The Cause of Small Scale Business Failures in Nigeria and its Remedies


The concepts small-scale business varies from one country to another and from one industry to another even within the same country. Many indicators and parameters like value of assets, turnover, number of employees, cost of investment and other criteria which have more relevance to the industrial polices of Nation have en used to characterize small-scale business.

The United Nations Industrial Development organization (UNIDO) has located about fifty different definitions of small-scale business in 75 different countries. According to the same UNIDO, a small-scale business is characterized by of two of the following features.

i   The area of operation is a localized worker and owners concentrate in the local community. Of course, some do have branches in other towns form of deposits.

ii   The owner makes capital available and policy decision s are in the hands of individual or small groups of entrepreneurs.

iii    The owners participate very actively in all decision making on day-to-day operational basis.

iv   The managers are usually the owners in Nigeria, the official definition of small-scale business is somewhat flexible and broad. The federal ministry of Industries defines it as “all manufacturing units with a total capital investment (excluding cost of land) up to N750,000 but including capital and paid employment of up to 50 person such as establishment must be wholly Nigeria owned (all companies in schedule I of the 1977 (NEPD), in addition manufacturing units exceeding the limit of investment and employment. As stated above may still be considered as small-scale business if the scale output is relatively small compared to prevalent sizes of plants and the technology is fairly lab our intensive. The central Bank of Nigeria defines small-scale business enterprises for monetary policy purpose in terms of their annual turnover. Specifically, through its 1984 credit guidelines, it regards any enterprise whose annual turnover is less than N500,000 (Five hundred thousand naira) as small-scale. The National Direct orate of Employment (NDE) defined small-scale enterprises to accommodate projects with capital investment as low as N5, 000 and employing as few as three (3) person.

The structural Adjustment programme (SAP) has readjusted the maximum capital investment level of small-scale business from N150,000 to N500,000. This definition on the maximum level of capital investment acts as the guiding principle of lenders, entrepreneurs and government in the classification of business into large, medium or small.

Furthermore, the small business act of 1953 (USA) provides that a small business venture concern is one, which is independently owned operated and not dominant in its field of operation.

Again the committee on Economic Development (CED) of the State Of America offers a definition, which states that a business will be classified as small if it meets two or more of the following criteria;

i         Management is independent usually the managers are also owners.

ii        Capital is supplied and ownership is help by an individual or a small group.

iii       The area of operation is mainly local workers and owner are in one home community.

iv       The business is small when compared to the biggest units in its field.

Small businesses are not limited to institutional definitions alone. Stephen Ekpenyoug defined small-scale enterprises as.

Those enterprises that have relatively small capital investment that produce in small quantities and as a result control a small share of the market that employ not more than fifty workers and in which management, marketing and entrepreneurial functions are vested in the proprietors. Nwakoby criticized the various definitions of small business especially those given by Nigeria institutions on the ground growth of the small-scale enterprises and the Economy at large. In his opinion the number of employees should be put to accommodate between 5 to 100 people and the annual turnover reduced to N400.00 considering the difficulties in capital formation by these business resulting from the altitude of banks towards them and the capital market which is still at the embryonic stage to development.

Arguing that there is no single universal definition of small-scale industry, Okorie (1989) defines it as wholly indigenously owned enterprise with les than 50 full time employees. On account of this multiplicity of definitions for small-scale enterprise, a published research conducted by the centre for Management Development (CMD) lagoe in 1979 (Okorie 1982) noted that small scale business cannot be adequately defined in terms of number of employees sales volume, asset base or even a combination of the above features because of the danger inherent in such a definition.

Despite there differences all these definitions share the same common idea that small-scale business are generally low in terms of number of persons employed and in the amount of investment and annual business turnover therefore the main criteria used worldwide to describe small-scale business ventures include:

i         Mostly owner managed (Independent ownership)

ii        Relative size and simple organizational structure

iii       Number of employees on payroll

iv       Sales value

v        Type of industry

vi       Initial capital outlay etc.



By definition, most business started as small-scale and most countries started their industrialization process with small-scale industries. Small-scale industries formed the bedrock of industrialization during the industrial revolution of most European Nations. The United Kingdom pioneered it and most countries that have developed quite successfully have systematically recorded a coherent and effective industrial development culture, which favoured small-scale industries.

