IMPACT OF OPERATIONAL AND CREDIT RISK ON THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN NIGERIA

CHAPTER ONE

 INTRODUCTION

1.1 Background to the Study

Due to the increasing rate at which technological development and globalization is affecting the marketplace, the business environment has become more and more risky and challenging for companies to operate within. It has therefore become necessary to identify, analyze and respond to the different types of risks in today’s market to ensure the survival of a firm. Small and Medium-Enterprises (SMEs), due to their limited resources and structural features, are more influenced by the effect of risks than larger organizations. Risk is defined as the possibility of something undesirable taking place. It is the likelihood of something happening that may affect a business’s objectives either negatively or positively. The term risk, especially in business, can interchangeably be used with uncertainty with respect to the variability of returns associated with a given investment. Although risk is generally considered the possibility of outcomes deviating from what was expected, firms are primarily concerned with negative outcomes since they negatively affect the business operation and thus require proper management.

According to the European commission SBA fact sheets, more than 99.9% of overall registered enterprises across nations fall within the SMEs classification [1]. Due to their significance in contributing to human capital and value-added creation, SMEs require the adoption of an effective risk management (RM) system. Furthermore, in small and medium enterprises (SMEs) and micro companies, where the capital is mostly not sufficient or strong, an unplanned misfortune could likely lead to interruptions in operational activities, financial loss, and bankruptcy (Lap, 2009).

 In the course of their operations, enterprises encounter many risks such as political, natural disaster, credit and operation risks, especially during the start-up and expansion stage. Political risk can be defined as the effects caused by the intersection of political decisions, socio-economic events and market evolutions that may impact specific business interests and situations. The political situation of a country can influence the economy, bring about changes in regulation or affect mitigation of risk. Also any political instability in a country or area will adversely affect business performance. Credit risk denotes to the risk that a borrower will default on any type of debt by failing to make required payments. According to Norlida et al (2015) credit risk depends on the ability of borrower to generate adequate cash flows through operation, earnings, or asset sales to meet their future interest and principle payment of the outstanding debt. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs (Alshatti 2015). Operational risks refer to the financial loss to business as a consequence of conducting it in an improper or inadequate manner and may result from external factors. Operational Risk may tangibly manifest itself in the likes of business disruption, control failures, errors, misdeeds or external events.

Therefore, risk management is deemed a core factor for business competitiveness. It facilitates a firm to develop a unique strategy to minimize the potential losses and open a door for the exploitation of new opportunities (Radner and Shepp 1996). For this reason, Smith and Watkins (2012) argue that risk management should be a major concern for SMEs particularly because they are more sensitive to business risk and competition.

Conflict in an organization

Introduction

Conflict is usually seen as a disagreement concerning interests of various persons in the workplace (Ford, 2007).  Conflict is a discord that happens when the objectives, interests and values of various people or team are incompatible (Hughes, 2001). However, conflict has some implications for both individual and organization which this piece would discussed further. 

Implications of Conflict 

Conflict can happen among individual employees.  For instance superior and subordinate at work place.  However, there are consequences of conflict for both the individual and organization.   According to Joan, (2010) conflict implications for the individual could result to demotivation and lack of interest for the actualization of objectives. On the other hand, Hughes, (2001) maintains that conflict implications for organization ranges from low productivity to labour turnover.   Nevertheless, Suliman, &   Abdulla, (2005) stated on the contrary that conflict could result to motivational values that drive individual and organization to address the situations in a strategic manners that could led to attainment of goals.  

Advantages and Disadvantages of Conflict

The advantages of conflicts for individual and organization as listed by Joan, (2010)  include;

Enhancing understanding of the challenges or causes of the conflict and ways to resolve them and,  

 Promoting harmony among individuals and departments in an organization (Joan, 2010).

Despite the above mentioned advantages of conflict for  both individuals and organization, there are disadvantages of conflict as well.  Ford, (2007) contended that if conflict is not well managed, it could escalate and result to decrease performance for both the individual and organization. 

In conclusion, individual and organization could resolve conflict through the use of the Thomas-Kilmann Conflict Mode Instrument (TKI), which was propounded in 1970s with the  two dimensions of behavior when responding to conflict.   What is conflict resolution and what are the conflict resolution processes?

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LEADERS ARE MADE AND NOT BORN

The answer to this question is yes leaders are made and not born as behavioral theories believe that a person can become a leader through the process of teaching, leaning and observing (Hyacinth, 2014).  However, “Whether it’s ‘birth to board’ or ‘self made success’ the reality is leaders gain fame (or notoriety) by their actions”   (White 2013, p.1).

Leadership is a procedure that enables an individual to influence others to achieve the set objectives through guiding them (Northouse, 2007).  Conversely, management is the act of planning,  organization,  and integrating all available resources to effectively achieve the set objectives (Williams, 2013).     White (2013) lists what makes a good leader to include; Being ethical, effectiveness, leading by example and so on.   A  good leader must lead by example and not to over complicate the process.  This is important as I have resigned my previous job where the Chairman/CEO takes all decisions and micro manages the organization, thus giving no room for employees' input. 

According to Sineriz (2019), the qualities and attributes of a leaders and managers comprises of emotional stability, enthusiasm and self assurance.  Emotional stability is vital as good leaders and managers would not allow anyone to frustrate them from achieving their goals.   These qualities and attributes are the driving force that allowed a leader or a manager to produce results in their working place.

The role of a leader is to decide where he or she is taking  the followers, while the manager duty is to recognize how the employees or subordinates realize the set objectives (Sineriz, 2019).

In conclusion,  there are conflicting arguments that some  leaders are born and  other are made.  My question is what are the examples of leaders that are born?

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