SMEs are noted as the foundation of the emerging private sector in developing countries and government’sassistance is paramount to sustainin contribution to the country’s economyenhance (Worl performance of SMEs, little or no attention is given to the sector to become business recovery conscious in moments when disaster strikes. Events such as violent floods, fire outbreaks, traffic accidents, occupational hazards, accidental damage to properties and harm caused to lives, theft and armed robbery, as well as other unforeseen events have slowed down private sector investment activities, and in some instance discontinued the existence of businesses. The need to possess appropriate insurance policy cover is significant and beneficial to both public and private stake holders; and more importantly to the survival and success of the Small and Medium Enterprises (SMEs) sector. The survey involved the collection of data using questionnaire and observation as a complement. In all 184 questionnaires were administered. The data gathered were primary in nature and then analysed using frequency counts, cross tabulation, graphs and percentages. The basic motive of this research was to establish whether SMEs within the UyoArea use non-life insurance as a risk management tool. The results have shown that most of the SMEs do not have insurance policies for their businesses, and the level of information on insurance is relatively low. Owners of SMEs are required to be educated on the need to have insurance and appropriate insurance to recover business losses associated with their operations through periodic workshops organised by industry players. The need to enforce the Insurance Act on fire and liability insurance to ensure compliance is paramount to enhancing business recovery mechanism for the sector.










1.1     Background to the Study    1

1.2     Problem Statement    3

1.3     Objectives of the Study    4

1.4     Research Questions    5

1.5     Significance/Justification of the Study    5

1.6     Method of the study    6

1.7     Scope and Limitation of the Study    7

1.8     Organisation of the Research    8



2.1     Defining the Small Business; Overview and Key Definitions    10

2.2     History of Medium Scale Enterprises (SMEs) in Ghana    12

2.3     Characteristics of SMEs for the Research    13

2.4     The Nigeriaian Situation    14

2.4.1     Working Definition    17

2.5     Strategic Role of SMEs    17

2.6     Challenges of SMEs    18

2.7     The Concept of Risk    19

2.7.1     Types of Risks    20   Speculative or Dynamic Risk    20   Pure or Static Risk    21     Why some Risks (speculative risks) are not insurable    21

2.8     Risk Management    22

2.8.1     Managing risk    23

2.9     Insurance as a Risk Management Tool    24

2.10     SMEs Insurance, the Perspectives    25



3.1    Overview    29

3.2     Research Design and Data Collection Instrument    29

3.2.1    Questionnaire    30

3.2.2     Pre-testing of the Research Instrument    30

3.3     Population and Sample Size    30

3.4     Sampling Technique    33

3.5     Data Preparation for Analysis    33

3.6     Data Analysis    34

3.7    Limitations    34



4.1    Introduction    35

4.2     Types of Business, Ownership and their Size    35

4.2.2     Classification of Business    36

4.2.3     Type and Locations of Business in Uyo Metropolis    37

4.2.5     Registration of Businesses    38

4.3     Analysis of Risk Management    39

4.4     Management of Business Risks by Entrepreneurs of SMEs    40

4.5     Benefits of Insurance    44

4.6     Information on Insurance    45

4.6.1     Awareness of Compulsory Insurance    46

4.7     Challenges of Businesses Using Insurance    47

4.8     Suggested Solutions to Challenges to Using Insurance    48



5.1    Introduction    49

5.2     Summary of Findings    49

5.3    Conclusions    50

5.4    Suggestions/Recommendations    51



 Appendix 1    59

 Section A: Business Information    59

 Section B: Profile of Business Activities and Risk Management    59

 Section C: Views of SMEs Insurance by Insurance Providers    59

 Particulars of respondent    59

 Appendix 2    60

 Questionnaire on Research Topic:    60



1    Background to the Study

Life is full of risks; expected or unexpected. In recent years there have been a lot of disasters and uncertainties affecting personal lives and the business environment across the globe. These events have had adverse effects on the socioeconomic activities on developed and developing nations; particularly Nigeria. There have been violent floods, fire outbreaks, traffic accidents, occupational hazards, accidental damage to properties and harm caused to lives, theft and armed robbery, as well as other unforeseen events that impact negatively on various economic ventures; especially the private sector investment activities. These mishaps remind us of the need to adopt risk management measures. Risk is everywhere but the business world is much exposed to it. To overcome the losses arising from these risks some take up insurance, others do not.

Aizenman and Marion (1999), highlight the adverse effects of risks on investment using macroeconomic data from more than forty (40) developing countries. They emphasized the fact that the uncertainty about business decisions in the future and the resulting gains cannot be optimistic.

