Impact Of Institutional Financing On The Performance Of Small-Scale Manufacturing Industries

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Impact Of Institutional Financing On The Performance Of Small-Scale Manufacturing Industries


Abstract


This research work studied the impact of institutional financing on the performance of small-scale manufacturing industries. In carrying out this study this study used annual time series data for the period 2002-2018 obtained from Central Bank of Nigeria (CBN) Statistical Bulletin (various issues). The Ordinary Least Square (OLS) technique was employed to obtain the numerical estimates of the coefficients of the equations. The variables are; sectorial distribution of commercial bank loans and advances to the small-scale manufacturing industries (CBCM), Lending interest rate (LR), savings rate (SR) and money supply (M2). This study identifies sectorial distribution of commercial bank loans and advances to the small-scale manufacturing industries (CBCM), Lending interest rate (LR), and savings rate (SR) as the major constraints to small-scale manufacturing industries of Nigeria economy. The three variables had coefficients of -0.036255, -0.172759, -3.965471and t-statistics values of -2.513035, – 0.219083, -2.369485 respectively. Both sectorial distribution of commercial bank loan and advances to the small-scale manufacturing industries and saving rate where negative but significant to the growth rate of the small-scale manufacturing industries, while lending rate was negative and insignificant to the growth rate of the small-scale manufacturing industries in Nigeria. Money supply was positive and insignificant to the growth rate of the manufacturing sector. This implies that for the growth of the small-scale manufacturing industries in Nigeria, bank lending interest rate should be low to allow investors to source capital for investment. This study therefore, recommends that monetary authority in Nigeria should therefore reduce the lending interest rate at which Commercial Banks lend to the small-scale manufacturing industries. While money supply in the economy should be increased to facilitate production processes, by assisting producer or manufacturers meet relative cost of production.


Table of Content


  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content
  • List of Tables
  • Abstract

Chapter One:

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisations of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Introduction
  • 3.2 Research Design
  • 3.3 Nature and Sources of Data
  • 3.4 Model Specification
  • 3.5 Description of Model Variables
  • 3.6 Techniques of Analysis

Chapter Four:

Data Presentation and Analysis

  • 4.1 Data Presentation and Description
  • 4.2 Descriptive Statistics
  • 4.3 Covariance Analysis
  • 4.4 Test of Hypothesis

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • REFERENCES
  • APPENDIX
  • QUESTIONNAIRE

Chapter One


Introduction

1.1 Background of the Study

Manufacturing sector plays a crucial role in the development of a modern economy. Manufacturing sector is a sub-sector of the industrial sector. In advanced economies, the manufacturing sector is a 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 capita 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 sectors. In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has been overtaken the services sector in a number of Organization for Economic Co-operation and development (OECD) countries (Anyanwu, 2010). In recognition of these potential roles of the sub-sector, various government regimes in Nigeria have articulated policy measures and programmes to achieve industrial growth incentives and adequate finances (Orji, 2012). Access to finance is prerequisite for survival and performance of any enterprise and has become an increasingly important development metric, as one of the factors which can drive widespread economic development (Cracknell, 2012).
Financial institutions called development financial institutions DFI(S) were established by the federal government with the specific and clear mandate of providing industrialists and entrepreneur with the required medium and long term finance in order to accelerate industrial development in Nigeria. These financial institutions are the Nigeria Industrial Development Bank (NIDB), Nigerian Bank for Commerce and Industry (NBCI), and the National Economic Reconstruction Fund, NERFUND, all of which have been merged to form the new Bank of Industry, BOI.

Industrial development, otherwise known as real sector growth which small-scale industries is the sub-sector of the real sector, remains the most important parameter for measuring a country’s level of economic development. Thus, industrial development is the bedrock of economic development of a nation.

Nigeria falls within the bracket of world’s underdeveloped countries. Over the years and since independence in 1960, successive governments have had to make conscious efforts aimed at pulling the country out of economic backwardness and stemming up economic development Philips (1987;3). Recognising the importance and significance of industrial growth in the scheme of overall economic development, government (both past and present) have had to embark on one form of economic blueprint or the other.

