The Role Of Commercial Bank In The Performance Of Small And Medium Scale Enterprises In Nigeria

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The Role Of Commercial Bank In The Performance Of Small And Medium Scale Enterprises In Nigeria


Abstract


This research examined the role of commercial banks in the performance of small scale enterprises in Nigeria a study of First Bank of Nigeria. Specifically, the study highlights the different sources of finance available to small scale enterprises, it also examine the role of commercial banks in satisfying the financial needs of SMEs in Nigeria and finally it also examine method to reduce formality needed for financing the entrepreneurs by commercial banks. A sample is a portion of the population selected for study. It is very important to select sample size that will give sufficient fair representation of the population. There are two basic way of making the sample size decision, one is by rule of thumb and the other one is by calculated method. In this research work, the rule of the thumb was used for this research where 90 employees of total population were selected as the sample size. Simple random sampling was used to select target individual from each stratum. The complete questionnaires were collected serially, coded and analyzed sequentially a cording to the research questions. Tables were used to present information to facilitate analysis, simple percentages where used while Chi -square was used to test the hypothesis. The responses were of five-point scale which range from “strong agreed to the undecided “. Thus; Strongly Agreed = 5 Agreed = 4 Undecided = 3 Disagreed = 2 Strongly Disagreed = 1. The findings of the research indicated that there is no significant relationship between financing of small and medium scale enterprises and commercial banks. Furthermore, result indicated that there commercial banks and lending to small scale industries and also in meeting the needs of small and medium scale enterprises. It is recommended that the government should be consistent in its industrial policies so as to enable manufacturing firms to factor tariff measures into their trade decisions.


Chapter One


Introduction

1.1 Background of Study

The development of any country on how far its income generating sectors can increase its capacity and its contributions to the generate output can only be answered through the industrial sector which seems to be the most dynamic sector from the economist point of view because of its ability to increase capacity almost to an infinite position and also because of its outputs usually a total creation of value. Therefore most countries focus on the growth and development of their industries to enhance fast economic development (Udeh, 2004).

Although, development of large scale industries, large manufacturing outfits and big conglomerates may be contributing immensely to the industrialization and growth of the economy, small and medium scale enterprises play he most paramount role in essence, the national development is a function of small scale industries performance. in the past few decades, small and medium scale enterprises (SMES) have played important roles in the development economics and proved to be one of the most visible sectors with economic growth potential (Shenton, 2001)

The successes recorded by these countries were because of serious consideration of the future rewards from sustained investment in this sectors. Due to their sizes and scope of operations these enterprises requires relatively small capital investment to start, there by offering a relatively high labour to capital ration. They also demand low technology and management skill, which are readily available within the society.

The extent to which the opportunities offered by SMEs are exploited and their contribution maximized enabling environment created through the provisions of pre-requist infrastructural facilities. These include good road networks, telecommunication, adequate and efficient power supply ports etc. and the introduction and pursuit of policies such as concessionary financing that encourage and strengthen the growth of SMEs. Small scale industries have such a crucial role to play in the development of an economy that they cannot be ignored.

In fact small and medium scale enterprises development should form one of the country’s development objectives. They can serve as sources of inputs for the multinationals there by replacing existing foreign source. They are also training grounds for local skill and entrepreneurs, could become channels for mobilizing local, savings and ensuring a more equitable distribution of manpower from the rural to urban areas (Udeh, 2004).

Across the word, SMEs, are crucial for economic growth, poverty alleviation, wealth acration and the promotion of more pluralistic societies.

Additionally and as expected, all the above vision and importance of SMEs cannot be fully realize and achieved without the financial institution. The expectation of the banking industry in the development and performance of small and medium scale sectors to enable entrepreneur in the sector acquires tested and modern knowledge necessary and not only that, but for research purpose.

The success of SMEs sectors will, therefore, depends on the co-operation and inter-relationship between the two sectors of the economy.

Without doubt, it is generally recognized development this act as catalysts in any development country’s quest to join the league of advanced and industrialized nations. The ability of small scale enterprises to initiate a nation to the vanguard of industrialization is proved by the fact that it was the major instrument of development of the Asian tigers (Singapore, south Korea, Taiwan, China, Malaysia, the Philippines and Indonesia) and their ability to hawness the potentials of their small and medium scale enterprises, put them on the right footing in their pursuit of a self reliant industry and a developed economy.

Today, SMEs, represent about 90 percent of the industrial sector in terms of number of enterprises (FOS, 1998), however, they contribute a meager 2 percent of GDP. This is insignificance when compared to countries like Indonesia, Thailand and India where SMEs contribute almost 40 percent of GDP, whilst SMEs are an important part country, of the business scenery in any country; they are faced with significant challengers that compromise their ability to function and to contribute optimally to the economy.


