Performance & financing of micro, small and medium enterprises (MSMES) in Nigeria : implication of transaction costs and collateral
Stellenbosch University. Faculty of Economic and Management Sciences. University of Stellenbosch Business School.
ENGLISH SUMMARY : This thesis examines the performance of MSMEs in the Nigerian economy and how transaction costs and collateral constitute constraints to accessing finance for a better MSMEs performance. This thesis looks at the sources of financing for MSMEs in Nigeria, the performance of MSMEs in employment generation, output contribution and the implications of transaction costs and collateral on MSMEs access to finance in Nigeria. World Enterprise survey data was used to analyse the performance of MSMEs in employment generation, as well as MSMEs output contribution, using the non-parametric variance estimation of the locally-weighted scatterplot smoothing (LOWESS) method. For the analysis of transaction costs, and issues with collateral determinant, the survey method was used. The thesis takes the form of five papers. The first paper enumerates the external sources of financing options available for MSMEs in Nigeria. The study also investigated the role of lending vis-à-vis stock markets especially for MSMEs, the Micro Finance Banks (MFBs) role and growth in Nigeria and lending to MSMEs to see if MFBs can mitigate the costs of lending to MSMEs. Finally, the major obstacles to bank lending to MSMEs, which are cumbersome application procedures, high interest rates, inaccessible collateral requirements and loan terms (maturities) were examined. The second paper analysed the importance of MSMEs in employment generation. Using a non-parametric variance analysis on the data obtained from World Bank Enterprise Survey, the analyses found MSMEs to performed better than large firms in term of employment generation in the Nigerian economy, with micro and small size enterprises leading the way. This confirms Birch’s (1979) claim that small businesses are the most important source of employment generation. We conclude that governments and other relevant stakeholders in developing countries such as Nigeria dealing with issues of high unemployment should consider MSME support and development as a necessary condition in their effort to reduce unemployment. Secondly, policymakers in developing countries such as Nigeria should provide the necessary infrastructure for MSMEs development through the creation of innovation hubs and clusters to enhance MSMEs’ ability to generate more employment. The third paper measured MSMEs’ productivity growth rate using annual sales of firms from the World Bank enterprise survey data for Nigeria. The study employed the non-parametric variance estimation using the locally-weighted scatterplot smoothing (LOWESS) method on three sets of two-points data (2006 and 2003, 2008 and 2002, and finally 2012 and 2009) of annual fiscal sales for each category of firms (micro, small, medium and large) surveyed. The results showed that small businesses recorded high productivity growth rates in some subsectors of the economy that specialises in product customisation such as garment, metal works, and furniture. Therefore, this study validates the flexible specialisation theory of Piore and Sabel (1984) that emphasises the economic importance of MSMEs in the post-industrial era where product customisation is the new order of production. The policy implication of the study is that any targeted intervention in the MSMEs sector designed to increase productivity must be channelled towards the subsector with the most employee specialisation as well as product customisation. Also, drawing from a synthesis of the flexible specialisation theory and pro-SME policy thesis, MSME production hubs similar to what is done in Silicon Valley and New York’s garment district should be encouraged as this can help spur MSME output because it prompts easy knowledge transfer and skill adaptation. The fourth paper investigated the impact of transaction costs in MSMEs access to finance. This was done by analysing transaction costs on access to credit from the view point of both MSMEs and financial institutions (commercial banks and microfinance banks). From the MSMEs’ side, borrowing experience, decision lag, firm size and borrowers’ distance to the loan office were investigated. On the financial institution’s side, the costs of information gathering, loan administration, monitoring and loan enforcement were investigated. We used the questionnaire survey method, in-depth interviews and case studies, as well as the annual financial statements of the banks. We identified interest rate and collateral value as constraints to accessing finance for MSMEs. We also found financial institutions’ attitude on MSMEs access to credit not being friendly. Financial institutions need to do more to bring down transaction costs of lending. This hopefully can be achieved by investing more in agent banking which would lower operating costs, as well as spreading risk, and ultimately increase credit intermediation to small businesses. Finally, the fifth paper looked at how collateral affects MSMEs’ access to credit facility from financial institutions. Using the questionnaire survey method and in-depth interviews, we found that collateral was a huge constraint to accessing finance with 45% of the firms surveyed revealing that collateral pledging has denied them access to debt financing from banking institutions. In the light of this finding, we believe that if the alternative collateral, explained in the chapter, is given proper consideration by all stakeholders, it would go a long way to reduce the problem of collateral as an obstacle to debt finance for MSMEs in Nigeria.
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