1.1 BACKGROUND OF THE STUDY
The Small and Medium Enterprises Equity Investment Scheme (SMEEIS) is an initiative of the bankers’ committee comprising Managing Directors and Chief Executives of Banking Institutions in Nigeria, and it requires all licensed banks in the country to set aside 10% of their Profit Before Tax (PBT) annually for Small and Medium Enterprises
The core thinking behind the scheme is the recognition of the need to assist the manufacturing sector, which is acknowledged as the veritable vehicle for economic growth by meeting their financial requirements through private equity participation. According to Ademola (2010), “despite the widely acknowledged role of small and medium scale enterprises in fostering economic growth and development, they have continued to face a variety of constraints”. some of the challenges they face are inadequate infrastructural facilities, shortage of skilled manpower, high rate of enterprise mortality, low level of entrepreneurial skills, lack of conducive operating environment, restricted market access and cumbersome regulatory requirements for those that are quoted on the Nigerian Stock Exchange.
SMEs are vital to economic growth and development in both the industrialised and developing countries, by playing a key role in creating jobs, improving living standards and contributing to the economy.
According to the Oteh (2010A), the capital market should be seen as an important alternative source of finance for SMEs, through equity debt financing, and venture capital funds. Equity financing is a strategy for obtaining capital that involves selling a partial interest in the company to investors. The equity or ownership or ownership position that investors receive in exchange for their funds usually take the form of stock in the company (Oteh, 2010B). This provides small business owners with a broader scope in terms of financing, as they gain access to multiple funding sources.
Equity financing does not involve a direct obligation to repay the funds. Instead, equity investors become part-owners and partners in the business, and thus are able to exercise some degree of control over how it is run. Venture capital firms can be key financing vehicles for SMES. Venture capital funds value the possibility of monitoring the performance of the business, giving advice when needed and following-up on such advice. Capital markets provide important exit opportunities for venture capital firms, thus enabling them to put their capital at risk to finance other SME opportunities. Venture capital has the potential of offering a valuable source of finance, complementing the more traditional credit finance provided by commercial banks.