1.2 Statement of the Problem

The Nigeria economy has been progressing as expected, the unemployment rate is so high that it is believed that 3 out of 5 graduates are likely to be jobless in the first 5 years of their graduation, inflation is galloping as prices double almost daily, poverty rate reached a chronic state where countries in the world and general welfare is dilapidating, mortality rate is increasing across the year basically due, to poor infrastructure and social amenities. To slove these problems, there is a need to investigate which sector has the highest potential to contribute positively to the economy, and most importantly to the grassroots.

Although, theory may back enormous contributions of small and medium scale enterprises to economic development, there is need to investigate if that is the case in Nigeria. It is obvious that if the available SMEs, in Nigeria were not faced with certain problems of infrastructure, funding, raw material sourcing, foreign dumping amongst other.

It is however, in the light of the above problems that this research study is initiated to investigate the problems, the extent of their hindrance to growth of the sector and their possible solution.


1.3 Research Questions

At the completion of this research work the following question must have been answered.

  1. To what extent does the small and medium scale enterprise in Nigeria contribute to national output and economic development in general?
  2. To what extent has the SME’s, being able to alleviate the unemployment problem in Nigeria?
  3. Does SMEs in Nigeria really consume more of domestic inputs as against imported raw material?
  4. What role does commercial bank performance in improving the performance of SMEs towards economic development?

1.4 Objective of the Study

In the light of the important roles performance of the small and medium scale enterprises in the country’s economic development coupled with the roles played by the commercial banks in solving the numerous problems believed to have overwhelmed the SMEs in Nigeria.

The primary focus of this study is aimed at understanding the economy, other objectives include:

  1. To analyze the contribution of the small scale industries to the economic development of Nigeria with reference to employment generation, gross domestic product (GDP), utilization of local raw materials and development of local technology. The study further examined the relationship between domestic input and capacity utilization.
  2. To discuss the performance of the small scale enterprises to the entire industrial sector.
  3. To examine the relative effectiveness of commercial banks on SMEs performance
  4. To identify factors (including financial, commercial, technical, managerial and regulation) that promotes or stunts the effective performance of the small scale industries
  5. To investigate whether a linkage exits between economic development and the SMEs.
  6. To make recommendation where government policies could draw from and on which possible forecasting on future researches can be based upon.

1.5 Research Hypothesis

The hypotheses for this study will be

hypothesis one:
  • Ho; SMEs contribute nothing to the economic growth and development of Nigeria.
  • Hi; SMEs contribute to the economic growth and development of Nigeria.
Hypotheses two
  • Ho; there is no relative effectiveness of commercial banks on SMEs performance
  • Hi; there is a relative effectiveness of commercial banks on SMEs performance

1.6 Significance of the Study

The study of small and medium scale enterprises as a sub-sector of the industrial sector at large, is very essential and important considering the role being play by the commercial banks and because of the enormous advantages that the economy can gain from the contribution of this sector.

Also, this study is signified on the ground that it will foster the confidence of the investors to focus their attention towards the development of the sector.

In addition it will be an eye opener to both the shareholders and management of organization, the important of this sector towards the important.

Specifically, the importance of studying the performance of the industry making small and medium scale enterprises the basic focus in Nigeria is as a result of the growing awareness of the country’s government on the importance of this sector and the current bid to improve it’s contribution and enhance it’s performance.

Lastly, the research study is signified in that it will contribute to the frontier of knowledge especially in research and development (R&D)and it will be of a reference point to those researchers who may be desiring to carry out a similar research on the topic


1.7 Scope of the Study

The study focuses on the small and medium scale industries in the Nigeria economy, which is used to measure the industrial sector at large. It centers on the evolution and management of the small and medium scale industries performance and the crucial role played by commercial development.

The study will generally cover the roll of commercial banks on the performance of small and medium scale enterprises.


1.8 Limitation of the Study

The effects of economic bottleneck and social infrastructure on the performance of the small and medium scale industries are identified so as not to underline their real contribution to economy in both economic and industrial development terms.

Since most small scale industries, are owned by private individuals, they usually feel reluctant or refuse to make their data public hence it may be difficult to get a well rounded conclusion.

This research study is also projected to be limited by time and cost constraint.


1.9 Operational Definition of Terms

Small scale enterprises or industries:

Any enterprises with a minimum assets base of N200 million excluding the land and working capital and with the number of staff employed not less than 10 or more than 300 (SMIE 15, 2003).

Commercial banks

Banks are financial firms or division of larger firms that accepted deposit subject to withdrawer on demand and invest part of these deposits in interest bearing loans and investments. They are profit making, banks organized on a joint stock basis, that is the purpose of their establishments to make profits for their owners the shareholders

Merchant banks:

Merchant banks on like commercial banks are whole banks owned by individuals are grouped of individuals their customers are mainly corporate bodies and deposits corporate bodies sums of N50,000 and above, they accept medium and long term deposits and give medium long term loan and advances.

