Effect Of Deposit Money Banks Credit On The Performance Of Micro, Small And Medium Scale Enterprises In Nigeria

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Effect Of Deposit Money Banks Credit On The Performance Of Micro, Small And Medium Scale Enterprises In Nigeria


Abstract


This research work studied the effect of deposit money banks’ credit on the performance of Micro, Small And Medium Enterprises In Nigeria. In carrying out this study this study used annual time series data for the period 2000-2016 obtained from Central Bank of Nigeria (CBN) Statistical Bulletin (various issues). The Ordinary Least Square (OLS) technique was employed to obtain the numerical estimates of the coefficients of the equations. The variables are; sectorial distribution of deposit money bank credit and advances to MSMEs (DMBCMSME), Lending interest rate (LR), savings rate (SR) and money supply (M2). This study identifies sectorial distribution of deposit money bank credit and advances to MSMEs (DMBCMSME), Lending interest rate (LR), and savings rate (SR) as the major constraints to MSMEs in of Nigeria. The three variables had coefficients of -0.036255, -0.172759, -3.965471and t-statistics values of -2.513035, – 0.219083, -2.369485 respectively. Both sectorial distribution of deposit money bank credit and advances to the MSMEs and saving rate where negative but significant to the growth rate of MSMEs, while lending rate was negative and insignificant to the growth rate of MSMEs in Nigeria. Money supply was positive and insignificant to the growth rate of MSMEs. This implies that for the growth of the MSMEs in Nigeria, bank lending interest rate should be low to allow investors to source capital for investment. This study therefore, recommends that monetary authority in Nigeria should therefore reduce the lending interest rate at which Banks lend to the MSMEs.


Table of Content


  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content
  • List of Tables
  • Abstract

Chapter One:

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisations of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Introduction
  • 3.2 Research Design
  • 3.3 Nature and Sources of Data
  • 3.4 Model Specification
  • 3.5 Description of Model Variables
  • 3.6 Techniques of Analysis

Chapter Four:

Data Presentation and Analysis

  • 4.1 Data Presentation and Description
  • 4.2 Descriptive Statistics
  • 4.3 Covariance Analysis
  • 4.4 Test of Hypothesis

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • REFERENCES

Chapter One


Introduction

1.1 Background of the Study

In developing countries Micro, Small and Medium Enterprises (MSMEs) are at the fore front of entrepreneurial development (Mupotola, 2021; Musa, 2021). MSMEs play key roles in transition and developing countries. These category of entrepreneurs typically account for more than 90% of all firms outside the white-collar jobs sector, constituting a major source of employment and generates significant domestic and export earnings (Kanu & Nwadiubu, 2021). In Nigeria 27% of the country’s trade balance comes from MSMEs, but more importantly they these businesses employ 60 million Nigerians (Aluko, 2018). Furthermore, Aluko (2018) asserted that without MSMEs, the unemployment rate would soar to as much as 50%, which could result in chaos in the country.

Commercial banks have a long and successful history of assisting the private sector (Nnamdi et al., 2021), particularly MSMEs. The bank’s actions help to create a favorable commercial and operational environment, encourage further entrepreneurial development through technical assistance and business development services, and offer trade credit via innovative financing products which have spurred economic growth over the years (Ozioko & Enya, 2021; Olaoye, Adedeji, Ayeni-Agbaje, 2018).

Credits plays a significant role in competitive economies (Obinna, 2020). Consequently, Adewole and Aderemi (2021) and have argued that when money is created in combination with interest-bearing debt, a growth imperative is necessarily created, particularly, the charging of interest on debt is itself an underlying driver for economic growth. Providing adequate finance for MSMEs is therefore critical since they are regarded as the motor of any economy’s development because they account for the majority of business operations in a developing economy like Nigeria. Because MSMEs are characterized by energy, creativity, and efficiency, and their small size allows for a faster decisionmaking process, most economies, particularly those of emerging nations, march on their shoulders.

