Role Of Money Deposit Banks In Financing Small Scale Industries In Nigeria (A Case Study Of First Bank Of Nigeria Plc)

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Role Of Money Deposit Banks In Financing Small Scale Industries In Nigeria (A Case Study Of First Bank Of Nigeria Plc)


Abstract


An appraisal Of Money deposit banks in Financial Small Scale Industry in Nigeria. A case study of First bank of Nigeria plc. This study is to ascertain the extent to which Money deposit banks have helped to finance small scale industries in Sokoto. To achieve this study adopted a survey research which employed the use of simple random sampling technique was employed and SMEs where selected which constitute the sample size of the research. Structured questionnaire was designed to facilitate the collection of the relevant data which was used for the analysis. Descriptive statistics which involves simple percentage and chi-square. The findings indicate that the operations of Money deposit banks towards SMEs have grown phenomenally in the last 3 years, driven largely by expanding informal sector activities. The study also reveals the challenges faced by SMEs, which has been addressed in this research. Money deposit banks traditional lend to medium and large enterprise, which are judged to be credit worthy. They avoid doing business with small and medium scale industry because the associated


Chapter One


Introduction

1.1 Background to the Study

Small and medium enterprises are believed to be the engine room for the development of any economy, because they form the bulk of business activities in a growing economy like that of Nigeria. This is manifested in the following ways, Employment generation, rural development, Economic growth and Industrialization, Better Utilization of Indigenous Resources. In the past, Nigeria’s over dependence on oil which really exposed the economy to unprecedented macro-economic instability resulting from the effects of external shocks to oil prices. The world economic recession and the sustained slump in oil prices posed a serious challenge on Nigeria economy which accounted for a reduction in our external Reserves and also diminished on the nation’s capacity to finance much of its development needs. It was also observed that the real GDP growth slows to 2.2% from 2009; population growth rate will climb to 2.5%. Such situation could plunge the country into economic embarrassment and posed a major challenge to the Government. However, with the trend of this event, the Government under vision 20:2020 program came up with undoubtedly consolidated empowerment program called the National Economic and
Empowerment Development Strategy (NEEDS) and other reforms which imperatively leads to the recognition given to the development of SMEs The SME sector is positioned generate employment, create wealth, reduce the prevalence of poverty and sustain economic growth and development. Money depositbanks provide broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their micro-enterprises. M.S Robinson asserts that ‘if it were widely available, institutional Money depositbanks could improve the economic activities and the quality of life of hundreds of millions of people in the developing world”. However it is generally agreed that micro-credit given to those of the poor who do not have a capacity to repay can increase their poverty. Until the early 1960s, many economists viewed the continued existence of small-scale industries in less developed countries as justified by scarify of capital and administrative experience. It was often argued that with economic growth, the small, traditional type of enterprise would, in one sector after another, be superseded by modem forms of large-scale production.

In order to ensure an orderly transition, small industries were seen to deserve support, but mainly in sectors where modem methods could not immediately applied. In the mid-160s a new approach to small to medium-scale enterprise (SME) development began to emerge due to several factors. First, there was growing concern over low employment elasticity of modem large-scale production. It was claimed that even with more optimal policies, this form of industrial organizational was unable to absorb a significance proportion of the rapidly expanding labour force (Cherney et al 1974; ILO, 1973). Second, there was widespread recognition that the benefits of economic growth were not being fairly distributed, and that the use of large-scale, capital intensive techniques was partly to blame (McCormick, 1988; House, 1981; Cherney et al 1974). Third, empirical studies revealed that the causes of poverty were not confined to unemployment, and that most of the poor were employed in a large variety of small-scale production (Noor Mohamed 1985). This suggests a new role of small industries, in what has come to be labeled “the urban informal sector”. Small, labor-intensive industries were seen not only to increase employment, but also to increase the living standards of the poor. They were also thought to be capable of providing a new dynamic of economic growth. The new objective was not just to stop to retreat, but to promote the small-scale sector (House, 1981; Schmitze, 1982; GiamartinoS, 1991). This change in approach was accompanies by a shift of focus towards a “rurally orientated smallholder” (ROSH) industrialization strategy, well-articulated in Kilby (1975), Child (1976), House (1978), Noor Mohamed (1’985), and Olofin (1990), among others. While the Word Bank 91992) and others have tended to favour the ROSH implementation strategy by assigning the major role to the private sector, there are those who favour its implementation by assigning a major role to government (Olofin 1990, Noormhamed, 1985).

