The Role of Small and Medium Equity Investement Scheme in Financing Sme's

Topics: Small business, Investment, Council of Smaller Enterprises Pages: 5 (1609 words) Published: November 1, 2012
The Role of Small and Medium Industries Equity Investment Scheme (SMIEIS) in financing Small-Scale Enterprises in Nigeria BACKGROUND TO THE STUDY
Interest in the role of Small-Scale Enterprises in the development process continues to be in the forefront of policy debates in developing countries. The advantages claimed for Small-Scale Enterprises are various, including: the encouragement of entrepreneurship; the greater likelihood that Small-Scale Enterprises will utilise labour intensive technologies and thus have an immediate impact on employment generation; they can usually be established rapidly and put into operation to produce quick returns; Small-Scale Enterprises development can encourage the process of both inter- and intra-regional decentralisation; and, they may well become a countervailing force against the economic power of larger enterprises. More generally the development of Small-Scale Enterprises is seen as accelerating the achievement of wider economic and socio-economic objectives, including poverty alleviation.

The role of finance has been viewed as a critical element for the development of small-scale industries. Previous studies have highlighted the limited access to financial resources available to smaller enterprises compared to larger organisations and the consequences for their growth and development (Udechukwu, 2003). Typically, smaller enterprises face higher transactions costs than larger enterprises in obtaining credit (Olorunshola, 2003). Poor management and accounting practices have hampered the ability of smaller enterprises to raise finance. Information asymmetries associated with lending to small-scale borrowers have restricted the flow of finance to smaller enterprises. In spite of these claims however, some studies show a large number of small enterprises fail because of non-financial reasons.

The panacea for solving problems of economic growth in developing countries often reside in the development of small scale industries. The establishment of those industries has been the centerpiece of industrial development of many countries such as India, Malaysia, Pakistan and Indonesia, to mention a few. It is expected that the gains to be derived from the establishment of small-scale industries will be translated into the generation of employment at a low investment cost. These industries will also be able to harness raw materials locally and serve as raw inputs to the large-scale industries.

The key problem facing most small-scale enterprises is lack of finance whether for the establishment of new industries or to carry out expansion plans. The inability to attract financial credit or resources has hindered or stifled the growth of small-scale enterprise. The reasons for the lack of fund include the followings: • High rate of inflation that led to the vast depreciation of Naira exchange rate, thus making it difficult for most small and medium scale enterprises to obtain required inputs for expansion. • Low level of savings in the economy, which leads to low capital formation. • High rate of interest charged on loans, which scares off potential small and medium scale entrepreneurs.

The unwillingness of retail banks to grant credit to small and medium scale enterprises because of the low creditworthiness of these enterprises has also hampered their growth over the years. Bothered by the persistent decline in the performance of the industrial sector and with the realization of the fact that the small and medium scale industries hold the key to the revival of the manufacturing sector and the economy, the Central Bank of Nigeria successfully persuaded the Bankers’ Committee in 2000 to agree that each bank should set aside 10 percent of its annual pre-tax profit for equity investment in small and medium scale enterprises. To ensure the effectiveness of the programme, banks are expected to identify, guide and nurture enterprises to be financed by the scheme. The...
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