Effectiveness Of The Technical Support For Small Scale Industries By Commercial Banks

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Effectiveness Of The Technical Support For Small Scale Industries By Commercial Banks


This study investigates the technical support which commercial banks provide for small scale industries in Nigeria (a case study of Union Bank of Nigeria Plc). The contributions of commercial banks range from the granting of loans to the small scale industries and advisory services are examined. Various determinants employed include the use of primary sources (those collected by the researcher) and secondary sources (those collected from relevant published materials). Importantly, the study provides entrepreneurs, small scale businesses, bankers, researchers and government official a clearer view of the problems facing small scale industries, understand how best to tackle these problems and ways of stimulating development of small scale industries.

Chapter One


Prior to the 1970s or thereabout, the view that large firms were the cornerstone of modern economy dominated economic literature (Nnanna, 2001). The theory of economy of scale which is predicated on the advantages of large scale operations was almost doctrine. In this context, small scale industries (SSIs) were seen as belonging to the past, out-model and a sign of technological backwardness. Indeed, their rapid decline became an index of industrial progress (Owualah, 2001). Lately, however, this view has changed, as the importance of small scale industries in promoting industrialization and economic growth has been recognized globally.

Studies have shown that SSIs have in many countries provided the mechanism for stimulating indigenous entrepreneurship, enhancing greater employment opportunities per unit of capital invested and aiding the development of local technology (Sule, 1986; World Bank, 1995). They help to mobilize savings for investment and promote the use of local raw materials. In addition, the SSIs contribute to the strengthening of industrial linkages and the integration of industrial with other sectors of the economy through the production of intermediate products such as raw materials, spare parts and machinery. It is also recognized that small enterprises adapt with greater ease under difficult and changing conditions as their low capital intensity allows product lines and inputs to be changed at relatively low cost.

In view of these advantages, greater attention has been given to the promotion of SSI globally.

According to Economics Dictionary (1960), industry is defined as the leading sectors of the economy, the totality of all factories, works, power house, mines and workshops which produce tools and equipment, which use the materials and produce the logs, timbers and woods and further use the immediate goods produced by industries as well by agriculture. There is no universal definition of small scale industry. Each country tends to derive its own definition based on the role SSIs are expected to play in that economy and the programmes of assistance designed to achieve that goal. Varying definitions among countries may arise from differences in industrial organization at different levels of economic development and difference in economic development in parts of the same country (Sule, 1986).

The criteria that have been used in the definition include capital investment (fixed assets), annual turnover, gross output and employment. Prior to 1992, different institutions in Nigeria adopted varying definitions of small enterprises. The institutions included the Central Bank of Nigeria, Nigerian Bank for Commerce and Industries, Center for Industrial Research and Development and the National Council on Industry (NCI) streamlined the definition of industrial enterprises to bring in uniformity and providing for its review every four years. The definition was revised in 1996 as follows (NCI, 1986): Small Scale Industry is an enterprise with total cost (including working capital but excluding cost of land) above N1 million, but not exceeding N40 million, with a labour size of between 11 and 35 workers.

The classification of small scale industries in a diagram:

  • Small scale industry
  • Factories Non-factories
  • Cottage Industries Crafts Industry

The increasing development of small scale industries in Nigeria can be appreciated by looking at the pride of place it occupied in many National Development plans. For example, in the second National Development Plan, the government stated that it is its policy to give active support to the promotion and development of small scale industries in the country. To this end, a lot of policies and programme have been initiated by government to enable them attain their objectives culminating in the establishment of the Nigerian Industrial Development Bank (NIDB). In fact, the forth National Development Plan 1980 – 1985 stated that the objective of establishment special assistance programme for the development of small scale industries is for them to serve as a necessary tool for the development of the Nigerian enterprises.

The term small, medium and large are relative. They differ from industry to industry and country to country. In short, there is no unique of universally accepted definition to these terms. What Nigerians considered very large scale in the 1940s may be qualified now as small scale. Also, the optimum size of a ceramic industry is quite dissimilar to that of a fertilizer plant. Some industries are typically small (crafts, gold milling for example). While some are typically large scale (iron and steel manufacturing for example) in terms of capital and/or employment. Many industries also graduate from medium or large probably due to differences in policy focus.

