CHAPTER ONE

INTRODUCTION/BACKGROUND OF THE STUDY

1.0 Introduction

Building strong debt management institutions, developing clearly defined procedures and creating the capacity for rigorous analysis can help countries to manage these risks effectively, minimising the cost of borrowing and ensuring a sustainable debt position into the future. Strong debt management can also encourage aid effectiveness. Accountability and governance can be

increased by integrating public financial management and debt management under a comprehensive legal environment. The failure rate of small and medium firms (SMFs) in Nigeria is very high. About 75% of SMFs become insolvent within the first five years of operation. One of the primary reasons for the high failure rate of SMFs is the high cost of debt finance occasioned by the high interest rate. According to Coleman and Chon (2001), debt is one of the variables that can cause the non-performance/insolvency of small manufacturing firms (SMFs). Most of the empirical studies such as Coleman and Cohn (2001) and Eriotis et al (2002) regarding the impact debt management on the performance of firms have focused primarily on large firms in developed countries. Of recent, there has been an increase in the recognition of the role played by small firms in national economies. Their contribution to job creation and poverty alleviation has been recognized by several governments of developing countries to the extent that they now include them in their development plans. Among the support structures include offering funding to the small firms’ sector, usually at concessionary rates. But whether the use of such debt improve firm’s performance, thereby enhancing sustainability, is not well known (Abor, 2005). Nigeria suffers from high unemployment with an official estimate of approximately 65% of the economically active population unemployed (Central statistic Office of Nigeria, 2006). One of the best ways to address unemployment is to leverage the employment creation potential of small businesses and to promote small business development. Small firms are expected to be an important vehicle to address the challenges of job creation, sustainable economic growth, equitable distribution of income and the overall stimulation of economic development Nigeria.

According to the Organization for Cooperation and Development (2006), small firms are now recognized worldwide to be key source of dynamism, innovation and flexibility. SMFs are responsible for most net job creation and they make an important contribution to productivity and economic growth. The manufacturing sector is very important to the economy of Nigeria. However, it is being constrained by lack of power supply, capacity under—utilization, inadequate research and development, lack of credit facility and poor financial management practices. When a firm cannot effectively manage its finances, it runs into debts and the inability to pay the debts can cause the business to collapse. It is therefore imperative to have knowledge of debt management.

1.1 Statement of the Problem

Business debt financing management has become imperative due to insufficient capital in the running of many small manufacturing firms in Nigeria. This sector is crucial to employment creation in Nigeria today. The loan has to be sourced and managed if the promoters’ of such firms desire growth/expansion. Management of such firm must appreciate the implication of the use of debt in financing the business operation/growth as enough earnings must be generated to cover overhead cost; interests on capital employed and return to the shareholders. Management must employ appropriate strategy in order to achieve better performance. This is where the choice of use of debt financing is imperative because its advantages over others. Most businesses collapse due to inefficient management of debt. Also, poor debt management practice gives room to question the reliability of the integrity of the organization.

The study aims at ascertaining how business debt financing management impacts a firm’s performance.

1.2 Objectives of the study

The following are the objectives of the study:

1. To assess the effect of poor debt management strategies on small and medium scale enterprises in Nigeria
2. To examine the benefits of good debt management strategies on small and medium enterprises
3. To examine the challenges of utilizing good debt management strategies on small and medium enterprises
4. To examine the strategies of mitigating the challenges of poor debt management

1.3 Research Questions

1. What are the effect of poor debt management strategies on small and medium enterprises (SME).
2. What are the benefits of good debt management strategies in Small and medium enterprises.
3. What are the challenges of utilizing good debt management strategies in small an medium enterprises (SME).
4. What are the measures of mitigating the challenges of maintaining good debt management.

1.4 Significance of the Study

The following are the significance of the study.

1. It will aid in assessing the effect of debt management on small and medium scale enterprises
2. It will provide knowledge on how small and medium enterprises can manage debt.
3. It will reveal the positive and negative effects of debt on the performance of small and medium enterprises.
4. It will serve as a useful reference material to other scholars seeking related information.

1.5 Scope/ Limitations of the Study

An assessment of the effect of poor debt management strategy in small and medium scale enterprises using selected SMEs in Ikot Ekpene as a case study.

Limitations of the study

In the course of carrying out the research, some challenges were encountered by the researcher that stood as limitation to the study and they include, limited time given for the completion of the study and financial challenges due to rising cost of text books, internet browsing, etc. the researcher could not visit different libraries to gather relevant information due to high cost of transportation. Also, some respondents could not provide their own opinion for reason of being busy.

1.6 Definition of Terms

Debt – Money that one person or entity owes or is required to pay to another, generally as a result of loan or other financial transaction.

Loan – A sum of money or other valuables that an individual, group or other legal entity borrows from another individual, group or entity with the condition that it be returned or repaid at a later date, sometimes with interest.

Leverage – The use of borrowed funds with a contractually determined return to increase the ability of a business to invest and earn an expected higher return but usually at high risk.

Interest – Price paid for obtaining money or goods in a credit transaction, calculated as a fraction of the amount or value of what was borrowed.

Credit – A priviledge of delayed payment extended to a borrower on the lender’s belief that what is given will be repaid.