Despite efforts by successive governments through economic reforms to heighten the private sector to complement government’sinvestments and enhance economic growth, the

sector’s    response   is   relatively   low;   and   thi

Entrepreneurs make decisions regarding their investment in a dynamic and risky environment.

The outcomes of their decisions are generally not conclusive due to the uncertainties associated with the future outcomes. Variability in future outcomes is the biggest source of risk, particularly among Small, and Medium Scale Enterprises (SMEs). The use of insurance as a risk mitigation tool provides confidence and prospects in successful business decisions, however to some degree.

The basic function of insurance is risk transference; risk is transferred from one party (the insured) to another party (the insurer). The transfer of risk by no means eliminates the possibility of misfortune, but the insurer provides financial security and tranquillity for the insured when the insured risk occurs. In return, an insured pays a premium in a very small amount when compared with the potential losses that may be suffered (Morton, 1999).

Insurance as a risk management tool in Nigeria is made extensive and mandatory by the Insurance Act, 2006 (Act 724). The Act makes it compulsory for private commercial property owners such as hotels, restaurants, hospitals and clinics, Auto shops, manufacturing firms and many other related businesses to obtain fire and liability insurance just as it is compulsory for vehicle owners to obtain the Third Party Motor Insurance cover under the compulsory third party

motor insurance Act 1958 (Act 42). Sections 1 not construct or cause to be constructed a commercial building without insuring with a registered

insurer the liability in respect of construction risks caused by negligence or the negligence of servants, agents or consultants which may result in bodily injury or loss of life to or damage to property of any workman on the site or of any member of the public; every commercial building shall be insured with an insurer against the hazards of collapse, fire, earthquake, storm and flood, and an insurance policy issued for it; the insurance policy shall cover the legal liabilities of an

owner or occupier of premises in respect of loss of or damage to property, bodily injury or death suffered by any user of the premises andicalthir satisfaction and financial leverages to investors buying insurance to safeguard business interests.

The compliance of the Act (Act 724) is in doubt: as the 2007, ENGAS company filling station gas explosion at Asokwa in Ashanti Region did not fulfil its obligation per the law; the 2011 fire explosions at the Western Steel and Forging Ltd in Tema caused injury, death and damages to people and properties; also, the destruction of properties at Kantamanto Market and the VRA computer room (housing its server) by fire evidence the need for insurance covers to minimize the effects of hazards to SMEs, Government Agencies and Departments; hence, the call on government with other stakeholders to assist victims.

1.2    Problem Statement

Risk is one of the most overlooked areas in SMEs in spite of the fact that it is clear to

most entrepreneurs that, operating any business involves risk such as losses associated with property, income, injury and liability. These risks are inevitable to most entrepreneurs in businesses. Prudent business owners take steps to minimize the risk of their businesses in other to maximize returns on investments. A good risk management system is a continuous process of analysis and communication to select the appropriate tool to manage risk.

SMEs in Nigeria serve as vital indicative sources of growth, technological innovation and flexibility. However, they are saddled with towards growth and development strategies. SMEs are exposed to many risks in their ordinary

course of business, such as interest rate risk, foreign exchange risk, market risk, natural disasters, political risk, and technological risk and so on, that minimize their profit by increasing their

financial losses. However, insurance enshrined in sections 183 and 184 of the Insurance Act, 2006 (Act724) to serve as a buffer in the event of mishaps is not given the attention it deserves regardless of its significance to mitigate the effects of risks resulting from disasters or unexpected events. In Uyo, the level of patronage of insurance by SMEs as a risk transfer mechanism to mitigate risks such as collapse of building, fire outbreaks, accidents, burglary, business interruptions, and dishonesty of personnel tend to be wavy. What were the recovery measures in the wake of the potential losses and financial hardships?

In view of this, the researcher examined the extent to which non-life insurance was used as a risk management tool by SMEs.

1.3    Objectives of the Study

The research broadly sought to assess the extent to which SMEs adopt insurance as a risk management and minimizing tool and the benefits there in. Specifically, the research intended to achieve the following objectives to:

1.    Identify what business risk(s) SMEs face;

2.    Examine the response of SMEs towards the use of non-life insurance to mitigate pure risk(s);

3.    Assess the benefits SMEs derive from using insurance as a risk management tool;

4.    Identify any problems SMEs encounter in using insurance; and

5.    Find out solutions to the challenges that SMEs encounter in using insurance.

1.4    Research Questions

The main research question addressed was: do SMEs use insurance to mitigate business risk(s)? The specific related questions to solve the research problem included the following:

1.    What were the risk exposures that an SME was faced with?

2.    Did entrepreneurs of SMEs have enough insurance for their businesses?

3.    What was the level of response to using insurance as a risk management tool?

4.    What benefits did SMEs derive from using insurance as a risk management tool?

5.    What were the problems that SMEs encounter in using insurance?

6.    What were the solutions to overcome the challenges that SMEs encountered in using insurance?

1.5    Significance/Justification of the Study

The study would help identify the reasons for the level of patronage of insurance as a risk transfer mechanism and create a changed behaviour of the owners of SMEs. The research would benefit, risk managers, business consultants and business continuity consultants by identifying areas that they might need to consider when preparing disaster recovery plans, particularly for SMEs. Findings that emerged from the study would serve as a spring board to generate interest for further research into the other aspects of insurance challenges. The research work would also be of enormous assistance to various levels of educational institutions in the country, especially the universities as reference material for further studies and research work on insurance as a risk management strategy. The study would further contribute to the existing literature on mitigating and providing confidence to entrepreneurs in their investment decisions. Also, the insurance

regulator in the country should find it useful to adopt pragmatic means to enforce the unenforced insurance Acts in the country. Lastly, it might influence the level of premium incomes of non-life insurance companies in the country.

1.6    Method of the study

The researcher made use of the survey method to generate primary data to achieve the objectives of the study, (Zikmund, 2000). A multiple stage sampling design was used to draw sample frame to avoid any bias. First, the metropolis was clustered into three electoral constituencies, constituting 19(nineteen) towns (Figure 3.1). A cluster sampling of 4(four) small scale businesses, 5(five) medium scale businesses were taken from each sample elements from the: central, south and north constituencies respectively. Nine (9) business units were clustered from each town. SMEs were divided into different clusters according to the number of employees. A total of 171 registered and non-registered SMEs were sampled and questioned. Different clusters of SMEs had the same number of employees as one sub-cluster. All thirteen insurance companies in the metropolis were

respondents to section “C” of the question were contacted.

Primary data was collected from respondents per the questionnaire. In gathering data, the researcher self-administered 13% of the questionnaire, while 87% of the remaining questionnaires were administered by trained personnel to administer and gather information from the entrepreneurs. The rationale for using this approach was to allow the respondents ample time with monitoring to answer at their own pace without taking them away from their work. The trained personnel read and interpreted questionnaires to non-literate respondents. In answering the questionnaire, the

respondents were asked to indicate their responses to the questions on a five point Likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree),  (Likert, 1932). Also closed and opened ended response questions were analysed.

The researcher made use of qualitative and quantitative survey design for this study. The design involved the collection of data concerning the study. Frequency tables and percentages (%), figures and cross tabulation were used in analyzing the data with the aid of Statistical Package for the Social Sciences (SPSS).

1.7    Scope and Limitation of the Study

The study covered the use of insurance as a risk management tool by SMEs, evidence and

prospects in the metropolis. Four categories of insurance protection were classified for any businesses: property, liability, people and income (Dorfman, 2008). These categories remained the focal points of reference in the research. Indemnification and risk pooling of the various categories of insurable risks enhance commercial transactions and the provision of credits by reducing losses. The research took a period of five months.

Uyo Metropolis was one of the 20 administrative districts in the region of the area of study. It is the central business district and the capital of the northern region. The Metropolis shares boundaries with Savelugu-Nantong to the North West, Yendi to the East and Gonja to the South.

The Uyo metropolis is the political, economical and financial capital of the region. The major government departments, NGOs and ministries have Uyo as the operational centre.

In recent times, the Metropolis witnessed the influx of banks, insurance companies and micro-finance institutions all geared at stimulating monetization in the region to provide services of economic value such as: the use of credit cards, money transfer, savings, and current accounts, provision of credits and risk transfers and returns on life insurance. That indicated the economic prospects of business growth in the metropolis.

Majority of the indigenes are principally engaged in primary occupation such as farming, weaving, leather work and hunting; while others and immigrants are engaged in micro, small and medium-scale businesses. There are some commercial crops (sheanuts and cotton) that are processed for exports.

Data gathering was challenged as follows: there was delay in getting responses on time due to the schedule of work, especially entrepreneurs. Again, the questionnaires were read and interpreted to non-literates before they could respond. Extra time and financial resources were committed. The limited time given for the completion of the thesis had a negative impact on my productivity at the office and stressed me.

Notwithstanding the above limitations, the study results were not affected and thus the findings were credible, reliable and useful for any purposes of evaluation and feedback.

1.8    Organisation of the Research

The dissertation was divided into five chapters. Following from above, chapter two of the

study concentrated on reviewing literature on SMEs, and insurance as a risk management mechanism as the conceptual framework for the research. Chapter three involved the research methodology. Chapter four was concerned with the presentation, analysis and interpretation of

data collected on the topic. The last chapter presented findings, conclusions and




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