THE CONTRIBUTION OF THE INFORMAL FINANCIAL INSTITUTIONS ON THE

GROWTH OF SMALL-SCALE ENTERPRISES IN NIGERIA A STUDY OF SOMOLU

LOCAL GOVERNMENTS CO-OPERATIVE MULTIPURPOSE SOCIETY

BY

DAUDA BLESSING RAMOTU

NOU222069092

PROJECT PRESENTED TO THE DEPARTMENT OF ENTREPRENUERSHIP

OF THE NATIONAL OPEN UNIVERSITY OF NIGERIA, IN PARTIAL

FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE

DEGREE OF POST GRADUATE DIPLOMA IN ENTREPRENEURSHIP

McCARTHY STUDY CENTRE

MARCH 2023

1
 DECLARATION
I, DAUDA, Blessing Ramotu hereby declare that this work is as a result of my research effort
and to the best of my knowledge, it has not been presented by any other person for the award of
any degree except where due acknowledgements have been made.

-------------------------------------------------- ----------------------------
Dauda Blessing Ramotu Date
Researcher

2
 CERTIFICATION
This is to certify that this research project entitled THE CONTRIBUTION OF THE

INFORMAL FINANCIAL INSTITUTIONS ON THE GROWTH OF SMALL-SCALE

ENTERPRISES IN NIGERIA A STUDY OF SOMOLU LOCAL GOVERNMENTS CO-

OPERATIVE MULTIPURPOSE SOCIETY, was written by DAUDA BLESSING

RAMOTU, with the matriculation number NOU222069092 under my supervision.

----------------------------------------- ……………………………………
Dr. Anthony Anazia. Date
Project Supervisor

---------------------------------------------------------- -------------------------------
Prof. Rotimi Ogidan Date
Study Centre Director

--------------------------------------------------- ----------------------------
HOD Date

----------------------------------------- ----------------------
EXTERNAL EXAMINER DATE

DEDICATION
3
This research work is dedicated to the Almighty God for his providence, and also to my late
younger sister Mrs Grace Charles-Aiso.

ACKNOWLEDGEMENTS

4
All glory, honour and thanks goes to Almighty God for his guidance, provision and favour

throughout this project work

My profound gratitude also goes to my children Samuel Dali and Daniel Dali for their

understanding, may God continue to guide and protect them.

Also want to appreciate a frienld and former colleague Mrs. Christiana Okorochukwu who

encourage me to pick up this programme may God bless you immensely.

I also appreciate my supervisor Dr Anthony Anazia for his fatherly advice, guidance and

assistance during the course of the study. I highly appreciate his efforts and comments that

helped to enhance the success and standard of the research work.

The same appreciation goes to all my lecturers and facilitators in the Entrepreneurship and

Business management department for their moral academic support throughout my stay at the

National Open University.

ABSRACT

5
 This paper examined the contribution of the information financial institutions on the

growth of small-scale enterprises in Nigeria A study of Somolu local Government co-

operative multipurpose society, Nigeria. The study used money lenders, cooperative

society, Somolu local Government as proxies of informal financial institutions. The study

utilized a structured questionnaire to collect primary data from a total of 160

respondents. Descriptive statistics was used to analyze the demographics of the

respondents. The study found that informal financial institution (money lenders,

cooperative society of somolu local Government) have positive and statistically

significant influence on growth of SMEs in the study area. Thus, the study recommends

that microfinance banks should be properly structured and funded to enable the SMES

access credit, government should establish special fund where SMEs can access soft and

cheap loan to finance their operations.

6
 TABLE OF CONTENTS

Pages
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
Table of Contents vii
CHAPTER 1 - INTRODUCTION
1.1 Background of the study - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - -1
1.2 Statement of the problems - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2
1.3 Research Question - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -3
1.4 Objective of Study - - - - - - - - - - - - - - - - - - - - -- - -- -- - - - - - -- - -- -- -- -- -- - -3
1.5 Research Hypotheses - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -3
1.6 Significance of the study - - - - - - - - - - - --- - - - - - - - - - - - - - - - - - - - - - - - - -- 4
1.7 Scope of the Study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -5
1.8 Operational Definition of terms - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5
CHAPTER 2 REVIEW OF RELATED LITERATURE
2.0 Introduction- - - - - - - - - - - - - - - - - - - - - - - - - --- --- - - - - ---- - - - - -- - - - - - - 9
2.1 Conceptual Review —-------------------------------------------------------------------------9
2.1.1 Concept of informal institution - -- - - -- -- -- - -- - - - --- - - - - - - - - -- - - - - –-----9
2.1.2 Small and Medium Scale enterprises (SMEs)-- - - - -------------------------------------12
2.1.3 Informal SMEs Finance Providers ------ - - - - - - - - - - - - -- - - - - - - - - -- - - - - 14
2.1.4 Non-Governmental organisations and SMEs ---------------------------------------------18
2.1.5 Financing Options of SMEs in Nigeria -- - - - - - - - - -- - - - -- - - - - - - - - - - - - 19
2.1.6 Owner’s Capital / Equity Sources of Finance- - - - - - - - - - - - - - - - - - - - - - - - -21
2.1.7 Types of Small and Medium sized Enterprises - - - - - - - - - - - - -- - - - - - - - - - - 24
2.1.8 Life Cycle of an SME and problems they face at each stage - - - - - - - - - - - - - - 24
2.1.9 Factors Affecting SMEs in Nigeria- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - –28
2.2 Theoretical Framework --------------------------------------------------------------------32

7
2.2.1 Neoclassical Theory of Financial Constrain-----------------------------------------------32

2.2.2 Financial Growth Theory --------------------------------------------------------------------33

2.2.3 Adverse Selection Theory of Financial Markets —-------------------------------------34

2.2.4 Financial Liberalization Theory —---------------------------------------------------------35

2.2.5 Asymmetry theory of SME financing —--------------------------------------------------36

2.3 Empirical Review ----------------------------------------------------------------------------38

CHAPTER 3 RESEARCH METHODOLOGY

3.1 Research Design -----------------------------------------------------------------------------44

3.2 Area of Study -------------------------------------------------------------------------------- 44

3.3 Population pf the Study —-------- ---------------------------------------------------------45

3.4 Sample Technique and Sample Size ------------------------------------------------------45

3.5 Method of Data Collection -----------------------------------------------------------------46

3.6 Data Analysis —------------------------------------------------------------------------------46

3.7 Validity and Reliability of Research Instruments ---------------------------------------47

3.8 Limitation of the Study —-------------------------------------------------------------------47

CHAPTER 4 DATA ANALYSIS AND DISCUSSION FOR FINDINGS

4.1 Preamble - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 48
4.2 Socio-Demographic Characteristics of the Respondents ------------------------------48

4.3 Analysis of Research Questions -----------------------------------------------------------58

4.4 Discussion of Findings ----------------------------------------------------------------------

59

CHAPTER 5. SUMMARY CONCLUSION AND RECOMMENDATION

5.0 Introduction - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 61

5.1 Summary of Findings - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - ---62

8
5.2 Conclusion- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --62

5.3 Recommendations - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -62

References - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -----64

9
 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Two distinct categories of financial institutions support the economies of developing countries

like Nigeria. Financial institutions that are directly supervised by the government make up one

group. These entities are referred to as formal financial institutions, and examples include

commercial banks, insurance companies, and mortgage banks. The other group consists of

financial institutions that are not under direct governmental supervision. Unofficial financial

institutions, such as neighbourhood banks, cooperatives, thrift and lending societies, money

lenders, etc., fall under this category. It should be remembered that the statutory dominance of

the formal banking sector in Nigeria since independence is based on the idea that doing so will

spur economic growth and speed the development of small and medium-sized enterprises there.

The formal banking system, according to analysts, will increase credit opportunities, encourage

savings and investment, and reduce poverty. However, it has been noted that formal financial

institutions have fallen far short of these expectations, making life more difficult for Nigerians

with stringent credit requirements, subpar customer support, and excessive interest rates. By

creating informal financial institutions, individuals and groups hope to lessen the detrimental

effects of official financial institutions on the growth of small and medium-sized businesses in

Nigeria. To improve community access to credit and loans and address socioeconomic

challenges, indigenous people founded informal financial institutions (Gulong, 2012).

10
Despite not being directly under the supervision of the government and its authorities, informal

financial institutions have infiltrated both formal and informal groups as well as official

institutions and organizations. There seem to be unofficial financial institutions established up

for specific or general objectives in practically every organization. These organizations allow

people to contribute money regularly and distribute it to members as loans or credit. People

prefer to do business with these institutions because they provide softer lending terms and

speedier loan processing at lower interest rates than traditional financial institutions.

Small- and medium-sized businesses, in particular, depend on finance for performance and

growth. This is so that various commercial actions, such as buying raw materials and other assets

or paying employees, can be carried out. Government and policy makers in emerging nations like

Nigeria, therefore, prioritise providing sufficient financing to ensure the survival of businesses

(Susan & Obamuyi, 2018).

SMEs are crucial to the economy of emerging nations because they foster job opportunities,

produce foreign profits, and promote economic expansion (Ofeimun, Nwakoby & Izekor, 2018;

Owenvbiugie & Igbinedion, 2015). Even while official financial institutions are traditionally

expected to finance the expansion of small and medium-sized businesses, attention has steadily

migrated away from these organizations in recent years and toward informal institutions. This is

due to flaws in the official financial system and their failure to provide small and medium-sized

businesses, particularly those in rural and semi-urban areas, with the capital they require (Fanta,

2015).

Traditional organizations known as informal financial institutions run savings plans primarily for

the mutual gain of their members. Financial transactions that take place outside of recognized

financial institutions and which are not subject to state regulation are referred to as informal

11
financial intermediation by Hanedar, Altunbas, and Bazzana (2014). To address the financial

needs of their members, informal financial institutions offer lending and savings services. Credit

from family and friends, moneylenders, rotating savings and credit organizations (ROSCAs),

loan sharks, indigenous savings and credit clubs, informal credit unions, and savings collectors

are some of the sources of informal credit (Forkuoh, Yao, Emmanuel, & Isaac, 2017).

Nigerians refer to these informal intermediation arrangements by a variety of names, including

Esusu or Ajo among the Yoruba of Western Nigeria, Etoto for the Igbo in the East, Adashiin for

the Hausa in the North, and Cooperative and Credit Thrift Societies, which are discovered in

rural and some urban communities. The dearth of collateral, proximity to borrowers, informal

nature of operations, savings and credit components, and lower interest rates are the main

characteristics of these unregulated schemes.

1.2 Statement of the Problem

Small and medium-sized businesses in Nigeria play an important developmental role, although

the industry has continued to face productivity and development setbacks. These issues include a

lack of credit, insufficient money, poor market research, a lack of company strategy,

inexperience, fierce competition, and poor entrepreneurial abilities with a lack of funding and

credit, to name a few (Nelson, Paul, & Olumorin, 2020; Ofeimun, Nwakoby, & Izekor, 2018;

Zirra & Charles, 2017). The majority of SMEs in Nigeria do not reach the growth stage of their

life cycle due to a lack of access to financing, according to Yusufu, Suleiman, and Saliu (2020),

who said that the contributions of SMEs to the growth of the Nigerian economy have not been

felt firmly.