Assigning the major role to the private sector has its appeal in the fact that the private sector has the resources needed to implement the strategy. But the proponents of assigning the role to the government are aware that in many developing economies; government is the major mover of the economy with only a small and sometimes weak private sector. Thus, they argue that assigning such an important role to the private sector would not work. Besides, for the strategy to produce an optimal effect on the wellbeing of the people, the social environment has to be considered something the private sector may not be willing to do. Kilby (1969) Sees SMEs as a quasi sponge for urban employment and a provider of inexpensive consumer goods with little or no import content, serving an important pressure-releasing and welfare augmenting function. SMEs also contribute to long-run industrial growth by producing an increasing number of firms that grow up and out of the small-sector. Most previous studies throughout African treat the information sector as essentially homogenous in its characteristics (Morris and Pitt, 1995; Bewayo, 1995; Ekpenyong and Nyong; 1992). Recent research suggests that government policy should be more narrowly targeted to subsectors within the informal sector (Parker and Torres, 1994). This study examines survey data in order to evaluate the characteristics of small scale manufacturers that make it more difficult for them to be profitable and the particular problems that they face which may have contributed to their poor performance. Since her independent in 1960, Nigeria has been trying to meet the yearnings and aspirations of her teeming population, especially in the area of provision of employment. Unfortunately, not much has been achieved in this respect. Given the importance of ‘small’ and ‘very small’ enterprise in the creation of employment, this study seeks to evaluate the financing of microenterprises in Lagos State of Nigeria by identifying the problems of financing very small enterprises (VSE’s). However, the growth of the country’s economy has not been without problems. For instance, Omopariola (1978) notes three successive phases can be discerned in the economic history of Nigeria. The first phase, dating back to 1900, “was the pleasant economy characterized by static and subsistence product” and a “high birth rate which was equally matched by high death rate” (P.15 resulting in a low population growth rate. The second phase, which occurred in the middle of the nineteenth century, was’ a dynamic export-oriented economy” Omopariola (1978) reiterated further that during this economic phase, “Nigeria had a steady growth in her economy which was stimulated primarily by agricultural exports during the first three decades of the twentieth century.”

(Ibid, p.16) the economic, starting from the collapse of international trade during the world economic crisis grinded to a halt in its growth in 1929 and remained more or less stagnant until 1945. Form 1954 until the outbreak of the war of unity (civil war) in 1967 and up to the end of the war in 1970, “Nigeria experienced steady economic growth” (Ibid, P. 16). The third Phase, which has its roots in 1960 when the country attained political independence from the British colonialists, has been described as the indigenized economy. This is still the phase under which the Nigerian economy is characterized. Thus, over the years, the Nigerian economy has been going through a number of developmental stages and its growth has not been smooth. Although the economy continues to hold out a bright promise of growth, this has been hampered by factors such as under-productivity, unemployment, heavily depreciated national currency, inadequate infrastructure facilities and structural defects in the country’s industrial framework.

The scope of this study focuses on the latter factors, structural defects in the nation’s industrial framework. A business whether small or big, simple or complex, private or public, etc. is created to provide competitive prices. Business in Nigeria has been classified as small, medium and large. However, a small scale industry can be defined by the criteria of project costs, capital, cost turnover by the employee, etc. the federal and state ministries of industry and commerce have adopted the criterion of value of installed fixed capital to determine what a small scale industry is, in this respect, the value has varied from N60,000 in 1972, N159, 000 in 1975, N250,000 in 1979, N500,000 in 1986, to a fixed investment of not more than N2,000,000 (Two Million Naira) in 1992. This figure is exclusive of a building and subject to government determination and land prevailing objectives of public policy. In the wake of SFEM, and SAP, this value has now been reviewed and subsequently, increased to five million naira. Since this happened, there may be a need to classify the small scale industry into MICRO and SUPER MICRO business, with a view to providing adequate incentives and protection for the former. In the meantime, any business or enterprises below the upper limit of N250,000 and whose annual turnover exceeds that of a cottage industry currently put at N5,000 per annum is a small scale industry. The National Directorate of Employment (NDE) concept of a small scale industry has been fixed to a maximum of N35, 000. Contributed significantly to the growth of the Gross Domestic Product (GDP), employment generation and exports. The sector now includes not only SSI units but also small scale services and business enterprise (SSSBEs) and is thus referred to as the small enterprises sectors.


1.2 Statement of the Problem

Small and medium enterprises have not made the desired impact on the Nigerian economy in-spite of all the efforts and support of succeeding administrations and governments gives a cause for concern. The expectation has been that, after the initial take off of the small scale enterprises, the business should be able to raise funds from the formal sector especially MFIs or banking industries to expand its operations. This has not been the case for a number of reasons (Sule, 1986; Inang and Ukpong, 1996; Iniodu and Udomesiet, 2004);

  • The perception of small and medium enterprises as high risks;
  • Inability of the SMEs to prepare acceptable or viable banking business plans;
  • Poor record keeping, especially of financial operations which at times make the entrepreneur draw money than expected from the business either for personal or family use;
  • Discriminatory cultural practices which at times make it impossible or difficult for women to borrow or own assets or land titles;
  • Weak capacity on the part of banks to down-scale their lending to SMEs; and
  • High transaction cost of small and often segmented loans.