To underscore the pivotal and critical role small-scale manufacturing industries play in capital formation, domestic savings and in the realization of sustainable economic growth and general prosperity in Nigeria, the Federal Government at different times introduced a number of schemes such as World Bank SME II Loan Scheme, Small Scale Industries Credit Scheme, established Industrial Development Centres, National Economic Reconstruction Fund(NERFUND), Nigerian Bank for Commerce and Industries, Nigerian Industrial Development Bank all aimed at improving and sustaining the performance of the sub-sector. In 2010, the Federal Government through the Central Bank of Nigeria made available the sum of N200 billion as Manufacturers’ Intervention Fund. “The objectives of the fund include fast-tracking the development of the manufacturing sector of the Nigerian economy by improving access to credit to manufacturers; improving the financial position of the Deposit Money Banks; increasing output; generating employment; diversifying the revenue base, as well as increasing foreign exchange earnings. It is also meant to provide inputs for the industrial sector on a sustainable basis” (CBN, 2010). Similarly, the involvement of the private sector such as the Dangote group, HoneyWell among others in the manufacturing sector has boosted its development. The central goal of government policy was to foster growth in the small-scale manufacturing sector. The role of bank credits in the growth of small-scale manufacturing sector cannot be overemphasized. For instance, the Federal Government’s Appropriation Bill for the year 2005 has as one of its 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 sector being mobilized and deployed to finance business expansion and growth. Banks have to be effective intermediaries for mobilizing and channeling deposits to the productive sectors of the economy especially the small-scale manufacturing sector.

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. It has been asserted that in any economy, one or more sectors serve as a prime mover moving the rest of the economy forward. The role of engine of growth or leading sector has usually been played by industrial sector under the industrialization process. Schumpeter (1911) strongly support finance-lead growth hypothesis, which says that financial sector play a key role in channeling savings into productive investment, particularly in the formal sectors of the economy. Were, Nzomoi and Rutto (2012) assert that commercial bank sector is the key conduit for financial intermediation in the economy.

The vital role of financial institution in generating growth in an economy has been widely acknowledged for instance Schumpeter (1932) established that financial institution 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 economic performance. Nwanyanwu (2012) noted that the banking sector 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 ideas on how to create additional wealth in the economy but lack the necessary capital to execute the ideas. His study further reveals that the role of credit in an economy has been recognized as credit are obtained by economic agents to enable them meet operating expenses. For instance business firms obtain credit to buy machinery and equipment, farmers obtain credit to purchase farm input such as fertilizers, seeds, farm buildings and the government obtain credit to meet various kinds of government expenditures, either recurrent or capital expenditure. Based on the aforementioned, this study will examine the impact of institutional financing on the performance of small-scale manufacturing industries.


1.2 Statement of the Problem

The Federal Government’s Appropriation Bill in recent years has as one of its 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. These objectives are not achievable without significant levels of resources from the financial sector being mobilized and deployed to finance business expansion and growth, hence, the role of the deposit money bank in ensuring the effective and efficient performance of this objective. Banks have to carry out its essential duty of intermediation to ensure smooth mobilizing and channeling of funds to the productive sector of the economy especially the manufacturing sector. However, in spite of persistent need by the federal government for improvement, which led to the development of policy strategy in order to attract credits to the manufacturing sector, there remains unwillingness by the deposit money bank to offer credits to the manufacturing sector at low lending rate. For instance, as indicated in the central bank of Nigeria (CBN report, 2009), almost throughout the regulatory era, commercial banks loans and advances to the manufacturing sector deviated persistently to a minimal. A study by the national planning commission, Federal Republic of Nigeria (2011) held that the flow and quality of bank funding to the private sector went down increasingly as the risk aversion of banks increased in the aftermath of the financial meltdown. Funding has made it difficult for firms to invest in modern machines, information and communication technology and human resources development which are essential factors in trimming down costs, raising productivity and improving competitive strength. Even when credit is available, high lending rate which is sometimes go over 30%, make such credits unattractive, given the fact that returns on investments in the sub-sector have been below ten percent (10%) on the average. Accordingly, manufacturing sector in Nigeria is faced with the problem of accessibility of funds for productive investment, hence its poor performance in recent years (Edirisuriya, 2008).

It is important to note that most of the studies on the role of bank lending in the manufacturing sector performance have been highlights on developed economies. There exist limited studies on its impact on developing and emerging economies (specifically, Nigeria), this has created a huge knowledge gap. Hence, the reason for this present study, to eliminate or reduce the information gap in existence.


