history of Nigeria. The first phase, dating back to 1900, “was the peasant economy characterized by static, agrarian and subsistence production” and a “high birth rate which was equally matched by high death rate” (p. 15) resulting in a low population growth rate. The second phase, which occurred in the middle of the nineteenth century, was “a dynamic export-oriented economy” (ibid, p. 16) Omopariola reports further that during this economic phase, “Nigeria had a steady growth in her economy which was stimulated primarily by agricultural exports during the first three decades of the twentieth century.” (ibid, p.16) The economy, starting from the collapse of international trade during the world economic crisis grinded to a halt in its growth in 1929 and remained more or less stagnant until 1945. From 1954 until the outbreak of the war of unity (civil war) in 1967 and up to the end of the war in 1970, “Nigeria experienced steady economic growth” (ibid, p. 16). The third phase, which has its roots in 1960 when the country attained political independence from the British colonialists, has been described as the indigenised economy.  This is still the phase under which the Nigerian economy is characterized.

Thus, over the years, the Nigerian economy has been going through a number of developmental stages and its growth has not been smooth. Although the economy continues to hold out a bright promise of growth, this has been hampered by factors such as under-productivity, unemployment, heavily depreciated national currency, inadequate infrastructure facilities and structural defects in the country’s industrial framework. The scope of this study focuses on the latter factor, structural defects in the nation’s industrial framework.

Structural Defects in the Nation’s Industrial Framework

Nigeria’s industrial framework is tri-partistic. There are the large-scale (LSE), the medium-scale (MSE), and the small-scale (SSE) parts. The three parts are expected to be harmonized and integrated for enhanced national development. However, what has been in place for several decades is the concentration of efforts and resources on the large-scale industrial sector to the neglect of small and medium-scale industries and enterprises, with the unavoidable debilitating effects of such neglect. This can be described as a vertical defect in the industrial framework.

There is also the problem of horizontal defect. In this respect, efforts and funds are disproportionately concentrated on the commercial/trading sector to the detriment of the agricultural and the small-scale manufacturing/industrial sectors. Omopariola (1978) notes, for instance, that since independence in 1960, the dominance of the Nigerian economy by the agricultural sector has been on a steady decline.

Given the scenario above, it is not too difficult to see the motivation for embarking on sectored studies of the economy. It is against this background that the present study into the financing of Very Small Enterprises (VSE) is being carried out.

Conceptual Framework of Micro-Enterprises

An entrepreneur has been defined by Casson (1993) as “someone who specializes in taking judgmental decisions about coordination of scarce resources” (p. 32). From this view, the term entrepreneur is referred to by Fabayo (1989) as “the instigator of entrepreneurial events for so long as they occur” (p. 277). As noted by Capati (1986), a question arising from this view concerns when entrepreneurial activity starts and stops. Casson (1993) seems to provide a satisfactory answer to this question. In his view, since in practice, judgmental decision-making about the coordination of scarce resources cannot be a “once-for-all” activity; therefore, entrepreneurship becomes a continuous process.

As reported by Boswell (1973) regarding developed countries, generally and particularly those countries where there has been rapid urbanization, a conspicuous and pervasive phenomenon has been the increasing importance of the small-scale enterprise. Small-scale entrepreneurs have made immense contributions to the development of today’s developed nation, although there are varying degrees of contributions from country to country (Solze, 1996).

It was also observed that developing nations, which are going through transitional phases of growth, are usually accompanied with a dearth of motivated entrepreneurs and entrepreneurial opportunities, contributing to a lack of balanced economic growth (Umar, 1997). This situation further deepens the under-development of such countries as mass unemployment rises and raw materials waste away. Ironically, as it has been observed by Aladekomo (1999), the salvation of developing countries, such as Nigeria, lies heavily in the development of entrepreneurial abilities and opportunities at all levels, including very large, large, medium, small and very small enterprises.

Fry (1993) noted that in the United States of America, small businesses account for 85% of all businesses. Noting the national variation of the definition of small enterprises, Afonja (1999) reports that the three variables generally used to define the concept are: number of employees, capital investment and annual turnover. In addition, Ajakaye (1999) sought to define and classify enterprises in terms of being either formal or informal.

