The Role Of Commercial Banks In Small Scale Entrepreneurial Development In Enugu State

Project and Seminar Topics with material for Banking and Finance

The Role Of Commercial Banks In Small Scale Entrepreneurial Development In Enugu State


The subject matter of this research work is to evaluate the extent to which Small Scale entrepreneurs in Enugu have been able to obtain loans and raise finance from Nigerian Commercial Banks as a major source of finance to the economy. The main objective of the study is to establish the role of Commercial Banks in financing Small Scale Enterprises (SSEs) in Enugu .A review of literature was done to ensure the conclusion of the study. Based on the analysis, Commercial Banks comply with the Central Bank of Nigeria (CBN) credit guidelines which stipulated that they should set aside 10% of their profit before tax for loan to Small Scale Enterprises (SSEs).Commercial Banks require feasibility report from SSEs before granting loan to them. Small Scale Enterprises do not provide proper feasibility studies due to poor level of education. The research concluded that for small scale enterprises to survive, there have to be a collective effort between them and banks. Also the government should engage more in the development of Small Scale Enterprises by creating and embarking on various incentives to encourage both Small Scale Enterprises and commercial banks.

Chapter One


1.1 Background Of The Study

The post-independence Nigerian government adopted the entrepreneurship government which constrained it to assume the role of entrepreneur and the urge to offset the economic neglect of the colonial government and that resulted in engaging in ambitious industrialization programmes. When the Nigerian industrial Development Bank Limited (NIDB) was established in 1964 for the purpose of speeding up the industrialization process, its mandate was to promote industrial projects which were large enough to make applicable contribution to the national economy. However, the collapse of the oil boom in the early 1980’s exposed the inherent weaknesses of this importation of inputs resulted in large idle capacities, thereby creeping many gross domestic product (GDP) declined in the face of the strong national aspiration for the restructuring of the economy and reduction of the dependence on petroleum. Small and medium scale enterprises have since become the focus of national industrial policy. In pursuit of self-reliance in a developing country particularly in Nigeria, the central government enacted a decree called “Enterprises promotion Decree” when there was need for small scale enterprises in the promotion of economic development. This has since been at the fore front of development strategies.

However, many developing countries have failed to adopt these strategies owing to their belief that it is a relatively slow process of industrialization. Without the development of small scale enterprises in Nigeria, the nation’s quest for industrialization will certainly remain forever at a slow pace. It is the humble opinion of the researcher that further development on our business enterprises must add to the basic issue of creating linkage within the economy to begin to yield real inputs to our economic activities. Priority attention must therefore be given to those business enterprises for which domestic inputs could easily be produced. The objective should be to maximize the value added in their processing and manufacturing as final strong producer incentives to small scale enterprises are necessary not only to meet the food requirement but also to promote growing input supplier industrial growth. The present economy constraints may well turn out to be a blessing in disguise to our small scale industry effort particularly for the dynamic manufacturing sector. For instance, the market determined exchange rate through Foreign Exchange Market with its resultant high cost of imported inputs may serve as an impetus for industrialist to intensify their search for loan substitute. In 1971, the government of then East Central State statutorily enacted an edit establishing an office which was hitherto a sub-system of the ministry of commerce and industry to be known as fund for small scale industries Credit Scheme (FUSSI) to give credits to prospective investors to enable them establish, thus helping the country towards industrialization.

As at 1996 and 1999 respectively, banks’ loans and advances to small scale enterprises rose from ₦42,302.1 to ₦46,824.00 million. However the very slow rate of growth of the industrial sector, the inability of the sector to adequately provide and satisfy the needs of the economy, the over-dependence of the nation at large on foreign goods, pose a necessary course for concern. The means for helping small scale enterprises to acquire the much needed finance form the background of this research.

1.2 Statement Of The Problem

There is dearth of financial institutions which cater for long and medium term credit needs of businesses operating in the economy. Small scale enterprises are no exceptions to these, and they suffer a great deal for want of capital for development and expansion of the economic survival of the country. It cannot be over emphasized that they have moved from the subsistence level of pre-indigenization period to a position of importance in the country’s industrialization process. In an attempt to modernize many small scale enterprises, their standard of operation has moved into the capital intensive stage. The need in many cases is beyond the financial capability of the entrepreneurs who set up the business. The major alternative for the provision of such capital is the financial institutions and among the financial institutions operating in the country, commercial banks are the major sources of credit to the various sectors of the economy.