1.3 Objectives of the Study

The general objective of the study is to examine the impact of institutional financing on the performance of small-scale manufacturing industries. Specifically, the study will be guided by the following;


1.3 Objectives of the Study

The general objective of the study is to examine the impact of institutional financing on the performance of small-scale manufacturing industries. Specifically, the study will be guided by the following;

  1. To examine the effect the sectorial distribution of banks’ loans and advances to the small-scale manufacturing industries has on the output and performance of the manufacturing sector in Nigeria.
  2. To determine the impact of lending rate on the performance of the small-scale manufacturing industries in Nigeria.
  3. To determine the impact of saving rate on the performance of the small-scale manufacturing industries in Nigeria.
  4. To examine the effect money supply has on the performance of small-scale manufacturing industries in Nigeria.

1.4 Research Questions

  1. In what way has the sectorial distribution of commercial banks’ loans and advances to the manufacturing sector had an impact on the performance of the small-scale manufacturing industries in Nigeria?
  2. To what extent does lending rate have an impact on the performance of the small-scale manufacturing industries in Nigeria?
  3. To what extent does saving rate have an impact on the performance of the small-scale manufacturing industries?
  4. To what extent has money supply had an impact on the performance of small-scale manufacturing industries in Nigeria?

1.5 Research Hypothesis

  • Ho1: Sectorial distribution of bank loans and advances to the small-scale manufacturing industries does not have a positive and significant impact on the performance of the small-scale manufacturing sector in Nigeria
  • Ho2: Lending rate does not have a positive and significant impact on the performance of the small-scale manufacturing industries in Nigeria.
  • Ho3: Saving rate does not have a positive and significant impact on the performance of the small-scale manufacturing industries in Nigeria.
  • Ho4: Money supply does not have a positive and significant impact on the performance of the small-scale manufacturing industries in Nigeria.

1.6 Significance of the Study

The study is useful to the academic community because it will provide them with an insight of how the development of small-scale manufacturing industries would contribute to the efficient and effective growth of an economy if proper measures would be taken to meet the financial needs of the sector.

This study is also useful to policy makers by making them aware of the problems affecting the growth of the small-scale manufacturing industries and pointing out steps or measures that can be taken in order to produce a better functioning sector.

This Research would also serve as a platform for other researchers on the same or related subjects.

This research will also satisfy the interest of the general public by creating awareness on sectorial issues of the economy.


1.7 Scope of the Study

The scope of this study boarders on the impact of institutional financing on the performance of small-scale manufacturing industries. This study will adopt time series data from 2002 to 2018. The data will be obtained from the publications of the central bank of Nigeria statistical bulletin and another academic journal.


1.8 Limitation of the Study

As regarding the limitations on this research project, it would be impossible to include all manufacturing industries in Nigeria, therefore, this study was limited to some selected manufacturing companies.

Time constraint was another strong factor that posed as a limitation to this research because the study was carried out when the researcher had so much work load. Thus, it was difficult for the researcher to meet up some of the appointment with respondents.


1.9 Definition of Terms

Bank Funding:

This is also known as bank lending or bank credits. It is the aggregate amount of credit available to a person or business from a banking institution. It is the total amount of funds financial institutions provides to an individual or business. A business or individual’s bank credit depends on their ability to repay and the total amount of credits available in the banking institution.

Lending / Interest Rate:

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed.

Sector:

A sector is an area or proportion that is distinct from others. Therefore, the sectors of an economy are large groups of the economy, grouped according to their place in the production chain, by their kind of work (product or services) or ownership. For example the agricultural sector, the manufacturing sector, etc. Our focus, for the purpose of this research work is the manufacturing sector.

Saving Rate:

A saving rate is an amount of money, expressed as a percentage or ratio that a person deducts from his disposable personal income to set aside as a nest egg or for retirement.

Money Supply:

Money supply is the total value of monetary assets available in an economy at a specific time. Money supply includes currency in circulation and demand deposits (depositors’ easily accessed assets on the books of the financial institution).


1.10 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, definition of terms etc.
  • Chapter two highlight 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 Policy Implications

5.1 Introduction

This chapter presents the summary, conclusions and recommendations of the study. These are presented in line with the objectives and findings of the study.


