Project – The Effect of Digital Payment Adoption on the Growth of Small and Medium-Sized Enterprises in Nigeria: A Study of Selected SMEs in Lokoja, Kogi State

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Small and Medium-sized Enterprises (SMEs) constitute an important component of economic activity in both developed and developing economies. They contribute to employment creation, income generation, innovation, entrepreneurship development and the distribution of goods and services. In developing countries such as Nigeria, SMEs are particularly significant because they provide livelihood opportunities for a large proportion of the population and serve as a major channel through which entrepreneurial activities are undertaken. The 2021 Micro, Small and Medium Enterprises (MSME) Survey conducted by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in collaboration with the National Bureau of Statistics (NBS) reported that Nigerian MSMEs contributed about 46.31% of national Gross Domestic Product (GDP), accounted for 6.21% of exports, represented 96.9% of businesses and provided 87.9% of employment. These figures demonstrate the strategic importance of small businesses to the Nigerian economy.

Despite their importance, Nigerian SMEs operate in an environment characterised by numerous structural and operational challenges. These include inadequate access to finance, poor infrastructure, unstable electricity supply, limited managerial capacity, multiple taxation, regulatory difficulties, inadequate access to markets, insecurity and increasing operating costs. Such challenges can limit the capacity of SMEs to expand their operations and remain competitive. The ability of small businesses to adopt appropriate technologies and innovative business practices has therefore become increasingly important to their survival and growth.

One of the technological developments that has significantly transformed business activities is the emergence of digital payment systems. Digital payment adoption refers broadly to the use of electronically enabled channels to initiate, receive or transfer funds without relying exclusively on physical cash. Such channels include point-of-sale (POS) terminals, mobile banking applications, internet banking, electronic funds transfer, USSD-based payments, mobile money, bank transfers, QR-code payments and other electronically mediated payment platforms. Digital payments have changed the manner in which businesses interact with customers, suppliers, financial institutions and other stakeholders.

The increasing relevance of digital payment systems in Nigeria is partly connected with the country’s broader transition toward a cashless and digitally enabled economy. The Central Bank of Nigeria (CBN) has implemented several policies and initiatives designed to promote electronic payments, financial inclusion and digital financial services. The Payments System Vision 2025, launched by the CBN in 2022, provides a strategic roadmap aimed at strengthening electronic payment adoption, improving payment-system safety and resilience, promoting financial inclusion and using the payments ecosystem as a catalyst for economic development (CBN, 2022).

The transformation of Nigeria’s payment ecosystem has been particularly noticeable in the growth of electronic transaction channels. According to the CBN, in the first half of 2024, the volume of NIBSS Instant Payment (NIP) transactions reached approximately 5.63 billion, while the value rose to about ₦476.89 trillion. POS transaction volume increased to approximately 6.40 billion transactions, with a value of about ₦85.91 trillion. Mobile payment transactions also increased to approximately 3.49 billion, while internet/web transactions reached about 11.64 billion transactions during the same period. These developments indicate the increasing integration of electronic payment channels into everyday economic activities in Nigeria.

The expansion of digital payments has important implications for SMEs. Traditionally, many small businesses have depended heavily on cash transactions. Cash-based transactions may expose businesses to several operational limitations, including the risks associated with carrying physical cash, difficulties in keeping transaction records, delays in payment collection and restrictions on conducting transactions with customers who prefer cashless channels. Digital payments can potentially reduce some of these constraints by enabling faster transactions, improving transaction records and allowing businesses to receive payments remotely.

The relationship between payment technology and economic activity is not entirely new. Aker and Mbiti (2010) argue that mobile technologies can reduce transaction costs, improve access to information and facilitate economic activities in developing countries. In the context of financial services, digital technologies can similarly reduce some of the costs associated with transferring money and accessing financial services. Jack and Suri (2014), in their study of mobile money in Kenya, found that access to mobile money improved the ability of households to manage economic shocks, demonstrating how digital financial systems can alter economic behaviour and resilience. Although household-level evidence should not automatically be equated with firm-level outcomes, it illustrates the broader economic significance of digital financial technologies.

Digital payment adoption can influence SME growth through several mechanisms. First, it can increase transaction convenience and speed. A customer can pay for goods or services electronically without necessarily carrying physical cash. This can reduce transaction delays and potentially improve customer experience. Second, digital payments can facilitate market expansion because businesses can receive payments from customers who are geographically distant or who prefer electronic channels. Third, electronic transaction records can improve financial record-keeping and accountability, potentially assisting business owners in monitoring sales, expenses and cash flows. Fourth, digital payment adoption can strengthen the connection between SMEs and formal financial institutions because electronic transaction histories may provide useful information about business activities.

