EFFECTIVENESS OF INSURANCE COMPANIES IN DEVELOPMENT OF SME's IN NIGERIA.

CHAPTER ONE INTRODUCTION 1.1 Background to the Study Small scale enterprises have been adjudged to act as catalyst in the economic development of any country. Sequel to the opinion of Aduke (2021), over the years Small and Medium Scale Enterprises (SMEs) have been described as possessing great potential for employment generation, improvement of local technology, output diversification, development of indigenous entrepreneurship and forward integration with large scale industries. Using CBN (2011) description cited in Ekpo & Etim, (2019), SME can be defined based on certain criteria including, turnover, number of employees, profit, capital employed, available finance, market share and relative size within the industry. The definition can be based on either some quantitative or qualitative variables. The SME sector comprises very different types of businesses across a wide range of economic sectors. There are essentially two categories: those that are growth-oriented, and those small and micro enterprises that operate at the subsistence level to provide employment and income mainly for their owners and a relatively small number of external employees. Apparently, developing countries like Nigeria that require sustained economic growth in their economies must pay attention to the SME sector and harness the great potential to generate employment, improved local technology, output diversification, developed indigenous entrepreneurship and forward integration with large-scale industries that can be provided by the sector. SMEs account for a large proportion of the total employment growth many countries. In such countries, SMEs produce a significant share of their increases in Gross Domestic Product (GDP), while the contributions of larger enterprises tend to remain stable (ADB, 2018). Salami (2021) pointed that although most of small scale businesses in Nigeria are not registered as corporate bodies but as sole proprietorship, this makes registration procedures quite simple and a bit easier than the other forms of business registration. Partly due to this phenomenon, Onyeka and Osita (2018) stated that SMEs has outnumbered all the other forms of business and could be found almost everywhere across the country. The Small and Medium and Large Enterprises are more commonly involved in trading, provision of services and craft production activities in Nigeria, the SMEs population comprises approximately 97% of all businesses. This sector plays a crucial role in the economy as an engine to generate economic growth and also has its contribution to the economy in other ways. With a nominal GDP of $207.11 billion and per capita income of $1,401 it has the second largest economy in Africa. In spite of laudable and commendable policies and efforts to promote the SMEs, Aduko (2021) in his observation after covid-19 pandemic outlined that little or no attention is given to the sector. This absence of business recovery conscious in moments when disaster strikes like pandemic, fire outbreaks, theft, accidents, and occupational hazards as well as deadly virus have caused the mass extinction of SMEs. Explaining further, IFC (2018) opines that SMEs are more vulnerable compared to larger enterprises. They are vulnerable to the personal risks of their owners and their family members, compounded with the personal risks of their employees. The personal risks affect the business, in addition to the various business-related risks the enterprise faces. In addition, SMEs often suffer from a lack of knowledge on how best to use financial services, how insurance works, or what risks they should seek insurance coverage for. The situation is aggravated by the fact that SMEs face higher exposure to threats and disasters while operating with limited funds for emergencies which necessitate for insurance. Put together, the contribution of insurance to public and private organizations especially to the survival and success of small businesses has been identified in advanced nations. According to Brainard (2018), insurance transfers risk by no means eliminates the possibility of misfortune and also complements the role of banks and other financial institutions in an efficient mix of activities than would be undertaken in the absence of risk management instruments. Agbaje (2019) argues that micro-insurance is a business of pooling resources together to pay compensation to the insured or assured on the happening of a specified event in return for a periodic consideration known as a premium, therefore, an insurance contract is usually evidenced by a document called the insurance policy which is usually signed at the foot by the insurer or assurer or his agent. Therefore, the need to possess appropriate insurance policy cover is germane for the sustainability of SMEs in Nigeria 1.2 Statement of the Problem It is no doubt that the majority of small and medium-sized enterprises (SMEs) in Nigeria cease to exist within the first five years of their establishment. A smaller proportion become extinct between the sixth and tenth year, while only approximately five to ten percent manage to survive, prosper, and reach a state of maturity. In a study by Saaior & Gregory (2021) several factors including insufficient capital, inconsistent power supply, inadequate infrastructure (such as water and roads), lack of focus, inadequate market research, excessive reliance on a few markets for finished products, absence of a succession plan, lack of experience, has led to untimely demise of small and medium-sized enterprises (SMEs). Their limited access to finance is because financial institutions frequently perceive small and medium-sized enterprises (SMEs) as high-risk because of their limited