5.2 Summary of Findings

The principle objective of this study is to examine the impact of institutional financing on the performance of small-scale manufacturing industries. An overview of Nigeria manufacturing industry and its activities was presented. The manufacturing industry which is a productive sector plays a very vital and significant role in the development of economy. The manufacturing industry as a sub sector of the industrial sector refers to a process in which raw material and other production factors such as labor land and capital are combined and utilized in the production of good and services. It was also identified that the manufacturing industries in Nigeria face difficulty in raising funds for father investments. Funding has made it difficult for these industries to invest in modern machines, information and communication technology and human resources development which are essential factors in trimming down costs, raising productivity and improving competitive strength. Loans which forms part of the ways by which business can obtain funds are usually made inaccessible by the Nigeria banks resulting from several factors such as interest rate or inability to meet up with some collateral or security requirements.

The study tried to identify some the major objectives of bank funding to include but not limited to; Stimulate economic growth: both on the borrowers and lenders, It encourages savings and investments, Maintaining maximum profitability to shareholders and liquidity for depositors, Realization of government policy objectives of ensuring financial stability within the country: through monetary policy tools such as liquidity ratio, bank rate etc. Although these positive objectives there are still constraints to lending, this is clearly discussed in the conceptual framework of this study.

The constraints are those factors that limit the amount of fund to be given out as loans by the commercial bank to the public. They include and are not limited to the volume of bank deposit, liquidity requirements of banks by the central bank, shareholders fund capital base, statutory lending limit.

Furthermore, an analysis was carried out for the purpose of the objectives as stated in chapter one. Using ordinary least square regression analysis technique, bank lending, through identifiable and measurable proxies such as lending rate (LR), commercial bank’s loan and advances to the small-scale manufacturing industries (CBCM), saving rate (SR) and money supply (M2) was used to investigate its impact on the growth of the small-scale manufacturing industries with time series data from 2002 to 2018.


5.3 Conclusion

This study has investigated the impact of institutional financing on the performance of small-scale manufacturing industries for the period which spanned between 2002 and 2018. Econometric model was specified and estimated via the Least Square regression techniques to ascertain the relationship between dependent manufacturing output growth rate and the explanatory variables (commercial bank credit to the small-scale manufacturing industries, interest/ lending rate, savings rate, money supply). Descriptive statistics for the variables was carried out, as well as correlation test between the dependent variable and the independent variables. From the results obtained in the regression analysis showed that manufacturing growth rate and selected macroeconomic variables included have a long run relationship with the growth of the small-scale manufacturing industries. The study also reveals that commercial bank loans and advances (CBCM) and savings rate has a significant impact on manufacturing growth rate in Nigeria. Although money supply has a positive relationship with manufacturing growth rate, its impact is still insignificant on the country’s manufacturing growth rate. This may be connected with the government monetary policy objective of ensuring financial stability by controlling the amount of money in circulation. The study shows that interest rate has adverse effect on the growth of manufacturing industry output. This finding confirms to the apriori expectation. This was attributed to the stable macroeconomic policy in management of interest rate and the control of money supply in the Nigeria economy. Conclusively, bank funding to the small-scale manufacturing industries and saving rate are the main determinants of Nigeria small-scale manufacturing industries growth.


5.4 Recommendations

Based on the findings and the conclusions made in the course of this study, the following recommendations were made;

  1. SMEs need to put more emphasis on informal form of finance (self help group finance, family and friends finance and trade credit finance)since the informal finance relies on relationships and reputation implying that information asymmetries between informal lenders and their borrowers are less acute, the loan application procedure lighter, and the collateral requirement easier to fulfill. Furthermore, informal financiers are often better positioned to efficiently monitor and enforce repayment when legal enforcement is difficult and time-consuming.
  2. Government should consider coming up with Usury laws that set interest rate ceilings to protect the borrower from exploitation by shylocks. Shylock finance sources need to be avoided by SMEs if possible since they charge unscrupulous interest rates. Credit from moneylenders is often the most expensive credit available; hence the demand for it usually comes from persons without any other options.
  3. SMEs in Enugu should adopt a capital structure that would allow them to expand their business activities.
  4. There is the need for the government to utilise Informal Financial Institutions in its poverty reduction programmes, since they have been found to be popular among the people in-terms of poverty reduction.

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