The industrial feat of Japan South Korea and other Asiann tiger Economies are fresh in mind out of sheer desire to survive and develop even after suffering great deal of economic hardship, the government of these nations consciously created on atmosphere that promotes the thriving of small-scale industries which eventually brought about huge industrial sectors. India followed the same system after discovering the importance of small-scale industries. However Nigeria’s bid for industrialization based on the development of small-scale industries have not yielded the desire dividend, though it has attracted a lot of attention and comments from various quarters particularly government and management scholars alike.

The first relerence made by Nigeria government to develop small-scale industries was in 1946 when the sessional paper No.24 of 1945 on a Ten Year Plan of Development and Welfare for Nigeria was approved by the Legislative Council in 1946 as amended by the selected committee of the council. The approval of the paper led to the establishment of a Nigeria local Development Board whose function among others were primarily associated with.

a        The promotion and development of village crafts and industries.

b        The setting up and operation of experimental undertaking of the testing and development of and Nigeria product. The idea was that small-scale industries would be made to become more remunerative to the operators through the attainment of highter level of efficiency unfortunately and dream could not materialize because of the economic management and structures that reported that the country has not made any significant progress in its industrial development the adoption of assemblage of system that encourage large-scale industries only whose objectives include achieving huge foreign exchange earnings acquisition of transferred technology through import substitution policy (1962-1968) National Development Plan has been elusive . This strategy continued during the second National Development Plan period of 1970-1975. As the economy benefited from oil boom, industrial projects were undertaken. Private sector investment in the manufacturing grew, through with less emphasis on the development of small-scale industry.

In reaction to these weaknesses of large-scale industries the government of Nigeria resorted of the promotion of small-scale industries as a strategy for self-reliant industrliazation. It is because of the important role to be played by small-scale industries in the economic development of the country that made her introduce programmes to encourage viable and vibrant small-scale business. Notabily, the government explicitly states the main objectives of a programme for the development of small-scale industries in the third National Development Plan (1975-1980) as thus:

i         The creation of development opportunities

ii        Mobilization of local resources

iii       Mitigation of rural-urban drift

iv       More even spread of industrial enterprises in different parts of the country. Furthermore, the aim of the plan includes the development of a more diversified and integrated industrial structure based on the large domestic market and rapidly rising income. These are to be achieved through the complentary assistance to small-scale entrepreneurs in financial management and technical aspects. The designated agency for administering the incentives were the Industrial Development centers (IDC’S) and the state government small-scale industries credit scheme.

In addition, the increasing recognition by government of the need to boost non-oil sector made the government to focus on small-scale industries in subsequent years after 1979, the objectives remained the same while the institutional arrangements and structures of the various programmes were modified for example, the Central Bank of Nigeria ( CBN) has ensured that adequate provision is made through its credit guidelines for the advancement of the sub-sector. Also the process culminated of the establishment of the Nigeria Bank for Commerce and industry (NCB) to over see the activities of small-scale industries in the country with an initial capital of fifty million naira (N50, million) which was subsequently raised to two hundred million naira (N200M) by January 1985. Equally important is the establishment of such institutions as funds for small-scale industries (FUSSI) Directorate of Employment (NDE) all geared towards the facilitation of the growth of the small-scale industries in the economy.

In Nigeria, small-scale industry can take many forms ranging from sole proprietorship to partnership and Limited liability companies. This means that ownership structure of the enterprises can take any form provided it conforms to legal framework and guideline. According to Adejugba “business ownership deals with the forms ownership as well as the identification of the owner of business in an economy. The greater the concentration of ownership in a few hands or units, the greater the influence of that group on output, employment and wage rates. Apart from ownership classification of small-scale industries, they can also be categorized into 3 major industrial groups (Anambra State Ministry of Commerce and Industries).

i         Agro-based Industries

ii        Engineering Industries

iii       Chemical Industries

The truth is that the future economic growth of Nigerian lies in the dynamism and growth of small and medium scale industries. This was the outcome of an economic dialogue help in Lagos on the plat form of the Fredrick Ebert Foundation, the Nigerian Institute of Social and Economic Research (NISER) and the National Association of small-scale industries (NASS).