The advantages of MSMEs to any economy are obvious. These category of entrepreneurs help in the economy in terms of output, i.e., providing goods and services; creation of jobs at relatively low capital cost, especially in the fast-growing service sector; provide a vehicle for reducing income disparities; develop a pool of skilled and semi-skilled workers as a basis for future industrial expansion; improve forward and backward linkages between economically, socially and geographically diverse sectors of the economy; Provide opportunities for developing and adapting appropriate technological approaches; offer an excellent breeding ground for entrepreneurial and managerial talent, the critical shortage of which is often a great handicap to economic growth, among others (Invoice, 2021).


1.2 Statement of the Problem

MSME’s in Nigeria over the last five years account for 48 percent of the country’s GDP, 96 percent of enterprises, and 84 percent of jobs- they account for over half of all industrial jobs and virtually all of the MSMEs in terms of number of businesses, with a total population of around 17.4 million (PricewaterhouseCoopers, 2021; Small and Medium Enterprises Development Agency of Nigeria. (2021).

Inadequate access to finance is a key constraint to SME growth, it is the second most cited obstacle facing MSMEs to grow their businesses in emerging markets and developing countries (Balarabe (2021; World Bank, 2021; Ayansola & Jennifer, 2017). Recognizing the importance of funding to MSME growth, the Federal Government of Nigeria through the Central Bank of Nigeria (CBN) launched the MSMEs Development Fund in 2013 with a share capital of N220 billion. The Fund was established in recognition of the significant contributions of the MSME sub-sector to the economy and the existing huge financing gap. In particular, substantial amounts of the fund, has been given to Participating Financial Institutions (PFIs) which are predominantly commercial banks for onward lending to MSMEs at a maximum interest rate of 9% per annum (CBN, 2021).

Despite these interventions, the cost of funds still constitutes a major source of problem for MSME, and this have significantly limited their competitiveness, survival, and their growth enhancing effects on the economy (PWC, 2021). In addition, the MSMEs finance led growth debate in the literature have remained inconclusive. While several studies such as that of Onyeiwu, Muoneke and Nkoyo (2021), and Akinadewo (2020) affirm the finance growth enhancing effect on the economy, studies such as that of Kanu and Nwadiubu (2021), and Olaoye et al. (2018) have disputed this position. To this end, this study aims to examine the effect of deposit money banks’ credit on the performance of Micro, Small And Medium Enterprises In Nigeria.


1.3 Objectives of the Study

The general objective of the study is to examine the effect of deposit money banks’ credit on the performance of Micro, Small And Medium Enterprises In Nigeria. Specifically, the study will be guided by the following;

  1. Examine the effect the sectorial distribution of deposit money banks credits on the performance of MSME in Nigeria.
  2. Determine the effect of deposit money banks lending rate on the performance of MSME in Nigeria.
  3. Determine the effect of saving rate on the performance of MSME in Nigeria.
  4. Examine the effect money supply has on the performance of MSME in Nigeria.

1.4 Research Question

The study will be guided by the following questions;

  1. What is the effect the sectorial distribution of deposit money banks credits on the performance of MSME in Nigeria?
  2. What is the effect of deposit money banks lending rate on the performance of MSME in Nigeria?
  3. What is the effect of saving rate on the performance of MSME in Nigeria?
  4. What is the effect money supply has on the c?

1.5 Research Hypothesis

The following hypotheses are relevant to our study:

  • Ho1: Sectorial distribution of deposit money banks credits does not have a positive and significant effect on the performance of MSME in Nigeria
  • Ho2: Lending rate does not have a positive and significant effect on the performance of MSME in Nigeria
  • Ho3: Saving rate does not have a positive and significant effect on the performance of MSME in Nigeria.
  • Ho4: Money supply does not have a positive and significant effect on the performance of MSME in Nigeria.

1.6 Significance of the Study

This study is also useful to policy makers by making them aware of the problems affecting the growth of the MSME and pointing out steps or measures that can be taken in order to produce a better functioning sector.

This Research would also serve as a platform for other researchers on the same or related subjects.


1.7 Scope of the Study

The scope of this study boarders on the effect of deposit money banks’ credit on the performance of Micro, Small And Medium Enterprises In Nigeria. This study will adopt time series data from 2000-2016. The data will be obtained from the publications of the central bank of Nigeria statistical bulletin and that of the selected Micro, Small And Medium Enterprises In Nigeria.