12
Additionally, because the success of small businesses frequently rests primarily on the abilities

of the entrepreneur, it is challenging for financial institutions to gather the data they need to

evaluate the risks of new, unproven ventures. Even though SMEs could be pleased with the

official credit system, the complicated application process for formal credit drives up the cost of

the application and deters SMEs from accessing it (Nguyet, 2014).

While studies have looked at how informal financial institutions affect the performance of SMEs,

the majority of these studies have mostly focused on how formal financial institutions affect

SMEs in Nigeria. Ayeni-Agbaje and Osho (2015), Zirra and Charles (2015), Ayuba and Zubairu

(2015), Owenvbiugie and Igbinedion (2015), Oke and Aluko (2015), Aliyu and Bello (2013), for

instance, Some (2013), Obansan and Arikewuyo (2012), Imoughele and Ismaila (2014), Ayeni-

Agbaje and Osho (2015), Studies primarily conducted in developing countries have focused on

the impact of informal financial institutions on the performance of SMEs (Fanta, 2015; Mungiru

& Njeru, 2015; Forkuoh, et al., 2017). Additionally, Yelwa, et al. (2017) limited their attention to

the impact of informal financial institutions on the reduction of poverty.

In light of the aforementioned and to raise awareness of the role that informal financing plays in

the development and survival of SMEs, this study chooses to focus on the impact of informal

financial institutions on the growth of small-scale enterprises in Nigeria a study of Somolu Local

Governments Co-Operative Multipurpose Society

1.3   Objectives of the Study

The main objective of this study will be the contribution of informal financial institutions in the

growth of small-scale enterprises in Nigeria, a study of Somolu Local Governments Co-

Operative Multipurpose Society.

13
The following will be the specific objectives of this study:

1. To examine the contribution of informal financial institutions to the growth of Somolu

Local Governments Co-Operative Multipurpose Society.

2. To examine the role of an informal financial institution in providing more credit facilities

to Somolu Local Governments Co-Operative Multipurpose Society

3. To examine the role of an informal financial institution in boosting economic growth in

Nigeria.

1.4   Research Questions

1. What are the contributions of informal financial institutions to the growth of Somolu

Local Governments Co-Operative Multipurpose Society?

2. What is the role of an informal financial institution in providing more credit facilities to

Somolu Local Governments Co-Operative Multipurpose Society?

3. What is the role of an informal financial institution in boosting economic growth in

Nigeria?

1.5   Statement of Hypotheses

Hypothesis One

HO: There is no significant relationship between informal financial institutions and the growth of

Somolu Local Governments Co-Operative Multipurpose Society

H1: There is a significant relationship between informal financial institutions and the growth of

Somolu Local Governments Co-Operative Multipurpose Society.

Hypothesis Two

14
HO: There is no significant relationship between informal financial institution and economic

growth in Nigeria

H1: There is a significant relationship between informal financial institution and economic

growth in Nigeria

1.6   Significance of the Study

The study when completed will be significant for the following:

1. The findings of this study will inform the general public, in particular small company

managers, about how informal financial institutions and the expansion of small

businesses interact.

2. This study will add to the body of knowledge regarding the impact of personality

characteristics on students' academic achievement, forming the empirical base for further

study in the field.

1.7 Scope of the Study

This study will focus on the role of informal financial institutions in the growth of small-scale

enterprises in Nigeria, a study of cooperative society in Somolu local government, Lagos State.

1.8 Operational Definition of Terms

Contribution: The giving or supplying of something (such as money or time) as a part or share.

the part played by a person or thing in bringing about a result or helping something to advance.

15
Financial Institution: An establishment that completes and facilitates monetary transactions,

such as loans, mortgages, and deposits. Financial institutions are a place where consumers can

effectively manage earnings and develop financial footing.

Lending Societies: Grant loans in such amounts and reasonable interest rates and charges as

may be agreed upon between the lending company and the debtor: Provided, That the agreement

shall be in compliance with the provisions of R.A.

Economic Growth: Can be defined as the increase or improvement in the inflation-adjusted

market value of the goods and services produced by an economy in a financial year. Statisticians

conventionally measure such growth as the percent rate of increase in the real gross domestic

product, or real GDP.

Informal Institution: Socially shared rules, usually unwritten, that are created, communicated,

and enforced outside of officially sanctioned channels'. Informal institutions are equally known

but not laid down in writing and they tend to be more persistent than formal rules.

Informal Financial Institution: financing activities that are mostly.legal but their activities are

often unrecorded, unregistered and unregulated by government.

16
 CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction

The review provides information that is critical to a thorough understanding of the issues that

necessitate the study of this topic. As a result, it deals with a balance of arguments for and

against the quoted comments, as well as the researcher's final position. These include

Conceptual Review: Definitions, characteristics, typologies, advantages and disadvantages

(Researcher’s own definition, if any), theoretical and empirical review.

2.1 Conceptual Review

2.1.1 Concept of informal institution

The economy of developing nations like Nigeria run on two different types of financial

institutions. One consists of financial institutions that are under the direct supervision of the

government. Commercial banks, insurance firms, and mortgage banks are examples of what are

referred to as formal financial institutions. The other group consists of financial institutions that

are not under direct governmental supervision. These are referred to as unofficial financial

institutions and include local banks, cooperatives, thrift and lending organizations, money

lenders, etc. The statutory domination of the formal financial sector since independence, it

should be recalled, is based on the belief that it will promote economic growth and hasten the

establishment of small and medium-sized businesses in Nigeria. Analysts argued that the formal

financial system will encourage saving and investing, expand credit options, and result in less

poverty. However, it has been noted that formal financial institutions have badly fallen short of

these expectations by imposing onerous credit requirements, subpar customer support, and

excessive interest rates on Nigerians. The establishment of informal financial institutions by

people and organizations aims to mitigate the negative impact of formal financial institutions on

17
the expansion of small and medium-sized businesses in Nigeria. Indigenous people established

informal financial organizations with the goal of enhancing community access to credit and loans

in order to address socioeconomic issues (Gulong, 2012). Informal financial institutions have

penetrated government institutions and organizations as well as a range of formal and informal

organizations, while not being directly under the supervision of the government and its

authorities.

In practically every organization, it seems that there are unofficial financial institutions set up for

particular or general goals that let individuals to donate money on a regular basis and distribute it

to members as loans or credit. People choose to work with these organizations because they have

softer credit requirements and faster loan processing times with lower interest rates than official

banking institutions. Small and medium-sized businesses, as well as overall company

development and performance, depend on finance. This is so that various commercial operations,

such as the acquisition of raw materials and other assets and the payment of salaries, may be

carried out. Therefore, in developing nations like Nigeria, government and policy makers place a

high priority on providing sufficient financing to ensure the survival of businesses (Susan &

Obamuyi, 2018). SMEs are crucial to the economy of emerging nations because they provide job

opportunities, produce foreign profits, and promote economic expansion (Ofeimun, Nwakoby &

Izekor, 2018; Owenvbiugie & Igbinedion, 2015). Even while official financial institutions are

traditionally expected to support the expansion of small and medium-sized businesses, attention

has steadily migrated away from these organizations in recent years and toward informal

institutions. This is due to flaws in the official financial system and their failure to provide small

and medium-sized businesses, particularly those in rural and semi-urban regions, with the capital

they require (Fanta, 2015). Traditional organizations known as informal financial institutions run

18
savings plans primarily for the mutual gain of their members. Financial transactions that take

place outside of recognized financial institutions and which are not subject to governmental

regulation are referred to as informal financial intermediation by Hanedar, Altunbas, and

Bazzana (2014).

To address the financial requirements of its members, informal financial organizations offer

lending and savings services. Credit from family and friends, moneylenders, rotating savings and

credit organizations (ROSCAs), loan sharks, indigenous savings and credit clubs, informal credit

unions, and savings collectors are some of the sources of informal credit (Forkuoh, Yao,

Emmanuel, & Isaac, 2017). Nigerians refer to these informal intermediation arrangements by a

variety of names, including Esusu or Ajo among the Yoruba of Western Nigeria, Etoto for the

Igbo in the East, Adashiin for the Hausa in the North, and Cooperative and Credit Thrift

Societies, which are found in rural and some urban communities. The absence of collateral, near

proximity to borrowers, informal nature of operations, savings and credit components, and lower

interest rates are the main characteristics of these unregulated schemes. Small and medium-sized

businesses in Nigeria play an important developmental role, although the industry has continued

to face productivity and development setbacks. These issues include a lack of credit, insufficient

money, poor market research, a lack of company plan, inexperience, fierce competition, and poor

entrepreneurial abilities with a lack of funding and credit, to name a few (Nelson, Paul, &

Olumorin, 2020; Ofeimun, Nwakoby, & Izekor, 2018; Zirra & Charles, 2017). The majority of

SMEs in Nigeria do not reach the development stage of their life cycle owing to a lack of access

to financing, according to Yusufu, Suleiman, and Saliu (2020), who said that the contributions of

SMEs to the growth of the Nigerian economy have not been felt firmly. Additionally, because

the success of small businesses frequently rests primarily on the talents of the entrepreneur, it is

19
challenging for financial institutions to gather the data they need to evaluate the risks of new,

unproven projects. Even if SMEs may be pleased in the official credit system, the complicated

application process for formal credit drives up the cost of the application and deters SMEs from

accessing it (Nguyet, 2014).

2.1.2 Small and Medium Scale enterprises (SMEs)

Small and medium-sized businesses (SMEs) are typically seen as the force behind fair

development and economic progress in developing nations. In Nigeria, the 1980s are seen to

have been the prime time for SMEs. Those were the years of the Nigerian Bank for Commerce

and Industry (NBCI) and the Nigerian Industrial Development Bank Ltd (NIDB) (NBCI).

Federal Government Development Banks existed that were devoted solely to the growth of

SMEs in the nation (Moradeyo & Babalola 2013). Small and medium-sized businesses (SMEs)

are essential for the growth of any economy. When the economies of emerging countries are

taken into consideration, the crucial role that Small and Medium-Sized Enterprises (SMEs) play

in the growth of any nation's economy becomes even more clear. The backbone of each rising

economy is the SME sector. For many Nigerians, these SMEs have been their main source of

employment and support (Babajide, Iyoha and Taiwo, 2013). It is well known that the majority

of big business purchases its raw materials (inputs) from small SMEs. SMEs serve as a kind of

training ground for the growth and development of indigenous businesses. Small and medium-

sized businesses (SMEs) serve as channels for the transfer and dissemination of innovative

concepts with broad implications. Reduced unemployment and an excess reliance on imports

and foreign goods are both indicators of the presence of thriving SMEs. The current economic

downturn that is sweeping the nation has been attributed to Nigeria's over-reliance on oil

revenues. It is unfortunate that the price of crude oil fell so sharply, but it has also made the

20
Nigerian government more aware of the many difficulties that come with over-dependence on

one particular sector of the economy. On the other hand, SMEs are not only present in one area

of the economy; rather, they are widespread throughout the entire economy and can be found

everywhere in the nation. In Nigeria, SMEs engage in a variety of activities, including

production, services, and manufacturing-related industries.