The study will examine problems associated with the role of Money depositbanks in financing small scale industry in Nigeria.

It will give information on the possible areas for in provident.

Furthermore, the study will help Money depositbanks to assess and appraisal their role in financing small scale industry in Nigeria.

Moreover, suggestions and recommendations made in this paper will help policy makers formulate new economic policies maintain or modify the existing one.

  • It will equally serve as guidelines to researchers who may wish to decide with this study in the future.
  • It will also help small scale entrepreneurs to make sufficient preparation in their request for credit assistance.
  • It will guide the entrepreneurs in making credits demands that are compliance with government monetary policy.

1.3 Objective of the Study

Since the importance of SMEs forwards the development of any country’s economy, as already discussed. This write up is aim at achieving the following questions.

  1. To highlight the different sources of finance available to small and medium industries?
  2. To examine the role of Money depositbanks in satisfying the financial needs of SMEs in Nigeria.
  3. To examine method to reduce formality needed for financing the entrepreneurs by Money depositbanks.

1.4 Research Hypothesis

HO1. There is no significant relationship between Financing of small and medium scale Enterprise and Money deposit Banks.

HO2: There is significant relationship between Money deposit banks and lending to small scale industries and also in meeting the needs of small and medium scale Enterprises


1.5 Scope of Study

The scope of the study is an appraisal of Money deposit banks in financing small scale industries in Nigeria, a case study of first bank limited. Money deposit banks adhere strictly to the rule of secret; in banking thus they refused to release information.

It will guide the entrepreneurs in making credit demand that are compliance with government monetary policy.

Finally it will help the entrepreneurs to display competence in preparing justification for their project; it is rear to see most of them coming up with cash projections, projected balance sheets.


1.6 Limitation of Study

However, there are constraint imposed on the researcher this includes the following.

  1. Time a study of this nature, needs a relatively long time during which information for accurate or at least near accurate inferences could be drawn. The period of the study was short, hence time posed as a constraint to the researcher.
  2. Cost: The researcher would have extent the survey to areas. But limitations here included cost of transportation to source for materials and cost of type setting the already completed work.
  3. Dearth (Scarcity) of statistical data: Lack of statistical data from our financial institutions like central bank of Nigeria (CBN) ministry of financial and economic development, Money deposit and merchant bank posed constraints. Money deposit banks adhere strictly to the rule of secret; in banking thus they refused to release information.

1.7 Significance 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 Money deposit 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;

  • SMEs industrialist will be able to know some sources of finance and choose amongst them the best.
  • Money deposit Banks will know how effective and efficient they have been towards economic development.
  • Money deposit Banks will be able to make some adjustments in their lending processes.

1.8 Definition of Terms

Small scale industry:

Any industry with capital not exceeding N750, 000 including capital but excluding cost of land.

It is also defined by center for industrial research and development of Obafemi Awolowo University Ile Ife as those industries whose total assess in plant equipment and working capital do not exceed N250,000 with not more than 50 employees.

Money Deposit Bank

A financial institution that acquires deposit from savings surplus unit and give out loans to savings deficit units.

Industrial Development Center:

Provide management, technical, consultancy and extension services for the small scale.

Indigenisation Decree:

A decree that stipulates that most business become, at least 60 percent owned by Nigerians.

Sole Proprietorship:

Is a business owned and conducted by one person presumably assisted by one or more persons for intakes wife and children.

SS/CS

Small scale industry credit scheme.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

This study sheds light on the problems, roles and importance of small and medium scale industries in the economic development of any country and Nigeria in particular. Attempt was made to evaluate the role of Money deposit banks of Nigeria through financing these industries. The other sources of finance available to small and medium scale industries were also enumerated. Issues raised by both the bank and the SMEs 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 and medium scale industries. 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 and medium scale industries, 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 SMEs 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 and medium scale businesses 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 and medium scale businesses 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 SMEs. 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 SMEs are mainly dependent on bank loans, this situation could be very disastrous. The implication is that many SMEs 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 and medium scale industries. Here, many banks blame their inability to fund SMEs 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 SMEs, 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 and medium scale industries in particular.


5.3 Recommendations

There is no way Nigeria can achieve sustainable funding of small and medium scale enterprises by Money deposit 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 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 and medium scale industries 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 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.
  4. The government should regard SMEs should regard SMEs as the ‘eggs’ that hatch big businesses. Apart from the adequate incentives in (3) above, the government should support SMEs 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 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.
  6. 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.
  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 SMEs, 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 SMEs 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 SMEs 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 Union 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 SMEs. This will mitigate the problem of weak asset based 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 SMEs 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 SMEs themselves, financing the SMEs by Money deposit banks will be made a lot easier, more effective and the impact will be felt towards the growth and development of small and medium scale industries vis-à-vis the economic development of Nigeria.


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