However, it is common knowledge that getting financial support from commercial banks has been grossly inadequate for budding indigenous entrepreneurs and even for those who have been in the manufacturing business for a long term. Three types of credit are usually required by small scale enterprises. They include:

i. Short Term Loan:

This type of credit is used to finance yearly operation until the product or proceeds from the industry are sold. The amount which is involved in this type of credit is usually small but lack of this type of credit is most accurately felt by small scale entrepreneurs who have little or no saving upon which to withdraw as they are mostly beginners.

ii. Medium Term Loan:

This type of loan is for more than one year maturity period but not exceeding three to five years. This loan is mostly required for acquisition of inexpensive equipment with relatively short life span.

iii. Long Term Loan:

This type of credit is necessary for acquisition of major industrial machines, improvement in industrial equipment, building and land: It is a type of loan that the maturity period is for quite a longer duration.

Small scale enterprises therefore can be a powerful instrument in bringing about a revolution in industrial practices and in firms productivity especially if supplied in sufficient quantity and used effectively. The study therefore identifies small scale entrepreneurial financing by commercial banks as a major role to entrepreneurial development because finance is just one of the major factors of production.

1.3 Objectives Of The Study

In view of the above problem of small scale entrepreneurship, the overall objectives of this study is to evaluate the role of commercial banks in financing small scale enterprises in Enugu.

The specific objectives are:

  1. To evaluate the extent to which small scale enterprises in Enugu have been able to obtain loans and advances from Nigerian Commercial Banks, as major source of finance to the economy.
  2. To ascertain the problems facing Commercial banks in financing small scale enterprises in Nigeria.
  3. To identify problems encountered by small scale enterprises in obtaining funds from commercial banks.
  4. To determine the viability in small scale enterprises financing by commercial banks.
  5. To appraise and evaluate the situation and make recommendations on how to improve on commercial bank provision of finance to small scale enterprises.

1.4 Research Question

  1. To what extent can small scale enterprises obtain loans and advances from Nigerian Commercial Banks?
  2. What are the problems facing commercial banks in financing small scale enterprises in Nigeria?
  3. What are the problems facing small scale enterprises in obtaining funds from commercial banks?
  4. How viable is small scale enterprises financing by commercial banks?
  5. How can commercial bank’s provision of finance to small scale enterprises be improved upon?

1.5 Hypotheses

The hypotheses to be tested include:

  • Ho1: United Bank for Africa (UBA) does not comply with the Central Bank of Nigeria Credit Guidelines as it affects lending to small scale enterprises.
  • Ho2: Union Bank of Nigeria Plc. does not comply with the Central Bank of Nigeria Credit Guidelines as it affects lending to small scale enterprises. When commercial banks are not willing to comply with the credit guidelines of the central bank, it will be a hindrance for any institution to obtain loans or advances from the bank.

1.6 Significance Of The Study

During the 1960’s and early 1970’s most Nigerians engaged in industrial project did so on subsistence level but now emphasis has shifted to the sophisticated and capital intensive enterprises. Annual policies of the Federal Ministry of Nigeria in recent years have been to ensure that commercial banks provide needed capital to small scale enterprises to help improve their present state. The study therefore sets out to ascertain the extent to which commercial banks have performed the role and the findings will help make recommendations and suggestions for future improvement of the present situation.

1.7 Limitation Of The Study

In view of the current emphasis on industrialization of the country in order to reduce the country’s import bill from foreign countries, the study focuses attention on the evaluation of the ability of small scale entrepreneurs to obtain loans from the commercial banks to attain the needed level of productivity of their enterprises. The research covers selected small scale entrepreneurs in Enugu State. For the period of three weeks.

