IMPACT OF INFORMAL CREDIT ON THE PERFORMANCE OF

SMALLSCALE BUSINESS ENTERPRISE IN SURULERE METROPOLIS

A STUDY OF SMALL SCALE BUSINESS ENTERPRISE IN SURULERE

METROPOLIS, LAGOS

BY

DARANIJO IBIWUMI ZAINAB

BA/HND/F18/4833

SUBMITTED TO THE

DEPARTMENT OF BUSINESS ADMINISTRATION

SCHOOL OF BUSINESS AND MANAGEMENT STUDIES
FEDERAL PLOYTECHNIC OFFA
KWARA STATE

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD

OF HIGHER NATIONAL DIPLOMA (HND) IN BUSINESS
ADMINISTRATION

DECEMBER, 2020.

i
 DECLARATION

I Daranijo Ibiwumi Zainab from the department of Business Administration, school of

Business and Management studies, federal polytechnic Offa, Kwara state, hereby declare that

this research work is written and produced by me and that to the best of my knowledge it

contains no material previously published by another person.

DARANIJO IBIWUMI ZAINAB

BA/HND/F18/4833 SIGNATURE DATE.

ii
 CERTIFICATION

The undersigned hereby certify that this project satisfies one of the requirements of the
department of business administration, federal polytechnic, Offa for the award of higher
national diploma in business administration of the federal polytechnic, offa Kwara state.

_______________ ___________________
MR. ISIHAK A. DATE
SUPERVISOR

_______________________ ____________________
B.A AJIBADE (MRS) DATE
HEAD OF DEPARTMENT

__________________________ ____________________
EXTERNAL EXAMINER DATE

iii
 DEDICATION

This project is dedicated to the Almighty God, the one who was, who is and is to come, for
His Divine provision, protection and benevolence throughout my studies.

Also, this work is dedicated to the entire family of Mr.&Mrs.Daranijo.

iv
 ACKNOWLEDGEMENT

My utmost appreciation goes to God Almighty for making everything possible, especially for
his guidance and provision, blessings and unmerited favour and granting me the grace to
attain this height in life.

My profound gratitude goes to my able supervisor Mr Isihak Abdulrasaq for his guide and
direction on the method, correction and writing of this constructive research works. Thanks
for putting me through in the course of this project work, God bless you immensely sir
(AMEN). Also to the head of department Mrs B.A Ajibade for her indispensable assistance
and to other noble lecturers, for impacting knowledge and supervision may the Almighty God
bless you and reward you all mightily.

My profound gratitude’s goes to my parents Mr. & Mrs. Daranijo and also to my sibling for
their supports, love prayers and kindness and to my darling husband Mr. Dada Abdulazeez
Olaniyi for is financial, moral, spiritual, support May Almighty Allah reward you abundantly
I appreciate you all.

Finally, my warm regards goes to all my well-wishers and friends like and to my wonderful
friends Mr. O.M Sanusi, Atolagbe Maroof, Oyeyemi Oyewumi, Oderinlo Usman, Giwa
Emmanuel, Mr&Mrs Suraj Ibrahim and Abdulfatai Rukayat May Almighty Allah guide your
steps in life and may the light of friendship and love we share never go dim.

v
 ABSTRACT

The study examined the impact of informal credit on the performance of small scale business

enterprise in Lagos metropolis. Descriptive survey was used to obtain information

concerning the current status of the phenomena to describe what exists with respect to

variables in a situation, by asking individuals about their perceptions, attitudes, behavior or

values. Stratified random sampling techniques were also adopted to select the respondent in

the study Area. One hundred and twelve (112) respondents were randomly to represent the

general interest of the entire population. The data analyses was carried out using the

Statistical Package for the Social Sciences (SPSS). Both descriptive and inferential statistics

were used to analyses the data obtained. Regression analysis was used to determine the

relationship between the independent and dependent variables. The result of the hypotheses

shows that informal capital has significant impact on performance of Small Scale Business

(SSBs). Finally, it was recommended that government development programmers aimed at

boosting Small Scale Enterprises through micro credit should be implemented through

Informal Financial Institutions since they have been effective in stimulating growth of small

businesses with more favorable conditions for accessibility of credit by Small Scale Business

Enterprises.

vi
 TABLE OF CONTENTS
Pages
Title Page i

DECLARATION ii

Certification iii

Dedication iv

Acknowledgements v

Abstracts vi

Table of Contents vii

List of Tables viii

List of figures xi

List of Appendix

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study 1

1.2 Statement of the Problem 3

1.3 Research Questions 4

1.4 Objective of the study 4

1.5 Statement of hypotheses 4

1.6 Significance of the Study 5

1.7 Scope of the Study 5

1.8 Definition of terms 6

1.9 Historical Background of Case Studies 7

CHAPTER TWO: LITERATURE REVIEW

2.0 Introduction 8

2.1 Conceptual Framework 8

2.1 Extensive Review of the concept of informal credit 8

vii
2.2 Extensive Review of the concept of small scale enterprise 13

2.1.3 Informal credit and Performance of small scale business 17

2.2 Theoretical Framework 19

2.3 Empirical Review 24

CHAPTER THREE: METHODOLOGY

3.1 Introduction 29

3.2 Research Design 29

3.3 Population of the study 29

3.4 Sampling Design 30

3.5 Research instrument 30

3.6 Validity and Reliability of Research Instrument 30

3.7 Data collection procedure 31

3.8 Methods of Data Analysis 31

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1 Introduction 32

4.2 Participation/Response Rate 32

4.3 Demographic characteristics of the Respondents/participants 32

4.4 Data presentation and analysis of Research Question 37

4.5 Test of Hypotheses 47

4.6 Discussion of findings 48

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary 51

5.2 Conclusions 52

5.3 Limitations of the Study 53

5.4 Recommendations 53

viii
5.5 Suggestions for Further Research 54

REFERENCES 55
APPENDIX 61

QUESTIONNAIRA. 62

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 LIST OF TABLES

Table 4.1: Analysis of Demographic Information 32

Table 4.2: Type of informal credit sources available to Respondents 34

Table 4.3: Of the various sources of informal credit above, which one is available to

you most 38

Table 4.4: What is the average profit made from your business on a monthly basis? 38

Table 4.5: Have you borrowed from friends and family in the last three years? 39

Table 4.6: If yes, how much in total have you borrowed in the last three years? 39

Table 4.7: Did the profitability of your business improve with the money borrowed

from your family and friends? 40

Table 4.8: Have you enjoyed trade credits in the last three years? 40

Table 4.9: If yes, how much have you enjoyed from trade credits in the last three years? 41

Table 4.10: Did the profitability of your business improve with the trade credits

enjoyed? 41

Table 4.11: Have you borrowed money from any local cooperative society in the last

three years? 42

Table 4.12: If yes, how much have you borrowed from cooperative society in the last

three years? 42

Table 4.13: Did the profitability of your business improve with the money borrowed

from the cooperative society? 43

Table 4.14: Have you borrowed any money from any money lender in the last three years? 44

Table 4.15: If yes, how much have you borrowed from the money lender in the last three

years? 44

Table 4.16: Did the profitability of your business improve with the money borrowed

x
 from the money lender? 45

Table 4.17: Have you borrowed money from any savings collector/Alajo in the last

Three years? 45

Table 4.18: If yes, how much have in total have you borrowed from the savings

collector/Alajo in the last three years? 46

Table 4.19: Did the profitability of your business improve with the money borrowed

from the savings collector/Alajo? 46

Table 4.20: Have you made profit from the informal credit your business sourced? 46

Table 4.21: Has the profit made help you to expand your business? 47

Table 4.22: There was high turnover after using the informal credit. 47

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 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Credit has been considered not only as one of the critical inputs for small scale business, but

also is regarded as an effective means of economic transformation and poverty alleviation

(Opio, 2010). The performance of small scale business depends to a large extent on the

availability of credit. Credit affects the performance of agriculture by providing resources for

the purchase of inputs and adoption of new technology. There are both formal and informal

sources of credit available to small scale business. In Nigeria, most of the rural dwellers do

not have easy access to formal credit.

Formal financial services refers to financial services provided by registered financial

institutions that are licensed to offer financial services by the country’s bank regulator (in

case of Nigeria is the Central Bank of Nigeria) largely urban based in terms of distribution of

branches and the concentration of deposit and lending activities (Ghate,2012). Examples of

institutions offering formal financial services are the Commercial Banks, insurance

companies and development banks. On the other hand, the informal financial sector also

known as un-organized sector consists of individuals such as money lenders, relatives,

friends, neighbors, landlords, traders and group of individuals that operates mainly in the

rural setting, (Mehrteab, 2005).Opio (2001) posited that the inability to access formal finance

by the rural poor is borne out of two related reasons: (a) financial institutional impediments -

the high interest rates charged by financial institutions, coupled with the lengthy and

cumbersome formalities and procedures required to access credit, are usually important

constraints and (b) resource limitations of rural households – the lack of the physical

collateral that is a pre-requisite for the granting of loans by financial institutions, together

with the low savings and the high transaction and administrative costs incurred during the

1
delivery and recovery of loans, makes lending financially unsound and costly.The money

lender is no less important in the informal credit arrangements in rural communities, in spite

of the fact that he may not be the most desired person in the community because of his

antecedents. In spite of his usurious rates, Ijere (1983) affirms that he is patronized by many

in Nigeria’s rural areas because of his timeliness in credit disbursement, a broader

interpretation of business credit to include the business and home financing and expeditious

enforcement of loan terms to ensure enforcement.

However, much of what is known about informal financial intermediaries are largely

descriptions of their use in consumption financing (Lijn and Pain, 2007) while little attempt

has been made to measure the impact of credit from informal sources on entrepreneurial

output, and performance of small scale business.Access to finance has been acknowledged as

a prerequisite for survival and performance of any enterprise and has become an increasingly

important development metric, as one of the factors which can drive widespread economic

development (Cracknell, 2012). Financial market in developing countries is composed of

formal, semiformal and informal financial institution with formal institutions being unable to

meet the needs of firms and individuals in informal settlements (Steel & Andah,

2004).Informal credit relies on relationships and reputation implying that information

asymmetries between informal lenders and their borrowers are less acute, the loan application

procedure lighter, and the collateral requirement is easier to fulfill. Furthermore, informal

financiers are often better positioned to efficiently monitor and enforce repayment when legal

enforcement is difficult and time-consuming as in the case of China’s fast-moving economy

(Allen & Qian, 2010).In a study of Ghana, Malawi, Nigeria and Tanzania, Steel et al. (1997)

stress that informal finance is an important vehicle for mobilizing household savings and

financing small businesses, a function that is carried out using specialized techniques that

2
address the problems of information, transaction costs and risks, which prevent banks from

serving these market segments.

