The Impact Of Bank Loans On Small And Medium Scale Enterprises In Nigeria

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The Impact Of Bank Loans On Small And Medium Scale Enterprises In Nigeria


Abstract


This study was carried out to examine the Impact of Bank Loan On Small And Medium Scale Enterprise in Nigeria using selected banks and SMEs in Lagos state as a case study. Specifically, the study examined the impact of commercial banks on small and medium scaled enterprises development in Nigeria, examine the extent to which small scale enterprises in Nigeria have been able to obtain loans and advances from Commercial Banks for business development, examine the relationship between commercial bank loans and development of SMEs in Nigeria, and examine the relationship between commercial bank deposit and development of SMEs in Nigeria. The study employed the survey descriptive research design. A total of 200 responses were validated from the survey.From the responses obtained and analysed, the findings revealed that there is significant relationship between Total asset of commercial banks and development of SMEs in Nigeria, there is significant relationship between commercial bank loans and development of SMEs in Nigeria, and there is significant relationship between commercial bank deposit and development of SMEs in Nigeria. The study therefore recommends that 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 84 negative impact on the ability of small and medium scale industries to obtain credit from the banks. Also, the government should be consistent in its industrial policies so as to enable manufacturing firms to factor tariff measures into their trade decisions. Moreso, 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. Furthermore, the government should regard SMEs should regard SMEs as the ‘eggs’ that hatch big businesses. Apart from the adequate incentives in above, the government should support SMEs by bulk purchasing their products and retailing them both for the domestic market and for exports.


Chapter One


Introduction

1.1 Background of the study

Small and medium-scaled businesses (SME) are businesses whose personnel numbers fall below certain limits. The abbreviation “SME” is used in the European Union and by international organizations such as the World Bank, the United Nations and the World Trade Organization (WTO). Small and medium-scaled enterprises outnumber large companies by a wide margin and also employ many more people. SMEs are also said to be responsible for driving innovation and competition in many economic sectors of every nation (Agwu and Emeti, 2014).

The important role played by Small and medium enterprises in the growth and development of developing countries is well rested in the literature. SMEs have been reported by Ayozie and Latinwo,(2010) to encourage entrepreneurship. In addition, Ariyo, 2008 posit that there is the greater likelihood that SMEs will utilize labour-intensive technologies thereby reducing unemployment particularly in developing countries and thus have an immediate impact on employment generation (Ariyo, 2008; Ayozie and Latinwo, 2010).According to the United Nations Industrial Development Organization UNIDO (2001), for developing countries, integration into the global economy through economic liberalization, deregulation, and democratization is seen as the paramount way to triumph over poverty and inequality. The importance of this process is the development of a vibrant private sector, in which small and medium enterprises can play a central role. The problems bedeviling the SMEs in Nigeria are multi-faceted. Ekpenyong (1997) and Utomi (1997) identified inadequate capital, inaccessible credit facilities. Long term development institutional credit was known not to be available to SMEs because they are generally considered high credit risks by financial institutions. The study by Evbuomwan, Ikpi, Okoruwa and Akinyosoye (2012) indicated that 75.7% of their survey respondents relied mostly on own funds to finance their businesses. A widespread concern is that the banking system in the sub sector (which supposed to be the major financier of SMEs) is not providing enough support to new economic initiatives and in particular to the expansion of SMEs and agriculture sector. It is noted that commercial and the hitherto merchant banks which retained liquidity levels in excess of regulation have shown reluctance in financing SMEs (Sacerdoti, 2005).

The vital role of commercial bank in giving credit for the development of SMEs within an economy has been widely acknowledged, for instance Schumpeter (1932) established that commercial banks facilitate technological innovation through their intermediary role. His emphasis was that efficient allocation of savings through identification and funding of entrepreneur with best chances of successfully implementing innovative product and production are tools to achieve real performance. Nwanyanwu (2012) noted that the commercial banks help to make credit available by mobilizing surplus fund from depositor who have no immediate needs of such money and channel it in form of credit to investors who have brilliant ideals on how to create additional wealth in the economy but lack the necessary capital to execute the ideals. The study further reveals that the role of commercial bank credit in an economy has been recognized as credit are obtained by economic agents to enable them meet operating expenses. For instance business firm obtained credit to buy machinery and equipment, farmers obtained credit to purchase farm input such as fertilizers, seeds, farm buildings.

The general role of commercial banks is to provide financial services to general public and business, ensuring economic and social stability and sustainable growth of the economy. In this respect, “credit creation” is the most significant function of commercial banks. While sanctioning a loan to a customer, they do not provide cash to the borrower. Instead, they open a deposit account from which the borrower can withdraw. In other words, while sanctioning a loan, they automatically create deposits, known as a “credit creation from commercial banks (Omika, 2014).

However, acknowledging the role of commercial bank credit in an economy various banking reformed has been established by the monetary authority in Nigeria in enhancing credit accessibility. The overall intentions of these reforms have been to ensure financial stability so as to influence the growth of the economy and also enhance commercial bank to play critical role of financial intermediation in provision and accessibility of credit to small and medium scale business owners. These various reforms have led to the improvement in services in the commercial banks in Nigeria. However, despite this increase in credit supply to the SMEs the performance of the sector (SMEs) in Nigeria has been dwindling. Therefore, this study examines the impact of commercial bank on small and medium scale enterprises development in Nigeria.