Different government agencies in Nigeria apply various definitions which are considered below:

The introduction of the Structural Adjustment Programme (SAP) July 1986 and with it, the realignment of the Naira exchange rate raised production costs particularly for high import dependent industries. The higher operational costs as a result of the depreciation of the Naira motivated the World Bank to consider a definition closely related to present day cost price configuration. In this programme of $270 million loan assistance to Nigeria’s small, medium scale businesses, the World Bank identified a group referred to as Micro-enterprises. These are enterprises with fixed assets (excluding land plus cost of investment project below N450,000 in constant 1988 prices. It’s also with fixed assets excluding land plus cost of the investment project not exceeding N10 million in constant 1988 prices.
With regard to the National Economic Reconstruction Fund (NERFUND) small scale enterprises are defined as those with fixed assets other than land but inclusive of the cost of new investment not exceeding N100 million.

The centre for Industrial Research and Development (GRO) at the Obafemi Awolowo University, Ile-Ife defines small scale industries as those enterprises with total assets in capital equipment, plant and working capital not exceeding N250,000 and employing not more than 50 full time workers.

The Nigerian Industrial Development Bank defines a small scale enterprises as the one with project cost (investment and working capital) not exceeding N750,000 while it defines medium scale as, those businesses in the range of N750,000 to N3 million.

Industrial policy defines small scale industries as those with total investment of between N100,000 and N2 million excluding cost of capital but including working capital.

The fluidity in the concept of small and medium scale industries as highlighted above, reflects that the range in the definition is exclusively wide from N250,000 in total asset (GRD) to N10 million in fixed assets excluding cost of land (World Bank and NERFUND). Given the prevailing high cost situation and taking into consideration the larger group for government’s policy measures and income taxes, some of the institutions would need to revise their definitions. Bankers on the other hand may need to vary their definitions in time with whatever project they are investing in or funding.

1.2 Statement of Problem

There are so many problems confronting the small and medium industries. Among these is financial constraint. This is caused by sources of fund used in financing the project. Industrial projects need long gestation period. So, to finance such project, long term finance is needed and not a short term finance. In order to solve the problem of short term finance, commercial banks came out with a strategic approach in extending medium to long financing which attracted high interest rates. This measure still constituted more constraint to promoters and investors.
Other problems which have hindered the development of the sub-sector are as follows:

  1. Lack of common service facilities
  2. Imperfect knowledge of the existing market
  3. Inadequate technical and economic counseling on the side of the promoters and investors.

It is against these, that this study will be looking into the following:

  1. Activities of major financial institutions, to find out their level of commitment and determine why there is gap in their credit delivery system.
  2. Whether the guidelines on interest and exchange rate and credit facilities do not contradict with the objectives of the scheme.

1.3 Objective of Study

This study intends to bring into limelight the following:

  1. The sustainable sources for adequate long term financing.
  2. The clear knowledge of existing markets.
  3. The provision of common service facilities.

Other objectives of this study are:

Evaluation of the contribution of commercial banks in Nigeria to the development of small scale industries.
Highlighting the progress and difficulties encountered by these banks in carrying out these duties to the small scale industries.

The successes and failures to the small scale industries will be considered also.

Highlights of the contribution of small scale industries in return to the development of the nation with possible changes.

1.4 Research Hypotheses

Hypotheses are ideas or suggestions put forward as a starting point for reasoning or explanation (Hornby, 1974). It is “a tentative, conjectural statement of the relationship between two or more variables (Agbonifoh & Yomere, 1999).

In this research work three hypotheses will be tested:

  1. Ho: (Null Hypothesis): Level of awareness of credit facilities from commercial banks to small scale enterprises will not significantly improve the activities of SMEs.
    Hi: (Alternative Hypothesis): Level of awareness of credit facilities from commercial banks to small scale enterprises will significantly imrpve the activities of SMEs.
  2. Ho: (Null Hypothesis): Lack of infrastructure will not significantly be a major constraint to SME operators.
    Hi: (Alternative Hypothesis): Lack of infrastructure will not significantly be a major constraint to SME operators.

