Effects of Capital Structure of Small and Medium Scale Agro-enterprise on Access to Microfinace Banks Credit In Enugu state

Abstract:

The study evaluated the effects of capital structure of small and medium scale agro-enterprises on access to microfinance banks credit in Enugu state, Nigeria. A multistage sampling technique was used to select 120 agro-enterprise loan recipients from microfinance banks. The data collected were analysed using descriptive statistics, capital structure ratio analysis, multiple regression analysis, simple linear regression analysis and likert scale rating technique. The result showed that 64.2% of enterprise owners were between the ages of 41 to 50 years, 61.7% were males while 38.3% were females. Majority (53.3%) of the loan recipients had secondary education, 64.2% had experience in management 9-12 years, all the agro-enterprises examined were small scaled and 71.6% were located close to microfinance banks. About 62.5% incurred debt of between N1500001 to N2500000, 40.8% had equity position of N4000001 to N5000000, 60.0% had savings level of N300001 to N600000 with the banks, 93.3% accessed credit at the rate of 21% to 30% and 35% made profit before interest and tax (PBIT) of N2000001 to N2500000. The multiple regression analysis revealed that experience in enterprise management had positive sign and was significant (p<0.05) on volume of credit accessed, savings level was also positive and significant (p<0.01) on volume of credit accessed. Age, interest rate and debt-equity ratio had negative signs and were significant (p<0.05) on volume of credit accessed. The agro-enterprises had debt-equity ratio of 0.54, debt-assets ratio of 0.35, equity-assets ratio of 0.65 and interest coverage ratio of 3.29. Debt-equity ratio was positive and significant (p<0.05) on demand-access gap. The major constraints to access were interest rate charged by the banks (3.07), savings level with the banks (3.12) and quality of business plan (2.54). The study therefore, recommends that agro-enterprises should adjust their capital structure in such a way that the equity level should be greater than debt by a high margin in order to access microfinance bank credit without much difficulty; agro-enterprises should increase their savings level with microfinance banks by increasing their cash deposits; and agro-enterprises should adopt methods that will increase the returns on investment in order to increase their interest coverage ratio. This can be done through strategic marketing which will in turn increase sales.