The Role Of Bank Of Industry In The Development Of Small And Medium Enterprises (SMEs) In Kaduna
This research work is conducted on the role of bank of industry in the development of small and medium enterprises (SMEs). The aims and objectives of the study is to analyze the various role played by bank of industry in developing small and medium enterprises as well as the activities of government policies, such as provision of infrastructural facilities provision of local finance facilities, funding of industries and institutions like SSICS, CIRD and FIIRO. The researcher uses the questionnaire and interview method to collect the data from the respondents. The analysis and crossed tabulation of data gathered were done using the mean statistical method with the 1-5 Likert rating scale for proper accuracy in arriving at a dependable decision rule. Lastly the researcher concluded that, the bank of industry was able to maintain its customer because they do welcome whatever kind of financial assistance, therefore, he finally recommended that, the government should also endeavour to appoint the workers to teach the entrepreneur who does not have the advantage of attending seminar or workshops especially the illiterate ones and keep supervising them in right way.
Table Of Content
- Title Page
- Table Of Contents
- 1.1 Background Of The Study
- 1.2 Problem Statement
- 1.3 Study Objectives
- 1.4 Significance Of The Study
- 1.5 Study Questions/Hypotheses
- 1.6 Scope And Limitation Of The Study
- 1.7 Definition Of Terms
Review Of Related And Relevant Literature
- 2.1 Introduction
- 2.2 Conceptual Clarifications
- 2.3 Theoretical Studies
- 2.4 Empirical Studies
- 2.5 Related Literatures
- 3.1 Research Design
- 3.2 Study Area
- 3.3 Sources Of Data
- 3.4 Population Of The Study
- 3.5 Sample Size Determination
- 3.6 Instrumentation
- 3.7 Reliability And Validity Of Instrument
- 3.8 Method Of Data Analysis
Data Presentation, Analysis And Interpretation
- 4.1 Data Presentation
- 4.2 Data Analysis
- 4.3 Data Interpretation
Summary, Conclusion And Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
1.1 Background Of The Study
The dynamic role of government agencies in the development of small and medium enterprises is an engine through which the growth and development objectives of developing nations can be achieved which has been recognized and stated in the literature is quite interesting. These enterprises have a very important impact on the life of everybody in the society. The small independence business are everywhere and in every line of work, they can also be seen in every community. This business is as old as man. So virtually everything is done in life involved the element of business. Small and medium enterprise constitutes an importance in today’s business activities or system. The role of small and medium enterprise in our economic history however, has been one of the distribution and contribution.
Although its relative importance has decline with the growth of the big business, small and medium business is till major contribution to the countries economy. Business in Nigeria today is made up of both large and small business. Today small scale enterprise have to enjoy more prestige than ever before because of its vital contribution to the nations economy. So vital is small scale business. There are successful small scale enterprise operating like the manufacturing plants, retails, stores, wholesales, drugs, computers, construction firms and hundred of other type of business.
Nigeria population was estimated to be 167 million in 2012 with about 75% of this made up of small scale enterprise operators. Lack of full study of government agencies in the development of these enterprises especially, the financial institution made it impossible to know the size, structure and function of these small and medium business to the development of the economy of Nigeria.
Government agencies are charged with the responsibilities among others to carryout duties and deliver utilities as it may be regulated from time to time on behalf of the government for the purpose of uplifting the standard of living. Government agencies such as bank of industry (BOI) is charged with the responsibility like provision of medium and long term finances by way of equity funding, loan and lease financing, guarantees, investment in corporate bonds business development services, co-financing, working capital finance and promotion of small and medium enterprises and industries project, co-sponsoring financial institutions and small and medium enterprises.
This bank of industry was formerly originated from Nigerian industrial development bank limited was established in 1964 following the reconstruction of the investment company of Nigeria limited (ICON) NIDB was set up primarily to accelerate Nigerian industrialization.
The bank was to conceive shortly after Nigerian attains independence in 1960. The idea was to set up development of financial institution to serve as a dedicated window for channeling fund from within and outside the country to the young nation states industrial sector. Economic reconstruction fund (NERFUND) in the last regime of Obasanjo administration is renamed as BOI.
This study attempts to find out how the Bank of Industry finance small and medium scale Enterprises in Nigeria.
1.2 Statement Of The Research Problem
Several studies have identified financial constraints as the major obstacle to good small and medium enterprise development in developing countries including Nigeria. Most government agencies have undergone numbers of re-organization especially bank of industry (BOI) which affect their forces and activities that leads to effective performance and lack of proper control on their activities.
