Impact Of Commercial Bank Credit On The Performance Of Small Scale Enterprises In Nigeria

Project and Seminar Material for Economics

Impact Of Commercial Bank Credit On The Performance Of Small Scale Enterprises In Nigeria


Prominent among the obstacles facing the performance of manufacturing sector in Nigeria is the lack of effectively bank credits to the manufacturing sector of the economy. The banks especially the commercial ones have not been contributing effectively to the output of manufacturing sector of the economy. This study takes into cognizance the problems of manufacturing the range of one understanding of something, or awareness of something). sector in Nigeria. Besides, it looks into the various economics effects of inefficiency of bank credits to the manufacturing sector in Nigeria over the period of 1989-2009, using the Nigerian data set.

The study employed the ordinary least square regression method. Above all, this project examines the earlier interventionist efforts by the CBN toward achieving a stable and low interest rate on the credits from the commercial banks to the manufacturing sectors in the economy and finally resolved to give useful recommendation on ways to improve upon the performance of the bank credits to the manufacturing sector in the economy.

Chapter One


1.1 Background of the Study

Manufacturing sector plays a catalytic role in a modern economy and has many dynamic benefits crucial for economic transformation. In typical advanced countries, the manufacturing sector is leading, sector in many respects. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capital income which causes unique consumption patterns. Furthermore, it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sector. In terms of contribution to the Gross Domestic product, the manufacturing sector is dominant but it has been overtaken by the services sector in a number of Organization for Economic Cooperation and Development (OECD) countries.

Before independent, agricultural product dominant Nigeria’s economy and accounted for the major share of its foreign exchange earnings. Initially, inadequate capital investment permitted only modest expansion of manufacturing activities. Early efforts in the manufacturing sector were oriented towards the adoption of an import substituting strategy in which light industry and assembly related manufacturing ventures were embarked upon by the formal trading companies. Up to about 1980, the prime move in manufacturing activities was the private sector, which established some agro-based light manufacturing units such as vegetable oil extraction plants, turneries tobacco processing textiles, beverages and petroleum products. The strategy of light and assemblage manufacturing shifted some what to heavy industries from the period of the Third National Development plan [1985-90] when Government intervened to establish care industrial plants to provide basis import for the downstream industries.

The import dependent industrialization strategy virtually came to a halt in the late 1980s and early 1990s when the liberal impart policy expanded the imports of finished goods to the detriment of domestic production.

In this regard, industrialization constitutes a veritable channel of attaining the lofty and desirable conception and goals of improved quality of life for the populace. Thus in a supportive mood, Lewis. (1967), assumes that “in any economy, one or more sectors serve as a prime mover moving the rest of the economy forward”. This role of engine of growth or leading sector has usually been played by industrial sector under the industrialization process.

Against this background, industrialization involves extensive technology based development of the productive [Manufacturing] system of an economy. Thus, the development of the industrial sector represents the deliberate and sustained application and combination of suitable technology, management techniques and other resources to move the economy from the traditional low level of production to a more automated and efficient system of mass production of goods and services.

Arising from the foregoing affirmed centrality of industrialization as the pivot of economic growth and development, industrialization process seems to be main hope of most developing countries such as Nigeria with large population and large labour force. In spite of these aspiration which ought to have favoured effective industrialization process in an economically conducive manufacturing environment, most of these results as reflected in the performance of the manufacturing sector remain socio-economically undesirable. Against this backdrop, current economic planning and policy instruments are diverted at the development of the key productive sectors, particularly manufacturing and commerce for the promotion of an increasing pace of industrialization in Nigeria.

The major problem facing the Nigeria manufacturing sector is having adequate finance resource for investment. Because of the low level of income of this, saving is very low.

Since the attainment of independent in 1960, commercial banks in Nigeria have been playing an important role in development process of the nation. The banks in collaboration with other financial institution, have been mobilizing the scare domestic resources for rapid social, economic and industrial transformation of the country.

Other services provided by the commercial banks includes facilities for safe-keeping of important documents, provision of advice to customers on insurance and investment matters, and provision of cash for bulk payment of non customers salaries and wages Umole.(1985).