Small-scale company is without a doubt the cornerstone of every country's industrial growth,

particularly in a typical developing nation like Nigeria. SMEs are not defined in a way that is

universally recognized. SMEs are organizations with a maximum of 300 workers, $15 million in

annual revenue, and $15 million in assets, according to the World Bank (Govori, 2013). Small

businesses might be compared to the value of the assets they have accessible to them. Small

businesses can be categorized based on their annual revenue and the number of employees they

have. The following are some of the characteristics that are used to define small businesses

throughout the globe: Initial financial commitment, stability, relative size, etc. According to

Ofoegbu, Akanbi, and Joseph (2013), SMEs hold the key to Nigeria and other emerging nations'

economic growth and development. Despite numerous government initiatives, Aruwa (2004)

noted that small and medium-sized businesses (SMEs) have a variety of financing options, but

access to the funds has been challenging. Since unregulated informal finance institutions support

SMEs more than formal sources do and account for more than half of their total funding mix, the

informal sources need to be revitalized to meet the demands of microfinancing. Through

regulation and government action, savings in them should be promoted through community and

development banks' active engagement in regional business groups. For the economy to expand

and for small and medium-sized businesses to accumulate, which in turn fosters performance and

economic growth, credit is necessary (Ubesie etal, 2017). Oleka, Maduagwu, and Igwenagu

21
(2014) see a lack of financing as a major barrier to the growth of small and medium-sized

businesses worldwide and the fulfillment of the entrepreneurial dream, particularly in emerging

nations. According to Musa and Aisha (2013), SMEs account for significantly more than half of

all employment, sales, and value contributed. The following sources of funding for SMEs were

listed by Ewiwile, Azu, and Owa (2011): The owner's savings and those of his or her

acquaintances, including family and friends who may or may not be partners or shareholders in

the business, Partners and investors in the business, Banks and lending organizations, the Small

Business Administration's financial assistance program, licensed small business investment

firms, industry professionals, including material suppliers like manufacturers and wholesalers,

and in some cases, clients who prepay their contracts, are all possible sources of funding.

2.1.3 Informal SMEs Finance Providers

Unregistered organizations like self-help groups, cooperatives, and rotating savings and credit

societies are examples of informal finance providers. They may be member-owned, like credit

unions and cooperative societies in West Africa, or government-owned, like microfinance banks

in Eastern Europe. Examples of member-owned entities include rural credit cooperatives in

China, credit unions in West Africa, and cooperative societies in West Africa (Udeaja and Ibe,

2016). The informal SMEs financing providers are microfinance institutions that operate outside

of the official financial system's regulatory and supervisory bodies. Due to poor people's

exclusion from financial services by government-regulated financial institutions due to high

transaction costs, high risk, a lack of infrastructure, and a lack of adequate/acceptable collateral,

there are more informal providers than formal providers in rural areas and semi-urban centers

(Akingunola and Onayemi, 2010). Even though they operate similarly, the structure and type of

informal financing providers vary greatly in developing nations. According to The Informal

22
Financial Sectors, financial service providers that are not subject to government oversight or

regulation cannot be considered as independent legal entities (Oluyombo, 2017). They typically

work outside of the financial system, so the cooperative society can be seen as an institutional

finance provider for business owners in communities' unofficial sectors, while personal financing

arrangements for small businesses typically involve friends, family, money collectors, and

money lenders (Oloyede, 2018). According to a World Bank research from 2000, individuals

have utilized their own funds, modest loans from family and friends, and other informal

organizations in practically every region of Nigeria to operate their companies. The same report

confirms that due to the high degree of certainty and flexibility in obtaining loans from informal

lenders and repaying them, people in both rural and urban areas favor and patronize the informal

sector. In Nigeria, these unofficial financial service providers make it simpler and quicker to

obtain loans than microfinance institutions and commercial banks (Idowu and Salami, 2011).

This is so that a potential borrower may contact the lender and get the financial transactions done

in a short period of time. The informal sector excludes itself from providing the medium- to

long-term finance required for long-term investment in prolonged gestation crops, animals, and

agro-processing due to its average maturity of three months (World Bank, 2000). Nigerian

informal SMEs loan providers. According to Richter (2011), roughly 70% of individuals in

developing nations lack access to financial services, and this percentage may be higher in rural

regions. However, 90% of the financial demands of the rural sector are met by informal rural

finance providers (World Bank, 1994). According to the survey, five active occupational groups

—farmers, craftsmen, market women, merchants, and local manufacturers—provide the majority

of rural residents' financial requirements. In the globe, there are many different kinds of informal

finance providers; some of these work in groups as organizations and unions within a specific

23
community, profession, clan, or company. The informal rural finance providers in Nigeria

highlighted by the World Bank (2000) and Akingunola and Onayemi (2010) include trade and

input supply financing, cooperative societies, nongovernmental organizations (NGOs), "esusus,"

family, friends, and money lenders. According to Iganiga (2008), the primary sources of rural

finance in Nigeria include NGOs, moneylenders, friends, relatives, savings collectors, rotating

savings and credit associations, credit unions, and cooperative organizations. Oloyede (2008)

cited the rotating savings and credit association, money lenders, daily contribution scheme,

social club and cooperative, and thrift and credit association as the informal financial service

providers. These unofficial lenders offer savings and lending services with favorable conditions

and at a lower price (Oloyede, 2018). The following are regarded as informal SMEs funding

providers in Nigeria: Supply chain credit In this arrangement, a business is given items on credit

for a predetermined amount of time. Due of the supplier and buyer's established business

connection, this is achievable. One aspect that sets apart official and informal financial service

providers is the lack of collateral security for loans. A money lender is not in a position to accept

collateral security because the loan is typically expected to be repaid within a few weeks or

months, in contrast to banks, which would look for physical and appropriate collateral that may

recompense them in situations of default. The interest rate charged is always greater than bank

interest rates since the money lender does not feel the need to request collateral (Sharma,

Simkhada and Shrestha, 2005). The high interest rate serves as a substitute for collateral security

to cover the default risk. The amount, duration, purpose, and time of year, including harvest and

festival seasons, all have a role in how much interest a lender would charge. It also provides the

borrower's profile and the money that the lender has available at that specific time. Scheme for

alternating savings and credit An arrangement known as a rotational savings and credit scheme

24
or association (ROSCA) is one in which familiar individuals join forces to form an economic

team that offers each member of the group the chance to save and borrow money. Each

participant in the operation must agree to and be committed to saving a specific amount over a

specified length of time (Iganiga, 2008). There are no limitations on how ROSCA participants

may use their credit; they are free to use it however they see fit for their businesses. Additionally,

because everyone contributes to the fund-raising effort, members are spared the hardship of

paying interest on their credit. It offers the chance to access a lump sum of cash at a specific time

that a person would not be able to come up with on their own. money managers. In poor

countries like Nigeria, the money keeper arrangement entails a person acting as a financial

middleman between a saver and a financial institution (World Bank, 2000). In order to collect

daily individual savings, the setup needs the money keeper to go from one residence, shop, shed,

kiosk, etc. to another. The money manager keeps track of all transactions in his ledger, which he

keeps open for each saver, and on a saving card that the contributor has and that the money

manager signs each day to confirm that monies in the form of saves have been retained with him.

Each saver typically makes a monthly contribution, and at the end of the month, the money

keeper provides the saver the entire amount saved for the month, less a day's worth of savings, as

compensation for the services provided (Singh, 2004). This kind of setup is typical in rural and

semi-urban regions, where residents find it very challenging to use commercial banks due to

either their lack of education or the distance of the banks from these places. One of the money

keeper's main advantages is that it encourages the rural poor to develop a saving habit (World

Bank, 2000; Singh, 2004; Iganiga, 2008). Although the savers pay for the service, it lowers the

transaction cost compared to the savers traveling alone to a commercial bank location before

they may deposit money into or withdraw money from their account. Contributors may borrow

25
from their collected savings as part of several types of savings plans before the end of the month.

Finance for trade and input supply The supply of cash for the acquisition, handling,

transportation, processing, storage, and sale of various commodities is the subject of this. To

maintain input and create inventories at various phases of production and marketing, short-term

financing is required. Both in urban and rural settings, commodities dealers frequently use this

financing structure (World Bank, 2000).

2.1.4 Non-Governmental organisations and SMEs

Non-governmental organizations (NGOs) run in part as a consequence of initiatives supported by

donor organizations and development organizations to combat poverty and promote rural

development (Singh, 2004). The majority of NGOs have as their mission to support rural

development and raise the standard of living for the underprivileged in rural areas by offering

finance and technical support. Esusu, close friends and family. Money keepers and esusus are the

primary informal lenders that mobilize deposits; money lenders are rarely involved in collecting

deposits. The savings collectors have the highest rates of mobilizing savings in terms of volume

and coverage. Family and friends may also offer modest loans with quick repayment terms as a

kind of informal financing (World Bank, 2000). Loans from friends and family are modest,

simple to obtain, accessible for brief periods of time, and highly well-liked in rural communities

without collateral or interest charges (Sharma et al., 2005).

Cooperative societies According to Sizya (2001), cooperatives offer a chance for individuals

with little financial resources to pool their resources in order to meet their members' recognized

development needs. Cooperative societies play a significant role in how development activities

are carried out in rural areas via the engagement of individual members (Oke et al., 2007).

26
According to Larocque et al. (2002), financial cooperatives provide a way for people who don't

have access to commercial banking services to get access to financial services including loans,

productive credit, consumer credit, and savings deposits. According to Sizya (2001),

cooperatives have been in the forefront of development initiatives designed to reduce rural poor

people's levels of poverty. The cooperative's little financial assistance is a source of comfort for

rural residents and small company owners. Cooperatives, according to Sizya (2001), are the most

significant avenues for rural area to participate in the financial markets. Larocque et al. (2002)

recognized the significance of cooperatives as a way to bring formal banking to Burkinabe rural

communities. This indicates that the lack of access to the formal banking system in rural areas is

a significant factor in the growth of cooperative societies because it demonstrates that the rural

people already have a good understanding of the advantages of financial services through

participation in financial cooperatives. The most often used policy recognized as a successful and

more market-friendly instrument is cooperative societies (Tunahan and Dizkirici, 2012; Zecchini

and Ventura, 2009; Kuo, and Sung, 2011; (Tunahan and Dizkirici, 2012).

Small-scale company owners who are members of cooperative societies might use this financial

instrument as a replacement for traditional sources of funding. Iganiga (2008) further noted that

only roughly 35% of Nigerians who are economically engaged have access to the official

banking system's services, leaving the other 65% without them. It appears that 91 million

individuals in a nation of 140 million are served by informal financial institutions.