The most obvious problems facing the society is the most basic economic problem such as what to produce, how much to produce, for whom to produce, How efficient of resources use or providing efficient financial resources technical assistance, how much to consume and to save and problem of unemployed resources etc, security on loan given out to customer SMEs evaluating of project that are financed which may take more time than stated at the beginning. Also the finance project time table, which depends on nature and complexity of the project, it may take one to two years sometimes longer from when project was identified to when it was commissioned.
The project financing involves giving loan to a new entity established specifically to own or operate project. On the part of small and medium enterprises (SMEs) how effective are they utilizing the services rendered to them by the bank of industry (BOI). Also are they able to cope with the policies adopted by these agencies (BOI) in obtaining loan and other services rendered such as interest rate on capital collateral facilities and the role of government.
1.3 Objective Of The Study
The aims and objectives of the study is to identify and consequently analyze the most effective and efficient way through which bank of industry is developing of small and medium enterprises as well as the activities of government policies such as provision of infrastructural facilities, provision for local finance facilitates and funding of industries and funding institutions like small scale industrial credit scheme (SSICS), center for industrial research and development (CIRD), and Federal Institute of industrial research, Oshodi (FIIRO) etc are they to what does the policies of government are achieved towards developing SMEs by so doing that, the researcher intends giving an in-depth information and analysis on the various strategies thorough which SMEs can be financed by BOI.
Specifically, this study is aimed at achieving the following objectives:
- To highlight the different sources of finance available to small and medium scale industries in Nigeria.
- To examine the role of Commercial Banks in satisfying the financial needs of SMEs in Nigeria taking Bank of Industry as a case study.
- To improve the financial assistance to the entrepreneurs by commercial Banks.
1.4 Formulation Of Hypothesis
- H1: That financing small and medium scale Enterprise by Commercial Banks has been a failure.
- H2: That obtaining financial assistance by small and medium scale Enterprises from Commercial Banks is very difficult and that most of the assistance is obtained through savings and borrowing from other sources.
1.5 Significance Of The Study
The study is to serve as a reference material to other students or researchers such as scholars, the management, the prospective investors, the general public, researchers and academic and banking professional body and banking and finance students etc who might be interested to write on or make research on similar topic and serve as recommendation to the bank of industry (BOI) in discharging its functions to their customers as well as mode of rendering services to the customers SMEs. Since the SMES in Africa rely largely on own savings, not only to grow but also to innovates, firms often need real services support and formal finance assistance, failing which under investment in long term capabilities training and research and development (R & D) may result to evaluate the operations of a vital segment of the industrial sector-small and medium scale enterprises which shall be done with special focus on their financing thereby adding to the existing literature on the subject matter.
The following can benefit from this studies.
1. The management:
Managers and the operators of the bank of industry will find this study very great benefit as it will give rise to the confidence of the banking public in the BOI thereby re-positioning them to play their vital intermediation roles in the economy of Nigeria.
2. The prospective Investors:
Investors or entrepreneurs and bank of industry customers will further be enlightened on the beneficial service maintaining and offered by the bank of industry from the results of this study. If the investors or customer comply with the efficiency of the management in terms of customer relations and some other activities that will determine the reputations of the corporate which will encourage more investors to invest more and by developed an orientation devoid of financial indiscipline the investors will use this study in repositioning their business for easy access to BOI’s credit facilities.
3. The general public:
Public can benefit from this study through by devoting a research and development (R & D) initiatives.
i. Regulatory Bodies:
The regulatory bodies will find this study very useful, such body are central bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC). The study will serve as a guide in the review of monetary policies guidelines on the operations of Bank of industry by the CBN. The study will also assist the NDIC in granting the extension of deposit insurance cover to bank of industry.
ii. Policy makers:
The government and other relevant agencies should utilize the knowledge gained from this study in assisting the bank of industry by designing appropriate policies and training programmes for the operators of banking sector.
4. Banking professional Body:
The chartered institute of bankers of Nigeria (CIBN) will find this study useful toward building and implementing the baking industries been competency framework by supporting the variety of career path ways for banking professionals in enriching their syllabus and accreditation criteria as well as review of licensing criteria for practicing bankers.
5. Research and Academics:
The researchers and academic can use the result of this study by using juggling process such as step by step self-regulated problem solving format with automatic reinforcement at every level of accomplishment and stay on task, screen out distractions, manage their energy to act appropriately and with the desired results using successive approximations, persevere through a series of minor failure (drops), analyzed final results of the process and incorporate the newly learned activities that can be demonstrated and through to others as a basis for conducting further research studies like for student of banking and finance.
