Impact Of Recapitalized Commercial Banks On Small Medium Enterprise Development In Nigeria

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Impact Of Recapitalized Commercial Banks On Small Medium Enterprise Development In Nigeria


The primary objective of this study is to examine the impact of bank recapitalization on small and medium scale enterprises (SMEs) in Nigeria. Data was obtained from primary source that is questionnaire and secondary source which include Banks bulletin, journals and books. For this study, twenty (20) staff of UBA Awolowo Road, Lagos Branch, were randomly selected and forty (40) from their SME customers, which gave the sum of sixty (60) respondents. Furthermore, the accessibility of Small and Medium Enterprise Equity Investment Scheme (SMEEIS) funds to SMEs was examined. The hypotheses were tested using chi-square method and summary of findings were highlighted.

Chapter One


1.1 Background of the Study

Small and Medium Enterprises (SMEs) play a vital role in the development of national economy. Due to their importance and the crucial role they play in economic development and growth of the nation, much attention has been placed on financing of small and medium enterprises, since they are major contributors to the economy of Nigeria. These enterprises are drivers of the economy; therefore policy attention has to be given to them especially in developing economies because of their impact on many sectors of the economy. Their impact is felt in the following ways: Greater utilization of local raw materials, employment generation, encouragement of rural development, development of entrepreneurship, mobilization of local savings, linkages with bigger industries, provision of regional balance by spreading investments more evenly, provision of avenue for self employment and provision of opportunity for training managers and semi skilled workers.

In Nigeria, credit has been recognized as an essential tool for promoting small and Micro Enterprises (SMEs), hence the need for recapitalization of commercial banks in Nigeria. Bank recapitalization which was effective from 2006 is aimed at making Nigerian banks stronger and better in-order to finance all sectors of the economy including the major drivers of the economy-Small and Medium Scale Enterprises. About 70 percent of the population is engaged in the informal sector or in agricultural production. The Federal and State governments have recognized that for sustainable growth and development, the financial empowerment of the people is vital. If this growth strategy is adopted and the latent entrepreneurial capabilities of this large segment of the people is sufficiently stimulated and sustained, then positive multipliers will be felt throughout the economy. To give effect to these aspirations various policies have been instituted over time by the Federal Government to improve rural and urban enterprise production capabilities (Olaitan 2006)

The central Bank of Nigeria on July 6th 2004, announced the recapitalization of banking sector from N2 billion to N25 billion with effect from 1st January 2006. This was with a view to make the sector internationally competitive, sound and improves its ability to provide credit to all the productive sectors of the economy. In order to meet this obligation, banks embarked on strategies of merger and acquisition, floating of new shares and so on. At the end of the exercise, 25 new banks emerged.

It was hoped that the consolidation will make the banks stronger to be able to provide large amount of funds to productive sectors of the economy which is largely dominated by Small and Medium Enterprises, thereby making them grow into large firms with enough resources to contribute to the economic development.

Also, in December 2005, the CBN introduced new Micro-finance Policy (MFP) which was designed to be public and private sector driven.

The purpose of the policy was to strengthen community banks in order forthem to be able to grant collateral and non collateral loans to financemicroeconomic activities in the economy. The policy also aims at providingmany people with access to financial services who otherwise will have noaccess to these services.

Small and Medium Enterprises as said earlier have a crucial role toplay in the development of an economy, they are training grounds for localentrepreneurs, they encourage local savings and ensure equitable distributionof wealth thereby reducing rural- urban migration of human resources.

To this end, government should collaborate with private sector in order to create an enabling and conducive environment for SME’S in order to contribute positively towards the development of the economy.

1.2 Statement of Problem

Bank fraud, poor lending and credit management practices in the Nigerian banking sector forced the Central bank of Nigeria to revisit the capital structure of commercial banks in Nigeria. These among other thingsled the Central Bank of Nigeria (CBN) to give a directive that all banksshould recapitalize from N2 billion to N25 billion with effect from 1stJanuary 2006.

