ACCOUNTING INFORMATION TECHNOLOGY (AIT) …acsaus.org/wp-content/uploads/2017/09/THE... · 2014 Organized by International Centre for Information Technology & Development (ICITD),

ACCOUNTING INFORMATION TECHNOLOGY (AIT)

INTERNATIONAL CONFERENCE

2014

Organized by

International Centre for Information Technology & Development (ICITD),

Southern University, United States

&

The Association of Chartered System Accountants (ACSA), United States

3rd Accounting Information Technology International Conference Volume 1 No. 3 Southern University, USA 2014

ii

BOOK OF PROCEEDINGS VOL. 1, No.3

Accounting Information Technology (AIT) International Conference

17th to 21st November, 2014

Southern University, Baton Rouge, Louisiana – USA

Acknowledgement Ideas and opinions expressed in this proceedings are those of the authors and do not reflect the view of the ACSA. We acknowledge with thanks institutions and individuals who have contributed in so many ways to make sure that AIT 2014 is a success. We look forward to more productive years of mutually benefitting partnerships and collaborations as we advance AITs for Development and its impact in the world. Copyright and Reprint Policy The papers in this book are the proceedings of the International Conference on AIT, 2014. They reflect the opinion of the authors and their inclusion in the Book of Proceedings does not constitute the endorsement of the Conference Programme Committee, the Organizers and the collaborating institution. Abstracting and content usage within the limit of acceptable use standards are permitted with credit to the source. Libraries may photocopy the articles in this proceeding for academic and private use. Copying of individual articles for non-commercial purposes is permitted without a fee, provided that credit to the source is given. For other copying, reprint or duplication or republication purposes, permission from the publisher should be obtained.

Additional copies may be ordered from The Conference Chairman, Ass. Prof. Mayoka Kituyi ICITD, Southern University, Baton Rouge, Louisiana-USA


iii

CONTENTS

Page

1 – 13 The Economy of Nigeria beyond Oil: Prospects and Challenges by

Professor Abimaje Akpa & Ahura Rita Yanang

14 - 29 Electronic Auditing by

Brittany Toriola

30 - 43 Government Accounting System in Africa: A Comparative Study of

Cash-Basis and Accrual-Basis of Reporting

Festus Jacob

44 - 58 Effects of Micro-Financing on Micro and Small Enterprises in Nigeria

Adejola Paul Adebayo, PhD

59 - 74 Financing Small and Medium Scale Enterprises in Nigeria for Economic

Development

Adebayo Paul Adejola, PhD & Emeka E. Ene, PhD

75 - 89 Benefits and Challenges of E-Commerce on Developing Nations with a

special reference to Nigeria

Alhaji Abiso Kabir

90 - 95 IPSAS as a Tool for Economic Growth and Development in Africa

Adimelechi Henry Chinedu

96 - 119 Effectiveness of ICT on the Operations of Banks

Ebenezer Ogunyinka, PhD.


1

The Economy of Nigeria beyond Oil: Prospects and Challenges

Professor Abimaje Akpa Benue State University, Makurdi

Tel: 08066654548

E-mail: [email protected]

Ahura Rita Yanang University of Agriculture, Makurdi

Tel: 08060830595

E-mail: [email protected]

Abstract

This paper examines the actual revenue and expenditure of Nigeria from 2005 – 2012,

establishing the fact that there has been an over dependence on oil revenue. This is a setback

for Nigeria because oil and Gas are depleting and exhaustible in nature. There is a

compelling need to look away from oil and focus on non - oil sources of revenue which are

internally generated (IGR). Existing related literature was critically examined using the

historical approach as the platform for content analysis. The major findings are that there

has been an unfortunate favour of recurrent spending at the expense of capital expenditure.

This has generated wasteful consumption as opposed to saving for investment. Suggestions

on spending more on capital expenditure will no doubt address a lot of nagging issues in

Nigeria, especially the crucial infrastructural problems. Strategic initiatives such as the

development of agriculture and industrial entrepreneurship were proposed. This paper has

discussed the prospects and challenges of weaning Nigeria away from over depending on oil

revenue towards being financially independent. The way forward for Nigeria is to harness the

opportunities that we have pointed out, failure to heed to the calls in the plan is simply

disaster waiting to explode soonest with consequences ranging from generalized insecurity

(made manifest by the army of the unemployed youths) to increased decay in both physical

and social infrastructure.

Keywords: Oil revenue, Non-oil revenue, internally generated revenue (IGR), Expenditure,

Agriculture.

INTRODUCTION

Leaning on over 80 percent of its annual revenue from the oil sector, the Nigerian economy is

said to be dangerously over-dependent on oil. This over-dependence risk is an outcome of

two realities. The first is that oil and gas are depleting assets in the sense that the sources are

exhaustible, thus rendering permanent dependence on them most disastrous. The second risk

factor is that the market for oil and gas is highly volatile in terms of predictability of sales.

The existence of these risk factors beckons on a compelling need to look away from oil and


2

pay a more focused attention on non-oil sources of revenue, which are internally generated

revenue (IGR). If the entire national economy is said to be over dependent on oil revenues,

the same declaration applies ipso facto to all the federating components of the federal system.

TABLE 1: REVENUE SOURCES OF NIGERIA (NAIRA MILLION) 2005-2012

For the avoidance of doubt, Table 1 below presents a graphic picture of this precarious state

of dependence.

Source: Federal Ministry of Finance and Central Bank of Nigeria.

FIGURE 1: PERCENTAGES OF REVENUE SOURCES IN NIGERIA 2005-2012

As % of non-oil revenue

As % of oil revenue

EARS

Revenue

source

2005 2006 2007 2008 2009 2010 2011 2012

Total

Revenue(TR)

5,547,500.00 5,965,101.90 5,715,600.00 7,866,590.10 4,844,592.34 7,303,671.55 998,762.00 7,211,000.00

Oil revenue

4,762,400.00 5,287,566.00 4,462,910.00 6,530,630.10 3,191,937.98 5,396,091.05 884,865.00 5,288,000.00

As % of oil

revenue

85.85% 88.64% 78.08% 88.02% 65.89% 73.88% 88.60% 73.33%

Non-oil

revenue

758,100.00 67,535.00 1,200,800.00 1,335,960.00 1,652,654.37 1,907,580.00 113,904.00 1,923,000.00

As % of non-

oil revenue

14.15% 11.36% 21.01% 16.98% 34.11% 26.12% 11.40% 26.67%

0

85.85% 88.64% 78.08% 88.02%

65.89% 73.88%

88.60%

73.33%

14.15% 11.36% 21.01% 16.98%

34.11% 26.12%

11.40%

26.67%

year 2005 2006 2007 2008 2009 2010 2011 2012


3

As depicted in the table, the average dependence of Nigeria on revenue from oil during the

eight (8) years spanning 2005 and 2012 was 80 percent while only 19.30 percent of the total

revenue for the country on the average came from internal sources (i.e. non-oil).

The data in Table 1 draw our attention to two unhealthy fiscal realities. The first is a

confirmation of the over- dependence on oil syndrome earlier discussed. The second

unpalatable fiscal condition is that except for the 2009 fiscal year when Nigeria generated

34.11 percent of its total revenue needs from the internal sources during the eight year period

under study, the IGR efforts in the rest of the years were unstable.

Fortunately or unfortunately, revenues from the oil sectors have started dipping in recent

times due to a host of factors including stealing via bunkering, falsification of sales

transactions, pipeline vandalization, and loss of market, amongst others. The immediate

effect of the fluctuations in the oil revenue flowing into the federation account is that many

federating units in the federal arrangement are now experiencing difficulty in meeting their

recurrent spending obligations such as monthly salaries and overhead without recourse to

borrowing for supplementation.

In the light of the foregoing background, the paper discusses prospects and challenges of

managing the Nigerian economy without oil. In ministering to this objective, the rest of the

paper is structured around the following related issues:

The effect of oil curse on political governance in Nigeria

Prospects and opportunities for managing the Nigerian economy without oil.

Challenges and hurdles to overcome in managing the economy of Nigeria with minimal

dependence on oil.

REVIEW OF RELATED LITERATURE

Before the arrival of oil, the Nigerian economy was fairly diversified. For example, before

independence in 1960, agriculture has the mainstay of the economy accounting for over one

half of the country‘s GDP. Up and until that point in time, agriculture was the main source of

public revenue as well as the main foreign exchange earner. The oil sector assumed the front

burner position as it now accounts for twenty percent of the nation‘s GDP, ninety five percent

of foreign exchange earnings, and about 65 percent of budgetary revenues. The sweepstakes

between ethnic and regional groups for power and siege to the country‘s oil wealth has been


4

at the root of politics in Nigeria.

The largely subsistence agricultural sector has not kept pace with the rapid population

growth. Nigeria, once a large net exporter, now imports food though the administration of

President Umaru Musa Yar‘Adua introduced far-reaching policy initiatives to reverse this

trend and attain national food self-sufficiency. Economic growth since the early 1970's has

been erratic, driven primarily by the fluctuations of the global oil market. During the 1980's

and 1990's, Nigeria faced growing economic decline and falling living standards, a reflection

also of political instability, corruption, and poor macroeconomic management (most notably

the failure to diversify the economy). Fundamental economic reforms were introduced by the

administration of President Olusegun Obasanjo, which resulted in a stable macro-economic

environment, including debt relief. A major debt deal led to massive reduction in Nigeria's

debt from over US$36 billion in 2004 to a mere US$3.6 billion in 2008. President Umaru

Musa Yar‘Adua intensified economic reforms on the basis of the foundation laid by his

predecessor. Between 2004 - 2008, the country's GDP grew two-fold to $209.5 billion and at

an impressive annual rate of seven percent. This was the best performance for many years,

above the regional average of six percent. The country's GDP recorded an average growth

rate of six percent between 2006 and 2008. This was largely fuelled by the growth of the non-

oil sector, including the phenomenal increase in the price of crude oil before the sharp decline

of 2008, made worse by the global economic meltdown (Nigeria High Commission, London,

UK, 2014.)

Even with the decrease of the agricultural sector due to emergence of oil in the economy, the

sector still manages to account for 33 percent of GDP (2005) and provides employment, both

formal and informal, for a large majority of the population. No matter what effort has been

made to revive the sector, it always turns out unsuccessful due to the government‘s

dependency on the oil sector.

Although government has largely neglected the agricultural sector, it is still dominated by

traditional smallholders raising subsistence crops such as sorghum, maize, cassava, yams,

millet, rice and increasing quantities of wheat. As stated above, over 70 percent of these crops

are planted mainly for household consumption.

With global oil prices deteriorating to below $40 a barrel, Nigeria is suddenly in a fright. It

has taken the inescapable reduction in revenue to make us all realize that we have to look

beyond the Niger Delta for our daily bread as a result of which efforts are beginning to be


5

redirected to other sectors such as mining, agriculture and manufacturing.

Given that about ninety five percent of Nigeria's export earnings come from oil, for instance

if the country were earning US$60bn from exports and there was a drastic fall to US$30bn,

that will be disastrous. To make matters worse, oil actually contributes very little to our local

economy in terms of employment rate, the growth of ancillary industries, out-sourcing to

secondary producers and the stimulating of a local supply sector. (Akinfe, 2014)

At the moment, most of our leaders are looking at agriculture as a respectable contribution to

our foreign export earnings. Katsina State is a good case in point where neem or dogonyaro

cultivation is currently being stepped up to serve the twin purposes of being a foreign

exchange earner and vital tool in the battle against desertification.

Neem is used as a raw material in the production of fertilizer, soap, waxes, cosmetics,

pharmaceuticals, insecticides and lubricants, among others. If cultivation is pervasive and is

backed up with the establishment of processing facilities, this would create employment for

vast rural communities.

Another great example is Yobe State Government which has recently embarked on the large-

scale production of castor oil seeds as part of a project to engage about 100,000 farmers to

cultivate more than 10,000 hectares of land. Castor oil can be used for pharmaceuticals and

aviation fuel, among other things. Due to the ability of the crop to stunt the emission of

carbon dioxide into the atmosphere, the European Union is crediting the Yobe State

government with a carbon credit of N2bn as part of its global warming initiative.

In an effort to promote and encourage agriculture, Kano State has assured its farmers a 40

percent subsidy towards the purchase of all agricultural appliances. Alhaji Musa Suleiman

Shanono, the state commissioner for agriculture, said the government is doing this as part of a

drive to put more effort towards revamping the agricultural sector.

Casual observation will easily depict how little we produce, export and earn from agriculture.

In contrast, cash crops are major revenue earners for countries such as Canada, Australia,

Brazil, Argentina, China, USA, India, Malaysia, Pakistan, Vietnam, Bangladesh and Mexico,

just to mention a few. There is simply no reason why Nigeria cannot join their ranks.

If Malaysia can generate U$10bn a year in palm oil exports alone, there is no reason why

Nigeria cannot earn U$15bn from the sale of the same crop, given that we have 10 times

more land suited to the crop than them. We are currently generating about $60bn from the

sale of crude oil exports a year but this is blinding us to the fact that we could be generating


6

$100bn from the sale of agricultural produce. (Nigeria Village Square, 2013)

After all said and done, the agricultural sector that has been long replaced by the oil sector

would be the saviour that will deliver the nation once again.

For the foreseeable future, the welfare of rural populations in Nigeria will be tied to

agriculture. Agriculture is the backbone of the rural economy, generating about 30 percent of

gross domestic product (GDP) and providing by far the largest source of rural employment.

Growth in Nigeria‘s agricultural sector, while better than the growth achieved in many other

African countries, has fallen short of expectations? Value added per capita in agriculture has

risen by less than 1 percent per year for the past 20 years, and food production gains have not

kept pace with population growth, resulting in rising food imports and declining levels of

national food self-sufficiency. (Marinos and Simeon, 2006)

The ineffectiveness of agricultural policies has been documented due to the misguided

principles, or because their impacts have been swamped by macro policies affecting inflation,

exchange rates and the cost of capital. The rapid expansion of the oil sector has also played a

role in corroding the competitiveness of agriculture, because successive governments have

chosen the easy path of relying heavily on earnings from oil exports rather than making the

investments needed to diversify the economy by maintaining productivity growth in

agriculture and other non-oil sectors.

These challenges have long been recognized and as such the federal government under the

administration of president Obasanjo identified the rejuvenation of the agricultural sector as a

major priority. He had a goal of investing 10 percent of the national budget in agriculture and

related activities. (Marinos and Simeon, 2006)

The National Economic Empowerment and Development Strategy (NEEDS) also explicitly

recognizes the strategic importance of the agricultural sector and lists a number of special

ingenuities that the Federal Government intends to pursue in promoting increased food and

agricultural production. The NEEDS sets out a series of quantitative performance targets to

be achieved by 2007, including 6 percent annual growth in agricultural GDP, US $3 billion

per year in agricultural exports, and 95 percent national food self-sufficiency, (Marinos and

Simeon,2006).

While there is interest in streamlining agriculture, there is insufficient knowledge about the

growth potential of the agricultural sector in Nigeria. Some still ask if it is appropriate to

focus on agriculture as a source of growth in Nigeria. Marinos and Simeon applied the global


7

trade assistance and production (GTAP) framework, an applied general equilibrium model, to

estimate the growth potential of agriculture in Nigeria. They found out that in Nigeria, the oil

sector accounts for over a quarter of the economy. Thus, 1 percent technological progress in

the oil sector gives a large welfare benefits in huge dollar terms. And to address the issue of

size of sector, they divided welfare gains by the value of the sector‘s output and magnitude

which results shows that for Nigeria, several food and agricultural sectors have a value that is

higher than that of the oil sector, (Marinos and Simeon, 2006).

THE EFFECT OF OIL CURSE

Watts (2008) never made a mistake when he referred to the discovery of oil in the developing

world as ―The Curse of the Black Gold‖. Today in Nigeria, the enormity of that observation

stares us unblinkingly in the face. The greatest of the effect of the oil curse on the Nigerian

economic system is the development of the rentier mentality in the political office bearers. To

wit, most of the 36 states plus FCT Abuja depend almost entirely on monthly allocations

from the federation account, a habit that has rendered them lazy and lacking in creativity and

innovation in public governance. From month to month, the oil revenue allocations once

shared out, they wait for the next round of sharing. The truth outside this rentier mentality is

that the states have the capacity to generate the required funds to develop and deliver services

to the people. Most of the politicians in office are simply not working sufficiently hard

enough to effectively harness the available revenue yielding opportunities in their domains. If

you ask them how come certain goods and services are not delivered to the people, their

simple excuse invariably is that shortage of funds is to blame. However, it is difficult to find

a governance situation anywhere in the world in which money needed is adequate. To

therefore get things done in the face of scarcity, the way out is strategic thinking and

visioning rather than spend an ample lot of time quarrelling over the sharing of the excess

crude account money.

PROSPECTS AND OPPORTUNITIES

Since the attention of the country has now been drawn to the need to start talking about

Nigeria without oil, it is imperative for all the federating units including the 36 states to also

begin to draw up a plan B for the country beyond oil. For example, USA (United States of

America) that used to be the greatest importer of Nigeria‘s crude oil has stopped because they


8

now have an alternative. The plan B referred to in the foregoing should be conceptualized as

a comprehensive economic development agenda designed to invest in the other sectors of

Nigeria‘s economy. The idea here is not only to be proactive but fundamentally to

supplement the current oil revenue with alternative income sources. The long run objective of

such an agenda is that with or without oil, the country can survive.

In developing the required economic development agenda that can migrate the country away

from high dependence on oil, the first step is to engage in serious environmental scanning or

self-audit whose outcome will include mapping out windows of opportunities waiting to be

harnessed. Such opportunities will include essentially areas of comparative advantage to

leverage upon in fast tracking economic growth via investment. Indeed, all the states in

Nigeria are endowed with one economic resource or another of comparative advantage which

can be economically developed.

We like to acknowledge at this juncture that the Transformation Agenda, the economic

development blueprint of President Goodluck Jonathan‘s administration, is deep and robust.

However, it was crafted with oil revenue in mind. The envisaged plan B will be unique in the

extent it anticipates an economy without oil. It requires a serious review of the development

blueprint with a view to reclassifying the strategic initiatives driven by the concept of

comparative advantage. In this context, we now examine the structure/content of the

proposed economic development plan that can move Nigeria away from total reliance on oil.

PROPOSED STRATEGIC INITIATIVES

It must be stated emphatically here that the new economic development frame work is

derived from the ideology of managing under scarcity which always calls for strategic

approach to management. The moving philosophy constrains the leaders to think strategically

in a manner that weans them away from the existing rentier mentality which relies almost

completely on the monthly federal allocations and begin to think creatively and innovatively

about how to fund development programmes and projects from non-oil revenue sources. To

migrate to high dependence on IGR, there is need to leverage on agribusiness which hub is

agricultural development, industrialization and commerce.

The rest of the discussion is on this strategic initiative which takes on board Nigeria‘s

comparative advantage and strategic opportunities or strengths. In other words, Nigeria

should leverage on its following opportunities:


9

1. The flock in of investors that are indicating their interest

2. Abundant agrarian land with sufficient bodies of water,

3. Enterprising and serious minded citizenry with deep appetite to grow economically.

4. The management philosophy here is that of strategic husbanding of agriculture,

industrialization and commerce using the value chain management model. With the

strategic goal established as one of agric-industrial-commercial value chain, we next

briefly discuss the components of this chain.

AGRICULTURE

The new economic development focus requires modernization and upgrading agriculture

production in Nigeria via mechanization. The value chain ideology consists of food

sufficiency first and balance channelled to economic/industrial processing. In other words the

chain is the farmer →processing→ packaging. No product should be allowed to be shipped

out of the Nigeria in its raw form. The unique nature of agriculture is that it can employ

massively while it ensures that we don‘t go hungry knowing that hunger breeds violence and

insurgency.

INDUSTRIAL AND COMMERCIAL ENTREPRENEURSHIP

Industrial and commercial entrepreneurship must be provided through funding of micro-level

entrepreneurs to grow into small and medium scale commercial and manufacturing

enterprises via a micro-credit scheme properly managed.

To implement this type of Marshal Plan for the Nigerian economy will, of course, require the

existence of an enabling environment. It is in this context that we next examine the

challenges and hurdles to overcome in managing the economy of Nigeria with minimal

dependence on oil, thus laying today the foundation of industrial revolution in Nigeria aimed

at guaranteeing jobs for the teeming youths.

CHALLENGES AND HURDLES

All Marshal Plans are crafted in a constrained environment, meaning that for such a plan to

succeed, the envisaged obstacles being success risk factors must be removed or minimized. In


10

this regard, we consider the following challenges or threats to successful implementation of

the transformation agenda for the Nigerian economy.

CREATION OF ENABLING ENVIRONMENT

To move the agric-industrial-commercial value chain forward in Nigeria, the following

challenges are adequately addressed:

Infrastructure: This includes:

i. Investment-attracting infrastructure such as power, transportation, roads, functional

airport, rail road, ICT, industrial parks, urbanization, et cetera,

ii. Social infrastructure such as education, water, public transportation, quality health

service centers (capable of discouraging medical tourism abroad), et cetera,

iii. Security of life and property.

NEED TO CHANGE CERTAIN FISCAL MANAGEMENT PRACTICES

Managing strategically under scarcity without a rentier mentality requires a new approach to

fiscal management in the following areas:

1. Medium term expenditure framework (MTEF) should be the basis for formulating the

annual budget in Nigeria. (The details are in the fiscal responsibility act, 2007.),

2. The budget must be tilted away from the existing unfortunate favour of recurrent

spending at the expense of capital expenditure as seen in Table 2 and Figure 2. This

attitude at best has generated wasteful consumption as opposed to saving for

investment. The reversal that favours capital expenditure will no doubt address a lot

of nagging issues in Nigeria, especially the crucial infrastructural problems and other

legacy-ensuring dividends,

3. Need to change the ratio of recurrent expenditure to non-oil revenues (i.e. IGR),

4. Need to strengthen Monitoring and Evaluation (M&E) processes in the MDAs

(Ministries, departments and agencies).


11

TABLE: 2: PUBLIC EXPENDITURE PATTERNS IN NIGERIA (NAIRA MILLION)

2005-2012

Source: Federal Ministry of Finance and Central Bank of Nigeria.

FIGURE 2: PERCENTAGES OF PUBLIC EXPENDITURE PATTERNS IN NIGERIA

2005-2012

As % of Capital expenditure

As % of recurrent expenditure

NEED TO TACKLE THE RAVAGING EFFECT OF OFFICIAL CORRUPTION

Corruption has been identified as the greatest enemy of development in Nigeria. It causes

some projects to be either delayed or completely abandoned, thus bringing to waste monies

so far expended on them. The way out here is the creation of robust and strengthened M&E

teams that can judiciously track project implementation. When this is in place and working,

Years 2005 2006 2007 2008 2009 2010 2011 2012

Total Expenditure 1,822,100 1,938,002 2,450,896 3,240,820 3,452 ,990 4,194 ,217 4,299,155 4,605,000

Total recurrent

expenditure

1,223 ,700 1,290,201 1,589,270 2,117,362 2,300,194 3,310,343 3,054,333 3,325,000

As % recurrent

expenditure

67.16% 66.57% 64.84% 65.33% 66.61% 78.93% 71.04% 72.20%

Total capital expenditure 519,500 552,385 759,323 1,123,458 1,152,796 883,874 918,548 1,301,000

As % capital

expenditure

28.51% 28.50% 30.98% 34.67% 33.39% 21.07% 31.37% 28.25%

0

67.16% 66.57% 64.84% 65.33% 66.61% 78.93%

71.04% 72.20%

28.51% 28.50% 30.98% 34.67% 33.39% 21.07%

31.37% 28.25%

year 2005 2006 2007 2008 2009 2010 2011 2012


12

the existing dismal budget performance that is below 50 percent (national average) will be

addressed.

FISCAL DISCIPLINE

In a regime with widespread fiscal indiscipline as is the case in Nigeria today, what happens

is that no matter how much is available to the federation, if it is not well administered, it will

not deliver the desired impact on people‘s lives. In managing under scarcity, leaders must

strive to:

i. Match revenue to expenditure by not allowing unbridled multiplication of structures

and processes, and

ii. Check current spending plan of government by paying attention to reducing recurrent

items and reducing the number of government agencies.

OTHER STRATEGIC INITIATIVES

Closely related to the overarching strategic economic initiatives discussed in the preceding

are the following platforms:

1. Developing of selected markets in Nigeria,

2. Partner international development agencies and eminent Nigerian indigenes in the

Diaspora with technical expertise and web of contacts,

3. Development of tourism and hospitality sector.

DIVIDENDS OF PROPOSED AGRIC-INDUSTRIAL-COMMERCIAL MODEL

It is both possible and inevitable to get away from the rentier mentality ushered in the land by

the curse of oil on the following ground. Most countries across the globe generate their

governance funds from taxation. So they try to plant and run efficient tax systems whose

dragnets bring as many people and entities as possible into their catch. In Nigeria today, it is

a fact that many wealthy individuals and businesses evade tax. There are however two things

that should be done. The first is to justify tax payment by using tax monies to develop and

upgrade the people‘s standard of living. The second step is that Nigeria should as a matter of

policy boost the revenue base of the citizens and tax payment capacity by investing and

supporting the development of SMEs. In other words, although it is easy to point to taxation


13

as an enormous source of IGR, the citizens shouldn‘t be over-taxed since doing so can be

counter-productive. This indeed calls for diversification of the revenue base including

borrowing from the capital market and financial institutions.

CONCLUSION

This paper has discussed the prospects and challenges of weaning Nigeria away from over

depending on oil revenue towards being financially independent. In addressing this overall

mission, we have shed light on the effect of the oil curse on public governance. Furthermore,

we have pointed the way to the prospects and opportunities waiting to be harnessed. The

converse of not heeding to the calls in the plan is simply a disaster waiting to explode soonest

with consequences ranging from generalized insecurity (made manifest by the army of the

unemployed youths) to increased decay in both physical and social infrastructure.

Considering that this appears to be the way to the future of Nigeria because of many

redeeming dividends of the proposal, we think it should be given a focused attention.

REFERENCES

Akinfe, A. (2009), Agriculture Offers A Brighter Future Than Crude Oil. Nigeria Village Square,

Retrieved 5th September 2014 from:

http://www.nigeriavillagesquare.com/articles/ayoakinfe/agriculture-offers-a-brighter-future-than-

crude-oil.html

Akpa, A. (2008), Public Finance and Budgeting: Issues, Imperatives and Challenges from Nigerian

Perspective. Ibadan: Spectrum Books.

Editorial (2012), Beyond Uduaghan‘s Delta without Oil. The punch, March 19 International Monetary

Fund (2003), Nigeria: Selected Issues and Statistical Appendix, IMF Country Report No. 03/60.

Ekpo, A .H & Umoh, 0. J. (2014), An Overview of The Nigerian Economic Growth and Development.

