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Role of Commercial Banks in Financing Small & Medium Scale Enterprise in Nigeria (1986 – 2013)

Bachelors Degree

This research work focuses on the financing of Small and Medium Scale Enterprises (SMEs) in Nigeria paying special attention to the role of commercial bank credit in the development of Small and Medium Scale Enterprises. Although there are other types of banks that grant credit facilities to Small and Medium Scale Enterprises in Nigeria, the analysis in this study focuses on commercial banks only. The research intends to study the essential problems encountered by Small and Medium Scale Enterprises and suggest ways by which they can be adequately and efficiently financed.

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The research work studied the financing of small and medium scale enterprises in Nigeria with special focus on the role of commercial banks. While the future of the Nigerian economy resides in the development of SMEs, the major problem confronting small and medium scale enterprises in the country is finance.

Regression analysis was employed in the data analysis. Due to the linearity nature of the model formulation, ordinary least square (OLS) estimation method was adopted. The variables employed include: gross domestic product, loan granted to small scale industries by commercial banks and the interest rate.

The result of the analyses showed that the small and medium enterprises do not play crucial role in economic development of Nigeria. It was also found that Nigerian banks has been giving less and less priority to small and medium enterprises in their credit composition.

Some of the recommendations made in this study are that commercial banks should give priority to SMEs, government should create and enabling environment where businesses can strive. Government should restructure BOI and BOA in order to make them effective and efficient.

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BACKGROUND

For both developing and developed countries, Small and Medium Scale Enterprises firms play important roles in the process of industrialisation and economic growth (Safiriyu and Njogo, 2012; Abiodun, 2010; Smit and Watkins, 2012). Apart from increasing per capita income and output, small scale enterprises create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resource utilization considered critical to engineering economic development and growth (Aigboduwa and Oisamoje, 2013). However, the prominent role played by small scale enterprises notwithstanding its development is everywhere constrained by inadequate funding and poor management. The unfavourable macro economic environment has also been identified as one of the major constraints which most times encourage financial institutions to be risk-averse in funding small and medium scale businesses (Ogunjiuba et al., 2004). The reluctance on the part of financial institution to fund small scale enterprises can be explained by the insufficient capital base of banks and information asymmetry that often exists between small scale enterprises and lending institutions.

Firms depend on a variety of sources of financing, both internal and external. The relationships among these sources and their effects on investment, however, remain unclear in the literature. In the case of SMEs, bank credit or loan is major alternative of external funding (James and Ashamu, 2014). According to Valverde et al. (2005) bank credit play a crucial role in providing external financing to Small and Medium Scale Enterprises (SMEs). But in the Nigerian context, this crucial source of finance for Small and Medium Scale Enterprises is apparently non-functional (Kadiri, 2012). This is evident in the ratio of loans to Small Scale Enterprises to Commercial banks’ total credit, which shows that a meager 0.13% of commercial banks’ total credit was granted to Small Scale Enterprises in the last quarter of 2013 (CBN, 2013). More worrisome is the fact that this ratio has been falling over the years and continued unabated in the post-consolidation era (Iorpev, 2012). Berg and Fuchs (2013) attribute this trend to the high interest rates on Government securities which serves as a disincentive to intensify lending to Small Scale Enterprises (SMEs).

Considerable attention has been paid in the last decade to the problem of poverty-reduction in developing countries. It is generally agreed that the development of micro and small scale enterprises can be a key ingredient in poverty-reduction. However, micro and small scale enterprises generally suffer from a range of problems in their establishment and development. Among these problems, finance is perhaps the most central (Calice et al., 2012). A priori, it might seem surprising that finance should be so important. Requirements such as identifying a product and a market, acquiring any necessary licenses, and keeping proper records are all in some sense more fundamental to running a small enterprise than is finance. However, potential providers of finance, whether formal or informal, are unlikely to commit funds to a business which they view as not being on a sound footing, irrespective of the exact nature of the unsoundness. Lack of funds may therefore be the immediate reason for a business failing to start or to progress, even when the more fundamental reason lies elsewhere. In this sense therefore, it could be argued that finance is the “glue” that holds together all the diverse aspects involved in a small business start-up and development.

 

 

 

OBJECTIVES

The main objective of this study is to evaluate the financing of Small and Medium Scale Enterprises in Nigeria taking into consideration various conditions such as economic, political, social, psychological etc under which small-scale enterprises operate.

In view of the above, this study intends to find out the following:

(i) To identify the economic potential of Small and Medium Scale Enterprises in Nigeria.

(ii) The role of commercial banks in the financing Small and Medium Scale Enterprises in Nigeria.

SIGNIFICANCE

Small and Medium Scale Enterprises in Africa rely largely on own savings, not only to grow but also to innovate, firms often need real services support and formal finance assistance, failing which under-investment in long term capabilities (training and R & D) may result (Oyelaran-Oyeyinka, 2003). This study is significant because it would help to evaluate the operations of a vital segment of the industrial sector Small and Medium Scale Enterprises, which have been identified as having very high potential in promoting economic growth and development (Oni and Daniya, 2012). The evaluation shall be done with special focus on their financing thereby adding to the existing literature on the subject matter.

RESEARCH QUESTIONS

The study would examine the following questions:

  1. What role do Small and Medium Scale Enterprises play in the economic growth and development of Nigeria?
  2. What role do commercial banks play in the development of Small and Medium Scale Enterprises in Nigeria?

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