Digital payment systems may also contribute to financial inclusion. The Central Bank of Nigeria identifies digital financial services as an important component of efforts to improve access to financial services, particularly among groups that have traditionally experienced difficulties accessing conventional banking services. The CBN’s financial inclusion framework specifically recognises MSMEs as an important target group for financial inclusion and promotes digital financial services and payment ecosystems as mechanisms for expanding financial access.

The World Bank (2019) similarly identified digital financial services as one of the critical areas requiring further development in Nigeria’s digital economy. Its Nigeria Digital Economy Diagnostic noted that Nigeria had considerable untapped potential in digital financial services and emphasised the importance of improved digital connectivity, digital skills and financial services for unlocking economic opportunities. The World Bank further noted that digital financial services for SMEs remained an underdeveloped area, suggesting that the benefits of digitalisation were not necessarily being distributed evenly across businesses.

The potential benefits of digital payments are particularly relevant to SMEs because these businesses often operate with limited financial and technological resources. Unlike large corporations, SMEs may not have sophisticated accounting departments, information technology specialists or extensive financial management systems. Consequently, relatively simple technologies such as POS terminals, mobile banking, USSD and electronic transfers can become important tools for conducting daily business activities.

The adoption of digital payment systems may also improve business efficiency. When payments are received electronically, business owners can potentially reduce the time spent travelling to banks, depositing cash and reconciling physical cash transactions. Electronic records can also make it easier to track revenue and identify payment patterns. These improvements may contribute indirectly to profitability and growth if the savings in transaction costs and time are greater than the costs associated with adopting and maintaining digital payment systems.

However, the adoption of digital payments does not automatically produce positive business outcomes. The Nigerian digital payment environment continues to experience challenges involving network reliability, transaction failures, cybersecurity risks, fraud, digital literacy, service charges, power supply and customer trust. These factors can affect the willingness and ability of SMEs to depend on digital payment channels. A payment system that is frequently unavailable or unreliable can interrupt business transactions and potentially reduce customer confidence.

Security is another important consideration. Digital transactions involve the transmission and storage of financial information, creating potential exposure to fraud, phishing, unauthorised transactions and other cyber-related risks. Consequently, SMEs and their customers must balance the convenience of digital payments against concerns about security and reliability. Research on electronic payment adoption in Nigeria has identified factors such as convenience, trust, security and safety as significant considerations in users’ adoption decisions (Adeoti & Osotimehin, 2012; Oladejo & Akanbi, 2012; Oney, Oksuzoglu-Guven & Guven, 2017).

Technology adoption theories provide useful explanations for why individuals and organisations accept or reject digital payment technologies. The Technology Acceptance Model (TAM) developed by Davis (1989) proposes that perceived usefulness and perceived ease of use are fundamental determinants of technology acceptance. From the perspective of an SME operator, a digital payment platform is more likely to be adopted when it is perceived as useful for business operations and sufficiently easy to operate. Similarly, the Diffusion of Innovations theory developed by Rogers (2003) explains how new technologies spread through social and organisational systems based on characteristics such as relative advantage, compatibility, complexity, trialability and observability.

The importance of technology adoption for SMEs has received growing attention in Nigeria. Recent empirical evidence from Enugu State indicates that electronic payment technology adoption is significantly associated with SME performance. Ezeudu and Mutezo (2025), using data from 220 registered SMEs, found significant relationships between dimensions of electronic payment technology adoption and perceived SME performance. Their study suggests that the digitalisation of business operations through electronic payment technologies can enhance SME productivity and efficiency.

Similarly, Adesina, Adegboye, Isibor and Afolabi (2025) examined electronic payment systems and SME business performance in Nigeria using survey data from 300 SME owners in Lagos. Their findings associated electronic payment adoption with improvements in profitability, customer growth and accountability, although the researchers also identified technical and infrastructural constraints as continuing challenges.

These findings provide important evidence that digital payment adoption may have implications for SME growth. Nevertheless, empirical findings from one geographical location cannot automatically be generalised to every Nigerian business environment. Nigeria is geographically and socioeconomically diverse, and businesses in Lagos, Enugu, Abuja, Port Harcourt, Kano or Lokoja may experience different levels of technological infrastructure, customer behaviour, financial access and digital literacy.

Lokoja, the capital of Kogi State, provides an important setting for investigating this relationship. The city serves as a commercial and administrative centre and connects different parts of the country through major transportation routes. SMEs operating in Lokoja are involved in diverse activities including retailing, hospitality, food services, transportation-related businesses, fashion, repairs, personal services and other commercial activities. These businesses increasingly interact with customers who use bank transfers, POS terminals, mobile banking and other digital payment channels.