1.2 Statement of the Problem

The problem inherent in this work is the necessity to know the impact of the informal credits on

the performance of small scale business enterprises. The roles of the informal credits have been

viewed as a critical element for the development of small scale industries. Previous studies have

shown that limited resources are made available by the informal sector which does not provide

the bulk of financing for small enterprises in the rural areas (Jinadu, 1995). The informal credit

channel is also said to be a source of credit and the most familiar financing source for small

scale businesses in the rural areas, despite government’s efforts to widen access to formal

credit. Small scale enterprises (SSEs’) loan requirements are small and the costs of

processing the loans tend to be adversely high. It is impossible for small scale business

without adequate collateral and legal backup to have access to formal credit loans. It is also

difficult for financial institutions to obtain the information necessary to assess the risks of

new business, especially because the success of small firms often depends heavily on the

abilities of the entrepreneur. Access to credit has been considered as one of the main

problems that small scale businesses have to deal with in order to survive and keep growing.

An appropriate combination of access to credit, sources of credit, credit conditions, and

adequate financial and operational policies, is the only way to deal with the complex problem

of small scale businesses performance.In spite of the valuable roles of small scale business in

promoting economic growth, job creation and the mitigation of poverty, there are still small

scale businesses closures than expansions due to lack of funds to continue or expand their

operation. Informal finance sources may be a complementary to increased formal financial

service use rather than competitive it. The contention of this study is that informal sources of

funds used by small scale businesses would be explored and their effect on performance

3
would also be analyzed.Therefore, this study is aimed at assessing the impact of informal

credit on the performance of small scale business enterprise in Surulere metropolis.

1.3 Research Questions

 What are the socio-economic characteristics of the respondents in the study area?

 What are the various sources of informal credit available to Small Scale Business

Enterprise?

 What are the effects of informal credit sources on the performance of Small Scale

Business Enterprise?

 What are the policy implications of this study?

1.4 Objectives of the Study

The main objective of this study is to examine the impact of informal credit on the

performance of small scale business enterprise in Surulere metropolis. Other specific

objectives are to:

 Examine the socio-economic characteristics of the respondents in the study area.

 Identify the various sources of informal credit available to Small Scale Business

Enterprise.

 Determine the effect of various sources of informal credit on the performance of small

Scale Business Enterprise.

 Make policy recommendations based on the findings of this study.

1.5 Research Hypothesis

The research hypothesis was formulated and tested in a null form:

Ho: Informal credit has no significant impact on performance of small scale business

enterprises

1.6 Significance of the Study

4
The objective of the informal credit is to assist most of the small scale businesses in building,

defending and maintaining its competitive edge. Therefore this study tends to pinpoint the

benefits of informal credit on small scale business. The findings of this study are expected to

be of importance to the various stakeholders who include financial institutions, small scale

enterprises managers and business owners, the government and community welfare

organization, general public, researchers and academicians. To the financial institutions, they

will be able to understand the importance of informal credit in enhancing the performance of

the SSEs and come up with products that will serve the SSEs better leading to their improved

performance.The study would assist SSEs by enlightening them on the ways of managing the

financial challenges they are facing and also provide alternative sources of finance that would

give them better chance of survival, growth and success in the global competitive corporate

setting. SSEs managers will be able to learn the relevance of financial access to their financial

performance and the factors that hinder access to credit. This will make them more informed

and hence be able to make more informed financing decisions.The government could use the

findings of the research work to design and implement policies that are meant to enhance

access to credit by SSEs as they contribute significantly to growth and development of the

country. The study would be of great importance to other researchers and scholars who seek

to understand the impact of informal credit on the performance of SSEs.

1.7 Scope of the Study

The study focused on informal credit sources available to SSEs in Surulere metropolis. It is

also assumed that the target respondents would complete the questionnaires objectively and

accurately on the basis of their own perception, knowledge, and experience on informal

credit.

1.8 Definition of Terms

5
Informal credit: this refers to rural informal credit markets where institutional credit

facilities are absent or insufficient to cater to the needs of local professionals of different

categories.

Small Scale Business: this is a business that employs a small number of workers and does

not have a high volume of sales. Such enterprises are generally privately owned and operated

sole-proprietorships, corporations or partnerships.

Performance: This means the degree of success. It is an act of carrying out assigned

duties/responsibilities in a manner to achieve success.

Credit: is the ability of a customer to obtain goods and services before payment based on the

trust that payment will be made in the future.

Enterprise: a unit of economic organization or activity, especially a business organization.

Finance: can be defined as the management of large amounts of money especially by

governments or large companies.

Entrepreneur: can be seen as a person who set up a business or businesses, taking on

financial risk in the hope of making profit.

Interest: for this study interest is the charge for privilege of borrowing money, typically

expressed as annual percentage rate.it can also be referred to the amount of ownership a

stockholder has in a company, usually expressed as a percentage.

1.9 HISTORICAL BACKGROUND OF SMALL SCALE BUSINESS

Small scale business are non-subsidiary, independent films or organizations varies across

countries. According to the European union are categories of micros, small and medium-sized

enterprises which employ fewer than 250 persons and which have an annual turnover not

6
exceeding 50 million euro. In Nigeria, the central bank of Nigeria in its monetary policies

circular No.22 of 1988 defined SSES as enterprises which have an annual turnover not

exceeding Five Hundred Thousand Naira(500,000). The national policy on micro small and

medium enterprises (MSMES) has given a clear distinction of enterprises, based on

employment and Assets. SSES are organizations which can best be described through their

capital, scope and cost of projects, annual turnover, financial strength and number of

employee amongst other things.Such organization must and can be registered under any part

of the companies and Allied Matters Act (CAMA) in order to do business in Nigeria.

7
 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

The chapter presented the theoretical framework .The theoretical framework captured the

various theories that informed the study. It also presented the empirical literature review. In

the empirical literature review, the findings were critiqued to establish the knowledge gaps.

2.1 Conceptual Framework

According to Kombo and Tromp (2009), a concept is an abstract or general idea inferred or

derived from specific instances. The goal of a conceptual framework is to categorize and

describe concepts relevant to the study and map relationships among them. Such a framework

would help researchers define the concept, map the research terrain or conceptual scope,

systematize relations among concepts, and identify gaps in literature (Creswell, 2013).

2.1.1 Concept of Informal Credit

The informal credit market is an important part of the financial system of the developing

countries. They play a decisive role in channeling credit to small and poor borrowers in both

urban and rural areas. They also constitute an important source of working capital of all sizes

and serve generally to ameliorate inefficiencies in the allocation of formal sector credit.

There are two views concerning the importance of the informal credit markets viz.

Traditional view and Modern view. The traditional view is quite skeptical about the

usefulness of the informal credit market in financial intermediation, saving mobilization,

Efficient and equitable use of funds in LDCs (Less Developed Countries). Informal finance

was often thought to be anti-developmental, exploitative, and prone to consumption rather

than investment behavior and incapable of expanding to provide an appropriate volume and

range of financial services (Pischke et.al., 1983).

8
However, of recent, the typically skeptical view of the traditional view has come to be

questioned. UNDP (1997) study made it clear that informal credit market works directly in

the community and had simplified application procedures, quickness in extending credit,

focus on the local market, providing larger loans based on successful repayments, charge

high rate of Interest, addressing the need of the poor clients and consider reputation in the

community as more important than collateral. This view looked more sympathetic than the

traditional one. Chandavarkar (2009) pointed out that the general stance of policy towards the

informal credit markets, in developing countries can best be described as an amalgam of

benign neglect and prejudice, which is unwarranted considering that its scope and persistence

testify, if anything to its basic economic rationale deriving from its capacity to satisfy the

needs which were not met by the formal sector. Rather it supported the case for a positive and

coherent policy towards the informal financial sector. Platteau et.al. (2011) through a seminal

study of informal credit market in some villages in Kerala found that the demand for credit in

the rural area is apt to be a function of the degree of commercialization and modernization of

agriculture, investment opportunities etc. The efficiency and resource rnobilisation aspects of

informal credit markets are most relevant in the present context.Konig and Koch (2010) held

the view that unorganized financial market could be seen as restoring part of the social

welfare lost due to the imperfection in formal credit market and distributing income in favour

of the small scale informal sector which suffers disproportionately from uncertainty and high

transaction cost.Rahman (2012) was of the view that informal credit markets needed to be

supported and nurtured for sustaining efficient and egalitarian development. Nair (2009)

asserted a linear relationship between credit and economic welfare. To her credit is just a

facilitation factor in poverty reduction and economic welfare. Credit is potentially a prime

weapon against rural and urban poverty.

9
Roe (2008) and Timberg and Aiyar (2007) held the view that informal credit markets

provided valuable services that were not adequately met by modern financial corporations.

Bhat (2010) viewed that informal credit markets operated largely on the basis of personal

intimate information and knowledge and they were in a better position to identify new

opportunities in financial transactions. Bouman (2013) asserted that informal credit markets

responded quickly or remarkably well to short term financing opportunities, and allowed low

income people access to service, not available to them elsewhere and at relatively low cost.

Another advantage is that the informal credit markets make loans accessed quickly (Ghate,

2012). Besides, informal credit markets were not subjected to interest rate regulation, credit

allocation guarantee or requirements to maintain specified liquidity ratio. They do not incur

legal expenses and their cost of lending and deposit taking tends to be lower than that of

modern financial institutions.Despite the growing body of literature upholding the merits of

informal credit markets, there are many who have remarked the negative side of the picture.

With regard to safety and liquidity of their customer's deposits, indigenous banks showed a

remarkably good performance although occasionally they mismatched maturities and had

liquidity problems. The risk diversification of indigenous bank was not good as they provided

unsecured loans (Nayar, 2012). Most of these unsecured loans were of short duration. Thus it

did not satisfy long term credit of the borrowers.

