Small and Medium Enterprises' Risk Exposures and Mitigation Approaches in Nigeria

Joshua Solomon Adeyele, University of Jos, NigeriaFollow
Olubunmi Florence Osemene, University of IlorinFollow

Abstract

Risks militating against small and medium enterprises (SMEs) have been on the increase due to how risks mitigations are conducted by the owners/operators. Although thorough understanding of businesses undertaken by the owners of SMEs enables them to have a clear picture of risks affecting their businesses so as to act in proactive manner in order to mitigate or avoid the impending risks. To assess the risk exposures of SMEs, a random sampling technique was used to select 209 SMEs within Lagos and Benin City. Both descriptive and inferential statistics such as Phi and Gamma were used to analyse the data collected. The study revealed that the relationship between SMEs’ operators understanding of business with risk mitigation, and record backup system are significantly low. However, the understanding is moderately strong with availability of risk management team to mitigate risk after the event (ATE) by the operators of SMEs. The study concluded that SMEs’ risk exposures are significant with the operators’ understanding of the business which in turn affects how record backup system is maintained and how credit collection strategies are used. Consequently, the study recommended among other things that SMEs’ operators need to have thorough understanding of their businesses and they can even hire experts to train them on record backup of vital information of their businesses.

JEL Codes

D81, L26

Keywords

SMEs, risk perception, risk exposures, risk mitigation

Recommended Citation

Adeyele, Joshua Solomon and Osemene, Olubunmi Florence (2018) "Small and Medium Enterprises' Risk Exposures and Mitigation Approaches in Nigeria," The Journal of Entrepreneurial Finance: Vol. 20: Iss. 1, pp. Introduction Thorough understandings of businesses undertaken by SMEs’ owners enable them to have a clear picture of risks affecting their businesses and to act in proactive manner in order to mitigate or avoid the impending risks. On the other hand, poor understanding of businesses could prevent the owners from taking rational decision to mitigate the inherent risks attaching to their businesses. While it has been acknowledged that big organisations are financially strong enough to attract experts to deal effectively with risks in their businesses, the financial standing of SMEs due to their small size prevent them to put in place sound risk management approach (International Labour Organisation (ILO), 2013). Inadequate funding has been identified as one of the major limitation of small and medium enterprises (SMEs) in any part of the world by many studies. However, risk mitigation is taking prominence in every area of business beyond issues of financing long-term and short term investments constraints (Plourd, 2009). Feridun (2006) cited in Kagwathi, Kamau, Njau and Kamau (2014) reveals that traditional risk mitigation of SMEs focuses on physical causes like fires, accidents and death. The operators of SMEs make decisions on day-to-day activities about their businesses which are function of individual perceptions and experiences. The approach used to reduce risk may either increase the level of business risk exposure instead of reducing it depending on the understanding of the business by the owners. Although risk management by the owners of SMEs also depends on their mood which influence the availability of information used to make business decision. Optimistic individuals are more likely to underestimate the negative consequence of risks affecting their businesses. On the other hand, the pessimistic SMEs’ owners are much likely to act in the opposite direction, and all of these affect risk exposure and mitigation approaches used in running their businesses. Virdi (2005) has uncovered the lack of risk management procedures among the SMEs as well as larger organisations which implies that risk management has not been embraced by many companies even though close to fifty to sixty percent of SMEs’ owners reported that they have risk management procedure put in place to reduce business failure. Ntlhane (1995) revealed that SME owners and managers were not properly-Kagwathi, G.S., Kamau, J.N. Njau, M.M. & Kamau, S.M. (2014). Risks faced and mitigation strategies employed by small and medium enterprises in Nairobi, Kenya. IOSR Journal of Business and Management (IOSR-JBM)16(4),1-11. Krallis, D. & Csonto, A. (n.d.) 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DOI: https://doi.org/10.57229/2373-1761.1327
Available at: https://digitalcommons.pepperdine.edu/jef/vol20/iss1/2