An assessment of the challenges of Small and Medium Scale Industries.

Abstract

The objective of this study is to ascertain the challenges facing SMEs in Nigeria. The study used

survey research design to gather data from two hundred respondents from small and medium.in

Abuja. The study employed t-test statistical technique to ascertain the extent to which these

challenges hamper the growth of SMEs. The results showed that multiple taxation, access to

finance and power supply are the major challenges facing SMEs in Nigeria. The results also

showed that power supply is the 1st

ranked challenge while multiple taxation is ranked the least

challenge facing SMEs in Nigeria. This study recommended that commercial banks should reduce

credit requirements for SMEs

1.0 INTRODUCTION

In recent times the world economy has developed tremendously and this development can be attributed to activities

of Small and Medium Scale Enterprises (SMEs), especially in developing countries of world (Ariyo, 2005). Basil

(2001) reports that the roles played by small and medium scale enterprises in communal and economic development

cannot be overestimated. The author further documents that SMEs sector is the highest employer of labour and it

contributes immensely to the GDP of any meaningful economy. Ariyo (2005) opines that SMEs is a vehicle used for

accomplishing sustainable growth. To assume this important role SMEs must marshal out strategies that will enable

them overcome a number of key business challenges that confront them on daily basis. Some of these challenges

include, high production costs, low employee productivity and inability to build competitive advantage through

producing quality products and services and low entrepreneurial interventions (UNCTAD, 2005). However anecdotal

evidence shows that SMEs in developing countries like Nigeria are faced with a lot of challenges that have hampered

their growth in recent times. Among these challenges are: intermittent power supply, indiscriminate tax levies, low

accessibility to loans from financial institutions and inability to keep proper financial records. Oluboba (2010) reports

that the main problems facing SMEs, which are however not unsurmountable are: low level of entrepreneurial skills,

poor management practices, low access to money and capital markets, low equity participation from the promoters

because of insufficient personal savings due to their level of poverty and low return on investment, inadequate equity

capital, poor infrastructural facilities, 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. In the same vein Onugu (2010) reports

that the major challenges facing SMEs include; insufficient capital, lack of focus, inadequate market research, overconcentration on one or two markets for finished products, lack of succession plan, inexperience, lack of proper book

keeping, lack of proper records or lack of any records at all, inability to separate business and family or personal

finances, lack of business strategy, inability to distinguish between revenue and profit, inability to procure the right

plant and machinery, inability to engage or employ the right caliber of staff, painlessness, cut-throat competition, lack

of official patronage of locally produced goods and services, dumping of foreign goods and over-concentration of

decision making on one (key) person, usually the owner. Other challenges which SMEs face in Nigeria include

irregular power supply and other infrastructural inadequacies. unfavourable fiscal policies, multiple taxes, levies and

rates, fuel crises or shortage, policy inconsistencies, reversals and shocks, uneasy access to funding, poor policy

implementation, restricted market access, raw materials sourcing problems, competition with cheaper imported

products, problems of inter-sectorial linkages given that most large scale firms source some of their raw material

outside instead of sub-contracting to SMEs, insecurity of people and property, fragile ownership base, lack of requisite

skill and experience, thin management, unfavourable monetary policies, lack of preservation, processing and storage

technology and facilities, lack of entrepreneurial spirit, poor capital structuring as well as poor management of

financial, human and other resources.

Osoba (1987) and Innag and Ukpong (1993) opine that financial institutions classify loans disbursed to small and

medium scale enterprises as “high risked loans”. They are accorded low priorities in the lending schemes especially

by the commercial banks. The financial institutions also claim that the owners of these enterprises most of the time

are unable to provide required collateral securities and are also unable to cope with the high interest on loan charged

by commercial banks. SMEs are unable to raise funds in the capital market either because they cannot fulfill the

conditions, or because they are ignorant of the facilities provided by the market. As a result of the foregoing, SMES

in general and the SSEs in particular find it difficult to expand their business operations.

Olayemi (2012) stresses that the importance of electricity supply to the growth of SMEs and industrialization cannot

be overemphasized. The author opines that the current unemployment rate is close to forty per cent and industrial

capacity utilization that is below thirty per cent are major problems caused by the epileptic electricity supply. He

stresses that the shortage of power supply in Nigeria has gained rapt attention of indigenous researchers because of

the adverse effect it has on industrialization. Kim (1997) also reports that shortage of power supply is the major factor

that grounded many businesses in Nigeria. Some businesses have to shift their base to neighboring African countries

like Ghana and Benin Republic because of epileptic electricity supply in Nigeria. China in its own wisdom leverage

on this shortcoming and use Nigeria as dumping ground for generators. Most Nigerians believe that the importers of

generators will do all within their power to make sure that poor electricity supply is not rectified because if it is

rectified they will be out of business (Arowolo, 2012). Dismal state of infrastructure, with particular reference to

power supply, transportation and workspace led to low productivity and stunted growth of SMEs.

