1.1 Background to the study
Prior to 1960s, investments on capital intensive and large scale industrial projects were seen as the major means of achieving economic growth and economic development (Ihua, 2009). ILO (1973) posited that many policyholders‟ attention started shifting from concentrating on large scale enterprises to small and medium size enterprises as a path to achieving economic growth and development. This shift in the attention of policyholders may not be unconnected with the rapidly expanding labour force, low employment elasticity of modern large- scale production, and uneven distribution of economic growth experienced all over the world in the mid 1960s(Ekpenyong & Nyong,1992). SMEs‟ potential to generate employment, utilize local resources, ensure even distribution of industrial development, as well as their ability to facilitate the growth of non-oil exports had made both developed and developing countries pay special attention to SMEs subsector; such as the creation of Small Business Agency (SBA) in USA; Small Business Service (SBS) in the UK; and Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in Nigeria (Aremu & Sidikat, 2011; Legg, Battista, Harris, Lamm, Massey, & Olsen, 2009; Anna, 2014). SMEs account for at least 95% of India‟s industrial units and contributes 45% of their manufacturing output as well as about 40% of their export(Nikaido, Pais, & Sarma, 2015). Sipa, Gorzen-Mitka, and Skibinski (2015) and Bates and Nucci (1989) also established that in the European Union, SMEs contribute to over 99% of all enterprises. Duale and Karemu (2015) identified Japan, Zambia, South Korea, Malaysia, as some of the countries that have benefited immensely from SMEs in terms of their contributions towards employment generation, export earnings, and Gross Domestic Product (GDP). Despite these enormous contributions of SMEs to the economic, the rate at which they fail shortly after
their establishment in Nigeria is alarming (Aremu & Sidikat, 2011; Achie & Sado, 2014). Empirical research had shown that managerial inability and financial constraints are not the only major factors militating against the success of SMEs in Nigeria (Ihua,2009). Ihua (2009) identified external factors such as crises and disasters as the major causes of SMEs‟ failure in Nigeria.
Also, Azende (2012), revealed that the inability of SMEs operators to efficiently manage the risks they are exposed to as well as their unwillingness to purchase insurance policies for their business operations contribute greatly to their failure. Amaefula, Okezie, and Mejeha (2012), argued that intention regarding insurance depend largely on the extent to which individuals perceive insurance firms‟ service quality as well as their willingness to bear risks. Insurable risks could take various dimensions ranging from fire outbreak, theft of business assets, damage of goods on transit, crisis and disaster outbreaks, etc resulting to loss of businesses and business properties. According to Ihua (2009), Azende (2012), and Kadams (2014) insurance protection could guaranty the continuous existence of some of the businesses that had failed. Bala, Sandhu, and Nagpal (2011), and Toran cited in Siddiqui et al (2010), asserted that quality should be at the core of what the insurance industry does. Their findings showed that the quality of services and the achievement of customer satisfaction and loyalty are fundamental for the survival of insurers. Despite the call on insurance industry to render quality service, the high rate of insurable risks that SMEs are exposed to in Kaduna state as well as the age of insurance industry in Nigeria in which according to Obasi (2010), Usman (2009), and Arena (2008) all argued that the industry in Nigeria started early 1920s which is older than those of China, India and Malaysia. The intention to purchase insurance by Nigerians may still be very low as the findings of both World Bank (2009) and Klynveld Main Goerdeler and Peat Marwick KPMG(2012) showed that only 3% of
potential loss is insured in developing countries, and that insurance penetration ratio in Nigeria is 0.68% which is far below the minimum standard of 6.5% .
The need to investigate SMEs operators‟ intention to purchase insurance in Kaduna state is also necessitated by the encounter of the researcher with some of the people that were affected by the fire outbreak at Sabon Gari Market, in Sabon Gari LGA of Kaduna state. When some of the fire victims were asked whether or not they had insurance covers for their businesses. Some of them perceived insurance as a scheme that is meant to cater for the survivor(s) of a deceased. Some of the sampled people understood that insurance could also offer protection for businesses but believed that when the insured peril occurred, the insurers may or may not indemnify the insured.
Parasuraman et al. (1988), identified five dimensions of service quality that could be used to evaluate the quality of service a firm renders to its customers as follows:
(i) Reliability: it is the ability to perform the promised service accurately and at the appropriate time.
(ii) Assurance: is the knowledge and courtesy of employees and their ability to inspire trust and confidence.
(iii) Tangibles: the state or appearance of physical facilities, equip ment, personnel and materials
(iv) Responsiveness: this is the willingness to help customers and provide prompt service.