Sources of Informal Credit

There are several ways in which small scale business enterprise can source for finance in

other to make their business grow. The source of informal credit includes the following:

i. Trade Credit

According to Demurgic-Kunt and Maksimovic (2001) trade credit is important alternative to

bank loans as a source of external funding in the SSE sector in every developed and

developing economy. Trade credit is an agreement in which a supplier allows a business to

10
delay payment for goods and services already delivered. Allowing payment to occur after the

receipt of the goods and services helps the business to better manage their short-term cash

flows. Trade credit is an alternative source of funding to credit provided by financial

institutions, hereafter referred to as bank credit.Trade credit has been identified as an

important source of finance for firms, especially when firms find it difficult to obtain external

funding via credit institutions. Over recent years, trade credit in the form of accounts payable

and receivable of euro area non-financial firms has moved broadly in line with the business

cycle. This confirms the typically procyclical pattern of accounts payable and receivable, as

they are closely linked to the exchange of goods and services and, hence, to economic

activity (Fernando & Mulier, 2012)

ii. Family and Friends Finance Sources

In most of the African countries, tradition demands that financial help should be extended to

one’s immediate and extended family members. Friends and family who are supportive of the

business idea provide money either directly to the entrepreneur or into the business. This can

be quicker and cheaper to arrange (certainly compared with a standard bank loan) and the

interest and repayment terms may be more flexible than a bank loan. However, borrowing in

this way can add to the stress faced by an entrepreneur, particularly if the business gets into

difficulties (Chioma & Ngozi, 2014).Financing of the small scale business enterprise, family

and friends played a big role in helping the business owners boost their operations with an

average of 40% of the finances coming from them, an average of 24% came from financial

institutions while on average 30% of the finances were from business savings (Macharia,

2012).

iii.LocalCooperative Society

These are locally organized money contributions groups, where each member deposits a

certain amount of money per day, week, or month. At the end of of a cycle, a member can

11
collect all the money they have saved, and in addition to that,they will be able to borrow

some more money from the cooperative. Local cooperative societies play an important role in

financing small scale business enterprise. It helps in improving the growth of the business

and it does not require any collateral requirements and the interest rate is low.

iv. Personal Savings

Personal savings is the money that an individual has put away for non-immediate use.

Personal savings are the dominant source of credit, especially for initial capital, pointing to

the limited ability of the financial markets to meet existing credit demand from certain

borrowers and reinforcing the argument that small-scale rural based enterprises do not have

access to the financial resources of the formal financial sector. Even within the informal

market, the different segments display different degrees of accessibility. Most enterprises

used personal savings and credit from relatives (Atieno, 2001)

v. Money Lenders

They operate on the lending side. Commercial money lenders cover a range of financial

arrangements with interest rates varying from 50 – 100% a month. This includes bank rate

plus default charges, time value of money and profit margin. Beneficiaries are often

introduced by those well known to the money lender and agreement bothering on collaterals,

defaults charges, interest rate, repayment date and other terms are clearly spelt out. None of

the conditions spelt out are normally relaxed on breach. If a borrower fails to extinguish his

debt voluntarily over a reasonable number of months, the extinction is involuntarily

implemented by confiscating his property.

vi. Saving Collectors (Alajo)

These collectors take regular deposits (often daily or weekly) of an amount determined by

each client and return the accumulated sum at the end of a stipulated period (usually a

month), minus l day’s deposit as commission. These savings collectors form a symbiotic

12
relationship with market traders, protecting their daily earnings from competing claims. They

sometimes extend advances to their clients.

2.1.2 Concept of Small Scale Business Enterprise

In many respects, the meaning and concept of small businesses cannot be completely isolated

from the operational environment. Thus the perception and definition is highly dependent on

the particular economy that provides the environment of operation. In Nigeria, there seems to

be no clear cut definition or scope for determining small business enterprise. However varied

definition and scope were made by some agencies as follows:

i. The National Directorate of Employment (NDE) defined it as being able to

accommodate project with capital investment as low as N5,000 and employing as few

as three persons (National Directorate of Employment, 2009).

ii. The Central Bank of Nigeria in its monetary policy guidelines 1980 defined small

scale business as an enterprise whose annual turnover does not exceed N500,000.

Also the Federal Ministry of Industries before the Structural Adjustment Programme

[SAP] and Foreign Exchange Market, defined small scale business as any

manufacturing, processing or service industry with capital investment of not more

than N150,000 in plant and machinery.

iii. The Nigeria Bank for Commerce and Industry also defines the small scale enterprise

as firms’ or companies with assets [including working capital but excluding land] not

exceeding N750,000 and paid employment of up to 50 persons an such an

establishment be wholly owned by Nigerians.

Measuring the appropriateness of some of these definition, Nwakobi (2011) criticized most of

the definition describing them as merely “institutional” Nwabobi holds the views that the

definitions does not picture on the growth of small scale business enterprise, considering the

difficulties involved in capital formation and other discrimination of attitudes of the banks

13
towards the owners of small scale business enterprise. In July, 2010, the National Council on

Industries at the 13th meeting in Markurdi, Benue State, reviewed and adopted the following

classification of industrial enterprises and came up with the definition that “A small scale

industry is an industry with total capital employed of over N1.5 million but not more than

N50million including working capital but excluding cost of land and of a labor size of 11 -

100 workers.However, comparatively, most developed countries seems to have agreed on a

maximum unit of 500 employees as a small firm (Feldman 2008). However, a review of the

performance of small scale business can be best anchored on the United Nations Industrial

Development Organization definition of small scale business as “an economic venture” that is

characterized by the following:

i. Ownership and management being vested in the same individual.

ii. Capital being made available by an owner on whom the policy decisions rest.

iii. Having a coalised operational area.

iv. A situation of a venture controlling a small share of the market thereby constituting a

little quota in the large sized market.

v. The owner participating very actively in all decision making processes on a day to day

operation basis with a high degree of rigid control.

Reflecting the characteristics, small scale business enterprises have emerged, especially in the

developing world, with roles of employment generation, encouragement of rural

development, assisting substantially in lifting gross domestic product, developing

entrepreneurship and proving avenue for self-employment.

2.1.3 Basic Characteristics of Small Scale Enterprise

The overall business scene and activities in Nigeria appear to be dominated by small

businesses which are established by individual, groups, companies and cooperatives.

14
Most business start off as small but with proper planning and management, then expand and

grow. However, it will be risky to assume that small enterprises are exactly like big ones after

all the difference is size. But it is necessary to differentiate the small business from the large

ones and to associate those characteristic with problems inherent in small business.

Basic characteristics as identified by several writers among (Broom and Longnecker 2009;

Musselman and Huglice 2007; and Yewande 2000) are presented below. It must not however

be taken that these characteristics are all embracing or that all must be present in the same

magnitude in a business for such a business to qualify as a “small scale business”.

i. Management is not independent- generally; the managers are also the owners. This

means that the manager/ owner can run the business as he pleases. Discipline as the

control factor in this case may sometimes be missing. This lack of proper managerial

discipline leads to business failures.

ii. The size of the small business firm within industry is usually small. Thus they are not

dominant in their individual field or operation.

iii. Capital requirement is small and therefore within reach of the indigenous

entrepreneurs.

iv. Majorities of the modern small business units are labour intensive and are able to

achieve high productivity. These units are concentrated in areas of low technology.

v. Capital is supplied and ownership is held by a small group or an individual. The

initial capital usually equity holdings is supplied by the owner or co- owners of the

business. Often for working capital, they depend on trade credit or credit finance or

both.

vi. The area of operation is mainly local employees / workers and owners all like in one

home community. Most small scale firms even those identified as modern utilizing

plants and machinery are run along family line. However, markets served by them are

15
 not always local, modern small firm’s serves market across ethnic cultural and even

nations or state boundaries.

vii. On other all – embracing characteristic of small scale business in Nigeria is the

apparent lack of attention to managerial functions of planning, organizing, directing

coordinating and controlling. In Nigeria, the entrepreneur usually sets out to achieve

high return on investment. The workers generally are not adequately remunerated or

sufficiently motivated.

Sources of Finance

i. Personal savings: This refers to the amount left over after subtracting the cost of

person’s consumer expenditure from the amount of disposable income in a given

period of time. Ojos as cited in Ekpenyong and Nyong (2012) shows that almost all

the funds required by SSEs owners came from personal savings (96.4 per cent). The

studies of BIS; Department for Business Innovation and Skills attested that half of

SSEs do not use formal sources of external finance, instead they rely on trade credit

from their suppliers or retained earnings and these show why the majority of the

industries have been wallowing in abject poverty with slow rate growth and

development. This is because the performance expectations from SSEs can only be

achieved with strong support of financial source.

ii. Formal Source: This refers to those financial institutions that are established by law

to carry out financial business activities and at the same time are saddled with the

responsibilities of assisting in growth, development and survival of SSEs by providing

facilities after fulfilling a certain criterion like collateral security which is commonly

used. The formal source comprises Commercial banks, Merchant banks, Savings

banks, Bank of industry, and Development banks. According to Beck, Demirgüç-Kunt

16
 and Pería (2008), most banks, independently of their country of operation or

ownership type, have set up separate departments to manage their

iii. Informal Source: This source of financing does not require serious paper works.

Sources under informal provides financial assistance with or without demanding

serious collateral security from SSEs’ owners, rather, it may base it on words of

mouth or with simple agreement. Besides owners’ savings, informal source comes

from friends, relatives and business angels. Riding (2006) shows that incidence of

informal investment was higher among firms in the manufacturing, wholesale or retail

and knowledge-based sectors. It equally shows that both business angels and friends

or relatives contribute significantly under informal source towards SSEs performance

in Canada to the tune of 15 and 25% respectively. In terms of Canadian financial

performance, it was revealed that the contributions of both angel-financed and those

financed by friends and family are larger than other SSEs financial sources.

This suggests that informal investment has indeed spurred growth for these SSEs. This similar

case can be seen in SSEs operating currently in Nigeria, especially Ado-Ekiti Metropolis. This is

in consonance with Gbandi and Amissah (2014) which shows that informal finance sector (IFS)

provides more than 70% of the funds to the SSEs, therefore, advocated that Federal government

should find out those factors that necessitate for this and incorporate such factors into its policy

for improving SSEs access to finance.

2.1.3 Informal credit and Performance of small scale business

Fadiga & Fadiga-Stewart (2004) conducted a study on collective action and informal

financial institutions: An empirical analysis of rotating and savings credit associations

(ROSCAS) in Ogun State. This study models cooperation among members as well as the

17
financial performance and sustainability of associations using data collected from field

research conducted in Ijebu Ode, Ogun State in 2001. The results show that factors such as

homogeneity of individuals within an association, how long the association has existed, how

defaults are covered, and rules such residency requirements, individual contributions, and

rotation order are to various degree critical to the financial performance and sustainability of

ROSCAs and to the fostering of cooperation among members of these associations.

Ostrom (1999) argued that ROSCAs have been able to avoid many of the high transaction

costs associated with formal financial institutions. For example, ROSCAs through various

monitoring and sanctioning mechanisms can minimize the costs of screening new borrowers

by capitalizing on local information about individuals past behavior. In addition, reputations

and the self-selection of members help these institutions reduce adverse selection and moral

hazard problems. High rates of interaction, proximity and effective mechanisms such as first,

second, and third-party enforcement make it easier for mutual monitoring among members to

occur and helps ensure that the benefits of cooperating minimize the temptation to default.

