The Effect Of Business Credit Availability On Small And Medium Scale Enterprises In Nigeria

Project and Seminar Material for Entrepreneurship

The Effect Of Business Credit Availability On Small And Medium Scale Enterprises In Nigeria


A business whether small or big, simple or complex, private or public is created to provide competitive prices. Business in Nigeria, has been classified as small, medium and large. In both the developed and developing countries, the government is turning to small and medium scale industries, as a means of economic development and a veritable means of solving problems. It is also a seedbed of innovations, inventions and employment. Presently in Nigeria, SMEs assist in promoting the growth of the country’s economy, hence all the levels of government at different times has policies which promote the growth and sustenance of SMEs. Small scale industry orientation is part of the Nigerian history. Which is why the researcher intends to investigate the availability of business credit for this SMEs.

Chapter One


1.1 Background of the study

For both developing and developed countries, small and medium scale firms play important roles in the process of industrialization and economic growth. Apart from increasing per capita income and output, Small Medium businesses create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resource utilization considered critical to engineering economic development and growth. However, the seminal role played by Small Medium businesses notwithstanding its development is everywhere constrained by inadequate funding and poor management. The unfavourable macroeconomic 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. The reluctance on the part of financial institution to fund Small Medium businesses can be explained by the insufficient capital base of banks and information asymmetry that often exists between Small Medium businesses and lending institutions.

This study critically examines the availability of business credit to small business in Nigeria, and how more funding can be made to support small businesses. However, this chapter, forms the basic foundation for this study as it presents the objectives of the study, and the statement of problem that motivated the researcher to undertake the study.

During the 1990s, a number of studies documented that lending to small businesses and the economic activity of small businesses were affected by financial sector disruptions, such as the widespread merging of banks of all sizes and the capital shortfalls occasioned by large loan losses.

Although not much previous research has examined discrimination in small business credit markets, there has been an active debate on the question of whether banks discriminate against minority applicants for mortgages. In an influential study in that area, researchers at the Federal Reserve Bank of Boston tried to collect any information that might be deemed economically relevant to whether a loan would be approved along with the borrower’s race and financial status (Munnell et al., 1996). In the raw data larger firms had 10 percent of their loans rejected versus rejection rates of 28 percent for small scale businesses. After controlling for the large number of variables collected to establish the credit-worthiness of the borrowers (including, the amount of the debt, debt/income ratio, credit history, loan characteristics, etc.) small scale businesses were still percentage points less likely to be granted the loan.

A variety of criticisms have been launched at this study (see, for example, Horne 1994; Day and Liebowitz, 1998; Harrison, 1998); responses to these criticisms are found in Browne and Tootell (1996). The most common critique indicates that we cannot make a determination of discrimination unless those small businesses whose loans are approved have a greater likelihood of repayment. This argument rests critically upon an implied assumption that the distribution of repayment probabilities for large companies and small businesses is identical. His figure indicates that if this assumption is met and if firms discriminate against small businesses by setting a higher bar for loan approval, then the mean rate of repayment among small businesses conditional upon loan approval will be higher for large and smaller firms.

1.2 Problem Statement

Small businesses and entrepreneurial ventures which are usually considered as the engine that run the economy are usually denied access to credit due to their risky nature. This disturbing threat has existed for a very long time and needs proper attention from both government agencies and non-governmental agencies as well. The importance of small businesses in the development of Nigeria cannot be overlooked. Without proper credit availability to small businesses, the economy as a whole will suffer. The objectives of economic planning cannot be achieved if small businesses do not do well. Keeping this in view, the Bank of Nigeria has streamlined Bank’s lending operations to ensure that banks’ credit actually benefits small and medium businesses in Nigeria. This strategy is intended to improve the economy and to develop rural areas in Nigeria.

However, there is some anecdotal evidence that most beneficiaries of business credit from most financial institutions are salaried workers and large scale companies, whose ability to repay loans are believed to be better than that of small scale businesses. Moreover, this belief is not always the case as some small businesses who go for loans are well profitable and well managed.

1.3 Research Objectives

This study is aimed at the following objectives:

  1. To examine the relationship that exist between small scale businesses and financial institutions that grant business credits in Uyo.
  2. To identify the challenges faced by small businesses in securing business credit in Uyo.
  3. To examine the degree of business credit availability to small businesses in Uyo.
  4. To identify the effects of businesses credit availability on small businesses in Uyo.

1.4 Research Hypotheses

The following null and alternate hypotheses were used by the researcher in achieving the research objectives of this study:

  1. H0: Pre and post bank consolidation do not have significant and positive impact on the number of registered small and medium enterprises in Nigeria
    H1: Pre and post bank consolidation in Nigeria have significant and positive impact on number of registered small and medium enterprises in Nigeria
  2. H0: Pre and post bank consolidation of banks in Nigeria do not have significant effect on asset size of small and medium enterprises in Nigeria.
    H2: Pre and post bank consolidation of banks in Nigeria have significant effect on asset size of small and medium enterprises in Nigeria.

1.5 Significance of the Study

This study is very important because it is aimed at examining the effects of business credit availability and its effect on small businesses in Uyo. The paper will provide some relevant recommendations for policy makers, development agencies, entrepreneurs, and small business managers to help seek better ways to increase business credits to small businesses, and appropriate strategies to improve the small business sector in Nigeria.

