Research Midas: Assessment Of Risk Management Of Small And Medium Scale Enterprises In Nigeria

AHAM NZENWATA

ABSTRACT

This study investigated the risk management practices of small and medium scale enterprises in Nigeria. In order to achieve the purpose of the study, data was collected from ten (10) small business owners through the use of structured questionnaires which was analyzed using simple percentages. From the results of the data analyses, the following findings were made: the use of conventional insurance policy as a risk management tool is not given serious consideration as none actually have or contemplate acquiring insurance cover for their business. The most prevalent tool for managing risk among the SMEs interviewed consisted mostly of risk avoidance i.e. avoiding activities which they perceive as being too risky no matter the return involved. They also retain a high percentage of the risks inherent in their business by not acquiring insurance and at the same time, they do not seem to plan for the possibility of a business loss or emergency. Given the above findings, we conclude that the small and medium scale enterprises in Nigeria have very poor attitude towards risk management. This is because adequate risk management should involve a conscious identification and assessment of the risks involved in a business and taking concrete steps to counter the likely fallouts if such events were to take place. However, most SMEs do not seem to have a fall back plan should the unforeseen event occur. Further, we conclude that the poor attitude of SMEs to risk management is as a result of the overall poor management skills and education among small business owners in Nigeria.

1. INTRODUCTION

Small and medium enterprises (SMEs) are businesses whose operations are relatively small and in most cases are geographically confined to specific regions. According to the Central Bank of Nigeria, a small and medium enterprise (SME) as any enterprise with a maximum asset base less than N200 million excluding land and working capital, and with the number of staff employed not less than 10 and not more than 300 (Sanusi 2003). The above definition of SMEs by the CBN was based on the revised definition by the National Council on Industry in 2001.

Small and medium scale enterprises (SMEs) are critical to economic growth and development of virtually all economies of the world because of their role in employment creation and provision of personalized services. SMEs have strong influence on the sustainable development process of less developed as much as developed countries because they foster economic growth and alleviate poverty.

Anochie & Ude (2015) posit that the development of SMEs is an essential element in the growth strategy of most economies and holds particular significance for developing countries like Nigeria. The best performing economies in the world are heavily based on SMEs which are major sources of dynamism in economic development. The requirements for SMEs to access the global market and upgrade their position within the international market as a result of trade liberalization are becoming increasingly difficult due to competition (Anochie & Ude 2015).

The increasing prevalence of flexibility and specialization of SMEs has persuaded many business analysts to believe in the strategic role SMEs play in the industrial structure of any developing nation. But he noted that SMEs are quite vulnerable to external shocks due to the global competition from the liberalization of trade. There is reasonable assurance that given favorable policy environment, SMEs can successfully compete in the global market (Briggs, 2007).

Businesses no matter their size face risks in their daily operations. Such risks can classified as internal or external to the firm. while internal risks include fraud, health, safety, access to capital and other materials, manageement deficiencies etc, External risky include those that have economy-wide implications such as price fluctuations, interest rates, competition, policy inconsistencies, political instability etc.

According Hillson and Murray-Webster, (2007), risk is an essential part of business because firms cannot operate without taking risks. Risk is commonly associated with uncertainty, as the event may or may not occur. Risk implies exposure to uncertainty or threat and a decision to do nothing explicitly avoids the opportunities that exist and leaving the threats unmanaged. Risk is, therefore, integral to opportunities and threats which may adversely affect an action or expected outcome. Moreover, getting rid of risk in most cases undermines the source of value creation; thereby truncateing potential opportunities (Knight and Petty, 2001)

What this essentially means is that for businesses (whether big or small) to survive, they must devise strategies to manage operating risks. Thus, the purpose of this paper is to investigate the risk management practices of small and medium enterprises in Nigeria, identify lapses and proffer solutions on how SMEs can better manage the risks inherent in their operations

2.0 LITERATURE REVIEW

2.1 Concept of Risk and Risk Management

The concept of risk management is, not new because risk management techniques like: risk reduction through safety; quality control and hazard education; alternative risk financing; and insurance, including self-insurance and captive insurance, have been in existence for a long time (Doherty, 2000). Risk management does not eliminate risks, nor is it a process of avoiding risk. Rather, it is a method of managing risks associated with firms’ operations, thereby maximizes opportunities and minimizes threats.

In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss (or impact) and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process of assessing overall risk can be difficult, and balancing resources used to mitigate between risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mishandled.

Risk Identification

In order for the business organization to properly manage risk, it must of necessity first identify the risks. This will help the organization to understand the nature of the risk and by extension how best to manage it.

Risk Assessment

Once risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring.

After the process of risk assessment has been completed, the business owner will now be in a better position to chose how best to manage the potential risk. This may be through: Risk Avoidance, Reduction, sharing, and/or Risk Retention.

Risk Avoidance:

This includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the legal liability that comes with it. Another would be not flying in order not to take the risk that the airplane were to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.

Risk Reduction:

Risk reduction or "optimization" involves reducing the severity of the loss or the likelihood of the loss from occurring. For example, sprinklers are designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy.

Acknowledging that risks can be positive or negative, optimizing risks means finding a balance between negative risk and the benefit of the operation or activity; and between risk reduction and effort applied.

