eISBN:978-983-43720-2-6
3rd Annual ECoFI Symposium 2016 18-19 December 2016, Kedah, Malaysia
Effect of Social Capital, Loan and Saving on the Growth of SMEs in Nigeria: A Proposed Research Framework Habibu Sani *, Shazida Jan Mohd-Khan Department of Economics and Agribusiness, School of Economics, Finance and Banking, Universiti Utara Malaysia, Sintok, Kedah
Abstract Over the years several studies in relation to the growth of Small and Medium Enterprises (SMEs) have reported that, SMEs were netted out from conventional financial services. This, motivated the regulatory authorities and several authors in the field and especially in emerging economies in an effort to foster SMEs access to financing. These regulatory authorities employed microfinance institutions as mechanism in dealing with the issue of financial exclusion. Review of the literature revealed that previous studies documented evidence on the connection between SMEs growth and its determinants. Though moderately few studies have struggled to consider the connection between social capital and the growth of SMEs. Hence, this paper is a proposed framework on the influence of loan, savings and social capital on the growth of SMEs in Nigeria. The framework is developed based on the Resource Based Theory (RBT) and Theory of Social Capital. Keywords: Microfinance loan, saving, social capital, SME.
1.
INTRODUCTION
Microfinance was established for the purpose of providing financial and non-financial services to the lowincome earners. These group, will establish micro or small businesses for the improvement of their standard of living (Central Bank of Nigeria, CBN, 2005). The Small and Medium Enterprises (SMEs) have limited access to finance from the formal financial services (Salman et al., 2015; Annim, 2012). The main purpose of microfinance is to provide more access finance for the SMEs. In Nigeria, SMEs dominated the industrial sector like other emerging economies. For instance, Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) and National Bureau of Statistics (NBS) survey (2012) posited that, about 90% of the total industrial sectors in Nigeria have been dominated by SMEs sector. For instance, data showed that, Nigeria became the largest economy in Africa following the rapid growth in the Nigerian industrial sectors. As such, this leads to substantial increase in the nominal Gross Domestic Product (GDP) for the periods of 2012 and 2013 putting South Africa the second economy in the continent as provided by IMF, Deutsche Bank Research (2014). It is depicted in Table 1.0.
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Proceedings of 3rd Annual ECoFI Symposium 2016 18-19 December 2016, Kedah, Malaysia Table 1.0. Selected African Country’s Nominal GDP with their Ranking Country Nominal GDP ($ Billion) Ranking Nigeria 451.7 1 South Africa 382.3 2 Nigeria 262.6 3 Ethiopia 42.5 4 Kenya 40.7 5 Ghana 40.4 6 Sources: IMF, Deutsche Bank Research (2014)
Table 1.0 indicates the Nigeria’s positive rise on its nominal GDP with about 75% increase i.e. from 262.60 billion dollars to 451.70 billion dollars. Moreover, the Africa’s biggest economy’s GDP which is Nigeria was 5.4% in 2012 and shift to an estimated 6.3% in 2013. The driven forces among the sectors in ranking were: service industry, manufacturing industry and agricultural industry. The absence of oil sector is a clear indication of a fallen of the oil sector that was previously the major driven force to the Nigeria’s GDP which recently contributed less. This situation testifies Nigeria’s diversification in the economy to other sectors, which consists of productive and service sectors (African Development Bank (ADB) & United Nation’s Development Program UNDP, 2015). Despite the domination of SMEs in the Nigerian industrial sectors and increase in the nominal GDP, the SMEs have been struggling to survive under shortage of finance. This became a great challenge to the smooth operation of the sector to effectively grow as pointed out by several scholars (Ademu, 2012; Aremu & Adeyemi, 2011; Adewale, 2011). In the same vein, SMEs in emerging economies like Nigeria, have over the years faced with the challenges of accessing financial services as the key basis of start-up capital (Salman et al., 2015; Annim, 2012; Culpeper, 2012). For example, there are almost 25-30 million formal SMEs in emerging economies of which 11-17 million do not have access to formal institutional loans (International Finance Corporation, IFC, 2010). With regards to this, there is need for investigation into the factors that determine SMEs growth in Nigeria, which will be an avenue for the solution to the challenging issue of access to finance. The objective of this paper is to develop a proposed framework to investigate the influence of microfinance (loan, saving) and social capital on the growth of SMEs in Nigeria. The rest of the paper will be organized as follows. Subsequently, a discussion on the concept of SMEs growth was emphasized, microfinance loan and saving are discussed. Followed by empirical studies in relation to microfinance (loan, saving) and social capital impacts on the growth of SMEs. Resource Based Theory (RBT) and theory of social capital are employed to link the relationships between the variables and the growth of SMEs. In addition, explanation of these theories is also explored. 2.