Performance

Is not a single technique, rather it is the term used for a variety of technique by which supervisors, peers, sub-ordinates, and the individual employee themselves rate, rank or describe the employees work effectiveness. It is a process in which bosses regularly volute and report on the performance attainments, abilities, potentials, for future development and other qualities of their development and other qualities of their organization sub-ordinate.

Organization of the Study

This work will be divided into five chapters. Chapter one will contains the introduction to the study, objectives, research questions, research hypotheses, significance and limitation of the study. Chapter two will take the literature review and conceptual frame work. Chapter three will present the research methodology; chapter four will be concerned with our analysis of data. Chapter five will elicit the summary of findings, recommendation and conclusion.


Chapter Five


Summary, Conclusions and Recommendations

5.1 Summary

The general objective of this study was to analyze the role of commercial banks in the performance of small scale enterprises in Nigeria a case study of First Bank Nigeria. Other specific objectives were to; highlight the different sources of finance available to small scale enterprises, examine the role of commercial banks in satisfying the financial needs of SMEs in Nigeria and examine method to reduce formality needed for financing the entrepreneurs by commercial banks.

Simple random sampling was used to select target individual from each stratum. The complete questionnaires were collected serially, coded and analyzed sequentially a cording to the research questions. In this research work, the rule of the thumb was used for this research where 90 employees of total population were selected as the sample size. The chi-square (X2) statistical was employed in testing hypothesis. The chi-square (X2) is a sample statistical measure used in testing hypothesis concerning the signification of any difference between a set of observed frequency (o) of a sample and a corresponding set of expected of theoretical frequency (e).

The study reveals that they have needed advice on certain issues or information concerning your organization. It was also revealed that they keep daily or weekly records of business transactions. Also findings show that CBN also influence the bank lending policies. The research also reveals that there is no significant relationship between financing of small and medium scale enterprises and commercial banks. Finally findings shows that there is significant relationship between commercial banks and lending to small scale industries and also in meeting the needs of small and medium scale enterprises.


5.2 Conclusion

The economic rationale for credit to small and medium scale enterprises (SMEs) is indisputable as earlier views of small and medium scale enterprises was seen to have progressively become a major factor in economic development of many countries of the world. This study has empirically brought to light pivotal role of commercial banks’ credit to growth of small and medium scale enterprises, which in turn accelerate economic growth and development. In addition, the finance led growth postulation for growth and development of an economy through mobilization and allocation of financial resources to deficit economic unit is valid in Nigeria. Although studies have assessed this subject matter, this study should be not an ultimate result on the nexus between banks’ credit and small and medium scale enterprises growth, rather a motivation for the development new ideas by scholars to emphatically and unambiguously assist banks to improving credit to the private sector as a way of achieving the vision of Nigeria to be among the top twenty economy in the world..

Conclusively, this research work makes useful contribution to knowledge by appraising the various means of commercial banks in the performance of small scale enterprises inNigeria. It explicates the importance of SMEs performance of banking sector. It gives a proper insight of what the banking sector entails of the economy.
Banking sector globally are identified to be major key players in the financial industry that have positively affected individuals, business organization, other financial institution, the government and the economy at large through services they offer and the function they perform in the economy. Finally, despite the effectiveness of the sector, it still suffers some setbacks. This means that the banking sector and their activities still have a long way to go in providing new services for good customer relationship, better financing schemes and development in the Nigerian economy.


5.3 Recommendations

There is no way Nigeria can achieve sustainable funding of small and medium scale enterprises by commercial banks and other agencies such as NERFUND, NIDB etc established for the funding purposes until both the external and internal problems of SMEs are solved. Banks react to the stimulus of the macroeconomic environment and as long as the environment remains conducive, banks will continue to exhibit risk-averse behavior irrespective of the programs put in place to address this problem including the SMIEIS program that was already highlighted. The following recommendations in my opinion will help improve the growth and development of the SMEs:

  1. The government should be consistent in its industrial policies so as to enable manufacturing firms to factor tariff measures into their trade decisions.
  2. The government should provide adequate infrastructural facilities like electricity, roads and water supply for the SMEs as this will reduce the high cost of doing business. This will encourage banks to fund the SMEs as their investment will be recouped.
  3. The government should regard SMEs should regard SMEs as the ‘eggs’ that hatch big businesses. Apart from the adequate incentives in (2) above, the government should support SMEs by bulk purchasing their products and retailing them both for the domestic market and for exports.
  4. To facilitate their access to bank credits, the government should be issuing LPOs to the SMEs and payment should be made promptly to the SMEs as this will encourage their growth and the banks can also accept such contract papers as collateral.
  5. On the issue of the internal problems of the SMEs like poor management practices, high rate of business failure, poor account standards, shortage of skilled manpower and financial indiscipline, the government should set up small business management assistance agencies manned by highly skilled and dedicated workers with the view of tackling these problems. The agencies should complement the provision of credit by insuring its efficient use through training and counseling of the small and medium scale entrepreneurs.

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