Based on these theoretical concepts presented, the definition of micro-enterprises will be discussed from two perspectives, materially and structurally.

On a material level, an enterprise in Nigeria currently possesses any or all of the following features:

(a)           a maximum of 15 paid employees

(b)           maximum total assets (excluding land) of N250,000, and

(c)           a maximum annual turnover of N1m

On a structural level, an enterprise in Nigeria currently possesses any or all of the following features:

(a)               as a large rural-based enterprise

(b)               producing petty commodities, or providing personal service, or engaging in low technology agricultural venture, etc.

(c)               unregistered (operating outside government corporate affairs), although engaged in lawful productive activities

Financing of Small Scale Enterprises

In spite of the relevance of the small-scale industry to Nigeria’s economic and industrial development, the sector faces a lot of problems. These problems include those of management, appropriate technological skill acquisition, a harsh policy environment, gender bias and finance (Olowu, 1993, Oresotu, 1995, Lewis, 1996 and Oguntoye, 1987).

Of all these problems, inadequate financing is the most limiting. This is because finance is strategic to any industrial setup. Finance is the hub around which a business flourishes. Lack of it, through mismanagement or misappropriation, could hinder any business venture. Ideally, before any business is set up, there must minimally be working capital and fixed capital, based on feasibility reports (Asaolu, 2001).

The two main channels that have been used to increase credit for small and medium enterprises are the formal and informal sources. The formal sources include banks, other financial institutions, government loan agencies and cooperative credit societies. While the informal sources include owners’ savings/retained earnings, friends and relations, clubs, “esusu” and money-lenders, among others.

The informal rather than formal capital markets provide the bulk of financing, especially in the less developed countries, for small enterprises in the rural areas (Jinadu, 1995). The continued importance of informal markets, despite the growth of monetisation and commercialization in the subsistence sectors of these countries, is due to restrictive and repressive financial policies, a lack of innovative measures and instruments to integrate informal and formal markets, and the typically lower transaction costs of certain informal market credit intermediaries. The peculiar characteristic of informal markets is that they are far more loosely monitored and regulated than formal finance markets (Onyenwaku and Fabiyi, 1991).

Most importantly, loan disbursements from the informal sources are usually timely; notwithstanding, this informal source of financing to small-scale entrepreneurs has serious shortcomings. For example, the amount of capital that can be raised from the informal sources is usually very small and inadequate when compared to the needs of the small-scale entrepreneurs. In most cases, the terms and conditions attached to their funds were found to be exploitative most especially with the money lenders (Ogundipe, 1997).

Upon taking account of the shortcomings associated with the various informal sources, the governments of most developing countries have initiated various industrial credit programs. Such programs have the objectives of assisting small-scale entrepreneurs to increase their income and to improve their living standards. It is believed that these programs are veritable tools for redistributing resources which would lead to the wealth maximization of the small-scale entrepreneurs. The above considerations have led to the establishment and recognition of many institutional credit markets in Nigeria, including commercial banks, community banks, cooperative societies, Industrial Development Centers (IDCs), and the Nigerian Industrial Development Bank (NIDB). However, corruption and other related vices which became endemic in Nigerian policy would not allow the benefits to be realized (Oguntoye, 1997).

            According to Pinches (1990), finance refers to money and productive resources available to governments, business and individuals. The term also covers the management of all money resources. As a resource type, finance is usually physical in the forms of cash, shares, stocks, accounts receivable, equipment and other facilities applied in mobilizing business. Briefly put, finance is the term that covers all monetary resources (money and money’s worth) for the establishment and sustenance of any productive activity. Finance is the ‘sine-qua-non’ of enterprises--that without which there cannot be business.

One area in which VSE’s differ greatly from SSEs, MSEs and LSEs is that of sourcing for finance. As noted earlier, there are three kinds of finance and these are distinguished according to their tenure as short-term, medium term and long term (Pandey 2000).  For the short term finance, the major sources are creditors, bank overdrafts and loans, bills of exchange and other suitable negotiable instruments and factoring. The main sources of medium-term finance are the high-premium loans, plant/machinery/factory/furniture leasing, and hire purchase. In the case of the long-term finance, the sources are long term loans, debentures stock, share capital, sale of assets and lease-backs. It must be added, however, that businesses of any magnitude and for any range of financial need can be financed with personal as well as corporate savings.