1.5 Scope and Limitation to the Study

The study will limit itself to the contribution of commercial banks through the granting of loans to the small scale industries from 1980 – 1999. To be looked at also are government policies and incentives for small scale industries within the period.

Samples will be used to represent the whole population and the fact that some companies do not let out some information which they consider as confidential, there is bound to be some elements of sampling bias which will reflect in the analysis of data. However, this is not expected to be significant as the characteristics and nature of commercial banks and small scale industries are homogenous.

1.6 Importance / Significance of Study

Clearly, the study will highlight the role commercial banks have played (especially Union Bank of Nigeria’s experience) towards the development of small scale industries. It will equally pinpoint the limitations these banks have encountered in fully realizing their potentials and then make suggestions for the full realization of these potentials.

Another significance is to provide entrepreneurs small scale businesses, bankers, researchers and government officials with a clear view of the problems facing small scale industries, understand how best to tackle these problems and ways of stimulating development of small scale industries.

Lastly, to acquaint owners of intending owners of small scale industries with the investment opportunities but exist in small scale industry, and how to set up simple accounting records for small scale industries. This study will be of great benefit to banking authorities especially the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance in their policy formulation.

1.7 Operational Definition of Terms

Technical Support

A service provided by a hardware or software company which provides registered users with help and advice about their products

Commercial Bank

A commercial bank is an institution that provides services such as accepting deposits, providing business loans, and offering basic investment products. The main function of a commercial bank is to accept deposit from the public for the purpose of lending money to the borrowers.

Small Scale Industries

Small scale industries is a next step to cottage industries which is a sub level to a large industries

1.8 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), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights 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 Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to examine the effectiveness of the technical support for small scale industries by commercial banks.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of small scale industries

5.2 Summary

The Governments both central and state–have setup several institutions and centers to support small scale industries. Their functions include project appraisals, construction of infrastructure facilities, distribution of raw materials, provision for machinery on hire-purchase scheme, reservation of items for production by small scale industries, and the like. A number of financial institutions offer different schemes to relieve the financial burden of the small-scale units. Industry wise lending to SSI at all the Nigeria level, have been discussed in order to give a comprehensive picture of the financial support available to SSI.

5.3 Conclusion

This study has attempted to examine the impact of the loan of commercial banks to small scale enterprises on the growth of the Nigeria economy. Based on the findings above, we hereby conclude that: The growth of the Nigeria economy does not depends on the loan from commercial to small scale enterprises. This is attributed to the facts that the small scale operators does not have access to credit which is a major problem to small scale enterprises in Nigeria since the traditional financial institutions have not been able to meet their credit needs. However, access to capital or finance is necessary but not a sufficient condition for successful operation. If one has the entire funds in the world and does not have the capacity to manage that fund and does not have the necessary information as to what he/she should do, the money would go down the drain. Government should encourage small scale enterprise through their micro credit scheme to give soft loans. Government should also re-introduce small business credit scheme so as for the beneficiaries to use them to run the small scale enterprises.

5.4 Recommendations

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 SMIs are solved. Banks react to the stimulus of the macroeconomic environment and as long as the environment remains conducive, banks will continue to exhibit risk-averse behavior irrespective of the programs put in place to address this problem including the SMIs program that was already highlighted. The following recommendations in my opinion will help improve the growth and development of the SMIs:

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 onthe 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 SMIs 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 SMIs should regard SMIs as the ‘eggs’ that hatch big businesses. Apart from the adequate incentives in (3) above, the government should support SMIs by bulk purchasing their products and retailing them both for the domestic market and for exports

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Frequently Asked Questions

What are the financial institutions supporting small scale industries in India?

Some of the financial institutions supporting small scale industries in India are:- 1. State Finance Corporations (SFCs) 2. Commercial Banks 3. Small Industries Development Bank of India (SIDBI) 4. Industrial Finance Corporation of India (IFCI) 5. Industrial Credit and Investment Corporation of India (ICICI Bank) 6.

What is the role of banking industry in small scale business?

The banking industry plays an important role to the economy of any nation and there is no doubt, it plays an indispensable role for the development of Small Scale business. This is not to say that they do not have lapses.