LITERATURE REVIEW
In addition to proposing the possible effect of microfinance in terms of loan and saving, this study offers theoretical clarifications on the impact of social capital, loan and saving on the growth of SMEs. The paper argued that, prior studies on the impact of loan and savings of microfinance reveals positive and negative impact on the growth of SMEs. Also, there is paucity of studies on the impact of social capital on the growth of SMEs in Nigeria. Most of these studies on this relationship were conducted in Europe and most of the Asian countries (e.g. Hadi & Kamaluddin, 2015; Su, Atmadja & Sharma, 2015; Adhikary & papachristou, 2014; Nishantha & Kawamura, 2011; Tendai, 2013). In this effect, this study is proposed to carry out in Nigeria as the economic activities, tradition and the kind of production between Asia and such a country like Nigeria are absolutely different. SMEs Growth Growth of a firm can be described as the efforts of a particular group of individuals for the purpose of achieving an objective (Penrose, 1959). These groups utilise different kind of resources in achieving their objective. Therefore, there is no contention in believing that the amount of resources administered by a firm has a significant influence on the chances for expansion and growth of firm be it small or large. Coad (2009) asserted that, firms struggled to grow in order to guarantee their future. Entrepreneurs are major contributors to economic growth and prosperity. For instance, Spulber (2009) posited that, entrepreneurs are responsible for a large portion of industrial innovation in production processes, which will lead to economic growth. Previous studies on the relationship between microfinance loan and SME’s growth have measured SMEs growth in term of Annual Net Sales (ANS) and Gross Profit Margin (GPM) (Emmanuel & Nneji, 2015; Fauster, 2015; Morobe, 2015; Mohammed, 2014; Babajide, 2012). In addition,
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Proceedings of 3rd Annual ECoFI Symposium 2016 18-19 December 2016, Kedah, Malaysia
SMEs growth is measured in terms of productivity growth (PG) (e.g. Su et al., 2015; McKenzie &Woodruff, 2013; Nwosa & Oseni, 2013; Vogelgesang, 2001). It has been revealed that, GDP per capita growth of most emerging economies over the 1990s had robust relationship with SMEs (Beck, Demirguc-Kunt & Levine, 2005). They further argued that, growth across countries show a strong connection between the importance of SMEs and economic growth. This finding is consistent with the interpretation that a big SME sector is a characteristic of fast growing economies (Penrose, 1959). Microfinance Loan and SMEs growth Microfinance loan represent the quantity of money that, clients of microfinance banks receives as a credit, within a required term before repayment period (Asiama & Osei, 2007). The clients may be poor, low income earners or SMEs, households or entrepreneurs. According to the CBN (2012) microcredit is a portion of microfinance because microfinance includes providing credit to poor people, yet microfinance includes additional services such as, savings, insurance, pension settlement and payments services etc. Maengwe and Otuya (2016) opined that, loan access assists the clients of microfinance to elevate their standard of living in many traditions that includes initiation of enterprises, future investment, diversification of a businesses, creation of jobs, household settlements, income generation. However, despite the vital role played by microfinance in providing loan to their clients, there are enormous population that were netted out from various financial services. For instance, in sub-Saharan Africa, where Nigeria is originated, only 19 percent of household have bank accounts (Demirgüç-Kunt and Klapper, 2012). In this effect, huge populations in Nigeria were excluded from financial services. With regard to this outcome, Financial Innovation and Access (FIA) discovered that 39.2 million populations in Nigeria were excluded from financial facilities (CBN, 2011). Empirically, some studies have revealed that, there is a significant positive connection between microfinance loan and the growth of SMEs in Nigeria. For instance, Agba, Ocheni and Nkpoyen (2014) assessed the impact of microfinance credit programs on poverty reduction between low income employees in Nigeria using micro savings and microloan. The study found that, microcredit scheme in the state increases access to loan of the lowincome earners which enhance their operations and boost their ability to savings. Akingunola et al. (2013) assessed the effect of microfinance on entrepreneurship development in Nigeria and found that, microfinance facilities like loan are positively related to the activities of micro entrepreneurs. Moreover, Olowe, Moradeyo and Babalola (2013) examined the influence of microfinance on SMEs growth in Nigeria and revealed that, loan offered by microfinance to SMEs has positive effect with their growth in Nigeria. But the study contended that, the frequency of repayment of loan is an impediment to SMEs growth in Nigeria. Other previous studies that found positive relationship between microfinance loan and the growth of SMEs are Ogunrinola (2011), Babagana (2010), Quinones and Seibel (2000) among others. In contrast, other studies have found a negative relationship between the impact of microfinance loan services and the growth of SMEs. For instance, Babajide (2012) assessed the impact of microfinance services on the growth of SMEs in Nigeria. The study used loan size, loan tenor, microloan, micro-saving and interest rate as the microfinance services (independent variables). The study found a dynamic indication that, access to microfinance facilities such as frequency of loan repayment, loan