            It needs to be emphasized, however, that most of the sources of finance mentioned above are not available to VSE’s, in as much as they are not available to SSEs. As noted by Weston and Brigham (1991), small enterprises cannot avail themselves of capital market funds. In the view of Umar (1997), many small enterprises are incapable of meeting borrowing requirements of the merchant and commercial banks. In the light of the foregoing, SSEs, especially VSE’s, have had to seek their finance from alternative, informal sources. Overall, sources of funds for all enterprises can be grouped into two categories: personal (informal) sources and the public (formal) sources. Of these, VSE’s and to some extent, SSEs, largely obtain their financing from personal sources.

            Amao (1987) grouped the sources of funding SMEs into “formal” and “informal” sources, and notes that SMEs have traditionally relied on informal sources which were usually more often than not insufficient for entrepreneurial growth and development. These are sources of funds, which are in a way personal to the entrepreneur and without recourse to the public capital markets as such. Such sources are often incapable of generating large volumes of funds for investment because of inherent limitations. The low capital generating capacity of such sources accounts to a great extent for the low growth rate of micro-enterprises, which in turn accounts for their continued lack of access to big funds.

            The claim that the capital shortage is the worst problem militating against the growth of VSE’s has not gone unchallenged. It has been argued by Omopariola (1978) that there have been times when banks and other lending institutions had more money to lend than entrepreneurs were willing to borrow. Omopariola further states that while subscribing to the view that “insufficient funds stifle growth of individual firms and consequently slow industrial growth of individual firms and consequently slows industrial growth in Nigeria” (1978, p. 15), a radical explanation of the idea of capital shortage is offered. In his view, the phenomenon of capital shortage does not apply to all aspects of the Nigeria economy. Rather, it is only peculiar to individual firms, and perhaps to particular sectors or industries. He argued that whereas there is always money to invest in the economy as a whole, firms which were otherwise unsuccessful in their bids to raise needed funds to finance their operations or which were ignorant of existing sources of funding, necessarily experienced a capital shortage. He goes on to explain that this “necessarily reflects adversely upon lending institutions in Nigeria” (ibid, p. 16).

Methods

It is, therefore, worthwhile to investigate the situation in Osun State of Nigeria. That is, assuming that there are lenders willing to assist micro-enterprises, the question remains as to why the VSE’s still not being adequately financed. The objectives of this study will, therefore, be to identify the structures, sources, problems and prospects of financing of very small enterprises (VSE’s) and to determine the impact of modes of financing on the very small enterprises (VSE’s) in Osun State of Nigeria.

This study was carried out in the three senatorial districts (Osun West, Osun East and Osun Central) of Osun State of Nigeria. It covered 240 respondents randomly selected from the total population of 2960 respondents, which were initially identified through a preliminary survey. The research made use of primary and secondary sources to collect data. For the primary source, a questionnaire was used, and the data covered the period of 1999-2000. There were two different sets of questionnaires: the first set solicited information from the entrepreneurs and the second set, from the providers of finance. The questions on the latter were set to provide relevant information that could help in answering the research questions. The secondary sources used included the records of some of the micro-enterprises under study, as well as related literature. The data collected were analyzed using descriptive statistics such as frequency and percentage distributions, various tables and charts. For the proper understanding of the aments quoted, in this study, a dollar exchanges for one hundred and thirty five Naira ($1 = N135).

Results and Discussion

Results regarding the structure and characteristics of entrepreneurs in the study were analyzed.  Table 1 below shows the results of the structural characteristics.  From these results, it can be deducted that in terms of both material and structural definitions given in this study, all the enterprises included in our survey are truly micro-enterprises.

The average number of paid employees is between 2 and 10 which works out to a total average of 5 employees per enterprise. This tallies very well with the maximum of 15 of such employees in our definition of a micro-enterprise. The total assets range averagely between N10,000 and N180,000 which is within the definitional limit of N250,000 for a micro-enterprise.