For SMEs in Lokoja, digital payments may be particularly relevant because customers increasingly expect convenient payment options. A customer who does not have sufficient cash may still complete a transaction through bank transfer or POS. Similarly, an SME can receive payments without necessarily maintaining large amounts of physical cash. Such flexibility may help businesses retain customers, improve sales and reduce certain transaction-related constraints.

Nevertheless, the extent to which digital payment adoption actually translates into measurable SME growth in Lokoja remains an empirical question. It cannot simply be assumed that the increasing volume of electronic transactions at the national level automatically means that individual SMEs are becoming more profitable, expanding their customer base or increasing their sales. National payment statistics demonstrate the growth of the payment ecosystem, but they do not directly establish the effect of digital payment adoption on individual SMEs.

The distinction is important because adoption and business growth are separate concepts. A business may possess a POS terminal or receive bank transfers without experiencing substantial growth. Similarly, an SME may adopt several digital payment channels but continue to experience declining profitability because of inflation, high operating costs, inadequate electricity, low purchasing power or intense competition. Digital payment technology may therefore be an enabling factor rather than a sole determinant of business growth.

Furthermore, transaction charges and service costs may reduce the financial benefits of digital payments for small businesses. SMEs generally operate with relatively narrow profit margins, meaning that frequent payment-related charges can become significant over time. Network failures and transaction reversals can also create customer dissatisfaction and administrative difficulties. These challenges raise questions about whether the benefits of digital payment adoption outweigh its associated costs for SMEs in Lokoja.

Another issue concerns digital financial literacy. The effectiveness of a digital payment system depends not only on access to technology but also on the ability of business owners and employees to use it appropriately. The World Bank (2019) identified digital skills as a significant component of Nigeria’s digital transformation challenge. Limited digital competence can make SME operators vulnerable to fraud, operational errors and poor utilisation of digital financial services.

Trust is also essential. Customers and business owners must have confidence that payments will be processed accurately, securely and promptly. Where electronic transactions fail frequently or where users have concerns about fraud, businesses may continue to favour cash despite the availability of digital alternatives. Thus, the relationship between digital payment adoption and SME growth may depend on the quality, reliability and security of the payment ecosystem.

The increasing importance of digital payments makes this issue particularly relevant to contemporary SME management. Nigeria’s payment ecosystem is continuing to evolve, with the CBN supporting innovations such as instant payments, open banking, contactless payments and QR-code solutions under its Payments System Vision 2025. The country’s digital payment ecosystem has therefore moved beyond the simple replacement of cash with electronic transfers; it is increasingly becoming an integral part of how businesses manage sales, customers, financial records and transactions.

The growth of digital payments has also been reinforced by changing consumer behaviour. A 2020 study of electronic payment adoption in Nigeria found that factors including convenience, security, trust and social influence were associated with electronic payment adoption, while electronic payment use was also linked with consumer purchase decisions and spending growth (Adewoye & Olayinka, 2020). This is relevant to SMEs because increased consumer willingness to make electronic payments may affect the sales opportunities available to businesses.

Therefore, examining digital payment adoption among SMEs in Lokoja is important for understanding whether technological changes in Nigeria’s financial ecosystem are producing tangible benefits at the enterprise level. The study focuses on selected SMEs in Lokoja, Kogi State, to determine whether the adoption of digital payment channels is associated with business growth. In particular, the study considers whether digital payment adoption contributes to improvements in sales, profitability, customer base and business expansion.

The study is consequently situated within the broader debate about digitalisation, financial inclusion and SME development in Nigeria. It recognises that digital payments are neither a complete solution to all SME challenges nor an insignificant technological convenience. Rather, they represent a potentially important business resource whose contribution to enterprise growth requires empirical investigation within specific local contexts.

1.2 Statement of the Problem

Small and Medium-sized Enterprises occupy a central position in Nigeria’s economy, contributing substantially to employment, output and entrepreneurship. The 2021 SMEDAN/NBS MSME Survey indicates that MSMEs account for a very large proportion of businesses and employment in Nigeria and contribute more than 46% of national GDP. Despite this importance, many SMEs continue to experience difficulties in achieving sustainable growth. Problems such as limited access to finance, inadequate infrastructure, high operating costs, unstable electricity supply, poor managerial capacity, taxation, insecurity and weak market access continue to constrain enterprise development.