In recognitions of this potential roles of the sector, successive governments in Nigeria have continued to articulate policy measures and programmes to achieve industrial growth incentive and adequate finance. The central goal of government policy was to foster growth in the manufacturing sector. Over the years, and largely in response to some of the previous policy strategies, the main features of the Nigerian manufacturing sector had emerged.

The role of bank credits in the growth of manufacturing sector cannot be over-emphasized. For instance the Federal government’s Appropriation Bill for the year 2005 has as one of it’s broad policy objectives to achieve a high economic growth rate (i.e GDP of at least 5%) through a better mobilization and prudent use of economic resources. This objective is not achievable without significant levels of resources from the financial sectors being mobilized and deployed to finance business expansion and growth.. Bank’s have to be effective intermediaries for mobilizing and channeling deposits to the productive sectors of the economy especially, the manufacturing sector.

1.1 Statement of Problems

In spite of continuous policy strategy to attract credits to the manufacturing sector, most Nigeria manufacturing enterprises have remained unattractive for bank credits. For instance as indicated in Central Bank of Nigeria (CBN) reports, most throughout the regulatory era, commercial bank’s loan and advances to the manufacturing sector deviated persistently from prescribed minima. Furthermore, the enhanced financial intermediation in the economy following the financial reforms of the 1990s not with-standing, credits to manufacturing as a proportion of total banking credits has not improved significantly averaging 15. 7% (percent) between 1994 and 2000 and 25.85% between 2001 and 2005. Consequently, many manufacturing firms in the country have continued to rely heavily on internally generated funds, which have tended to limit their scope of operating.

In the process, attempts will be made to provide answers to a series of questions including.

  1. How has bank credits affected the growth of manufacturing sector in Nigeria?
  2. What role can bank credit play in revitalizing the manufacturing sector?
  3. What are the basic problems of the manufacturing sector in Nigeria?
  4. What are the causes of inadequacy of skilled technical manpower in manufacturing sector in Nigeria?
  5. The causes of inadequacy of local technical support services for manufacturing sector in Nigeria?

1.3 The Purpose of the Study

  1. To examine the impact of commercial bank credit on the performance of SMEs in Nigeria.
  2. To evaluate the relationship between commercial bank density and SMEs performance in the Nigerian economy.
  3. To evaluate the impact of government policy on the performance of SMEs in the economy.
  4. Finally, to look into the problems that militates against this sector (SMEs) apart from finance in Nigeria and makes recommendation where necessary.

1.4 Hypothesis of the Study

  • HO: commercial banks’ credit to small scale enterprises, savings and time deposit with commercial banks, exchange rate of naira, interest rate, bank density proxy by total number of commercial bank and total government expenditure have insignificant impact on SMEs output.
  • H1: commercial banks’ credit to small scale enterprises, savings and time deposit with commercial banks, exchange rate of naira, interest rate, bank density proxy by total number of commercial bank and total government expenditure have significant impact on SMEs output.

1.5 Significance of the Study

This study was motivated by the challenges pose by the lack of sufficient bank credit to meet the increasing needs in the manufacturing sector of the Nigeria economy.

There is no idea doubt that a bank credit is very crucial and essential in revitalizing the manufacturing sector. As important as bank credit is to the sector inspite the continuous policy strategies to attract credits to the sector, most Nigeria enterprises have remained unattractive for bank credits. Hence, this study therefore intends to throw more light on the operation of bank credits and their resultant effect on the manufacturing sector.

1.6 Limitation of the Study

In view of the current emphasis on industrialization of the country in order to reduce the country’s import bill from foreign countries, the study focuses attention on the evaluation of the ability of small scale entrepreneurs to obtain loans from the commercial banks to attain the needed level of productivity of their enterprises.

Some of the difficulties encountered by the researcher were the unco-operative attitudes of many of the banks’ officials approached and some of the small scale entrepreneurs who misconstrued the essence of the study.
Another problem is that of lack of time on the side of respondents to answer the questionnaires in details coupled with the high fare of public transportation. This greatly increased the cost of production and limited the scope of areas covered by this study. Also difficulties were encountered in collecting data from the banks used as case study.