1.8 Limitation of the Study

As regarding the limitations on this research project, it would be impossible to include all manufacturing industries in Nigeria, therefore, this study was limited to some selected manufacturing companies.

Time constraint was another strong factor that posed as a limitation to this research because the study was carried out when the researcher had so much work load. Thus, it was difficult for the researcher to meet up some of the appointment with respondents.


1.9 Definition of Terms

Micro, Small And Medium Enterprises:

Micro-enterprises as those with fewer than 10 employees, small enterprises as those with 10 to 49 employees, and medium-sized enterprises as those with 50 to 249 employees(European Union).

Bank credits/lending:

Bank lending or bank credits are the aggregate amount of credit available to a person or business from a banking institution. It is the total amount of funds financial institutions provides to an individual or business. A business or individual’s bank credit depends on their ability to repay and the total amount of credits available in the banking institution.

Lending/Interest rate:

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed.

Sector:

A sector is an area or proportion that is distinct from others. Therefore, the sectors of an economy are large groups of the economy, grouped according to their place in the production chain, by their kind of work (product or services) or ownership. For example the agricultural sector, the MSMEs, etc. Our focus, for the purpose of this research work is the MSMEs.

Saving rate:

A saving rate is an amount of money, expressed as a percentage or ratio that a person deducts from his disposable personal income to set aside as a nest egg or for retirement.

Money supply:

Money supply is the total value of monetary assets available in an economy at a specific time. Money supply includes currency in circulation and demand deposits (depositors’ easily accessed assets on the books of the financial institution).


1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc.
  • Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Summary, Conclusion and Policy Implications

5.1 Introduction

This chapter presents the summary, conclusions and recommendations of the study. These are presented in line with the objectives and findings of the study.


5.2 Summary of Findings

The principle objective of this study is to examine the effect of deposit money banks’ credit on the performance of Micro, Small And Medium Enterprises In Nigeria. An analysis was carried out for the purpose of the objectives as stated in chapter one. Using ordinary least square regression analysis technique, bank lending, through identifiable and measurable proxies such as lending rate (LR), Deposit Money Bank’s loan and advances to the MSMEs (DMBCMSME), saving rate (SR) and money supply (M2) was used to investigate its impact on the growth of the MSMEs with time series data from 2000 to 2016.


5.3 Conclusion

This study has investigated the effect of deposit money banks’ credit on the performance of Micro, Small And Medium Enterprises In Nigeria for the period which spanned between 2000 and 2016. Econometric model was specified and estimated via the Least Square regression techniques to ascertain the relationship between dependent MSMEs output growth rate and the explanatory variables (Deposit Money Bank credit to the MSMEs, interest/ lending rate, savings rate, money supply). Descriptive statistics for the variables was carried out, as well as correlation test between the dependent variable and the independent variables. From the results obtained in the regression analysis showed that MSMEs growth rate and selected variables included have a long run relationship with the growth of the MSMEs. The study also reveals that Deposit Money Bank Credits and advances (DMBCMSME) and savings rate has a significant impact on MSMEs growth rate in Nigeria.

Although money supply has a positive relationship with MSMEs growth rate, its impact is still insignificant on the country’s MSMEs growth rate. This may be connected with the government monetary policy objective of ensuring financial stability by controlling the amount of money in circulation. The study shows that interest rate has adverse effect on the growth of MSMEs output. This finding confirms to the apriori expectation. This was attributed to the stable macroeconomic policy in management of interest rate and the control of money supply in the Nigeria economy. Conclusively, bank credit to the MSMEs and saving rate are the main determinants of Nigeria MSMEs growth.


5.4 Recommendations

  1. Banks should further be empowered, so as to be able to grant long-term loan that would enhance MSMEs’s output growth and performance. These loans would ensure that more funds are available for investment purposes and for improvements such as technological improvement.
  2. Interest rate must be allowed to function through market mechanism to ensure that interest rate is determined by the demand for loanable fund and the supply of these loanable funds.
  3. Saving should be encouraged by establishing more Deposit Money Banks in the rural area which would facilitate financial inclusion and also ensure effective and efficient mobilization of rural saving for MSMEs’s development.

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