1.2 Statement of the Problem

The key problem facing the development of most small and Medium-Scale Enterprises (SMEs) in Nigeria is inadequate finance; whether for the establishment of new industries or to carry out expansion plans on the existing business. This led to the curiosity that necessitates this study because in spite of continuous policy strategies to attract credits to the SMEs, most Nigerian SMEs have remained unattractive for commercial bank credits supply. For instance, as indicated in central Bank of Nigeria (CBN) reports, almost throughout the regulatory era, commercial bank’s loans and advances to the SMEs sector deviated persistently from prescribed minimum.

It is therefore important to carry out a study that examined the effect of commercial banks on small and medium scaled enterprises from the perspectives of business owners and entrepreneurs. All the existing studies on the role of commercial banks on the development of SMEs made use of financial statements of banks published in the CBN bulletin. However, this study is examining the impact of commercial banks on the development of SMEs in Edo State which is the area of this study.


1.3 Objectives Of The Study

The general objective of this study is to analyze the impact of commercial banks on small and medium scaled enterprises in Nigeria while the following are the specific objectives:

  1. To examine the impact of commercial banks on small and medium scaled enterprises development in Nigeria.
  2. To examine the extent to which small scale enterprises in Nigeria have been able to obtain loans and advances from Commercial Banks for business development.
  3. To examine the relationship between commercial bank loans and development of SMEs in Nigeria
  4. To examine the relationship between commercial bank deposit and development of SMEs in Nigeria

1.4 Research Questions

  1. What is the impact of commercial banks on small and medium scaled enterprises development in Nigeria?
  2. To what extent do small scale enterprises in Nigeria able to obtain loans and advances from Commercial Banks for business development?
  3. What is the relationship between commercial bank loans and development of SMEs in Nigeria?
  4. What is the relationship between commercial bank deposit and development of SMEs in Nigeria?

1.5 Hypothesis

Hypothesis one
  • H0: There is no significant relationship between Total asset of commercial banks and development of SMEs in Nigeria
  • H1: There is significant relationship between Total asset of commercial banks and development of SMEs in Nigeria
Hypothesis two
  • H02: There is no significant relationship between commercial bank loans and development of SMEs in Nigeria.
  • H2: There is significant relationship between commercial bank loans and development of SMEs in Nigeria.
Hypothesis three
  • H03: There is no significant relationship between commercial bank deposit and development of SMEs in Nigeria
  • H3: There is significant relationship between commercial bank deposit and development of SMEs in Nigeria

1.6 Significance of the Study

This study will be of significance to monetary authority, policy maker, government, academia and the general public. The findings of this study will help government and the monetary authorities to see the effectiveness of monetary policy in the management of the Nigerian economy in terms of credit demand and supply for the development of small and medium scaled enterprises which have a spillover effect on Nigeria economic growth. This research work further serves as a guide and provides insight for future research on the topic and related field for academia’s and policy makers who are willing to improve on it. This study will also educate the management of commercial banks in Nigeria on new ways to satisfy the entrepreneurs to promote mutual understanding and business growth and development. The study will also contribute to knowledge by appraising the impact of bank density and government expenditure on the growth of SMEs output in Nigeria.


1.7 Scope/Limitations of the Study

This study limited to small and medium scaled enterprises in Nigeria. It will also cover the current relationship between commercial banks and entrepreneurs towards entrepreneurship development in Nigeria.


1.8 Definition of Terms

SMEs:

Is made up of enterprises which employ fewer than 250 persons

Commercial Bank:

A bank that offers services to the general public and to companies

Entrepreneurs:

A person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so.

Policy:

A course or principle of action adopted or proposed by a government, party, business, or individual.
Economy: the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services.

Loan/Credit:

A thing that is borrowed, especially a sum of money that is expected to be paid back with interest

Deposit:

A sum of money placed or kept in a bank account, usually to gain interest.

Short Term Credit:

This type of credit is a credit or loan that has maturity period that is less or more than one year e.g. Personal loan.

Medium Term Credit:

This is a type of credit or loan that has a maturity period of more than one year but not exceeding two years to be repaid back e.g. loan required for temporary business requirement.

Long Term Credit:

This type of credit matures in more than three years and above. It has a very long maturity period as agreed by the lender and the borrower. E.g. are business development loans and Bridging loans.


1.9 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, research methodology, definition of terms and historical background of the study.
  • Chapter two highlight the theoretical framework on which the study its 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 ascertain the impact of bank loan on small and medium scale enterprise in Nigeria. 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 obtaining bank loan by SMEs in Nigeria.


5.2 Summary

This 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 etc. 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 82 problem of funding small and medium scale businesses in Nigeria, whether banks can play the intermediary role.


5.3 Conclusion

This study evaluates the impact of commercial banks loans on small and medium scale enterprises in Nigeria. The empirical results suggest that commercial banks have significant impact on SMEs and their financing regardless of the general perspective that commercial banks shy away from lending to the SMEs. This confirms that commercial banks still remain an important source of finance for SMEs and an avenue through which SMEs can grow.In order for SMEs to enjoy greater benefits, they should see bank credit as a source of finance to be utilized for the expansion of their business. Government should encourage commercial banks to lend to SMEs by providing incentives and persuade the banks to give preference to SMEs.Also, SMEs on their own part should keep adequate financial accounts of their business operations as this is one of the pre-requisite in securing loans from banks.


5.4 Recommendations

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 84 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 above, the government should support SMEs by bulk purchasing their products and retailing them both for the domestic market and for exports.


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