duration, loan size does not improve growth of SMEs in Nigeria (negative impact). Also, Ene and Inemesit (2015) examine the impact of microfinance in promoting financial inclusion in Nigeria. The study measures loans and advances, deposits (savings) and interest rate on loan. The study found insignificant and negative relationship between the interest rate charged on loan of microfinance to SMEs. The likes of these studies are Nwosu, et al. (2015), Emmanuel and Nneji (2015), Babajide and Joseph (2011). Based on the inconsistency of the findings on the effect of microfinance facility (loan) and the growth of SMEs, yet this study proposed that: H1: Microfinance loan has positive relationship with the growth of SMEs Microfinance Savings and the Growth of SMEs Savings in relation to microfinance represent the sum of money that SMEs deposited to microfinance banks based on the agreement between the bank and their client. For example, SMEs, active poor or entrepreneurs as microfinance clients may use such amount deposited in order to reinvestment in the future or for family or business purposes (Mkpado & Arene, 2007). Brune (2009) revealed thatmicrofinance institutions usually attached a little mandatory savings for their clients normally in a group of 5 members or more in terms of social network among the members in order to prevent defaults on repayment of loan. This situation normally 3
Proceedings of 3rd Annual ECoFI Symposium 2016 18-19 December 2016, Kedah, Malaysia
occurs as a result of lack of guarantee in form of tangible assets as a collateral in the system of receiving loan from microfinance (CBN, 2005). Generally, personal savings stands as the main source of startup capital for SMEs in Nigeria. For instance, SMEDAN and NBS (2012) revealed that, about 47,664 SMEs in Nigeria, possessed their startup capital through personal savings followed by loan from financial institutions as a source of capital with about 13,031 SMEs. In the same vein, Koko (2014) posited that, personal saving is the key basis of start-up capital as a result of the difficulties faced by SMEs in the entire process of receiving loan from microfinance banks and other financial institutions. However, some empirical studies have found that, savings offered by microfinance increases the growth of SMEs. For instance, Anane, Cobbinah and Manu, (2013) examines the effects and the responsibilities of microfinance on the growth of SMEs in rural Ghana. The study utilizes savings and loan as the microfinance facilities and revealed that, there is a positive relationship between the savings offered by microfinance and the growth of SMEs in Ghana. Similarly, Emmanuel and Nneji (2015) found a significant impact of savings facility of microfinance on SMEs growth and performance in Nigeria. In this regards other similar studies that found positive impact of microfinance savings on the growth of SMEs include Ojelabi et al. (2015), Bello (2012). On the other hand, Duru and Ogbe (2013) assessed the connection between microfinance and financing of SMEs in Nigeria and found that, SMEs did not basically succeed in deriving the positive impact of microfinance facilities, including savings facility. Ihugba et al. (2013) examine the impact of microfinance on poverty reduction in Imo State Nigeria. The study found a negative and insignificant impact between small enterprises growth and savings offered by microfinance. Other prior studies that revealed negative impact of microfinance savings on the growth of SMEs are Tumwine et al. (2015), Imoisi and opara (2014), Olu (2009). Despite the negative and positive findings of these previous studies, this research proposed that: H2: Microfinance savings has positive impact with growth of SMEs Social Capital and the Growth of SMEs Grootaert and Van Bastelaer (2002) defined social capital as the institutions, relationships, and standards that outline the quality and quantity of a society’s social connections. It is the social ties that, holds the institutions together for the procurement of their respective goals. Social capital is understood mainly as an accrual of obligations from others according to the norm of reciprocity which may lead to an improved stream of information among the parties (I.e. lenders and borrowers) thereby lowering the rate of loan defaults between the parties involved (Olomola, 2002). Moreover, social capital refers to structures of social group such as networks, norms and trust that facilitates coordinated actions towards achieving mutual benefits (Putman, 1995). In the same vein, Putnam (1995) in the theory of social capital asserted that social capital is a concept which has long been experienced substantial theoretical and empirical analysis that, motivated various other descriptions that emerged over the years. In line with this, Microfinance sector proposes an informative context for exploring different programs and inferences of liberal and Marxian theories of social capital (Rankin, 2002) which both are expressed within the leading Grameen Bank Model of group lending. In Nigeria, both governmental and NGO’s are gradually placing more emphasis on the group approach in extending credit to the low-income earners. Previous studies in relation to social capital reveals positive relationship with the growth of SMEs. For instance, Kiprotich (2014) investigates the effect of social capital on the growth of SMEs. The study measure trust, civic meeting and culture. They found significant and positive impact between civic meetings, culture and trust with the profitability growth of SMEs. Also, trust positively affect both profitability and sales growth of SMEs. Moreover, Nishantha and Kawamura (2011) assessed the role of social and human capital on SMEs growth in Sri Lanka. The study found a great and fundamental relationship among social capital, human capital and SMEs growth. Other studies that found positive relationship between social capital and the growth of SMEs include Clarke, Chandra and Machado (2016), Tendai (2013). It has also been argued recently that social capital forms the basic component of reliable progress in the poor’s lifecycle and the SME. This occur, if social capital linkage is developed between microfinance and their borrowers (Akingunola, et al., 2013). Hence, the research proposed that: H3: Social capital will positively affect the growth of SMEs