Similarly, the maximum average annual turnover is N500,000 compared to N1 million stated in the definition. The total average turnover of N306,000 per enterprise confirms the sampled enterprises as truly very small enterprises.

            Structurally, the surveyed enterprises also meet the definition of micro-enterprises. The enterprises are rural-based in terms of ownership structures, level of entrepreneur’s formal education and formality of business: only 20.83% of all the respondents claimed to have formal education beyond the secondary education, while the rest 40.83% do not have beyond primary education. What this means is that about 80% of the entrepreneurs have either no formal education through secondary education. They are also mostly engaged in activities which serve the needs of the rural-based people.

            On the score of formality, only 12.08% of all the surveyed enterprises are registered with the necessary agencies. The remaining 211 representing 87.92% of the total sample size are not registered. The same number of micro-enterprises do not file returns or follow strict procedures for recruitment and staff welfare. Still on structure, 69.58% are sole proprietorship, 16.25% are partnership, 6.67% are cooperatives, while only 7.5% are private limited liability companies. About forty-two percent (41.67%) claimed not to be keeping detailed records of their finances and transactions, while 58.33% do not keep any records at all.

Finally, a large number of the employees and other hands involved in the businesses studied were generally unskilled or semi-skilled compared to the jobs they did. There was a gender balance among the entrepreneurs who responded to the questionnaires, 126 males and 114 females, representing 52.5% and 47.5% of total sample respectively. This shows that entry into the enterprise is easy, a feature of micro-enterprises according to the definition in this study. 

Table 1:

Structure of Micro-Enterprises in the Study

(con’t Table 1:

Structure of Micro-Enterprises in the Study)

Source: Field Survey, 2001

            Also of interest in the study was the performance of the enterprises.  Among the indices for measuring the performance of an enterprise are (i) the growth rate of its staff strength, (ii) the rate of change of its turnover, (iii) the rate at which its net profit is growing and (iv) adequacy of initial capital. The growth of the staff strength is considered a good measure of the performance of an enterprise because of the observation and practice that it is only when a business is doing well that it normally employs more paid workers into its workforce. A business that is not doing well is not likely to be eager to employ more hands.

From Table 2 below for all the categories of micro-enterprises surveyed, net profit increased from year to year. This, however, is not a reliable measurement of business performance over a given period of time. In order to know how well a business is doing, there is a need to know the rate at which the net profit is changing over a given period of time. It is also necessary to know the ratio of the net profit to the turnover.

            In terms of the average rate at which the net profit rose form one year to another, all the enterprises, except those in transportation category, recorded a decline between 1999 and 2000. Also in terms of the profit-turnover ratio, a general decline is observed from 1998 to 1999, and from 1999 to 2000 representing to. This shows that the enterprises were not improving on their performances year to year. This poor performance in terms of rate of change in annual turnover and net profit probably explains in part the inability of most of the micro-enterprises (16.67% of total sample population) to source their working capital from their retained earnings. This poor performance may also be a part of the reasons why most of the surveyed micro-enterprises failed to obtain their working capital from the commercial banks years after the establishment of the enterprises.

Table 2: Performance of Micro-Enterprises by Average Net-Profit, Average Rate of Change of Profit and Average Profit-Turnover  Ratio (1998-2000)

(con’t Table 2:

Performance of Micro-Enterprises by Average Net-Profit, Average Rate of Change of Profit and Average Profit-Turnover  Ratio (1998-2000))

Source: Field Survey, 2001.

Exchange rate     $1 = N135

Key: ANP                   -           Average Net Profit

            ARCNP          -           Average Rate of Change in Net Profit

Table 3 below indicates that, between 1998 and 2000, there has been only a slight average staff growth for all the enterprises surveyed. For instance, from 1998 to 1999, the only change in staff strength was a decrease by one  for the catering sector. Other classes of micro-enterprises in the survey did not record any change. From 1999 to 2000, the situation only changed slightly. Agro-allied ventures recorded an average increase of two workers, catering services regained the average of one employee that they lost in the preceding year. The three other categories of micro-enterprises remained stagnant as they were in the preceding year. Looked at closely, what one sees is that the catering did not really do better than those that did not record any changes in their staff strength. This is because the catering sector of micro-enterprises surveyed, had in year 2000, exactly the same average number of employees as it had in 1998. This apparent stagnation in staff strength suggests that the enterprise did not, on the whole, perform well in the period under study and so could not expand to employ more hands.