(v) Empathy: is the caring and individual attention the firm provides its customers.
Rendering service quality should create a win-win scenario for both the insurers and the SMEs operators. This is because, insurers‟ premium income will increase owing to the SMEs intention
to purchase insurance as they are assured of reinstatement to their former financial position before the loss should the insured peril occurred.
1.2 Statement of the Proble m
Most SMEs particularly in Nigeria die within their first five years of existence, smaller percentage goes into extinction between the sixth and tenth years while only about five to ten percent of young companies survive, thrive, and grow to maturity(Aremu & Sidikat 2012). In Kaduna state, the rate of SMEs failure is more disturbing as Archie and Sado (2014), found that 60% of SMEs failed in the first three years of establishment and 80% of most start-ups failed within their first five years.
Ihua (2009), argued that mana gerial inability is not only the major cause of SMEs‟ failure in Nigeria, but rather, disasters and crises as 73% of the respondents in Nigeria agreed that disasters and crises lead to SMEs failure.Azende (2012), also identified flood and fire outbreaks as some of the major causes of SMEs failure in Nigeria. Crises, such as ethno-religious and post election violence had caused a lot of business interruption in Kaduna state. United States Institute for Peace (2011), revealed that many businesses were destro yed in Kaduna state during the 2011 post election violence. This claim was supported by Lemu (2011), who found that 827 out of the total number of 938 persons killed during the 2011 post election violence were recorded in Kaduna state.
Kaduna State Emergency Management Agency (SEMA), revealed that there were 385 cases of fire outbreaks in Kaduna state in 2013 which led to the loss of over 1.1 billion Naira. SEMA (2015), reported that in the last quarters of 2015, Kaduna state experienced 163 fire outbreaks which affected a lot of SMEs operators as well as economic activities considerably.
Kadams (2015), opined that the major losses of SMEs operators in Kaduna state were owing to frequent fire outbreaks and other disasters, hence, they can be minimized if SMEs operators had purchased appropriate insurance covers for their businesses. Daniel (2014), confirmed that the Federal government commitment towards ensuring that the insurance industry is strong enough to handle most of the risks that are peculiar to N igeria‟s culture locally through implementation of various policies are aimed at strengthening the industry so as to boost the insuring public‟s intention to purchase insurance..
Poverty and religion were identified as the major causes of insurance low pe netration ratio (Scheve & Stasavage, 2006). Kaushalya, Karunasena, and Amarathunga (2014), identified quick recovery of business, and fulfilling borrowing requirements as the major reasons SMEs operators opt for insurance covers. These could not be achieved if insurance firms failed to render quality services.
Studies have evaluated impact of service quality on customers‟ satisfaction of banks ( Saghier & Nathan; 2013), hotel industry (Carman, 1990), and insurance industry ( Siddiqui & Sharma; 2010). But to the best of the researcher‟s knowledge, none has tried to quantitatively isolate the impact of perceived insurance firms‟ service quality on theSMEs‟intention to purchase insurance. Therefore, this study is an effort to quantitatively isolate the impact of insurance firms‟ service quality on theintention of SMEs to purchase insurance using samples of SMEs owner- managers in Kaduna state.
1.3 Research Questions
The following research questions were raised in the course of this research.
(i) To what extent does reliability of insurance service affect SMEs‟intention to purchase insurance in Kaduna State?
(ii) To what extent does assurance of insurance service affect SMEs‟intention to purchase insurance in Kaduna state?
(iii) To what extent does responsiveness of insurance serviceaffect SMEs‟intention to purchase insurancein Kaduna state?
(iv) Towhat extent do tangibles of insurance service affect SMEs‟intention to purchase insurancein Kaduna state?
(v) To what extent does empathy of insurance serviceaffect SMEs‟intention to purchase insurancein Kaduna state?
1.4 Objectives of the Study
The main objective of this study is to investigate perceived impact of insurance service quality on the SMEsintention to purchase insurance in Kaduna state. The specific objectives are:
(i) To determine how reliability of insurance service affect SMEs‟ intention to purchase insurance in Kaduna State
(ii) To determine how assurance of insurance service affect SMEs‟ intention to purchase insurance in Kaduna state
(iii) To determine how responsiveness of insurance serviceaffect SMEs‟ intention to purchase insurance in Kaduna state
(iv) To determinehow tangibles of insurance service affect SMEs‟ intention to purchase insurance in Kaduna state
(v) To determine how empathy of insurance service affect SMEs‟ intention to purchase insurance in Kaduna state?
1.5 Statement of Hypotheses
The folowing hypotheses were formulated and tested empirically during the course of this study.