Retrieved 5th September 2014 from: http://www.onlinenigeria.com/economics/#ixzz3CNZGqY7d

Marinos, T and Simeon, E. (2006), The Role of Agriculture in Nigeria’s Economic Growth Abuja,

Nigeria.

Nigeria High Commission (2013), Economy. London, UK. Retrieved 4th

September 2014 from:

http//www.nigeriahc.org.uk/economy.

Udeh, J. (2002), Petroleum Revenue Management: The Nigerian Perspective, Paper presented at the

World Bank Petroleum Revenue Management Workshop, October 24-25, 2002, Washington D.C.

Watts, M. (2008), The Niger Delta: The Curse of the Black Gold. Retrieved 10th September 2014

from: www.independent.co.uk/the-niger-delta

http://www.nigeriavillagesquare.com/articles/ayoakinfe/agriculture-offers-a-brighter-future-than-crude-oil.html

http://www.nigeriavillagesquare.com/articles/ayoakinfe/agriculture-offers-a-brighter-future-than-crude-oil.html

http://www.onlinenigeria.com/economics/#ixzz3CNZGqY7d

http://www.independent.co.uk/the-niger-delta


14

Electronic Auditing

Brittany Toriola Info-Tech Business School,

Illinois, Chicago-USA

[email protected]

Abstract

The recent advancement in technology has modernised the way we live and conduct our

business. One major example of this advancement in the accounting and auditing profession

is the use of computers in preparing and auditing financial statements. Auditors are

constantly challenged by the application of computers in carrying out their auditing

engagements. The use of computers is no longer a thing of choice but of necessity as data is

collected, stored, processed, transmitted and reported with computers (Okereke, 2000). This

paper looks at how information technology (computer systems) impacts auditing processes

and procedures.

Keywords: Auditing, Computer, Computer Based Accounting System, Computer Information

System, Computerised Environment, Data Processing System, Electronic Data Processing

System.

INTRODUCTION

The recent advancements in technology have had a great impact on our way of life, especially

in the area of mechanisation of our day to day operations. This impact has also been felt in

the various professions from laser eye surgeries in the medical profession to mechanised

manufacturing in the manufacturing industry. The Accounting and Auditing professions have

also not been left out as there has been an increase in accounting software packages for

preparing financial statements and audit software packages for gathering sufficient and

appropriate audit evidence during an audit. Computer technology has become an integral part

of most organisations today as it affects information storage, data processing, retrieval and

communication.

With the pervasiveness of computer technology and the complex nature of the current

database systems, the auditor can no longer apply the traditional techniques in auditing

controls (Akpa, 2014). He therefore has to adapt himself to this revolution whilst bearing in

mind that the basic requirement of his duty has not changed.

This paper explores the different ways in which the use of computers impacts on the external

audit process, the benefits and the challenges or risks this might present.


15

DEFINITIONS

A Computer is an electronic device which accepts data as input and processes it by following

a set of instructions to produce accurate and efficient results known as output (Onochie,

2005).

A Computer Accounting System exists when a computer of any kind or size is involved in the

processing by an entity of financial information of significance to the audit whether that

computer is operated by the entity or by a third party (Onochie, 2005).

Audit Automation is the general term given to the use of IT in the audit process, the basic

idea being that it frees up staff to carry out judgemental work rather than being engaged in

repetitive activities (Get Through Guides, 2013).

WHAT IS AUDITING?

According to Anderson (1977), ―the practice of auditing commenced on the day that one

individual assumed stewardship over another‘s property. In reporting on his stewardship, the

accuracy and reliability of that information would have been subjected to some sort of critical

review‖. The review referred to in his definition is auditing.

THE PURPOSE OF AN AUDIT

Porter, Simon & Hatherly (2008) explain that the purpose of an audit is to express an opinion

on whether or not the financial statements provide a true and fair view of the entity‘s

financial performance and financial position, and comply with relevant statutory and/or other

regulatory requirements. The primary objective of an audit is to provide credibility to an

auditee‘s financial statements (which are prepared by the auditee‘s management), by the

auditor expressing an opinion on the truth and fairness (or otherwise) of the financial

statements.

The fundamental objectives of an audit do not depend on whether the accounting system is

manual or computerised. As mentioned earlier, it is embodied in the fundamental concept of

true and fair view. Therefore, it does not change whether the accounts of the company are

computerised or not (Okereke, 2000).

THE TRADITIONAL/CONVENTIONAL ROLE OF AN AUDITOR

The practice of auditing goes beyond a mere mechanical application of standard procedures.

An auditor in carrying out an audit is required to employ considerable skill and judgement,


16

for instance, in determining the audit approach to adopt, in evaluating internal control

systems and audit evidence, etc.

Some other important roles performed by the auditor includes: ensuring that organisational

policies are properly implemented and adhered to, assist management in improving the

quality of reporting systems and reporting weaknesses or deficiencies in internal control to

management.

Generally, external auditors report on the accounts prepared by management. They assess the

value of assets and liabilities on the basis of audit examination and reliability of accounting

records (Okereke, 2000).

THE CHANGING ENVIRONMENT AND AUDITORS

The events of the last two decades have necessitated the utilisation of computer facilities in

our environment as large volumes of data are being processed at very high speed for the

purpose of prompt decision making (Bhaskar, 1982/1983). Accounting staff, computer

operators and other company staff are fast discovering ways and techniques of playing tricks

with computer in order to defraud their organisations. This emergence of computer fraud has

thrown many organisations into untold hardship and some into heavy losses.

Auditors must therefore be prepared to acquire and develop the necessary skills for the

handling of computerised audit assignments, because more reliance on the statements of

specialist cannot absolve them of liabilities. The basic approach of auditors to their

professional work still remains the same except that in a computerised accounting system,

audit procedures are adjusted to reflect the peculiar nature and complexity of such an

application system (Okereke, 2000).

ADVANTAGES OF A COMPUTERISED EDP SYSTEM

According to Onochie (2005), once an auditor accepts the task of auditing a computerised

environment and acquires the skills commensurate with the task, he will find that the

computers presence entails a number of distinct advantages. Generally, the amount of

detailed audit work is always governed by the degree of confidence which the auditor has in

the controls operated by his client.

In many ways, the data processing system help expedite the audit work on the final accounts

through their ability to provide for more immediate and effective recording control over


17

assets and liabilities. For example, reconciliation between various accounts can easily be

achieved.

By use of exception reporting, debts of doubtful value are highlighted without delay for

prompt action. Similar controls may be exercised over slow-moving and obsolete stocks and

regular reconciliation carried out between physical and book records of stock. With most

manual systems, these controls and tests are not easily carried out.

DISADVANTAGES OF A COMPUTERISED (EDP) SYSTEM

According to Onochie (2005), computer systems record and process transactions in a manner

that is significantly different from manual systems thereby giving rise to various possibilities

or problems. Some of these problems according to Okereke (2000) and Onochie (2005)

include:

Computerised systems take a longer time to install especially when they are customised. Any

improper or inefficient installation can cause problems including inability of an auditor to

form proper audit opinion or even corporate failure.

Computerised systems can be complicated and therefore the auditor requires special EDP

knowledge to carry out a successful audit which might require more time.

In some cases, a larger part of the data processing operations become centralised in the

computer room contrary to the usual decentralisation of accounting units. Too much

centralisation may facilitate errors and fraud which may be difficult to discover.

Data processed in an EDP system is not visible unless it is printed out. This leads to loss of

audit trail (the ability to trace individual transactions through a system from source,

processing to completion or vice versa). Other reasons for loss of audit trail include: frequent

absence of the customary source documents, the storage of information on magnetic files

which is constantly being reviewed, the authorisation of transactions being executed through

programs and limiting human intervention (automatic initiation and execution of

transactions), the reduction in permanently kept data and print-outs, the deleting of old data

files to create space for more recent transactions.

In a manual system, clerical staff may be able to detect errors and fraud early for appropriate

action. Machines (computer) generally do not make mistakes. However, machines cannot be

relied upon to recognise improper or incorrect data input and this will also lead to improper

output (garbage-in garbage-out).


18

Millichamp (2002) said there is a lack of segregation of duties. Commonly in the past every

transaction would probably be reviewed and processed by several people. This no longer

happens and frauds may proliferate as a result. He also said that there is potential for fraud

and error as a result of system or programme faults.

Considering the above problems, there should be appropriate application of computer audit

programs and audit tests data to the system under consideration (Bhaskar &Williams, 1986).

More important is the need for a closer liaison between auditors and clients at the design and

installation stages of audit computer systems.

IMPLICATION OF COMPUTERS FOR THE AUDITOR/AUDIT FIRM

The Get through Guides (2013) states the following implications of using computers in

auditing:

Knowledge and experience: Auditors are required to have technical knowledge and practical

experience since they are essential to the planning and execution of all audit procedures. This

can only be obtained from appropriate theoretical and practical training sessions.

Expensive procedure: Automating audit techniques can be expensive as it necessitates the use

of specialist software which is costly. Also the audit firm has to spend on the training of its

employees in the application of such software. Therefore, automation of audit techniques

cannot be afforded by small audit firms. Usage of automated techniques is mostly found to be

employed by the Big Four.

High Audit Fees: Since automating audit techniques is expensive, the audit fees charged to

clients will increase. This may not be acceptable to the clients as automating audit techniques

only helps the auditors in their work. The client may not be ready to bear the burden of such

increased costs. As a result, he audit firm may lose some clients.

Results are not guaranteed: The results of automated techniques are not guaranteed. As

automated audit tools are operated by technology, the possibility that the technology might

not give the desired results cannot be avoided. The auditor will have to test the effectiveness

of such auditing tools before relying on them.

Client Resistance: The client‘s management may not appreciate the use of automated audit

techniques as it gives the auditor wide access to the client‘s data and information systems. In

such a case, the auditor will either have to use traditional audit techniques or discontinue the

auditor-client relationship.


19

General application may not be possible: It may not be possible to use one single type of

auditing software for all types (e.g. manufacturing and service companies) of businesses or

clients. Specialist audit tools will then be required for different types of businesses resulting

in a further increase in the costs to the audit firm.

Continuous Upgrading: As automated auditing tools are based on technology which upgrades

at a very fast pace, the auditor may also have to upgrade his auditing tools every time in order

to achieve the desired results. This would mean additional costs.

Separate IT Teams: The audit form will have to employ a special IT team to maintain the

auditing tools in order to ensure that they are operated effectively and also to address the

problems faced by the accountants in applying these tools.

IMPACT OF COMPUTER-BASED SYSTEMS ON THE AUDIT APPROACH

According to Byrne (2009), the fact that systems are computer-based does not alter the key

stages of the audit process; this explains why references to the audit of computer based

systems have been subsumed into the International Standards on Auditing (ISAs) 300, 315

and 330.

(i) Planning

The Appendix to ISA 300 (Redrafted) states ‗the effect of information technology on the

audit procedures, including the availability of data and the expected use of computer assisted

audit techniques‘ as one of the characteristics of the audit that needs to be considered in

developing the overall audit strategy.

(ii) Risk assessment

‗The auditor shall obtain an understanding of the internal control relevant to the audit.‘ (ISA

315 (Redrafted)). The application notes to ISA 315 identify the information system as one of

the five components of internal control. It requires the auditor to obtain an understanding of

the information system, including the procedures within both IT and manual systems. In other

words, if the auditor relies on internal control in assessing risk at an assertion level, s/he

needs to understand and test the controls, whether they are manual or automated. Auditors

often use internal control evaluation (ICE) questions to identify strengths and weaknesses in

internal control. These questions remain the same – but in answering them, the auditor

considers both manual and automated controls.


20

For instance, when answering the ICE question, ‗Can liabilities be incurred but not

recorded?‘, the auditor needs to consider manual controls, such as matching goods received

notes to purchase invoices – but will also consider application controls, such as programmed

sequence checks on purchase invoices. The operation of batch control totals, whether

programmed or performed manually, would also be relevant to this question.

(iii) Testing

‗The auditor shall design and perform further audit procedures whose nature, timing and

extent are based on and are responsive to the assessed risks of material misstatement at the

assertion level.‘ (ISA 330 (Redrafted)). This statement holds true irrespective of the

accounting system, and the auditor will design compliance and substantive tests that reflect

the strengths and weaknesses of the system. When testing a computer information system, the

auditor is likely to use a mix of manual and computer-assisted audit tests. This means that the

auditor reconciles input to output and hopes that the processing of transactions was error-free.

The reason for the popularity of this approach used to be the lack of audit software that was

suitable for use on smaller computers. However, this is no longer true, and audit software is

available that enables the auditor to interrogate copies of client files that have been

downloaded on to a PC or laptop. However, cost considerations still appear to be a stumbling

block. In the ‗through the machine‘ approach, the auditor uses CAATs to ensure that

computer based application controls are operating satisfactorily.

AUDIT PROCEDURES

In a computerised accounting system, the records need an appropriate audit approach to

ascertain whether the results represent a true and fair view of the financial position of the

company (Okereke, 2000). Below are the two approaches that can be used in a computer

audit:

Auditing Round the Computer: This implies that the auditor ensures that transactions are

inspected (for validity, proper authorisation, clerical control and coding, etc) before they are

processed by computers and that the corresponding computer-generated outputs are

completely and correctly/accurately processed i.e. it concentrates on initial input and final

output.

The benefit of this approach is that it saves time. The justification is largely that the computer

is 100% accurate in processing and material processing errors simply do not occur


21

(Millichamp, 2002). The problem with this approach is that it may not detect malpractices

which are perpetrated within the computers themselves or within the computer centres since

the auditor depends highly on computer print-outs. The auditor audits the records, some of

which are maintained on computer memory devices but without using the computer to

perform audit test. (Okereke, 2000)

This approach is suitable for small businesses but it can also be said that it is easier to

understand a smaller system than the immense complexities of CISs in large-scale enterprises

(Millichamp, 2002).

Auditing Through the Computer: Under this approach, the auditor trace transactions through

the computer by using specially prepared audit program to interrogate the files; The auditor

audits the records, some of which are maintained on computer memory devices by using the

computer itself to perform audit test. (Okereke, 2000). According to Oladipupo (2003), it

involves a thorough examination of the computer‘s own processing to ensure that: all input

finds its way into the computer, unusual conditions in the input cannot cause processing

errors, and controls with the computer programs are as effective in practice as they may

appear to be in theory.

COMPUTER ASSISTED AUDIT TECHNIQUES (CAATS)

The overall objective and scope of an audit do not change when an audit is conducted in an

EDP environment. However, the application of auditing procedures may require the auditor

to consider techniques (Computer Assisted Audit Techniques) that use the computer as an

audit tool (Onochie, 2005). These are techniques available to the non-technical auditor to

bridge the gap between him and the computer system and help to manage his way through the

data files and get what he wants (Oladipupo, 2003).

CAATs are used by the auditor for the following reasons (Oladipupo (2003) & Onochie

(2005)):

• To extract data or create an audit trail (tracing a business transaction through all

stages in which it features in the records of the business) in the absence of human

readable records.

• To perform audit procedures that are lengthy or error-prone.

• To obtain assurance that program controls function correctly.


22

• To improve the efficiency and effectiveness of audit procedures and thereby reduce

cost.

• In test of detail of transactions and balances, for example, the use of audit software to

test all (or a sample) of transactions in a computer file.

• During analytical review procedures, for example, the use of audit software to identify

unusual fluctuations or items.

• For compliance tests of general EDP controls, for example, the use of test data to test

access procedures to the program libraries.

• For compliance tests of general EDP application controls, for example, the use of test

data to test the functioning of a programmed procedure.

CAATs are normally placed in three main categories (Byrne, 2009):

(i) Audit software

Computer programs used by the auditor to interrogate a client‘s computer files; used mainly

for substantive testing. They can be further categorised into:

Package programs (generalized audit software) – pre-prepared programs for which the

auditor will specify detailed requirements; written to be used on different types of computer

systems

Purpose-written programs – perform specific functions of the auditor‘s choosing; the auditor

may have no option but to have this software developed, since package programs cannot be

adapted to the client‘s system (however, this can be costly)

Enquiry programs – those that are part of the client‘s system, often used to sort and print data,

and which can be adapted for audit purposes, e.g. accounting software may have search

facilities on some modules, that could be used for audit purposes to search for all customers

with credit balances (on the customers‘ module) or all inventory items exceeding a specified

value (on the inventory module).

Using audit software, the auditor can scrutinise large volumes of data and present results that

can then be investigated further. The software consists of program logic needed to perform

most of the functions required by the auditor, such as: select a sample, report exceptional

items, compare files, analyse, summarise and stratify data. The auditor needs to determine

which of these functions they wish to use, and the selection criteria.


23

(ii) Test data

Test data consists of data submitted by the auditor for processing by the client‘s computer

system. The principle objective is to test the operation of application controls. For this reason,

the auditor will arrange for dummy data to be processed that includes many error conditions,

to ensure that the client‘s application controls can identify particular problems. Examples of

errors that might be included: supplier account codes that do not exist, employees earning in

excess of a certain limit, sales invoices that contain addition errors, submitting data with

incorrect batch control totals.

Data without errors will also be included to ensure ‗correct‘ transactions are processed

properly. Test data can be used ‗live‘, i.e. during the client‘s normal production run. The

obvious disadvantage with this choice is the danger of corrupting the client‘s master files. To

avoid this, an integrated test facility will be used (see other techniques below). The

alternative (dead test data) is to perform a special run outside normal processing, using copies

of the client‘s master files. In this case, the danger of corrupting the client‘s files is avoided –

but there is less assurance that the normal production programs have been used.

(iii) Other techniques

There are increasing numbers of other techniques that can be used; the main two are:

• Integrated test facility – used when test data is run live; involves the establishment of

dummy records, such as departments or customer accounts to which the dummy data can

be processed. They can then be ignored when client records are printed out, and reversed

out later.

• Embedded audit facilities (embedded audit monitor) – also known as resident audit

software; requires the auditor‘s own program code to be embedded into the client‘s

application software. The embedded code is designed to perform audit functions and can

be switched on at selected times or activated each time the application program is used.

Embedded facilities can be used to:

– Gather and store information relating to transactions at the time of processing for

subsequent audit review; the selected transactions are written to audit files for

subsequent examination, often called system control and review file (SCARF)

– Spot and record (for subsequent audit attention) any items that are unusual; the

transactions are marked by the audit code when selection conditions (specified by the

auditor) are satisfied. This technique is also referred to as tagging.


24

The attraction of embedded audit facilities is obvious, as it equates to having a perpetual audit

of transactions. However, the set-up is costly and may require the auditor to have an input at

the system development stage. Embedded audit facilities are often used in real time and

database environments.

According to Oladipupo (2003) and Onochie (2005), before an auditor decides whether or not

to use CAATs, he should consider the following:

• His computer knowledge, expertise and experience.

• The availability of CAATs and suitable computer facilities.

• The impracticability of manual test where input documents are non-existent and where

the EDP system does not produce a visible audit trail of transactions processed or where

output reports are not produced.

• The effectiveness and efficiency of CAATs.

• The time available to perform the audit (using CAATs save time).

INTERNAL CONTROLS IN A COMPUTERISED ENVIRONMENT

The internal control in a computer environment is normally considered under 2 main

headings (Byrne, 2009):

General Controls: These are policies and procedures that relate to many applications and

support the effective functioning of application controls. They apply to mainframe, mini-

frame and end-user environments (the situation in which the users of the computer systems

are involved in all stages of the development of the system). General IT controls maintain the

integrity of information and security of data and commonly include controls over: data centre

and network operations, system software acquisition, change and maintenance, program

change, access security, application system acquisition, development, and maintenance (ISA

315 (Redrafted)).

They may be either manual or programmed. They are often sub-divided into administration

controls and systems development controls.

(i) Administrative controls

Controls over ‗data centre and network operations‘ and ‗access security‘ include those that:

• prevent or detect errors during program execution, e.g. procedure manuals, job

scheduling, training and supervision; all these prevent errors such as using wrong data

files or wrong versions of production programs


25

• prevent unauthorized amendments to data files, e.g. authorisation of jobs prior to

processing, back up and physical protection of files and access controls such as passwords

• ensure the continuity of operations, e.g. testing of back‑up procedures, protection against

fire and floods.

(ii) System development controls

The other general controls referred to in ISA 315 cover the areas of system software

acquisition development and maintenance; program change; and application system

acquisition, development and maintenance.

System software‘ refers to the operating system, database management systems and other

software that increases the efficiency of processing.

Application software refers to particular applications such as sales or wages. The controls

over the development and maintenance of both types of software are similar and include:

• Controls over application development, such as good standards over the system design

and program writing, good documentation, testing procedures (e.g. use of test data to

identify program code errors, pilot running and parallel running of old and new systems),

as well as segregation of duties so that operators are not involved in program

development

• Controls over program changes – to ensure no unauthorized amendments and that

changes are adequately tested, e.g. password protection of programs, comparison of

production programs to controlled copies and approval of changes by users

• Controls over installation and maintenance of system software – many of the controls

mentioned above are relevant, e.g. authorisation of changes, good documentation, access

controls and segregation of duties.

Application Controls: These are manual or automated procedures that typically operate at a

business process level and apply to the processing of transactions by individual applications.

Application controls can be preventative or detective in nature and are designed to ensure the

integrity of the accounting records. Accordingly, application controls relate to procedures

used to initiate, record, process and report transactions or other financial data. These controls

help ensure that transactions occurred, are authorised and are completely and accurately

recorded and processed (ISA 315 (Redrafted)).


26

Application controls apply to data processing tasks such as sales, purchases and wages

procedures and are normally divided into the following categories:

(i) Input controls

Examples include batch control totals and document counts, as well as manual scrutiny of

documents to ensure they have been authorised. An example of the operation of batch

controls using accounting software would be the checking of a manually produced figure for

the total gross value of purchase invoices against that produced on screen when the batch-

processing option is used to input the invoices. This total could also be printed out to confirm

the totals agree.

(ii) Processing controls

An example of a programmed control over processing is a run-to-run control. The totals from

one processing run, plus the input totals from the second processing, should equal the result

from the second processing run. For instance, the beginning balances on the receivables

ledger plus the sales invoices (processing run 1) less the cheques received (processing run 2)

should equal the closing balances on the receivable ledger.

(iii) Output controls

Batch processing matches input to output, and is therefore also a control over processing and

output. Other examples of output controls include the controlled resubmission of rejected

transactions or the review of exception reports (e.g. the wages exception report showing

employees being paid more than $1,000).

(iv) Master files and standing data controls

Examples include one-for-one checking of changes to master files, e.g. customer price

changes are checked to an authorized list. A regular printout of master files such as the wages

master file could be forwarded monthly to the personnel department to ensure employees

listed have personnel records.

DOCUMENTATION/COMPUTER AUDIT WORKING PAPERS

The working paper of a computer auditor represents a logical extension of the traditional

work files of auditors in more conventional processing system. The conventional audit

working paper and computer related working papers in particular differ in format,

complexity, content and extent (Oladipupo, 2003).


27

According to Onochie (2005), the documentation on the audit files should reflect the nature

of the audit. Appropriate questionnaire and check lists must be produced together with record

of client‘s data processing systems and controls. The standard of working papers and

retention procedures for a CAAT should be consistent with that on the audit as a whole (ISA

230). It may be convenient to keep the technical papers relating to the use of the CAAT

separate from the other audit working papers.

THE FUTURE OF AUDITING IN AN EDP WORLD

Akpa (2014) suggests that future technology will impact auditing in the following areas and

this will shape research direction: type and source of evidence, evidence quality, audit scope

expansion, professional education and standards, staffing, legal liability, etc.

METHODOLOGY

The paper employed the use of exploratory research design. It used secondary data (e.g.

books, journal articles, discussion and working papers, etc.) which was relevant to Auditing

and information technology. This design was chosen in order to explore some relevant

applications of information technology or computers in auditing the financial statements of

entities.

CONCLUSION AND RECOMMENDATIONS

Even though the computerisation of accounting records results is relatively achieving greater

accuracy, it is posing new challenges and risk to the work of auditors. These new challenges

cannot easily be ignored, because auditors are required to form an opinion on whether the

financial statements presented before them give a true and fair view of the financial position

of a company at a stated date. There are dangers if auditors place too much reliance in

computer output without investigating the means by which that output is produced. As a

result auditors should enhance their competence in information technology so as to use

computers effectively in terms of correct data input and processing.

When auditing a computer system, the auditor will need to go beyond the usual audit

techniques. An audit firm should weigh the costs and benefits of investing in CAATs before

implementing them. If the benefits exceed the costs, then the audit firm must opt for such

techniques as they considerably reduce the audit timing and also enhance the quality of the

audit work. There is every possibility that the business environment will become more


28

advanced as a result of technological advancements. The auditor should therefore keep

abreast with the latest technological development in order to remain relevant.

REFERENCES

Anderson, R. J. (1977). The external audit, Toronto: Cropp, Clark Pitman.

Bhaskar, K. N. (1982). Use of computers in accountancy courses. Accounting and Business

Research, 13, 3-10.

Bhaskar, K. N. (1983). Computers and the choice for accounting syllabuses. Accounting and

Business Research, 13, 83-93.

Bhaskar, K. N. & Williams, B. C. (1986). The impact of microprocessors on the small

accounting practice. London: Prentice-Hall International.

Byrne, P. (2009). Auditing in a computer based environment. Student Accountant. London:

United Kingdom: Association of Chartered Certified Accountants.

Get Through Guides. (2013). Paper p7 advanced audit and assurance (international) study

text (5th ed.). Surrey, United Kingdom: Author.

International Standard of Auditing 230. Audit documentation. Retrieved from

http://www.ifac.org/sites/default/files/downloads/a011-2010-iaasb-handbook-isa-230.pdf

International Standard of Auditing ISA 300. Planning an audit of financial statement.

Retrieved from http://www.ifac.org/sites/default/files/downloads/a016-2010-iaasb-handbook-

isa-300.pdf

International Standard of Auditing ISA 315 (Redrafted). Identifying and assessing the risks of

material misstatement through understanding the entity and its environment. Retrieved from

http://www.ifac.org/sites/default/files/downloads/2008_Auditing_Handbook_A100_ISA_315

.pdf

International Standard of Auditing ISA 330. The auditors response to assesses risk. Retrieved

from http://www.ifac.org/sites/default/files/downloads/a019-2010-iaasb-handbook-isa-

330.pdf

Millichamp, A. H. (2002). Auditing (8th Ed.). London, United Kingdom: Thomson Learning.

Okereke, L.C. (2000). Principles and practice of auditing and investigations: A manual for

professionals and non-professionals (1st ed.). Lagos, Nigeria: Lima.


29

Oladipupo, A.O. (2003). Principles and practice of auditing. Benin City, Nigeria: Mindex

publishing.

Onochie, V.O. (2005). A handbook on auditing and investigation for higher studies. Lagos,

Nigeria: Vindo Associates Ltd.