Social capital such as shared norms, networks of relationships, and trust are important factors

that explain how these institutions have been able to remain sustainable. With respect to the

impact of group size on collective action, a critical mass of individuals and how associations

affect social capital requires further investigation to offer solid conclusions.Evidence from

the existing empirical literature on the impact of access to finance on informal lending among

the poor, and near poor, is mixed. Khandker (2000) found that while enhanced access to

formal finance reduces the incidence of borrowing from informal sources. On the other hand,

Sinha and Matin (1998) found that microfinance member household does not reduce

borrowing from informal credit sources. More recently, Mallick (2012) and Berg et al. (2013)

addressed the issue using village level moneylender’ interest rates and found that

moneylender interest rates increase with higher formal finance coverage.

18
The research employed a survey research design and employed a stratified random sampling.

In his study, he found that performance of SSEs was influenced by finance, management

skills, macro environment, and infrastructure. The finding of the study indicates that access to

finance had the potential to positively affect performance of SSEs. Similar studies by Nabintu

(2013) found that performance of SSEs, was influenced by access to access to finance among

other factors such as technological input in the payment system, and availability of

management experience. The finding of the study indicates that there is a positive correlation

or relationship between financial performance of SSEs and access to finance. Parker and

Torres (2004) found that a shortage of working capital was cited as the primary reason for 25

percent of Surulere microenterprises that terminated operations. Informal credit remains the

most important source of credit throughout the business cycle. The survey conducted by

Daniels, Mead and Musinga (2005) found that almost 95 percent of the interviewed

entrepreneurs used family savings as the primary source of working capital.However, based

on the above contributions of scholars on this topic, this work however, tries to examine the

impact of informal credit on the performance of small scale enterprises in Surulere

metropolis.

2.2 Theoretical Framework

This section provided the theoretical foundation for this study which was informed by the

Adverse Selection Theory of Financial Markets and Financial Liberalization Theory.

Adverse Selection Theory of Financial Markets:

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

and Weiss (2004). 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

19
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 (2004),

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 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.

Financial Liberalization Theory

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

Shaw (2005). They popularized the concept of financial depression as a financial system with

20
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 (2000)

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 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

21
micro-finance) for meeting private sector credit demand, particularly from small enterprises.

(Aryeetey, 2002)

The Theory of Financing Choices

In general, three categories of financing are available to all businesses: internal equity, external

equity and debt. For large firms that are listed on major stock exchanges an ordering of financing

preferences known as the "pecking order theory" has been argued on theoretical grounds by

Giggs, (2004) and Myers and Maljuf (2004). According to this theory, firms prefer internal

sources of finance (i.e. internal equity) to external sources. In resorting to external sources, firms

prefer debt to external equity. The order of the preference is from the one which is least sensitive

(and least risky) to the one which is most sensitive (and most risky) to asymmetric information

between corporate insiders and less well-informed market participants. For smaller firms,

entrepreneurs' initial sources of capital are typically raised from personal sources (savings,

mortgages, retirement funds, life insurance, friends, family). Beyond these sources, debt is the

most common source of external finance used by small businesses (Binks, Ennew & Reed, 2012)

and is particularly important to Canadian firms (Petersen and Shulman, 2004). While this

ordering of preferences is the same as that predicted by the 'pecking order theory, it reflects

owners' tradeoffs between control and growth. The Canadian Bankers Association (1998) finds

that 85 percent of business owners would eschew growth if it compromised control.

Mobilization of Savings Theory

Financial markets and institutions function to mobilize savings for investments. Without access

to capital, many production processes would be constrained to economically inefficient scales.

Furthermore, through the mobilization of capital, financial markets and institutions create small

denomination instruments that provide opportunities for households to hold diversified portfolios,

invest in firms, and increase their asset liquidity. Sirri and Tufano (2005) suggest that, without

pooling, households would have to buy and sell entire firms. Hence, by mobilizing financial

capital, households are able to enhance their risk diversification and liquidity, and promote the

22
productive sector of the economy through the efficient allocation of resources. Mobilization of

savings is very costly. There is transaction costs associated with collecting savings from different

individuals, and informational asymmetries have to be overcome so that economic agents are

comfortable parting with their savings. As pointed out in Carosso (1970), in the mid-1880s, some

American investment banks used their European connections to raise capital abroad for

investment in the United States. Other investment banks used the ties with major banks and

industrialists in the United States to mobilize capital, while others placed advertisements in

newspapers, used pamphlets and travelled from state to state, selling securities to individual

households. Carosso’s example shows that the mobilization of resources entails a range of

transaction costs, including the non-monetary cost of assuring savers of the soundness of their

investments. De Long (1991) points out that, in addition to other transaction costs, financial

institutions have to spend resources to establish stellar reputations so that savers feel comfortable

about entrusting their savings to them. Financial markets and institutions also mitigate the high

transaction and information costs associated with the mobilization of financial capital from

savers. Mobilization involves multiple bilateral financial contracts or arrangements between

productive capital-raising units and savers. To minimize the transaction and information costs,

financial institutions pool the multiple bilateral contracts together, ensuring that investors entrust

them with their wealth to invest in hundreds of firms. Financial systems that are more effective at

pooling the savings of households affect economic development, since better savings

mobilization improves resource allocation and consequently boosts technological innovation.

Thus, by effectively mobilizing resources for projects, financial markets and institutions play a

crucial role in promoting the use of better technologies, thereby encouraging growth.

2.3 Empirical Review

This section included studies that other scholars have previously undertaken on the impact of

informal credit on the performance of small scale business enterprise. In the study of Joseph

23
and Agnes, (2015) the study examined the effect of self-help group finance, family and

friends finance, trade credits and shylock financing on the performance of SSEs. The study

found out that self-help group finance, family and friends finance, trade credit finance has a

positive influence on the performance of SSEs while shylock finance sources have negative

influence on the performance of SSEs. Ghazala (2006) found positive effects of informal

financial institutions such as micro-credit programmers on the welfare of the entrepreneur.

The study showed that the programme reduced poverty through microfinance and thrift

societies. It also increased women empowerment, improved savings and purchase of

agricultural inputs and ensured easy access to loans with considerably lower interest rates.

Zaman (1999) emphasized the importance of Informal Financial Institutions on socio-

economic development with reference to Rotational Savings Credit Association (ROSCA).

He found that loans provided by the ROSCA increased people’s income and stimulated

building of assets. It also improves the economic condition of subsistence rural farmers

through easy availability of finance for adequate storage facilities to protect their farm

products from seasonal price dangle. This enables the farmers to store their product until the

prices are reasonable enabling farmers to reap the reward of high profits. A study by World

Bank (1999) found an increasing patronage of IFI’s in Bolivia and Niger, highlighting their

importance to the socio-economic lives of the people in the two countries. It reported that

adults in Bolivia participated much in IFI’s by putting on the average contribution of one

sixth of their salaries. Also, in rural Niger, about 389 village households in 1986 indicated

that credit especially from ROSCA accounted for 84% of the total loans they collected.

Goodland et al (1999) also reported that IFI’s contributed in equitable distribution and

utilisation of local resources most especially in-come raw materials because credit taken was

used to finance income generating activities with return in excess of the loan taken, thus

ensuring economic stability and reducing people among the people. The Special Issue on

24
Arts, Commerce Bauchi (2000) study in Gwer- West of Benue, Nigeria found that IFI’s

through ROSCA promoted economic situation of its members and society at large. They keep

money on behalf of their members which is a function that is vital for capital creation, and

also give credit to members to facilitate investment. Tsai (2004) assert that informal sector

represents a major source of finance for traders and farmers which invariable ensure socio-

economic development. IFAD (2001) study in China found that Informal Financial

Institutions provided more access to credit than Formal Financial Institutions as much as four

times more. Another study by Tsai (2002) on small business owners in showed that IFIs were

responsible for up to three-quarters of private sector financing during the first two decades of

reforms. A study AIDIS (1992) in India revealed that nearly 40% of rural household continue

to rely on informal institutions such as professional money lenders and agricultural money

lenders for credit.Quaye (2001) while studying the effects of informal financial institution on

the survival of Small Scale Enterprises (SMEs), examined the detailed profile of SSEs in the

Kumasi Metropolis of Ghana, reveals that informal financial institutions have a positive

effect on the survival of SSEs. In other to enhance a sustained and accelerated growth in the

operations of SMEs credits should be client-oriented and not product- oriented. Proper and

extensive monitoring activities should be provided for clients who are granted loans.

Chijoriga, (2001) evaluated the performance and financial sustainability of informal financial

institutions in Tanzania, in terms of the overall institutional and organizational strength, client

outreach, and operational and financial performance. 10 Informal financial institutions and

194 SSEs were randomly selected and visited in Dares Salaam, Arusha, Morogoro, Mbeya

and Zanzibar regions. The findings of this revealed that, the overall performance of informal

financial institutions in Tanzania is poor and only few of them have clear objectives, or a

strong organizational structure.

25
It was further observed that informal financial intermediaries in Tanzania lack participatory

ownership and many are not donor driven. Although client outreach is increasing, with

branches opening in almost all regions of the Tanzanian mainland, still informal financial

activities remain in and around urban areas. Their operational performance demonstrates low

loan repayment rates. In conclusion, the author pointed to low population density, poor

infrastructures and low house hold income levels as constraints to the MFIs‟ performance.

Abiola, (2001) in his paper, Impact Analysis of informal financial institution in Nigeria

applies the financing constraints approach to study whether microcredit institutions improved

access to credit for microenterprises in Nigeria or not. According to this approach,

microenterprises with improved access to credit rely less on internal funds for their

investments. Thus, investment sensitivity to internal funds of microenterprises in Lagos State

(a municipal with significant presence of Microcredit Banks was compared to that of micro

enterprises in Ekiti State (a municipal with no (or limited) presence using a cross sectional

survey method and Microcredit Institutions (MFI) branch location data. Results indicate that

s alleviated micro businesses‟ financing constraints. This approach is applicable to evaluating

microcredit impact in other countries.

Formal versus Informal Finance

Poor people either obtain informal credit or borrow from both financial sectors at the same

time. Using unique survey data, the study found that informal finance is associated with

higher sales growth for small firms and lower sales growth for large firms. The study

identifies a complementary effect between informal and formal finance for the sales growth

of small firms, but not for large firms. Informal finance offers informational and monitoring

advantages, while formal finance offers relatively inexpensive funds. Co-funding, i.e. the

simultaneous use of formal and informal finance, is the optimal choice for small firms.