6. Student of banking and finance
This study will be useful to students who is studying in this field by also using that of juggling process format such as step by step self-regulated problem solving. The juggling process format provides a series of sequential problems solving which might require the researchers (Students) to calm down and settled by paying attention, listen analytically, observe critically focus on one activity at a time and plan a learning strategy by using that of juggling process format. The study will make empirical contribution to the field of banking sectors to the bank of industry and the student who are yet upgrade of working in bank and other industries, who seek to pursue a career in banking sector as well as to help bank professionals in order to keep pace with the development of banking.
1.6 Research Methodology
As it is fully aware, the significance, reliability and validity of any research work to a great extent depends on the methodology used.
There are two methods of data collection; the primary and secondary methods. The primary method consist of structural questionnaire and personal interview, while the secondary method include published government documents and journals, periodicals notable from Central Bank of Nigeria’s publications like bulletins, financial and economic review text books, magazines, budget speech and so on. This research work will not be exceptional.
- There will be two sets of questionnaires; one set will be for some top management and employees of BOI. The other set will go to some small and medium scale industrialist through the chairman of NASSIS.
- There will also be personal interview with some staff in the credit department of BOI and also some staff of industrial development centre.
- The secondary method will also be consulted as this will give room to obtaining financial data easily. Also data will be obtained from manuals, reports and handbooks of BOI. IDC inclusive.
1.7 Scope Of The Study
This research work is intended to examine the financing of SMEs by the Bank of Industry (BOI). The study was limited to BOI in Kaduna state. As seen in the earlier part of this chapter, the importance of SMEs towards economic development of a nation cannot be overemphasized, the study covers all kinds of industries, production, processing, servicing, e.t.c.
1.8 Limitations Of The Study
One of the major limitations in carrying out this work is time. There is time constraint in carrying out this research work due to the fact that there are other academic engagements like attending lectures, writing assignments, tests, e.t.c. Another limitation of this study is that only BOI is used. The operation in this bank will certainly not represent the genuine situation obtainable in other banks. This can be as a result of different polices or the financial capabilities in lending.
However, BOI is chosen because of its financial backing and thus represent Commercial Banks that can fulfill their obligations as seen in the earlier part of this chapter.
1.9 Definition Of Terms
1. Commercial Banks:
Commercial Banks are generally referred to as those banking institutions that create money in the form of demand deposits. Simply put, a Commercial Bank in an institution engaged in all aspect of the commerce of its own country and its business relations with other countries with a view f making profit.
2. Small And Medium Scale Industries (Enterprises) SME:
Small and medium scale enterprises are defined as those enterprises with fixed assets other than loan but including the cost of new investments not exceeding N36Million.
This can be defined as a person who set and start his own new and small business enterprise.
4. Economic Growth:
This is defined as a sustained increase in a nation’s gross national income per capital over a long time period.
5. Economic Development:
This is defined as the st5ructural transformation of all the economic indexes from a low to the high strata.
This is the process of sourcing for fund or acquisition of funds for financial purpose.
This can be defined as wealth or property in form of money or property, sometimes the basic sum in an investment enterprise.
8. Collateral Security:
Property or something valuable which is used as guarantee that someone will repay such a landed property, insurance policy e.t.c., which the bank is authorized to take in the event of a customer defaulting in the loan agreement.
The sum of money borrowed at an agreed rate of interest. It can be of long term or short term.
This is a financial assistance granted by way of allowing customers withdraw in excess of the balance in their accounts.
Resources or things of value owned by an economic nit, such as a firm, individual or household as cash property and rights to property.
Summary, Conclusion And Recommendation
4This study sheds light on the problems, roles and importance of small and medium scale industries in the economic development of any country and Nigeria in particular. Attempt was made to evaluate the role of commercial banks of Nigeria through financing these industries. The other sources of finance available to small and medium scale industries were also enumerated. Issues raised by both the bank and the SMEs were analyzed and summary of the findings were discussed in chapter four, in which the primary data were collected through two sets of questionnaires; one to the bank and the other to the small and medium scale industries. Interviews were also conducted in which IDC staffs were included. The secondary data obtained were from annual and financial reports, bulletins, publication of CBN, newspapers, relevant text books
In an effort to enhance and develop these small and medium scale industries, the federal government of Nigeria at the initiative of the CBN introduced a scheme (SMIEIS) which requires banks to set aside 10 percent of their profit before tax to fund SMEs in an equity participation framework other schemes like NERFUND and SSICS were also established.
The purpose of this research work is to analyze the result of these programs so far and ascertain whether it offers an effective means of solving the problem of funding small and medium scale businesses in Nigeria, whether banks can play the intermediary role.