At the same time, Nigeria has experienced rapid growth in digital payment systems. Electronic transfers, POS terminals, mobile payments, internet banking and other digital channels have become increasingly prominent in commercial transactions. CBN statistics show substantial increases in the volume and value of POS, mobile, internet and instant-payment transactions. The policy direction of the CBN also strongly supports the development of a digital payment ecosystem as part of the country’s financial inclusion and economic development agenda.

However, the rapid expansion of digital payment infrastructure creates an important research problem: does the adoption of digital payment systems actually translate into measurable growth for SMEs? The existence of digital payment facilities does not necessarily mean that individual businesses benefit from them. An SME may have access to POS, mobile banking or electronic transfers and still experience low sales, declining profitability or inability to expand.

This problem is further complicated by the costs and risks associated with digital payment adoption. SMEs may encounter transaction charges, unreliable network services, failed transactions, delayed reversals, electricity problems, inadequate digital skills and cybersecurity threats. Such challenges may reduce the expected benefits of digital payment adoption and, in some cases, increase the operational burden of small businesses.

There is also a possibility that digital payment adoption may produce different outcomes for different businesses. A retail business with a large customer base may benefit considerably from accepting electronic payments, while a small enterprise with limited digital customers may experience relatively little advantage. Similarly, an SME with good digital literacy and reliable internet access may derive greater benefits than another business facing network and technological constraints.

The empirical literature provides evidence that digital payments can contribute to business performance, but there remains a contextual gap. For example, Ezeudu and Mutezo (2025) found a significant relationship between electronic payment technology adoption and SME performance in Enugu State. Adesina et al. (2025) also reported positive associations between electronic payment adoption and profitability, customer growth and accountability among SMEs in Lagos. While these studies are useful, their findings are based on other Nigerian locations and therefore do not sufficiently explain the situation of SMEs in Lokoja.

The geographical gap is significant because the effectiveness of digital payment systems depends partly on local business conditions. Lokoja has its own commercial characteristics, consumer patterns, infrastructure conditions and SME structure. Consequently, conclusions drawn from Lagos or Enugu cannot simply be imposed on SMEs operating in Lokoja without empirical verification.

A further problem is that national statistics primarily demonstrate the growth of digital payment transactions rather than the growth of businesses using those payment channels. The CBN reports rapid expansion in electronic payment volumes and values, but such statistics do not directly indicate whether participating SMEs have experienced higher sales, increased profitability, larger customer bases or business expansion. This creates a gap between payment-system growth and enterprise growth.

There is therefore insufficient local evidence regarding the extent to which digital payment adoption affects the growth of SMEs in Lokoja, Kogi State. Without such evidence, SME owners may be unable to determine whether investments in digital payment facilities are generating meaningful business benefits, while policymakers and financial institutions may lack adequate local evidence for designing targeted interventions.

The central problem of this study is consequently the uncertain effect of digital payment adoption on the growth of SMEs in Lokoja, Kogi State, despite the rapid expansion of digital payment systems in Nigeria. This study seeks to address this problem by empirically examining the relationship between digital payment adoption and SME growth among selected SMEs in Lokoja.

1.3 Aim of the Study

The main aim of this study is to examine the effect of digital payment adoption on the growth of Small and Medium-sized Enterprises in Nigeria, with particular reference to selected SMEs in Lokoja, Kogi State.

1.4 Objectives of the Study

The specific objectives are to:

1. examine the extent of digital payment adoption among selected SMEs in Lokoja, Kogi State;
2. determine the effect of Point-of-Sale (POS) payment adoption on the growth of selected SMEs in Lokoja;
3. examine the effect of mobile banking and mobile payment adoption on the growth of selected SMEs in Lokoja;
4. assess the effect of electronic bank transfers and internet-based payment adoption on the growth of selected SMEs in Lokoja; and
5. determine the overall effect of digital payment adoption on the growth of selected SMEs in Lokoja, Kogi State.

1.5 Research Questions

The following research questions will guide the study:

1. What is the extent of digital payment adoption among selected SMEs in Lokoja, Kogi State?
2. To what extent does POS payment adoption affect the growth of selected SMEs in Lokoja?
3. What effect does mobile banking and mobile payment adoption have on the growth of selected SMEs in Lokoja?
4. To what extent do electronic bank transfers and internet-based payments affect the growth of selected SMEs in Lokoja?
5. What is the overall effect of digital payment adoption on the growth of selected SMEs in Lokoja, Kogi State?

1.6 Research Hypothesis

The following null hypothesis will be tested at a 0.05 level of significance:

H₀: Digital payment adoption has no significant effect on the growth of selected Small and Medium-sized Enterprises in Lokoja, Kogi State.

1.7 Significance of the Study

The study will be significant to several stakeholders.