26
Fridell (2007) explored the roles of informal, formal and semiformal Micro credit in Jordan

credit. The study found that accessibility and low application costs are the key advantages of

informal credit, while these are often perceived to be disadvantages of formal credit. Informal

finance was found to be very flexible since the dominant source of informal credit seems to

be family, friends, neighbors, it may not be so surprising that most informal loans were

interest free and that many do not agree that interest rates are higher for informal lending in

general. The informal financial sector was also seen to be disadvantaged by credit ceilings,

while the formal sector had reliable funds available. The study concluded that the key method

of enhancing credit access to business and individuals and hence reduce the financial

exclusion was by encouraging development of informal financial sector. The reduced costs

and flexibility was found to enhance credit access which in turn led to increased business

performance.Atieno (2001) found that credit rationing is significantly higher in the formal

financial markets as compared to the informal and semiformal financial sectors in surulere.

She found that the concern with the loan repayment among formal lenders determines the

amount credit a borrower gets while in the informal financial sector, the main determinant is

their limited resource base. She concluded that lending terms imposed by the formal financial

sector ( emphasizing collateral security) ration a large number of borrowers out of the credit

market leaving only a few who can afford the required collateral. On the other hand, some of

the borrowers do not get what they want from the informal sector due to the limited resource

base creating a credit gap in the rural markets in surulere.

Various studies that have been carried out globally on the effect of financial accessibility on

the financial performance of SSEs show conflicting results. Limited access to finance has

been identified as the key constraint globally (Minniti, 2009). Cressy and Ollofson (2006) in

their study concluded that the growth and financial performance finance of firms was more

constrained by managerial and psychological factors than it was by the availability of

27
external finance. (Cressy, 2006). On the other hand, Schiffer and Weder (2001) in their paper

on firm growth and business environment identified constraints on access to finance as the

main factor hindering growth of firms.Kamau (2008) focused on the critical factors affecting

accessibility of credit services by small scale tea farmers, Wanjohi and Mugure (2008)

Factors affecting growth of MSEs in Rural Areas in surulere while Wasonga,(2008) did

research on challenges in financing SSEs in surulere . Muniru (2013) carried out a study on

the effects of human resource management on financial performance of small and medium

enterprises in Surulere metropolis.While the scale of informal finance in many developing

countries has long been known to be extensive, data at the national level and particularly in

Africa has been scarce. This study will help to fill the void in the knowledge gap. This study

is therefore conducted so as to identify the impact of informal credit on the performance of

SSEs.

28
 CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter describes the method employed in the collection and analysis of the data to solve

the hypothetical problems already stated. This chapter forms the framework of the entire

research process and involves adopting the most suitable form of investigation, the nature of

the scientific research process, the research design, sources of data and all other information

relevant to this research study.

3.2 Research Design

A research design is the framework or strategy of investigation conceived so as to obtain

answers to research questions. In this study, Descriptive survey was used to obtain

information concerning the current status of the phenomena to describe what exists with

respect to the variables in a situation, by asking individuals about their perceptions, attitudes,

behaviour or values. The research adopted the survey design to enable her to achieve the

objective of the study. This design was appropriate because it gives a conclusive result

between two variables. For this case, informal credit was the independent variable whereas

the dependent variable is performance of small scale business enterprise.

3.3 Population of the study

According to Kombo and Tromp (2006) population is a groups of individuals, objects or

items from which samples will be taken for measurement or it is an entire group of persons,

or elements that have at least one thing in common. The population of the study consist of all

the registered SSEs in Surulere metropolis which according to SMEDAN and National

Bureau of Statistics Collaborative Survey (2013) Lagos state comprises of two thousand, two

hundred and forty seven (2247) registered small scale business. In order to gather data for

understanding informal credit on the performance of small scale business enterprises in

29
Surulere metropolis, a sample of one hundred and twelve (112) registered small scale

business were asked to take part in a self-administered questionnaire. Therefore, the sample

size used for this study is 5% of the total population which is 2247. The sample size was 112.

3.4 Sampling Design

This study makes use of stratified random sampling techniques which was used to select the

SSEs in Surulere metropolis. The SSEs were stratified based on type of business which

includes services, manufacturing, merchandising, processing, trading, farming and livestock.

One hundred and twelve (112) SSEs were randomly selected within Surulere metropolis

based on the strata above.

3.5 Research Instrument

Primary data was collected through the administration of the questionnaires. A questionnaire

is pre-formulated written set of questions to which the respondents record the answers usually

within rather closely delineated alternatives.

It was divided into two parts: PART A was for the purpose of gathering personal data,

education, and work experience. While PART B was designed for the purpose of gathering

information related to the topic of study.

3.6 Validity and Reliability of Research Instrument

The questionnaires were administered by the researcher. The questionnaires were circulated

among the one hundred and twelve (112) respondents in surulere metropilis. Before giving the

questionnaire to the respondents, the objective of study and questions were described to the

respondents so they can easily fill the questionnaire with appropriate responses. A total of 112

questionnaires were distributed in the study area for administration. After collecting the completed

questionnaires from the respondents, these questionnaires were entered into the SPSS sheet for further

analysis.

3.7 Data collection procedures

30
The data used in this study was collected through primary and secondary source of information. The

primary data used in collected through administered questionnaires, and the secondary source is

through literatures, internet, journals textbooks and articles.

3.8 Method of Data Analysis

This study employed descriptive and inferential statistics, descriptive and inferential statistics

were used to derive conclusions and generalizations regarding the population. The particular

descriptive statistics were frequencies and percentages. The particular inferential statistics

was regression model. A regression analysis model is used to link the independent variables

to the dependent variables are as follows:

Y=f(x1, x2, x3……………………xn)

Y=business performance

X1=personal savings

X2=friends and family

X3=trade credit

X4=local cooperative society

X5=money lenders

X6=savings collectors.

31
 CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

4.1 Introduction

This chapter deals with the analysis of data collected and presented for investigation of identified

phenomena. It also deals with the interpretation and discussion of the results which were analysed.

The researcher conduct a regression analysis of the variables in consideration and a test of the model

and hypothesis formulated earlier in the course of the study.

4.2 Participation/Response Rate

For this research work, a total number of 112 respondents were selected. The question was analyzed

in a tabulated form and the result was interpreted at the end of each table.

4.3 Demographic Characteristics ofthe Respondents/Participant

Particulars of Respondents Frequency Percentage (%)
SEX
Male 53 47.3
Female 59 52.7
Total 112 100.0
AGE
BELOW 30 YEARS 29 25.9
31 - 40 YEARS 41 36.4
41 - 50 YEARS 34 5.4
51 YEARS ABOVE 2 1.8
Total 112 100.0
MARITAL STATUS
SINGLE 22 20.5
MARRIED 70 62.5
DIVORCED 12 10.7
WIDOWED 7 6.3
Total 112 100.0
EDUCATIONAL QUALIFICATION
NO FORMAL EDUCATION 14 12.5
PRIMARY SCHOOL LEAVING CERTIFICATE 15 13.4
WAEC/SSCE/GCE/NECO 13 11.6

32
ND/NCE 33 29.5
B.Sc 29 25.9
OTHERS 8 7.1
Total 112 100.0
SIZE OF HOUSEHOLD
1–5 52 46.4
6 - 10 42 37.5
11 - 15 10 8.9
ABOVE 16 4 3.6
MISSING SYSTEM 4 3.6
Total 112 100.0
TYPE OF BUSINESS
SERVICES 18 16.1
MERCHANDISING 4 3.6
MANUFACTURING 11 9.8
PROCESSING 11 9.8
TRADING 45 40.2
FARMING/LIVESTOCK 23 20.5
Total 112 100.0
HOW LONG HAVE YOU BEEN IN BUSINESS?
LESS THAN 1 YEAR 16 14.3
2 – 5 YEARS 40 35.7
ABOVE 5 YEARS 54 48.2
MISSING SYSTEM 3 1.8
Total 112 100.0
WHAT IS THE FORM OF YOUR BUSINESS
OWNERSHIP?
SOLE PROPRIETORSHIP 72 64.3
PARTNERSHIP 25 22.3
PRIVATE LIMITED LIABILITY 14 12.5
MISSING SYSTEM 1 .9
Total 112 100.0
HOW MANY EMPLOYEES DO YOU HAVE IN YOUR
BUSINESS?
LESS THAN 2 EMPLOYEES 47 42.0

33
2 – 5 EMPLOYEES 26 23.2
6 – 10 EMPLOYEES 17 15.2
ABOVE 10 EMPLOYEES 20 17.9
MISSING SYSTEM 2 1.8
Total 112 100.0
HAVE YOU EVER SOURCED FOR INFORMAL CREDIT
BEFORE?
YES 94 83.9
NO 17 15.2
MISSING SYSTEM 1 .9
Total 112 100.0
HOW MANY TIMES HAVE YOU SOURCED FOR
INFORMAL CREDIT BEFORE?
LESS THAN 5 TIMES 64 57.1
ABOVE 5 TIMES 36 32.1
MISSING SYSTEM 12 .9
Total 112 100.0
WAS THE FUND GRANTED?
YES 90 80.4
NO 16 14.3
MISSING SYSTEM 6 5.4
Total 112 100.0
IS THE PAYMENT TERMS FAVOURABLE?
YES 72 64.3
NO 34 30.4
MISSING SYSTEM 6 5.4
Total 112 100.0
Source: Field Survey, 2020

Table 4.1 shows that 53 (47.3%) of the respondents are male while the remaining 59 (52.7%)

of the respondents are female. Based on the result in Table 4.1, the dominated sex among the

respondents is female. This shows that there are more females who participated in this

research studies. Both male and female are regarded to as operators of small and medium

34
scale business. Although, they might defer in terms of the type of product/services rendered.