Porter, B.A., Simon, J. & Hatherly, D. (2008). Principles of external auditing (3rd ed.). West

Sussex: Wiley.


30

Government Accounting System in Africa: A Comparative Study

of Cash-Basis and Accrual-Basis of Reporting

Festus Rotimi Info-Tech Business School,

Illinois, Chicago-USA

[email protected]

Abstract

The objective of this study is to investigate the accounting system that should be adopted in

the Nigerian public sector for achieving the financial, public and growth objectives of the

government. To achieve this purpose, research questions were raised, hypotheses were

formulated and a critical review of extant literature was made. The population of the study

consists of eighteen (18) state legislators and thirty-nine (39) Directors of Finance and

Accounts of the chosen ministries and extra-ministerial departments. In order to generate the

necessary data for this study, the survey method of research design was adopted in which a

well-structured questionnaire designed in five-point Likert Scale was administered on the

study population. The data generated for this study were analysed using mean scores while

the stated hypotheses were statistically tested with Z-test. The findings generated from this

study indicated that cash basis of accounting does not significantly promote effective

financial reporting of public sector entities in Nigeria, since the z-test result shows that the

computer z-value (1.0) is less than the critical z-value (1.96). Similarly, it was gathered in

this study that accrual basis of accounting significantly promotes effective financial reporting

of public sector entitles in Nigeria. In view of the above findings we recommended the

adoption of accrual basis of accounting in public sector entitles in Nigeria.

Keywords: Cash accounting, accrual accounting, public sector entity, assets and liabilities,

receivables and payables

INTRODUCTION

In modern democratic governance, the basic objectives used in assessing the performance of

public sector organizations are – financial objective, public objective and growth objective.

While the financial objective is concerned with the ability of the government to meet the

needs and aspirations of taxpayers, public objective focuses on meeting the demands of the

citizenry (i.e. those within and outside the tax bracket), and the growth objective is tailored

towards improvement in economic performance and international relations (Okoye and

Oghaghomeh, 2011). An efficient and transparent public sector financial reporting system

can be very helpful in achieving the above objectives as such a system enhances the

credibility of financial information, public trust and attracts foreign investment.

The South Asian Federation of Accountants – SAFA (2006) revealed the following issues to

be considered in choice of public sector accounting system – accountability in the use of


31

public funds, timeliness of financial information, efficient financial management and control

system, transparency in decision-making, good governance, comparability of financial

reporting with other countries of the world, ease of raising capital from the international

markets, and donor agencies, and reliable information on the use of taxpayers‘ money.

A review of existing literature on cash accounting and accrual accounting systems indicate

that cash accounting system provides essential information and it is simple, easier to

understand, facilitate decision making, and much more objective than other alternatives

(Ross, 2003. However, the system is not intended to provide information on the cost of

services, earned revenues, account receivables, account payable, long-term assets and

liabilities, accrued interest on external debt and stock value (Zakiah, 2007; Saleh, 2007;

Joned and Pendlebury, 1984). In addition, Okoye and Oghoghameh (2011) revealed that cash

accounting system is not significantly effective in providing accounting information for

efficient performance of public sector organization, because there is no indication of long-

term.

Fiscal strength and the relationship between revenues, expenses, and changed in net worth

and the trade-off between the burdens current and future taxpayers. Obazee (2011) claim that

cash basis of accounting is not comprehensive enough to give true and fair view of

government activities. It does not provide the users with complete and comprehensive

financial information needed for decision-making purposes and accountability functions.

Developments in government activities and programmes in recent times have raised concerns

over whether the cash basis of accounting currently used in Nigerian public sector helps in

presenting an accurate and fair view of governments‘ fiscal position, financial performance

and cash flows. As a result, accrual accounting system that is previously thought to be

suitable only for private sector organizations has been seen to be an alternative for better

reporting of government activities because with it, accountability in assured, information on

assets and liabilities are readily available, comparability of financial information becomes

effective, costs are adequately matched with revenue and compliance reporting becomes

possible and effective (SAFA, 2006). Available literature such as Adeqbayo (2010), Ross

(2003), Hajik and Kpamala (1998), and De Volkskrant (1994), have equally questioned the

use of accrual accounting system in public sector entities on the grounds that it is not budget

compliant, operating costs are higher, more difficult to understand and operate, it delays the

review and assessment of cash position, and it involves a subjective adjustment of financial

statements. Based on the above, there is a continuing debate over the use of cash accounting


32

and accrual accounting in public sector entities. It is against this backdrop that this study

tends to investigate the accounting system that should be adopted in the Nigerian public

sector for achieving the financial, public and growth objectives of the government.

To achieve the stated objective, the following research questions were raised-

i. To what extent does cash basis of accounting promotes effective financial reporting of

public sector entities in Nigeria?

ii. To what extent does accrual basis of accounting promotes effective financial reporting

of public sector entities in Nigeria?

In order to provide tentative answer to the research questions, it was hypothesized that-

(i) Cash basis of accounting does not significantly promote effective financial reporting

of public sector entities in Nigeria.

(ii) Accrual basis of accounting does not significantly promote effective financial

reporting of public sector entities in Nigeria.

LITERATURE REVIEW

Most studies on tax compliance particularly in developing countries indicate that people

avoid and evade taxes because of poor usage of tax revenue by the governments. Therefore

efficiency and transparency in financial reporting system have become extremely important

for governments all over the globe. The basis of accounting for achieving efficiency and

transparency in government activities and programmes is of utmost importance. According to

Omenika (2008), the basis of accounting is a set of rules and principles that determine the

recognition of expenses and revenues in exchange transactions. It could be cash basis or

accrual basis. While cash basis recognizes transactions and events only when cash is received

or paid, accrual basis recognizes all transactions and events irrespective of whether cash is

received /paid or not (Omenika, 2008).

To provide a proper perspective of the two basis of accounting, a comparative analysis based

on existing literature is made as follows;

(i) Recognition of Total Liabilities: Liabilities are obligations owed. The basis of

government accounting should provide relevant and accurate information about

governments‘ liabilities. Under the cash basis of accounting, no liabilities are

recognized. Accordingly, neither liabilities due in the current period (short-term

liabilities) nor liabilities which are owed beyond the current period (long-term


33

liabilities) are recorded in the operating accounts of that period. As a result of not

recognizing the long-term liabilities such as pensions and claims, their costs as well are

not recognized and reported because the governments do not make plans to meet these

liabilities when they fall due. Consequently, the deficit in one period may increase more

than the other periods (Langendijik, 1990). For example, Zik (1997) reported that in the

late 1980s, Canada‘s federal and provincial governments had accumulated more than

$30 billion unrecorded employee pension liabilities. In some provinces, the size of

unrecorded liability equaled or exceeded their accumulated deficits. But the accrual

basis shows hidden liabilities and forces the government entities to suddenly show huge

deficits in governmental funds. More so, receivables and payables of the government

are made known at the end of the fiscal year only with the adoption of accrual

accounting system.

(ii) Revenue Recognition: Under the cash basis of accounting the revenues will only be

recognized in the financial statements in the period in which cash is received. However,

the cash receipts do not make distinction between current receipts and capital receipts.

So an excess of receipts over payments cannot be called income because receipts might

encompass capital receipts. This will result in that the revenues, which are earned in a

given fiscal year, are not known. As such it is difficult to evaluate the efficiency of

revenue collection staff and to discover the losses during the collection process (Okoye

and Oghoghomeh, 2011). In addition, under cash basis, receipts and revenues are

identical since no difference exists between the time when they are recognized and

when they are collected. But under accrual basis, the recognition of revenues is required

at the time when they are earned, and the receipts occur when revenues are collected.

This manner of revenue recognition presents a better financial information (Saleh,

2007).

(iii) Recognition of Total Cost of Goods and Services Provided: The use of cash-based

accounting system would result in reporting of only those costs, which involved a cash

flow during the period. However, the cash disbursements do not reflect what the

organization cost to run during the year, because these disbursements may also include

cash flows resulting from, for example, the acquisition of assets or the repayments of

debt related to the previous years. This means that cash-based accounting system makes

no difference between expenditures and disbursements, and generally no distinction

between current and capital expenditure. Capital purchases are treated in the same

manner as personnel expenses with no recognition that they are productive for years. As


34

a result, there is little incentive to use current capital assets efficiently. Accordingly,

under the cash basis of accounting, it is difficult to know how much resources have

been consumed in carrying out the operations during the accounting period (operating

costs). Also as a result of not capitalizing the fixed assets and not recognizing the long-

term debts, the depreciation and interest costs are not accounted for. This, in turn,

means that the costs of producing the services in the government entities, and the total

cost of the programs and activities, which take place in the given period, are also not

known. Consequently, it is difficult to generate the right information about the total cost

of services and goods produced during the year and such costs are important for

performance evaluation, control, public contracts policy, and to measure the efficiency

and effectiveness of the governmental entities (Saleh, 2007). However, the accrual

accounting recognizes total costs of goods and services appropriately.

(iv) Disclosure of Stock Value: Cash-based accounting system does not present information

regarding the value of stocks that are consumed during the fiscal year or the closing

stocks. This is because the accounts are not concerned with recording the usage; they

are rather concerned with the cash outflow, which has been paid for purchases.

Consequently, there are no stock adjustments, stock valuation and stock measurement.

This would result in that the real value of the stock is not known and this is turn gives

rise to the appearance of several problems such as carrying cost problem; freezing the

public money, opportunity costs of public capital. Furthermore. These stocks can be lost

by a deliberate manipulation during the addition and deduction operations. On the other

hand, accrual accounting takes such adjustments into consideration. This exercise will

consume time, money, and effort, thereby increasing operational costs. The output of

the accounting system with respect to the stocks is considered as one of the main and

important information sources that the management relies on in the decision making

process. So the absence of useful accounting information regarding stocks would result

in finding it difficult to take the right decision (Zakiah, 2007).

(v) Recognition of Total Assets: Assets are economic benefits of an entity which have to be

reported in financial statements. The elements, which are included in the financial

statements under the cash-based accounting system, are cash receipts, cash

disbursements and cash balances. Accordingly, there is no information provided on the

total assets (financial and physical). For example, there is no information provided

about the investment in materials, supplies, equipment‘s and other assets, which are

available for future use in discharging government activities and programmes. Accrual


35

accounting provides accounts to take care of all assets including those that are still in

use, those that have reached the end of their useful life and those that have been sold.

Nevertheless, this information can be used in estimating how much is to be requested

for acquisition of assets in each year‘s budget (Appollos, 2001).

(vi) Manipulation of Accounting Records: The balances of appropriations (the estimated

expenditures) available for expenditure may not be accurately stated when determine

only on the basis of cash payments. Part of the balances so determined are needed to

pay for credit goods and services received or ordered which makes accrual accounting

basis more reliable. There is a strong potential for over-spending appropriated amounts

when the cash basis is used (Hongs, 2004). More so, under the cash basis, most of the

liabilities are hidden and this gives government officials and politicians the opportunity

to manipulate the deficit amount. Similarly, with accrual basis of accounting, there is

need to exercise judgment in determining the amount of cash flow for the period and

this, involves a subjective adjustment of financial statements which is prone to

manipulation (Ozugbo, 2009).

(vii) Accountability and Transparency: As mentioned earlier, information on period revenues

and expenses, long-term assets and liabilities, receivables and payables, value of stocks,

total cost of series provided are essential for efficient financial reporting. For example,

information on assets and liabilities is a measure for net worth. Since the net worth is

the difference between total assets and total liabilities, the changes in the total assets

and the total liabilities will affect the net worth. So if the government increased the

liabilities either by borrowing to fund the deficit or obligation to make payments in the

future, such as pension; or increased the assets which would provide economic benefits

to the reporting entity, these actions would affect the net worth. Similarly, information

on the total cost of services and gods enables the government to compare the total cost

of services and goods produced in the previous years. Ozugbo (2009) asserts that

accountability and transparency in the use of taxpayers‘ money is assured in accrual,

basis of accounting and it is difficult to be achieved in cash accounting system.

(viii) Financial Control Function: Cash accounting is not a complete accounting system and

its internal control is very weak. Inherent to this system is the lack of control in the

usage of inventories during the year. On the other hand, the cash basis assists in

fulfilling the budgetary control function. The budgetary controls concerned with

ensuring that actual expenditures are in line with budgeted amounts and the objectives

and levels of activity envisaged in the budget are achieved. Therefore it is required in


36

the governmental entities, in order to achieve the control purposes, to prepare the

budget (a budget is financial plan describing the estimated expenditures and the means

of financing them) as a control means of the activity of the government entity besides

the financial regulations – restrictions. In a nutshell, while cash accounting system is

prepared for budgetary control, accounting system is suitable for internal control

(Eagleton, 2009; Veneeva, 2003).

(ix) Comparability of Financial Reporting: As it is clear from the nature of cash-based

accounting system that it is interested in cash flows and recognizes the events and

transactions only on cash basis. Therefore, it ways happens that one year can be charged

by costs made in other years. Accordingly, the use of cash basis results in over-lapping

of activities of different financial years thereby hindering effective performance

measurement (Zik, 1997). For example, if the government entity purchased some

stationeries worth N50,000 in 2010 and used them in the same year but makes

payments in 2011, the accounts in 2010 will not show the accrued costs of the

stationeries and the accounts in 2011 will show only the payments which are included

in the total expenditures of that year although the year has not benefited from the

stationeries. Consequently, the adoption of accrual accounting system by governmental

entities often makes the comparison between the results of different financial years

more useful and important (Zik, 1997). Ozugbo (2009) added that for international

comparability of financial reporting of government entities, accrual accounting is the

pathway to success.

(x) Stewardship Function: The stewardship function of financial reporting demands that

information that can assist in assessing whether resources were used in accordance with

the legally adopted budgets must be furnished. Zaklah 92007), and De Volkzkrant

(1994) state that cash accounting system is more appropriate in meeting the stewardship

function of public fanatical reporting because it is budget compliant.

(xi) Book-keeping and Accounts – Every financial reporting system requires that necessary

books of account be kept and maintained to provide information of financial

performance. Under the cash accounting system, account books are very simple to keep

and maintain and easier to understand compared to accrual basis of accounting.

(Ozugbo, 2009). This is because cash accounting provides only necessary and essential

information on receipts and disbursements made during the fiscal year.

(xii) Quick Decision Making: The ultimate goal of accounting information is for decision

making. When decisions are not made at the right time perhaps due to delay in


37

providing the necessary information, a wrong decision could be made in the long-run

and this adversely affect the overall performance of the entity (Adebayo (1004) asserts

that cash accounting provides useful information that permit analysis of the monetary

impact of fiscal transactions, review and assessment of cash position thereby facilitating

decision making.

METHODOLOGY

The population of this study consists of legislators and Directors of Finance and accounts of

Ministries and extra-ministerial departments in Rivers and Delta States of Nigeria. In order to

generate the necessary data for this study, a survey method of research design was adopted in

which a well-structured questionnaire designed in five-point Likert Scale was administered

on eighteen (18) state legislators and thirty-nine (39) Directors of Finance and Accounts of

selected ministries and ministerial departments.

The data generated for this study were analysed using mean scores while the stated

hypotheses were statistically tested with Z-test. The Z-test was computed using the formula –

√

Where:

= Mean of X1

= Mean of X1

= Variance of X1

= Variance of X2

n1 = Size of X1

n2 = Size of X2

DATA PRESENTATION AND ANALYSIS

This section of the study focused attention on the empirical analysis of data generated for this

study. The questionnaire administered to the respondents were fully completed and returned

thereby representing one hundred percent (100%) response rate.


38

In testing the first hypothesis, the respondents were asked to indicate the extent to which cash

basis of accounting promotes effective financial reporting of public sector entities in Nigeria

and their responses are presented in the table below.

Table 1: Cash Basis of Accounting and Effective Financial Reporting of Public Sector

Entities in Nigeria.

Responses Scores

(x)

Frequencies

(F)

Fx ( )

( )2

F( )2 Frequencies

(F)

Fx ( )

( )2

F( )2

Very High

Extent

5 5 25 1.06 1.124 5.62 11 55 1.36 1.85 20.35

High Extent 4 9 36 0.06 0.004 0.03 13 52 0.36 0.13 1.68

Low Extent 3 2 6 -0.94 0.814 1.77 8 24 -0.64 0.41 3.28

Very Low

Extent

2 2 4 -1.94 3.76 7.53 4 8 -1.64 2.69 10.76

Undecided 1 0 0 2.94 8.64 0 3 3 -2.64 6.97 20.91

Total - 18 71 - - 14.95 39 142 - - 56.98

Source; Filed work, 2011

= 3.94 = 3.64

= 0.83

= 1.46

n1 = 18 n2 39

Z =

√

Z = 1.0

This result is represented in a normal distribution as shown below

Figure 1: Normal Distribution for Test of Hypothesis I

1.0 1.96 1.96

Acceptance


39

Decision: Accept H0; since Z-computer (1.0) is less than Z-critical (1.96). This implies that

the cash basis of accounting does not significantly promote effective financial reporting of

public sector entities in Nigeria.

In testing the second hypothesis, the respondents were asked to indicate the extent to which

accrual basis of accounting promotes effective financial reporting of public sector entities in

Nigeria and their responses are presented in the table below.

Table 2: Cash Basis of Accounting and Effective Financial Reporting of Public Sector

Entities in Nigeria.

Responses Scores

(x)

Frequencies

(F)

Fx ( ) ( )2 F( )2

Frequencies

(F)

Fx ( ) ( )2 F( )2

Very High

Extent

5 10 50 0.61 0.378 3.72 10 50 1.46 2.13 21.3

High Extent 4 7 28 -0.39 0.152 1.06 12 48 0.46 0.21 2.54

Low Extent 3 0 0 -1.39 1.932 0 8 24 -0.54 0.29 2.33

Very Low

Extent

2 0 0 -2.39 5.712 0 7 14 -1.54 2.37 16.60

Undecided 1 1 1 -3.39 11.492 11.49 2 2 -2.54 6.45 12.90

Total - 18 79 16.27 39 138 - - 55.67

Source; Filed work, 2011

= 4.39 = 3.54

= 0.90

= 1.43

n1 = 18 n2 39

Z =

√

Z = 2.83

This result is represented in a normal distribution as shown below

Figure 2: Normal Distribution for Test of Hypothesis I

-2.83 – 1.96 1.96 2.83

Rejection


40

Decision; Reject H0; since Z-computer (2.83) is greater than Z-critical (1.96). This implies

that the accrual basis of accounting does not significantly promote effective financial

reporting of public sector entities in Nigeria.

DISCUSSION OF FINDINGS

In this study, various factors such as recognition of total assets and liabilities recognition of

total cost of goods and services, revenue recognition, disclosure of stock value, manipulation

of accounting records, accountability and transparency, financial control function,

comparability of financial reporting, stewardship function, maintenance and ease of book-

keeping and accounts, and quick decision making; were empirically used in testing the

influence of the two accounting systems – cash basis and accrual basis, in promoting

effective financial reporting of public sector entities in Nigeria.

The result of our analysis shows that cash basis of accounting does not significantly promote

effective financial reporting of public entities in Nigeria as the Z-test result (1.0) is less than

the critical value of 1.96. The finding is supported by the previous studies such as Okoye and

Oghoghomeh (2011), Obasee (2011), Ozugho (2009), Saleh (2007), Zakiah (2007), Hongs

(2004), Zik (1999), and Langendijik (1990). Okoye and Oghoghomeh (2011), reported that

cash accounting system is not significantly effective in providing accounting information for

efficient performance of public sector organizations because there is no indication of long-

term fiscal strength an relationship between revenues, expenses and changes in net worth and

the trade-off burdens of current and future taxpayers. They equally claim that with cash

accounting, it is difficult to evaluate the efficiency of revenue collection staff and discover

the losses during the collection process because the total revenues which are earned in a

given fiscal year are not known. Obazee (2011) claim that cash basis of accounting is not

comprehensive enough to give true and fair view of government activities. Ozugbo (2009)

asserts that accountability and transparency is difficult to achieve in cash accounting system

because there is lack of information on period revenues and expenses, long-term assets and

liabilities, receivables and payables, value of stock and total cost of goods and services

provided. Saleh (2007) affirms that with cash accounting it is difficult to generate the right

information about the total cost of services and goods produced during the year and such

costs are important for performance evaluation, control, public contract policy, and efficiency

and effectiveness measurement of governmental entities. Zakiah (2007) claim costs

accounting lacks useful accounting information regarding stock value and such would result


41

in management finding it difficult to take the right decision. Hongs (004) opine that there is

strong potential for over-spending appropriated amounts when the cash basis is used. Zik

(1999), states that the use of cash basis results in over-lapping of activities of different

financial years thereby hindering effective performance measurement. Langendijik (1990)

reveals that under cash accounting no liabilities are recognized and consequently the deficit

in one fiscal period may increase more than other fiscal periods.

Similarly, this study revealed that accrual basis of accounting significantly promotes effective

financial reporting of public sector entities in Nigeria, as the Z-test result 2.83 is greater than

the critical value of 1.96. Other studies such as Ozugbo (2009), Saleh (2007), SAFA (2006)

and Appollos (2001) are in concordance with our result. Ozugbo (2009) asserts that

accountability and transparency in the use of taxpayers‘ money is assured in accrual basis of

accounting since the system provides a more comprehensive information. Saleh (2007) is of

the opinion that accrual accounting makes distinction between current receipts and capital

receipts because revenues are recognized at the time when they are earned, and the receipts

occur when revenues are collected and this presents a better financial information SAFA

(2006), reported that with accrual accounting system, accountability is assured, information

on assets and liabilities are readily available, comparability of financial information becomes

effective, casts are adequately matched with revenues, and compliance reporting becomes

possible and effective. Appollos (2001) claim that information generated from accrual

accounting can be used in estimating how much is to be required for acquisition of assets in

each year as budget and this serves as an informed decision. However, the works of Adebayo

(2001), Ross (2008), Hajik and Kpamalu (1998), and the Volkskrant (1994) fail to agree with

this finding. They claim that accrual accounting is not budget compliant, increased operating

costs, more difficult to understand and operate, delays the review and assessment of csh

position and involves a subjective adjustments of financial statement, which is prone to

various forms of manipulation.

CONCLUSION AND RECOMMENDATION

Public sector accounting system has been devoid of advancement in terms of continuing

existence of rule-based accounting framework but as the government mandate becomes

increasingly growth-oriented, the realignment of the financial accounting system supporting


42

the developmental role of the government has become imperative. Two bases of accounting –

cash accounting system are currently in contentions to achieve this purpose.

It is important to realize that whichever basis of accounting is adopted, either one only gives

a partial picture of financial status of the reporting entity. While the accrual basis shows the

ebb and flow of income and debts more accurately, it may leave the reporting entity in the

dark as to what cash reserves are available, which could result in serious cash flow problem.

In trying to produce a cash flow statement, accrual accounting may involve subjective

adjustments, which are prone to various forms of manipulations for personal gains.

In order to improve financial reporting in the public sector all over the world, the

International Federation of Accounting (IFA) has constituted International and standardizes

government financial reporting standards. The standards and guidelines issued by the Board

revealed the need for a comprehensive system of financial reporting in public sector entities.

In meeting the above objective and in view of the findings generated from this study, it is our

humble submission to recommend the accrual basis of accounting for public sector entities in

Nigeria.

REFERENCES

Adebayo, J (2010) ―Accrual Accounting – Does it meet Government Financial Reporting

Objective‖? International Journal of Public Finance and Economic Development; 13(4); 126-

134

Appollos, D (2001) Public Sector Financial Reporting; Fortune Press; Enugu

De Volkskrant, W.K (1994) ―Can Public Sector Abandon Cash Accounting?‖ International

Journal of Development Studies in Arab World; 7(2); 18-20

Eagleton, T (2009) ―Public Sector Financial Controls‖; Researches in Public Finance; 13(2);

79-86

Hajik, G and Kpamala, J (1998) Public Sector Accounting and Financial Management; New

Delhi; Vikas Publishers

Hongs, M (2004) Public Financial Management and Accounting; New Jersey; Prentice Hall

Inc.

Jones, K. and Pendlebury, I. (1984) ―Problems of Cash Accounting‖; International Journal of

Public Finance; 9(1); 134-141

Langendijik, T.O (1990) ―Cash Accounting and International Control in Government

Parastatals – The Australia Perspective‖; The Accounting Review; August/September; 34-38

Obazee, J (2011) ―Moving from Cash to Accrual Basis of Accounting – The Transition Path;

Workshop on Accounting and Financial Reporting in the Public Sector; Held at Ibadan,

Nigeria


43

Okoye, E.I and Oghoghomeh, T. (2011) ―Cash Accounting System in the Nigerian Public

Sector – The case of Delta State Government, Proceedings of the International Conference on

Social Sciences and Humanities; Universite Nationale Du Benin, Abanney-Calavi; 2(6); 153-

158

Omenika, H (2008) Advanced Public Financial Management; New York; Free Press

Ozugbo, M.J (2009) ―Financial Reporting for Good Governance in Public Sector Entities‖; in

Nedaw, D (Ed.) Public Sector Accounting; Bahir Dar; Nakura Publications Ltd

Ross, S.A (2003) ―Cash Accounting Preferred to Accrual Accounting‖;

http://www.publicfinancialrepoting.com; Retrieved on 10th July 2011

SAFA (2006) A study on Accrual-Based Accounting for Government and Public Sector

Entities; September

Saleh, Z (2007) ―Malaysian Governmental Accounting – National context and user

Orientation‖; International Review of Business Research Paper; 3(2); 386-394

Veneeva, V (2003) Public Sector Economics; London; Belhaven press

Zakiah, S (2007) ―Cash-Based Accounting System and Government Financial Reporting‖; A

Ph.D Seminar paper presented to the Faculty of Business and Accountancy; University of

Malaya, Kuala Lumpar

Zik, T.E (1997) ―Accrual Accounting and Cash Accounting in Public Sector – A comparative

Analysis; American Economic Review; 72(1); 149-157


44

Effects of Micro-Financing on Micro and Small Enterprises in

Nigeria

Adebayo Paul Adejola, PhD Department of Accounting,

Nasarawa State University, Keffi- Nigeria

[email protected]

Abstract

This study investigates the effects of microfinance on micro and small business growth in

Nigeria. The objectives are to examine the effects of different loan administration practices

(in terms of loan size and tenor) on small business growth criteria; to examine the ability of

Microfinance-Banks (MFBs) (given its loan-size and rates of interest charged) towards

transforming micro-businesses to formal small scale enterprises. Hypotheses were

formulated and the paper employed panel data and multiple regression analysis to analyse a

survey of randomly selected enterprises finance by microfinance banks in Nigeria. Strong

evidence was found that access to microfinance does not enhance growth of micro and small

enterprises in Nigeria. However, other firm level characteristics such as business size and

business location, are found to have positive effect on enterprise growth. This paper

recommends a recapitalization of the Microfinance banks to enhance their capacity to

support small business growth and expansion.

