Impact Of Commercial Bank Lending Policies To The Growth Of Small And Medium Enterprises (SMES) (A Case Study Of First Bank Plc, Katsina Branch)

Impact Of Commercial Bank Lending Policies To The Growth Of Small And Medium Enterprises (SMES) (A Case Study Of First Bank Plc, Katsina Branch)

Abstract

This study examined the impact of commercial bank lending policies to the growth of small and medium enterprises (SMES) using First Bank plc. as a case study. The the study was specifically carried out to examine the effect of commercial bank loans on the growth of SMEs’ in Nigeria, assess the effect of commercial bank loans to the private sector on the growth of SMEs’ in Nigeria, evaluate the effect of interest rate on the growth of SMEs’ in Nigeria, investigate the effect of foreign exchange rate on the growth of SMEs’ in Nigeria, assess the effect of inflation rate on the the growth of SMEs’ in Nigeria, and examine the combined effects of banking, lending policy variables on the growth of SMEs’ in Nigeria. Twenty three years macroeconomic data, from 1995 to 2018, were collected from the CBN Statistical Bulleting for this study. The findings indicate that SMEs sector is facing problem in accessing the needed loans from the commercial banks; while the commercial banks loans granting to the private sector are increasing, the commercial banks loans to the SMEs are declining; interest rate, commercial banks loans to the private sector have significant effects on the growth of SMEs’, but commercial banks loans to the SMEs, exchange rate, and inflation rate do not have significant effect on SMEs performance.

Chapter One

Introduction

1.1 Background of the Study

The succeeding Nigerian government administrations have been introducing different economic policies in order to stabilize the nation’s economy that has been going through one problem or the others after the independence. Nigeria got its independence from the British, the colonial master; fifty- seven years ago. At age of fifty- seven, Nigeria is still struggling to have a stable economy that will provide employment opportunity for its citizens. The failure of the past economic policies can be attributed to the lack of economic policies that will develop the SMEs sector and enhance its performance. SMEs sector has been recognized as the pillar of any nation’s economy as it creates an employment opportunity more than any other sectors. The focus on the large industries at the detrimental of the SMEs has not been helpful to the Nigerian economy. The SMEs sector has been struggling to have access to funds from the banking sector, but the accessibility to these funds is very difficult due to the stringent conditions demanded from the SMEs by the banking sector. Access to the funds to acquire the needed assets and working capital for the day to day running of the business makes a strong determinant of firm success or failure. The SMEs that is the backbone of economic development of any nation is not getting the needed help it deserved. The initiatives introduced so far to improve the Nigerian economy did not have any positive impact on the nation’s economy (Olokoyo, 2011; Imoughele & Ismaila, 2014; Uremadu, Ani, & Odili, 2014; Dada, 2014; Atarere, 2016, Hassan, Aku, & Aboki 2017; Eniola & Entebang, 2015; Okhankhuele, 2017).

In addition to the different Nigerian government administrations previous economic policies, the Central Bank of Nigeria (CBN) approved and asked Bank of Industry (BOI) to issue the sum of ₦500 billion debenture stock with effect from May 2010. The money raised from the debenture stock is aimed at helping the SMEs to have access to the needed funds. The sum of ₦300 is for infrastructure in the area of power project and the remaining ₦200 billion is to restructuring and refinancing the existing SMEs loan portfolio, especially in the manufacturing sector. The ₦200 billion is under Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) and the funds shall be provided by the CBN. The SMECGS would provide a guarantee for the SMEs who are seeking funds from the lenders. The aims of this project are to increase SMEs output, generate employment, diversify the revenue generation base, increase foreign exchange incomes, and to have uninterrupted inputs for the industrial sector. The main goal of all these aims is the revolutionization of the Nigerian economy (Central Bank of Nigeria, n. d.). From the Structural Adjustment Programme (SAP) in the year 1986 that’s supposed to reduce the stringent conditions placed on the SMEs by the commercial banks, recapitalization of the banking sector from ₦2 billion to ₦25 billion, with effect from 2006 that supposed to help in the development of the SME and enhancement of its performance, and many other initiatives; the Nigerian economy remains a serious concern for all stakeholders. The research findings are showing declines in the loans provided to the SMEs by the banking sector year by year (Uzonwanne, 2015; Anigbogu, Okoli, & Nwakoby, 2015; Dada, 2014; Taiwo, Falohun, & Agwu, 2016). It is well known that no nation can develop economically without effective and efficient economic policies that will focus on the SMEs development. The question now is: What could have gone wrong with all these initiatives that different Nigerian government administrations have taken without positive results? This study examines the impact of commercial bank lending policies to the growth of small and medium enterprises (SMES) using First Bank plc.as a case study.

