CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Micro enterprises play a critical role in the economic development of nations. Indeed, Muchira (2012) states that micro enterprises significantly contribute to the economic growth and sustainability of every country. Moreover, the global economy recognizes micro enterprises as stepping stones for industrialization. Fredric (2005) observes that economic development does not rely solely on large businesses. In fact, micro enterprises drive the economies of countries such as the USA, UK, Japan, Germany, China, and Brazil by creating jobs, reducing poverty, generating wealth, and promoting growth.

Furthermore, the performance of micro enterprises directly influences the growth of developing nations. For example, in South Africa, micro enterprises provide over 55% of employment and contribute 22% of GDP (Commonwealth of Australia, 2010). In Kenya, micro enterprises generate more than 50% of new jobs (Economic Survey, 2006). In Nigeria, Yahaya, Geidam, and Usman (2016) show that micro businesses contribute 41% to industry, 32% to agriculture, and 27% to services while employing 95% of the workforce.

As a result, the Nigerian government implements programs to promote micro enterprises. Specifically, these programs create an enabling environment to maximize economic benefits. Additionally, the Central Bank of Nigeria (CBN) licenses financial operators to provide microfinance services. Consequently, micro enterprises now access loans without collateral, reducing traditional financing barriers.

Nevertheless, micro enterprises still face a high risk of failure despite financial support (Akande & Alabi, 2015; SMEDAN, 2015; Longenecker et al., 2006). For instance, SMEDAN (2015) reports that 80% of micro businesses close within seven years of operation. This finding indicates that poor financial management continues to impede business sustainability.

Moreover, studies identify poor financial management as the primary cause of micro enterprise failure (Longenecker et al., 2006). Bowen (2009) emphasizes that organizational performance improves when entrepreneurs master financial management skills. Similarly, Muchira (2012) highlights that proper recordkeeping forms a crucial part of business management. Therefore, SMEs must adopt bookkeeping skills and modern electronic payment systems to remain sustainable. As Germain (2009) notes, inadequate bookkeeping often leads to business collapse within a few years.

Consequently, this study examines the electronic payments and bookkeeping practices of SMEs in Lagos to understand how they affect financial management and sustainability.

1.2 Statement of the Problem

Despite support measures, many SMEs in Nigeria struggle to grow. Bowen et al. (2009) report that 50% of SMEs stagnate and fail to expand into larger enterprises. In addition, Boachie-Mensah and Marfo-Yiadom (2005) reveal that around 60% of small businesses fail within their early years. A major reason is that owners often fail to understand and apply bookkeeping concepts such as capital, assets, liabilities, and depreciation.

Furthermore, SMEs often fail to maintain proper records of payables and receivables. Consequently, banks frequently deny them credit due to inadequate documentation (Williams et al., 2008). Additionally, poor bookkeeping limits their ability to prepare proposals or financial presentations for funding. Therefore, lack of proper financial management and low adoption of electronic payments continue to hinder SMEs’ growth in Lagos.

1.3 Objectives of the Study

The main objective of this study is to examine electronic payments and bookkeeping practices of SMEs in Lagos. Specifically, the study aims to:

1. Identify the types of bookkeeping that SMEs use in Lagos.

2. Determine whether SMEs use electronic payments along with bookkeeping to track their financial positions.

3. Examine how entrepreneurs’ background characteristics influence the adoption of electronic payments.

1.4 Research Questions

1. What types of bookkeeping do SMEs in Lagos use?

2. Do SMEs use electronic payments along with bookkeeping to monitor their financial positions?

3. How do entrepreneurs’ background characteristics influence electronic payment adoption in SMEs?

1.5 Significance of the Study

Firstly, this study emphasizes the importance of bookkeeping in improving business performance. Proper recordkeeping prevents cash flow crises, misappropriation of funds, and missed growth opportunities. Furthermore, adopting electronic payments enhances operational efficiency and supports long-term performance.

Secondly, the study contributes to the knowledge of bookkeeping and electronic payment adoption among SMEs. It may also serve as a reference for future research. Finally, understanding these practices benefits not only SMEs but also individuals in various professions, enhancing financial literacy and understanding of the digital economy.

1.6 Scope of the Study

This study focuses on SMEs in Lagos Mainland Local Government Area. It specifically investigates their use of electronic payments and bookkeeping practices.

1.7 Limitations of the Study

Time constraints may reduce the researcher’s available time due to other academic obligations. Financial constraints may limit access to literature, materials, and data collection. Additionally, some respondents may provide incomplete questionnaire responses. Despite these challenges, the study employed strategies to mitigate the limitations and successfully achieved its objectives.

1.8 Definition of Terms

Bookkeeping: The process of recording financial transactions, including purchases, sales, receipts, and payments.

Small and Medium-scale Enterprise (SME): Businesses with staff numbers below specified thresholds, operating at small or medium scales.

Electronic Payments: Transactions that allow customers to pay for goods or services electronically, including online payments.