Some of the difficulties encountered by the researcher were the unco-operative attitudes of many of the banks’ officials approached and some of the small scale entrepreneurs who misconstrued the essence of the study.
Another problem is that of lack of time on the side of respondents to answer the questionnaires in details coupled with the high fare of public transportation. This greatly increased the cost of production and limited the scope of areas covered by this study. Also difficulties were encountered in collecting data from the banks used as case study. Some of the questions in the questionnaire were not answered inspite of the university’s inscription on the questionnaire and the letter of authorization by the head of department attached to it as well as the detailed explanations given to them on the need of the study. They insisted that some of the required information were confidential and should not be released.

1.7 Definition Of Terms

1. Small Scale Enterprises

As defined in the Nigerian context, following the current official definition of industrial enterprises adopted by the 13th meeting of the National Council on Industry (NCI) Markudi, Benue State in July, 2001 as “an enterprise with total capital employed of over ₦1.50m but not more than ₦50m, including working capital but excluding cost of land and or labour size of 11-100 workers.

2. Short term credit

This type of credit is a credit or loan that has maturity period that is less or more than one year. E.g. Personal loan.

3. Medium term credit

This is a type of credit or loan that has a maturity period of more than one year but not exceeding two years to be repaid back. E.g. loan required for temporary business requirement.

4. Long term credit

This type of credit matures in more than three years and above. It has a very long maturity period as agreed by the lender and the borrower. E.g. are business development loans and Bridging loans.

Chapter Five

Summary Of Findings, Conclusion And Recommendations

5.1 Summary Of Findings

From the data analysis carried out in chapter four, the major findings, from the research are summarized as follows:

  1. Commercial banks recognize the need of granting loans to the small scale enterprises as means of generating employment and enhancing growth of the economy.
  2. Commercial banks comply with CBN credit guideline on setting aside 10% of their profit before tax for small scale enterprises.
  3. Commercial banks require a feasibility report and collateral before granting loan to small scale enterprises.
  4. Since small scale enterprises do not provide proper feasibility studies of every viable project due to poor level of education, banks find financing of small scale enterprises (SSEs) unattractive because of inability of such borrowers to meet their financial obligations.
  5. Most of small scale entrepreneurs are scared of applying for loans from commercial banks due to poor level of education that is, illiteracy, high interest rate, collateral requirement etc.
    • Diversion of funds provided to other ventures
    • Changes in economic trends and activities
  6. Finally, although banks revealed that loan given to SSEs are not properly utilized, the banks used in the study were relevant to reveal the percentage being set aside for small scale enterprises.

5.2 Conclusion

There is no doubt that small scale enterprises (SSEs) can be a miracle source of development and an engine of growth that they have been in Asian Countries and in America. In fact, going by their characteristics, they should be the major focus of the government, together with agriculture, if Nigeria is to realistically address the development problems of unemployment, poverty, urbanization etc. They should therefore, immediately becomes the economic policy priority of government because of their potentials if they have to address our economic ills. The oil boom of the early seventies brought with it the enormous notion that a project had to be big, to be viable and profitable.

Consequently, many large and complex projects were started without due regards to our management limitations. Our track record in Nigeria in the management of large and complex organizations has proved unsatisfactory. Even now, many of such organization cannot pass the test of efficient and effective management. Many have collapsed while many are still grappling with problems that could have been avoided had they started on small scale.
Indeed, the industry for the future in this country should emphasize the development of the well-managed small size firms. The government providing the necessary incentives, education and infrastructure and a general conducive environment for the environment for the development of Small Scale Enterprises (SSEs).

Our universities, colleges of education and research institutions should devote more time and resources into the problems of small scale enterprises so that the ultimate objective of entrepreneurial and commercial development of the nation can be achieved.

Our banks should adopt a more developmental approach to the financing of small scale enterprises.
When these are achieved, other benefits of small scale enterprises (SSEs) as a source of raw material, provision of food, employment generation and self-reliance will be accomplished.

Banks adopting more developmental approach to the financing of small scale enterprises can be achieved through the nature of advice and guidance they give their small scale customers.

They should also encourage them to use the facilities at the stock exchange particularly under the second-tier securities market, as a basis of acquiring needed capital and spreading ownership and consequently reducing the risks of concentrated control. They should also de- emphasize collaterals as the overriding condition for granting credit facilities to small scale enterprises (SSEs).

