Financial Risk and Performance of Small and Medium Enterprises in Nigeria

Abstract

Small and medium enterprises (SMEs) are imperative for the growth of a striving economy because they cater for a huge level of manpower and vast resources. Therefore, it is essential that their stability and performance should be ensured in order to promote the economic growth of Nigeria. SMEs are pronged to unsecured financial risk, which can lead to the collapse of the enterprises. Various studies have been done on the small and medium enterprises’ contribution to the Nigerian economic growth, but only few have addressed how financial risks affect it. This study aims to investigate how financial risk affects SMEs` performance. In other to achieve this exploratory research design was used and data were sourced from Central Bank of Nigeria (CBN) statistical bulletin from 1986 to 2017. The study uses autoregressive distributed lag (ARDL) techniques as the tool of analysis. It reveals a negative and insignificant relationship between financial risk and SMEs` performance in Nigeria in the long run. However, exchange rate risk, liquidity risk, interest rate risk and inflation risk have a significant, but negative impact on small and medium enterprises in the short run, as well as the long run. Financial risk adversely affects the performance of Nigerian SMEs and, therefore, should be controlled to enhance their performance.