Problems Facing Small And Medium Scale Enterprises In Obtaining Bank Loans

Project and Seminar Topics with material for Banking and Finance

Problems Facing Small And Medium Scale Enterprises In Obtaining Bank Loans


This research work aims at investigating the problems encountered by small and medium scale enterprises in obtaining bank loans with particular reference to Union Bank Nig. Plc, Ogui Road, Enugu.It is a common knowledge that Banks often favour the large –scale industries in credit extension scheme. This is because of their higher equity base, availability of collaterals and lower risk. Further still, they have a more organized management team and employ professionals with greater skills.

In this study therefore, efforts are made to identify the problems usually encountered by small and medium scale enterprises in raising money from bank. These problems could be broken down into technical problems, managerial or environmental constraints and financial problems. Nevertheless, have identifi9ed these problems some suggestions on how to ameliorate such inherent difficulties were offered.

Chapter One


1.1 Background to the Problem

According to African Development Bank Group Report (2012) Small and Medium Enterprises are the best candidates to achieve inclusive growth in Africa as they contribute significantly to the income generation and joint creation. However, financial access is consistently reported as one of the major obstacles to SME’s growth and development. Only 20 percent of African SMEs have a line of credit from a financial institution. There has been a growing recognition of the importance of the role that Small and Medium Enterprises (SMEs) play in the economic development globally and Nigeria in Particular. Nonetheless, in order for Nigeria’s Small and Medium Enterprises (SME’s) to continue to fulfill social economic needs, they need access to finance to carry out their business operation and expansion.

In particular, small and medium scale appear to play a significant role in the economy in terms of balanced and sustainable growth, employment generation, development of entrepreneurial skills and contribution to the country’s export earnings. However, despite their importance to the economy, most SMEs are not able to stand up to the challenges of globalization, mainly because of difficulties in the area of financing (Macntosh, 2003 and Saeed2002).

The objective of the National Vision 2025 is to transform the predominantly agricultural economy to semi-industrialized one. The SMEs sector has a significant role to play towards attaining this goal. It is on the above basis that the sustainable industrial policy identified specific strategies, targeting at stimulating the SMEs sector to be able to play a crucial role. The vision if SME development policy is to have a vibrant and dynamic SME sector that ensures effective utilization of available resources to attain accelerated and sustainable growth. Current researcher needed to evaluate on the above focus and the extent in which SMEs face to play in terms of prospects and challenges of obtaining bank loan in Union bank PLC Ogui Enugu metropolis, being one of crucial entrepreneurial city of Nigeria.

Inferring from the foregoing discussion, despite the importance of the Small and Medium Enterprises (SME) sector in the economic development, it has been facing critical challenges particularly linked to inability to access credit facilities. This study explored on the problems that SMEs face focusing on the market and financial issues, especially access to finance. The study used the case study of agricultural inputs Sellers and distributors sampled from Enugu metropolis. This stands to be not only the research ground for the current study, but prepares the coming researchers for more critical researchers on SMEs as Nigeria and the world is changing every day.

1.2 Statement of the Problem

Though, small business owners often have more information about the potential of their own businesses, in some situations it can be difficult for business owners to articulate and give detailed information about the business as the financiers want (Aryeetey et al., 1994). In additional, some small business managers tend to be restrictive when it comes to providing external financiers with detailed information about the core of the business since they believe that information about their business may leak through to the competitors (Winborg and Landstrom, 2009).

Lack of planning, improper financing and poor management have been reflected as the main cause of failure to small enterprises to obtain credit has been revealed by (Longenecker et al., 2006). This is yet to be evaluated in the context of a growing self employment environment and SMEs platform such as Enugu metropolis in Nigeria. Though shortage of credit facility has ever being identified as one of the most serious constraints, facing SMEs and hindering their development in Millenium Goals Reports.

Nigeria has been changing, the Medium Enterprises (SMEs) operation have been striving to cope with the process of changes in the business climate particularly linked to credit accessibility and market competitions. The business entrepreneurs have been the most directly affected by the changing business climate. The study explored on problems that face SMEs in accessing finances fro Union bank PLC Ogui, using a case of sellers’ and distributors of agricultural inputs in Enugu metropolis.

1.3 Objectives of the Research

  1. To assess the nature of SMEs in accessing financial credit from Union bank PLC, Ogui Enugu.
  2. To identify major problems faced by SMEs in accessing financial credit from Union bank PLC, Ogui Enugu.
  3. To examine on strategies and opportunities for SMEs in accessing financial credit in Union bank in Ogui, Enugu metropolis.