Keywords: Microfinance, Micro and Small Enterprises, Microcredit

INTRODUCTION

Since Nigeria attained independence in 1960, considerable efforts have been directed towards

industrial development. The initial efforts were government-led through the vehicle of large

industry, but lately, emphasis has shifted to Small and Medium Scale Enterprises (SMEs)

following the lessons learnt from the success of SMEs in the economic growth of Asian

countries (Ojo, 2003). Thus, the recent industrial development drive in Nigeria has focused

on sustainable development through small business development. Prior to this time,

particularly judging from the objectives of the past National Development Plans, 1962-68,

1970-75, 1976-80 and 1981-85, emphasis had been on government-led industrialization,

hinged on import-substitution strategy.

Since 1986, government had reduced its role as the major driving force of the economy

through the process of economic liberalization entrenched in the IMF pill of Structural

Adjustment Programme. Emphasis, therefore, has shifted from large-scale industries to small

mailto:[email protected]


45

and medium- scale industries, which have the potentials for developing domestic linkages for

rapid and sustainable industrial development. Attention was focused on the organized private

sector to spearhead subsequent industrialization programmes. The incentives given to

encourage increased participation in these sectors were directed at solving and/or alleviating

the problems encountered by industrialists in the country, thereby giving them opportunity to

increase their contribution to the Gross Domestic Product (GDP).

The contribution of Micro, Small & Medium Enterprises (MSMEs) to economic growth and

sustainable development is globally acknowledged (CBN, 2004). There is an increasing

recognition of its pivotal role in employment generation, income redistribution and wealth

creation (NISER, 2004). The micro, small and medium enterprises (MSMEs) represent about

87 per cent of all firms operating in Nigeria (USAID, 2005). Non-farm micro, small and

medium enterprises account for over 25 per cent of total employment and 20 percent of the

GDP (SMEDAN, 2007) compared to the cases of countries like Indonesia, Thailand and

India where Micro, Small and Medium Enterprises (MSMEs) contribute almost 40 percent of

the GDP (IFC, 2002).

Whilst MSMEs are an important part of the business landscape in any country, they are faced

with significant challenges that inhibit their ability to function and contribute optimally to the

economic development of many African countries. The position in Nigeria is not different

from this generalized position (NIPC, 2009).

Realizing the importance of small businesses as the engine of growth in the Nigerian

economy, the government took some steps towards addressing the conditions that hinder their

growth and survival. However, as argued by Ojo (2003), all these SME assistance

programmes have failed to promote the development of SMEs. This was echoed by Yumkella

(2003) who observes that all these programmes could not achieve their expected goals due

largely to abuses, poor project evaluation and monitoring as well as moral hazards involved

in using public funds for the purpose of promoting private sector enterprises. Thus, when

compared with other developing countries, Variyam and Kraybill (1994) observed that many

programmes for assisting small businesses implemented in many Sub-Saharan African (SSA)

countries through cooperative services, mutual aid groups, business planning, product and

market development, and the adoption of technology, failed to realize sustained growth and


46

development in these small enterprises. Among the reasons given were that the small-sized

enterprises are quite vulnerable to economic failure arising from problems related to business

and managerial skills, access to finance and macroeconomic policy.

The reluctance of formal financial institutions to introduce innovative ways of providing

meaningful financial assistance to the MSEs is attributed to lack of competition among

financial service providers, in the sense that none of financial service providers came up with

an innovative way of financing small businesses. In order to enhance the flow of financial

services to the MSME subsector, Government had, in the past, initiated a series of

programmes and policies targeted at the MSMEs. Notable among such programmes were the

establishment of Industrial Development Centres across the country (1960-70), the Small

Scale Industries Credit Guarantee Scheme (SSICS) 1971, specialized financial schemes

through development financial institutions such as the Nigerian Industrial Development Bank

(NIDB) 1964, Nigerian Bank for Commerce and Industry (NBCI) 1973, and the National

Economic Recovery Fund (NERFUND) 1989. All of these institutions merged to form the

Bank of Industry (BOI) in 2000. In the same year, Government also merged the Nigeria

Agricultural Cooperative Bank (NACB), the People‘s Bank of Nigeria (PBN) and Family

Economic Advancement Programme (FEAP) to form the Nigerian Agricultural Cooperative

and Rural Development Bank Limited (NACRDB). The Bank was set up to enhance the

provision of finance to the agricultural and rural sector. Government also facilitated and

guaranteed external finance by the World Bank (including the SME I and SME II loan

scheme) in 1989, and established the National Directorate of Employment (NDE) in 1986.

In 2003, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), an

umbrella agency to coordinate the development of the SME sector was established. In the

same year, the National Credit Guarantee Scheme for SMEs to facilitate its access to credit

without stringent collateral requirements was reorganised and the Entrepreneurship

Development Programme was revived. In terms of financing, an innovative form of financing

that is peculiar to Nigeria came in the form of intervention from the deposit-money banks.

The deposit money banks through its representatives, ‗the Banker's Committee‘, at its 246th

meeting held on December 21, 1999. The deposit-money banks agreed to set aside 10% of

their profit before tax (PBT) annually for equity investment in small and medium scale

industries. The scheme aimed, among other things, to assist the establishment of new, viable


47

SMI projects; thereby stimulating economic growth, and development of local technology,

promoting indigenous entrepreneurship and generating employment. Timing of investment

exit was fixed at minimum of three years, that is, banks shall remain equity partners in the

business enterprises for a minimum of three years after which they may exit anytime. By the

end of 2001, the amount set aside under the scheme was in excess of six billion naira, which

then rose to over N13 billion and N41.4 billion by the end of 2002 and 2005 respectively.

The modality for the implementation of the fund is such that the fund set aside is to be

invested within 18 months in the first instance and 12 months thereafter. After the grace

period, the CBN is required to debit the banks that fail to invest the fund set aside and invest

same in treasury bills for 6 months. Thereafter, the un-invested fund would be bided for by

successful investors under the scheme. The fund set aside by the banks under the scheme

decreased from N41.4 billion in 2005 to N38.2billion in 2006. This was as a result of

N2.5billion and N25.3 million set aside from failed banks and liquidated banks respectively,

which were netted out after the bank consolidation exercise. Actual investment during the

period grew from N12 billion in December 2005 to N17 billion in 2006, representing only

29.1 percent of the total fund set aside. In 2007, total amount set aside decreased further to

N37.4 billion, while total investment stood at N21.1 billion representing 56 percent of the

total sum set aside. The number of projects that benefitted from the scheme also increased to

302 projects in 2007, from 248 in 2006 (CBN, 2007).

The CBN found the reasons for the slow pace in utilization of the SMIEIS fund to include:

the desire of the Banks to acquire controlling shares in the funded enterprises and the

entrepreneurs‘ resistance to submit control; inability of the banks to adapt equity investment

which is quite different from what the banks are familiar with in credit appraisal and

management, and lack of proper structure for effective administration of the scheme when it

took off among other factors. Responding to the findings, the Bankers‘ Committee took a

policy decision to extend funding under the scheme to all business activities including even

non-industrial enterprises, except for general commerce and financial services. The name of

the scheme was changed from SMIEIS to Small and Medium Enterprises Equity Investment

Scheme (SMEEIS) to reflect the expanded focus. Also, the limit of banks‘ equity investment

in a single enterprise was increased from N200 million to N500 million, making room for

medium size industries.


48

Despite all these efforts, the contribution of SMEs in the industrial sector to the Nation‘s

GDP was estimated to be 37% compared to other countries like India, Japan and Sri Lanka

and Thailand where SMEs contributed 40%, 52% 55% and 47.5% respectively to the GDP in

2003, (UNCTAD, 2003), hence the need for alternative funding window. In 2005, the Federal

Government of Nigeria adopted microfinance as the main financing window for micro, small

and medium enterprises in Nigeria. The Microfinance Policy Regulatory and Supervisory

Framework (MPRSF) were launched in 2005. The policy, among other things, addresses the

problem of lack of access to credit by small business operators who do not have access to

regular bank credits. It is also meant to strengthen the weak capacity of such entrepreneurs,

and raise the capital base of microfinance institutions. The objective of the microfinance

policy is to make financial services accessible to a large segment of the potentially productive

Nigerian population, which have had little or no access to financial services and empower

them to contribute to economic development of the country.

The microfinance arrangement makes it possible for MSEs to secure credit from

Microfinance Banks (MFBs) and other Microfinance Institutions (MFIs) on more liberal

terms. It is on this platform that we intend to examine the impact of microfinance on small

business growth, survival, as well as business performance of MSEs operators.

The impact of micro-financing majorly should be seen in the multiplication of MSEs across

Nigeria. The survival of these MSEs should reflect in employment generation, engagement of

available local resources, local technology utilization, improved standard of living and

growing gross domestic product (GDP). However, despite MSEs representing about 87% of

all firms operating in Nigeria (USAID, 2005), they only account for 10% of total

manufacturing output, 25% of total employment in the productive sector and 37% of GDP

(Investment Climate Assessment (ICA) survey, 2009). A common problem for the Nigerian

small business sector is that, the high rates of formation of new businesses evidenced in

Corporate Affairs Commission (CAC) annual report have not yet translated into comparable

high rates of small firm growth. New firms are being started but few grow rapidly to become

significant international competitors. For the great majority of micro and small enterprise in

Nigeria long term growth remains uncertain and bleak. The question is how many of these

small businesses are transforming from the subsistence level at start-up to the stage of

maturity and later expansion where they will have to employ more hands? Total productive

output is also low compared to other emerging economies like India, Sri Lanka and Thailand


49

where SMEs contribute 40%, 55% and 47% respectively in 2002 into the productive sectors

of the economy (UNCTAD, 2003).

It is not uncommon to find in many microfinance programmes non-financial services such as

advisory services, managerial and technical training, weekly meetings and pre-loan training

to mention only a few, rendered as support services to MSMEs. These services that are

poorly provided in Nigeria are mostly very costly to deliver (McKernan, 2002), yet many

microfinance programmes consider them an integral part of the success of their programmes.

Though the contribution of such non-financial services is not in doubt, the extent of the

contributions is yet to be ascertained in Nigeria. Therefore, the aim of this study is to

estimate the effects of micro-financing on business performance of MSEs in Nigeria.

LITERATURE REVIEW

Defining small business has always been very difficult and controversial. The term ―small

business‖ covers a variety of firms. According to Peterson and Kozmetsky (1983), a small

business is one which is independently owned and operated and which is not dominant in its

field of operation. Researchers and other interested parties have used specific criteria to

operationalize the small business, from the perspective of value added, value of assets, annual

sales, and number of employees. Annual sales and number of employees are most often used

to delimit the category. The problem of definition confronts all researchers as well as

operators in the field.

A review of the literature on Micro, Small and Medium Enterprises (MSMEs) shows that the

definition of MSMEs significantly varies from country to country depending on factors such

as the country‘s state of economic development, the strength of the industrial and business

sectors, the size of MSMEs and the particular problems experienced by MSMEs. Hence,

there is no uniform or universally accepted definition of MSMEs (Investment Climate

Assessment (ICA), 2009). In Nigeria, parameters such as asset base (excluding land), the

number of workers employed and the annual turnover are used for the classification of

MSMEs. Carpenter (2001) maintains that there is no one definition for SMEs; they are

defined in Nigeria and other countries based on one or all of the following: the size or amount

invested in assets excluding real estate; the annual turnover and the number of employees.

The 1992 review by the National Council on Industrial Standards (NCIS) defined small and

medium scale enterprises (SMEs) as enterprises with total cost (including working capital but


50

excluding cost of land) of more than N31m, but not exceeding N3,150million, with a labour

size of between 11 and 100 employees. There is, however, a consensus of opinions when it

comes to defining SMEs in terms of asset base than on any other parameter. This is because

in case of an economic depression, the impact on turnover and employment base would be

greater than the impact on asset base. For instance, during a depression, there is a tendency

for turnover and the number of people employed to fall substantially, while the asset base

may be unaffected (NCIS, 1992).

MSMEs can be divided into micro, small and medium enterprises. The Federal Ministry of

Industries defines a medium-scale enterprise as any company with operating assets less than

N200 million, and employing less than 300 persons. A small-scale enterprise on the other

hand, is one that has total assets of less than N50 million, with less than 100 employees.

Annual turnover is not considered in the definition of an SME. The National Economic

Reconstruction Fund (NERFUND) defines an SSE as one whose total assets are less than

N10 million, but makes no reference either to its annual turnover or the number of

employees. These and other definitions of the National Association of Small Scale Industries

(NASSI), the National Association of Small and Medium Enterprises (NASME), the Central

Bank of Nigeria (CBN) and other institutions are shown in the Table below.

Table 1: Definition of SME by Nigerian Institutions

Parameters Total Assets ( N‘m) Annual Turnover (N‘m) No of Employees

Nigerian Institution MSE SSE ME MSE SSE ME MSE SSE ME

Fed. Min. of Industries. <200 <50 n.a. n.a. n.a. n.a. <300 <100 <10

Central Bank <150 <1 n.a. <150 <1 n.a. <100 <50 n.a.

NERFUND n.a. <10 n.a. n.a. n.a. n.a. n.a. n.a. n.a.

NASSI n.a. <40 <1 n.a. <40 n.a. n.a. 3 - 35 n.a.

NASME <150 <50 <1 <500 <100 <10 <100 <50 <10

Nigeria Industrial Policy n.a < 2m <.1 n.a n.a n.a n.a n.a n.a

Source: World Bank, SME Country Mapping 2001

Small and Medium Enterprise Equity Investment Scheme (SMEEIS), a private initiative by

the Bankers‘ Committee defined MSME as enterprises with an asset base not exceeding

$3.85 million (N500 million) excluding land and working capital with staff strength of not

less than 10 and not more than 300 (Sanusi, 2003).


51

A common feature of these definitions is that MSMEs are usually small, owner or family

managed businesses with basic goods and services. MSMEs also tend to lack the

organizational and management structures, which characterize large-scale enterprise. Urban

MSMEs tend to be more structured than their rural counterparts.

The National Policy on MSMEs adopts a classification based on the dual criteria: of

employment and assets (excluding land and buildings), as follows:

Table 2: Classification Adopted by SMEDAN for National Policy on MSMEs

SIZE CATEGORY EMPLOYMENT ASSETS (N million)

(excluding land and buildings)

1 Micro-enterprises Less than 10 Less than 5

2 Small enterprises 10 – 49 5 – less than 50

3 Medium enterprises 50 – 199 50 – less than 500

Source: SMEDAN, 2007

Where there exists a conflict in classification between employment and assets criteria (for

example, if an enterprise has assets worth seven million naira (N7m) but employs 7 persons),

the employment-based classification would take precedence and the enterprise would be

regarded as micro. Employment-based classification tends to be relatively a more stable

definition, given that inflationary pressures may compromise the asset-based definition. In

choosing these definitions, cognizance was taken of all possible factors, including

international comparisons and peculiarities of the various sub-sectors/enterprises (SMEDAN,

2007).

It is obvious that there is no universal definition of MSMEs. Some countries define MSMEs

according to number of employees; others define them based on the level of assets or

turnover or both. However, most definitions are based on a mix of the above parameters. This

creates a definite problem for MSME operators. Lack of proper definition makes it difficult

for them to take advantage of government-assisted programmes meant for them.

EMPIRICAL LITERATURE

Empirical studies on the impact of microfinance can be categorized into two main groups:

those that were not concerned with the selection bias problem and those that were. A large

number of impact studies of microfinance programmes did not take into account selection


52

bias. According to Chen‘ s review of 11 impact studies of the Grameen Bank in Bangladesh,

no study corrected the selection bias (Chen, 1992 cited in Coleman 1999). Shaw (2004) also

studied two microfinance programmes in Sri Lanka, and used a questionnaire and conducted

interviews in one semi-urban and two rural groups. The author presented only median

comparisons of client incomes among four household income groups (extreme poor, poor,

near-poor and non-poor), at the time of the clients‘ first loan (June, 1994) and at the time the

research was conducted (June, 1999). However, he did not take into account selection bias.

Hulme and Mosley (1998) tried to solve the selection bias by studying different credit

programmes in a number of countries. In their study, they included eight microfinance

institutions which provide group lending. Of these eight institutions, two were used as a

control group in case a loan had been approved for participants, but had not yet been received

by any of them. However, only the means of different outcome variables for both treatment

and control groups were introduced. There were no statistical analyses of the differences

between the two groups. In addition, the possibility of endogenous programme placement

could not be controlled with their available data (Coleman, 1999). Recently, many papers on

the evaluation of microfinance programmes have adopted an econometric approach and taken

account of both the selection bias and non-random programme placement Coleman, 1999 &

2002; Khandker, 2005; McKernan, 2002; Morduch, 1998).

According to Coleman‘s (1999) claim for the eligibility criteria for membership

consideration, ―most group lending programmes…do not impose such eligibility criteria,

rather, they attempt to attract the relatively poor and dissuade the relatively rich from

participating by the small size of loans, the high frequency of meetings, and the stigma of

belonging to a poor person‘s credit programme. Hence, the method of Pitt and Khandker

could not be implemented in most group lending programmes. Moreover, even in the context

of the three Bangladesh programmes they studied, their survey found that some 18-34% of

programme participants in fact had wealth that should have excluded them from participating.

Hence, the use of this eligibility criterion as a key exclusion restriction may not be

appropriate‖ (Coleman, 1999).

The methodology applied by Coleman (1999) did not require the existence and enforcement

of exogenously imposed membership criteria to identify programme impact. As part of his


53

study, a unique survey which allows for the use of relatively straightforward estimation

techniques was applied for data collection. Then, the survey was done four times over the

course of a year, during 1995-1996, for both members and non-members of the village bank

in 14 villages in Northeast Thailand. Six of those villages were identified as ―control‖

villages that were recognized to receive NGO support for village bank within one year after

the identification. It means that there was self-selection for villagers in six control villages as

participants had already decided whether or not they wanted to be members of the village

bank. The rest of the eight villages were ―treatment‖ villages of which seven villages had a

village bank for two to four years and one village started its village bank suddenly after the

first survey. The comparison between the ―old‖ village bank members in the eight treatment

villages and the ―new‖ village bank members in the six ―control‖ villages could be

undertaken. In addition, the author identified precise impact estimator as a variation of the

length of time for the programme availability in the treatment villages. When non-members

in all villages were included in the sample, this allowed for the use of village fixed effect

estimation to control the possibility that the order in which these 14 villages received

programme support is endogenous. Based on empirical evidence, most studies showed

positive impact of microfinance on different dimensions of outcomes at different levels, even

though they applied various methodologies.

METHODOLOGY

The data generated for the study were analysed using both descriptive and inferential

analytical techniques. The analytical techniques employed are basically two: Survival

Analysis and multiple regression analysis using the ordinary least square (OLS) approach.

The survival analysis incorporated Cox Regression Analysis and Kaplan Meier Survival

Analysis technique. The adequacy of the fitted model was assessed using the likelihood ratio

test. Analyses were done using SPSS statistical package version 15.1. The duration of

survival was measured for each of the MSEs in the study using the past five years‘ records

and financing method as treatment control.

Test of Hypothesis: Micro-financing makes no significant contribution to the survival of

MSEs in Nigeria.


54

Table 3: Adjusted Hazard Ratio from Cox Proportional Hazard Model

Variables in the Equation

Exp(B)

95.0% CI for

Exp(B)

Predictor variables B SE Wald

t-value df Sig.

Hazard

Ratio Lower Upper

No Regular participation in

microfinance .098 .025 3.779

3.920 1 .000 1.102 3.450 9.162

No conversion of profit to

Investment .633 .222 3.796

2.851 1 .002 1.883 2.225 7.781

No regular profit 2.015 .376 7.300

5.359 1 .021 7.500 1.133 7.154

Low technical capacity 1.126 .343 .134

3.283 1 .000 3.083 2.243 8.141

No regular contact with Loan

officer 1.555 .391 .158

3.976 1 .006 4.735 1.810 7.164

Low Entrepreneur level of

education 1.196 .269 8.774

4.446 1 .003 3.307 2.245 7.550

No access to micro credit 2.011 .224 1.067

8.978 1 .031 7.471 1.778 6.066

No mandatory micro savings 1.016 .210 .006

4.838 1 .001 2.762 2.073 8.711

Source: Author‘s Computation from Study Sample Data 2014

Table 3 shows hazard ratios estimated from Cox regression. The Table shows that the

survival of businesses is most strongly influenced by 8 of the 28 predictor variables used for

the survival analysis. These eight (8) influential variables are the ability to generate profits,

ability to convert profits back into investment, easy access to micro credit, adequate technical

capacity, regular contact with loan officers, entrepreneurs‘ level of education, regular

participation in micro finance programmes, and mandatory micro savings. The most

influential predictor variable affecting the survival of businesses is the ability to generate

profits on a sustainable basis. It shows the ability to generate profits regularly and easy access

to micro credit as the top two prominent predictor variables of survival in our estimated

equation. However, based on the Pearson chi-square test of association, both predictor

variables are significantly associated with regular participation in microfinance (p 0.001).

This shows clearly that the significance of the top two predictor variables is attributed to

regular participation in microfinance programme.

The adequacy of the fitted Cox model was assessed using log-minus-log plots, the likelihood

ratio test and the AIC (Akaike‘s Information Criterion) as diagnostic procedures. All log-

minus-log plots were parallel, showing that the assumption of proportional hazards was

satisfied. The p-value from the likelihood ratio test was small (0.0001 < 0.05), thereby


55

showing that the 8 variables constituting the fitted Cox model were jointly efficient in

explaining the long-term survival at the 5% level of significance.

The key objective of this aspect of the study is to test the ability of microfinance to enhance

small business survival and to identify influential variables that affect the survival of micro

and small enterprises (MSEs), particularly in assessing the degree of importance of

participation in microfinance for promoting viability and long-term survival of micro and

small enterprises. Each of the 8 predictor variables in Table 3 is highly significant at the 5%

level of significance.

DECISION

Table 4 below presents a summary of results obtained for the estimated equation. The log

likelihood of 101.493 is high and significant at 5%. When compared with the critical Chi

square at 5% = 31.4. This led to our decision to reject our null hypothesis and accept our

alternative hypothesis. Because the Chi Square calculated is higher than the critical Chi

square, we conclude that microfinance enhances the survival of small businesses financed by

Microfinance Banks.

Table 4: Overall Statistics for Cox Regression

Omnibus Tests of Model Coefficients (a,b)

-2 Log Likelihood Overall (score) Change From Previous Step Change From Previous Block

Chi-square Df Sig. Chi-square df Sig. Chi-square Df Sig. Chi-square

101.493 11 .002 29.347 11 .002 29.463 11 .002 29.463

Source: Author‘s Computation from Study Sample Data 2014

a Beginning Block Number 0, initial Log Likelihood function: -2 Log likelihood: 130.956

b Beginning Block Number 1. Method = Enter

DISCUSSION OF FINDINGS

The findings of this study among others reveal that 90% of the Micro and Small Enterprises

(MSEs) financed by MFBs with track records of regular participations in microfinance

programme and easy access to micro credit survived up to 4½ years.


56

The study also reveals that the likelihood of survival of small firms increases provided that

they are able to generate profits regularly, have easy access to micro credit and plough back

profits generated into re-investments. The study also shows that formal education has positive

impact on the ability of business owners and operators to conduct business efficiently. The

study reveals that high level of education is a significant factor in increasing operational

efficiency, profitability and success of businesses. Technical capacity is also revealed to

have significant influence on long-term survival of small business. Technical capacity may be

assessed in terms of ability to adapt to new technology, regular technology-related training,

application of information technology and sound business plan writing. Successful businesses

and enterprises were associated with managers who are given to continuous innovation and

adapting new technology. The study also reveals profitability as a key predictor of long-term

survival and viability of MSEs.

CONCLUSION

Entrepreneurs in the small and micro sub-sector of the economy in Nigeria require access to

finance for their businesses to thrive on a sustainable basis. Although, the MSE sector

contributes significantly to the national economy, the sector has so far not been given due

recognition commensurate with level of the contribution. Although financial issues are

important to all firms, results from this study show that both financial and non-financial

services obtained from MFBs have highly benefited MSEs in Nigeria and have facilitated the

sharing of business skills and innovative ideas, as well as alleviated the acute shortage of

finance to an extent. The policy implication of this study is that, micro-financing contributes

significantly to an enhanced entrepreneurial environment by making the business

environment more conducive and narrows the resource gap for small businesses.

When properly harnessed and supported, microfinance can scale-up beyond the micro-level

as a sustainable part of the process of economic empowerment by which the poor improve

their situation. Based on findings from this study, the use of MFBs has potentials for

enhancing the performance of small businesses in three major ways- regular participation in

micro-financing, offering of non – financial services, and as a means to enhance

entrepreneur‘s productivity.


57

RECOMMENDATIONS

i. Enterprises supported by MFBs should be linked up with larger financing

windows like the SMEIES fund or Strategic Partners as suggested by Ojo (2003).

The linkages should be such that the entrepreneurs would be serviced through

their MFBs based on social capital. This will enable MFBs to introduce loan

products and strategies targeted at financing technology acquisition by MSEs.

ii. In order to encourage technology acquisition for MSE expansion, MFBs can

categorize their loans into low and high interest loans.

iii. MFBs should increase the duration of their clients' asset loans, or spread the

repayment over a longer period of time, or increase the moratorium. This will

enable the clients to have greater use of the loan over a longer period for the

acquisition of capital assets and technology.

REFERENCES

Central Bank of Nigeria (2005), Microfinance, Regulatory & Supervisory framework for

Nigeria.http://www.cenbank.org/OUT/PUBLICATIONS/GUIDELINES/DFD/2006/MICRO

FINANCE%20POLICY.PDF‘. Accessed on Jan. 13, 2008.

Central Bank of Nigeria (2004), Draft National Microfinance Policy and Regulatory

GuidelinesforNigeria.<<http://www.cenbank.org/OUT/PUBLICATION/DRAFT/DFD/2005/

MICROFINANCE%20POLICY.PDF‘>. Accessed on June. 18, 2007.

Central Bank of Nigeria CBN 2007, annual report.

<http://www.cenbank.org/documents/annualreports. asp. Assessed on Dec. 12, 2008

Coleman, B. E. (1999). The impact of group lending in Northeast Thailand. Journal of

Development Economics, 60, 105-142.

Coleman, B. (2002). Microfinance in Northeast Thailand: who benefits and how much?‖

Manila: Asian Development Bank.

Khandker, S. R.(2005). Microfinance and Poverty: Evidence Using Panel Data from

Bangladesh. World Bank Economic Review, 19(2), 263 – 286.

McKernan, S. (2002). The Impact of Microcredit Programs on Self-Employment Profits: Do

Non-credit Program Aspects Matter? The Review of Economics and Statistics, 84(1), 93-115.