Some of the questions in the questionnaire were not answered inspite of the university’s inscription on the questionnaire and the letter of authorization by the head of department attached to it as well as the detailed explanations given to them on the need of the study. They insisted that some of the required information were confidential and should not be released.

1.7 Definition of Terms

1. Small Scale Enterprises

As defined in the Nigerian context, following the current official definition of industrial enterprises adopted by the 13th meeting of the National Council on Industry (NCI) Markudi, Benue State in July, 2001 as “an enterprise with total capital employed of over ₦1.50m but not more than ₦50m, including working capital but excluding cost of land and or labour size of 11-100 workers.

2. 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.

3. 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.

4. 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.

1.8 Organization of Works

This study is divided into five chapters, Chapter one deals with introductory aspect followed by chapter two which is primarily central on the literature review. Chapter three is center on research methodology while chapter four is the main thrust of this study and it is concerned with the research findings, recommendations and conclusions comes in chapter five.

Chapter Five

Summary of Findings, Recommendations and Conclusion

5.1 Summary of Findings

From the data analysis carried out in chapter four, the major findings, from the research are summarized as follows:

  1. Commercial banks recognize the need of granting loans to the small scale enterprises as means of generating employment and enhancing performance of the economy.
  2. Commercial banks comply with CBN credit guideline on setting aside 10% of their profit before tax for small scale enterprises.
  3. Commercial banks require a feasibility report and collateral before granting loan to small scale enterprises.
  4. Since small scale enterprises do not provide proper feasibility studies of every viable project due to poor level of education, banks find financing of small scale enterprises (SSEs) unattractive because of inability of such borrowers to meet their financial obligations.
  5. Most of small scale entrepreneurs are scared of applying for loans from commercial banks due to poor level of education that is, illiteracy, high interest rate, collateral requirement etc.
    1. Diversion of funds provided to other ventures
    2. Changes in economic trends and activities
  6. Finally, although banks revealed that loan given to SSEs are not properly utilized, the banks used in the study were relevant to reveal the percentage being set aside for small scale enterprises.

5.2 Conclusion

There is no doubt that small scale enterprises (SSEs) can be a miracle source of development and an engine of performance that they have been in Asian Countries and in America. In fact, going by their characteristics, they should be the major focus of the government, together with agriculture, if Nigeria is to realistically address the development problems of unemployment, poverty, urbanization etc. They should therefore, immediately becomes the economic policy priority of government because of their potentials if they have to address our economic ills. The oil boom of the early seventies brought with it the enormous notion that a project had to be big, to be viable and profitable. Consequently, many large and complex projects were started without due regards to our management limitations. Our track record in Nigeria in the management of large and complex organizations has proved unsatisfactory. Even now, many of such organization cannot pass the test of efficient and effective management. Many have collapsed while many are still grappling with problems that could have been avoided had they started on small scale.

Indeed, the industry for the future in this country should emphasize the development of the well-managed small size firms. The government providing the necessary incentives, education and infrastructure and a general conducive environment for the environment for the development of Small Scale Enterprises (SSEs).

Our universities, colleges of education and research institutions should devote more time and resources into the problems of small scale enterprises so that the ultimate objective of entrepreneurial and commercial development of the nation can be achieved.

Our banks should adopt a more developmental approach to the financing of small scale enterprises.

When these are achieved, other benefits of small scale enterprises (SSEs) as a source of raw material, provision of food, employment generation and self-reliance will be accomplished.

Banks adopting more developmental approach to the financing of small scale enterprises can be achieved through the nature of advice and guidance they give their small scale customers.

They should also encourage them to use the facilities at the stock exchange particularly under the second-tier securities market, as a basis of acquiring needed capital and spreading ownership and consequently reducing the risks of concentrated control. They should also de- emphasize collaterals as the overriding condition for granting credit facilities to small scale enterprises (SSEs).