This development led to various financial activities in the Nigerian financial sector with most banks initially opting for additional source of fund from the capital market via floating of shares. Most banks at this stage started inviting members of the public to acquire new shares in-order to meet up with the new minimum capital directed by the central bank of Nigeria. Notwithstanding, some banks were not capable of raising the new minimum capital by themselves, hence the need for mergers and consolidation of banks, reducing the total number of banks in Nigeria to twenty five (25).

However, the consolidation of the banking sector presented new challenges tothe banks which require more efforts to control cost and increase theirefficiency; this in turn has effect the volume of credit facilities granted to small and medium scale enterprises in Nigeria. A study conducted by Iloh et al (2012) reveals the gap between deposit money bankdeposits (DMBD) and commercial bank lending to SMEs from year 2000 upward (the year that saw theend of merchant banks). There is a wide margin between the two variables and while deposit moneybank deposits rose very high, commercial bank lending to SMEs declined from 2004 to 2010. The gapbetween commercial bank deposits and its lending to SMEs reveals the shift in focus from lending toSMEs to lending to major investors (customers). One is made to ask, while the banking sector is said todrive any economy, has Nigerian commercial banks neglected SMEs, which is vital for the growth anddevelopment of the Nigerian economy? Notwithstanding, it is interesting to note that community/Microfinance bank (CMFB) lending to SMEs moved in the same trend with its bank deposit. This implies that ascommunity/microfinance bank deposits increased, it’s lending to SMEs increased. Regardless of thedirect impact of community/microfinance bank on SMEs, SMEs still cry for lack of funding and lending toSMEs in Nigeria is still poor. This is so because their capital, reserve and deposit are very small andinsufficient to meet the needs of small and medium entrepreneurs.

1.3 Objectives of Study

The primary objective of the study is to examine the effects of bank recapitalization on small and medium scale enterprises in Nigeria.

Specific objectives of the study are:

  1. To determine the relationship between Commercial Banks and the performance Small Business Entrepreneurs in Nigeria.
  2. To determine whether bank recapitalization led to increase in funds for financing SMEs.
  3. To examine the accessibility of Small and Medium Enterprise Equity Investment Scheme (SMEEIS) funds to SMEs.

1.4 Research Questions

In-order to achieve the above stated objectives, the researcher formulated the following research questions:

  1. What is the relationship between commercial banks and the performance small business entrepreneurs in Nigeria?
  2. Does bank recapitalization increase funding for SMEs?
  3. How accessible are Small and Medium Enterprise Equity Investment Scheme Funds to SMEs?

1.5 Hypothesis of the Study

The following hypotheses are formulated in line with the objectives and research questions of the study:

  1. Ho: There is no significant relationship between Commercial bank and the performance of Small Business Owners in Nigeria.
    Hi: There is a significant relationship between Commercial banks and the performance of Small Business Owners in Nigeria.
  2. Ho: Bank Re-capitalization has not led to the increase of funds to SMEs
    Hi: Bank recapitalization has led to the increase of Funds to SMEs
  3. Ho: Small and Medium Enterprise Equity Investment Scheme funds are not easily assessable to SMEs
    Hi: Small and Medium Enterprise Equity Investment Scheme funds are easily assessable to SMEs

1.6 Significance of the Study

Robust economic growth cannot be achieved without putting in place well focused programmes to reduce poverty through empowering the people by increasing their access to factors of production, especially credit. The latent capacity of the poor entrepreneurs would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant; increase employment opportunities, enhance household income, and create wealth.

However, the lack of required financial support from the microfinance banks to Micro Business operators in Lagos state has become a major concern in Nigeria. Hence, this study shall be relevant to policy makers in the areas of finding out the impact of micro financing on the small scale investors. Also, this study shall enhance further research in the subject area.

1.7 Scope of the Study

The scope of this research work is the recapitalized commercial banks and their SME customers in Nigeria. However, due to the fact that there are many commercial banks with many SME customers, the research is limited to Mainstreet Bank, Osun branch and some of their SME customers.

