Small and medium enterprises’ financing and dynamics of gross fixed capital formation: evidence from Nigeria

Abstract

This study aims at investigating the impact of Small and Medium Enterprises’ (SMEs) financing on the dynamics of Gross Fixed Capital Formation (GFCF) in Nigeria in both short and long run. SMEs have been described as drivers of domestic investments and growth. Literatures reveal that although there had been concerted efforts at enhancing SME financing in Nigeria, the results reflect an empty box as the funds meant for SMEs are either grossly inadequate or diverted. This has undermined the role SMEs play in stimulating investment (GFCF) and ultimately, economic growth. The current recession in Nigeria could possibly be remedied by strengthening the SME sub-sector of the economy through adequate funding. This is necessary in the face of a tight monetary policy currently being enforced to check the growing inflationary trends in the country. Ordinary Least Squares (OLS), Co-integration and Error Correction Model (ECM) were used in analyzing the effect of SME financing on GFCF. The results revealed that over the period under review (1984 -2014), there actually exists a significant and positive relationship between SME financing and dynamics of GFCF in Nigeria in both the short and long run. Specifically, SME financing is a major contributor to the short run dynamic behavior of GFCF in Nigeria. This study therefore confirms that policies aimed at stimulating SME financing in Nigeria will invariably positively affect capital formation and ultimately, economic growth. The researcher recommends that the government should continue to implement policies that will channel cheap funds to the SMEs sector and ensure that these funds are not diverted to other sectors while creating the enabling infrastructural, legal and institutional environments for SMEs survival and growth. This will engender accelerated investments and may be the key to pulling the economy out of the current recession in the face of tightening monetary policy.

Keywords: SME, Gross Fixed Capital Formation, Error Correction Model