The table also reveals that 29 (25.9%) of the respondents are below 30 years, 41(36.4%) of

the respondents are between 31 – 40 years of age, 34 (36.4%) of the respondents are between

41 – 50 years old, while 2 (1.8%) are above 51 years old. This shows that a matured group of

people participated in the study. Adults who are of economic ages are the major operators of

business. It is expected that you must be of an economic age before you venture into any

business. The Table above further depicts that 23 (20.5%) of the respondents are single, 70

(62.5%) of the respondents are married, 12(10.7%) of the respondents are divorced while 7

(10.7%) of the respondents are widowed. From the above table majority of the respondents

are married. 14 (12.5%) of the respondents have no formal education, 15 (13.4%) of the

respondents have Primary School leaving certificate, 13 (11.6%) of the respondents are

WAEC/SSCE/GCE/NECO holders, 33 (29.5%) of the respondents areND/NCE holders while

8 (7.1%) of the respondents are B.Sc holders. However, 8 (7.1%) of the respondents had

other qualification apart from those listed in the study. Educational knowledge also

contributes to way or process a business is run, one cannot compare the way a university

graduate will run a business with the way an o’ level holder will run hers. Although, one can

acquire additional skills in relation to the type of business you want to venture into. 52

(46.4%) of the respondents has a household size between 1- 5, 42 (37.5%) have a household

size between 6 – 10, 10 (8.9%) have a household size of 11 – 15 while the remaining 4

(3.6%) have a household size which is above 16. The table also shows the type of business of

the respondents and it was revealed that 18 (16.1%) of the respondents are into services, 4

(3.6%) of the respondents are merchandisers, 11 (9.8%) are manufacturers, 11 (9.8%) are into

processing, 45 (40.2%) are traders and the remaining 23 (20.5%) of the respondents are into

farming/Livestock. This implies that all the respondents are into different type of businesses

but the majority that participated in the study are traders. The Table further reveals that 16

35
(14.3%) of the respondents have been in the business for a period which is below 1 year, 40

(35.7%) have been in business for a period of 2 – 5 years, 54 (35.7%) have been in the

business for a period which is above 5 years. This implies that majority of the respondents

have been operating their business for a period which is above 1 year and have proper

knowledge about the business. Also, the form of business ownership of the respondents also

revealed that 72 (64.3%) of the respondents are sole proprietors, 25 ( 22.3%)are into

partnership while the remaining 14 (12.5%) of the respondents runs a private limited liability

company.The information on the number of employees which the business has also revealed

that 47 (42.0%) of the respondents have less than 2 employees, 26 (23.2%) of the respondents

have between 2 – 5 employees, 17 (15.2%) of the respondents have within 6 – 10 employees

while the remaining 20 (17.9%) of the respondents have above 10 employees. This implies

that all the respondents have employees which assist them in the day to day running of their

business but the number they have differs. It was further revealed that 94 respondents

representing (83.9%) have sourced for funds from informal credits before while 17

respondents representing (15.2%) have not sourced for funds from informal credits before.

Also, the response from the respondents revealed that 90 (80.4%) of the respondents were

granted the funds requested for from informal credits while 6 (5.4%) of the respondents were

not granted the funds requested for from informal credits. This implies that majority of the

respondents have requested for funds before and that this funds were actually granted to

them. The study also revealed that 72 (64.3%) of the respondents indicated that the payment

terms was favourable while the remaining 34 (30.4%) of the respondents indicated that the

payment terms was not favourable to them.

4.4 Data presentation and Analysis of Research Questions.

Table 4.2: Please indicate the type of informal credit sources known to you

Frequency Percent

36
 personal savings, friends and family, trade credit, local
cooperative society, money lenders and savings 27 24.1
collector/Alajo

personal savings, friends and family, trade credit, local

10 8.9
money lenders and savings collector/Alajo

trade credit, local cooperative society, money lenders and

Valid 18 16.1
savings collector/Alajo

friends and family, trade credit, local cooperative society 17 15.2

money lenders and savings collector/Alajo. 18 16.1

savings collector/Alajo 7 6.3

None 15 13.4

Total 112 100.0

SOURCE: Field Survey, 2020

Table 4.2 shows that 27 (24.1%) knows all the types of informal credit sources listed in the

study which includes personal savings, friends and family, trade credit, local cooperative

society, money lenders and savings collector/Alajo. However, 18 (16.1%) of the respondents

revealed that the only informal sources known to them is money lenders and savings

collector/Alajo, 17 (15.2%) indicated that they are aware of only friends and family, trade

credit, local cooperative society, 18 (16.1%) knows trade credit, local cooperative society,

money lenders and savings collector/Alajo, 10 (8.9%) knows personal savings, friends and

family, trade credit, local money lenders and savings collector/Alajo and 7 (6.3%) knows

only savings collector/Alajo.

Table 4.3: Of the various sources of informal credit above, which one is available to you most. Please
tick one.
Frequency Percent

Valid
Personal Savings 12 10.7

Family and Friends 15 13.4

37
 Trade Credits 22 19.6

Money Lenders 28 25.0

Savings Collector/Alajo 18 16.1

Total 95 84.8

Missing System 17 15.2

Total 112 100.0

SOURCE: Field Survey, 2020

On the availability of the informal sources, it was revealed in Table 4.3 above that 12

(10.7%) of the respondents indicated that the most available informal credit to them is

personal savings, 15 (13.4%) of the respondents indicated that the most available informal

credit to them is family and friends, 22 (19.6%) of the respondents indicated that the most

available informal credit for them is trade credits and 18 (16.1%) of the respondents indicated

that the most available informal credit to them is savings collector/Alajo.

Table 4.4: What is the average profit made from your business on a monthly basis?
# Frequency Percent

Below 100,000 61 54.5

100,000 - 200,000 17 15.2

201,000 - 300,000 12 10.7

Valid 301,000 - 400,000 5 4.5

401,000 - 500,000 9 8.0

Above 500,000 8 7.1

Total 112 100.0

SOURCE: Field Survey, 2020

Table 4.3 shows the average profit made by the respondents on a monthly basis. 61

respondents representing (54.5%) makes a monthly profit which is below #100,000,

38
17 (15.2%) makes a monthly profit of between #100,000 – #200,000, 12 respondents

representing (10.2%) makes a monthly profit of between #200,001 – #300,000, 5 (4.5%) of

the respondents makes a monthly profit of between #301,000 – #400,000, 9 respondents

representing (8.0%) makes a monthly profit of between #401,000 – #500,000 while 8

(7.11%) of the respondents makes a monthly profit above #500,000. This implies that

majority of the respondents makes profit from their business on a monthly basis.

Table 4.5: Have you borrowed from friends and family in the last three years?

Frequency Percent

Yes 49 43.8

Valid No 61 54.5

Total 110 98.2

Missing System 2 1.8
Total 112 100.0
SOURCE: Field Survey, 2020

Table 4.5 reveals that 49 (43.8%) respondents have borrowed money from family and friends

in the last three years while 110 (98.2%) respondents have not borrowed money from family

and friends in the last three years. This implies that majority of the respondents have not

received money from family and friends in the last three years.

Table 4.6: If yes, how much in total have you borrowed in the last three years?
# Frequency Percent

Below 50,000 16 14.3

51,000 - 100,000 19 17.0

101,000 - 200,000 7 6.3

Valid 201,000 - 300,000 5 4.5

401,000 - 500,000 4 3.6

Above 500,000 2 1.8

Total 53 47.3

39
 Missing System 59 52.7

Total 112 100.0

SOURCE: Field Survey, 2020

It was also revealed in Table 4.6 that 16 (14.3%) of the respondents borrowed an average sum

of below #50,000 in three years, 19 respondents with (17.0%) borrowed an average sum of

between #51,000 – #100,000, 7 (6.3%) of the respondents borrowed an average sum of

below #101,000 – #200,000, 5 respondents representing (4.5%) borrowed an average sum of

between #201,000 – #300,000, 14(3.6%) borrowed an average sum of between #401,000 –

#500,000 and 2 (1.8%) borrowed an average sum above #500,000.

Table 4.7: Did the profitability of your business improve with the money borrowed
from your family and friends?
Frequency Percent

Ye 39 34.8

Valid No 54 48.2

Total 93 83.0
Missing System 19 17.0
Total 112 100.0
SOURCE: Field Survey, 2020

The opinion of the respondents whether the profitability of their business improve with the

money borrowed from family and friends in Table 4.7 revealed that 39 respondents with

(34.8%) agreed that the profitability of their business improve with the money borrowed from

family and friend while 54 respondents with (48.2%) does not agree to the statement.

Table 4.8: Have you enjoyed trade credits in the last three years?

Frequency Percent

Yes 57 50.9

Valid No 53 47.3

Total 110 98.2

Missing System 2 1.8
Total 112 100.0
SOURCE: Field Survey, 2020

40
Table 4.8 shows that 57 (50.9%) respondents have enjoyed trade credits in the last three years

while 53 (47.3%) have not enjoyed trade credits in the last three years. Therefore the

population of the respondents who have enjoyed trade credits in the last three years is slightly

higher than those who have not enjoyed it.

Table 4.9: If yes, how much have you enjoyed from trade credits in the last three years?
# Frequency Percent

Below 50,000 14 12.5

51,000 - 100,000 10 8.9

101,000 - 200,000 10 8.9

201,000 - 300,000 7 6.3

301,000 - 400,000 6 5.4

Valid 401,000 - 500,000 2 1.8

501,000 - 600,000 3 2.7

601,000 - 700,000 2 1.8

701,000 - 800,000 2 1.8

Above 800,000 3 2.7

Total 59 52.7

Missing System 53 47.3

Total 112 100.0

SOURCE: Field Survey, 2020

Table 4.9 shows the average amount the respondents have enjoyed from trade creditors in the

last three years. It was revealed that 14 (12.5%) respondents enjoyed less than #50,000,

10 (8.9%) enjoyed between #51,000 – #100,000, 10 (8.9%) enjoyed between

41
#101,000 – #200,000, 7 (6.3%) enjoyed between #201,000 – #300,000, 6 (5.4%) enjoyed

between #301,000 – #400,000, 2 (1.8%) enjoyed between #401,000 – #500,000, 3 (2.7%)

enjoyed between #501,000 – #600,000, 2 (1.8%) enjoyed between #601,000 – #700,000, 2

(1.8%) enjoyed between #701,000 – #800,000 and 3 (2.7%) also enjoyed between above

#800,000.

Table 4.10: Did the profitability of your business improve with the trade credits
enjoyed?
Frequency Percent

Yes 55 49.1

Valid No 41 36.6

Total 96 85.7
Missing System 16 14.3
Total 112 100.0
SOURCE: Field Survey, 2020

Table 4.10 shows that 55 respondents with (49.1%) revealed that the profitability of their

business increased with the trade credits while 41 (36.6%) of the respondents revealed that

the profitability of their business did not increase with the trade credit received. Therefore,

we can say that the profitability of majority of the respondents who has enjoyed trade credits

improved.

Table 4.11: Have you borrowed money from any local cooperative society in the last
three years?
Frequency Percent

Yes 34 30.4

Valid No 74 66.1

Total 108 96.4

Missing System 4 3.6
Total 112 100.0
SOURCE: Field Survey, 2020

Table 4.11 depicts that 34 respondents representing (30.4%) have borrowed money from

local cooperative society in the last three years while 74 respondents representing (66.1%)

revealed that they have not borrowed money from any cooperative society in the last three

42
 years. The implies that majority of the respondents did not borrow money from local

cooperative society in the last three years.