2.1.5 Financing Options of SMEs in Nigeria

The two primary forms of funding for SMEs are debt and equity. A company's capital structure

is made up of long-term funding sources such preferred shares, long-term debt-debentures, and

27
equity shares. The literature on finance acknowledges the importance of equity in corporate

operations.

If there is a high rate of return on investment, the desire to gain from less borrowed money will

be understandable. In order to give a rate of return that is significantly higher than the cost of the

external fund, external funds are combined with the owner's fund. There are two opposing

theoretical stances on this matter, as well as a workable middle ground. The net income

technique implies that financial decisions have a significant influence on the firm's value and that

leverage is a significant variable beneficial to a running corporate entity that may be employed

endlessly. Contrarily, the net operating income method assumes that the cost of equity rises

linearly with leverage, negating the impact of the financing choice on the firm's valuation. This

approach reflects the widely accepted Modigliani and Miller (MM) perspective. In this sense, it

is possible to have an all-equity-financed company or an all-debt-financed company; the former

is more typical in the commercial world than the latter.

Beyond capital structure ideology, equity (owner's capital) is a factor in the construction of the

financial structure. From an intermediate vantage point, the cost of capital decreases with

leverage up to an optimum level at which the company's value would have been greatly

increased. It is a well-known fact that larger businesses have greater access to potential financing

sources than do smaller businesses that find it difficult to sell long-term equity or debt issues.

Size is therefore crucial for the following reasons: In addition to dictating access to capital

markets, it also influences a company's credit rating and borrowing costs. Small businesses ought

to be categorized as operating in the informal sector, whereas large businesses ought to be

considered to be working in the formal sector.

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2.1.6.1 Debt Sources of Finance

Debt is external financing (both formal and informal) used in a business with the requirement of

monthly interest payments and capital repayment when the instrument crystallizes. In Nigeria,

formal sources of debt financing for SMEs include short- and medium-term loans and advances

from banks (commercial and development), national agencies created to assist SMEs such as the

Central Bank of Nigeria's Export Stimulation Loans (ESL), the National Directorate of

Employment (NDE), the National Poverty Eradication Programme (NAPEP), and cooperative

credit societies. Because -enterprises are deemed to be more indigenous and informal than

SMEs, they may be unable to get money from formal sources. Informal debt sources for SMES

are seen as more essential than official debt sources, which include friends and relatives, clubs,

esusu, and money lenders, and which may account for more than 60% of total, owner capital

(Ojo, 1995).

2.1.6 Owner’s Capital / Equity Sources of Finance

The equity in a business is the owner's investment in the form of capital. Profits from operations

can be kept and used to boost equity capital. Equity is necessary as a start-up capital to cover

capital and pre-operational costs. According to finance theory, borrowed funds should only be

used for profitable enterprises that have a better rate of return on investment than the cost of

external financing. It is surprising that borrowed money make up the majority of neither the

company's original capital nor a significant portion of its total capital, exposing the company to

considerable financial risk, as well as expensive interest payments and other pressures. As a

result, the current scenario, in which business owners possess very little capital relative to their

needs, particularly in industrial-based businesses, is unsatisfactory, causing such businesses to

rely heavily on externally supplied funds.

29
Furthermore, the promoters' dilemma has been exacerbated by their failure to secure sufficient

external financing, as investors are wary of such enterprises due to their high credit risk.

However, as SMEs grow and their growth activities involve the dispersion of assets over a larger

area, their capital requirements may surpass the promoters' financial resources, making external

funding (borrowing) a viable option. The company is able to meet the demands of external

funders while also meeting its expected obligations at this level of development. As previously

stated, the predicted altruistic behavior of external fund givers may remain an illusion. In order

to take full advantage of SMES in developing nations, particularly Nigeria, it is necessary to

improve existing sources or seek out other equity sources that are amenable to the informal

"culture."

2.1.6.3 Funds from Specialized Financial Institution

It is important to acknowledge government efforts to improve the capital base of SMEs through

the establishment of specialized and developed institutions, as well as specific directives issued

by these and other formal financial institutions, as well as the Central Bank of Nigeria (CBN),

aimed at increasing lending to indigenous (SMEs) borrowers. Other measures include non-

governmental organizations (NGOs) providing money to the informal sector, particularly SMEs.

The following are examples of recent government initiatives to fulfill the sector's needs:

i. In 2001, the former Nigerian Industrial Development Bank (NIDB) was renamed Bank of

Industry (BOI), and the Nigerian Bank for Commerce and Industry (NBCI) and the National

Economic Reconstruction Fund (NERFUND) were merged into the newly formed Bank of

Industry.

ii. In December 2005, the Federal Government launched a micro-finance policy in response to

government attempts to meet the financial needs of micro entrepreneurs.

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iii. The government recognized the need to strengthen SMEs equity capital when it established

the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) in 2001. The Small and

Medium Enterprises Equity Investment Scheme (SMEEIS) was created to provide access to low-

cost capital. It is a fund that the participating banks have pooled together with the goals of:

a) Facilitating the flow of funds for the establishment of new and viable small and medium

industrial (SMI) projects;

b) Stimulating economic growth through the development of local technology for capable and

suitable Nigerians; and

c) creating jobs.

d) Removing or decreasing the weight of attention and other financial charges for entrepreneurs;

e) Providing financial, advisory, technical, and managerial support to entrepreneurs;

f) Consulting to entrepreneurs; and

g) Ensuring output expansion, income redistribution, and productivity of intermediate goods in

order to strengthen inter and intra-industrial linkages.

The initiative was created to address the lack of long-term financing for SMEs in Nigeria. Banks

are supposed to jump-start the development of the real sector of the economy through the plan by

financing SMEs outside trading from an equity investment fund pooled from 10% of commercial

banks' profit before tax. Agro-allied, information technology and telecommunications,

manufacturing, educational, service, travel, solid minerals, and construction were all included by

the system. By registering with the Corporate Affairs Commission and following with all

necessary requirements of the Companies as Allied Matter Act (1990), as well as tax laws and

regulations, a company might be eligible for equity capital. Contributing banks are free to use the

31
fund to make equity investments in qualifying industries. New cash injections and/or the

conversion of existing debts owned by a participating bank could be used to make an equity

investment. In addition, qualifying businesses may be able to access additional financing from

banks in the form of loans in addition to equity investment outside of the plan.

2.1.6.4 Finance from Venture Capitalist

A venture capitalist offers funds for the start-up of a new business, the expansion of an

established business, or the rescue of a failing business. In some circumstances, venture capital

entails an investment in a firm in which the venture capitalist obtains a predetermined percentage

of the company's share capital.

Because venture money is not secured, it is subject to the same risks as other stockholders in the

event of a business collapse. A venture capitalist benefits from the company's success by

realizing personal and capital gains from selling his investment or obtaining flotation on the

stock market. The right to engage in project/business management and be engaged in corporate

business decisions is an appealing aspect for venture capitalists.

Owners of shares in the Small and Medium Enterprises Equity Investment Scheme (SMEEIS)

and venture capital typically have the option to execute their repatriation rights by repurchasing

their shares. Another way is to invest in shares in a planned or gradual manner. Another option is

to depart in tiers over a period of time, or to list on the market.

2.1.7 Types of Small and Medium sized Enterprises

According to Owirendu (2014) enterprises that fall within the small and medium scale umbrella

are classified as follows: Firewood supply, food packing, meat retailing, plantain manufacturing,

restaurant service, small scale chicken rearing, rabbit breeding, organizing labor squads,

operating a nursery school for children, home service, preparing food for parties, and so on are

32
all examples of small scale enterprises. Soap production, aquaculture/fish farming, chalk

production, foam production, nylon production, concrete block production, hair/body cream

productions, chemical production, commercial poultry, professional practice claw, accountancy,

education, food and beverage production, and other industries fall under the medium scale

category.

2.1.8 Life Cycle of an SME and problems they face at each stage.

As a business grows, it goes through a series of what may be considered conventional stages.

Some of these phases can be tough to navigate, and some SMEs do not survive them while others

do. The following sections will outline the various growth stages of SMEs. Noel J. divided the

stages into the following categories:

PHASE I: Start-up

This is the stage of the business where all of one's energy, hard work, and time is devoted to

building it from the ground up while simultaneously attempting to persuade oneself that the time

invested is worthwhile. This is also the stage at which the company concept is offered to others

in the hopes of persuading them to believe in it and consider it as promising as the creator does.

Furthermore, ideas will arrive from a variety of sources at some point during this stage; the

initial business concept may alter at this point, or it may be changed, or it may remain the same.

Furthermore, at this point, the actual business may begin, with buying and selling taking place.

This stage is frequently marked by early exhilaration before to the start of the business, which

fades fast as questions about the business ideas emerge, followed by the hard labor necessary to

establish the firm. Then there's the tension of hard labor, which gives way to a sense of

accomplishment once the business is up and running. At this stage, there is always the risk of

putting the focus on sales while overlooking costing and stocking, concentrating on the

33
increasing other books, focusing on the high demand for their product, while choosing to ignore

some fundamental management issues, such as a clear job description, a clear training program

for new staff to make sure quality productions, and so on. If these issues are not addressed

quickly enough, the newly launched firm may fail. This crisis normally occurs between the 12th

and the 18th month of a company's existence, and it can be resolved in as little as six months if

effectively managed.

PHASE 2: Steadying the Ship

At this point, the SME is beginning to slow down its expansion and better control its operations.

Using the reformations brought about by the crisis in phase one, the business will be able to have

a detailed description of tasks and duties for employees, separate duties according to different

segments of the industry (Marketing, Finance, Management, and so on), and allow each field to

do their job. Furthermore, this is the stage at which the company begins to grow, hire additional

personnel, and place a greater emphasis on client relationships. It is correct to claim that the firm

is likely prospering at this level, yet, as with any new business at this time, despite the success

rate shown, the business is going to have some administrative difficulties. It's referred to as

"office politics" in most firms. This crisis occurs because, as a start-up, the business owner is still

involved directly with the day-to-day running of the business. During this phase, when new

management teams have been hired, there is always the risk of the business owner interfering

with the decisions of their experts, causing some misconceptions and potentially creating a

schism among employees, with some vow commitment to the boss and others continuing to

34
support the expert's stand. Furthermore, due of the rapid expansion, increased purchases,

increased output, and so on, there may be a mix-up in certain transactions that, if not addressed

swiftly, might lead to a larger problem. This is the second crisis, and as with the first, the

business owner must make the appropriate option to slow things down in able to fix the coming

disaster to its firm; otherwise, the business may fail. This is known as a "crisis of autonomy." At

this stage, some critical considerations may include the firm owner stepping down as Chief

Executive Officer and hiring an expert to do so. Depending on how severe the crisis becomes, it

may be necessary to recruit some external advisors to assist in resolving the problem. This

second crisis, like the first, lasts roughly 6 months, though it can sometimes last longer.