Risk sharing:

Briefly defined as sharing with another party the burden of loss or the benefit of gain, from a risk, and the measures to reduce a risk. The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that you can transfer a risk to a third party through insurance or outsourcing. In practice if the insurance company or contractor go bankrupt or end up in court, the original risk is likely to still revert to the first party. As such in the terminology of practitioners and scholars alike, the purchase of an insurance contract is often described as a "transfer of risk."

However, technically speaking, the buyer of the contract generally retains legal responsibility for the losses "transferred", meaning that insurance may be described more accurately as a post-event compensatory mechanism. For example, a personal injuries insurance policy does not transfer the risk of a car accident to the insurance company. The risk still lies with the policy holder namely the person who has been in the accident. The insurance policy simply provides that if an accident (the event) occurs involving the policy holder then some compensation may be payable to the policy holder that is commensurate to the suffering/damage.

Risk retention:

Involves accepting the loss, or benefit of gain, from a risk when it occurs. True self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the organization too much.

2.2 SMEs and Risk Management: Empirical Review

According to Yusuf and Dansu (2013) SMEs and large firms operate in the same economic and business environments but there are evidences that they derive different benefits and opportunities therein. More so, they are exposed to diverse categories of risks. This is because of their differences in economic capacity including firm structure and size, access to human capital and material resources etc. Kelkar (2008) posits that SMEs are weak in terms of business plan, management structure and in decision making when compared to large organizations. This further increases SMEs’ inability to absorb most business uncertainties and risks.

Suh (2010) posit that the SMEs sector is worst affected by the economic environment and is the first to be hit by any external shock. As a result, there are more SMEs closures than larger establishments, with approximately only 1% of SMEs growing from having five or less employees to ten or more. The implication is that SMEs face a wider range of business risks which are rooted in both the internal and external environment of the enterprises.

Henschel (2009) affirm that a risk management system is necessary for SMEs not only because it is required by law but also because it is in the interest of the SMEs for the sake of their survival. Moreso, risk management is a major concern for SMEs particularly because of their sensitivity to business risk and competition (Smith and Watkins, 2012).

Risk management will therefore help in the development of contingency plan to stop the erosion of income and improve performance. The purpose of risk management is to control and manage the existing risks of a company so that nothing will hinder the organization from achieving its main and long term goal. Also to ensure that the risk exposures of a company can be controlled within the available resources of the company (Henschel, 2009).

The achievement of these goals usually begins with the performance of the risk management function. Watt (2007) opines that the risk management function in SMEs is usually at the prerogative of the owner. This means that SMEs risk management will greatly be influenced by the owner’s risk perception and his attitude towards risk management, Smith and Watkins (2012). In this regard, entrepreneurs should acquire the skills of risk identification, analysis and control. Alternatively, the function of risk management should be assigned to another person with the necessary skills within or outside the enterprise.

Yusuf and Dansu (2013) in their study on SMEs, Business Risks and Sustainability examined the relationship between business risks and the sustainability of SMEs in Nigeria. They used collected data from 50 SMEs in Lagos and using Chi-square and descriptive statistics as method of data analyses, they find that: standard risk management strategy by SMEs will result to their sustainability.

In a similar study, Iopev and Kwanum (2012) investigated the level of risk management by SMEs in Nigeria with particular emphasis on the level of accounting records maintained by SMEs and the insurance policy cover undertaken by their business with a view of reducing their risk. Using descriptive statistics as the method of data analyses, they discovered that SMEs do not maintain proper accounts as a result they are not able to identify, assess and plan the management of their business risk effectively. More so, about eighty four percent of SMEs do not cover their business against risk. This is a clear indication that SMEs in Nigeria do not take the issue of risk management as seriously as they ought.

Gwangwava, et al (2014), using xploratory and descriptive survey research design probed into the level of risk management by SMEs in Zimbabwe with particular emphasis on the knowledge possessed by SMEs Owners/managers. Their findings show that a majority of SMEs (90%) did not have insurance cover, neither did they have an established risk management strategy. With the obvious implication that they had very poor outlook towards risk management.

3. METHODOLOGY

The study adopted the survey method to investigate the Risk Management Practices of Small and Medium Scale Enterprises (SMEs) in Nigeria. The design was adopted because of its appropriateness in describing the current situation of the phenomenon. The population of study includes all SME business operators operating in Port Harcourt, Rivers State. We adopted the convenience sampling method to choose ten (10) SMEs who we could easily approach for information on their risk management practices.

The primary instrument used for gathering data for the study is the questionnaire. The questionnaires were designed close ended patterns and administered directly on the operators of SMEs. In order to ensure that all questionnaires were completed and returned, the questionnaires were retrieved in same manner, which they were administered. The data so obtained were presented in tables and analyzed using non-parametric simple percentages and average.

4. DATA PRESENTATION AND ANALYSES

Table 4.1 RISK IDENTIFICATION AND ASSESSMENT

S/N	QUESTION	RESPONSES
		Frequency		Percentage (%)
		YES	NO	YES	NO
1	If I take interest in a new line of business I want to engage in, I ask others who have been doing the business about the risk before deciding to join	7	3	70	30
2	I identify the possible risks in business before deciding to engage in it	4	6	40	60
	Average%			55	45