collateral, absence of credit history, and perceived instability. This perception leads to elevated interest rates and strict borrowing requirements, which numerous small and medium-sized enterprises (SMEs) are unable to fulfil. Existing research indicates that insured businesses are more likely to recover quickly from disruptions compared to those without insurance. For instance, a study by Okoye and Adebiyi (2022) highlighted that small-scale businesses in Lagos that were insured showed higher resilience after a market downturn than their uninsured counterparts and the insurance companies has played a role in enhancing business confidence cannot be overstated. Furthermore, insurance companies in Nigeria often face criticism for their complex policy structures and high premiums, which are seen as barriers to small business engagement (Adebayo & Olatunji, 2019). Many small-scale entrepreneurs in Onitsha have expressed concerns about the affordability and relevance of insurance policies available to them, pointing to a mismatch between insurance offerings and the actual needs of the businesses (Ibekwe, 2021). A report by Nwosu and Ugwu (2020) indicates that a substantial number of small-scale enterprises do not take advantage of insurance services due to inadequate information. This lack of awareness prevents these enterprises from securing their operations against risks, which can result in severe financial losses and even business closure during unexpected events. Ekpo & Etim, (2019) added that entrepreneurs are more inclined to take strategic risks when they know they have financial coverage in case of unexpected setbacks. This assurance provided by insurance can translate to increased investments, the introduction of innovative products, and overall industry development. Onyeka and Osita (2018) found that small-scale businesses in other regions that embraced insurance experienced more robust development and were better equipped to handle risks. Despite the existence of tangible literature on the importance of business adopting adopting insurance policies, there is limited research on how insurance companies are engaging with small-scale industries in Onitsha and the extent to which their services impact business growth. This knowledge gap has left policymakers and business owners with limited information on the practical role insurance plays in the development of SSIs in this region. Upon this premise, this study aims to bridge this gap by examining the role of insurance companies in facilitating the effective development of small-scale industries in Onitsha. 1.3 Research Questions i. What types of insurance policies are commonly utilized by small-scale industries in Onitsha? ii. What is the impact of insurance company services on the growth and sustainability of small-scale industry in Onitsha? iii. What challenges do small-scale industry face in accessing insurance company services? iv. What strategies can be implemented to enhance the role of insurance companies in supporting small-scale industries in Onitsha? 1.4 Statement of Hypotheses v. H1: There is no significant role insurance companies play in effective development of small scale industry in Onitsha. vi. H2: The type of insurance policies utilized does not significantly impacts the sustainability and growth of small-scale industries in Onitsha. 1.5 Objectives of the Study The primary objective of this study is focused on the role of insurance company in the effective development of small scale industry in Nigeri. Specifically, the study seeks to: i. Examine the types of insurance policies commonly utilized by small-scale industries in Onitsha. ii. Evaluate the impact of insurance company on the growth and sustainability of small-scale industries. iii. Identify the challenges faced by small-scale enterprises in accessing insurance services. iv. Recommend strategies for improving the role of insurance companies in supporting small-scale industries in Onitsha. 1.6 Significance of the Study Practically, this study is significant to various stakeholders, including small-scale business owners, insurance companies, and policymakers. Small-scale business owners will benefit from the findings by understanding the importance of insurance services and how they can be leveraged to mitigate risks and support business growth. Insurance companies can use the study’s results to better tailor their services to meet the needs of small-scale enterprises. Policymakers will gain insights into the current gaps and challenges in the insurance sector that need to be addressed to promote the growth of SSIs. Empirically, the study will contribute to the existing body of knowledge on the role of insurance in business development, particularly within the context of small-scale industries in Nigeria. It will provide a foundation for future research on how insurance services can be optimized to support small-scale enterprises, thereby contributing to the literature on business risk management and economic development. 1.7 Scope of the Study This study focuses on the role of insurance companies in the development of small-scale industries in Onitsha, Imo State, Nigeria. It will cover selected small-scale enterprises and examine their level of awareness, types of insurance policies utilized, and perceived impact on business growth. The study also includes an evaluation of the challenges faced by these businesses in accessing insurance services. 1.8 Definition of Terms Insurance: A contractual agreement in which an individual or business receives financial protection or reimbursement against losses from an insurance company. Small-Scale Industry: A business enterprise characterized by a small number of employees and limited revenue, typically involved in local or regional trade.