1.8 Limitations of the Study

Time and financial constraints were the major limitations of the study. Since the researcher could not afford the cost of reaching out to more banks, money became a challenge. The researcher was also engaged in other school activities which also limited the time used for the project.

1.9 Definition of Terms


An economy is the total sum of product and service transactions of value between two agents in a region, be it individuals, organizations or states. An economy consists of the economic system, comprising the production, distribution or trade, and consumption of limited goods and services between two agents, the agents can be individuals, businesses, organizations, or governments.

Mergers and Acquisitions:

Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture.


Recapitalization is a sort of a corporate reorganization involving substantial change in a company’s capital structure.


Small and Medium Enterprises


Small and Medium Enterprise Equity Scheme

Chapter Five

5.0 Summary, Conclusions and Recommendations

5.1 Summary

The first chapter covered the general introduction on the research

topic and therefore examines such issues as background to the study, statement of the problem, objectives of the study, statement of hypothesis, significance of the study as well as the scope and limitation of the study.

Chapter two reviewed related literature on the research topic and this include introduction on Small and Medium Enterprises, Bank consolidation and it’s benefits to SMEs. The chapter also examined Small and Medium Enterprises Equity Investment Scheme.

Chapter three examined the methodology in gathering relevant data for the research topic and this include the research design used, research population and sampling techniques, sources of data collection and method of data analysis.

The fourth chapter deals with data presentation and analysis, where the data collected was presented and analyzed. Also hypotheses were tested using chi-square method and summary of findings were highlighted. While chapter five comprises of summary, conclusions and recommendations.

5.2 Conclusions

The Central Bank of Nigeria directed banks to recapitalize from N2billion to N25 billion with effect from 1st January 2006. This is in order to make the banking sector stronger, more competitive and internationally standard to provide large amount of funds to productive sectors of the economy which is largely dominated by Small and Medium Enterprises, thereby making them grow into large firms with enough resources to contribute to the economic development.

This study shows that, due to consolidation of the banking sector, there is increase in funds for SME funding. However, these funds are not easily accessible by the SMEs due to more stringent requirements placed before the funds can be given to them. Also, it was discovered that there are more request for such funds by SMEs after the consolidation of the banking sector. Furthermore, the study discovered that even after the consolidation which made the banks to be stronger with more capital base, only few SMEs benefited from the SMEEIS Scheme.

However, the few SMEs that can access the funds experienced rapid growth in their businesses. This shows that if many SMEs can access the funds, it will go a long way in helping them grow and expand, thereby making it possible for them to contribute more to the economic growth and development of the economy.

5.3 Recommendations

This research work highlighted that funds are not easily accessible to SMEs for their operations. Based on that, the following recommendations are made.

  1. The government should not only commit resources to the SMEs by setting up agencies through which SMEs can be given financial assistance. It should equally establish a monitoring agency to see that the required assistance is actually extended to the SMEs.
  2. The government through the Central Bank of Nigeria should establish National Credit Guarantee Scheme for SMEs which should guarantee the loans needed by SMEs from banks. This will in a way solve the problem of access to funds faced by the SMEs.
  3. The government should reduce the tax rate for SMEs thereby making them to have more money to pay back loan granted to them.
  4. SMEs should endeavor to honor payments obligations to banks, government or other loan agents by promptly paying back the loans as at when due.
  5. SMEs should be encouraged to raise more funds by inviting other people to participate in the company by buying shares of the company. This brings in fresh capital to the business, thereby reducing their over reliance on banks for funds.
  6. SMEs should be encouraged to plough back some of the profit realized. If this is done, they will not need to depend too much on financial institutions for finances to run their business.
  7. SMEs should be locally monitored on how they use the funds. This is will discourage them from embezzling the funds.
  8. There should be a legal institution solely mandated to punish the offending banks or beneficiaries in the usage of the funds.
  9. SMEs should provide needed statistics and information to relevant agencies whose contributions are vital to creating an enabling environment for them to operate.

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