EFFECTS OF CAPITAL STRUCTURE OF SMALL AND MEDIUM SCALE AGRO-ENTERPRISES ON ACCESS TO MICRO FINANCE BANKS CREDIT IN ENUGU STATE, NIGERIA
1.1 Background of Study
The term capital structure is used to represent the proportionate relationship between debt and equity. Equity includes paid-up share capital, share premium and reserve and surplus (retained earnings) (Pandey, 2010), while debt can be classified into bank debt, straight bond debt, convertible bond debt, program debt (such as commercial paper), mortgage debt, and all other debts (Rauh & Sufi, 2008). A firm can issue a large amount of debt or a large amount of equity; hence it is important for a firm to deploy the appropriate mix of debt and equity that can maximize its overall market value. Utilization of different levels of equity and debt by managers is one strategy used by firms to improve their financial performance (Gleason, Mathur & Mathur, 2000).
Capital structure is important for agricultural firms, lenders, and policy analysts because all of them need information about financial structure of agricultural enterprises in order to make justified decisions about farm viability (Nurmet, 2011). It is the most significant aspect of company’s operations. Capital structure theories predict that leverage level influences a firm’s performance (Orua, 2009). Maina and Ishmail (2014) reported that there was evidence of a negative and significant relationship between capital structure and all measures of performance. This implies that the more debt the firms used as a source of finance they experienced low performance. Capital structure decision is a vital decision with great implications for the firm’s sustainability. The ability of the organization to meet its stakeholders need is closely related to the capital structure (Leon, 2013).
Agricultural credit is the present and temporary transfer of purchasing power from a person who owns it to a person who wants it, allowing the later opportunity to command another person’s capital for agricultural purposes, but with confidence in his willingness and ability to repay at a specified future date with or without interest (Nwaru, 2011). According to Akudugu (2012), credit is a strategic empowerment tool that has the potential to change the life of a person, family or community from a situation of abject poverty to a more dignified life. It can transform self-image, unlock potential and boost the productivity and well-being of the poor and vulnerable. Credit could bring about higher productivity and profit in agricultural production (Ashaolu, Mamioh, Philip & Tijani,2011) and may be financial or consist of goods and services.