Holtz-Eakin (1995) document that in levying SMEs, tax ought to be done in such a way that it will put the income

size and need for survival into consideration. It is expedient that enough profit is allowance is given to them for the

purpose of business expansion. Some scholars suggest that tax policy must be not gear toward encouraging SMEs to

remain in the informal sector or to evade or avoid tax payments. Other scholars argued that many small firms in Africa,

including Nigeria, choose to remain in the informal sector because of the perceived benefits derived from remaining

in the informal sector outweigh the perceived costs.

Stem and Barbour (2005) argue that for SMEs to grow, the tax rates must be realistic and not to asphyxiate the

businesses of their working capital. Holtz-Eakin (1995) argues there is no economic legal clause that is enunciated to

give the preferential treatment to SMEs with regard to tax. Some of the factors that could be advanced in favour tax

concessions for SMEs includes: the presence of externalities provided by small firms that benefit the economy, the

rewards for which are not fully captured by small firms, for example, there is a need for government to provide taxbreak for small firms, on the basis of equity and the tax system should not be designed to affect the growth of the

SME’s in a negative way.

The object of this study is ascertain the challenges facing SMEs. This study is different from previous studies because

it focuses on the challenges posed on SMEs with regard to taxation, power supply and access to funds. The study

was restricted to some selected medium scale manufacturing businesses in Nigeria.

1.2 Objective of the study

This broad objective of this study to ascertain the challenges facing SMEs in Nigeria while the specific objectives

are to:

1. ascertain the relationship between multiple tax and growth of SMEs in Nigeria

2. find out the relationship between power supply and growth of SMEs in Nigeria

3. instigate the relationship between access to fund and growth of SMEs in Nigeria

  CHAPTER 2- LITERATURE REVIEW

Small and medium scale enterprises

The definition of SMEs depends mainly on the level of development of the country. In most

developed market economies like the United States of America (USA), U.K. and Canada the definition criterion

adopted a mixture of annual turnover and employment levels. In Nigeria, the Small and Medium Industries Enterprises

Investment Scheme (SMIEIS) defines SME as any enterprises with a maximum asset based of N200 million excluding

land and working capital and with a number of staff employed not less than 10 or more than 300.

In extant literature small and medium scale enterprises are usually determined by various quantitative parameters.

Such parameters include the number of people employed in the enterprises, the capital investment outlay, the size of

the plant capacity, the sophistication of the equipment, sales turnover, and profit margin and perhaps market share. In

Nigeria, existing official definitions, by government agencies such as the Federal Ministry of Industries, Central Bank

of Nigeria emphasize nominal financial outlay as the operational indices for defining small and medium scale

enterprises. The current national definition of SMEs in Nigeria as adopted at the National Council on Industry (NCI)

in 1996 and as cited by the Central Bank of Nigeria (CBN, 1997) is to classify small scale enterprises as those with

total cost, including working capital but excluding cost of land above N1.0 million, but not exceeding N 40.0 million

with a labour size of between 11 and 35 workers. Medium Scale Enterprises are defined as those with total cost,

including capital but excluding cost of land above N40.0 million but not exceeding N150.0 million with a labour size

of between 36 and 100 workers. In this study however, the use of qualitative criteria in defining small and medium

scale enterprises is preferred. This definitional preference is based on the realization of the ever-changing quantitative

economic indicators affecting money both as a unit of account and as a store of value. These indicators include interest

rates, the level of prices and exchange rates. Against this background and according to Koroma (1992) small and

medium scale enterprises may be seen to exhibit the following characteristics.

