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THE EFFECT OF INFORMAL FINANCING OPTION FOR RURAL SMEs GROWTH IN KWARA STATE
Background to the Study
As the global debate on reducing world poverty increases, rural communities have been identified as mostly affected poverty ridden areas. Poverty is a global phenomenon which threatens the survival of mankind (Appleton and Song, 1999). Hence, effort to bridge the gap of poverty reduction through job creation especially at the rural areas is a priority for international organizations. Part of the giant stride taking for instance, is the millennium declaration of the United Nations signed by 189 countries commits the global community to reduce by half the proportion of the world‟s poor and hungry by 2015 Millennium Development Goals (MDG, 2013). In addressing this, various measures at improving rural economic conditions have been advanced by international communities among such are United Nations, World Bank and ECOWAS among others. A common and most recommended solution towards achieving this has been „conscious development of Small and Medium Enterprises (SMEs) at the rural areas‟. Globally, SMEs have been considered to be the engine of growth of modern economies and serve to provide more employment to a large portion of the population in a given economy than the big organizations, hence contribute in reducing poverty (Fatai, 2011). More so, recent researches have linked rural economic growth with small business development (Eme, 2014; Oba and Onuoha, 2013; Masanai and Fatoki, 2012). In Nigeria, it is evident that SMEs have various constraints, among which are; poor access to finance, inadequate infrastructure, weak government regulatory support, poor demand for local made goods, among others (Kadiri, 2012; Eme, 2014). Among the various constraints, poor access to finance is proved to be most vital and critical to SMEs in sub-Sahara Africa (World Bank, 2013). Therefore, availability of alternative sources of finance is a priority issue at developing rural SMEs as an engine for employment creation and poverty alleviation in the rural areas, and socio-economic stability at large.
Problem of Statement
Nigeria is a rapidly growing nation with an annual population growth of 3.2% (NBS, 2013). Statistics have further shown that Nigeria is one of the fastest growth economies of the world and the fastest in Africa (World Bank, 2013). The above notwithstanding, a large proportion of her vast population is under the poverty line of 2 dollars per day while abject poverty is domicile in the rural areas (Word Bank, 2014). This becomes more evident as Nigeria records a slow progress towards her fulfillment of many of the Millennium Development
Goals, as the country ranked 153 out of 186 countries in the 2013 United Nations Human Development Index (Word Bank, 2014). In an attempt to address this, the federal government of Nigeria has initiated different policies and structural programmes between 1977 till date. However, many of these programmes have not significantly addressed poverty especially at the rural areas. Recent scholars have therefore linked increased rate of poverty to poor Small and Medium Enterprises (SMEs) development, hence, government has concentrated more attention to its development as alternative option. Similarly, Oni and Daniya (2012) posit that governments over the years have formulated several policies with a view to developing SMEs in Nigeria as they have been recognized as organ for achieving self-independence, employment creation, import substitution and ultimately poverty reduction.
Despite the huge potentials of the SMEs sector to achieve these, the finance gap remains a major problem particularly to the rural operators with access to credit as the biggest problem. This gap was created in various ways through; unattractive and high interest rate, collateral requirement; lack of confidence, volatility and high business risk, and ultimately limited fund which enhanced conscious lending to high profile large corporations (OECD, 2004; Kadiri, 2012; Masanai & Fatoki, 2012). In the same vein, Gbandi & Amissah (2014), World Bank (2014) opine that the gap affects both formal and informal sectors as the local financial systems do not sufficiently cater for the needs of SMEs, and this results to negative consequences on employment generation, poverty incidence and ultimately, poor economic development. In a similar view, Oba & Onouha (2013) state that SMEs poor performance has resulted to high level of poverty, unemployment and low standard of living in the Nigeria, though SMEs provide 70% industrial employment and 60% of agricultural sector employment, but only account for 10 – 15% of the total industrial output with a capacity utilization of a little over 30%.
This study aims at examining the Indigenous financing and the growth of small scale enterprise in Akure South local government. In order to achieve a proper investigation, the following specific objectives were set:
- To examine if the informal financing option such as personal servings, contribution from relations and friends, mobile bankers etc. contribute to rural SMEs growth in Akure South L.G.A.
- To ascertain the major factors responsible for SMEs poor access to finance in the study area.
- Would the adoption of informal financing option such as personal servings, contribution from relations and friends, mobile bankers etc. improve rural SMEs?
- Are there major factors responsible for SMEs poor access to finance in the rural areas?
- The adoption of informal financing options would not significantly contribute to SMEs growth in rural areas.
- Factors such as small asset base, poor financial literacy, information asymmetry, low capital base and collateral requirement do not significantly contribute to SMEs access to formal financing in the study area.