1.4 Research Questions

  1. What are the nature of SMEs across Enugu metropolis?
  2. What are the key problems faced by the SMEs in Enugu metropolis to access financial credit from Union bank PLC, Ogui, Enugu?
  3. What could be potential and strategies for SMEs to access financial credit facility from Union bank PLC, Ogui, Enugu metropolis?

1.5 Significance of the Study

The study will be significant to the policy makers-especially in the Ministry of Industry and Trade to understand the problems of enhancing SMEs accessibility to financial credit from Union bank PLC Ogui.

Critical policy issues will benefit the current and future government and policy makers in understanding the challenges and needed solution for SMEs to serve socio- economic issues. To other sectors of the economy, a better understanding of SMEs and financial credit operations provide a chance for stakeholders and other sectors to utilize resources more rationally through linking the sectors of the economy efficiently. Nigeria needs SMEs for a common man livelihood and also linkage between agricultural sector and industrial sector development SMEs perspectives need to be understood clearly.

1.8 Organization of the Study

This dissertation is organized into the following chapters. Chapter one is composed of introduction and the background to the study. Chapter Two presents a review of literature. Chapter Three provides the research methodology. Chapter Four contains research results and analysis of data. Finally is Chapter Five which is about summary, conclusion and recommendations drawn from the findings of the study.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary of the Major Findings

Nature of SMEs in Accessing Credit

The first specific objective of this study assessed the nature of the SMEs in Enugu metropolis. The findings from the study have shown that majority of the SMEs had registered as the Family Owned Business.

Challenges on SMEs at Enugu

The second specific objective of this study identified the challenges facing SMEs who deal with selling and distributing agricultural inputs in Enugu metropolis in accessing financial credit. Majority of respondents lack collateral which hinder them in accessing loans from Unity bank PLC, Ogui.

Strategies used by SMEs in Accessing Financial Credit from Unity Bank PL Ogui

The third specific objective of this study aimed to identify the strategies used by Small and Medium Enterprises (SMEs) in accessing financial credit from Unity bank PLC, Ogui in Enugu metropolis. In view of these findings, maximizing profit, personnel and business plan are strategies which help access financial credits to SMEs deal with agricultural inputs Sellers and distributors.

5.2 Conclusion

Based on the research findings SMEs in agricultural inputs sellers and distributers in Enugu metropolis represent other SMEs in the country still face challenges in accessing credit. This study has consistently shown that the traders in the sampled SMEs are so determined to excel in their businesses. The point is justified by data in which 68% of the respondents said they were willing to invest in other regions of Nigeria and even beyond if they had the financial ability to do so. This implies that the SMEs sector in Nigeria remains largely unexploited. Due to the importance of the SMEs sector, there is a need to revitalize it so that it may positively contribute to the implementation of the National Development Vision2025.

Most of the SMEs required training in the area of finance, legal aspect for them to be able to control their finances assets and build trusts in their operations.

Financial institutions policies and regulations need to be focused not only on security but also on how flexibility to accommodate more SMEs for financial accessibility to raise their capital for operation in Enugu metropolis so as to help socio-economic issues of the community. Less than half of the SMEs samples are yet to access financial credit facility from Unity bank PLC, Ogui.

Taxes and interest rates are hinder accessibility of SMEs to access reasonable finances from Unity bank PLC, Ogui. In addition to that, lack of planning, information and financial knowledge is factors which hindering SMEs acceding financial credits.

Majority of SMEs found in Enugu metropolis are based in retail trade. Most of the SMEs found to have large turnover are the one have more chances to access financial credit from Unity bank PLC, Ogui which in turn build their assets and income flow again gives sense of collateral trust.

5.3 Recommendations

Recommendations for Future Actions

  1. There is a need to establishing of factoring services by bank and non bank services to help the SMEs sellers and distributors in agricultural inputs to access financial services for growth.
  2. The government should make financial regulations and policies flexible to usher growth for SMEs sellers and distributors in agricultural inputs.
  3. The government has to provide incentives and subsidy for the banks with outstanding records of lending to SMEs sellers and distributors in agricultural inputs, to encourage them to boost operation to SMEs, which helps SMEs to contribute to economy.
  4. The Ministry of Industry and Trade need to intensify campaigns and training through the mass media aimed at educating the general public in Nigeria, about SMEs sellers and distributors in agricultural inputs and their potentials to development and progress of the Nation.
  5. Mentoring SMEs sellers and distributors in agricultural inputs before and after accessing financial credit from the financial institutions in Nigeria.
  6. All opportunities concerning financial services and accessibility should be made public, whereby information will lead to the growth of knowledge and awareness of sources of finances for SMEs and individuals to use.
  7. There is a need for Nigeria to research and observe on how SMEs sellers and distributors in agricultural inputs are doing in other in terms of management and financial operations.

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