PHASE 3: Business Consolidation

This is the stage at which the corporation recovers from the difficulties encountered during the

"steadying the ship" phase. The firm is maturing or growing up during this time. Of course,

resolving the second crisis in a company's life cycle will result in the development of a well-

organized "management system, financial system, administrative system, HR system, production

and quality control system, and sales and marketing system." This will guarantee that the process

runs smoothly.

At this point, the company may begin to look into new options, such as diversification or

expansion. These new endeavors will, of course, present new obstacles, but the new competent

administrative staff will be on hand to ensure that everything runs properly. Moreover, because

this growth entails recruiting new employees and expanding multiple activities, the third crisis

may result from a loss of business culture and team spirit among the old staff as a result of the

new advancements and an increase in the number of staff beginning to work for the company.

Another issue that the corporation may face at this point is financial troubles caused by poor

35
investment or diversification decisions. Because of the quick expansion, it is extremely normal

for the firm to become overly enthused and make some significant blunders when attempting to

expand its operations. One strategy to combat the issue is for businesses to carefully consider

what sort and capacity of business they want to invest in, as well as what types of goods they

want to stick to even while expanding. In other words, the company must remind itself of its

vision and purpose statements.

Phase 4: Business for the Long Haul

After surviving the crisis in the third stage of its life cycle, the firm is ready for long-term

operations. After expanding and diversifying its businesses, the company may always conduct its

operations while closely reviewing its operations to ensure it does not make major mistakes that

could jeopardize the company.

2.1.9 Factors Affecting SMEs in Nigeria

Abbakin (2019) provided a thorough account of the multiple elements influencing the success of

SMEs in Nigeria, which are as follows;

Financial Aspect:

It is commonly recognized that money is at the core of any business; therefore, an initial decent

quantity of money is necessary to start a firm. Young Nigerians who want to establish a business

generally run into this issue since the country's poor economic condition makes it difficult to

accumulate enough money to start a business.

Furthermore, it is very hard to obtain a bank loan to finance a start-up since banks are often

unwilling to take the risk of investing in a start-up that may fail, preferring to invest in

preexisting enterprises. As a result, when new enterprises approach banks for financing, they are

required to offer unreasonable collateral. Furthermore, there are virtually few government

36
initiatives that help new businesses get started. And when it comes to applying for these few

programs, they generally entail a lot of complicated procedures.

Lack of Technical and Technology Infrastructure: In addition to a dearth of appropriate cash,

there is a lack of critical technical skills and technological infrastructure. There is a weak road

network connecting cities, making it difficult to get about while launching a business.

Furthermore, bad internet connectivity, weak security systems, and unreliable power supply have

a disastrous effect on SMEs since these enable start-ups to develop quickly and thrive.

Competition from Foreign Corporations: One of the biggest issues that Nigerian SMEs confront

is competition from large foreign companies that set up shop in Nigeria. Most well-known

brands that have been in the market for a long time and have achieved great success have

invested in Nigerian markets; these larger companies pose a threat to SMEs because consumers

already believe in their product; they also have a better business strategy and more money to

spend on advertising.

MTN in the telecommunications industry, Shoprite in the retail store sector, Shell in the oil

sector, and so on are examples of these firms.

Lack of Organizational and Management Skills: Many SMEs are founded by young individuals

who were enthralled by a concept and determined to put it up and profit from it. Most of these

young individuals do not consider the possibility that they need to hire someone to help with

some area of the business, or that they do not have the money to pay someone. They, too, lack

the patience to drop everything and try to learn these things first. As a result of this, many start-

ups have failed owing to ineffective management.

Inability to Create Partnership: To save their enterprises, most start-ups form partnerships. This

is not true for Nigerian start-ups. Because partnership discussions are always done by a third

37
party, most Nigerian young company owners are not educated enough to fully comprehend what

partnership comprises, and as a consequence, they opt not to enter it out of fear of being duped.

Human Resource Factor: The sort of personnel in a firm, particularly a start-up, can have an

impact on its success. As a result, large and wealthy organizations invest money to engage

experienced human resource specialists who ensure that the best prospects for the company are

scrutinized and hired. In the case of Nigerian SMEs, their lack of large cash limits their options

for staff recruitment patterns; as a consequence, they run the danger of hiring the incorrect

personnel, which will eventually lead to the failure of their firm.

Lack of Marketing Strategy and Professional Skills: Even when Nigerian SMEs successfully

begin their businesses, one of the most difficult difficulties they encounter is how to raise

awareness about their products and/or services. They just do not notice this, and when it is

brought to their attention, they attempt to engage in certain marketing efforts that generally fail

due to a lack of marketing abilities.

2.1.10 Roles of SME in Economic Development

According to Eniola (2014), a healthy and rapidly developing SME is a tool for socially

sustainable growth that fuels a country's economy. This good impact on the economy may be

seen in a variety of industries; Eniola, 2014 goes on to describe more about these sectors and

how SMEs affect them.

Creating Job Opportunities: One of the most significant reasons for encouraging the formation

and growth of SMEs is to create jobs. SMEs account for half of all new employment generated in

the country's economy each year; moreover, because most SMEs start from scratch, they offer

meaningful occupations that allow individuals to focus on their immediate needs. According to

Eniola, the "Small and Medium Scale Enterprises Development Agency of Nigeria," "SMEs

38
employ 87.9 percent of the workers in the private sector" (Eniola, 2014). As a result, it is critical

to support and promote the growth of SMEs since it inevitably improves the development of the

country's economy.

Poverty Alleviation: Many poverty alleviation initiatives are developed on SMEs since SMEs

generate various job possibilities for individuals, and these programs assist citizens in becoming

their own bosses while also helping to raise the standard of life in society. SMEs play a critical

role in bridging the social divide between the affluent and the disadvantaged through these

activities.

Transformation of Indigenous Technology: According to Eniola, most large industrial

enterprises, such as Honda of Japan, began as tiny businesses. This demonstrates that SMEs may

employ easily available raw resources to create something large, albeit with the assistance of

certain sample imported items that may improve their productivity or transformation speed.

Manufacturing of Intermediate Goods: Certain SMEs produce various intermediate goods

required for completing in some major enterprises. By doing so, they minimize rivalry from

these huge firms and instead cultivate collaboration, which aids in the smooth production process

for both large firms and SMEs.

2.1.11 The Role of the Government in the Development of SMEs

With all of the obstacles that SMEs face, as well as the fact that SMEs make for a significant

portion of the country's economy, it is imperative that the government play an important role in

the growth of SMEs.

The trajectory of SMEs and government engagement in Nigeria has varied over time. Various

intervention initiatives aimed at fostering and assisting SMEs have been implemented in the past.

39
These programs have aided in the improvement of the status of Nigerian SMEs (Atsu & Ojong,

2014) Aside from the direct government intervention program, there are various additional

initiatives in Nigeria that help SMEs. According to BWN, Nigerian SMEs have access to seven

distinct intervention funds in 2018. These initiatives made funding accessible to those who had

an excellent business concept but had the necessary capital to carry it out. To be eligible for the

money, they had to submit a strong business plan, which had to describe in detail the sort of

market, product, or service the entrepreneur wished to go into, as well as give a plan for the

future of the firm. Examples of these programs and what they represent are provided below.

BoI Investments: The Bank of Industry provides several options targeted at supporting SMEs in

Nigeria and, as a result, assisting the population and boosting the economy. Among the several

opportunities it provides are: Graduate Entrepreneurship Cash; This fund is often aimed at young

inventive graduates. They are encouraged to submit their company ideas, and the top ideas are

granted access to funds ranging from N500,000 to N2 million. (from €1218.44 to €4873.74)

There's also the Cottage Agro Processing Fund for agricultural growth, Fashion Funds for

designers, and so on.

Tony Elumelu Fund: In 2010, Tony Elumelu, a Nigerian economist, established this intervention

initiative. This initiative has provided $100 million to 1000 African businesses. This money is to

be disbursed in such a way that $10 million is distributed each year for the next ten years.

Agriculture, fashion & design, light manufacturing, ICT, and other fields are included in the

program.

GroFin Support: This is a development financier that has set aside $500 million to fund Nigerian

micro, small, and medium-sized enterprises (MSMEs) across the country. Its programs are

divided into the following categories: Aspire Nigeria Fund, Growth Africa Fund, Small Growing

40
Business Fund, Aspire Small Business Fund, and Aspire Growth Fund. Shell LiveWire: Shell

Petroleum Development Company of Nigeria offers assistance to entrepreneurs aged 18 to 35.

This assistance might take the shape of funding or organized training exercises designed to teach

young people how to establish their own businesses.

2.2 Theoretical Framework

2.2.1 Neoclassical Theory of Financial Constraint

This study applies the neoclassical theory of financing constraints to investigate whether

informal financial institutions improved access to credit for microenterprises in Nigeria. The

financing constraints approach, pioneered by Petersen, Fazzari and Hubbard, (1988) simply tests

for differences in sensitivity of investment to internal funds in enterprises with different levels of

informational capacity by splitting a sample of enterprises into subsamples. For each sub-sample,

a reduced- form investment equation is estimated, where investment is modeled as a function of

the enterprise‟s internal funds, usually defined as revenues minus expenses and taxes and used as

a proxy for changes in net worth, as well as controls for enterprise-specific characteristics and

investment opportunities determined from a variety of theoretical perspectives (Hubbard, 1998).

Though the financing constraint is an empirical approach, its theoretical underpinnings come

from recent developments in the literature on investment. Cleary, Povel, and Raith (2007) show

that for positive or slightly negative levels of enterprise wealth, investment is positively related

to internal finance.

2.2.2 Financial Growth Theory

Berger and Udell (1998) propose a financial growth theory for SMEs where the financial needs

and financing options change as the business grows, becomes more experienced and less

41
informationally opaque. They further suggest that firms lie on a size/age/information continuum

where the smaller/younger/more opaque firms lie near the left end of the continuum indicating

that they must rely on initial insider finance, trade credit. The financial growth theoey model

predicts that as firm grows, it will gain access to venture capital (VC) as a source of intermediate

equity and mid-term loans as well as a source of intermediate debt. At the final stage of the

growth paradigm, as the firm becomes older, more experienced and more informationally

transparent, it will likely gain access to public equity (PE) or long-term debt.