While there has been divergent definitions on what is a small-scale business, the following activities are widely accepted by a majority of researchers to fall into the category of small business. They include weaving, carpantry, pottery and ceramics, farming, fishing, piggery and animal husbandry, poultry, wood and metal works, retail trade, tailoring and dress making, mechanics and repair workshops, brick and shoe making, transport to mention but these few. The third national Development Plan (1975-1980) also gave a long list of economic activities which have scope for small-scale operation in Nigeria Oshagbemi believes that the bulk of Nigeria small-scale business is located in the commercial sector with prospect for further expansion towards the service sector like hotels and restaurant, retail and distribution business as seen in the sectoral analysis of the business registered in 1980.

However, it has been observed that although there are clearly many problems and dangers in generalizing about such diverse economic activities, evidence has shown that any small-scale business is characterized among other features by these two key features, which has been listed by the committee for Economic Development (CED) of the United State of America.          Managers are also owners ownership is usually in the hands of private individuals. The proprietors and in some cases, in the hand of individuals who have come together to form partnership or sole traders, in hands of individuals who have come together to form partnership or sole traders. Thus the majority of small-scale firms are not incorporated but the proportion which are incorporated depends on the industry and there are usually considerable variations.

ii        Educational Background: There is usually a low level educational background by the owner-man-ager. Sometimes he may be primary school leaving certificate holder or a drop out in secondary school who happens to get money through many years of self determined efforts in allies business. Thus, he may have very low of business management, technical expertise and market information. Tus limiting their area of operation to being mainly local. Above all, there is business life-cycle resulting from high mortality rate among small-scale business small-scale business play very vital role in the general economic growth of any developing country like Nigeria. The small-scale business in Nigeria are shown to be essentially for the development of entrepreneurial skill, innovation diffusion wider geographical spread of development and more equitable income distribution. Above all, for employment creation, smaller firms tends to use simple technologies and therefore provide a more effective vehicle for providing jobs for a rapidly growing Urban population. A comment credited to Prof. Pita Ejiofor, which was paramount to his industrial revolution of 1987. read thus:

If we want employment there are only tow other areas where it can be generated. One is agriculture and the other is small-scale industries. The main aim of that revolution include shifting emphasis from propping up the grant industries of years, shifting emphasis from trading and distribution services, estates, to encourage smaller organizations that are more appropriate to Nigeria’s present and future conditions of small-scale industries to the economic development of the country, Okorie stated that the small-scale enterprises provide employment on a large scale and therefore make the possibility of equitable distribution of National income more realistic. He went further by asserting that by creating more employment opportunity, they help in mobilizing capital and human resources that would other wise be left idle. Another importance of small-scale industries that it leads to the removal of regional imbalance through reduction in the few developed centers of the country. Hence it believed that small-scale business if promoted will help in checking rural-urban migration and the associated problem of unplanned urbanization characteristics of most Nigeria cities. Ogogu in his own submission stressed that the existence of small-scale business provides considerable solution to the imbalance of payment problem because of their less dependence on imported inputs thereby reducing the demand pressures on foreign exchange earnings.

Furthermore, small-scale business are also very important in the sense that some functions are more expertly performed by this small business. This enables them to contribute to the success of large business ventures. In view of this the existence of the big enterprises without the small ones is often comparable to the life of human trunk without legs. Langnecker further asserted that if small business were suddenly removed from the contemporary sence big business would find it self saddled with a myriad of activities that could only be inefficiently performed.

The quotation above simply emphasized the importance of small business in relation to bigger concerns. Consider for example the process of distribution manufactures cannot do without wholesalers who buy in bulk and of course wholesalers in turn depend on retailing business in order to survive. It is also a know fact that certain services like those offered by caterers, accounting firms, lawyers, doctors by other professnal men are essentially in the small business category.

Allsoop saw small business operation as a means of self employment for older persons, physically handicapped persons and minority group who find it difficult to obtain gainful employment elsewhere, while Akwa eze believe that small-scale business are a legitimate and viable component in any strategy for reconstructing the economy.