1.2 Statement of the Problem

The monetary and fiscal policies of a nation dictate the economy of such nation and everything in the nation revolves around the economy. When the nation’s economy is good, other economic activities will also be good and vice versa. Nigerian economy has been struggling because of the lack of monetary and fiscal policies that supposed to change the current economic situation for better. The SMEs sector plays a significant and dominant role in the development of national economy, but this sector is not getting the kind of economic policies needed for its development and performance enhancement. Research findings indicate that banking, loans granted to the SMEs are declining rapidly. The lack of SMEs’ access to funds has been preventing the sector to reach its potential. Even the percentage of loans given to the SMEs compared to the total loan given to the private sector are declining. If the SMEs sector has a problem in having access to the needed funds, then this problem will continue to prevent the SMEs sector from contributing its share to the development of the Nigerian economy. Other problems mentioned by other researchers aside from access to finance are lack of: infrastructure, management commitment, access to modern technology, inconsistent government policy, multiple taxes and levies, unfair competition, marketing related problem, local raw materials, and corruption from the bank officials. However, the problem of lack of access to finance is a major problem (Uremadu, Ani, & Odili, 2014; Uzonwanne, 2015; Muritala, Awolaja, & Bako, 2012; Eniola, 2014).

The reduction in the loans granted to the SMEs compared to the loans granted to the private sector, higher lending rate, fluctuating foreign exchange rate, and high inflation rate is working against the SMEs. This sector supposed to contribute to the GDP more than the large industries but because of unfavorable economic conditions, such is not the case. It is going to be difficult for the SMEs to compete with the large industries in having access to funds because of the high- interest rate, fluctuating foreign exchange rate, and high inflation rate. These unfavorable macroeconomic variables have resulted in an increase in unemployment and poverty. Based on the aforementioned problems mentioned in the statement of the problem, this study seek to examine the impact of commercial bank lending policies to the growth of small and medium enterprises (SMES) using First Bank plc.as a case study.

1.3 Objectives of the Study

The main objective of this study is to examine the impact of commercial bank lending policies to the growth of small and medium enterprises (SMES) using First Bank plc.as a case study.

The specific objectives are to:

1. Examine the effect of commercial bank loans on the growth of SMEs’ in Nigeria
2. Assess the effect of commercial bank loans to the private sector on the growth of SMEs’ in Nigeria.
3. Evaluate the effect of interest rate on the growth of SMEs’ in Nigeria
4. Investigate the effect of foreign exchange rate on the growth of SMEs’ in Nigeria
5. Assess the effect of inflation rate on the the growth of SMEs’ in Nigeria.
6. Examine the combined effects of banking, lending policy variables on the growth of SMEs’ in Nigeria.

1.4 Research Question

The study will be guided by the following questions;

1. What is the effect of bank loans on the growth of SMEs’ in Nigeria?
2. How do commercial bank loans to the private sector affect the growth of SMEs in Nigeria?
3. In what way does the interest rate affect the growth of SMEs’ in Nigeria?
4. To what extent does foreign exchange rate affect the growth of SMEs’ in Nigeria?
5. How does inflation rate affect the growth of SMEs in Nigeria?
6. What are the combined effects of banking, lending policy variables on the growth of SMEs’ in Nigeria?

1.5 Research Hypotheses

The research hypotheses for this study are:

1. H01: Bank loans to the SMEs do not have a significant effect on the growth of SMEs’ in Nigeria.
2. H02: Commercial bank loans to the private sector do not have a significant effect on the growth of SMEs’ in Nigeria.
3. H03: Interest rate does not have a significant effect on the growth of SMEs’ =in Nigeria.
4. H04: Foreign exchange rate does not have a significant effect on the growth of SMEs’ in Nigeria.
5. H05: Inflation rate does not have a significant effect on the growth of SMEs’ in Nigeria.
6. H06: The combined banking, lending policy variables do not have a significant effect on the growth of SMEs’ in Nigeria.