Tax policy and SMEs

Tomlin (2008) documents that economists barney is that the amount expended by smaller companies on tax may well

be used for reinvestment that could aid future growth. He further contends that taxes and complex tax system put

disproportionate pressure on smaller businesses. Some schools of thought are of the opinion that low income tax

payers under the regular system of taxation are disadvantaged due to fact that the compliance requirements, cost of

compliance and tax rate are the same for both small and large enterprises. SMEs usually have to operate under an

overbearing regulatory environment with plethora of regulatory agencies, multiple taxes, cumbersome importation

procedure and high port charges that constantly exert serious burden on their operations. Many SMEs have to deal

with myriad of agencies at great cost because they are heterogeneous and these differences in size and structure may

in turn carry differing obligations for record-keeping that affect the costs of the enterprises complying with (and to

the revenue authorities of administering) alternative possible tax obligations. Public corporations, for example,

commonly have stronger accounting requirements than sole proprietorships, and enterprises with employees may be

subject to the full panoply of requirements associated with withholding labour income taxes and social contributions

(International Tax Dialogue 2007). An overly complex regulatory system and tax regime or one opaque in its

administration and enforcement makes tax compliance unduly burdensome and often have a distortion effect on the

development of SMEs as they are tempted to morph into forms that offer a lower tax burden or no tax burden at all

(Masato, 2009) and this results in a tax system that imposes high expenses on the society. A poorly executed tax

system also leads to low efficiency, high collection charges, waste of time for taxpayers and the staff, and the low

amounts of received taxes and the deviation of optimum allocation of resources (Farzbod, 2000). Existing empirical

evidence clearly indicates that small and medium sized businesses are affected disproportionately by these costs: when

scaled by sales or assets, the compliance costs of SMEs are higher than for large businesses (Weichenrieder, 2007),

Among the factors militating against SME tax compliance with are: high tax rates, Low efficiency, high collection

charges, waste of time for taxpayers and the staff, and the low amounts of received taxes and the deviation of optimum

allocation of resources (Farzbod, 2000).Yaobin, (2007) opines other factors that lead to low tax compliance by SMEs

are double taxation, no professional tax consultancy, weak tax planning, high taxation cost.

Power Supply and Small and Medium Scale Enterprises

Some scholars argued that unemployment has a direct link with power supply. Intermittent power supply has made

many businesses in developing nations to die prematurely. Ayodele (2001) argues that the development of the

Nigerian economy as an emerging market is technically a function of amount electricity power that it can generate.

Similarly, Okafor (2008) argues that poor power generation epitomizes a fundamental industrial setback for the

Nigerian economy. Asaolu and Oladele (2006) argue that infrastructural decadence is the major problem confronting

Nigeria and that electricity generation is one of the examples of the infrastructural deterioration in Nigeria. In the

same vein, Rabiu (2009) posits that for three epochs, inadequate quantity, quality and access to electricity supply

remain a big challenge to the Nigerian economy. The author further reports that the resolution of this challenge would

boost the economy, reduce unemployment and the resultant social vices. Dinkelma (2008) ascertains that

electrification has reduced unemployment among the rural dwellers especially among women who engaged in home

made goods and services. In Pakistan, Khan and Khan (2010) discover that power shut down to textile industries

worsened unemployment, while Aqeel and Butt (2001) discover that a proper energy (electricity and gas) growth

consumption policy in Pakistan would stimulate economic growth resulting in expanded employment opportunities in

the country. Statistics have shown that small and medium-sized enterprises (SMEs) including macro-businesses are

the highest employers of labour in Nigeria (Barros, Ibiwoye & Managi, 2011). One of the major challenges of SMEs

in Nigeria is the high cost of electricity generation from private electricity power providers (Onugu, 2005; Aremu &

Adeyemi, 2011).The SMEs and micro- businesses (barbing and hair salons, electronic repairs, business centres,

welding), in Nigeria have witnessed stunted growth due to high costs of fuel and maintenance of cost of generators.

Generally, generators which are supposed to serve as backup have now become the primary source of electricity

supply to industries(Okereke, 2010).

Essentially, they argue that poor budget implementations over the years account for the excruciating impacts of SMEs

on the Nigerian economy, which has led slow growth.

Access to finance and SMEs

Many studies have performed by both foreign and local authors on the relationship between access to finance and

growth of SMEs. Ohachosim (2012) carried out a study to ascertain the challenges facing SMEs in Nigeria using

simple percentage non-parametric technique. The result shows that despite all the efforts of government and progress

attain by SMEs in Nigeria, access to finance still remain the worst among all the challenges facing SMEs in Nigeria.

Aremu and Adeyemi (2011) carried a study in Nigeria to find out the challenges facing SMEs in Nigeria employing

ANOVA statistical technique. Their result shows that access to funds is one the major challenges facing of SMEs

in Nigeria.

Akingunola (2011) performs a study on the challenges facing SMEs in Nigeria using Rho spearman. The result shows

that there is a positive relationship between SMEs financing and economic growth in Nigeria via investment level.