The Role Of Commercial Banks In The Performance Of Small Scale Enterprises

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The Role Of Commercial Banks In The Performance Of Small Scale Enterprises


This study examined the role of commercial banks in the performance of small scale enterprises in Nigeria.The critical causes on why financing small scale enterprises by commercial banks in Nigeria have not been very effective were evaluated. Not only are the SSEs starved with financial back-up, they are also faced with other external problems such as high interest rates, inconsistency in government industrial policies, lack of infrastructural facilities and internally; poor management practices, high rate of business failure, poor accounting standards, shortage of skilled manpower and financial indiscipline. In view of these numerous problems, this research work was conducted so as to come out with solutions as this will pave way for banks to have more confidence in financing these SSEs efficiently and effectively as against hitherto, their stringent lending policies and the risk averse behavior of funding. This has become necessary as it is a well known fact that the survival, growth and development of SSEs of any country depend largely on funding with other factors put in place. In the light of the findings in this research work, some recommendations and suggestions were made to the government, commercial banks and the small scale entrepreneurs themselves which if implemented will not only sustain the survival, growth and development of this sector, it will also provide employment opportunities and improve the economic situation of Nigeria.

Chapter One


1.1. Background of Study

For both developing and developed countries, small scale firms play important roles in the process of industrialization and economic growth. Apart from increasing per capita income and output, SSEs create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resources utilization considered critical to engineering economic and growth.

However, the seminal role played by SSEs not with standing its development is everywhere constrained by inadequate funding and poor management. The unfavourable macro economic environment has also been identified as one of the major constraints which most times encourage financial institutions which most times encourage financial institutions to be risk-averse in funding small scaleenterprises.

The manufacturing sector (Including Micro, Small and Medium Enterprises) is acknowledged to have huge potential for employment generation and wealth creation in any economy, yet in Nigeria, the sector has stagnated and remains relatively small in terms of its contribution to GDP or to gainful employment. Activity mix in the sector is also quite limited dominated by import dependent processes and factors. Although there is no reliable data, imprecise indicators show that capacity utilization in the sector has improved perceptibly in the period since 1999, but the sector is still faced with a number of constraints with lack of credit availability as the principal constraint. Credit is the largest element of risk in the books of most banks and failures in the management of credit risk, by weakening individual banks and in some cases, the banking system as a whole, have contributed to many episodes of financial instability. A greater understanding of the nature of credit risk, leading to improved measurement and international financial system vis-a-vis the small and medium enterprises in the long run.

Generally, the stage of development and, thus the efficiency of the system varies among countries and changes over time in the same country. The more developed and sophisticated financial systems tend to be associated with the nature economies, while underdeveloped financial systems feature in developing economies. As a process, the financial system adjusts to changes in the real economy just as the economy responds to developments in the financial sector. All over the world, size had become an important ingredient for success, the banking sector included.

In Nigeria every known regime recognizes the importance of promoting SSEs as the basis of economic growth. As a result, several micro-lending institutions were established to enhance the development of SSEs. Such micro credit institutions include the Nigerian Bank for Commerce and Industry (NBCI), National Economic Reconstruction Fund (Nerfund), the people’s Bank of Nigeria (PBN), the community Banks (CB) and the Nigerian Export and Import Bank (NEXIM), and the Liberalization of the banking Sector.

This study attempts to find out how Commercial Banks finance small scale enterprises taking First bank Plc as a case study.

1.2 Statement of the Research Problem

One of the main obligations of commercial Banks in Nigeria and else where in the maximum contribution to the economic development of the nation. Others are maximum profitability owned to the shareholders and maximum liquidity owned to the depositors.

This research work will concentrate on the maximum contribution to the economic development of the nation, i.e. through financing SSEs by commercial Banks. The analysis of the research problem will thus pose some questions like.

Do commercial Banks finance small scale enterprises adequately, if not what are the limitations.

1.3 Objective of the Study

The main objective of this study is to examine the role of commercial banks in the performance of small scale enterprises in Nigeria, this write-up is aimed at achieving the following objectives:

  1. To highlight the different sources of finance available to small scale enterprises in Nigeria.
  2. To examine the role of Commercial Banks in satisfying the financial needs of SSEs in Nigeria taking First bank of Nigeria Plc as a case study.
  3. To improve the financial assistance to the entrepreneurs by commercial Banks.