Finally, the Banker’s committee initiative and commercial banks are to keep the ball rolling in financing small scale enterprises as well as enhancing and uplifting the growth of the economy.

5.3 Recommendations

Having highlighted the problems and shortcomings of small scale enterprises (SSEs) in Nigeria, the following recommendations aimed at correcting and eliminating those constraints are put forward for consideration.
In order to reduce the risk in small scale enterprises (SSEs) lending, the Central bank of Nigeria and the government must ensure that they keep on regulating properly their current initiative of requiring all commercial banks to set aside 10 percent of their profit before tax for equity investment in small and medium scale enterprises.

Rediscounting by the Central bank of Nigeria (CBN) can sample possibilities for encouraging commercial banks to gain experience in medium and long term building operation. A number of procedures can be adopted such as preferential discount rates, multiple discount rates or quotas favouring certain purposes.

The banks, themselves can ensure minimum risk of the loan losses by providing technical and managerial resources to various kinds of small scale enterprises customers. This would assist them in project preparation, implementation, financing and management.

At the same time, small scale enterprises can avail themselves of such services provided by the government at the entrepreneurial development center.

In order to make credit available to small scale enterprises (SSEs) sector, the banks and the government should make use of the rural banking program. The branches of each bank in the rural community should be given free hand to take certain decisions concerning advancement of these loans and advances to rural small scale enterprises. They should be able to act as “management consultants” identifying problems and suggesting solutions.

Banks would also need to be encouraged to fund the working capital requirements of small scale enterprises (SSEs). In the face of the limitations and inadequacies already enumerated in this project, small scale enterprises are high risk for banks to lend. Consequently, part of the government programs for small scale enterprises (SSEs) would be to devise a means of providing incentives and encouragement to banks to be able to freely lend to small scale enterprises (SSEs).

There is need to have an institutional coordination of the funding efforts of government and its agencies if small scale enterprises are to access and benefit from these institutions set up to cater for their financing needs. We can borrow a leaf from the USA where the small business administration (SBA) creates awareness about funds available, the categories of business that can get them money and various ways to obtain them. It is also involved in loan guarantee, certificate of competence, prime contracting, break out procurement, research and development, business information services etc. much more, the small business administration (SBA) channels all its assistance through appropriate institutions like commercial banks.

Probably, this is the direction that the newly established bank for industry and small and medium enterprises development agency (SMEDA) would have to focus. Government efforts should be geared towards the creation of management environment conducive to the development of their efficiency, productivity and the adoption of a result-oriented management approach.

Central bank of Nigeria (CBN) should license more Micro Finance banks to be able to extend more loans to small scale enterprises (SSEs).

We also recommend that small scale enterprises (SSEs) should not base only in urban areas. This is because the numbers of small scale enterprises in urban areas are alarming and commercial banks cannot give loans to all. This is why they should be encouraged to reside more in rural areas i.e. rural small scale enterprises should be encouraged. If this is achieved, the government should ensure that it provides more infrastructural facilities in rural areas so as not to discourage these small scale enterprises (SSEs) in achieving their objectives.

Banks should not discriminate from lending to small scale enterprises (SSEs) as there are no more restrictions restricting them from doing so. They should extend loans freely to small scale enterprises (SSEs) and ensure that these loans are monitored effectively so that they are used for their specific purposes.

Also, government should initiate industrial development bonds, which are used in countries for the purpose of building industrial plans in certain areas with a view to attracting industries or firms to such an area. Business firms apply and are allowed under certain conditions to occupy such plans for which they pay rent. The rents paid are used to offset the principal and interest.

Finally, a major impediment to growth generally in Nigeria has been the state of economic and social infrastructure. This has been an over-flogged issue in the discussion of Nigeria’s economic development. Provision of necessary infrastructural facilities and the enabling environment for business operations generally is an imperative uninterrupted power supply, good roads and transportation networks, rural development, efficient, effective and cheap communications etc. are the basis to competitive performance of enterprises. Their provision will definitely reduce the funding needs of small scale enterprises (SSEs) as they would no longer require funds to provide electricity, water, telephone and other infrastructures on their own.

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