Many others have seen the importance of all scale businesses expanded in the values inherent in economic competition. When a monopoly dominates a sector, customers are at the monopolist because the monopolist may set an exorbitant price withhold a technological development exclude new competitors or otherwise abuse his position of power so small business encourage competition in the economy. To this Albert Opined that the existence of many healthy business firms in an industry constitutes a barrier against monopoly. Brown summarizes the importance of small-scale business by saying contribution of small-scale businessman to the vitality of society is inestimable. The qualities of vigour enterprises and ambition which made them natural community leader and they have ,been benefactor to their localities to the art in many other ways which help to make life meaningful and pleasant. Above all the Nation as deeply needed now as it has never been.

Small-scale business provide inputs for the medium and large scale industries as well as government establishment through the manufacturing of components and supplies. Also small-scale business have been recognized as veritable engines of growth and development. According to Kalu their role in the development of indigenous technology is not doubt. Williams stressed that small-scale industry is a source of innovation. He maintained that new services are often inaugurated by small business owners who perceive the need for such services.

The above review on the importance of small-scale businesses only stressed the fact that is economic justification for the continued existence and survival of the sub-sector. Oshunbiyi says that the key problem facing most small business in Nigeria is lack of finance. He started it this way.

Whether for the establishment of new industries, or to carry out expansion plans the ability of attract financial credit has stiffed the growth of this sub-sector.

In this view Commercial Banks which were expected to be the launch pad for the development of some-scale business through the provisions of loans have failed to give adequate support to them. Stiff collateral security demanded by banks often means that small-scale entrepreneurs are unable to meet these provisions consequently losing the chance to obtain loans. In addition, high interest rates charged on loans have scared off existing and potential small-scale entrepreneurs.

Another major problem be setting small-scale business is that of knowing the feasible business to develop and into. This is because there are always some people who have money but will not know what to do with it while at the same time there are others who do not have the money but are full of business ideas except in certain cases, one of the greatest problems confronting the small-scale is finding the ideal staff and keeping them. The entrepreneur has titled knowledge of selection techniques and he is frequently not aware of the selection criteria used by large firms for employing their personnel. It is not enough to establish an organization without making adequate provision for staffing of such firm. Staffing is concerned by employing capable hands to carry out various functions to achieve the organizational goals.

Lack of marking information is yet another unnoticed problem facing small-scale business. The small-scale business experiences tendons difficulties in finding the appropriate market for its product (s) and even when the market is there the techniques of identifying the proper distribution channels and packing of the product (s) may yet be another set of obstacles.

Another problem worthy of mention was highlighted in an article by Orjiako. He stated that lack of strategic planning is an impediment to an effective development of small-scale businesses. This problem is better conceived as lack of management ability.

The researcher has observed as a problem, often time there is diversion of valuable funds and energies from business to public life and conspicuous living by the owners. In some cases, small business owners are known to go into extravagant spending and polygamy to the detriment of their businesses.



The concept of business social responsibility seems to be based in board terms on two premises. Firstly that there are some goals which different segments of the society are interested in accomplishing and that business as social institution have a moral obligation to assist these various segments of society of which they are part in this quest. The various segments of society in focus are customers of its product, employees of the business and government.

Secondly, that business contribute to be problem of the society and are therefore expected to help solve these problems some of the problem of that businesses cause include the problem of urbanization which he described are the congestion and the altendand difficulties of adequate water supplies, sewage disposal and transportation flows, atmospheric and environment al pollution caused by the wastes off business, littered surroundings foul air and poisoned streams and rivers. He added that some poisonous gases emitted by the production processed some corporation’s constitute a danger to the public, agriculture and livestock. Another is the noise from manufacturing plants and inflation, which he saw as a social problem.

In view of this the social responsibilities of small-scale business to its employees, customers and government can be seen thus.


In its responsibility to employees the small business must ensure a proper and conducive working environment for its employees paying them regularly. Justifiable and commensurate to heir performance, providing them with opportunities for self-fulfillment.


One valid purpose of business is to create a customer in a largest society. Peter Drucker once stated that it is to supply the customer that society entrusts wealth producing responsibilities of small business to the customer arises. To fulfill this obligation, business must refrain from unfair trading practices, supply substandard goods and service, creating artificial scarcities and charging exorbitant prices. Adulteration of product in order to make profits endangers the customer’s life and as such should be avoided. The small business must also abstain from exaggeration and misinterpretation in its advertising programmes.