            The other sectors, trading, transport, and technical services, did not record any changes in their average staff strength between 1998 and 2000. This means a zero growth of employment for a period of three years. The clear implication of this, again, is that the enterprises are performing rather poorly.

Table 3: Performance of Micro-Enterprises in Osun State – Average Growth of Employment  

Source: Field Survey, 2001.

Table 4 below shows measure of the turnover performance of the micro-enterprises in the three years preceding this study. This was done on the basis of yearly averages of each of the five surveyed classes of micro-enterprises.

            Between 1998 and 2000, all the surveyed kinds of micro-enterprises show a steady rise in gross turnover. Although this trend shows that on the average, each micro-enterprise surveyed was recording an increased gross earning which does not necessarily reflect a buoyant performance by the enterprises. When the rate at which the gross earnings rose between 1998 and 1999 was compared with the rate at which they rose between 1999 and 2000, it was found that the micro-enterprises performed relatively lower in 2000 than they did in 1999. The only exceptions are the catering enterprises which had a marginal 4.6% rise in the rate of change of gross turnover between 1999 and 2000. This general relative decline in the rate at which gross turnover increased from one year to another indicates that the micro enterprise were declining in their performance over time.

Table 4: Performance of Micro-enterprises by Average Gross Turnover and Average Rate of Change in Turnover (1998-2000)

Source: Field Survey, 2001.

Exchange rate     $1 = N135

It could be deduced from the data available in Table 5 below that a large percentage of micro-enterprises in Osun State have low-capital invested businesses. About 96% of them started with a capital of not exceeding N200,000. For 80% of the enterprises, the initial capital did not exceed N100,000. Over half of the enterprises (54%) started with more than N50,000. This indicates that they are very small enterprises as well as that they could not raise enough fund at start up capital.

Table 5: Inadequate Initial Capital Affecting the Performance

Source: Field Survey, 2001.

Exchange rate     $1 = N135

            Table 6 below indicates the sources of finance that are available to entrepreneurs are very personal because there is no opportunity for recourse to the capital market/money market. The entrepreneurs cannot source financing from the banks because they cannot afford the conditions of such sources. These conditions include collateral securities, business registration certificate and certified statement of affairs.

From Table 6 it can be seen that some enterprises obtained their initial capital from two or more sources. Using the category of very small (or micro – enterprises) in Osun State, majority (83.33%) depend on their proprietors’ personal savings for their initial capital or wholly on this source of finance at start – up of all the enterprises, only 0.83% obtained their initial capital from commercial bank loans. None of the 240 respondents claimed to have obtained their initial capital from the People’s Bank or any of the relevant government agencies. The conclusion to be drawn from this is that micro-enterprises in Osun State largely obtained their initial capital from informal sources.

 Table 6: Sources of Initial Capital

** The total of 362(instead of 240) is accounted for by the multiple sourcing of initial capital by some of the enterprises.

Source: Field Survey, 2001.

On the topic of adequacy of initial capital obtained, Table 7 indicates that almost all micro-enterprises in Osun State were inadequately financed at the initial stage of their establishment. Only about 17% of all the surveyed enterprises had up to 71% of their required initial capital. This is considered fairly adequate. On the other hand, as much as 66.25% of the enterprises started business with inadequate capital. About 17%, having from 61% to 70% of their required capital, had marginally adequate start up capital. There was no enterprise that had up to 91% of its required initial capital.

            Looking at the foregoing, analytically it is right to deduce that micro-enterprises in Osun State were inadequately financed at inception. Table 7 further confirms that this acute inadequate financing may not be unconnected with micro-enterprise founders’ preference for informal sources of finance because no other feasible option is open to them. Unlike the banks, the informal sources of business finance cannot generate large sums of funds to meet the required initial capital that most enterprises usually require at the time of their establishment. This initial handicap cannot but stall the growth and performance of the micro-enterprises.