Morduch, J. (1998). Does Microfinance Really Help the Poor? New Evidence from Flagship

Programs in Bangladesh. Princeton University working paper.

Morduch, J. (1998). The Microfinance Promise. Journal of Economic Literature, XXXVII,

1569–1614


58

Ojo, J. A. T. (2003). Partnership and Strategic Alliance Effective SME Development. Small

and Medium Enterprises Development and SMIEIS: Effective Implementation Strategies;

CIBN Press Ltd, Lagos, 185-212.

Peterson, R. & Kozmetsky, G. (1983). ―Perceived Causes of Small Business Failure: A

Research Note‖ American Journal of Small Business, Vol. 8, Issue 1, pp. 15-19

Sanusi, J. O., Governor CBN. Paper presentation at the 9th John wood Ekpenyong memorial

lecture. Jan 29. 2003.

SMEDAN (2007), ‗National Policy on Micro, Small and Medium Enterprises.‘ <<

http://www.smedan.gov.ng/search.php?searWords=National%20policy%20on%20MSMEs.

Assessed March. 8. 2009.

UNCTAD (2003). Improving the Competitiveness of SMEs through Enhancing Productive

Capacity, TD/B/Com.3/51/Add.1 (Geneva, 31 January 2003), table 2, p. 3 and country

profiles of Nepal and Viet Nam.

Variyam, J. and Kraybill, D. (1994). Managerial Inputs and the Growth of Rural Small Firms.

American Journal of Agricultural Economics, 76(3), 568-575.


59

Financing Small and Medium Scale Enterprises in Nigeria for

Economic Development

Adebayo Paul Adejola, PhD

Department of Accounting,

Faculty of Administration,

Nasarawa State University, Keffi- Nigeria

[email protected]

&

Emeka E. Ene, PhD

Department of Accounting,

Bingham University, Karu

Nasarawa State- Nigeria

[email protected]

Abstract

In a developing economy like Nigeria, Small and Medium scale enterprises play a vital role

in economic development. Unfortunately, these categories of industries are bedevilled with

many problems ranging from lack of infrastructural facilities, low technological know-how,

and lack of technical skills to financing problems. The overall objective of the study is to seek

for improved or new methods of financing SMEs for improved performance which will in turn

lead to economic development of the nation. To carry out the study; data were collected from

both primary and secondary sources using structured questionnaire and personal interview

and they were presented in tables as frequency distribution and analysed with percentages

and frequencies. The sign test was used to test the hypothesis. The end result of the research

shows that SMEs were underfinanced and various measures were suggested to improve the

funding status including direct government intervention in financing.

Keywords: SMEs, Financing, Microfinance, Economic development

INTRODUCTION

The Nigerian Economy has been unstable. It has witnessed a lot of downturn over the years.

Since the oil boom of the 80‘s, the state of the economy has deteriorated and Nigeria has

continued to be ranked among the least developed nation. So many reasons can be adduced

for the slow pace of economic growth. Such reasons include; mono-cultural economy, low

industrialization, high import dependency and corruption. Various regimes in the past had

come up with one initiative or the other in a bid to turnaround the economic fortunes of this

country. Also some bodies or agencies have been established to oversee and solve the

problem of poverty and promote economic advancement. In this regard, bodies like the

National Poverty Alleviation Programme (NAPEP), Family Economic Advancement




60

Programme (FEAP), Small and Medium Scale Enterprises Development Agency (SMEDAN)

etc. were established.

Past governments have been involved in different development plans all geared towards

uplifting the nation‘s economy. The government of Gen. Sanni Abacha lunched a

development plan tagged vision 2010. It was a plan that was drawn to put to achieve certain

level of development of Nigerian economy by the year 2010. The government of President

Olusegun Obasanjo in effort to turnaround the economy, embarked on so many reforms in

different sectors of the economy including; education, energy, solid minerals, works,

transport etc. He also established the Due Process Office that brought a lot of positive

changes in the contract award process and execution.

The government of Alhaji Yar‘adua came up with its own agenda popularly known as the

seven point agenda. Through the seven point agenda his government focused on key sectors

of the economy that sped up economic development of the nation. He also launched a

development plan titled vision 2020. Through this plan he intends to speed up economic

development that will put Nigeria among 20 top-most economies by the year 2020.

Despite these laudable programmes and plans, the pace of economic development seems to

be at a standstill. In fact with the global financial meltdown leading to world economic

recession, the economy seems to be deteriorating further. One problem that has been

identified as a clog in the wheel of economic advancement is the neglect of small and

medium scale enterprises or what some call micro-entrepreneurs. It has been established in

both advanced and emerging economies that the growth of most economies has been

anchored on the growth of small and medium scale enterprises Muhammad (2003)

Countries like Bangladesh, India, and Indonesia etc. are doing well today because they have

gotten it right in developing the middle level manpower that accounts for more than half of

the productive sector.

In Nigeria, despite the fact that government has in one way or the other tried to recognize the

sector and accord it a sort of priority, there are still many challenges restraining the small and


61

medium scale enterprises from realizing their objectives. Some of the challenges that are

teething to small and medium scale enterprises range from lack of infrastructural facilities,

low technological advancement in terms of machinery, absence of experts and technical skills

to lack of fund and inability to access credit facility from banks.

The most critical among the challenges faced by small and medium scale enterprises is lack

of adequate capital and inability to access bank credit. An economy can only grow through

support from the financial sector in availing credits to different sectors. One of the agenda of

banking reforms or recapitalization was to enable banks support the real sector of the

economy by availing credits to firms in these critical sectors. If credit is made available to the

formal sector while neglecting the informal sector where the medium and small scale

enterprises fall in, there will still be gap in the growth of the economy.

While the large scale enterprises have access to bank credit, the small and medium scale

enterprises find it difficult to obtain bank credit. It is in the bid to resolve this problem that

the Federal Government in conjunction with Central Bank of Nigeria carried out reforms in

the lower side of the finance industry. Among the reforms is liberalizing the licensing of

micro-finance banks and conversion of community banks to micro-finance banks.

Micro-finance banks are expected to provide micro-credits to small unstructured businesses,

salary earners, artisans, food vendors, small farmers and traders. It is in pursuit of this

objective as well as the drive to reduce unemployment that the Central Bank established skill

acquisition centres located in three geopolitical zones in the country. The essence of

establishing the centres is to empower the youth through relevant skills training and

subsequently increase their access to fund (credits) with which to start up business.

This research will focus on micro-credits and its accessibility by medium and small scale

enterprises and individual entrepreneurs and other modes of financing them.

EMPIRICAL LITERATURE

Financing Micro, Small and Medium Scale Enterprises

The take-off and efficient performance of any enterprise, be it small or large, requires the

provision of funds for its capitalization, working capital and rehabilitation needs, as well as


62

for the creation of new investments. The entrepreneur needs funds to facilitate the

coordination of other factors of production such as land, labour and capital.

Effort by SMEs to provide the needed fund by themselves has not been a success as only very

few are able. Even the very few that are running presently still needs more capital for

expansion and growth. One of the sources of funding still under-harnessed in Nigerian

Economy is Micro-credit Scheme. This scheme has assisted some countries in the past and

their economies today are ranked among industrialized countries. The study being carried out

will try to find out why the scheme is not vibrant in Nigeria yet and why funding still remains

the most prominent problem of SMEs.

Ojo (1990) in his paper entitled ―The relative importance of Banks and other institutions in

financing small scale business‖ presented at a seminar identified two major sources of

financing small scale enterprises. The two major sources he categorized into formal and

informal sources.

1. Formal Sources

The formal sources include banks, other financial institution, government loan agencies and

co-operative credit societies. Ojo (1990) pointed out that these sources constituted a small

portion of finance for small scale enterprises. This he attributed to partly the banks

unwillingness to lend to this sector due to their inability to meet requirements including

collateral. He also observed the lukewarm attitude of the small businessmen to approach

banks for loans.

2. Informal Sources

Ojo (1990) noted that informal rather than formal capital markets provide the bulk of small

enterprises financing, especially in the lesser developed countries and in their rural areas. He

is of the opinion that the continued importance of informal markets despite the growth of

monetization and commercialization in the subsistence sectors of developing countries is due

to restrictive and repressive financial policies, lack of innovative measures and instruments to

integrate informal and formal markets and often the lower on transaction costs of certain

informal market credit intermediaries. He identified informal financial intermediaries to

include friends, relatives, and traditional mutual aids groups like ‗esusu’, middlemen,

landlords and professional money lenders.


63

The essential characteristic of informal markets is that they are far more loosely monitored

and regulated than formal finance markets. In Africa, informal markets consist mainly of

circles of friends and relatives and sometimes traders and middlemen. In many countries,

ROSCA (rotating savings and credit associations) play a prominent role in rural economy.

The ROSCA is a group in which participants make a regular periodic contribution, the

proceeds being helped to members turn by turn. Personal relationships are dominant factor in

settling up and functioning of these groups often based on village or ethnic origins.

Informal Credit Markets (ICMs) are generally complementary to formal markets. Since they

are able to both mobilize and allocate savings, they are characterized by a smaller scale of

operation and they enable direct contact between borrower and lender. ICMs need to be

closely integrated in the capital market structure in order to solve the needs of the rural

market and of smaller enterprises, in an effective and efficient manner. ICMs have met a

large part of the requirement of small enterprises in both urban and rural areas because of

their ability to assess risk and ensure repayment and their lower loan transaction costs.

Nevertheless, there is still a large unmet demand for credit by rural and small borrowers.

Besides improving the efficiency of institutional finance through higher deposit rates and

subsides for small borrowers (targeted at the rural poor), refinancing of ICMs by formal

financing institutions would help to fill the unmet demand.

In summary, Ojo having identified that the major source of funds for small and medium scale

enterprises comes from informal sector, could not explore all other sources that most SMEs

uses presently.

OBOH (2005) in his paper titled Contemporary approaches for financing micro, small and

medium scale enterprises published in a book on contemporary issues in the Nigeria Banking

System, identified sources of finance for small and medium scale enterprises to come from

two major sources; internal and external sources.

Internal Sources: These include personal savings of the promotion and ploughed back

profit. Due to the fact that the income level in the developing countries is usually small,

personal savings constitute an inadequate source of funds for the SMEs. Similarly, quantum


64

of profit to be ploughed back into the business is also small. Thus, internal sources of funds

are usually inadequate to meet the funding needs of SMEs.

External Sources: This is further divided into informal credit market and formal credit

market. The informal credit market includes funds from friends, relatives, local money

lenders, credit and savings associations. Credit from these sources is more suitable for SMEs

because there is little or no collateral requirement. However, the associated interest rate is

usually high.

On the other hand, the formal or organized credit market is made up of conventional banks,

development finance institutions and other specialized government agencies such as

NERFUND, SME II and capital market. These sources of funds are more important for the

growth and development of SMEs due to relatively low interest rates and the fact that the

volume of loan is larger.

Furthermore, they are in position to give long term loans for projects with long gestation

period which is ideal for the financing of SMEs.

Iman (1998) in her paper entitled ―Micro-credit/finance scheme: A gender sensitive approach

to poverty alleviation‖ also towed the line of previous authors and identified the following

sources of financing small and medium scale enterprises.

1. Personal Funds (Equity): This is that part of fund invested in the Business by the

owner(s) which the business is under no obligation to refund or pay interest(s) on.

2. Loans from Relations and Friends: Borrowing money from friends and relative to

start an income generating business is also a veritable source of fund.

3. Trade Credit: This is also an important source of short-term financing of a business.

A micro-entrepreneur enjoys trade credit from her supplies when she is allowed to

pay in arrears for goods and services she receives.

4. Borrowed Capital/Loans: This is that portion of capital obtained to supplement the

owners‘ equity. Loan to businesses are under legal obligations to be repaid in

accordance with terms of the loan and in most instance with interest. For the type of


65

income generating activities that we are discussing the loans may come from ESUSU

group, micro-credit organizations, donor agencies and banks.

ESUSU, Ajo or Adashe, is a traditional financed system whereby individuals source for funds

through mutual agreements, covering amounts to be contributed, sequence of drawing from

the poor and unwritten codes governing administration of funds. This system is as old as our

various societies in Nigeria. It is both savings and loan scheme.

Amao (1987) grouped the sources of funding SMEs into ―formal‖ and ―informal‖ sources,

and notes that SMEs have traditionally relied on informal sources which were usually more

often than not insufficient for entrepreneurial growth and development. These are sources of

funds, which are in a way personal to the entrepreneur and without recourse to the public

capital markets as such. Such sources are often incapable of generating large volumes of

funds for investment because of inherent limitations. The low capital generating capacity of

such sources accounts to a great extent for the low growth rate of micro-enterprises, which in

turn accounts for their continued lack of access to big funds. The claim that the capital

shortage is the worst problem militating against the growth of VSE‘s has not gone

unchallenged. It has been argued by Omopariola (1978) that there have been times when

banks and other lending institutions had more money to lend than entrepreneurs were willing

to borrow. Omopariola (1978) further states that while subscribing to the view that

―insufficient funds stifle growth of individual firms and consequently slow industrial growth

of individual firms and consequently slows industrial growth in Nigeria‖ (1978, p. 15), a

radical explanation of the idea of capital shortage is offered. In his view, the phenomenon of

capital shortage does not apply to all aspects of the Nigeria economy. Rather, it is only

peculiar to individual firms, and perhaps to particular sectors or industries. He argued that

whereas there is always money to invest in the economy as a whole, firm which were

otherwise unsuccessful in their bids to raise needed funds to finance their operations or which

were ignorant of existing sources of funding, necessarily experienced a capital shortage. He

goes on to explain that this ―necessarily reflects adversely upon lending institutions in

Nigeria‖ (ibid, p. 16).

APPRAISAL OF GOVERNMENT EFFORTS TOWARDS FINANCING SMES

Successive government in Nigeria have at different times put in place programs/schemes

designed to facilitate the growth and development of micro, small and medium scale

enterprises. These programmes were in the form of monetary fiscal and industrial policy


66

measures at the macro level and financing arrangements at the micro level. OBOH (2005)

grouped these schemes into three namely:

• Provision of local finance through government agencies-Federal Ministry of Industry,

Central Bank of Nigeria, Nigeria Industrial Development Bank (NIDB) Nigerian

Bank for Commerce and Industry (NBCI), Nigeria Export-Input Bank (NEXIM) etc.

• Facilitating and guaranteeing eternal finance through the World Bank, African

Development Bank (ADB) and other multilateral institution set up to support SMEs.

• The establishment of the National Economic Reconstruction Fund (NERFUND) and

FEAP which was a source of medium and long-term loans to SMEs

Family Economic Advancement Programme (FEAP)

This programme was announced by former Head of State and Commander-in-chief of Armed

forces – General Sanni Abacha in 1985 and was initiated by the first lady of the Federal

Republic of Nigeria Mrs Maryann Abacha as a panacea to poverty eradication and peace in

the nation. The programme was particularly targeted at enhancing the development of rural

areas of Nigeria.

Central Bank of Nigeria (CBN)-Directed SME Funding

As a primary organ for projecting and implementing government‘s policy of funding small

businesses, the Central Bank of Nigeria since 1970 has been instrumental in promoting the

development of wholly Nigeria enterprises through its credit guideline, which required

Commercial and Merchant Banks to allocate a minimum of stipulated credit to the preferred

sectors. For instance in 1979/80 fiscal year, the CBN directed that at least 10% of total loans

and advances to indigenous borrowers be allocated to SMEs. This was subsequently raised to

16 and 20 percent in 1980 and 1990 respectively. However due to the high default rate

coupled with the cumbersome loan administration, banks preferred to pay the prescribed

penalties for non-compliance, rather than channel credit to SMEs.

Nigerian Industrial Development Bank (NIDB)

The NIDB was set up in 1964 to provide credit and other facilities to industrial enterprises

especially medium and large scale ones. The bank had initial mandate of providing credit

facilities for the large-scale industries, however, the bank accommodated SMEs with total


67

assets and working capital of up to N750,000. A remarkable aspect of the NIDB financing of

SMEs was its policy of equity investment of 11-26% in the paid up share capital of some of

the projects it financed. It is on record that the bank disbursed a total of N174.6million to

SMEs between 1980 and 1988. However due to a number of constraints, the bank‘s

involvement in the financing of SMEs dwindled in the late 90‘s. Presently the bank

metamorphosed into Bank of Industry with greater focus on large scale enterprises.

National Economic Reconstruction Fund (NERFUND)

This scheme which was introduced in 1989 during the structural adjustment programme to

assist SMEs cope with the attendant high production costs arising from high cost of imported

inputs and high rates of interest. In addition NERFUND was established to bridge the long-

term financing gap in banks‘ lending to SMEs. The fund was expected to provide long-term

fund for wholly Nigerian owned SMEs operating in area of manufacturing, agro-allied

enterprises, mining, quarrying, industrial support and other ancillary services. The resources

of NERFUND were mainly contributions from the Federal Government, the CBN, and

foreign services. Available record show that from inception in 1989 to 1998, NERFUND

disbursed about US$144.9million and N681.5million to the approved projects.

Small and Medium Industry Equity Investment Scheme (SMIEIS)

This approach is focused on equity investment of the participating financial institutions in

promoting the development of SMEs in Nigeria. SMEIS, which is an initiative of the

Bankers‘ committee, a forum for the meeting of chief executives‘ of bank and the regulatory

authorities was conceived primarily to address the death of long-term finance for the SMEs

and other related problems. The scheme was expected to stimulate economic growth and

diversify the nation‘s production base for sustainable economic development.

Under the scheme, all banks in Nigeria are required to set aside 10% of their profit before tax

annually for equity investment in small and medium scale enterprises, as the banking industry

contribution to government effort towards stimulating economic growth, developing local

technologies and generating employment. The scheme is expected to engender a new form of

partnership between banks and promoters of industry, and to eradicate mutual suspicion

among other. Under the scheme, banks are expected to identify genuine industrialists and

provide financial, technical and managerial support for identified enterprises in the areas of;


68

Agro-allied, information technology, manufacturing, solid mineral, construction, tourism,

educational establishment and other approved activities.

Peoples Bank of Nigeria (PBN)

Peoples Bank was established in 1989 in another Government‘s intervention in the economic

policies of the nation. The need for the Bank was informed by the desire of Federal

Government of Nigeria to improve access to banking and financial services by a large

segment of the society hitherto excluded from and inadequately provided with such services.

The principal objectives for establishment of people‘s Bank of Nigeria were:

The extension of credit facilities to the less privileged members of the society who

cannot normally benefit from services of the conventional banks.

The acceptance of savings from customers and repayment together with any

interest thereon.

Provision of opportunities for self-employment for the vast unutilized and

underutilized manpower resources.

Complement government efforts in improving the productive base of the

economy.

Armed with the above objectives the bank worked assiduously to empower the poor

Nigerians and encouraging rural development.

THEORETICAL FRAMEWORK

Microfinance Policy of Nigeria

In 2005 CBN in its effort to engineer the economic growth of the country and also to lay

emphasis in small and medium scale enterprises as a vehicle for economic advancement,

formulated the microfinance policy that acted as the background to the formation of

microfinance banks.

Policy Objectives

The specific objectives of this microfinance policy are the following:


69

i. Make financial services accessible to a large segment of the potentially productive

Nigerian population which otherwise would have little or no access to financial

services;

ii. Promote synergy and mainstreaming of the informal sub-sector into the national

financial system;

iii. Enhance service delivery by microfinance institutions to micro, small and medium

entrepreneurs;

iv. Contribute to rural transformation; and

v. Promote linkage programmes between universal/development banks,

specialized institutions and microfinance banks.

Policy Targets

Based on the objectives listed above, the targets of the policy are as follows:

i. To cover the majority of the poor but economically active population by 2020 thereby

creating millions of jobs and reducing poverty.

ii. To increase the share of micro credit as percentage of total credit to the economy from

0.9 percent in 2005 to at least 20 percent in 2020; and the share of micro credit as

percentage of GDP from 0.2 percent in 2005 to at least 5 percent in 2020.

iii. To promote the participation of at least two-thirds of state and local governments in

micro credit financing by 2015.

iv. To eliminate gender disparity by improving women‘s access to financial services by

5% annually; and

v. To increase the number of linkages among universal banks, development banks,

specialized finance institutions and microfinance banks by 10% annually.

Policy Strategies

A number of strategies have been derived from the objectives and targets as follows:

i. License and regulate the establishment of microfinance Banks (MFBs)

ii. Promote the establishment of NGO-based microfinance institutions.


70

iii. Promote the participation of Government in the microfinance industry by encouraging

States and Local Governments to devote at least one percent of their annual budgets to

micro credit initiatives administered through MFBs.

iv. Promote the establishment of institutions that support the development and growth of

microfinance service providers and clients;

v. Strengthen the regulatory and supervisory framework for MFBs;

vi. Promote sound microfinance practice by advocating professionalism, transparency

and good governance in microfinance institutions;

vii. Mobilize domestic savings and promote the banking culture among low-income

groups;

viii. Strengthen the capital base of the existing microfinance institutions;

ix. Broaden the scope of activities of microfinance institutions;

x. Strengthen the skills of regulators, operators, and beneficiaries of microfinance

initiatives;

xi. Clearly define stakeholders‘ roles in the development of the microfinance sub-sector;

and

xii. Collaborate with donors, coordinate and monitor donor assistance in microfinance in

line with the provisions of this policy.

RESEARCH DESIGN

The study adopted the descriptive survey research design. In the survey, a sample was

selected from an identified relevant population for the purpose of questioning and interview.

The response to the questionnaire and interview process provided the primary data used in the

study.

Procedure for Data Analysis and Model specification

In analysing the data, a brief explanation of specific issues investigated was made under each

sub-heading. This was followed by the presentation of tables and then the analysis of

frequencies and percentages.


71

SIGN TEST

This test was used to test the hypothesis. It is a non-parametric test that focuses on median

rather than the mean as measure of central tendency and derives its name from the fact that

signs, namely +‘s and –‗s rather than numerical values provided in the raw data were used in

the calculation.

The null hypothesis tested is that the population median is equal to some specified value

against the alternative hypothesis that the population median is different from the specified

value.

Stated symbolically; the null hypothesis was

H0: P(-)=P(+)=0.5 whereas the alternative hypothesis was, H1: P(-) # P(+)

DECISION RULE

For a one-sided test;

Reject H0 if P-value ≤ ∞ (level of significance), otherwise accept.

For two –sided test

Reject H0 if P-value ≤ ∞ (level of significance), 2 Otherwise accept.

Test of Hypothesis

The hypothesis was tested to prove or disprove some of the assumptions made in course of

the research. Government effort towards financing small and medium scale enterprises has

not had much impact.

Hypothesis – Impact of Government Programme

This hypothesis seeks to prove or disprove the fact that government effort towards financing

SMEs had not had much impact in turning the enterprises around.

This hypothesis is tested with data supplied to research question 12.


72

Table 1: Degree of Impact

Level of Impact

No Cumulative

assigned Frequency Percentage Percent

No impact 1.00 43 21.5 21.5

Small Impact 2.00 143 71.5 93.0

Great Impact 3.00 14 7.0 100.0

Total 200 100.0

The above table shows that 71.5% of the respondents agreed that Government efforts towards

financing small and medium scale enterprises have only had small impact. The median value

is 2 which support the fact that government efforts had only had small impact. However to

find out the actual level of impact, we perform sign test. The result of the test at 5% level of

significance computed using Minitab software is shown below;

Sign Test for Median

Sign test of median = 2.000 versus > 2.000

N Below Equal Above P Median

Q12 200 43 143 14 0.9998 2.000

From the computation the value of p is 0.9998 (p>0.05) which is greater than 0.05. This

supports the hypothesis that the median is equal to 2.

Hence we accept the null hypothesis which says that government effort towards financing

small and medium scale enterprises had not had much impact.

CONCLUSION

The following conclusion can be drawn from the investigation;

1. The growth of small and medium scale entrepreneurs has been severely limited by

lack of funds.


73

2. Potential entrepreneurs in Nigeria lack the requisite skills and knowledge to embark

on viable business ventures that will be profitable and boost the growth of the

economy.

3. The average Nigerian entrepreneur lacks the knowledge of various options available

to raise fund to finance small scale businesses. This lack of awareness is hindering the

growth of SME‘s.

RECOMMENDATIONS

The following recommendations are made with a view to improving the financing and

performance of Small and Medium Scale enterprises.

1. Comprehensive training programme should be organized for potential and existing

entrepreneurs. Such programme should be in form of seminars, workshops,

enlightenment etc. and should covers areas as, skills acquisition, financing options,

viable business that they can venture into etc. This has become necessary as there is

serious knowledge gap among potential entrepreneurs.

2. Finance should not be the only area of need to be addressed. Even if credit is made

available to entrepreneurs under the current harsh environment of the country, it may

still be difficult for them to operate successfully and contribute to the economic

development.

3. There has been sustained public outcry concerning the poor state of various

infrastructures affecting the day to day operations of small scale business enterprises.

The critical area of infrastructure failure which government has been trying to tackle

include; power & transportation (roads, rails, water), security and land tenure system.

Government should speed up its effort in tackling these critical areas as it plays a vital

role in the sustenance of small and medium scale enterprises.

REFERENCES

Amao J. O (1987) Modes of financing Small-scale industries in Nigeria, in Igwe B.U.N,

Akinbi A.F and Banwo P.A.(eds). Small Scale Industries and Development of Nigeria.

Proceedings of national Conference NISER Ibadan.

Asaolu T.O. (2007) Financing Small Scale Enterprises in Niger State of Nigeria. An

unpublished MBA Thesis; Delta State University Abraka, pp 1-55.


74

Central Bank of Nigeria: Micro-credit Fund. A publication of Development Finance

Department. January 2009.

Central Bank of Nigeria: Microfinance Policy, Regulatory and supervisory Framework for

Nigeria. December 2005.

Mbachu U. M (1996) Corporate Finance; Principles and Practice. Enugu. Optimal Publishers.

Oboh G.A.T (2005) Selected Essays on Contemporary issues in Nigerian Banking. Ibadan.

University press plc.

Ogundipe V. (1997) Commercial bank and the promotion of small scale Enterprises. The

Nigerian Banker Vol 7 No 1 pp 10-13.

Ojo, A. T. (1989) The Relative Importance of Bank and other Institutions in Financing Small

Scale Businesses. A paper presented at a Seminar on Nigerian Banks and Small scale

Business. March 13-14, 1989.

Pinches G.E (1990). Essentials of Financial management. London. Winthrop Publishers Inc.

Cambridge.

Umar A. B. (2009) Financing Small and medium scale Industries in Nigeria. The Guardian,

June 11, 2009.