SME owners and managers:
The findings will provide evidence on whether digital payment adoption contributes to business growth. SME owners will be better positioned to evaluate the usefulness of POS terminals, mobile payment applications, electronic transfers and other digital payment channels as part of their business strategies.

Government and policymakers:
The study will provide information that may assist policymakers in designing programmes aimed at improving the digital business environment for SMEs. The findings may be useful to agencies such as SMEDAN and other government institutions responsible for entrepreneurship development and financial inclusion.

Central Bank of Nigeria and financial institutions:
The findings may provide useful evidence for banks, fintech companies and payment service providers seeking to improve digital payment products for small businesses. Understanding the challenges encountered by SMEs may assist financial institutions in developing more affordable, reliable and secure payment solutions.

SMEDAN and business-development organisations:
The study may assist SME-support institutions in identifying areas where entrepreneurs require training, digital literacy and technical support. This is particularly important because access to technology alone does not guarantee effective utilisation.

Researchers and students:
The study will contribute to the growing literature on digital payments and SME development in Nigeria. It may also serve as a reference for future research involving digital finance, financial inclusion, technology adoption and enterprise performance.

Customers:
The study may indirectly benefit consumers by highlighting the importance of reliable and convenient payment channels. Increased understanding of digital payments may contribute to better customer service and transaction convenience.

1.8 Scope of the Study

The study focuses on the effect of digital payment adoption on the growth of Small and Medium-sized Enterprises in Lokoja, Kogi State.

Geographically, the study is limited to selected SMEs operating within Lokoja metropolis. The study will focus on business owners, managers and other appropriate representatives of selected SMEs.

Conceptually, the independent variable is digital payment adoption, while the dependent variable is SME growth.

Digital payment adoption will be examined through selected channels such as:

• Point-of-Sale (POS) payments;
• mobile banking/mobile payment;
• electronic bank transfers;
• internet-based payments; and
• other relevant digital payment channels used by SMEs.

SME growth will be examined through indicators such as:

• increase in sales/revenue;
• profitability;
• customer-base growth;
• business expansion; and
• overall improvement in business performance.

The study does not attempt to examine every possible determinant of SME growth, such as taxation, access to credit, electricity supply, government regulation, managerial competence or macroeconomic conditions, except where such factors arise as contextual issues affecting digital payment adoption.

1.9 Operational Definition of Terms

Digital Payment:
An electronic method of transferring money or making payments for goods and services without relying primarily on physical cash. It includes bank transfers, POS payments, mobile payments, internet banking and related electronic payment channels.

Digital Payment Adoption:
The extent to which an SME uses digital payment technologies as part of its routine business transactions for receiving payments from customers, paying suppliers or conducting other financial transactions.

Electronic Bank Transfer:
The electronic movement of money from one bank account to another through banking or payment platforms.

Mobile Payment:
A payment or money-transfer transaction conducted through a mobile phone or mobile-enabled financial application.

Point-of-Sale (POS):
An electronic payment device that enables customers to make payments using cards or other supported payment methods and allows merchants to receive electronic payments.

Small and Medium-sized Enterprises (SMEs):
Business enterprises that fall within the relevant size classification established under Nigeria’s MSME policy framework, generally distinguished according to factors such as employment and assets.

SME Growth:
The improvement or expansion of an SME’s business activities, measured in this study through indicators such as sales/revenue, profitability, customer base, business expansion and overall business performance.

Profitability:
The ability of an SME to generate income or profit after accounting for the costs associated with its operations.

Customer Base:
The number and range of customers regularly patronising an SME’s products or services.

Business Expansion:
An increase in the scale or scope of an SME’s operations, which may involve increased sales, additional employees, new branches, increased product lines or a larger market.

1.10 Organisation of the Study

The study will be organised into five chapters.

Chapter One presents the introduction, background to the study, statement of the problem, aim and objectives, research questions, hypothesis, significance, scope and operational definitions.

Chapter Two will review relevant conceptual, theoretical and empirical literature relating to digital payment adoption and SME growth. It will also present the theoretical framework and identify the research gap.

Chapter Three will present the methodology of the study, including the research design, study area, population, sample size, sampling technique, instrument for data collection, validity and reliability of the instrument, method of data collection and techniques for data analysis.

Chapter Four will present and analyse the data collected from respondents. The research questions will be answered and the hypothesis will be tested using appropriate statistical techniques.

Chapter Five will present the summary of findings, conclusion and recommendations, as well as suggestions for further studies.

Project – The Effect of Digital Payment Adoption on the Growth of Small and Medium-Sized Enterprises in Nigeria: A Study of Selected SMEs in Lokoja, Kogi State