2.2.3 Adverse Selection Theory of Financial Markets

The adverse selection theory of financial institutions originates from the work of Stieglitz and

Weiss (1981). In his explanation interest charged by a credit institution are assumed to have a

dual role of sorting potential borrowers (leading to adverse selection) and affecting the actions of

borrowers (leading to incentive effect). Interest rates thus assumed to affect the nature of the

transaction and do not necessarily clear the market. Both effects are seen as a result of the

imperfect information inherent in credit markets. Formal lenders insistence on collateral security

rations a large number of borrowers out of the credit market, leaving only the few who can afford

the required collateral. According to Stiglitz and Weiss (1981), lenders would like to identify

borrowers most likely to repay their loans since the banks’ expected returns depend on the

probability of repayment. Formal institutions fail to cater for the credit needs of small firms who

are perceived to be too risky and small enterprises often have greater access to informal credit

facilities than to formal sources. Adverse selection arises because in the absence of perfect

information about the borrower, an increase in interest rates encourages borrowers with the most

risky projects, and hence least likely to repay, to borrow, while those with the least risky projects

cease to borrow. Interest rates will thus play the allocative role of equating demand and supply

42
for loanable funds, and will also affect the average quality of lenders’ loan portfolios. Lenders

will fix the interest rates at a lower level and ration access to credit. Imperfect information is

therefore important in explaining the existence of credit rationing for small and medium

enterprises. Stiglitz and Weiss’ theory was designed to apply quite generally, rather than in a

specific context of informal credit in developing countries. In the latter context, the theory has

often been criticized for its underlying assumption that lenders are not aware of borrower

characteristics. The close knit character of many traditional rural and close knit urban societies

implies that lenders possess a great deal of information about relevant borrowers’ characteristics,

such as business ability, size and quality of assets, and risk attitudes. Criticism for this theory

stems from the fact that it ignores the fact that borrowers themselves who can seek ways to

assure the lender that they are not "lemon" and hence have access to credit.

2.2.4 Financial Liberalization Theory

The financial liberalization theory was given prominence by seminal work of McKinnon and

Shaw (1973). They popularized the concept of financial repression as a financial system with

policies that distort domestic financial markets and credit controls. The observation is that such a

system interferes with the economic development of a country as the intermediaries are not well

developed for mobilization of savings while allocation of financial resources among competing

uses is inefficient. The early hypothesis of McKinnon and Shaw (1973) assumed that

liberalization (absence of repression) which would be associated with higher real interest rates as

controls are lifted would stimulate savings which would lead to higher levels of investments and

therefore to economic growth. McKinnon and Shaw also suggest that liberalization of financial

43
markets allows penetration of financial services among the poor population. These groups of

people are always on the lower cadre of the social cycle. Therefore, providing them with

accessible tools of finance could be considered a very significant step towards achieving

economic growth. This is because peasant communities could be mainly left out due to poor

infrastructure, insecurity and abject poverty. Providing these people with access to credit gives

them the opportunity to expand their business activities to middle class economy. Financial

repression has generally hindered the development of the institutional capacity of financial

institutions in their development of the commercial viability of their operations. Reform of

financial markets has taken the form of significant liberalization as countries shifted from the

‘repressive’ regimes. Governments are no longer required to play major roles in determining

credit flows through a system of subsidies, interest rate ceilings, credit allocation and direct

intervention. However, liberalization has not been effective in improving credit delivery

especially for SMEs. In many African countries, a consequence of the initial growth that resulted

from the structural adjustment programmes was a significant increase in the demand for finance

by businesses, which formal financial units failed to satisfy. In searching for alternatives to

formal sector finance, attention is increasingly being paid to informal and semi-formal finance

(including micro-finance) for meeting private sector credit demand, particularly from small

enterprises. (Aryeetey, 1998).

2.2.5 Asymmetry theory of SME financing

The foundations for this theory were established in the 1970s by three researchers: George

Akerlof, Michael Spence and Joseph Stiglitz. They received the Bank of Sweden prize in

Economic Sciences in memory of Alfred Nobel 2001 “for their analyses of markets with

asymmetric information”. On asymmetric theory, there has not been any specific theory that

44
describes how entrepreneurs access external financing of their businesses (Kalid et al., 2014).

Similarly, theories of financing SME have not proffered adequate explanation of financial

behaviour (Romano et al., 2001). Thus, scholars have adopted different theories to x-ray how

businesses access external financing. The SME financing theory that is vital to this study is the

asymmetry theory. Bank is the major formal financing of businesses. The main provider of debt

capital to businesses is the commercial banks that give loans mostly to businesses with

collaterals and good track records (longenecker et al., 2012). However, only few businesses have

proven track records and collaterals that are needed for bank loan by the commercial banks.

Precisely, businesses inability to access loan could be traced to information asymmetry.

According to Bahr et al., (2011) financial gap hypothesis indicates that businesses are unable to

access finance due to information asymmetry between the banks and the businesses that want to

borrow (Kalid et al., 2014). Thus, the newly businesses and those firms that want to expand

encounter difficulties to obtain external formal financing. As a result, they resort to internal

financing or informal external financing (friends, clubs, association etc) as a fall back option

(Kalid et al., 2014). Much progress has been made in the last twenty years in advancing

theoretical knowledge on the role of information asymmetry in obtaining loans (Peltoniemi &

Vieru, 2013). Information asymmetry is when business owner possesses more knowledge about

the business risks and prospects than the banks or financial institutions that want to lend money

to them. Financial institution usually requires information on business performance before giving

them loan to ascertain whether the projects they are embarking on will be viable and completed.

However, getting this information is difficult and not usually available. Thus, the owners of

businesses have better information about their businesses than financial institutions (Riding et

al., 2010). The business owners are better informed about their businesses than outsiders who do

45
not have enough management information on businesses. This results to granting of inadequate

or high interest rate loan (Kalid et al., 2014). When banks do not have enough information about

the business, they will be unwilling to give loan because they are not certain their money will be

recovered. (Riding et al., 2010). In a nutshell, asymmetry theory indicates that in a decision

making that involves two parties a situation exists that one of the parties is well informed than

the other (Osano & Longuitone, 2016). The banking institution does not know much about the

business enterprise, while the business enterprise in the same vein, does not have any knowledge

in banking information (Mauzurinal et al., 2020). The inability of a business enterprise to pay

back borrowed money centres on uncertainty surrounding investment projects embarked upon.

(Yan et al., 2015). Banks are unable to lend to most small and medium enterprises due to high

level of uncertainty and risk (Berger et al., 2011). Therefore, uncertainty and risk may push

banks to indulge in debt information about the business enterprises (Mauzurinal et al., 2020).

This is a protracted process and time consuming for banks to take a decision. When information

asymmetry could not be controlled or handled, it becomes a threat and moral hazard to the

business enterprise (Yan et al., 2015). The uncertainty and the risky nature of most business

enterprise have instigated studies to ascertain the role of collateral power in obtaining a loan

from financial institutions (Mauzurinal et al., 2020). If business enterprise that wants to borrow

provide her collateral, the bank will grant the loan, no matter the level of uncertainty surrounding

the business enterprise (Hoque et al., 2016). Collateral is a pledge of property presented by

business enterprise to secure repayment of the money borrowed from financial and could affect

bank credit rationing behaviour (Hoque et al., 2016). Most times businesses find it difficult to

present their collaterals during recession in order not to lose them, and there are characteristics

that owner of a business enterprises may possess that can affect his chances of securing external

46
finance from financial institutions (Hoque et al., 2016). Characteristics such as age and education

play a big role in bank loan (Mauzurinal et al., 2020). The issue of age could be seen to indicate

the ability to survive, good management and positivity. Most financial institutions find it difficult

to give loan to young business enterprise because information asymmetry between them and the

financial institutions is enormous which makes it difficult to build good relationship (Hoque et

al., 2016). Precisely, the inability of most businesses to provide collaterals for bank loans makes

them to seek for the services of informal financial institution. Thus, this study included informal

external loans as option for business finance for investment purpose.

2.3 Empirical Review

Prior empirical studies on the role of informal financial institutions in enterprise growth exist.

Oluwole and Oluwagbemigun (2021) investigated the effect of informal financial institutions on

SMEs performance in Akoko South-west Local Government Area of Ondo State; and reported

that credit from family and friends and credit from money lenders had negative effect on the

growth of small and medium scale enterprises. The study however, reported that cooperative

credit and credit from business angels had positive effect on growth of SMEs. This report of

Oluwole and Oluwagbemigun (2021) supports the report of Yusufu, Suleiman, and Saliu (2020),

that microfinance banks play key role in the growth and development of SMEs, especially, in the

wave of turbulence and hostile business conditions, since they provide short term facilities to

SMEs. Yusufu et al. (2020) also observed that repayable loans provided at low interest rates

enhance the development of SMEs.

Bamidele, Ayibiowu, Nwogu, and Attahiru (2019) evaluated the impact of Nigerian financial

markets on SMEs in Gusau metropolis. The study found a positive significant influence of

47
financial markets on growth of SMEs. Olusola (2019 appraised the most patronized informal

financial institutions SMEs in Ekiti State, and the distribution of SMEs by informal finance

options and rural and urban areas classification in the State. The study found that among the

informal financial institutions analyzed, availability of fund from cooperative thrift and credit

society, daily savings scheme, rotational savings and credit association, tends to be considerably

high, while majority of SMEs in the state do not have access to funds from professional money

lenders, and professional trade association.

Odunjo, Osawe, and Okoruwa (2018) in their study, evaluated the effect of microcredit on

SMEs in Oyo state, Nigeria and its implication on their welfare. The study found that more than

two-third (69%) of the respondents did not have access to microcredit, while 31% had access to

microcredit. The study also revealed that poverty incidence was higher among respondents that

did not use microcredit than those with access. This suggests that incidence of poverty declines

with access to microcredit. Mungiru and Njeru (2015) opined that formal lending institutions fail

to satisfy financial needs of smallholders, mainly due to stringent lending terms and conditions.

This position was premised on the results of a study on the effect of informal finance on the

performance of SMEs in Kiambu County; which showed that self-help group finance, family and

friends finance; trade credit finance and shylock finance are the sources of SME financing in the

study area; and that self-help group finance, family and friends finance; trade credit finance has a

positive influence on the performance of SMEs while shylock finance have a negative influence

on the performance of SMEs.

In addition, Ashamu (2014) examined the performance of micro finance institutions in Lagos

State, based on the development of SMEs. The findings indicate that the operations of micro

finance institutions have grown phenomenally in the last three years, driven largely by expanding

48
informal sector activities, the conversion of community banks to micro finance banks and the

reluctance of commercial banks to fund emerging micro enterprises.

Okey (2016) carried out a study on commercial banks‘ credit and the growth of small and

medium scale enterprises: the Nigerian experience. Survey the role of Banks in Nigeria as

regards granting of credit facilities to SME‘s. Secondary data was used to embracing

cointegration and error correction contrivances in piloting the study. The result of the study

revealed that Bank credit has no significant influence on the growth and expansion capacity of

SME‘s in Nigeria. The author suggests that policy and guidelines be put in place to ensure that

SME‘s in the country have unrestricted access to bank financing. One of the ways by which this

could be done was for the Central Bank of Nigeria to make policies which will ensure that loans

are given to SME‘s with little or no interest rate.

Ayeni and Osho (2015) examined how SMEs can be developed through the involvement of the

banking segment. The study with the aid of structured questionnaires sampled the entire SME‘s

in Ekiti state and also sample the United Bank of Africa in the state. The study found that

significant relationship exist between credit facilities offered to SME‘s by banks and the growth

and development of SME‘s in the state. The study observed that it was impossible for SME‘s to

be concentrated in the state without the full financial support of banks in the state. Thus Ayeni

and Osho (2015) recommends that bank rules and policy regarding granting of loan to SME‘s be

made more flexible.