Secondly, the study is also vital since it suggest to small businesses certain strategies they can adopt before seeking business credits, to make their borrowing process easier and more effective. This will go a long way to increase the efficiency and profitability level of small businesses in Uyo. Any time these strategies are put in place, access to business credit increases, and the participation of more people in entrepreneurial activities will also increase, hence the economy of Nigeria will be improved.

1.6 Scope and Limitation of the Study

The area chosen for this study is Uyo in the southern region of Nigeria. The study is limited to the effects of business credit availability on small businesses in Uyo, using various small businesses in Uyo as a focus point.
In undertaking this research, the researcher encountered the following problems;

  1. The time used to undertake the study was limited. The time was loaded with other academic activities and as a result limited time was made available the study.
  2. Also, response from the various small business owners through the questionnaire provided by the researcher was also a bit slow. This is because of reasons such much work load on the part of the respondents.

1.7 Definition of Terms


Effect is defined as a change which is a result or consequence of an action or other cause or cause (something) to happen; bring about.


A business is an organizational entity and legal entity made up of an association of people, be they natural, legal, or a mixture of both who share a common purpose and unite in order to focus their .

Credit Availability:

The amount of credit to which a borrower has access at a given time. Credit card accounts and lines of credit have a maximum amount of money that can be borrowed; credit availability describes the amount that is remaining after subtracting outstanding balances.


The European definition of SME follows: “The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.”

1.8 Chapter Scheme

The project will be organized around following chapters;

  • Chapter one gives an introduction to the research work. It gives the basic information about the company and the research being undertaken. This chapter therefore consists of the background of the study and organizational profile, statement of the problem, objectives, research questions, significance of the study, scope of the study, and limitations encountered by the researcher.
  • Chapter Two consists of the literature review and the theoretical framework
  • Chapter three gives details of the research methodology. The research methodology represents the various ways and methods which the researcher used in order to gain his information.
  • Chapter Four gives the analysis and interpretation of the information gathered by the researcher.
  • Chapter five gives the findings and conclusion of the researcher. Here, conclusions will be drawn based on the findings and their implications will also be given.

Chapter Five

Summary Conclusion and Recommendation

5.1 Introduction

It is pertinent to note that this research was to examine the impact of business credit availability on small and medium scale enterprises, thus the topic, “effect of business credit availability on small and medium scale enterprises”.

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 associated with business credit availability on small and medium scale enterprises in Nigeria.

5.2 Summary

Based on the hypotheses tested the following are the summary of findings.

  1. Bank consolidation had positive and non-significant impact on the number of registered SMEs in pre consolidation era in Nigeria while it was found to have positive and significant impact on the number of registered SMEs in post consolidation era in Nigeria.
  2. Bank Consolidation had positive and significant impact on growth of SMEs in both pre and post consolidation banking era in Nigeria
  3. Bank consolidation have negative and non-significant impact on bank lending to SMEs in pre consolidation banking era in Nigeria but was positive and non-significant on banking lending to SMEs in post consolidation banking era in Niger.

5.3 Conclusion

The economic rationale for domestic consolidation is indisputable. An early view of consolidation in banking was that it makes banking more cost efficient because larger banks can eliminate excess capacity in areas like data processing, personnel, marketing, or overlapping branch networks. Cost efficiency also could increase if more efficient banks acquired less efficient ones. Though studies on efficiency in banking raised doubts about the extent of overcapacity, they did point to considerable potential for improvement in cost efficiency through mergers (Somoye, 2008). Soludo (2004) canvassed that the goal of the reforms is to help the banks become stronger players in global, and in a manner that will ensure longevity and hence higher returns to the shareholders over time and hence lead to greater impact on the Nigerian economy. It is strongly believed that the ultimate beneficiaries of this policy shift would be the Nigerian economy – the ordinary men and women who can put their deposits in the banks and have a restful sleep; the entrepreneurial Nigerians who can now have stronger financial system to finance their businesses; and Nigerian economy which will benefit from internationally connected and competitive banks that would also mobilize international capital for Nigerian development. This measure is about the Nigerian people. It is about meeting their national economic emancipation and development strategy (NEEDS) (Soludo, 2004). Consolidation of Nigerian banks has indeed increased the financial muscle of the sector. It has contributed to the major foreign direct investments in the country. While consolidation positively moved towards its goal, it behooves on banks to increase it effort in funding small and medium scale enterprises in Nigeria. This has become imperative given the positive and significant impact it had in post consolidation era of the Nigerian economy.

5.4 Recommendations

This study recommends as follows:

  1. It is therefore recommended that government should make policies that will strengthen and boost capital of small and medium scale enterprises capital through the encouragement of consolidation of banks and also monitor closely the management of the banks to ensure that more funds are granted to SMEs as to ensure the survival of small and medium scale investments as observed in post consolidation era in Nigeria.
  2. The consolidation of banks has been the major policy instrument being adopted in correcting deficiencies in the financial sector as well as accelerating the rate of growth in the sector. This study therefore recommends the enactment of polices that will support institutions such as Nigerian Bank for Commerce and Industry and other similar banks that will support the growth of SMEs in Nigeria.
  3. The economic rationale for domestic consolidation is indisputable. Consolidation in enables cost efficient because larger banks can eliminate excess capacity in areas like data processing, personnel, marketing, or overlapping branch networks. This study therefore recommends the strengthening of the consolidation policies of Nigeria in a bid to growing deposits of banks.

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