1.1    Background to the Study

The performance and effectiveness of small and medium scale enterprises as an instrument of economic growth and development in Nigeria has long been under scrutiny. This intense scrutiny has been against the backdrop of the low performance and inefficiency that characterized small and medium scale enterprises particularly in assessing its role on economic growth and development. Despite government institutional and policies support to enhancing the capacity of small and medium scale enterprises, SMEs has fallen short of expectations. This has generated serious concern and skeptism on whether SME can bring about economic growth and national developments in Nigeria. The concern is even more disturbing when comparing SME in Nigeria with other countries particularly where SME has become harbinger of economic reconstruction and transformation (Ihua, 2009). In the case of Nigeria, SMEs have performed at very abysmal level. This low performance has further exacerbated poverty, hunger, unemployment and low standard of living of people in a country whose economics is ailing.

Small and Medium Scale Enterprises (SMEs) have been acknowledged to have huge potential for sustainable development. Yet in Nigeria, the SMEs have stagnated and remain relatively small in terms of its contribution to the Gross Domestic Product (GDP). Different people, organizations and operators have advanced various reasons as to why SMEs have not been able to live up to their billing.

The Association of Nigeria Development Finance Institutions (ANDFI) in 2004 issued this stamen in relation to why SMEs perform poorly in Nigeria: “Finance is usually considered as the major constraints of SMEs”. While finance is obviously not the only problem militating against the development of the SMEs, it is certainly the most formidable (Lawrence, 2003). Finance has been viewed as a critical element for the development of SMEs. Previous studies have decried the limited access to financial resources available to smaller enterprises compared to larger organizations and the consequences for their growth and development (Berger and Udell, 2004; Wattanapruttipaisan, 2003; Ogujiuba et al, 2004; Hossain, 1998 etc). Typically, small and medium scale enterprises (SMEs) face higher transactions costs than larger enterprises in obtaining loans (Lee, 2004). Funding has therefore remained one of the key managerial problems that keep confronting business enterprises in Nigeria today (Azende, 2012).

1.2    Statement of the Problem

Small and Medium Scale Enterprises (SMEs) in Nigeria have not performed creditably well and hence have not played the expected vital and vibrant role in the economic growth and development of Nigeria. The situation is more disturbing and worrying when compared with what other developing and developed countries have been able to achieve with their SMEs. It has shown that there is high correlation between the degree of poverty, hunger, unemployment, economic wellbeing (standard of living) of the citizens of countries and the degree of vibrancy of the respective country’s SMEs (Ekpenyong, 1992).

In spite of the fact that SMEs have been regarded as the bulwark for employment generation and technological development in Nigeria, the sector nevertheless has had its own fair share of neglect on the economy. In a seminar titled “ Industrial financing in Nigeria: Problems and Prospects”, Olorunshola (2004), identified in his paper the following as the main problems of SMEs, which are however insurmountable: constrained access to money and capital markets, poor infrastructural facilities, low level of entrepreneurial skills, poor management practices, inadequate equity capital, high rate of enterprise mortality, shortages of skilled manpower, multiplicity of regulatory agencies and overbearing operating environment, societal and attitudinal problems, integrity and transparency problems, restricted market access, lack of skills in international trade, bureaucracy, lack of access to information given that it is costly, time consuming and complicated at times.

The problem and challenges that SMEs contend with are enormous but it is curious to know that some SMEs are able to overcome them. This gives hope and should provide a basis for optimism that there is a way out.

1.3     Objectives of the study

The broad objective of this study is to examine the extent to which poor financing has affected small and medium scale enterprises operations in Nigeria. Specifically, this study seeks to accomplish the following objectives.

1.  To examine the extent to which SMEs in Nigeria face poor financing challenges.

2.  To examine the extent to which poor financing influences the operations of SMEs in Nigeria.

3.  To examine the extent to which poor financing has influenced the development and growth of SMEs in Nigeria.

1.4     Research Questions

The following research questions are relevant to this study and it provides the basis for evaluating the research problems;

i.  To what extent has SMEs in Nigeria faced poor financing challenges?

ii.  To what extent has poor financing influenced the operations of SMEs in Nigeria?

iii.  To what extent has poor financing affected the development and growth of SMEs in Nigeria?

1.5    Hypotheses of the study

The following three null hypotheses have been formulated to guide the researcher in the investigation.

Ho1: SMEs in Nigeria do not significantly face poor financing challenges.

Ho2: Poor financing does not significantly influence the operations of SMEs in Nigeria.

Ho3: Poor financing does not significantly influence the development and growth of SMEs in Nigeria.

1.6       Significance of the study

This study shall be of immense benefit to government, SMEs operators, and prospective researchers. The government shall be made to understand the impediments in the growth and development of the SMEs subsector through a comprehensive understanding of the adverse effect of financing challenges that hitherto besieged SMEs in Nigeria. This will help them to take appropriate measures aimed at providing financial aid to the sector.

Also, the owners of SMEs shall be avail with valuable insight on how the smooth operation of their business is hampered by poor financing. This will help them to explore available sources of finance at their disposal to savage their business from total failure.

More so, researchers and students who are interested in the area of financing of small businesses in Nigeria will find this work of immense benefits as it will contribute to existing literature and thus serve as a reference material to them.

1.7    Scope of the study

The scope of this study is limited to SMEs operating within Makurdi Local Government Area of Benue State. The choice of Makurdi is stems from the researcher’s belief that being the state capital, it has the highest concentration of SMEs. The scope in relation to time shall be limited to a period between 2008-2012. The period will provide findings that reflect current reality.

1.8     Definition of Terms

Finance: is described as the provision of money when and where it is needed.

Loan: is a certain sum of money borrowed.

Collateral: it is described as the asset used for the purpose of guaranteeing the amount collected; i.e. any negligence the lender will impound it for debt recovery.

SMIEIS: Small and Medium Industries Equity Investment Scheme.

NERFUND: National Economic Reconstruction Fund; which is a source of medium to long-term local and foreign loans for small and medium scale businesses.

CBN: Central Bank of Nigeria; the apex bank in Nigeria which supervises other banks.

SMEDAN: Small and Medium Enterprises Development Agency of Nigeria.

NASME: Nigeria Association of Small and Medium Enterprises; which is an umbrella association of all SMEs.

BOI: Bank of Industry; which provides medium to long-term loans to enterprises.