75

Benefits and Challenges of E-Commerce on Developing Nations

Alhaji Abiso Kabir

Department of Business Administration,

ICT University Cameroon,

Finance Department,

Kala Balge Local Government Area, Borno State-Nigeria

Abstract

E-commerce certainly has a potential to add a higher value to businesses and consumers in

developing countries however, most developing country enterprises are faced with threats

and challenges which hinders the effective utilization of ICT to comply with e-commercial

activities. Based on this, the author reviewed previous literature to investigate the benefits

and challenges of ICT use and e-commerce to developing countries. The following were

identified as benefits of e-commerce; job creation, proximity to major markets, lower cost of

transaction, relatively high levels of functional literacy, growth of entertainment industry,

and high rates of telecommunication penetration. While the challenges to e-commerce

includes; economic barriers, sociopolitical barriers, cognitive barriers, lack of

infrastructure, poor service from the internet service provider, and lack of education. In

order to address these challenges, the author concluded that, there is need for government of

Nigeria to have policies and measures to improve the electricity generation and supply,

improve the quality of internet services and initiate an effective enlightenment campaign

towards to use of e-commerce in the country.

Keywords: E-Commerce, Developing Nations.

INTRODUCTION

E-commerce arguably has a potential to add a higher value to businesses and consumers in

developing countries than in developed countries (Arnold & Quelch, 1998; Lituchy & Rail,

2000; Annan, 2001; Kshetri, & Dholakia, 2002; Kshetri, 2008). Yet most developing

country-based enterprises have failed to reap the benefits offered by modern information and

communications technologies (ICTs) (Kshetri, 2008).However, there exists a growing

consensus among development agencies and academics on the potential role of electronic

commerce (e-commerce) in socio-economic development (Boateng, Heeks, Molla & Hinson,

2008). Use of the Internet and other related information and communication technologies

(ICTs) to conduct business transactions is growing in private, public and non-profit sectors in

both industrialized and developing country contexts (Okoli & Mbarika, 2003). The potential

value of e-commerce has received extensive coverage in research and trade publications with

reportage of several successful e-commerce stories (Mukti, 2000; Berrill, Goode & Hart,

2004; Grandson and Pearson, 2003, 2004). Therefore, literature tends to suggest various


76

definitions of e-commerce (Ngai & Wat, 2002), and in a review of e-commerce research,

Boateng et al (2008) outline four definitions of e-commerce from different perspectives:

1. From a communications perspective, e-commerce is the delivery of information,

products/services, or payments via telephone lines, computer networks, or any other

means.

2. From a business process perspective, e-commerce is the application of technology

toward the automation of business transactions and workflow.

3. From a service perspective, e-commerce is a tool that addresses the desire of firms,

consumers, and management to cut service costs while improving the quality of goods

and increasing the speed of service delivery.

4. From an online perspective, e-commerce provides the capability of buying and selling

products and information on the Internet and other online services (Ngai & Wat,

2002, p. 415).

In line with this idea, Asikhia (2009) mentioned that marketing professionals consider the 21st

century to be a distinctive period because of the electrification of traditional marketing

practices. With regards to Africa and indeed Nigeria, e-marketing is gradually gaining

prominence as a tool for competition in Nigeria (Asikhia, 2009). Most banks now offer e-

banking transactions online so that customers can patronize them from the convenience of

their homes or offices (Asikhia, 2009). The growth and acceptance of credit/debit cards and

automated teller machines (ATMs) are also testimonials to the country‘s fledging e-

commerce. Today, with e-payment solution companies like Master Card, Interswitch, Visa

Card, and E-tranzact, Nigerians can pay, withdraw, or transfer funds anywhere in the country,

as well as make purchases with their e-cards. This development coincides with the increasing

development and growth of Western shopping malls in the country. Shopping online has also

gained acceptance with more Nigerians, who recognize the importance of buying from

abroad and who realize that it is no longer necessary to go in person to shops to make their

purchases. These changes have prompted organizations to step up efforts to electronify their

marketing operations to better satisfy customer needs.

Statistics indicate that the number of Internet users in Nigeria increased from 200,000 in the

year 2000 to 5 million in 2006, for a growth rate of 2,400% (Awe & Olubamise, 2006;

Asikhia, 2009), and this number expected to double by 2016. Increasing numbers of

businesses now handle commercial exchanges of goods, services, information, and ideas


77

through technology. Smart cards, debit cards, ATM cards, point-of-sale technology, scratch

cards, and similar technology are highly visible in the Nigerian business environment (Awe

& Olubamise, 2006).

THEORETICAL UNDERPINNING

A theoretical support serves as the structure that holds and guides the research work which

explains the rationale behind justification of the study (Khan, 2010). Thus, Modernization

Theory (Rostow, 1960) is used to explain the adoption of Information Technology (IT) in

Developing Countries. Certainly, academic proponents of the theory promoted it by

examining the socio-economic conditions of becoming a ―modern‖ society. The terms ―less

developed‖, ―underdeveloped‖, and ―developing‖ countries, also synonymous to ―Third

World‖, implied that some appreciable ―degree of economic and social backwardness‖

existed in these countries (Toye, 1995, p. 43). The root cause of this underdevelopment was

the focus on traditional modes of production, and the lack of skills, know-how, and poor

tradition of research and exploitation of technology (Soeftestad & Sein, 2003, p. 64). The

poor countries were characterized as being ―traditional‖ or having ―primitive‖ values,

comprising of an orientation to the past, strong kin relationships, superstition, and fatalism

(Webster, 1990, pp. 49-50). Developed countries, in contrast, managed to move from this

―traditional society‖ through industrial revolutions coupled with research and exploitation of

technology that resulted in an increase in the productive capacities of their societies and

creating the conditions of modernity (Soeftestad & Sein, 2003). The ―modern‖ society was

characterized by innovation, motivation, entrepreneurship, weaker kin relationships and not

enslaved by tradition (Webster, 1990, pp. 49-50). The social, economic and political systems

of the developed countries, therefore, signified the vision, epitome or desirable state of

society that the less developed countries should seek to become or follow, and the process of

change to achieve that formed the basic notion of modernization (Eisenstadt, 1966, p. 1).

Consequently, the developed countries defined what constituted good change and how it was

to be achieved – through imitating the development strategies and ideologies applied in

developed countries into less developed countries in order to bridge the gap of differences or

to become ―developed‖ like them (Hettne, 2002). Imitation meant that the history of

development through industrialization that had occurred in Western Europe and North


78

America became a ―blueprint‖ for development for the developing world (Webster, 1990, p.

53). In this perspective the major ideology was to promote economic development – raising

the productive capacities of societies – through industrialization (Bernstein, 1971).

Modernization theorists argued that industrialization would take-off when the obstacles of

economic growth were removed. This required the creation of capital, through sustained

capital accumulation and investment, and a capitalist class, as in the entrepreneurial ambition

that could catalyze industrialization and further on, modernization (Webster, 1990; Binns,

2002). It thus was expected that the traditional patterns of living; norms, actions and values

would give way as the ideas and technologies of the rich countries diffused through the poor

countries (Boateng, 2008).

As modernization became more popular within academic circles its influence extended into

several development policies and strategies carried out by development agencies, particularly

on business sector (Boateng, 2008).Salifu (2008) argued that, recent and anticipated changes

in technology arising from the convergence of communications and computing are truly

breathtaking, and have already had a significant impact on many aspects of life. Meanwhile,

at the center of this convergence is the internet. Banking, stock exchanges, air traffic control,

telephones, electric power, and a wide range of institutions of health, welfare, and education

are largely dependent on information technology and telecommunications – the internet – for

their operation (Salifu 2008)).

Since then IT became commercial in the early 1990s, it has diffused rapidly in developed

countries but generally slowly in developing ones (Achimugu, Oluwagbemi, Oluwaranti &

Afolabi, 2009). This has led to a widening IT gap known as digital divide between the two

groups (Achimugu, et al., 2009). The IT gap among developing countries is also increasing.

The more advanced, such as the Newly Industrialized Economies (NIEs), Brazil, Chile,

Estonia and Malaysia, have made enormous progress toward a digital economy, but many of

the rest of the developing nations remain much more backward. Based on this, the paper

discussed on the benefits and challenges of e-commerce on Developing Nations with A

special reference to Nigeria


79

CURRENT TRENDS IN INTERNET USAGE IN NIGERIA

The Internet has become an important tool for business growth, social activities and research

in Nigeria (Achimugu, et al., 2009). While the interest is well integrated into education,

business and social activities in developed countries, Nigeria can be said to be attempting

giant strides in embracing its usefulness and applications. Internet/cyber cafes have sprung up

in major cities with majority of them in cities having educational institutions and in big

commercial/business centers/activities. A large majority of Internet access is provided by

these cyber cafes, universities and other research centers. In developed countries, individuals

are well connected to the Internet via various communication links but in developing

countries, individuals might not get connected due to several reasons. These include: Absence

of adequate communication network infrastructures; relatively high cost of equipment that

could not be afforded by the large low-income portion of the Nigerian population; lack of

government interest and support; and problems associated with technical and management

support for Internet connection (Achimugu, et al., 2009).

ELECTRONIC COMMERCE IN NIGERIA

Electronic commerce changed the face of marketing through technology-enabled observation,

surveying, and experimentation (Asikhia, 2009). Most firms now use at least one of the

commercial online services for accessing general news information or for research on more

specialized subjects. Tens of thousands of commercial databases are available worldwide,

providing information on business, technical, and scientific topics, company reports, broker

reports, newspaper and journal articles, and patent documents (Asikhia, 2009). These online

commercial and research information sources provide variety, up-to-date information, cost

efficiency, and accessibility to far-reaching information. Technology-enabled observation in

marketing research is highly objective because it records actual behavior, as opposed to what

the researcher thinks is important (Asikhia, 2009).

The recent resurgence in direct marketing has been enabled by the increased productivity and

processing power of information technology, and marketing is taking advantage of this. E-

mail is increasingly used to target consumers in Nigeria. By 2006, expenditures on Internet

direct marketing had increased from zero to nearly 15.3% of the total direct marketing

expenditure in Nigeria (AIS, 2006). More than 500 million global systems for mobile (GSM)


80

communication users in the world are capable of receiving text messages using short

messaging service (SMS) technology. A survey in the United Kingdom by DMA found that

60% of respondents were running e-mail marketing campaigns, that 16% of marketers were

using e-mail marketing more than direct mail, that 30% elected to use e-mail marketing rather

than telemarketing, and that more than 55% used e-mail marketing more than SMS (DMA,

2002). The arrival of newer generation mobile handsets signaled a new marketing medium.

The use of multi-media messaging service (MMS) technology, which is an upgrade of text

messaging, allows pictures and images to be sent via a mobile phone (Smith, 2001), this

recent development has speed up the effectiveness of e-commerce around the globe.

BENEFITS OF E-COMMERCE ON THE NIGERIAN ECONOMY

Benefits in the e-commerce are not uniformly distributed across nations, as some might

believe (Adekunle & Tella, 2008). Language, telecommunication infrastructure and technical

competence are some of the factors that determine one country‘s relative strength in the new

economy (Mounsey, 2002). Therefore, Adekunle et al (2008) identified benefits of electronic

economy to include; job creation, proximity to major markets, lower cost of transaction,

relatively high levels of functional literacy, growth of entertainment industry , and high rates

of telecommunication penetration.

Job creation

With 1.203 million Internet/IP-based jobs, the Internet economy is reshaping the job market.

Many of these jobs (e.g., Web design and development, Internet consulting) did not exist

prior to 1994/1995, and companies have also re-designed existing jobs to meet the challenges

and opportunities of the Internet economy. An estimated 5.9 million Americans work in the

broadly defined high-tech field, of which 20% were associated with the Internet economy as

of 1998 (Barrua, Pinnel, Shutter &Whinston, 1999). As Internet players flourish and as

traditional businesses become more dependent on Internet related technologies for their daily

business operations, new jobs will continue to be created and existing jobs will continue to be

reshaped in the new economy of in the world in general and Nigeria in particular.

Lower cost of transaction

Instant communication, coordination, and collaboration across the Internet are helping firms

lower their transaction costs through virtual integration with suppliers and customers.


81

Proximity to major markets

In the trade of tangible deliveries (goods that must be physically delivered) on the Internet,

the issue of proximity to major markets is critical, as it has implications for transportation

cost and delivery time. As the largest geographical market on the Internet, the Nigeria market

is important not just for its size but also for its spending power. It should be noted that many

countries of the world are closer to this market.

Growth of entertainment industry

The entertainment industry is one of the fastest growing sectors in the digital economy

(Adekunle & Tella, 2008). A recent survey on the online purchasing habits of Britons reveals

that the category of purchases with the second highest frequency by both males and females

was the compact disc and video category (Hijazi, 2000). For instance Nigeria as a country

populated by peoples of diverse ethnic and cultural origin is thought by many to be a great

repository of cultural assets. These endowments place the country at a strategic advantage to

exploit the growing entertainment industry in the digital economy.

Relatively high levels of functional literacy

Active participation in the electronic economy requires functional literacy (Adekunle &

Tella, 2008). Other things being equal any country with a significantly higher literacy rate

than another would be at an advantage in this new economy. Mounsey (2002) pointed out that

although, data are incomplete it has long been believed that many developing countries have

relatively low levels of illiteracy when compared to countries in similar income groups. The

advent of electronic economy had brought about the development in functional literacy. This

gives them an enablement to participate in this new economy.

High rates of telecommunication penetration

Telecommunication is the backbone of the Internet. The higher a country‘s rate of

telecommunication penetration the greater is its chances of competitive participation in the

Internet economy. The high rate of telecommunication penetration would therefore prove to

be an advantage in exploiting the opportunities presented by the new economy.

CHALLENGES FACING E-COMMERCE IN NIGERIA

Kshetri (2008) analyzed e-commerce barriers in developing countries in terms of three

categories of negative feedback systems: economic, sociopolitical and cognitive (Noda &

Collis, 2001), and these barriers are perceived as challenges facing the e-commerce sector in


82

the Nigerian context. While economic and sociopolitical factors focus primarily on the

environmental characteristics, the cognitive component reflects organizational and individual

behaviors. Arguably, for the initial adoption of e-commerce in developing countries, the

cognitive component plays a more prominent role (Molla & Licker, 2005). As organizations

assimilate sophisticated e-commerce practices, environmental factors play more critical roles

(Molla & Licker, 2005).

Economic barriers

Positive economic feedback occurs in the presence of increasing returns to scale (Noda &

Collis, 2001). Research has suggested that a slow Internet diffusion in developing countries

has led to a low IT business value measured by performance and productivity (Tam, 1998;

Dewan & Kraemer, 2000). Barriers associated with the lack of economies of scale in small

developing countries are widely recognized. A study found that small sizes of many

Caribbean nations inhibited the development of ‗‗clusters‘‘ for the IT industry (Fraser &

Wresch, 2005). Another study found adverse scale effects in the Tanzanian e-commerce

industry (Pigato, 2001). Therefore, slow Internet diffusion in developing countries can be

attributed to market and infrastructural factors controlling the availability of ICTs (Brown,

Malecki & Spector, 1976). In Nigeria, for instance, a lack of electrical supply, a low

teledensity and a lack of purchasing power resulted in a low rural Internet usage (Mercer,

2006). Moreover, manufacturers of ICT products focus on large distributors (Gatignon &

Robertson, 1985) often located in developed countries for their selling initiates.

Unavailability of credit cards is also a major hurdle (Mercer, 2006; Saideman, 2001). Past

studies have found such problems for B2C e-commerce in Russia, India and Latin America

(Hawk, 2004; Hilbert, 2001). In Asia, 35–40% of transactions are cash-based (Biederman,

2000). Other aspects of financial systems are also underdeveloped (Kenny, 2003). In the

Caribbean, local banks do not process online credit card transactions (Pigato, 2001) or other

forms of electronic payment systems (Wresch & Fraser, 2006).

Sociopolitical barriers

Sociopolitical barriers can be explained in terms of formal and informal institutions (Alston,

Eggertsson & North, 1996; Tigre & Dedrick, 2004). They often tend to be more difficult and

time consuming to overcome than technological barriers (Tigre & Dedrick, 2004; Kenny,

1999). Social barriers are related with informal institutions. In Asia and Africa, personal

relationships are important in businesses and anonymous online relationships threaten

established interpersonal networks (Gibbs, Kraemer & Dedrick, 2003). Preference for

personal face-to-face communications over e-mails and precedence of established


83

relationships over the Internet‘s inter-personal efficiency also work against e-commerce

(McKinsey, 2001).Political barriers are applied in an organized way by formally appointed

groups (Kshetri, 2008). Many developing countries lack laws that provide legal validity of

digital and electronic signatures (DES) (Stephens & Infrastructure, 2001). Some developing

countries treat ICT products as luxury items and impose import duty, surtax, value added tax,

sales tax, etc. (McKinsey, 2001). Weak formal institutions also lower consumer trust in e-

commerce and willingness to buy online (Kenny, 1999).The literature provides abundant

evidence that legal barriers are among major hindrances to e-commerce in the developing

world (Kshetri, 2008). A survey conducted among Brazilian consumers indicated that the low

e-commerce adoption rate was related to government regulations such as concern about

privacy and security, lack of business laws for e-commerce, inadequate legal protection for

Internet purchases and concern over Internet taxation (Tigre & Dedrick, 2004). Likewise, in

China, a lack of ‗transactional and institutional trust‘ related to the weak rule of laws was a

major impediment to e-commerce (Gibbs, Kraemer & Dedrick, 2003; Efendioglu & Yip,

2004).

Cognitive barriers

Cognitive factors are related to mental maps of individuals and organizational decision

makers Huff, 1990). Some analysts argue that cognitive barriers are more serious than other

categories of barriers in developing countries (Gibbs, Kraemer & Dedrick, 2003). Many

effects such as inadequate awareness, knowledge, skills, and confidence serve as cognitive

feedbacks. Consumer‘s lack of awareness (Huff, 1990) and knowledge of ecommerce

benefits and their lack of confidence in service providers have also hindered e-commerce. For

instance, in Latin America, a low rate of credit card usage can be attributed to the ‗‗lack of

trust in than lack of access to‘‘ the credit card system (Hilbert, 2001). A final consideration

with cognitive barriers is related to general and computer illiteracy and a lack of English

language skills (Kenny, 2003). Note that most software, human-computer interfaces and

content on the Web are in English (Nunberg, 2000). Estimates suggest that half of the

populations of developing countries cannot speak an official language of their own country

(Kenny, 2003). A lack of capability in English language has thus been a major inhibitor

among non-English speaking consumers, especially the older generation (Gibbs, Kraemer &

Dedrick, 2003). In Slovenia, 75% of the population fluent in English used the Internet

compared to only 1% of non-English speakers (Kenny, 2002). The number of sites in

languages such as Quechua (10 million speakers in Bolivia, Ecuador and Peru) or Ibo (15


84

million speaker in Nigeria) ‗‗can be counted on the fingers of one hand—and none offer

interactive features‘‘ (Kenny, 2002).

In a similar vein, Apulu and Ige (2011) identified unstable electricity, lack of infrastructure,

poor service from the Internet Service Provider, and lack of education as peculiar e-

commerce problems to Nigeria.

Unstable Electricity

Apulu andIge (2011) finding shown that, the epileptic supply of electricity in Nigeria has a

major impact on e-commerce and utilization of ICT. Baker (2008) in his study identified that

less than 20% of the Nigerian population have access to stable electricity supply. Similarly,

Gnansounou (2008) also stated in his research that the Nigerian demand for electricity is in

deficit of about 80%. This indicates that there is a correlation between the results of Apulu

and Ige (2011) study and that of Baker (2008) and Gnansounou (2008).

Lack of Infrastructure

Lack of infrastructural facilities is another major barrier affecting the effective e-commerce

utilization of ICT in Nigeria. This is as a result of the insufficient provision of some major

infrastructures needed for the proper implementation of ICT such as Network backbone,

fiber-optic backbone for Local Area Networks amongst others that is essential for

interconnectivity between firms (Apulu & Ige, 2011). Iloanusi and Osuagwu (2009)

identified similar issues in their research. Based on their study, 71.7% of the respondents‘

indicated that the lack of infrastructural facilities inhibits their ICT usage. Kapuruandara

(2006) highlights that lack of telecommunications infrastructure such as poor Internet

connectivity, lack of fixed telephone lines for end user dial-up access, and the

underdeveloped state of the Internet Service Providers are factors affecting the proper

utilization of ICT amongst SMEs in Sri Lanka. Arikpo et al (2009) in their research, also

highlighted the high subscription and infrastructure costs, coupled with the poor quality of

service by service providers at inception, as a major hindrance to the use of ICT in education

research and development in Nigeria. Arikpo et al (2009) added that, the high cost of ICT

equipment is estimated to be 36.1% which shows that the acquisition of ICT equipments is

also a barrier that inhibits the effective utilization of ICT.

Poor Service from ISP Provider

Poor service provided by ISP providers is estimated to be 67.2%. The poor services provided

by ISPs in Nigeria possess a serious challenge to the effective utilization of ICT due to low


85

bandwidths characterized by very slow speed, high subscription costs, together with frequent

disconnection of the networks.

Lack of Education

From the findings, lack of education is estimated as 61.7%, illiteracy accounts for 59.4%

while lack of technical skills/poor technical knowledge (40%), account as other factors that

also hinder the effective utilization of ICT in Nigeria. Education ranks high with above 50%

of the identified factors. Lack of education and lack of awareness of ICT act as reasons for

non-utilization of ICT (Kapurubandara, 2009). Kapurubandara (2009) added that literacy

amongst SMEs is generally low and often SMEs do not have access to professional advice to

address complex ICT issues. In other words, the poor technical knowledge and lack of

expertise of ICT in SMEs deprives SMEs of benefitting from new developments and in turn

slows their growth.

CONCLUSION

The review of above mentioned literature indicated both benefits and challenges facing the

use of ICT particularly e-commerce in developing countries and indeed Nigeria. Therefore,

the potentials of e-commerce cannot be overemphasized as shown in the previous studies in

terms of job creation, easy access to market, low cost of transaction, growth of electronic

related industries, and high rate of penetration of telecommunication industries. These ICT

related development and other factors have led to rapid economic growth in Newly

Industrialized Economies (NIEs). Despites these potentials however, there are other

challenging factor that adversely affects the utilization of ICT and growth of e-commerce in

developing nations especially Nigeria with is the focus of the paper. The identified threats

include; unstable electricity, lack of infrastructure, poor service from the Internet Service

Provider, and lack of education. The review identified that lack of electricity is the leading

factor behind the non-utilization of ICT in Nigeria; hence efforts need to be made to

reposition the power sector in Nigeria in terms of power generation and distribution in order

to have effective and efficient power supply. There is the need for the government to have

policies and measures to enforce these policies as this will assist to improve the electricity

generation and supply problems in Nigeria. Lack of infrastructural facilities also contributes

to poor performance of e-commerce in Nigeria, this also relates to the inadequate government

support in terms of providing the required infrastructural facilities. Furthermore, the review

indicates that there are other barriers such as poor services from the ISP providers, and lack


86

of education. In terms of education and training there is the need to increase the ICT training

opportunities and create more awareness on the relevance of ICT usage among Nigerians.

With regards to these challenges, the author suggests that, Nigerian government need to

develop policies that are geared towards addressing the issues affecting service demanders

(ICT users) from effectively utilizing ICT and hence, gaining the benefits associated with

ICT utilization in order to create an enabling environment for the utilization of ICT in

Nigeria. There is a need to put some form of initiatives in place, which will assist in solving

this challenge. This includes having the right telecommunications infrastructures in place

such as stable good and stable internet connectivity, fixed telephone lines for end users;

uninterrupted power supply, create mass awareness on the relevance of ICT use in relation e-

commerce and so on.

REFERENCES

Achimugu, P., Oluwagbemi, O., Oluwaranti, A., & Afolabi, B. (2009). Adoption of

information and communication technologies in developing countries: an impact analysis.

Journal of Information Technology Impact, 9(1), 37-46.

Adekunle, P.A., & Tella, A. (2008). Nigeria SMEs participation in electronic economy:

Problems and the way forward. Journal of Internet Banking and Commerce, 12(3), 1-13.

Alston, L. J., Eggertsson, Þ.,& North, D. C. (Eds.). (1996). Empirical studies in institutional

change. Cambridge University Press.

Annan, K. (2001).Development without borders. Harvard International Review, 23(2), 84.

Apulu, I., &Ige, E. O. (2011). Are Nigeria SMEs Effectively Utilizing ICT?.International

Journal of Business and Management, 6(6), 207-214.

Arendt, L. (2008). Barriers to ICT adoption in SMEs: how to bridge the digital divide?.

Journal of Systems and Information Technology, 10(2), 93-108.

Arnold, D. J., & Quelch, J. A. (1998). New strategies in emerging markets. Sloan

management review, 40(1), 7-20.

Asikhia, O. U. (2009). The mediating role of e-marketing on the consequences of market

orientation in Nigerian firms. International Journal of Business and Information, 4(2), 243 –

270.

Awe, J., & Olubamise, B. (2006).E-business getting down to doing business on the net,

Lagos. Development Information Network.

Baker, L. (2008). Facilitating whose power? IFI policy influence in Nigeria‘s energy sector.

Published by Bretton Woods

http://www.brettonwoodsproject.org/update/60/bwupdt60_ai.pdf (20 October, 2014).

http://www.brettonwoodsproject.org/update/60/bwupdt60_ai.pdf


87

Bernstein, H. (1971). Modernization theory and the sociological study of development∗. The

Journal of Development Studies, 7(2), 141-160.

Berrill, A., Goode, S., & Hart, D. (2004).Managerial Expectations of Internet Commerce

Adoption after the" Tech Wreck" of 2000-An Australian Perspective. Journal of Global

Information Technology Management, 7(3), 45-63.

Biederman, D. (2000). E-commerce comes to Asia. Traffic World, 26(9), 23.

Binns, T. (2002).Dualistic and unilinear concepts of development. In Desai, V. and Potter,

R.B. (Eds).The Companion to Development Studies.Hodder Headline Group, London.

Boateng, R., Heeks, R., Molla, A., & Hinson, R. (2008). E-commerce and socio-economic

development: conceptualizing the link. Internet Research, 18(5), 562-594.

Brown, L. A., Malecki, E. J., & Spector, A. N. (1976). Adopter categories in a spatial

context: alternative explanations for an empirical regularity [Innovation diffusion]. Rural

Sociology (USA).

Chong, S., & Bauer, C. (2000). A model of factor influences on Electronic Commerce

adoption and diffusion in small-and medium-sized enterprises.

Dewan, S., & Kraemer, K. L. (2000). Information technology and productivity: evidence

from country-level data. Management Science, 46(4), 548-562.

Efendioglu, A. M., & Yip, V. F. (2004). Chinese culture and e-commerce: an exploratory

study. Interacting with Computers, 16(1), 45-62.

Einsenstadt, S. N. (1966). Modernization: Protest and Change. Prentice-Hall, Englewood

Cliffs, NJ.