Olowe, Moradeyo and Babalola (2013investigated the impact of microfinance on SMEs growth

in Nigeria. The population of the study consists of the entire SMEs in Oyo State. However, the

study was restricted to Ibadan metropolis. Purposive sampling technique was used to select the

49
participating SMEs. Simple random sampling technique was used to select a total of 82 SME

operators that constituted our sample size. Pearson correlation coefficient and multiple regression

analysis were used to analyze the data. The results from this study showed that financial services

obtained from MFBs have positive significant impact on SMEs growth in Nigeria. The results

also revealed that duration of loan has positive impact on SMEs growth but not statistically

significant. The results also showed that high interest rate, collateral security and frequency of

loan repayment can cripple the expansion of SMEs in Nigeria. The paper recommended that

MFBs should lighten the condition for borrowing and increase the duration of their customers‘

loan and also spread the repayment over a long period of time.

Adeoti, Gbadeyan and Yinusa (2015) examined the impact of microfinance credit on the survival

of small- and medium-scale businesses in Irepodun Local Government Area (LGA) of Kwara

State, Nigeria. The two functional microfinance banks in the Irepodun LGA were the

population/sample for this study. ANOVA was used to test the hypothesis. The findings revealed

that microfinance banks contribute significantly to the survival of small- and medium-scale

enterprises in the study area. The study recommends that: repayment periods should be increased

and more funds should be released to potential entrepreneurs for enterprise creation and to

generate more employment.

Ofeimun, Nwakoby and Izekor (2019) Examined the effect of micro finance bank on small

businesses in Nigeria. Data was obtained from the Micro-finance banks and CBN annual reports

for the period 1990 to 2015. The study adopted the ordinary least square regression as the basic

techniques of analysis. The study also employed both normality and the multi-collinearity tests to

examine the features of the data for analysis. The study used the results of the micro financing of

SMEs statistics and exploratory variables in a regression model, it showed that micro loan

50
disbursed and micro loan spread have a significant positive relationship with small business

growth in Nigeria during the period under review. The study therefore concludes that micro

financing of small businesses by micro finance banks has a great effect in stimulating the

economy. The study recommends amongst others that emphasis should be placed on lending to

preferred sectors like agriculture and mining so as to stimulate growth of the economy.

Okpara (2012) conducted a study on “the relationship between establishments of microfinance

banks and development of rural areas in Nigeria”. Data were generated by means of two sets of

questionnaires administered to some selected microfinance banks in the South-east, Nigeria. The

study generated responses from five microfinance banks. The responses from the survey were

statistically analyzed using Chi-Square method. The result of the study indicates that there is

strong relationship between establishments of microfinance banks and development of rural

areas in Nigeria. Therefore, the study recommends that microfinance banks should be established

in rural areas to facilitate rural development in Nigeria.

Taiwo, Onasanya , Agwu and Benson (2016) studied the role of microfinance institutions in

Financing Small Businesses . Primary data was obtained via interviews conducted in 15 small

businesses across Lagos state with their responses summarized in tables. The study advocates the

recapitalization of microfinance banks to enhance their capacity to support small business growth

and expansion and also to bring to the knowledge of the management of microfinance banks and

institutions the impact of the use of collaterals as a condition for granting credit to small

businesses. Findings include both financial and non-financial services provided by microfinance

banks and institutions have greatly assisted small businesses in Nigeria and have enhanced the

distribution of business skills and the sharing of innovative ideas. It was concluded that Small

businesses in Nigeria need access to funding for their businesses to flourish on a sustainable

51
basis. The study recommended that Microfinance banks should try to find long-term capital from

Pension and insurance companies within the country.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 RESEARCH DESIGN

This study will employ the descriptive method of research using questionnaire and documentary

analysis as tools. The use of this method will be based on its capacity to successfully complete

the purpose of this study. As mentioned by Calderon and Gonzales (2004), the descriptive

method of research is a process of gathering, analyzing, clarifying and tabulating data about the

prevailing conditions, practices, beliefs, processes, trends and cause and effect relationships and

then making adequate interpretation about such data. It also includes studies that seek to present

52
facts concerning the status of anything, group of persons, acts, conditions and any other

phenomenon.

The method is therefore appropriate as it permits the researcher to assess the influence of

customer information systems and customer retention. The quantitative and qualitative

approaches will be utilized; the data will be tabulated and analyzed statistically. Documentary

assessment will be employed in acquiring information. Research surveys will be conducted as

the source of data from the respondents regarding their assessment of influence of customer

information system and customer retention will also be done to strengthen and support the

information that will be gathered.

3.2 AREA OF STUDY

The area of study evolves around Members of the co-operative multipurpose society run by the

Somolu Local Government which is within the Mainland Local Government and 15km to Lagos

Island local Government; other communities surrounding it. The city is versatile with offices and

residential area.

3.3 POPULATION OF THE STUDY

According to Asika (2004), every component of the population possesses traits that are similar. It

is the total number of components allotted to a target population. Members of the co-operative

multipurpose society run by the Somolu Local Government were chosen as the study's

population.

3.4 SAMPLING TECHNIQUES AND SAMPLE SIZE

53
A sample size refers to the number of variables to be included in a study (Malhotra and Briks,

2005). Normally, it is drawn from the general population for the study. A simple size of 160 was

selected from the overall 180 respondents, from Somolu Local Governments co-operative

multipurpose society ,160 respondents were randomly selected from the local government. The

choice of respondents of the co-operative multipurpose society is based on the demographic

characteristics sex, age, marital status and educational qualification/s, apart from the objectives

of the study. The sampling technique used in selecting the sample size is simple random

sampling technique. Simple random sampling technique is a type of sampling technique where

the sample size is selected in accordance with the objective of the researcher.

3.5 METHOD OF DATA ANALYSIS

The questionnaire is a means of gathering information from respondents through a series of

questions (Parahoo, 2006). The questionnaires were self-administered to the respondents by the

researcher. Primary data was obtained from the use of questionnaire to collect data in order to

assess the influence of customer information system and customer retention in some logistics

company. Questions were in closed-ended and open-ended types. The researcher designed only

one set of questionnaires for the customers. In designing the questionnaire, items were selected

from the literature. Afterwards, the supervisor of the thesis moderated the questionnaire to check

content. Additionally, a pilot study was carried out where the questionnaire was given to five

insurance experts, managers and customers to evaluate. They commented on the errors and the

researcher made the necessary corrections leading to the final questions.

The researcher administered the questionnaires personally to the respondents. Items in the

questionnaire were partly open-ended and partly close-ended. The open-ended items allow the

54
respondents to answer the questions freely and fully in their own words and with their frame of

reference. Generally, open-ended questions are flexible, encourage rapport and offers

possibilities of depth whiles the closed-ended items allow the given respondents to answer the

questions of specific nature. The close-ended questions were developed on a five-point Liker

scales ranging from 1 (strongly agree/ satisfied) to 5 (strongly disagree / dissatisfied). The open-

ended questions elicited information about the background of the respondents. Copies of the

questionnaires were administered to the selected respondents in the sampling population of all

respondents of Somolu Local Governments co-operative multipurpose society. After the

responses, the researcher retrieved the copies of the questionnaires.

3.6 DATA ANALYSIS

In the study of Macnee and McCabe (2007) the researchers affirm that data gathering is an act of

collecting facts from spotting individuals through the study questions in forms of questionnaires,

interviews and checklists. In mobilizing the actual or primary information from respondents,

questionnaires were employed. Apart from content analysis, simple percentages mean scores;

and frequency table was employed in analyzing the data in this research. Percentages describe

data in simple and clear analysis. These methods facilitated good presentation and interpretation

of data which showed the dispersion of opinions.

3.7 VALIDITY AND RELIABILITY OF THE RESEARCH INSTRUMENT

The Test-Retest reliability otherwise known as coefficient of stability which is the degree at

which scores and consistent over time, is used. It is obtained by administering the same test to

the same group of individuals on two occasions and correlates the paired scores. For example, a

55
physical fitness test may be given again the following week. If the test is reliable, each

individual’s relative position on the second administration of the test will be near his or her

relative position on the first administration of the test. The validity also includes face validity,

concurrent validity, discriminant validity and predictive. Course mates and the supervisor were

the main succor for the use of face validity.

3.8 LIMITATION OF THE STUDY

In spite of the research methodology contribution of this study to the existing literature, the study

has several limitations. The study is limited to Somolu Local Governments co-operative

multipurpose society in Lagos; inadequate financial resources and time constraint was the reason

for choosing one local government in Lagos.

CHAPTER FOUR

DATA ANALYSIS, FINDINGS AND DISCUSSION OF FINDINGS

4.1 Preamble

This chapter presents the analysis and interpretation of the data generated from questionnaires

administered on respondents. The hypotheses formulated to guide the study were also tested

56
here. The presented results in this chapter are built around the discourse which is on the effect of

customer information system and customer retention.

4.2 Socio-Demographic Characteristics of the Respondents

One hundred and Eighty (180) questionnaires were administered to the respondents and one

hundred and sixty (160) were retrieved which represents a 95.2 % collection. The data analysis is

based upon the returned questionnaires.

SECTION A - Socio - Demographic Characteristics

Table 4.1

Sex Frequency Percentage

Male 144 80

Female 16 20

Total 160 100

Age Frequency Percentage

20- 29 56 40

30- 39 49 25

40- 49 35 20

50- Above 20 15

Total 160 100

Educational Status Frequency Percentage

WASC/GCE/SSCE 60 40

B.sc/HND 35 20

NCE/OND 50 30

Dr/Masters 15 10

57
 Total 160 100

Marital Status Frequency Percentage

Single 83 57

Married 65 37

Divorced 10 5

Seperated 2 1

Total 160 100

Religion Affiliation Frequency Percentage

ATR 6 5.5

Christianity 81 50.5

Islam 68 44

Total 160 100

Respondents Level Frequency Percentage

Management 15 7.5

Senior Staff 25 12.5

Junior Staff 120 80

Total 160 100

Source: Fieldwork 2023

The demographic characteristics table shows that 144 respondents representing 80% were males

while 16 respondents representing 20% were females.

Thus, more male respondents were interviewed than their female counterparts in order for the

researcher to get a definite conclusion on the specific research study.

From the data, the majority of the respondents were from ages 20-29 years which is 40%, 49

respondents representing 25% were from 30-39 years and 35 respondents from 40-49

58
representing 20%, the least number of respondents (20) with the age of 50 and above represent

15%.

The above table also shows that 60 respondents representing 40% have only

WASC/GCE/SSCE qualification, 50 respondents representing 27% also have NCE/OND while

20 respondents representing 13% have Masters and 35 respondents representing 20% have

B.sc/HND certificate. The main feature of the personal characteristics of the respondents is the

fact that majority of them are city dwellers and many literate.