1.4 Formulation of Hypothesis

  • H1: That financing small scale enterprise by Commercial Banks has been a failure.
  • H2: That obtaining financial assistance by small scale enterprises from Commercial Banks is very difficult and that most of the assistance is obtained through savings and borrowing from other sources.

1.5 Justification of the Study

In the modern times, industrial production requires the procurement of equipment, machineries and other inputs. The capital required in procuring the requirements in limited in supply and very few industrialists have access to it considering the type of collateral security required by the banks which must be fulfilled before granting loans.
Since Commercial Banks act as intermediaries between surplus and deficit or as a bridge between scattered pockets of savers and the business community desirous of loans for investment, at the end of this research work the following will be attained;

  1. SSEs industrialist will be able to know some sources of finance and choose amongst them the best.
  2. Commercial Banks will know how effective and efficient they have been towards economic development.
  3. Commercial Banks will be able to make some adjustments in their lending processes.

1.6 Research Methodology

As it is fully aware, the significance, reliability and validity of any research work to a great extent depends on the methodology used.

There are two methods of data collection; the primary and secondary methods. The primary method consist of structural questionnaire and personal interview, while the secondary method include published government documents and journals, periodicals notable from Central Bank of Nigeria’s publications like bulletins, financial and economic review text books, magazines, budget speech and so on. This research work will not be exceptional.

  1. There will be two sets of questionnaires; one set will be for some top management and employees of FBN, Plc. The other set will go to some small scale industrialist through the chairman of NASSIS.
  2. There will also be personal interview with some staff in the credit department of FBN, Plc and also some staff of industrial development centre.
  3. The secondary method will also be consulted as this will give room to obtaining financial data easily. Also data will be obtained from manuals, reports and handbooks of FBN, Plc. IDC inclusive.

1.7 Scope of the Study

This research work is intended to examine the financing of SSEs by Commercial Banks with emphasis on FBN, Plc. As seen in the earlier part of this chapter, the importance of SSEs towards economic development of a nation cannot be overemphasized, the study covers all kinds of industries, production, processing, servicing, e.t.c.

1.8 Limitations of the Study

One of the major limitations in carrying out this work is time. There is time constraint in carrying out this research work due to the fact that there are other academic engagements like attending lectures, writing assignments, tests, e.t.c. Another limitation of this study is that only FBN, Plc is used. The operation in this bank will certainly not represent the genuine situation obtainable in other banks. This can be as a result of different polices or the financial capabilities in lending.

However, FBN, Plc is chosen because of its financial backing and thus represent Commercial Banks that can fulfill their obligations as seen in the earlier part of this chapter.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary

This study sheds light on the problems, roles and importance of small scale enterprises in the economic development of any country and Nigeria in particular. Attempt was made to evaluate the role of commercial banks of Nigeria through financing these industries. The other sources of finance available to small scale enterprises were also enumerated. Issues raised by both the bank and the SSEs were analyzed and summary of the findings were discussed in chapter four, in which the primary data were collected through two sets of questionnaires; one to the bank and the other to the small scale enterprises. Interviews were also conducted in which IDC staffs were included. The secondary data obtained were from annual and financial reports, bulletins, publication of CBN, newspapers, relevant text books etc.

In an effort to enhance and develop these small scale enterprises, the federal government of Nigeria at the initiative of the CBN introduced a scheme (SMIEIS) which requires banks to set aside 10 percent of their profit before tax to fund SSEs in an equity participation framework other schemes like NERFUND and SSICS were also established.

The purpose of this research work is to analyze the result of these programs so far and ascertain whether it offers an effective means of solving the problem of funding small scaleenterprises in Nigeria, whether banks can play the intermediary role.