From the analysis of the results in chapter four, one can deduce that the accessibility to credit market for small and medium scale businesses in Nigeria is extremely difficult due to the fact that the macroeconomic instability and uncertainty in the business environment has forced banks to lend short to SMEs. Also such facilities i.e. overdrafts and short term loans are made available at a very high interest rate of over 26 percent and they are heavily collaterised. In a situation in which SMEs are mainly dependent on bank loans, this situation could be very disastrous. The implication is that many SMEs do not have access to bank loans with grave implications for their growth and development. Also the inconsistency in government industrial policies for example the inability of the government to execute budgets on time is a major restriction on the ability of manufacturing firms to factor tariff measures into their trade decisions. The lack of infrastructural facilities is also part of external problems that affect the growth of small and medium scale industries. Here, many banks blame their inability to fund SMEs on the poor economic climate prevalent in the country, citing for instance the low performance of public utilities as one of the factors threatening fund managers.
Apart from the external problems that harm the growth of SMEs, there are also serious internal problems that greatly constrain their growth and serve as a deterrent for banks to lend. These problems include among others poor management practices, high rate of business failure, poor accounting standards, shortage of skilled manpower and financial indiscipline.
On the basis of these problems, some recommendations are made below which , if implemented will improve the dwindling state of our economy in general and the small and medium scale industries in particular.
There is no way Nigeria can achieve sustainable funding of small and medium scale enterprises by commercial banks and other agencies such as NERFUND, NIDB etc established for the funding purposes until both the external and internal problems of SMEs are solved. Banks react to the stimulus of the macroeconomic environment and as long as the environment remains unconducive, banks will continue to exhibit risk-averse behavior irrespective of the programs put in place to address this problem including the SMIEIS program that was already highlighted.
The following recommendations in my opinion will help improve the growth and development of the SMEs:
- The government should cut down the interest rate since interest rates are not favorable to investors in the sense that the cost of funds could undermine profits and cause a loss of the investment. Interest rates in Nigeria officially are as high as 23.6% and this has a negative impact on the ability of small and medium scale industries to obtain credit from the banks.
- The government should be consistent in its industrial policies so as to enable manufacturing firms to factor tariff measures into their trade decisions.
- The government should provide adequate infrastructural facilities like electricity, roads and water supply for the SMEs as this will reduce the high cost of doing business. This will encourage banks to fund the SMEs as their investment will be recouped.
- The government should regard SMEs should regard SMEs as the ‘eggs’ that hatch big businesses. Apart from the adequate incentives in (3) above, the government should support SMEs by bulk purchasing their products and retailing them both for the domestic market and for exports.
- To facilitate their access to bank credits, the government should be issuing LPOs to the SMEs and payment should be made promptly to the SMEs as this will encourage their growth and the banks can also accept such contract papers as collateral.
- On the issue of the internal problems of the SMEs like poor management practices, high rate of business failure, poor account standards, shortage of skilled manpower and financial indiscipline, the government should set up small business management assistance agencies manned by highly skilled and dedicated workers with the view of tackling these problems. The agencies should compliment the provision of credit by insuring its efficient use through training and counseling of the small and medium scale entrepreneurs.
- The banks should target potential borrowers for its core operations and form them into groups. Then soft loans should be made available to these SMEs, repayable within a specified period before others in that strategic group can benefit from the scheme. The idea is that with this system, a subtle pressure from other SMEs that are members of this strategic core is mounted on the benefiting group to repay so that others can benefit from the scheme. This will no doubt introduce healthy capitalization among SMEs through factoring the credibility of the borrowers.
- The need for capitalization of the banks cannot be overemphasized as capitalization influences the way banks react to GDP shocks. Also, the credit supply of well capitalized banks is less pro-cyclical. This indicates that well capitalized banks are not risk-averse. Moreover, well capitalized banks can better absorb temporarily financial difficulties on their borrowers and preserve long term lending relationships.
- If (8) above is achieved, the mega banks such as Bank of Industry should play a more active role in actualizing the objectives of SMIEIs by setting up separate desks to manage the funds and vigorously pursue the idea as with any other bank product and undertaking studies aimed at attracting foreign investors scanning overseas markets and monitoring developments that have implications for the sector.
- The banks should adopt relationship lending as a dominant bank rule in funding SMEs. This will mitigate the problem of weak asset based collateral. However, this can be more effective if the borrowers show some high level of responsibility, discipline and trustworthiness. According to the CEO of one of the mega banks in Bangladesh, they give loans to SMEs without collateral and realize over 96 percent of their investments (CNN CONNECTS, Sept 05).
I strongly believe if all these recommendations are given serious attention by both the key players’ i.e. the government, the banks and the SMEs themselves, financing the SMEs by commercial banks will be made a lot easier, more effective and the impact will be felt towards the growth and development of small and medium scale industries vis-à-vis the economic development of Nigeria.
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