Finally, the Banker’s committee initiative and commercial banks are to keep the ball rolling in financing small scale enterprises as well as enhancing and uplifting the performance of the economy.

5.3 Recommendations

Having highlighted the problems and shortcomings of small scale enterprises (SSEs) in Nigeria, the following recommendations aimed at correcting and eliminating those constraints are put forward for consideration.
In order to reduce the risk in small scale enterprises (SSEs) lending, the Central bank of Nigeria and the government must ensure that they keep on regulating properly their current initiative of requiring all commercial banks to set aside 10 percent of their profit before tax for equity investment in small and medium scale enterprises.

Rediscounting by the Central bank of Nigeria (CBN) can sample possibilities for encouraging commercial banks to gain experience in medium and long term building operation. A number of procedures can be adopted such as preferential discount rates, multiple discount rates or quotas favouring certain purposes.

The banks, themselves can ensure minimum risk of the loan losses by providing technical and managerial resources to various kinds of small scale enterprises customers. This would assist them in project preparation, implementation, financing and management

At the same time, small scale enterprises can avail themselves of such services provided by the government at the entrepreneurial development center.

In order to make credit available to small scale enterprises (SSEs) sector, the banks and the government should make use of the rural banking program. The branches of each bank in the rural community should be given free hand to take certain decisions concerning advancement of these loans and advances to rural small scale enterprises. They should be able to act as “management consultants” identifying problems and suggesting solutions.

Banks would also need to be encouraged to fund the working capital requirements of small scale enterprises (SSEs). In the face of the limitations and inadequacies already enumerated in this project, small scale enterprises are high risk for banks to lend. Consequently, part of the government programs for small scale enterprises (SSEs) would be to devise a means of providing incentives and encouragement to banks to be able to freely lend to small scale enterprises (SSEs).

There is need to have an institutional coordination of the funding efforts of government and its agencies if small scale enterprises are to access and benefit from these institutions set up to cater for their financing needs. We can borrow a leaf from the USA where the small business administration (SBA) creates awareness about funds available, the categories of business that can get them money and various ways to obtain them. It is also involved in loan guarantee, certificate of competence, prime contracting, break out procurement, research and development, business information services etc. much more, the small business administration (SBA) channels all its assistance through appropriate institutions like commercial banks.

Probably, this is the direction that the newly established bank for industry and small and medium enterprises development agency (SMEDA) would have to focus. Government efforts should be geared towards the creation of management environment conducive to the development of their efficiency, productivity and the adoption of a result-oriented management approach.

Central bank of Nigeria (CBN) should license more Micro Finance banks to be able to extend more loans to small scale enterprises (SSEs).

We also recommend that small scale enterprises (SSEs) should not base only in urban areas. This is because the numbers of small scale enterprises in urban areas are alarming and commercial banks cannot give loans to all. This is why they should be encouraged to reside more in rural areas i.e. rural small scale enterprises should be encouraged. If this is achieved, the government should ensure that it provides more infrastructural facilities in rural areas so as not to discourage these small scale enterprises (SSEs) in achieving their objectives.

Banks should not discriminate from lending to small scale enterprises (SSEs) as there are no more restrictions restricting them from doing so. They should extend loans freely to small scale enterprises (SSEs) and ensure that these loans are monitored effectively so that they are used for their specific purposes.

Also, government should initiate industrial development bonds, which are used in countries for the purpose of building industrial plans in certain areas with a view to attracting industries or firms to such an area. Business firms apply and are allowed under certain conditions to occupy such plans for which they pay rent. The rents paid are used to offset the principal and interest.

Finally, a major impediment to performance generally in Nigeria has been the state of economic and social infrastructure. This has been an over-flogged issue in the discussion of Nigeria’s economic development. Provision of necessary infrastructural facilities and the enabling environment for business operations generally is an imperative uninterrupted power supply, good roads and transportation networks, rural development, efficient, effective and cheap communications etc. are the basis to competitive performance of enterprises. Their provision will definitely reduce the funding needs of small scale enterprises (SSEs) as they would no longer require funds to provide electricity, water, telephone and other infrastructures on their own.

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