What is the government doing to help small scale businesses?

The Government has set up a new ministry of Small Scale Industries and Agro & Rural Industries for looking after small scale business units. 2. The Government gives purchase preference to products manufactured by the small sector. 3. More than 800 items have been reserved for exclusive production by the small scale sector. 4.

How to meet the financial needs of small scale industries?

In order to meet the financial needs of small-scale industries, the Government has created a network of financial and developmental institutions.

Which organizations provide financial assistance to small scale units in India?

A network of State Financial Corporations, National Small Industries Corporation, State Small Industries Corporations, Commercial Banks, Cooperative Banks, and Regional Rural Banks provide financial assistance to small scale units.

What are the different types of financial institutions in India?

These institutions may be classified as follows: 1. All India Financial Institutions: (ii) Industrial Credit and Investment Corporation of India (ICICI), (vi) Small Industries Development Bank of India (SIDBI). 2. State Level Institutions: (iii) State Small Industries Development Corporations (SSIDCCs).

What are the institutions supporting small business enterprises in India?

Institutions Supporting Small Business Enterprises in India: SSIB, SIDO, NSIC, SISIS, SSIDCs, DICs, SIDBI, NABARD and a Few Others Government of India constituted the Small Scale Industries Board in 1954 to advice on the programmes and policies for the development of small-scale sector.

What is the scope of banking sector in India?

Their scope of services could include offering loans, credit, underwriting, retirement plans, and merger proposals. As per government-funded research, the Scheduled Commercial Banks comprise the largest share of the banking sector (76.1%), followed by the NBFCs (15.4%), Cooperative Banks (6.8%), and finally, Regional Rural Banks (1.7%).

What is the role of commercial banks in the economy?

The Role of Commercial Banks in the Economy. Many of us share a fairly basic view of banks. They are places to store money, make basic investments like term deposits, sign up for a credit card or get a loan. Behind this mundane view, however, is a highly regulated system that ties our day-to-day banking back into the wider financial system.

What is the current scenario of the Indian banking industry?

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase.

What is the role of the bank?

The bank – the building, people, processes and services – is a mechanism for drawing in more capital and allocating in a way that the management and board believe will offer the best return. By allocating capital efficiently, the bank will be more profitable and the share price will increase.

How can the government help a small business?

Ways the Government Could Help Your Small Business 1 Local Government. Some local governments will take direct measures to help small businesses in their area, such as offering low interest loans so that business owners can upgrade the facades … 2 State Government. … 3 Federal Government. …

What is the importance of a small business?

The way a business is legally structured (Legal Form of Organization or LFO) also signals importance of small businesses. Businesses organized as a corporation are often considered larger businesses while those that are sole proprietorships or partnerships are often thought of as “small”.

What qualifies as a small-scale enterprise?

To address the fact that size definitions are complicated, the Small Business Administration has developed strict standards for defining whether a business qualifies as a small-scale enterprise. In many industries, businesses can have hundreds of workers on salary before leaving the small-business category.

How can the government help the private sector to innovate?

Establish policies (e.g. reduced capital gains taxes) and programs (e.g. matching funding with the private sector such as the SBIR from the US government) to ensure the availability of risk capital. Establish incentives for small and large businesses to co-innovate together.

How to avoid the problems of small scale industries?

Measures to Avoid the Problems of Small Scale Industries. 1. Problem of Finance: The most important problem faced by these industries is that of finance. The financial position of SSIs is a part of the wider problem of capital scarcity in the economy as a whole.

What is meant by small scale industry?

Small-scale industries are industries where the processing, production, and delivery of services are undertaken on a micro or small scale. Such firms make a one-time investment in equipment, facilities, and factories, albeit not exceeding the Rs 20 Crore limit.

Is there any financial assistance available for small scale units?

There has been a spectacular rise in the financial assistance provided to small- scale units and new entrepreneurs. IFCI generally finances up to half of the total cost of setting up / modernisation / expansion of an industrial unit.

Is NSIC still relevant to the small scale sector?

As the small scale sector continues to be an important instrument for enterprise building, dispersal of industries and employment generation, NSIC continues to perform its assigned role successfully in this endeavour. 


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