Table 4.12: If yes, how much have you borrowed from cooperative society in the last three years?
# Frequency Percent

Below 50,000 11 9.8

51, 000 - 100,000 9 8.0

101,000 - 200,000 6 5.4

201,000 - 300,000 5 4.5

Valid
301,000 - 400,000 1 .9

401,000 - 500,000 1 .9

Above 500,000 2 1.8

Total 35 31.3

Missing System 77 68.8

Total 112 100.0

SOURCE: Field Survey, 2020

The amount borrowed by the respondent from the local cooperative was also revealed in

Table 4.12 above. It was revealed that 11 respondents representing (9.8%) borrowed an

average amount below #50,000, 9 (8.0%) of the respondents has borrowed an average amount

of between #51,000 – #100,000, 6 respondents representing (5.4%) borrowed an average

amount of #101,000 – #200,000, 5 (4.5%) of the respondents has borrowed between

#201,000 – #300,000 averagely within three years, 1 (0.9%) of respondents has borrowed

between #301,000 – #400,000 averagely within three years and 1 respondent representing

(0.9%) has borrowed between above #500,000 averagely within three years,

Table 4.13: Did the profitability of your business improve with the money borrowed
from the cooperative society?
Frequency Percent

Valid Yes 25 22.3

43
 No 66 59.8

Total 92 82.1
Missing System 20 17.9
Total 112 100.0
SOURCE: Field Survey, 2019

Table 4.13 shows that 25 respondents with (22.3%) have an increased profitability with the

money collected from the cooperative society while 66 respondents representing (59.8%)

does not have an increased profitability with the money collected from the cooperative

society.

Table 4.14: Have you borrowed any money from any money lender in the last three
years?
Frequency Percent

Yes 35 31.3

Valid No 69 61.6

Total 104 92.9

Missing System 8 7.1
Total 112 100.0
SOURCE: Field Survey, 2020

Table 4.14 shows that 35 (31.3%) of the respondents have borrowed money from money

lender in the last three years while 69 (61.6%) of the respondents have not borrowed money

from money lender in the last three years. It is pertinent to note that the respondents do

borrow money from money lenders.

Table 4.15: If yes, how much have you borrowed from the money lender in the last three years?
# Frequency Percent

Valid
Below 50,000 9 8.0

51,000 - 100,000 7 6.3

101,000 - 200,000 8 7.1

201,000 - 300,000 7 6.3

301,000 - 400,000 4 3.6

44
 401,000 - 500,000 1 .9

501,000 - 600,000 1 .9

Above 600,000 1 .9

Total 38 33.9

Missing System 74 66.1

Total 112 100.0

SOURCE: Field Survey, 2019

Table 4.15 reveals that out of the respondents who have borrowed money from money

lenders, the average money borrowed within three years by 9 (8.0%) of the respondents was

below #50,000, 7 (6.3%) was between #51,000 – #100,000, 8 (7.1%) borrowed between

#101,000 – #200,000, 7 (6.3%) borrowed between #201,000 – #300,000 and 1 (.9%)

borrowed between above #600,000.

Table 4.16: Did the profitability of your business improve with the money borrowed
from the money lender?
Frequency Percent

Yes 30 26.8

Valid No 60 53.6

Total 90 80.4
Missing System 22 19.6
Total 112 100.0
SOURCE: Field Survey, 2020

Table 4.16 also reveals that 30 respondents representing (26.8%) have an increase in their

business profit with the money collected from money lender while 60 respondents

representing (53.6%) does not have an increase in their business profit with the money

collected from money lender.

Table 4.17: Have you borrowed money from any savings collector/Alajo in the last
three years?
Frequency Percent

Valid Yes 55 49.1

45
 No 52 46.4

Total 107 95.5

Missing System 5 4.5
Total 112 100.0
SOURCE: Field Survey, 2020

Table 4.17 above reveals that out of the 112 respondents, 55 respondents representing

(49.1%) have borrowed money from any savings collector/Alajo in the last three years while

the other 52 respondents representing (46.4%) have not borrowed money from any savings

collector/Alajo in the last three years. This implies that the respondents the population of the

respondents who have borrowed money from savings collector/Alajo is lower than those who

have not borrowed from them. However, this is not surprising as they are informal various

sources which SMEs can borrow from.

Table 4.18: If yes, how much have in total have you borrowed from the savings collector/Alajo in
the last three years?
# Frequency Percent

Below 50,000 15 13.4

51,000 - 100,000 11 9.8

101,000 - 200,000 16 14.3

201,000 - 300,000 8 7.1

Valid
301,000 - 400,000 3 2.7

401,000 - 500,000 1 .9

Above 500,000 1 .9

Total 55 49.1

Missing System 57 50.9

Total 112 100.0

SOURCE: Field Survey, 2020

46
Table 4.18 shows that out of the 55 respondents who have borrowed from the savings

collector/Alajo, 15 respondents representing (13.4%) borrowed an average funds below

#50,000 within three years, 11 (9.8%) of the respondents have borrowed an average funds of

#51,000 – #100,000 within three years, 16 respondents representing (14.3%) have borrowed

an average funds of #101,000 – #200,000 within three years, 8 respondents representing

(7.1%) have borrowed an average funds of #201,000 – #300,000 within three years, 3

respondents representing (2.7%) have borrowed an average funds of #301,000 – #400,000

within three years, 1 (.9%) have borrowed an average funds of #401,000 – #500,000 within

three years and 1 respondent representing (.9%) have borrowed an average funds above

#500,000 within three years

Table 4.19: Did the profitability of your business improve with the money borrowed
from the savings collector/Alajo?
Frequency Percent

Yes 46 41.1

Valid No 53 47.3

Total 99 88.4
Missing System 13 11.6
Total 112 100.0
SOURCE: Field Survey, 2020

Table 4.19 above reveals that 46 (41.1%) of the respondents indicated that the profitability of

their business improve with the money borrowed from the savings collector/Alajo and 53

(47.3%) of the respondents indicated that the profitability of their business did not improve

with the money borrowed from the savings collector/Alajo.

Table 4.20: Have you made profit from the informal credit your business sourced?
Frequency Percent

Valid Yes 88 78.6

47
 No 23 20.5

Total 111 99.1

Missing System 1 .9
Total 112 100.0
SOURCE: Field Survey, 2020

Table 4.20 shows that 88 (78.6%) of the respondents who have sourced for informal credit

have made profits from the funds received while the remaining 23 (20.5%) of the respondents

who sourced for informal credit have not made any profit from the funds received.

Table 4.21: Has the profit made help you to expand your business? .

Frequency Percent

Yes 91 81.3

Valid No 20 17.9

Total 111 99.1

Missing System 1 .9
Total 112 100.0
SOURCE: Field Survey, 2020

The result in Table 4.21 above reveals the respondents opinion on whether the profit made

has helped them to expand their business. It was revealed that 91 (81.3%) have made a profit

which has helped them to expand their business while 20 (17.9%) has made a profit but did

not expand their business. This implies that majority of the respondents have made a profit

which has also helped them to expand their business.

Table 4.22: There was high turnover after using the informal credit.
Frequency Percent

Yes 84 75.0

Valid No 28 25.0

Total 112 100.0

SOURCE: Field Survey, 2020

48
Table 4.22 reveals that 84 respondents representing (75.0%) indicated that the business

recorded a high turnover after using the informal credit while 28 respondents representing

(25.0%) indicated that their sales turnover did not improve after using the informal credit.

4.5 Test of Hypotheses

The hypothesis formulated was tested so as to determine the reliability and dependability of
the result using regression analysis

HYPOTHESIS ONE

H0: Informal credit (IC) has no significant impact on performance of small scale business
enterprises

Regression Result
Model Unstandardized Coefficients Standardized t Sig.
Coefficients

B Std. Error Beta

(Constant) .978 .208 4.698 .000

IC has lead to significant

1
impact on performance of .251 .127 .274 1.974 .054
SMBs

Source: Statistical package (SPSS) output (2020).

The t-test and p- value give a rough indication of the impact of the independent variable on

the dependent variable. An absolute t value > 2 and p value < 0.05 suggests that an

independent variable is having a large effect on the dependent variable. The table shows that

informal credit has significant impact on performance of small scale business. This is

evidenced by tcal = 4.698 > t* 2. The result is further strengthened with the p-value of 0.00

which is less than 0.05. Given the above, the null hypothesis is rejected while accepting the

alternative hypothesis and concludes that informal capital has significant impact on

performance of SMBs

4.6 Discussion of findings

49
The age distribution of the respondents revealed that 53 (47.3%) of the respondents are male

while the remaining 59 (52.7%) of the respondents are female. Based on the result, the

dominated sex among the respondents is female. This shows that there are more females who

participated in this research studies and that 29 (25.9%) of the respondents are below 30

years, 41(36.4%) of the respondents are between 31 – 40 years of age, 34 (36.4%) of the

respondents are between 41 – 50 years old, while 2 (1.8%) are above 51 years old. This

shows that a matured group of people participated in the study. Adults who are of economic

ages are the major operators of business. It is expected that you must be of an economic age

before you venture into any business.

It was further revealed that 23 (20.5%) of the respondents are single, 70 (62.5%) of the

respondents are married, 12(10.7%) of the respondents are divorced while 7 (10.7%) of the

respondents are widowed. From the above table majority of the respondents are married. 14

(12.5%) of the respondents have no formal education, 15 (13.4%) of the respondents have

Primary School leaving certificate, 13 (11.6%) of the respondents are

WAEC/SSCE/GCE/NECO holders, 33 (29.5%) of the respondents areND/NCE holders while

8 (7.1%) of the respondents are B.Sc holders. However, 8 (7.1%) of the respondents had

other qualification apart from those listed in the study. Educational knowledge also

contributes to way or process a business is run. 52 (46.4%) of the respondents has a

household size between 1- 5, 42 (37.5%) have a household size of between 6 – 10, 10 (8.9%)

have a household size of 11 – 15 while the remaining 4 (3.6%) have a household size which

is above 16. During the course of this study, it was found that there is a positive relationship

between informal credit and the performance of small scale business in Surulere metropolis.

This implies that if the percentage of informal credit granted to SSBs is increased, the rate of

growth in the performance of SSBs will also be increased. This is in line with the study of

Joseph and Agnes, (2015) which examined the effect of self-help group finance, family and

50
friends finance, trade credits and shylock financing on the performance of SSEs. The study

found out that self-help group finance, family and friends finance, trade credit finance has a

positive influence on the performance of SSEs while shylock finance sources have negative

influence on the performance of SSEs.