Fraser, S., & Wresch, W. (2005). National competitive advantage in e-commerce efforts: a

report from five Caribbean nations. Perspectives on Global Development and Technology,

4(1), 27-44.

Gatignon, H., & Robertson, T. S. (1985). A propositional inventory for new diffusion

research.Journal of consumer research, 849-867.

Gibbs, J., Kraemer, K. L., &Dedrick, J. (2003). Environment and policy factors shaping

global e-commerce diffusion: A cross-country comparison. The information society, 19(1), 5-

18.

Gnansounou, E. (2008). Boosting the electricity sector in West Africa: An integrative vision.

International Association for Energy Economics, 17, 23-29.

Hawk, S. (2004). A comparison of B2C e-commerce in developing countries. Electronic

Commerce Research, 4(3), 181-199.

Hettne, B. (1995). Development theory and the three worlds: Towards an International

Political Economy of Development (2nd

Ed.). Longman, Harlow.

Hijazi, N. (2000). Online Purchasing Habits of Britons. Commerce Net, June 7.


88

Hilbert, M. R. (2001). Latin America on its path into the digital age: where are we?. United

Nations Publications.

Huff, A. S. (1990).Mapping strategic thought. John Wiley & Sons.

Iloanusi, N. O., &Osuagwu, C. C. (2009). ICT in Education: Achievements so far in Nigeria.

Research, Reflections and Innovations in Integrating ICT in Education, 1331-1335.

Kapuruandara, M. (2006). Model for Adoption of ICT and E-Commerce in the Developing

Countries: A Pilot Study of SMEs in Sri Lanka, Retrieved on October, 15, 2014 from

http://bai2006.atisr.org/CD/Papers/2006bai6370.doc.

Kenny, C. (1999). Why aren't countries rich?: Weak states and bad neighbourhoods. The

Journal of Development Studies, 35(5), 26-47.

Kenny, C. (2002). Information and communication technologies for direct poverty

alleviation: costs and benefits. Development Policy Review, 20(2), 141-157.

Kenny, C. (2003). The Internet and economic growth in less-developed countries: a case of

managing expectations?.Oxford Development Studies, 31(1), 99-113.

Khan, R.E. (2010).Developing the theoretical and social framework. Lecture J199. Retrieved

on October 20, 2014, from http://www.scribd.com/patrisya123/document

Kshetri, N. (2008). Barriers to e-commerce and competitive business models in developing

countries: A case study. Electronic Commerce Research and Applications, 6(4), 443-452.

Kshetri, N., &Dholakia, N. (2002).Determinants of the global diffusion of B2B e-

commerce.Electronic Markets, 12(2), 120-129.

Lituchy, T. R., & Rail, A. (2000). Bed and breakfasts, small inns, and the Internet: The

impact of technology on the globalization of small businesses. Journal of International

Marketing, 8(2), 86-97.

McKinsey, K. (2001). Asians miss the e-biz mark. Far Eastern Economic Review, 15, 42.

Mercer, C. (2006).Telecentres and transformations: Modernizing Tanzania through the

Internet. African Affairs, 105(419), 243-264.

Molla, A., & Licker, P. S. (2005). Perceived e-readiness factors in e-commerce adoption: an

empirical investigation in a developing country. International Journal of Electronic

Commerce, 10(1), 83-110.

Mounsey, A. (2002).The Internet economy: Challenges and opportunities for Caribbean

Exports. The Economic Outlook for the eastern Caribbean Currency Union. Annual Report.

Ngai, E. W., & Wat, F. K. T. (2002).A literature review and classification of electronic

commerce research. Information & Management, 39(5), 415-429.

Noda, T., & Collis, D. J. (2001). The evolution of intra-industry firm heterogeneity: Insights

from a process study. Academy of Management Journal, 44(4), 897-925.

Nunberg, G. (2000). Will the Internet always speak English? Language in a wired world. The

American Prospect, 27, 40-43.

http://bai2006.atisr.org/CD/Papers/2006bai6370.doc

http://www.scribd.com/patrisya123/document


89

Okoli, C., & Mbarika, V. A. (2003).A framework for assessing e-commerce in Sub-Saharan

Africa. Journal of Global Information Technology Management, 6(3), 44-66.

Pigato, M. (2001).Information and communication technology, poverty, and development in

sub-Saharan Africa and South Asia. Washington, DC: World Bank.

Pigato, M. (2001).Information and communication technology, poverty, and development in

sub-Saharan Africa and South Asia. Washington, DC: World Bank.

Rashid, M. A., and Al-Qirim, N. A. (2001).E-commerce technology adoption framework by

New Zealand small to medium size enterprises.Research Letters in the Information and

Mathematical Sciences, Institute of Information and Mathematical Sciences, 2, 63-70.

Saideman, S. M. (2001). The ties that divide: Ethnic politics, foreign policy, and

international conflict. Columbia University Press.

Salifu, A. (2008). The impact of internet crime on development.Journal of Financial Crime,

15(4), 432-443.

Soeftestad, L.T., &Sein, M.K. (2003). ICT and development: east is east and west is west and

the Twain may yet meet. In Krishna, S. &Madon, S. (Eds), The Digital Challenge:

Information Technology in the Development Context. Ashgate Publishing Ltd, Aldershot.

Stephens, D. O., & Infrastructure, P. K. (2001). Digital signatures and global e-commerce:

Part 1-US initiatives. Information Management Journal, 3(1), 68.

Tam, K. Y. (1998). The impact of information technology investments on firm performance

and evaluation: evidence from newly industrialized economies. Information Systems

Research, 9(1), 85-98.

Tan, M., &Teo, T. S. (2000).Factors influencing the adoption of Internet banking.Journal of

the AIS, 1(1es), 5.

Tigre, P. B., &Dedrick, J. (2004). E‐commerce in Brazil: Local Adaptation of a Global

Technology. Electronic Markets, 14(1), 36-47.

Toye, J. (1995). Is the Third World still there?. In Ayres, R. (Ed.), An Introduction through

Selected Readings. Greenwich University Press, Dartford, pp. 35-49.

Webster, A. (1990). Introduction to the sociology of development.(2nd

Ed.). The Macmillan

Press Ltd, London.

Whinston, A. B. (2000). Measuring the Internet economy.Center for Research in Electronic

Commerce, University of Texas at Austin.

Wresch, W., & Fraser, S. (2006). Managerial strategies used to overcome technological

hurdles: a review of e-commerce efforts used by innovative Caribbean managers. Journal of

Global Information Management (JGIM), 14(3), 1-16.


90

IPSAS as a Tool for Economic Growth and Development in

Africa

Adimelechi Henry Chinedu Federal College of Education Technical,

Port Harcourt, Rivers State- Nigeria

[email protected]

INTRODUCTION

International Public Sector Accounting Standards (IPSAS) are basically accounting reporting

guidelines developed specifically to offer reporting guidance to general purpose financial

reporting officers in the public sector.

In other ways IPSASs are credible, high-quality, independently produced accounting

standards, underpinned by a strong due process and supported by Governments, professional

accounting bodies, and international organizations, such as the International Organization of

Supreme Audit Institutions, the Organisation for Economic Co-operation and Development

and the World Bank.

• They are periodically developed and issued by the International Public Sector

Accounting Standards Board (IPSASB), a specialty board of the International

Federations of Accountants (IFAC) headquartered in New York, USA

• IPSASB therefore, is an independent standard-setting board with special consideration

to public sector financial reporting standards on ethics and public sector accounting.

• As a board of IFAC, IPSASB also issues guidance to support professional accountants

working for the public sector organizations. In addition, IPSASB issues policy

positions on topics of public interest.

WHY IPSAS?

Within the international community, there has been a growing consensus around the need to

harmonize international accounting practices in order to create a homogenous basis for

financial reporting, facilitate accounting processes, and generate information that accurately

reflects the financial position of public sector and non‐profit organizations.

IPSAS is therefore aim at improving the quality of general purpose financial reporting by

public sector entities, leading to better informed assessment of the resource allocation



91

decisions made by governments, thereby improving transparency and accountability in the

system.

ADOPTION OF IPSAS BY GOVERNMENTS

The need to achieve high standards of accountability through adoption of consistent

accounting basis and user friendly financial reporting formats is vital. Government leaders

need to plan for periods ahead.

The quality of their decisions can be improved and made better only if they have access to a

reliable source of performance reports, which give periodic comparisons and recognize all

transactions in a transparent manner. The answer to this challenge lies in adoption of the

International public Sector Accounting Standards (IPSASs).

So far Almost 70 countries have adopted IPSASs or are in the process of adopting IPSASs.

Many international organisations, most notably the United Nations, are also in the process of

adopting IPSASs.

Nigeria therefore has no choice than to adopt IPSASs. Thus, IPSAS have become defacto

international benchmarks for evaluating government accounting practices worldwide.

For these reasons, IPSAS deserves the attention of accounting policy-makers, practitioners

and scholars alike.

The global financial crisis has significantly increased these pressures in many cases, which

has led to heightened interest in the long-term financial consequences of government

interventions.

Amidst the challenges of unfavourable climatic conditions, poor infrastructural systems, ever

rising unemployment levels etc. the question that lingers is whether the government can apply

the limited resources at its disposal to meet these challenges.

The implementation of IPSAS would require a migration from the current accounting system

(Cash Basis) to Accrual Accounting.

SCOPE AND AUTHORITY OF IPSAS

IPSASs are designed to apply to the general purpose financial statements of all public

sector entities.


92

Public sector entities include Federal , States and local governments, and their

component entities such as departments, agencies, boards, commissions et cetera. It is

important to note that IPSAS do not apply to Government Business Enterprises (GBE

which is covered under IFRS ).

IPSAS are developed and set out to recognize, measure, present and disclose

requirements dealing with transactions and events in general purpose financial

statements.

There are two sets of IPSASs

Cash basis of accounting

Accrual basis of accounting

The adoption of IPSAS by governments will improve both quality and comparability of

financial information reported by their departments and agencies. The IPSASB encourages

the adoption of IPSASs and advocates for the harmonization of national reporting

requirements with IPSASs. By adopting IPSASs therefore, the government will have

undertaken to benchmark its financial reporting against the global best practices.

IMPACT OF IPSAS ADOPTION ON THE GROWTH AND DEVELOPMENT OF

NIGERIAN ECONOMY

Adoption of IPSAS will impact positively on the Growth and Development of Nigerian

Economy in the following ways:

(a) Accounting and financial reporting

IPSAS Adoption will bring the following changes in Accounting and Financial Reporting in

Public Sector, thereby making Reports more detailed and reliable for economic decisions:

Full recognition of Liabilities for employee benefit obligations and other accruing

compensatory benefits ( though not the case with cash Accounting)

Recognition and depreciation of capital assets such as buildings, vehicles, furniture

and equipment, as a result of which capital assets will not be charged to expenditures

at the cost of purchase (including the cost of bringing the asset into operation) in

the year of purchase, but will be depreciated over their useful life;

Change in the structure and content of financial reports at all levels.


93

Changes in Expenditure and income recognition etc.

(b) Compliance with International Financial Rules and Regulations

Adopting IPSAS simply entails complying with International Reporting Best

Practices. This will no doubt give creditability to Accounting and Financial Reports

prepared in the country.

(c) Budget and Budgetary Control System

IPSAS No. 24 ensures that the public sector entities discharge their accountability

obligations and enhance the transparency of their financial statements by

demonstrating compliance with approved budget. This therefore entails that Public

Sector Entities must improve on its level of budget Implementation which is healthy

for our Economic Growth and Development.

(d) Quality and Comparability

The adoption of IPSASs by Nigeria Government will improve both the quality and

comparability of financial information reported.

It will improve the comparability of reports between various government agencies,

parastatals, donor funded projects, etc.

Reports prepared in accordance with IPSASs provide for comparability between

different financial periods, even within the same institutions, hence facilitating

management decisions

(e) Transparency

Disclosure information requirements of various reports will facilitate transparency in

the financial dealings of public institutions. These disclosures will enable users of

financial information interpret the reports in the right context and better decision

making processes.

(f) Governance

IPSAS will result in stronger governance procedures and a framework for the

accounting practise in the public sector. This will strengthen the financial

management of public institutions. This is good for the Economy.


94

(g) Improvement on Capital Allocation

The credit crisis has raised several public sector accounting issues. One of the issues

is how capital can be allocated to more productive sectors. It is expected that

adoption and full implementation of IPSAS will bring improvement on Capital

Allocation.

(h) Oversight Issues

In all countries, changes to government accounting systems require the approval of

the chief financial officers and possibly the legislature.

Approval may take the form of administrative rule or legislation.

Budgetary support to implement IPSAS is the most tangible form of endorsement. To

the extent that international organizations of legislators, finance ministers, budget

directors exist, their willingness to participate in an oversight body for IPSAS would

be conducive to the implementation of IPSAS. It has been said that wars are too

important to be left to generals. If so, government accounting may be too important to

be left to accountants. For those who fear the ―politicization‖ of accounting, politics is

that way government operates. IPSAS represents accounting for government.

However, accounting by government is still the way of accounting of government is

carried out.

(i) Increase in Foreign Investment

Due to credible financial reports and their comparability

Increase Donors interest

In many states today, balance sheet audits, when performed, still routinely reveal

major discrepancies. This is because in Nigeria the operation of government business

and accounts has been within the general framework of the principles of fund

accounting. The major problem is that the financial reporting structure is far from the

principles in absolute terms, as such, compliance with relevant standards has at best

been incidental.

Judging from the information available from the IPSAS Board, the process of

adopting and implementing IPSAS has already begun. That would be similar to

starting the construction process while the conceptual design is still being drawn. The

hopes are high, but the risks may be higher.


95

CONCLUSION

One may draw an analogy between adoption of IPSAS in Nigeria and constructing a new

building to replace an old one.

Before the new building is realized, many steps have to be executed:

(1) An architect sketches a conceptual design, refines it into a blueprint and also must comply

with the building code promulgated by government authorities to ensure safety, among other

objectives.

(2) A structural engineer will come in to make sure that the building the architect has

designed will not collapse under various stressful scenarios, such as earthquakes, strong

winds, and extreme temperatures.

References

Hennie Van G. (2010): ―International Financial Reporting Standards – A Practical Guide‖ 5th Ed. The

World Bank Washington DC.

Training materials on IPSAS sensitization workshop; Federation Accounts Allocation Committee

(FAAC), 2012.

International Public Sector Accounting Standards (IPSAS) and IPSASB's; www.ipsasb.org. 2014

http://www.ipsasb.org/


96

Effectiveness of Information and Communication Technology on

the Operations of Banks

Ebenezer Ogunyinka, PhD. HawaMc,

Baton- Rouge, Louisiana, USA

[email protected]

Abstract

Several studies have revealed conflicting results as regards the actual impact of ICT on

corporate performance. While some conclude that ICT does not make a significant

contribution to corporate performance; others posit that ICT contribution to corporate

performance is immense. This study is borne out of this curiosity to ascertain the actual

impact of ICT investments on corporate performance in African banks, using Nigerian banks

as case study. The paper employed a combination of questionnaires and observation to

collect information from the staff and customers of the banks to evaluate the influence of ICT

related problems on the performance of the financial institutions. The paper equally used

secondary information such as annual statements of accounts of the sampled banks, Nigerian

Deposit Insurance Commission (NDIC) and Central Bank of Nigeria (CBN) publications to

determine the performance of the banks via such performance measures as net income (the

dependent variable) against the various investments of banks, which include ICT investments,

investments in non-ICT labour and other investments for a period of ten years (1998 to

2007). Thus, the paper examines the relationship between ICT investments and banks

performance. It made two phases of analysis. In the first phase of analysis, multiple

regression analysis was used via SPSS 15 to test the first hypothesis on whether or not ICT

applications and investments significantly contribute to the performance (measured in terms

of net income) of Nigerian banks. In the second phase of analysis, Chi–square test was

employed to test the second hypothesis on whether or not ICT related problems influence the

performance of Nigerian banks. The study revealed that ICT investments do not contribute

significantly to the profitability of Nigerian banks and ICT related problems influence the

performance of Nigerian banks. Based on the findings and conclusions, the paper

recommended that Nigerian banks develop internal maintenance skills, invest more on latest

ICT technologies that make use of biometrics as security solutions, make complimentary

investments on business process reengineering and fully maximize the opportunities available

in information and communication technology.

Keywords: ICT, Effectiveness, Operations, Biometrics

INTRODUCTION

ICTs are basically information handling tools, a varied set of goods, applications and services

that are used to produce, store and process, distribute and exchange information. They

include the ―old‖ ICTs of radio, television and telephone, and the new ICTs of computers,

satellite and wireless technology and the Internet. These different tools are now able to work


97

together, and combine to form our ―networked world‖- a massive infrastructure of

interconnected telephone services, standardized computing hardware, the Internet, radio and

television, which reaches into every corner of the globe.

The revolutionary potential of new ICTs lies in their capacities to instantaneously connect

vast network of individuals and organizations across great geographic distances at very little

cost. As such, ICTs have been key enablers of globalization, facilitating worldwide flows of

information, capital, ideas, people and products. They have transformed businesses, markets

and organizations, revolutionized learning and knowledge sharing, empowered citizens and

communities and created significant economic growth in many countries. ICTs have

amplified brain power in much the same way that the 19th

century industrial revolution

amplified muscle power.

In recent years, with the coming of the digital age, there has been a growing awareness of the

significance of Information and Communication Technologies. Financial institutions have

understood that poor information and communication system have an impact on every aspect

of its performance, from operational effectiveness to strategic management.

However, the unfolding development and the inherent challenges of Management

Information System (MIS), demand that to maximize the benefits of information and

communication technology such as improving management / customer relationships,

streamline operations, expand activities, improve services and minimise risk exposures in a

turbulent business environment, organisations need to compliment the investment in ICT with

corresponding investment in Business Process Re-engineering (Gates, 2000).

This paper begins by analysing the trend in Information and Communication Technologies

(ICTs). It then considers the role played by Information and Communication Technology in

the overall performance of banks using Nigerian banks as a case study and how it will impact

on the overall goal attainment of the institutions. Finally, the paper discusses how ICT

adoption has transformed the banking sector in terms of changes in structure, strategies,

products, service delivery and performance as well as the problems associated with these

changes.

STATEMENT OF PROBLEM

The following problems are evident in the operations of Nigerian Banks:

i. Inefficiency in payment and transactions processing system.


98

ii. Time spent on various banking transactions and unnecessary use of material resources

such as paper.

iii. Frequent system breakdown without provision for an alternative means of attending to

customers during the period of breakdown.

iv. Ineffective business strategies requiring restructuring and reengineering programmes.

v. Time spent by customers queuing for the services in spite of the use of ICT tools such

as Automated Teller Machine (ATM).

Looking at the array of these problems and the efforts by the introduction of technology to

address these problems, it is only necessary to look at the investment in information and

communication technology to see whether the investment in the sector is justified. It is

therefore, pertinent to look at the general impact of Information and Communication

Technology on the general performance of Nigerian banks.

OBJECTIVES OF THE PAPER

Basically, this study seeks to achieve the following objectives:

1. To determine the relationship between ICT investment and performance.

2. To determine whether Nigerian banks are maximizing the opportunities and potentials

available in ICT.

3. To determine the problems limiting the ability of Nigerian banks to maximize

opportunities available in ICT.

4. To evaluate the management of the transaction processing system.

5. To determine the quantity of ICT investment in banks and establish its contribution to

profitability, customer satisfaction, and overall performance.

STATEMENT OF HYPOTHESES

There have been claims by virtually all banks of acquiring state-of-the-art communication

equipment as well as satellite technology to support their operations, with so doing, they hope

to render customized services as well as improve their efficiencies. Sequel to the above, this

paper wants to test that:


99

Hypothesis 1

H0: ICT applications and investments do not contribute significantly to the profitability of

Nigerian Banks.

H1: ICT applications and investments contribute significantly to profitability of Nigerian

Banks.

Hypothesis 2

H0: Information and Communication Technology related problems do not have significant

relationship with the performance of Nigerian Banks.

H1: Information and Communication Technology related problems have significant

relationship with the performance of Nigerian Banks.

LITERATURE REVIEW

During the last few decades, financial institutions and other organisations have made

immense investments in Information and Communication Technology (ICT). The

implications of these investments for productivity have been discussed in business and

academic communities (Kayode, 2005). Besides, according to the role of ICT in Business

process reengineering, BPR is essential for organizations to increase potential impact of ICT

on overall performance of a company (Ahmad, 2008). This paper will provide an overview of

the relevant literature relating to ICT and performance, to direct theoretical contexts toward

research hypothesis. In that line, we shall look at the relationship between ICT investments,

Business process Reengineering and Corporate Performance.

Information and Communication Technology ICT)

Information and Communication Technology (ICT) is the set of activities that facilitate the

capturing, storage, processing, transmission and display of information by electronic means.

Information technology comprises of the hardware, software and human ware.

Information and Communication Technology (ICT) is the set of activities that facilitate the

capturing, storage, processing, transmission and display of information by electronic means

(World Bank, 2002). ICTs include Computer, Internet, Communication networks, Telephone,

Radio, Television, and Wireless Technologies like Global System of Mobile Communication

(GSM).


100

BPR begins with process redesigning which leads to fundamental changes in many aspects of

an organization, including organizational structure, job characteristics, performance measures

and the reward system. BPR relies heavily on the ICT uses to create radically different

working methods to achieve improvements of the order of magnitude required. Furthermore,

BPR facilitates the change in corporate management‘s perception of technology. It also

confirms an alternative channel through which ICT solutions are being scrutinized and

selected (James, Peter & Donatus, 2004).

ICT-BASED SERVICES IN THE NIGERIAN BANKING SECTOR

According to Jim (2006), in the past few years, banking activities in Nigeria had depended

heavily on the deployment of information technology. The net value of ICT investment by

Nigerian financial institutions is estimated at over N50 billion. This huge amount is an

indication of the desire of Nigerian financial market to deploy ICT as a strategic source in

competitive positioning for the 21st century. There are also clear indications that banks in

Nigeria would thrive on web-based services in view of the overwhelming enthusiasm e-

banking/internet banking is generating in Nigeria‘s rapidly changing financial landscape. But,

is the Nigerian financial market e-ready?

Information and Communication Technology has assisted the way and manner in which

banks carry out their operations to satisfying both their existing and potential customers. The

products and services offered by banks in Nigeria include:

1. Automated Teller Machine (ATM)

An ATM is a machine that enables a bank to handle customer‘s transaction around the clock

i.e. 24 hours a day; 7 days a week banking service at electronic speed.

It is evident that ATMs render numerous services to customers. Another advantage of using

ATM is the convenience of carrying portable ATM smart cards instead of cash. ATMs

displayed in several countries over the world can be linked online to the banks software or

operated off lines.

2. Telephone Banking

Here the customer only needs to lift the telephone handset, and push the buttons. A voice

response system emulates an operator who answers the customers‘ call on the other end of

the line; customers hear a friendly human voice that greet the caller, guides him/her through

every step of the process servicing their needs swiftly and accurately.


101

Telephone banking makes use of automated interactive voice response (IVR) systems; this

enables customers to know their deposits and savings account balance, cheques recently

cleared, interest rates, loan rates information among others.

3. Internet (On-Line) Banking

The internet is the interconnection (network) of computers worldwide. Virtually any kind of

information ranging from politics, religious, culture, tourism, education etc can be gotten

from surfing the internet. Internet banking become the apex of banking technology; here a

customer is able to make transactions in his bank account from anywhere in the world via

internet.

It is a form of online real time banking. Customers banking transactions is being controlled

by the internet; confines and the data transactions are captured and processed as they

occurred (real time).

4. Electronic Mail (E-Mail)

This combines the feature of telephone and paper communication. It has the advantage of

speed and variety. The electronic mail system can provide banks with the following services:

i. A variety of message formats for instance letter, notepads and memos of financial

statement.

ii. Communication to other branches and customers over long or short distances.

iii. Text manipulation facilities to allow composing, editing and storing of messages. This

enhances banks clerical operations.

5. Facsimile (Fax)

This allows the sending of an exact copy of an original (using radio transmission or telephone

network) to be recomposed by the receiver‘s equipment. In banks, fax machine could be used

to send documents in which the signature has to be verified, for inter-bank transactions with

customers. Facsimile system works by scanning a document and digitally coding the contents

which are then transmitted and recorded at the receiving end.

6. Decision Support System (DSS)

This system refers to the application of ICT on the problem met by decision makers. Those

problems include marketing, forecasting, statistical analysis etc. The DSS multipurpose

application can also be used to support functions like credit and corporate planning at all


102

levels of management. In general the DSS will enable bank management use analysis tools

which will make information more effective.

A DSS has the ability to capture, store and manage large volumes of data; it makes use of

packages like Lotus 1.2.3 and super calc. These and other packages can be used for instance

in analysing the profitability of opening of new branch at particular location putting into

consideration several factors.

7. Smart Cards

A smart card is a small plastic card on which information is stored in electronic form. It

contains a microchip that has information about the card holder. Such information may

include account balance and authorized code. Smart card could either be a credit card, debit

card or access card.

8. Counting Machine

A counting machine is an electronic device used to count paper money at extremely high

speed. Money counting is one factor that delays banking services. With the emergence of the

counting machine, this delay has been greatly reduced. A counting machine looks somehow

like a large calculator. It has split that enables it pick paper money one by one but at a very

high speed. The counting machine can be used to ascertain the number of notes from a

bundle.

9. Teleconferencing

Teleconferencing is the linking of two or more locations by using a transmission media. With

teleconferencing facilities, banks can conduct meetings without the physical presence of the

individual involved. Teleconferencing technology could either be audio conferencing or

video conferencing. Visual conferencing is more expensive but it has the ability to send both

audio and visual transmission, marketing conferencing as real as possible.

10. Electronic Visa Payment System (E-VISA)

This is another e-based solution that allows embassies to process documents and payments.

Features / Benefits include:

– Fast track processing of visa applications.

– Convenient payment of visa fees through the web.

– Less queues at Embassies/High commissions.

– Efficient visa administration procedure.


103

Portal supports the following electronic payment platforms: Master card, Nigerian Debit card;

E-transact card.

11. Master Card

The master card is a credit card denominated in dollars. It is global payment instrument

which is recognized and accepted in over 210 countries and territories.


– Two years card validity.

– Flexible on multi-currency purchase.

– Secured and accepted in over 210 countries and territories.

– Open to customers and non-customers.

– On-line monthly statement.

– SMS alert on all card transactions.

– A convenience card for shopping around the world.

– 24 hours access to funds, without the need for cash or cheque.

– An easy way to track spending with detailed listing of every purchase on monthly

statement, clearly indicating date, time and location.

– Accepted at all location with the ―Master Card‖ acceptance (over 210 countries

worldwide).

– It allows for internet shopping on the web (online purchase).