Reliability of insurance service has no significant impact on the intention of SMEs to
purchase insurance in Kaduna state
Assurance of insurance service has no significant impact on the intention of SMEs to
purchase insurance in Kaduna state
Responsiveness of insurance service has no significant impact on the intention of SMEs to
purchase insurance in Kaduna state
Tangibles of insurance service has no significant impact on the intention of SMEs to
purchase insurance in Kaduna state
Empathy of insurance service has no significant impact on the intention of SMEs to
purchase insurance in Kaduna state
1.6 Significance of the Study
Kadams (2015) observed that many developing countries including Nigeria still experience high rate of SMEs failure, which could have been reduced if SMEs operators had purchased appropriate insurance products. KPMG (2012), argued that insurance has played vital roles
towards ensuring sustainable growth and development by rendering quality services to countries like UK, USA, South Africa, etc. This study is therefore significant to the following categories:
1.6.1 Managerial Contribution
Given the high rate of SMEs failure in Kaduna state, as well as the numerous call on the insurance industry to render quality service, this study had clearly brought out the effect of insurance service quality on the intention of SMEs to purchase insurance in the state The findings of this research will be of great benefits to insurance firms as it had clearly specified the extent to which insurance service quality could positively influence SMEs intention to purchase insurance. The findings are useful to the owners/ managers, SMEs stakeholders , and anybody with material assets that no amount of capital or skill could prevent some associated risks from occuring and affecting/ consuming the cherished material assets and thus the need to protect such assets by transfering the associated risks to insurance firms. The findings are also believed to be of immense benefits to both local and foreign SMEs partners such as BOA, BOI, CBN, SMEDAN, UNIDO, World Bank etc that spend their scarce resources yearly on SMEs but only to realise that a lot of them die prematurely as a result of one insurable shock or the other.
1.6.2 Contribution to Knowledge
The research provides empirical evidence on the impact of perceived insurance service quality on the SMEs‟ intention to purchase insurance in Kaduna state. The researcher is convinced that this study will add to the existing literature not only on SMEs and insurance, but also service quality. This is because no study to the best of the knowledge of the researcher has related insurance firms service quality and the SMEs‟ intention to purchase insurance in Nigeria context. In the light of this, students and researchers will find it useful.
1.7 Scope of the Study
This study covered most of the SMEs that are registered with the Kaduna state SMEDAN office as at June, 2015. These include different businesses cutting across various SMEs subsector such as; manufacturing, distributions, wholesales, retails, and services rendering entities. According to SMEDAN, there are 201 (two hundred and one) registered SMEs during the period under study. Proportional sampling technique was used to determine the appropriate sample size which was spread across the three senatorial districts in the state.
Kaduna state was chosen based on three criteria: Firstly, the state has witnessed a lot of crises and disasters that affected business activities considerably within this period. High volume of SMEs activities occur in the state as it was ranked by SMEDAN (2012) as the 4t h state with huge volume of SMEs activities after Lagos, Kano, and Oyo. Secondly, According to NAICOM (2014), out of the 59 recapitalized insurance companies in Nigeria, no fewer than 30 (50.85%) of them have branches in the state. Thirdly, in a study cond ucted by GIZ, a German agency for sustainable development titled “ 16 insurance companies known to Nigerians”, out of these 16 companies, nine (9) which represent 56.25% of them have branches in Kaduna state(vanguard newspaper, October 3, 2012). The choice of this period was as aresult of the establiment of SMEDAN in 2003. This agency has a clear vision of establishing a structured and efficient micro, small and medium enterprises sector that will enhance sustainable economic development of Nigeria.
Hakeem and Tajudeen ( 2010), argued that the period between 2003 and 2007 witnessed major recapitalization exercise of insurance industry. This exercise flushed out a lot of insurers with weak or dubious financial bases thereby leaving only those that were pres umed to be able to offer quality services to the customers.
1.8 Definition of Key Terms
(i) Insured: The person or entity who bought insurance policy because of the exposure to one form of risk or the other.
(ii) Peril: cause of a loss
(iii) Buying behavior: the attitudes, preferences, intentions, and intentions regarding the consumer's behavior in the marketplace when purchasing a product or service.
(iv) Insurer: the person or entity that guaranteed to reinstate the insured to the former financial position immediately before the loss should a specific thing occurred.
(v) Insurable: the risk that insurer can accept from the insured
(vi) Risk : presence of danger or possibility of a loss.
(vii) Loss: an undesired, unplanned reduction of economic value.
(viii) Risk Attitude: chosen state of mind regarding uncertainties that matter.