1.6 Significance of the Study

Given the importance of the SMEs contribution to the GDP, this study will help the policy makers to refocus their attention on what is needed to revitalize the SMEs sector in order to develop the Nigeria economy. The policymakers will be guided by the findings of this study on what needed to be done to develop the SMEs sector in Nigeria. The management of the SMEs will also benefit from the findings of this study as this study will shed more lights on what is going on in the SMEs sector. The society will benefit from the development of the SMEs as this will enable the sector to contribute its quota to the GDP which will result in the economic development in Nigeria.

1.7 Scope of the Study

This study is to critically assess the impact of commercial bank lending policies to the growth of small and medium enterprises (SMES) using First Bank plc.as a case study.. The study will make use of secondary data from First bank and CBN covering the period of 23years from 1995-2018. Geographically, the study will be delimited to First Bank Plc, Katsina Branch.

1.8 Limitations of the Study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing to the nature of the discourse thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection.

1.9 Definition of Terms

…

1.10 Organization of the Study

The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, population of the study, sample size determination, sample size, abnd selection technique and procedure, research instrument and administration, method of data collection, method of data analysis, validity and reliability of the study, and ethical consideration. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.

Chapter Five

Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on the impact of commercial bank lending policies to the growth of small and medium enterprises (SMES) using First Bank plc.as a case study.The chapter consists of summary of the study, conclusions, and recommendations.

5.2 Summary of the Study

In this study, our focus was to examine the impact of commercial bank lending policies to the growth of small and medium enterprises (SMES) using First Bank plc.as a case study.The study was specifically carried out to examine the effect of commercial bank loans on the growth of SMEs’ in Nigeria, assess the effect of commercial bank loans to the private sector on the growth of SMEs’ in Nigeria, evaluate the effect of interest rate on the growth of SMEs’ in Nigeria, investigate the effect of foreign exchange rate on the growth of SMEs’ in Nigeria, assess the effect of inflation rate on the the growth of SMEs’ in Nigeria, and examine the combined effects of banking, lending policy variables on the growth of SMEs’ in Nigeria.

The study made use of secondary data from FBN, and central bank of Nigeria within the period of 23yrs from 1995-2018.

5.3 Conclusion

The attitude of the commercial banks towards the SMEs in terms of granting loans has not been encouraging. The SMEs sector is having a difficult time in getting access to the funds needed to acquire the needed assets as well as for operation expansion. The structural adjustment programme, consolidation of the banks, and other policies introduced by the different Nigerian Government administrations to help the SMEs accessing the needed funds have not been helpful to the SMEs. The SMEs sector is even facing more difficulties in having access to the needed funds in post bank’s consolidation than pre banks consolidation. The belief of the commercial banks that granting loans to the SMEs is a risky business is not helping the SMEs. The SMEs sector has not been able to fulfill its role as a main contributor to the Nigerian economy due to the lack of access to the needed loans from the commercial banks. While the commercial bank’s loans to the private sector are increasing, the ratio of commercial bank’s loans to the SMEs compared to the commercial loans to the private sector is declining. It is going to be difficult for the Nigerian nation to get out of the current economic hardship unless the present government administration and the subsequent ones focus their attention to revitalize the SMEs.

5.4 Recommendations

In the light of the findings the following recommendations are made:

1. The commercial bank’s loans to the SMEs should be increased to the point that will allow the SMEs get the needed funds.
2. While it is true that the large corporations may be used as a measure of the nation’s industrialization, research findings have confirmed that SMEs sector provides more employment opportunities to the nation’s workforce. As a result, part of the commercial bank’s loans to another private sector should be redirected to the SMEs.
3. The interest rate should be made available to the SMEs at a reasonable cost.
4. Though the exchange rate is not significant in this study but stable exchange rate is in the best interest of all business organizations, especially the SMEs. Therefore, the government should embark on economic policies that will ensure the stability of the exchange rate.
5. Though, the inflation rate is not significant in this study, but the government should pursue policies that will reduce it as it determines the purchasing power of the consumers. Implementing these recommendations will help in bringing out Nigerian economy out of its present situation.

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