Table 7: Adequacy of Initial Capital Obtained

Source: Field Survey, 2001

Table 8 below indicates the entrepreneur comparative awareness and preference of sources of business finance and that most of the micro-enterprises in Osun State are aware of many of the sources of business finance available in the state. All the 240 entrepreneurs in this study are aware of the existence and services of commercial, community and people’s banks, cooperative societies, contributions, personal savings, gifts and grants, and money lenders as sources from which they could get funds with which to finance their businesses. 200 of them were aware of the possibility of getting materials and services on credit. The lesser known or relatively unknown sources are the government agencies – National Economy Recovery Fund (NERFUND), National Directorate of Employment (NDE), etc., and finance houses.

            However, micro-entrepreneurs’ preferences for sources of finance diverge very widely from their awareness. For insurance, only 10 (4.17%) and 50 (20.83%) out of 240 respondents sought finance from commercial and community banks respectively, while none of them approached any of the government agencies, while only a marginal number 12.5% and 20.83% respectively approached either suppliers and finance houses.

            The general reasons mostly given for not approaching the commercial and community banks was that getting funds from them is tough, and involves cumbersome procedures although they were also largely rated as being very reliable and accessible. The government agencies were not approached because they were not aware of their presence in the state while the peoples’ bank was considered unreliable.

            Cooperative societies, contributions schemes and personal savings were much patronized because they are interest-free or with very low interest rate and most easily accessible, although they provide only small amounts of business finance, especially at start-up. Money lenders and finance houses were not patronized, relative to entrepreneurs’ awareness of them, because they were considered to be too costly and so only to be approached as a very last resort. Gifts and grants were preferred for financing business by 200 out of 240 enterprises surveyed because of their being interest-free although they are always unreliable and they generate very small amount of capital relative to business needs.

From the foregoing, it can be deduced that entrepreneurs’ search for business finance is not hampered by their lack of knowledge of available sources of finance in the state. Rather, whatever limitations there are, arise from the entrepreneurs’ preferences for the available sources, the reasons given for such preferences not withstanding. It is obvious that in line with the nature of micro-enterprises, their operators prefer sources of finance that will leave them relatively free to run their businesses as they like and as cheaply as possible.  

Table 8: Entrepreneurs Comparative Awareness and Preference of Sources of

                     Business Finance

Source: Field Survey, 2001

NERFUND     =          National Economic Recovery Fund

NDE                =          National Directorate of Employment

             Considering the widespread claim of micro-enterprises that they do not get enough financial support from banks, it becomes necessary to investigate the bank’s lending criteria in financing micro-enterprises in Osun State. This becomes even more important in view of the fact that although most of the enterprises were aware of the  existence of banks as sources of business finance, they did not approach them as much as would have been expected for initial capital as well as for working capital. These findings are presented in Table 9 below.

 Table 9: Factors Influencing Banks Financing Of Micro-Enterprises

Source: Field Survey, 2001.

            Banks generally rely on objective factors like existing customers, age of business, business, business amongst others to guide them in considering loan applications for business purposes. They are more confident to give loans to their existing customers than to non-customers. They also prefer to invest on established enterprises than on newly established ones or very recently established ones. This, perhaps, is because older and on-going businesses are generally more able to meet the loan conditions, apart from their viability and profitability being more easily determinable than for new businesses.

            Commercial and Community Banks are equally (fully) influenced by the financial standing of the applicant, government policy on investments, the availability of funds to invest, applicant’s provision of acceptable collateral and/or guarantor; they are also equally influenced by the profitability of the business seeking finance, as well as the cost of administering the loan if granted.

            However, whereas 80% of the surveyed commercial banks would prefer to invest in businesses located in urban areas, only 30% of community banks will use urban location as a criterion in granting a loan. For both commercial and community banks, the entrepreneur’s ignorance of the procedure for applying for financing will not be a reason for refusing to finance a micro-enterprise.

