A STUDY ON RISK APPETITE OF SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA AND ITS INFLUENCING FACTORS

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The level of industrialization any nation can attain at a particular point in time is hinged on the prevailing entrepreneurial activities in that nation. At the same time, no economy can effectively grow without active roles of SMEs that shape the entrepreneurial activities in the country. Indeed, it has been acknowledged that SMEs are engines to achieving growth objectives of developing countries because they mobilize idle funds, employ and adapt easily to customers’ needs (Abotsi, Dake & Agyepong, 2014; and Luper & Kwanum, 2012). However, significant numbers of SMEs have been reported to fail before attaining fifth year of their incorporation due to lack of funds (Bank of England, 2014; Rogerson, 2011; Skinner, 2011). To understand the pattern of SMEs’ survival in Nigeria, there is need to come up with models that explain their growth rate instead of relying on the use of simple percentages. Previous studies (such as Abotsi et al, 2014; Berger and Udell, 2014; and Reynolds & Lancaster, 2011) have focused on how the physical assets can be protected and prevent the occurrence of business leads to strengthen the survival of SMEs. As at the time of this study, there has not been evidence of any previous study that applied reliability theory to predict the survival pattern of SMEs. At best, previous studies only use mean/standard deviation test to report how SMEs failed owning to financial and other environmental factors.  Acerbi [2008] defines the term risk as the possibility for danger, negatively unexpected circumstance to occur. In most of economic publications, risk refers to the negative deviation from the plan. In finance, risk is related to hazard towards an investment, or loan. In terms of business organisations, risk is the possibility that an event, either expected or unexpected, may create an unfavourable effect on the organizations. Small and medium-sized enterprises (SMEs) play significant roles in the world economy and contribute substantially to income, output and employment. According to Henderson, (2010) stated that SMEs connect the community to the larger global economy, and they are the vital link to the economic development of any nation (Thurik and Wennekers, 2013). Indeed, they function as a source of innovation, technological growth, and creation of recent job (Wiklund et al., 2009). In the Nigerian macroeconomic and political environment, SMEs have compelling growth potential and like other emerging economies are likely to constitute a major portion of GDP in the near future. According to Nwankwo et al. (2012) SMEs sector provide, an average of 50% of Nigeria‘s employment and 50% of its industrial output. Thus, SMEs are very important part of the Nigerian economy. One of the most important issues in the area of research particularly in SMEs is the antecedent that leads to the effective performance of SMEs. Characteristics that connect leadership and entrepreneurship are some of the things or events that influence organisational performance, the characteristics consist of innovation, vision, risk-taking, pro-activeness, strategic initiative, problem solving, strategic planning and decision making (Cogliser and Birham, 2013; Fernald et al, 2011 and Saher, 2013). These characteristics some are more related to entrepreneurship while others are more related to leadership. Four of these characteristics can be used to examine their relationship with SMEs performance in Nigeria based on review of literature; they include vision, innovation, pro-activeness and risk-taking. Thus, this paper will examine risk appetite of small and medium enterprises in Nigeria by reviewing some of the previous literature.

STATEMENT OF PROBLEM

In spite of the efforts of government and other stakeholders to achieve economic growth and development through sustainable SMEs, most small firms are short-lived. According to Utomi (2008) cited in Ifekwem, Oghojafor, and Kuye (2011), few of the early wealthy families (SMEs owners) have been able to sustain wealth past one generation, many of the ventures have failed rather than change ownership. Unlike in Nigeria, most large public firms in some countries were SMEs. This does not only result from the basic challenges facing SMEs in Nigeria, it stems out of the poor attitudes of SMEs owners to business risk and their management. SMEs seem to be generally characterized by limited capital. In addition, they usually lack the requirements to assess the various funding options open to business firms. However, in their efforts to expand and grow their businesses, SMEs owners engage in various credit options which further exposes them to financial risks. This is because most SMEs find it difficult to fulfill their financial obligations to their various creditors thereby resorting to early liquidation in order to pay their debts with the business’ assets. Furthermore, SMEs are weak and confront a lot of competition from their larger counterparts. These usually put them in poor strategic positions because they lack the wherewithal needed to withstand such competition like qualified and skilled workforce, adequate professionalism, limited capital and other resources among others. These expose them to serious strategic risks which limit their chance of survival. SMEs face a number of operational risks. This stems mainly from the fact that most SMEs are family businesses structured along sole-proprietorship or partnership. Managerial decisions here are usually at the mercy of the key owner who in most cases lacks basic managerial skills, qualities and culture to manage a business successfully. This also has effects on the management structure and employees-employer relationship. In addition, SMEs’ survival is threatened by high employee turnover, this result to poor and unstable organisation structure. Furthermore as business entities, SMEs face a lot of hazard or pure risks. These include personal risks which result from bodily injury to or death of employees while working. Also, property risks which emanate from damage to plants, machineries or other assets use for production. Liability risks which place responsibility of other people’s losses on the entrepreneurs and risks that arise from the failure of other people like debtors, suppliers, contractors among others. The happening of these risks hinder the performance, growth and expansion of SMEs. This is why Idemobi (2012) reports that over 70% of SMEs die within five years of establishment.

AIMS OF THE STUDY

The major purpose of this study is to examine risk appetite of small and medium enterprises in Nigeria and its influencing factors. Other general objectives of the study are:

1. To examine the economic role of Small and medium enterprises.

2. To examine the major business risks that affect Small and medium enterprises’ performance.

3. To examine the effect of risk financing and mitigation approaches on Small and medium enterprises.

4. To examine the factors influencing risk appetite of small and medium enterprises in Nigeria.

5. To examine the relationship between risk appetite and performance of Small and medium enterprises.

6. To examine the challenges faced by small and medium enterprises in risk taking.

RESEARCH QUESTIONS

1. What are the economic role of Small and medium enterprises?

2. What are the major business risks that affect small and medium enterprises’ performance?

3. What are the effect of risk financing and mitigation approaches on Small and medium enterprises?

4. What are the factors influencing risk appetite of small and medium enterprises in Nigeria?

5. What is the relationship between risk appetite and performance of Small and medium enterprises?

6. What are the challenges faced by small and medium enterprises in risk taking?

RESEARCH HYPOTHESES

1. There is no significant impact of risk appetite on the survival of SMEs in Nigeria
2. There is no significant relationship between risk appetite of SMEs and achievement of business goals.

SIGNIFICANCE OF THE STUDY

This study has the following significance: Accountants have been acquainted with the nature of SME finances and their accounting needs. SMEs have learnt the need to access the services of the accountants. Banks have learnt an accounting-related process of accessing SMEs for loan purposes. Government have got an accounting-related method of identifying genuine SMEs to benefit from various government schemes in Nigeria. Academics have been provided with a new, scientific and verifiable process of studying SMEs financial challenges.

SCOPE OF THE STUDY 

The study is based on the study on risk appetite of small and medium enterprises in Nigeria and its influencing factors.

LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

DEFINITION OF TERMS

Risk: Risk of an asset is the potential change of future returns due to its assets (Weston & et al, 2008). Investors always face the risk that their rates of return asset may be lower than value of expected. So the "risk" is likely to be different the real rate of return with investor's desired rate. The risk of a financial asset is a function of one or more factors that cause changes securities prices in market.