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Proceedings of 3rd Annual ECoFI Symposium 2016 18-19 December 2016, Kedah, Malaysia
Underpinning Theory The theories proposed in this paper is significant and suitable for the explanation of the effect of microfinance (loan, saving) and social capital on the growth of SMEs. These theories employed consists the resource based theory and the theory of social capital. Resource Based Theory (RBT) RBT suggest that, the foundation for improvement in the competitive market of a firm toward achieving growth rely on the organization’s ability in utilising tangible and intangible resources (assets). Intangible capital like social capital factor, training programs for employees of a firm, etc. On the other hand, tangible resources or capital like physical assets such as buildings and machineries of the firm (Nothnagel, 2008; Barney & Clark, 2007). It is important to note that social capital factor represent the intangible resources of a firm and loan received will be part of the tangible capital (resources) towards realization of the firm’s growth. While savings may be used by a firm to make further investment in another sector. Also, saving can be utilized in acquiring shares in another firm (intangible resources). Theory of Social Capital The theory of social capital has focused on meetings and the level of interaction among the groups, social network, standards of reciprocity, trust and honesty between the entrepreneurs or members that will enhance coordinated activities for the procurement of their goals (Putnam, 1995). The group of borrowers of firms, loan recipient group, self-help group have social capital as each group has its targeted objectives. Therefore, based on the argument, it is anticipated that, the microfinance (loan, saving) and social capital will lead to significant and positive effect to the growth of SMEs 3.
PROPOSED RESEARCH FRAMEWORK
Based on the foregoing discussion and literature review, this paper proposes a conceptual framework as depicted in Figure 1.0.
Independents Variables
Dependent Variable
Loan Saving Social Capital
SMEs Growth
Resource Based Theory Theory of Social Capital
Fig. 1. Proposed Framework
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Proceedings of 3rd Annual ECoFI Symposium 2016 18-19 December 2016, Kedah, Malaysia
The framework shows the impact of loan and saving offered by microfinance institutions and social capital to SMEs on their growth. It is postulated that, microfinance services like loan and savings facilities improves the financial ability of SMEs which will leads to effective performance of their operations towards their growth (Obaidullah, 2008; Maengwe & Otuya, 2016). This will also, be reliable progress in the poor’s lifecycle and SMEs growth with social capital linkage between the variables (Akingunola, et al., 2013). The proposed framework indicates the RBT and the theory of social capital which clearly supported the combination of variables employed in this research. In a nutshell, this paper assessed the impact of microfinance (loan and saving) on the growth of SMEs more importantly, the proposed model recognizes the contribution of social capital factor in the Nigerian environment towards the growth of SMEs via microfinance activities.
4.
CONCLUSION
The aim of this paper is to propose a model on the impact of social capital, loan and savings of microfinance on the growth of SMEs in Nigeria. The implications of the proposed model towards the growth of SMEs is in different aspects. If the proposed model is supported, the findings will offer valuable insight in the field. These include serving as reference to other studies. The paper may also benefit microfinance institutions and SMEs in relation to the technique of given and receiving loan through the significant role of social capital factor. Moreover, if the proposed model is validated may also provide useful information to the policy makers or regulatory and supervisory authorities like CBN and SMEDAN in Nigeria. Additionally, the study may offer practical implication like information that will be use for the purpose of adjustment in relation to the regulatory framework for microfinance. The paper may also serve as a yardstick for entrepreneur’s decision on engaging in SMEs operation or business establishment. In general, if the paper is supported it will enhance the activities of microfinance in relation to their respective services which will improve the growth of SMEs in Nigeria as well as other emerging nations. Lastly, the paper suggests for future research to test for the existing relationship between the model’s variables. REFERENCES Ademu, W. A. (2012). Finance for the Poor: An Assessment of the Performance of Microfinance Institutions in Nigeria. African Research Review, 6(2), 312-325. Adewale, A. A. (2011). A measurement model of the determinants of financial exclusion among micro-entrepreneurs in Ilorin, Nigeria. The 8th International Conference on Islamic Economics and Finance, Doha. Adhikary, S., & Papachristou, G. (2014). Is There a Trade-Off Between Financial Performance and Outreach in South Asian Microfinance Institutions? 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