            Furthermore, in demonstration of their rural-based nature, only 50% of community banks make the entrepreneur’s financial management ability such as keeping records of accounts and daily transactions, as a criterion for approving an application for a business loan from a micro-enterprise. All the surveyed commercial banks claimed this to be one of the factors for their granting loan applications. Neither class of investors however made an applicant’s gender or type of business an important factor in deciding on a loan application.

            One other condition that makes it difficult for micro-enterprises to source their finance from the banks is the requirement that they should be registered firms. 100% and 50% of commercial and community banks respectively, require this, whereas by the nature, scope and structure of ownership, most micro-enterprises cannot be bothered about this condition. Owners of micro-enterprises understand this requirement of business registration as part of the reluctance of sources of funds to grant them loans or as part of the stringent conditions for bank loans. Rather than formally register their businesses, most micro-enterprise owners therefore seek their finance from other sources.

            From the banks’ responses, it was further shown that whereas only 10% of commercial banks will like to finance micro-enterprises, 80% of community banks will. The size of a business is therefore considered as an important factor by commercial banks in responding to applications for loans to finance micro-enterprises.

            In deciding on whether to provide finance for an enterprise or not, banks also refer to the track record of applicants. They consider the demand for their products and services. Generally, the performance of micro-enterprises is considered too low to warrant the commercial banks’ interest in financing them. This, however, worsens the micro-enterprises’ problem of poor performance as they always lack enough funds with which to improve their performance.

            The formal sector financing institutions have thus not been of much help to the micro-enterprises. The micro-enterprises have continued to perform poorly, and thus, will continue to be unqualified for substantial bank assistance.    

Initial Capital

            To start any business, prospective entrepreneurs have to raise funds from different sources. These sources include personal savings, grants/gifts and loans and advances from banks, cooperative societies and insurance companies.

It could be deduced from Table 10 below that a large percentage of micro-enterprises in Osun State have low-capital funded businesses. About 96% of them started with a capital not exceeding N200,000. For 80% of the enterprises, the initial capital did not exceed N100,000. Over half of the enterprises 53.53% did not start with more than N50,000. This indicates that they are very small enterprises as well as that they could not raise enough capital at start up.

Table 10:

Initial Capital (N’000)

Source: Field Survey, 2001

Exchange rate     $1 = N135

Conclusion and Recommendations

            From the study, it was found that the micro-enterprises were generally inadequately financed at their establishment. A large proportion of the surveyed entrepreneurs (83.33%) attributed their inability to raise adequate initial capital to the following factors: unfavorable government policies, scarcity of money in the country, money lenders’ high interest rates, low personal savings and the unwillingness of formal capital market to supply the required funds (Table 9). In the area of performance, the micro-enterprises surveyed were revealed to be performing very poorly. This conclusion is reached on the grounds that they are not recording growth in staff strength and recording low profits in the three years preceding the study and they were poorly capitalized. Because of the “rural-based” nature of these businesses and also of the fact that state and federal governments are overwhelmed with other economic problems, it is recommended that the local governments should become more actively involved in financing micro-enterprises in the state. In addition, it is also recommended that the micro-entrepreneurs themselves should be helped to have a new business orientation. Since most of them have very low formal education, they should be encouraged to attend and benefit from seminars, adult education and literacy programs. Finally, the government should provide the enabling environment, finance and policies for micro-entrepreneurial enhancement.

            Business financing in terms of start-up and working capital for day-to-day operation is often cited as the greatest problem for small business development. As such, in Nigeria, start-up capital is a barrier to entry in most entrepreneurial activities. The agro-allied sector had the greatest average amount of start-up capital requirement reported followed by transport services, and the catering sector had the smallest average start-up capital reported at only one-third and one-fourth of the other more capital intensive industries.

            As revealed from the study, when entrepreneurs were asked from what sources they had requested external funds, most reported that no request was made. From the oral interview conducted, most business owners “knew” that they would not be granted loan as they did not have the collateral which is one of the pre-conditions for such approval. One owner stated that loans “were made to rich people”. Another entrepreneur felt that “there was a lot of discrimination in the provision of loans, particularly against small business entrepreneurs”. However, most of the entrepreneurs stated that a source of external funds would improve their businesses significantly. 

References

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