5.2 Conclusion

From the analysis of the results in chapter four, one can deduce that the accessibility to credit market for small scaleenterprises in Nigeria is extremely difficult due to the fact that the macroeconomic instability and uncertainty in the business environment has forced banks to lend short to SSEs. Also such facilities i.e. overdrafts and short term loans are made available at a very high interest rate of over 26 percent and they are heavily collaterised. In a situation in which SSEs are mainly dependent on bank loans, this situation could be very disastrous. The implication is that many SSEs do not have access to bank loans with grave implications for their growth and development. Also the inconsistency in government industrial policies for example the inability of the government to execute budgets on time is a major restriction on the ability of manufacturing firms to factor tariff measures into their trade decisions. The lack of infrastructural facilities is also part of external problems that affect the growth of small scale enterprises. Here, many banks blame their inability to fund SSEs on the poor economic climate prevalent in the country, citing for instance the low performance of public utilities as one of the factors threatening fund managers.

Apart from the external problems that harm the growth of SSEs, there are also serious internal problems that greatly constrain their growth and serve as a deterrent for banks to lend. These problems include among others poor management practices, high rate of business failure, poor accounting standards, shortage of skilled manpower and financial indiscipline.

On the basis of these problems, some recommendations are made below which , if implemented will improve the dwindling state of our economy in general and the small scale enterprises in particular.

5.3 Recommendations

There is no way Nigeria can achieve sustainable funding of small 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 SSEs are solved. Banks react to the stimulus of the macroeconomic environment and as long as the environment remains unconducive, 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 SSEs:

  1. The government should cut down the interest rate since interest rates are not favorable to investors in the sense that the cost of funds could undermine profits and cause a loss of the investment. Interest rates in Nigeria officially are as high as 23.6% and this has a negative impact on the ability of small scale enterprises to obtain credit from the banks.
  2. The government should be consistent in its industrial policies so as to enable manufacturing firms to factor tariff measures into their trade decisions.
  3. The government should provide adequate infrastructural facilities like electricity, roads and water supply for the SSEs as this will reduce the high cost of doing business. This will encourage banks to fund the SSEs as their investment will be recouped.
  4. The government should regard SSEs should regard SSEs as the ‘eggs’ that hatch big enterprises. Apart from the adequate incentives in (3) above, the government should support SSEs by bulk purchasing their products and retailing them both for the domestic market and for exports.
  5. To facilitate their access to bank credits, the government should be issuing LPOs to the SSEs and payment should be made promptly to the SSEs as this will encourage their growth and the banks can also accept such contract papers as collateral.
  6. On the issue of the internal problems of the SSEs 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 compliment the provision of credit by insuring its efficient use through training and counseling of the small scale entrepreneurs.
  7. The banks should target potential borrowers for its core operations and form them into groups. Then soft loans should be made available to these SSEs, repayable within a specified period before others in that strategic group can benefit from the scheme. The idea is that with this system, a subtle pressure from other SSEs that are members of this strategic core is mounted on the benefiting group to repay so that others can benefit from the scheme. This will no doubt introduce healthy capitalization among SSEs through factoring the credibility of the borrowers.
  8. The need for capitalization of the banks cannot be overemphasized as capitalization influences the way banks react to GDP shocks. Also, the credit supply of well capitalized banks is less pro-cyclical. This indicates that well capitalized banks are not risk-averse. Moreover, well capitalized banks can better absorb temporarily financial difficulties on their borrowers and preserve long term lending relationships.
  9. If (8) above is achieved, the mega banks such as First bank should play a more active role in actualizing the objectives of SMIEIs by setting up separate desks to manage the funds and vigorously pursue the idea as with any other bank product and undertaking studies aimed at attracting foreign investors scanning overseas markets and monitoring developments that have implications for the sector.
  10. The banks should adopt relationship lending as a dominant bank rule in funding SSEs. This will mitigate the problem of weak assetbased collateral. However, this can be more effective if the borrowers show some high level of responsibility, discipline and trustworthiness. According to the CEO of one of the mega banks in Bangladesh, they give loans to SSEs without collateral and realize over 96 percent of their investments (CNN CONNECTS, Sept 05). I strongly believe if all these recommendations are given serious attention by both the key players’ i.e. the government, the banks and the SSEs themselves, financing the SSEs by commercial banks will be made a lot easier, more effective and the impact will be felt towards the growth and development of small scale enterprises vis-à-vis the economic development of Nigeria.

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