12. Maestro Card

The maestro is a debit card anchored on the master card brand. It is denominated both in

Naira and Dollar. The local currency variant is the first to be issued in Nigeria. It is an on-line

debit card that account holders have 24 hours access to accounts via Terminals, ATMs and

the internet.

13. Value Card

Value card is an electronic purse in the form of a plastic card with a built-in microchip that

allows the cardholder to store money on the card rather than carry cash.

Features /Benefits include:


104

– Widely accepted in a wide range of outlets across the country and used to pay for visa

and related fees at designated embassies.

– Convenience as it eliminates the risks of carrying cash. Safe and secured as it can only

be assessed with a 4 – digit personal identification number (PIN) which is only known

to the holder.

– Enables the loading / storing of large sums of money since N16.7 million can be

loaded and stored on the card at once.

14. E-Ticketing (Electronic Ticket)

This is a paperless electronic document used for ticketing passengers in the airline industry.


– Reduces booking expenses by eliminating the need for printing and mailing of paper

documents.

– Loss of documents/wrong mailing of documents eliminated.

15. Security Access Control Collection

Banks run free collection services via electronic and physical cash receivership. The

collection integrates customers‘ access control codes, spy ware, blue-tooth, smartcard, mark

stripe cards to their up run devices.

16. Port Management Services

This is an e-payment solution designed to enhance collection of levies and payments at the

ports. It is all encompassing software that will allow all forms of payments.

17. Money Transfer

I-Cash Local Money Transfer

I-Cash is the banks local money transfer aimed at eliminating the difficulties of quick money

remittances for urgent needs. The product is open to customers and non-customers of the

bank.


– Customers are paid cash only.

– Customers receive monies‘ from designated branches already advised by sender.

– Beneficiary presents identification as advised by sender before payment.


105

– Sender gives a test question/answer as additional security.

– Speed of availability – Money can be controlled within minutes at the receiving

branch.

– Large network of branches. The sender has various choices of where money can be

cashed.

– Simplicity: The process of sending and collecting cash is simple.

– Reliability–The beneficiary is sure of collecting his money from designed branch.

– No fee payment by beneficiary.

18. Western Union Money Transfer

Banks offers a Western Union Money Transfer service and international money transfer

product with the world‘s largest network. It is available in over 200 countries with over

210,000 agent locations worldwide.


- Funds are paid within minutes of receiving instruction from abroad.

- Beneficiaries can receive their money in dollar or naira as directed by the sender.

- Adequate security to verify the identity of beneficiary.

- Flexible and easy to collect.

- No fee payment by beneficiary.

- Funds can be received in any of the branches of a bank nationwide.

- Sender gives a test question/answer as additional security.

- You don‘t need to be an account holder to be a beneficiary of Western Union

Transactions from the bank.

- Beneficiaries without accounts can open accounts with the proceeds of their transfer.

- Dollars received in the banking halls can easily be converted to naira at competitive

rates from the bureau-de-change in the banking hall.

19. Domiciliary Extra Accounting (DEA)

This is a product packaged to guarantee a high yield on investment by customers while at the

same time providing comfort and hedging against exchange rate volatility.


106


– Minimum amount of USD50,000 or equivalent in EURO.

– Minimum tenor of 90 days.

– Attractive interest rate (ranging between 1 – 4%).

– Allows for lodgements / withdrawals in cash / transfer (subject to prevailing exchange

control regulations).

– Certificates can be used as collateral for loan.

– Personalized executive and advisory services.

IMPORTANCE OF ICT FOR BANKING SERVICES

Many writers concur with the fact that ICT applications are indispensable instruments of

banking nowadays. This importance is recognized worldwide and huge sums of money have

been invested in acquisition, deployment and maintenance of ICT by banks. Lunardi (2002)

equally observe that banks in Latin America increased their investments in ICT to sixty

percent (60%) between 1999 and 2003. Likewise, Caldwell (1998) observes that for several

years beginning from 1995, the annual expenditure on the upgrading of ICT and introduction

of new services in Australia was one billion, nine hundred and fifty million dollars ($1.950

billion). The import of all these lend credence to the fact that ICT has become an integral part

of banking services, whether in product or service offering, delivering channels or internal

management.

Goldfinder (1998) observes that ICT penetration in banking services is a ceaseless process of

change. ICT started as an administrative back-office function support. It moved to the front

office to facilitate contacts with customers and to support financial transactions. According to

him, the entire process can be divided into four (4) stages:

1. Back Office Automation: When the key motivation is to reduce transaction cost

and administrative overhead.

2. Front Office Automation: When personnel dealing with external parties

(customers or other financial institutions) were able to access centrally-held

information.


107

3. Bring Customers On-line: When customers gain direct access to their accounts

in the core processing and accounting function.

4. An Integrated System: Where various elements of ICT are brought together to

provide a complete picture of customer‘s relationships and bank‘s position.

ICT has profoundly influence the nature of money and monetary systems. Some believe that

information technology has made more difficult the conduct of monetary policy and

supervision of financial institutions by blurring distinctions between various category of

money and financial account – savings investment, and demand deposits (Goldfinger, 1998;

and Oluyemi, 2001).

CONCEPT OF CORPORATE PERFORMANCE

Evaluations of corporate practices invariably use the notion of corporate performance. Akin

to corporate performance are a number of semantically related terms, such as corporate

health, success, efficiency, effectiveness, productivity or excellence. Some authors use the

terms interchangeably often ostensibly in order to overcome terminological confusion. Others

come up with additional labels such as organization or corporate goodness. Whichever term

is adopted the end result is the same because there is no difference between them. The terms

are the same and they are accepted as such.

FINANCIAL/ECONOMIC PERFORMANCE MEASURES

Students examining performance effects of strategic decision use predominantly financial /

economic goals to be the only ultimate organizational goals (Venkatraman and Ramanujan,

1986; Zahrly and Reuning Elliot, 1994). Performance is usually accessed with accounting-

based measures (e.g. profitability measures such as return on assets, return on investment,

return on sales, return on equity, market-based measures - e.g. price-earnings ratio). In

general, there is no much agreement on which specific measures to employ for the

assessment of financial / economic performance. Hubbard and Bromiley (1995) found that

researchers as well as practitioners employ highly diverse financial performance measures.

However, accounting based criteria are common in performance evaluations. At the same

time, such accounting based measures have been subject to considerable amount of critics.

However, the convergence of accounting and market-based performance measures seems to

depend on time and context factors.


108

OPERATIONAL PERFORMANCE

In addition to financial performance criteria, Venkatraman and Ramanujam (1986) propose

operational performance measures such as market share, new product introduction,

product/service quality and marketing effectiveness. Comparable approaches are the balanced

scored (Kaplan and Norton 1992) or the business model approaches (Meyer and Gupta,

1994), which include financial as well as operational criteria relating to value for customer,

innovation and internal business improvement. These models promote the linking of data

from several financial and operational measures in order to see if improvement in one area

has been achieved at the expense of another.

CONCEPT OF BUSINESS PROCESS REENGINEERING

Hammer (1990) defined BPR as the ―fundamental rethinking and radical redesign of business

processes to achieve dramatic improvements in critical measures of performance – cost,

quality, capital service and speed‖.

According to Laudon (2001), competitions among companies oblige them to employ the new

technologies for improving productivity level of their resources. Productivity growth directs

companies increase market share. Business process reengineering has been adopted by many

firms in an effort to improve their competitive position and enhance their ability to produce

customer satisfaction and delight (Ahmad, 2008).

Nowadays, demands of customers change continually, and strong competition makes

companies retain their customers and delight them. So, hierarchy structures do not fulfil

companies‘ competitive requirements anymore (Laudon, 2001) and organisational

modification is necessary for companies to stay in the competitive market.

Laudon (2001) concluded that radical changes are the main characteristics of BPR to alter

organizational structures from duty orientation to business process approach. Therefore

reengineering is one of the important necessities for companies to fortify their situation in the

market.

BPR involves the fundamental redesign of a business process. It has been called the ―new

industrial engineering‖ in contrast to the old Taylorian industrial engineering based on task

decomposition and specialization (Grover 1994). BPR could involve a change in the way the

process is organized, the roles of the participants involved in the process, elimination of steps


109

in the process or a change in their temporal sequence. In its purest sense BPR initiatives

should start with a ―clean slate‖ (Grover et al, 1994).

In figure 1, the schematic form of BPR has been shown.

Figure 1: BPR Schematic

The BPR analysis task typically consists of the following:

1. Collecting data on the existing process.

2. Breaking the existing process down into activities.

3. Capturing expenses, staff and materials information for each activity.

4. Capturing the sequence and timing of the several activities.

5. Capturing information flow and material flow through the process.

IMPACT OF ICT INVESTMENTS ON CORPORATE PERFORMANCE

Literature is replete on business value of ICT. The central issue is whether the tremendous

amount of ICT capital invested has had any impact on the performance of the investing firms.

However, in this review the intention is not to give details of prior work, rather, an attempt to

discuss key findings as well as the major hurdles researchers and practitioners face in this

area.


110

Prior research on ICT in the banking services sector falls into one of the following two

categories namely; descriptive analyses of the use of ICT and the value it generates, and,

measurement of the business value of ICT.

The first category is primarily based on case studies at the firm or industry level and offers

useful insights about significant issues. While research in the second category i.e. research on

the measurement of ICT on business value consist of studies on the impact of specific

technologies and that of the overall use of ICT.

One of the studies in the first category is that conducted by Weill (1992). He classified ICT

into three categories based on the management goals supported by the system. The study of

the valve manufacturing sector identified significant productivity gains due to transactional

ICT, but did not find any positive impacts for strategic or informational (ICT infrastructure)

systems. Still another study by Brynjolfsson and Hitt (1993) used firm level data on three

hundred and eighty (380) large firms for the period from 1987 to 1991 to measure the ICT

impact. This study found that ICT had made a substantial and statistically significant

contribution to firm output. Thus, so far, empirical findings reported in the literature on

impact of ICT investment at firm or industry level, are mixed.

In the second category, Steiner and Teixeira (1990) drew on a wealth of experience with

many of the large American banks in McKinsey and Company‘s financial services consulting

practice and presented arguments about why ICT investments in the major lines of the

commercial banking business create value for banking customers, but destroy profitability for

the firms that service them.

In the case of Nigeria, very little empirical research has examined ICT impact on corporate

performance. One of such limited studies was conducted by Idowu (2002) on the effect of

ICT on the growth of the banking industry in Nigeria. This study assesses the perception of

banking customers on the quality of banking services using a questionnaire survey. The study

sampled five commercial banks namely; Wema Bank Plc, Union Bank, Omega Bank,

Corporative and Access Bank. It examines one major issue; impact of ICT on bank services

but in three different perspectives namely effect of ICT on banking services, effect of ICT on

customer services and on bank productivity measured in term of speed of operation. It

concludes that ICT has contributed immensely to growth of the banking industry in Nigeria.

The second study is that conducted by Oyeyinka (1996) on ICT in the finance sector. It

examines the adoption of computers in Nigerian banks with specific reference to the specific


111

ways computer is affecting the organisation of work and constraints to its adoption. The study

covered twenty financial institutions comprising of twelve commercial banks, five merchant

banks, one development bank and two mortgage institutions. Although the study did not set

out to evaluate productivity gains, it concludes that given the enthusiastic adoption of

computers by Nigerian banks, the perceived benefits may have outweighed the costs of

adoption.

These few studies undertaken to determine the impact of ICT in banking in Nigeria indicate

that there is paucity of literature on impact of ICT on corporate performance in the banking

sector. Besides, the ones available have not been specific on financial performance. Thus, this

present study fills this gap in the literature, particularly with respect to bank performance

within the Nigerian context. Though the study looks at the impact of ICT at the firm level, it

takes a very broad perspective because it includes various banks in terms of size, age, and

geographical spread among other variables.

RESEARCH METHODOLOGY

The paper employed a combination of questionnaire and observation to collect information

from the staff and customers of banks to evaluate the influence of ICT related problems on

the performance of Nigerian financial institutions. The paper equally used secondary

information such as annual statements of accounts of the sampled banks, Nigerian Deposit

Insurance Commission (NDIC) and Central Bank of Nigeria (CBN) publications to determine

the performance of the banks via such performance measures as net income (the dependent

variable) against the various investments of banks, which include ICT investment,

investments in non ICT labour and other investments for a period of ten years (1998 to 2007).

The first level of analysis aims at establishing the relationships stated in the first hypotheses

of the paper. For this purpose the paper employed parametric statistics to establish the needed

relationship. In particular, the paper used multiple regression analysis. The multiple

regression analysis was done with the aid of Statistical Package for Social Science (SPSS)

version 15.0. In the following hypothesis there is a regression equation needed to establish

the relationship;

Hypothesis 1: ICT applications and investments do not contribute significantly to the

profitability of Nigerian banks.

To test this relationship, the following regression equation is stated:


112

Netincomt = a + βi Annuictvestt + β2AnnuOpercostt + β3Annuvestossett + ℮i

Where:

a = Intercept

Netincomt = Corporate performance at time t measured by Net income.

Annuictvest = Annual ICT Investment

AnnuOpercost = Annual Operating Costs

Annuvestosset = Annual Investment on other Assets

℮i = Error level

In the second level of analysis, the paper used descriptive statistics to present the summary of

data collected from the responding banks. It also used descriptive statistics to analyse the

data. However, the paper subsequently proceeds to test the second hypothesis stated earlier

with the aid of non-parametric statistics such as Chi-square. The following hypothesis was

tested in that manner:

Hypothesis 2: Information and Communication Technology related problems do not have

significant relationship with the performance of Nigerian Banks.

Results and Discussions of Findings

The following tables represent the results of the regression equation.

Table 1: Regression results on ICT contribution to Banks performance

Source: Multiple Regression Results through SPSS 15

Model

Un-standardized Coefficients

Standardized

Coefficients T Sig.

Co-linearity

Statistics

B Std. Error Beta Tolerance VIF B

Std.

Error

1 (Constant) 1533646367.075 1048528385.486 1.463 .194

ICTI 1.520 1.643 .259 .925 .390 .316 3.160

O.I 1.325 .516 .704 2.570 .042 .330 3.029

OP.C -.586 1.463 -.066 -.401 .702 .905 1.105


113

The information on Table 1 presents a picture of ICT contribution to bank performance in

Nigeria. In general, it is apparent that ICT investments have some contributions to banks

performance. The significance level for ICT from Table 1 above is 39%. By implication, we

accept the null hypothesis and reject the alternative hypothesis, thereby implying that

Information and Communication Technology (ICT) investments has no significant

contribution to the profitability of Nigerian banks.

The significant level is 39% as against 5% level chosen.

The results equally revealed that at 5% significant level, the significant level of other

investments on net income is 4.2% .Since this is less than the 5% level chosen, it implies that,

investments in other assets (i.e. other than ICT) have significant contribution to the

performance of Nigerian banks. Also, at 5% level of significance chosen, the operating costs

as regressed on net income showed a significance of 70.2%. This is higher than 5% chosen,

implying that operating costs has no significant contribution to the performance of Nigerian

banks, measured in terms of profitability (i.e. income).

The Variable Inflation Factor as revealed in Table 1 is 19.4%, meaning that there is co-

linearity between the unexplained variable and some of the independent variables.

Table2: Regression results on R, R square and Durbin – Watson Tests


The information on Table 2 represents the results of R, R square and Durbin Watson tests. R

Test shows a result of 0.92 implying a strong correlation between dependent variable and

independent variable, R2 test revealed that 0.851 of the changes in net income is as a result of

ICT investments, other investments and operating costs. Durbin Watson test result is 1.982,

meaning that there is no auto correlation.

Model R

R

Square

Adjusted

R Square

Std. Error of the

Estimate Change Statistics

Durbin-

Watson

R Square

Change

F

Change Df1 df2

Sig. F

Change

R

Square

Change

F

Change df1 Df2

Sig. F

Change

1 .923(a) .851 .777 1224241879.04546 .851 11.454 3 6 .007 1.982


114

Table 3: Regression results on ANOVA

Model

Sum of Squares Df Mean Square F Sig.

1 Regression 5149960879314

1600000.000 3 17166536264380550000.000 11.454 .007(a)

Residual 8992609070452

610000.000 6 1498768178408768000.000

Total 6049221786359

4200000.000 9


ANOVA test whether there is regression at all. The result in Table 3 above shows a

significant level of 0.007 or 0.7%, implying that there is regression.

The Chi-square values were computed from the information and it surmises that ICT-related

problems have significant relationship with the performance of Nigerian Banks.

FINDINGS

It was discovered that ICT investments and applications do not contribute significantly to

banks‘ performance in Nigeria. The types of ICT applications that are designed to contribute

to performance are front office applications. These types include telecommunications, online

banking, electronic fund transfer, smart cards, telephone banking, home banking, and ATMs,

among others. These types of ICT applications are directed at improving bank-customer

relationships. However, the study revealed that ICT related problems affects the ability of

Nigerian banks from taking full advantage of these ICT facilities.

It was discovered by the study that ICT applications such as , data processing from computer

terminal, computer terminal access, facsimile systems, electronic filing system and computer

with voice dictation input do not contribute significantly to banks‘ performance, because

proper synchronization has not been made between these various ICT facilities and the

potentials in them.

It was discovered that other investments, which include: short-terms funds, short-terms

investments, loans and leases, cash and interest bearing deposits with other banks contribute

significantly to the profitability of Nigerian banks.


115

Investment on non ICT labour and other related costs have been found not to have significant

impact on banks performance. This is because the huge sums of money invested were not

commensurate with the returns, thereby reducing profitability.

Automated Teller Machine (ATM)-related problems have also been found by the study to

have significant relationship with banks profitability. This shows that ICT related problems

have not been efficiently handled by Nigerian banks. The seven most pressing ICT related

problems in Nigerian banks include: Lack of investment capital; Lack of maintenance culture

in the public network; Security threats; Inadequate ICT internal maintenance culture; Lack of

encouragement from the government on indigenous development of ICT facilities; lack of

ICT management knowledge and inadequate basic infrastructure. The reason for the problems

border on the fact that ICT usage by banks was not motivated internally through internal

dynamics of national ICT infrastructural development in the country rather an externally

induced process. For instance infrastructural facilities were not laid when ICT adoption

became popular among banks in the 90s. Nigeria did not have ICT policy until the year 2000

and the country‘s telecommunication network was dominated by NITEL until the late 1990s

when telecommunication sector was deregulated.

CONCLUSIONS

Based on the findings above, the following conclusions emerge:

Nigerian banks currently use ICT as source of competitive advantage and not as strategic

necessity to improve profitability. This stems from the fact that they are yet to derive

maximum benefits from the use of ICT. Secondly, ICT use in Nigerian banks is significantly

constrained by ICT related problems and lastly, the effective usage of ICT to significantly

improve performance requires a complementary investment in Business process re-

engineering (BPR).

RECOMMENDATIONS

The following recommendations which are likely solutions to improve on the performance of

banks on the effective use of ICT are the following:

a) The Nigerian banks need to integrate all types of ICT into the main stream of banking

operations to maximally experience a positive impact on their performance. This can

be done by banks executives‘ commitment to understanding how ICT management


116

can be developed internally. The current reliance on front office applications alone

will translate into serious problems in the future if proper synergy is not made

between the front office and other applications.

b) In order to obviate the problem relating to effective use of ICT as a performance

improvement strategy, there is need for mergers and consolidations among Nigerian

banks. Consolidation that does not take cognizance of the strategy imperative of ICT

as a source of performance and competitive advantage only reduces the scope of

banking in the future. If properly considered, a maximum of twenty banks in Nigeria

is sufficient in order to take advantage of ICT effectively. Twenty mega banks

certainly will have the wherewithal to completely leverage the use of ICT. This is

because their large asset base will guarantee the ability to overcome most, if not all of

the ICT related problems. In addition, they will be able to acquire latest ICT

applications as well as the knowledge to manage ICT effectively. The cumulative

effect is that Nigerian banks will be placed at the level of international standard in

terms of both ICT applications and the use of ICT as a source of improving

performance.

c) The government needs to encourage indigenous development and manufacture of

computer hardware, software and other ICT applications in order to reduce the cost of

importing these applications. Policies should be made to control importation of ICT

equipment so that the indigenous manufacturers will have the opportunity to use

innovative and creative skills to develop ICT facilities that will be cost effective as

well as perfect quality of indigenous ICT applications. This will help stimulate

domestic competition in the manufacture of ICT applications and equipment and as

such will not only obviate the high cost associated with the importation of these

equipment but will also lead to improvement in the quality of domestic manufacture.

This will go a long way in reducing the pressure on our foreign exchange and will

generally improve our balance of trade problems and other related macroeconomic

problems.

d) Infrastructural facilities are imperative for banks to take advantage of ICT. The

current state of infrastructural facilities in Nigeria is appalling. Though government

has made efforts in improving Electricity and Telecommunications services in

Nigeria, the efforts have not yielded any significant positive results. While many

banks have resulted to the use of VSAT and alternative power supply, these


117

alternatives only add to the mounting cost of banking operations and by extension

affecting the profits of the banks. In addition, the lack of these infrastructural facilities

discourages the use of credit cards in the banking sectors of the Nigerian economy.

This is because the use of credit cards depends on very stable power supply and

dependable network. For the country to have a proper and functional cashless

economy there must be concurrent use of both debit and credit cards and the only way

this can be realised is through the improvement in the infrastructural facilities of the

network and power supply. This will not only improve the use of ICT by banks but it

will lead to complete cashless economy with externalities of reduced bank robberies

among others.

e) Banks need to train staff in the maintenance of ICT applications internally. High cost

of regular maintenance coming from outside would be reduced drastically if there is

very good internal maintenance culture. This will go a long way in saving the profits

of the banks being eroded as a result of high cost of maintenance of ICT applications

externally.

f) Banks should be aware that without complimentary investment on business process

reengineering, the opportunity currently made available by ICT applications may

change to threat. Therefore, Nigerian banks should provide appropriate infrastructures

in order to reengineer the business processes and stabilize and support the positive

contribution of ICT in profitability.

g) Banks should implement security measures that make use of biometrics. Biometric

security is a fast growing area of computer security. These are security measures

provided by computer devices that measure physical traits that make each individual

unique. These include, voice verification, finger prints, hand geometry, signature

dynamics, keystroke analysis, retina scanning, face recognition and genetic pattern

analysis. Biometric control devices use special purpose sensors to measure and

digitize a biometric profile of an individual‘s fingerprints, voice or other physical

traits. The digitized signal is processed and compared with a previously processed

profile of individual stored on magnetic disc. If the profiles match, the individual is

allowed entry into a computer network and given access to secure system resources;

and which could equally reduce fraudulent act by the staff and customers.


118

REFERENCES

Ahmad, S. (2008): Impact of Information Technology on Productivity, A Master‘s Thesis

submitted to Tarbiat Modares University, Iran.

Brynjolfsson, E. & Hitt, L. (1993): ―Paradox Lost? Firm-Level Evidence on the Returns to

Information Systems Spending‖: Journal of Management Science.

Caldwell, B (1998), New Problems, New Solutions, New Information 700, 149 – 156.

Gates (2000): ―Doing Business at the speed of thought‖: Mackays of Chatham Plc, Chatham,

Kent, England

Gelos, Co. (2006): Banking Spreads in Latin America, IMF Working Paper 06/44.

Goldfinger, C. (1998):Use of Information and Communication Technology in European

Financial Services, www.gefma.com/Articles

Grover, V., Kirk, D. Fielder, & James, T.D. (1994): ―Business Process Reengineering

Charting a strategic path for information age‖: IEEE transactions on engineering

management.

Hammer, M. & Champy, J. (1990): ―Reengineering the Corporation‖: London: Nicholas

Brealy.

Hitt, L. and Brynjolfsson, E. (1993): ―Productivity, Business Profitability, and Consumer

Surplus: Three Different Measures of Information and Communication Technology Value‖:

MIS Quarterly.

Hubbard, G. and P. Bromiley (1995): Researchers and Top Managers: How do they measure

firm Performance? University of Minnesota: Working Paper

Idowu, P.A., Alu, A.O. and Adagunodo, E.R. (2002): The Effect of Information

Technology on the growth of the Banking Industry in Nigeria, The Electronic Journal on

Information Systems in Developing Countries, 10(2), pp.1-8

James, G.C. & Helen (2004). Information and Communication Technology for Development:

Elsvier, New Delhi.

Jim, O. (2006). Development of the Nigerian Financial Market, Paper presentation at

National Workshop, Financial Services Registration Co-ordinating Committee, Abuja.

Kaplan, R.S and Norton D.P. (1992) ―The Balanced Scorecard – Measures that Drive

Performance. “Harvard Business Review, Jan – Feb, 71 – 79.

Kayode, (2005): Business Information and Communication Systems: 2nd

edition, Jos –

Nigeria.

Laudon, D. P. & Loudo, J. (2001). Management Information System: Organization and

Technology of the Network Enterprise.

Limayem, M. (2006): ―E-strategy course‖ Tarbiat Modares University.

Lunardi, L.G., Becker, J.L. and Macada, A.C. (2002): ―The Impact of Information

Technology Investments on banking Industry Performance and Evaluation: Evidence from

http://www.gefma.com/Articles


119

cross-country analysis for Brazil, United States, Argentina, Uruguay and Chile‖ Journal of

Information Technology, Vol.3, No.4

Meyer, M.W. and V. Gupta (1994): The Performance Paradox, in B.M. Staw and L.L.

Cummings (Eds.), Research in Organizational Behaviour, 309-369, Greenwich: JAI Press

Oluyemi, S.A. (2001): ―An Industry in Perspective‖, www.sageconsult.com

Oyeyinka, B.O. (1996): Information Technology in the Finance Sector: Adoption of

Computers in Nigerian banks. NISER Monograph series, No.3

Steiner, T.D. and Teixeira, D.B. (1990): Technology in Banking: Creating Value and

Destroying Profits, Homewood, IL: Business One, Irwin

Venkatraman, N. And V. Ramanujam (1986): ―Measurement of Business Performance

in Strategy Research: A Comparison of Approaches‖ Academy of Management Review,

11(4), 811-814

Weill, P. (1992): The Relationship between Investment in Information Technology and

Firm Performance: A Study of the Valve Manufacturing Sector, Information Research, Vol.3,

pp. 307-333

Zahrly, J. And E. Reuning-Elliot (1994): Convergent and Discriminant Validity of

Selected Financial Performance Measures: A Multitrait-Multimethod Matrix Approach.

Paper presented at the International Federation of Scholarly Associations of Management,

August, Dallas

Website

www.worldbank.org

http://www.sageconsult.com/

http://www.worldbank.org/

Documents

ACCOUNTING INFORMATION TECHNOLOGY (AIT) …acsaus.org/wp-content/uploads/2017/09/THE... · 2014 Organized by International Centre for Information Technology & Development (ICITD),