51
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 SUMMARY

The age distribution of the respondents revealed that 53 (47.3%) of the respondents are male

while the remaining 59 (52.7%) of the respondents are female. Based on the result, the

dominated sex among the respondents is female. This shows that there are more females who

participated in this research studies and that 29 (25.9%) of the respondents are below 30

years, 41(36.4%) of the respondents are between 31 – 40 years of age, 34 (36.4%) of the

respondents are between 41 – 50 years old, while 2 (1.8%) are above 51 years old. This

implies that adults who are of economic ages are the major operators of business. It was

further revealed that 23 (20.5%) of the respondents are single, 70 (62.5%) of the respondents

are married, 12(10.7%) of the respondents are divorced while 7 (10.7%) of the respondents

are widowed. This implies that majority of the respondents are married. 14 (12.5%) of the

respondents have no formal education, 15 (13.4%) of the respondents have Primary School

leaving certificate, 13 (11.6%) of the respondents are WAEC/SSCE/GCE/NECO holders, 33

(29.5%) of the respondents areND/NCE holders while 8 (7.1%) of the respondents are B.Sc

holders. However, 8 (7.1%) of the respondents had other qualification apart from those listed

in the study. 52 (46.4%) of the respondents has a household size between 1- 5, 42 (37.5%)

have a household size between 6 – 10, 10 (8.9%) have a household size of 11 – 15 while the

remaining 4 (3.6%) have a household size which is above 16.

During the course of this study, the result of the hypothesis shows that there is a positive

relationship between informal credit and the performance of small scale business in Surulere

metropolis. This implies that if the percentage of informal credit granted to SMBs is

increased, the rate of growth in the performance of SSBs will also be increased. This is in line

with the study of Joseph and Agnes, (2015) which examined the effect of self-help group

52
finance, family and friends finance, trade credits and shylock financing on the performance of

SSEs. The study found out that self-help group finance, family and friends finance, trade

credit finance has a positive influence on the performance of SSEs while shylock finance

sources have negative influence on the performance of SSEs.

Based on the above findings, the influence of informal credit on performance of SSEs cannot

be overemphasized. Tsai (2004) assert that informal sector represents a major source of

finance for traders and farmers which invariably ensure socio-economic development. IFAD

(2001) study in China found that informal financial institutions provided more access to

credit than formal financial institutions as much as four times more. Another study by Tsai

(2002) on small business owners showed that IFIs were responsible for up to three-quarters of

private sector financing during the first two decades of reforms. A study AIDIS (1992) in

India revealed that nearly 40% of rural household continue to rely on informal institutions

such as professional money lenders and agricultural money lenders for credit. Also,Quaye

(2001) while studying the effects of informal financial institution on the survival of Small

Scale Enterprises (SSEs), examined the detailed profile of SSEs in the Kumasi Metropolis of

Ghana, reveals that informal financial institutions have a positive effect on the survival of

SSEs. In other to enhance a sustained and accelerated growth in the operations of SMEs

credits should be client-oriented and not product- oriented. Proper and extensive monitoring

activities should be provided for clients who are granted loans.

5.2 Conclusion

This study examined impact of informal credit on performance of small scale business

enterprises in Surulere metropolis, Lagos state. Overall, the findings confirmed that there is a

positive relationship between informal credit and the performance of small scale business,

showing that the funds disbursed to SMES enhanced their business performance. This implies

that informal finance could serve as a vehicle for economic development, hence, its role

53
should be enhanced to reduce the financial exclusion while encouraging the development of

informal financial sector.

5.3 Limitation of the Study

Some limitations were encountered during the course of this research project. The following

serve as limitation in the process of processing data and information:

i. Finance: in this research there were a lot of expenses which the researcher incurred

especially in the area of transportation to the various location within the sample

frame. Also the printing of the generated questionnaires which were administered to

the respondent came with a high cost, but the cost was worthwhile due to the result

which was achieved from the field.

ii. Constant visit to the study area is another constraint that was encountered by the

researcher because the respondent could not fill the questionnaire as early as possible

because of the busy schedule of the respondents. The researcher had to wait till they

attend to their customers first before the respondents could fill the questionnaire.

iii. Finally, low rate of response gotten from the copies of questionnaire administered due

to the unwillingness of the respondents to divulge all necessary information.

5.4 Recommendations

Based on the findings of the study, the following recommendations have been made:

i. There is the need for the government to utilise Informal Financial Institutions in its

poverty reduction programmes, since they have been found to be popular among the

people in-terms of poverty reduction.

ii. Government development programmes aimed at boosting Small and Medium Scale

Enterprises through micro credit should be implemented through Informal Financial

54
 Institutions since they have been effective in stimulating growth of small businesses

with more favourable conditions for accessibility of credit by the SSB.

iii. Government and other stake holders should initiate and implement programmes that

will enhance the multiplication and growth of Informal financial sector as it has been

dominant in ensuring socio-economic development among people in the study area.

iv. In addition, government should also tackle the infrastructural problem of electricity,

water, transportation among others, as they impact greatly on SMEs operation. All

these recommendations will go a long way to make SMEs more effective and

productive, for a far-reaching impact on the Nigerian economy.

v. The government should step in to assist informal financial institutions in enabling it to

facilitate entrepreneur’s access to finance.

5.5 Suggestion for Further Studies

This study examined the informal credit on performance of small scale business enterprises in

Lagos state with a particular reference to Surlier metropolis . However, a further research can be

extended to the impact of informal financial institution to the survival of Medium Scale Industries in

Nigeria by expanding the scope to a larger one. This would further broaden the scope of the topic and

a broad knowledge about the topic would further be examined.

i. Impact of informal financial institution to the survival of medium scale industries.

ii. Effect of formal and informal institution’s lending policies and access to credit on

small scale enterprise.

iii. Effect of informal credit on the significant performance of business growth

iv. Effective informal institution as a tool for stability and growth in the business

industry.

55
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Routledge, New York, 118-14
Aryeet, ey E. (2002), The characteristics of informal financial markets in Africa. Paper
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62
 APPENDIX 1

Federal Polytechnic Offa,

School of Business and Management Studies,

Department of Business Administration,

P.M.B 420, Offa,

Kwara State.

16th March, 2019.

Dear Respondent,

THE COMPLETION OF RESEARCH QUESTIONNAIRE

I DARANIJO IBIWUMI ZAINAB, a student of federal polytechnic Offa, Kwara state, I am

here to administer this questionnaire in order to collect data to determine the impact of
informal credit on the performance of small scale Business Enterprise in Lagos metropolis.
This study is in fulfilment of the award Higher National Diploma. Please note that this
questionnaire is primary designed for academic purpose. Your responses to the statement
listed below will be highly appreciated as all information will be treated with deserving
confidentially.

Thanks for your anticipated co-operation.

Instruction: please tick [√] appropriately and supply information where needed.

Yours faithfully

DARANIJO IBIWUMI ZAINAB

BA/HND/F17/4728.

63
SECTION A: SOCIO-ECONOMIC CHARACTERISTICS
(Fill in the blank spaces and tick once in the below given choices of all questions).
1. Sex: Male ( ) Female ( )

2. Age: Below 30 years ( ) 31 - 40 years ( ) 41 - 50 years ( ) 51 – 60 years ( )

61 years above ( )

3. Marital Status: Single ( ) Married ( ) Divorced ( ) Widowed ( )

4. Educational Qualification: No Formal Education ( ) Primary School Leaving Certificate (

) WAEC/SSCE/GCE/NECO ( ) ND/NCE ( ) BSc ( ) Others ( )

5. Size of household? 1 – 5 ( ) 6 – 10 ( ) 11 – 15 ( ) Above 10 ( )

6. Type of Business: Services ( ) Merchandising( )Manufacturing ( ) Processing ( )
Trading ( ) Farming/Livestock ( )
7. How long have you been in business? Less than 1 Year ( ) 2 – 5 Years ( ) Above 5 Years
( )
8. What is the form of your business ownership? Sole Proprietorship ( ) Partnership ( )
Private Limited Liability ( )
9. How many employees do you have in your business? Less than 2 employees ( ) 2 – 5 ( )
6 – 10 ( ) Above 10( )
10. Have you ever sourced for informal credit before? Yes ( ) No ( )
11. How many times have you sourced for informal credits in the last three years?
Less than 5 times ( ) Above 5 times ( )
12. Was the funds granted to you? Yes ( ) No ( )
13.Is the payment terms favourable? Yes ( ) No ( )

64
SECTION B
I. IDENTIFY THE VARIOUS SOURCES OF INFORMAL CREDIT AVAILABLE
TO SMALL SCALE BUSINESS ENTERPRISE
1. Please indicate the type of informal credit sources known to you:
ITEM YES NO
a Personal savings
b Friends and family
c Trade credit
d Local cooperative society
e Money lenders
f Savings collector/Alajo

2. Of the various informal sources of informal credit above, which one is available to you
most. Please tick only one. Personal Savings ( ) Family and Friends ( ) Trade Credits
( )Local cooperative society ( ) Money lenders ( ) Savings collector/Alajo ( )

II. DETERMINE THE EFFECT OF VARIOUS SOURCES OF INFORMAL CREDIT

ON THE PERFORMANCE OF SMALL SCALE BUSINESS ENTERPRISE
1. What is the average profit made from your business on a monthly basis?
………………………………….
2. Have you borrowed money from Friends and family in the last three years? Yes ( ) No (
)
3. If yes, how much in total have you borrowed in the last three years?
2016……………………………….

2017…………………………………

2018………………………………….

4.Did the profitability of your business improve with the money borrowed from your family
and friends? Yes ( ) No ( )
5. Have you enjoyed trade credits in the last three years? Yes ( ) No ( )
6. If yes, how much in total have you enjoyed from trade credits in the last three years?

2016……………………………….

2017…………………………………

2018………………………………….

65
7. Did the profitability of your business improve with the trade credits enjoyed? Yes ( ) No
( )
8. Have you borrowed money from any local cooperative society in the last three years? Yes
( ) No ( )
9. If yes, how much in total have you borrowed from the cooperative society in the last three

years?

2016……………………………….

2017…………………………………

2018………………………………….

10. Did the profitability of your business improve with the money borrowed from the
cooperative society? Yes ( ) No ( )
11. Have you borrowed money from any money lender in the last three years? Yes ( ) No (
)
12. If yes, how much in total have you borrowed from the money lender in the last three

years?

2016……………………………….

2017…………………………………

2018………………………………….

13. Did the profitability of your business improve with the money borrowed from the money
lender? Yes ( ) No ( )
14. Have you borrowed money from any savings collector/Alajo in the last three years? Yes
( ) No ( )
15. If yes, how much in total have you borrowed from the savings collector/Alajo in the last

three years?

2016……………………………….

2017…………………………………

2018………………………………….

16. Did the profitability of your business improve with the money borrowed from the savings

collector/Alajo? Yes ( ) No ( )

17. Have you made any profit from the informal credit your business sourced? Yes ( ) No (

66
18. Has the profit made help you to expand your business? Yes ( ) No ( )

19. There was high turnover after using the informal credit. Yes ( ) No ( )

67