The small-scale business offers the largest sectional employment in Nigeria. It employs   over 20 percent of Nigeria labour force, U. Nkpolokwu observed those small-scale businesses by virtue of their definition enjoy vital advantages in today’s economy, they are dynamic flexible and willing to innovate which enables them to adapt more easily to new market condition and have constituted an important source of employment and a means of redistribution of income.


Characteristically, small businesses depend less on imported inputs since they make use of mostly local raw import content in the production inputs of small-scale businesses obviously reduce the need for foreign resources (inputs), thus reducing pressure on the limited foreign exchange earning in the country.


          This phenomenon is generally divided into industrial urban and welfare dualism. The most pronounced of them in Nigeria is industrial urban dualism. Small-scale businesses provide the unique opportunity for building a strong foundation for a balanced decentralized and even distribution of industrial activities throughout the country and ensuring rigid and self growth ogundipe agrees with this view as he stated thus encouragement of small-scale businesses could also help to eliminate the unhealthy imbalance in the rate of economic growth of both present rural development programme embarked by the government.


In a bid produce good and services, the small-scale business makes use of the society labour and capital and those factors are scarce. The firm also owners itself society to allocate these resources in a profitable way.


It must comply with government, directives, moral suasion, fiscal and monetary guidelines in addition, the small business owners must pay their taxes and other similar charges as at and when due. From he above submissions it can be inferred that small-scale businesses indeed have social that cannot be over emphasized.



(1)     The study indicates that business centers and restaurants were the sample surveyed in Enugu. It was also revealed that majority of the respondents were females though more male respondents were recorded in the business centers covered. Equally, majority of the respondents show that their ages fall within 30-49 years. This is not surprising as that age bracket constituted the most productive priod in one’s life span.

(2)     The research shows that majority of the business as were established within last 8 years as at time of research.

(3)     On the level of education attainment most of the restaurateurs first school leaving certificate and below. However, most of the business centers owners have OND/NCE and above the reason for the higher educational obtainment of business centers owners seems to be that the natural of today’s business machines requires manager who have at least above primary/secondary school level of education.

(4)     On the reason for going into business, it was found out that to make money was popularly chosen by the respondents as their main reason for going into business while others opted for “ being independent as their reason for going into business social reason” as a reason for as their business ownership was the least favored by respondents.

(5)     From the study, it could be deduced that the majority of the entrepreneurs had 1-5 years per-entrepreneurial experience those in the business centre had the least number of years of (1 year) per-entrepreneurs experience while the restaurants recorded a higher per-entrepreneurial experience (4-5 years) before launching into their own business.

(6)     On the issue of state of profitability, the highest rating was those who acknowledged that their business is fairly profitable, this was followed by those who believed their business is doing well (profitable) those who believed that their business is not profitable.

(7)     The study further revealed that the type of problem being encountered by respondents is mainly that of insufficient capital, the next was scarcity of raw materials/costly equipment while the least acknowledge problem was that of too many debtors not paying up.

(8)     Although substantial evidence in research and pronouncement by government representative in recent time tend to suggest that three has been an improvement in the supply of credit/loan to small-scale business activities that study showed that most entrepreneurs source their finance through family and savings, while friends and relatives, government agencies, bank and trade associations/town unions followed in that order.

(9)     The study also showed that majority or the business centre owners have three persons either as employees or apprentices in their pay oil while most of the restaurateurs had four and above persons as either employee of apprentices. However, non of the respondents said that he/she managed his or business alone.

(10)   More so, it was revealed in the study that the majority of the respondents surveyed started their business as new ventures from the scratch only a very few owned their businesses their through outright purchase or in heritage these findings agreed with literature that majority of the business are established, as new ventures while inheritance or outright purchase are the least followed routes to business ownership.

(11)   The study indicates that the greatest percentage of the respondents in both line of businesses operated the sole proprietorship form of business enterprise.

(12)   The study revealed nine causes of small-scale business future the two main causes of failure identified are insufficient capital and poor management other notable causes or failure according to this study include had location, scarce raw materials/costly equipment, unplanned.

(13)   Looking at the hypotheses set out to be tested, it was found that at 0.05 level of significance. The hypothesis on sex respondents and business failure are not significantly related. This means that the sex of a business owner does not have influence on the business performance (failure). Also in the third hypothesis, which is on finance and business failure, it was observed that lack or shortage of finance is a causative factor to business failure. This means that the two variables are significantly related.


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