Out of the 160 respondents representing 100 % who took part in the survey, 65 respondents

representing 37% were married while the young girls and boys which were 83 respondents

representing 57% were single, 10 respondents of 5% were divorced and 2 respondents

representing 1% are seperated.

Another table shows that 81 respondents representing 50.5% are Christians in religion, 68

respondents representing 44% were Islam while also 6 respondents representing 5.5% were

African Traditionalist. Which implies that majority of the respondents practiced Christianity.

Finally another Table above shows that 15 respondents representing 7.5% indicated that they

are of the management level, 25 respondents representing 12.5% are senior staff, while 120

respondents of 80% are junior staff. As expected, this shows that most of the respondents are

non-management staff.

Section B: Socio-Demographic Characteristics of the Respondents on Contributions of

Informal Financial Institutions to the Growth of Somolu Local Government Co-operative

Multipurpose Society

Table 4.1.2

59
The informal financial institutions have brought Frequency Percentage

savings and credit facilities down to the grass root

and door steps of the Nigerian SMEs

Yes 127 78.5

No 33 21.5

Total 160 100

The operations of the informal financial institutions

are adjusted to the financial need and ability of

members

Yes 36 27

No 124 73

Total 160 100

Finance is made available at the right time since loan

requests are quickly considered without any

bureaucracy

Yes 126 74

No 34 26

Total 160 100

Informal financial institutions by individuals and

groups is to cushion the effects of the Formal

financial institutions on the socio-economic

wellbeing of the people

60
 Yes 128 75

No 32 25

Total 160 100

Cooperative societies through common goals, create

unity in solving community problems.

Yes 125 75

No 35 25

Total 160 100

Source: Fieldwork 2023

The first Table shows that 127 respondents representing 78.5% agreed that The informal

financial institutions have brought savings and credit facilities down to the grass root and door

steps of the Nigerian SMEs, while 33 respondents representing 21.5% disagreed consecutively.

So therefore the majority are of the opinion that Informal financial institutions have brought

savings and credit facilities down to the grass root and door steps of the Nigerian SMEs.

The second table above shows that 124 respondents representing 73% are of the No opinion that

the operations of the informal financial institutions are adjusted to the financial need and ability

of members only, while 36 respondents representing 27% disagreed completely.

The third table above shows that 126 respondents representing 74% agreed that finance is made

available at the right time since loan requests are quickly considered without any bureaucracy,

while 34 respondents representing 26% disagreed with the suit. This shows that indeed finance

is made available at the right time since loan requests are quickly considered without any

bureaucracy.

61
The fourth table above shows that 128 respondents representing 75% agreed that informal

financial institutions by individuals and groups is to cushion the effects of the Formal financial

institutions on the socio-economic wellbeing of the people, 32 respondents representing 25%

disagreed with the opinion. This shows that informal financial institutions by individuals and

groups is to cushion the effects of the Formal financial institutions on the socio-economic

wellbeing of the people.

The fifth table above shows that 125 respondents representing 75% strongly agreed that

Cooperative societies through common goals, create unity in solving community problems,

while 35 respondents representing 25% disagreed. Which implies that Cooperative societies

through common goals, create unity in solving community problems.

Section C: Socio-Demographic Characteristics of the Respondents on Role of an Informal

Financial Institution in Providing More Credit Facilities to Somolu Local Governments

Co-operative Multipurpose Society

Table 4.1.3

Informal financial institution organizes training and Frequency Percentage

educational programmes for members for positive

62
 growth and development thus enhancing profitability

Yes 120 70

No 40 30

Total 160 100

Informal financial institution makes available materials

and technical assistance for members in difficult period

Yes 125 75

No 35 25

Total 160 100

Informal financial institution provide access to essential

and scare production inputs for members

Yes 112 65

No 48 35

Total 160 100

Informal financial institution leads to the development

of indigenous entrepreneurship and increases the utility

of local resources

Yes 120 70

No 40 30

Total 160 100

Source: Fieldwork 2023

The first Table shows that 120 respondents representing 70% agreed that Informal financial

63
institution organizes training and educational programmes for members for positive growth and

development thus enhancing profitability, while 60 respondents representing 30% disagreed

that it does not organizes.

The second table above shows that 125 respondents representing 75% are of the Yes opinion

that Informal financial institution makes available materials and technical assistance for

members in difficult period, while 35 respondents representing 25% are of the No opinion.

The third table above shows that 112 respondents representing 65% agreed that Informal

financial institution provide access to essential and scare production inputs for members, while

48 respondents representing 35% disagreed of the opinion. This shows that indeed Informal

financial institution provide access to essential and scare production inputs for members.

The fourth table above shows that 120 respondents representing 70% agreed that Informal

financial institution leads to the development of indigenous entrepreneurship and increases the

utility of local resources, while 40 respondents representing 30% disagreed.

Section D: Socio-Demographic Characteristics of the Respondents on Role of an Informal

Financial Institution in Boosting Economic Growth in Nigeria

Table 4.1.4

Informal financial institution helps to increase the Frequency Percentage

financial status Nigeria citizens

Yes 124 75

No 36 25

Total 160 100

Informal financial institution helps to reduce

64
 unemployment in Nigeria

Yes 102 56

No 58 44

Total 160 100

Informal financial institution has the tendency of

equipping and making users experts in the

production of certain items

Yes 118 63

No 42 37

Total 160 100

Informal financial institution helps to circulate

funds in the country

Yes 110 60

No 50 40

Total 160 100

Source: Fieldwork 2023

The first Table shows that 124 respondents representing 75% agreed that Informal financial

institution helps to increase the financial status Nigeria citizens, while 36 respondents

representing 25% disagreed on the narative above.

The second table above shows that 102 respondents representing 56% are of the Yes opinion

that Informal financial institution helps to reduce unemployment in Nigeria, while 58

respondents representing 44% are of the No opinion.

The third table above shows that 118 respondents representing 63% agreed that Informal

65
financial institution has the tendency of equipping and making users experts in the production

of certain items, while 42 respondents representing 37% disagreed of the opinion.

The fourth table above shows that 110 respondents representing 60% agreed that Informal

financial institution helps to circulate funds in the country, while 50 respondents representing

40% disagreed with the opinion. This shows that Informal financial institution helps to circulate

funds in the country.

Section E: Socio-Demographic Characteristics of the Respondents on Members Perception

and Expectation

Table 4.1.5

Informal financial institution ensures proper Frequency Percentage

utilization of a nation's vast human and material

resources

Yes 101 56.5

No 59 43.5

Total 160 100

Informal financial institution has positive effect on

member’s welfare

Yes 114 62

No 46 38

Creating informal financial institutions, individuals

and groups hope to lessen the detrimental effects of
official financial institutions on the growth of small

66
 and medium-sized businesses in Nigeria

Yes 115 62.5

No 45 37.5

Total 160 100

Source: Fieldwork 2023

The first Table for this section shows that 101 respondents representing 56.5% agreed that

Informal financial institution ensures proper utilization of a nation's vast human and material

resources, while 59 respondents representing 43.5% thinks it does not.

The second table above shows that 114 respondents representing 62% are of the Yes opinion

that Informal financial institution has positive effect on member’s welfare, while 46

respondents representing 38% are of the No opinion.

The third table above shows that 115 respondents representing 62.5% agreed that Creating

informal financial institutions, individuals and groups hope to lessen the detrimental effects of

official financial institutions on the growth of small and medium-sized businesses in Nigeria,

while 45 respondents representing 37.5% disagreed of the opinion above. Which signify that

indeed creating informal financial institutions, individuals and groups hope to lessen the

detrimental effects of official financial institutions on the growth of small and medium-sized

businesses in Nigeria.

4.3 DISCUSSION OF FINDINGS

The findings of the result show that the majority of the respondents are male between the age

group 25-35 years,

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The study's findings also demonstrate how informal financial organizations have pushed savings

and lending opportunities to the doorsteps and base of the Nigerian SMEs. The activities of

informal financial institutions are modified to account for members' financial abilities and needs.

Since loan applications are rapidly reviewed without any red tape, financing is made accessible

when it is needed. Through shared objectives and cooperation, informal financial organizations

operate to mitigate the impacts of formal financial institutions on the socioeconomic well-being

of individuals and cooperative societies.

The results also demonstrate that informal financial institutions organize educational and training

programs for members for positive growth and development, enhancing profitability, informal

financial institutions make materials and technical assistance available for members during

challenging times, informal financial institutions give members access to crucial and scarce

production inputs, and informal financial institutions have a favorable impact on members'

welfare.

The study's results also show that informal financial institutions aid in boosting citizens' financial

well-being, lowering unemployment rates in Nigeria, equipping users with the necessary tools

and training to become experts in the production of specific goods, facilitating the flow of money

throughout the nation, and ensuring proper use of a country's reserves.

The results of this study demonstrate a positive connection between informal financial

institutions and the growth of Somolu Local Governments Co-Operative Multipurpose Society.

Finally, the results of this study demonstrate a positive and substantial link between informal

financial institution and economic growth in Nigeria.

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 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.0 INTRODUCTION

This study examines the study on the contribution of the informal financial institution on the

growth of small-scale enterprises in Nigeria A study of Somolu Local Governments co-operative

69
multipurpose society, however the chapter deals with the summary of findings, conclusion and

recommendation.

5.1 SUMMARY OF FINDINGS

The study was to examine the contribution of the informal financial institutions on the growth of

small-scale enterprises in Nigeria a study of Somolu Local Governments co-operative

multipurpose society. The specifics of this study were:

1. To examine the contribution of informal financial institutions to the growth of Somolu

Local Governments Co-Operative Multipurpose Society.

2. To examine the role of an informal financial institution in providing more credit facilities

to Somolu Local Governments Co-Operative Multipurpose Society

3. To examine the role of an informal financial institution in boosting economic growth in

Nigeria.

This research was carried out among Somolu Local Governments co-operative multipurpose

society. The literature review was conducted, and a questionnaire was drafted and disbursed to

180 respondents with 160 returned and analyzed in order to determine the specific objective and

provide answers to the questions raised in chapter one. To test the hypothesis, the researchers

used simple percentages, as well as frequency table was employed in analyzing the data in this

research. Male students made up the majority of those who took part in the survey. The study

arrived at the following conclusions based on the analysis and subsequent interpretation of the

results.

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5.2 CONCLUSION

According to this study, the development of Somolu Local Governments Co-Operative

Multipurpose Society and informal financial institutions both have a positive effect on Nigeria's

economic growth. This led to the conclusion that Nigeria's unregulated financial sector has the

potential to boost the Cooperative Multipurpose Society and the country's economic growth.

5.3 RECOMMENDATIONS

For SMEs to be economically viable to contribute their quota to growth of Nigeria economy, the

following recommendations are made based on the findings:

1. The necessary financial assistance should be given to the sector without stringent and

unattainable collaterals.

2. The government should establish special fund where SMEs can access soft and cheap loan to

finance their operations.

3. The loans given to SMEs should be at single digit interest rate.

4. The microfinance banks should be properly structured and funded to enable the SMES access

credit.

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