The Roles And Problems Of Financial Institutions To The Growth Of Small Scale Business In Nigeria (A Case Study Of Union Bank Of Nigeria Plc Enugu)

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The Roles And Problems Of Financial Institutions To The Growth Of Small Scale Business In Nigeria (A Case Study Of Union Bank Of Nigeria Plc Enugu)


Abstract


The objective of this study was to determine the roles and problems of financial institutions to the growth of small and medium scale business in Nigeria. The study employed both primary and secondary instruments in generating data that were analyzed using simple percentage and correlation coefficient. The empirical result reveals that there is a positive relationship between small and small scale enterprises are veritable tool for economic growth and development and has an impact on the economy. It was observed that most of the entrepreneurs encounters problems in getting loans from banks especially when it comes to collateral security requirement. It is also observed that SMEs played a significant role in the development of nation’s economy. The following recommendations may be appropriate Putting in place appropriate mechanism to ensure that loans are given to well established enterprises or prospective entrepreneurs that have the capacity and capability to pay back loans borrowed for either business expansion or business establishment.


Chapter One


Introduction

1.1 Background of the Study.

Financial institutions have a very great role to play in the growth of small scale business everywhere in the world but I will limit my discussion to their roles in Nigeria.

Financial institutions could be seen as an institutions which primary function is collecting and giving out funds to individuals, firms, organizations etc. for business purposes.

From the definition of financial institution, or its function, one can see that financial institution could aid the growth of small scale business. How can this be done or achieved? That is the next question that could come to one’s mind. It could be achieved by the financial institutions giving out funds in form of loans, overdraft, grants and aids etc on request from small scale business man or woman.

I will not forget to talk about or explain what a small scale business is. A small scale business could be talked about or explained by different people in different ways.

And in their different views, a lot of factors or things is being considered before calling a business small scale business. What am saying in essence is that, what Mr A calls small scale business might not be what Mr. B calls small scale business. Therefore a small scale is business is being explained by these few people and school of thought. Blott Lawrence 1973 defines small scale business to be any industry which is independently owned and operated and not dominant in its area of operation.

The Committee for Economic Development (C.E.D) of the united States defines small scale business of having at least two of the underlisted characteristics:

  1. Managers are also owners.
  2. Area of operation mainly local
  3. Owner supply capital and
  4. Small in size within the industry.

1.2 Statement of the Problem.

  1. Small scales industries are capable to source capital easily from Union Bank Plc and this problem prevents entrepreneurs from procurement of machinery and equipment required for production.
  2. The banks are not helping matters because their condition for giving loans are not easily met and the small scale industry owners are unable to provide their request with well structured and circulated feasibility studies.
  3. The inability of the banks to support the entrepreneurs through loan and other instruments such as leasing of equipment result in low capital utilization, volume of production, provision of services and sales.
  4. The loan granted suffers additional problems of high interest rates and the burden creates higher probability of default in repayment of loans.
  5. The rapid policies of banks contrary to CBN guidelines and the attendant. Lack of collateral securities from the entrepreneurs created additional problems of inability to procure and unitize capital from Union Bank Plc.

1.3 Purpose of the Study

The reason for the study of the roles and problems of financial institutions to the growth of small scale business is that it helps individuals, small scale business owners and all the sundries to be informed of the roles of financial institutions to the economy and at the same time so that they can take an advantage of the roles and develop themselves, their families and the nation at large. These roles include giving of loans, advances, overdrafts, grants and aids and advisory services. The roles when utilize properly by small scale business owners help in the growth of their businesses.

Financial institutions have some problems they are confronted with too. These problems include borrowers not paying back at stated time, government policies and regulations etc. This problems affect the smooth running of financial institutions because ties up capital that would have been used for further development of the sector. Government regulations or policies also affects also affects financial institutions because, government might make a policy to correct certain abnormalities in the economy. The policy might affect their profit as such it constitutes a problem.


1.4 Scope of the Study

The research was to determine the roles and problems of financial institutions to the growth of small scale business in Nigeria. The research carried out in-dept study on the operations of financial institutions to the growth of the said industries.

Due to the current emphasis on the industrialization of the industry in order to reduce country’s export bill from foreign countries and unemployment the study focuses attention on the evaluation of small scale industries that obtains loan from the Union Bank of Nigeria Plc to attain the needed heights and capacity. The research covers selected small scale industries in Enugu.

Small scale industries as used in this study are those indigenously owned fully by Nigerians and with an annual turnover not exceeding five hundred thousand naira (N500,000.00)


1.5 Research Hypothesis

Hypothesis 1
  • Ho. Union Bank Nigeria Plc would not accommodate small scale entrepreneurs in their priority sector for provision of funds for procurement of machinery and other equipment.
  • H1. Union Bank Nigeria Plc would accommodate small scale entrepreneurs in their priority sector for provision of funds for procurement of machinery and other equipment.
Hypothesis 2
  • Ho: Union Bank Nigeria plc would not provide financial assistance to entrepreneurs without collateral securities.
  • H1: Union Bank Nigeria plc would provide financial assistance to entrepreneurs without collateral securities.

1.6 Significance of the Study

Financial institutions play a very significant5role in the growth of small scale business. The roles they play includes:

  1. Giving of loans to small scale business.
  2. Giving of overdraft
  3. They render business advisory services.
I. Giving of Loans to Small Scale Business:

This is one of the roles played by financial institutions in the growth of small scale business. They give loans to small business man or woman on request. This aids the small scale businessmen can now perform better compares to when they has small capital.

II. Giving of Overdraft.

Financial institutions allow small scale businessmen that have a savings account deposit to withdraw from their accounts more than they have if they wish. This excess allows or enables the capital at hand to increase. The addition of the excess fund to the main amount withdrawn would aid the small scale businessmen to plan better than they would have done if they withdraws the main fund he has in his account.

III. They Render Business Advisory Services.

Financial institutions render advisory services to small businessmen. This advisory services they render aids the small scale business who acts upon the advise rendered. It aids them to grow in business. Small scale businessmen are thought how to introduce simple record keeping and accounting in their operations. This is because, most business concerns do not keep accurate record of their business and this can lead to business failure. Banks or financial institutions providing this services have reported significant success.


1.7 Definition of Terms

1. Bank

A financial institution that keeps custody of valuables such as money, gold, jewelries etc. for customers. They charge customer for their services.

2. Entrepreneur.

The one who conceives the idea of a business, runs the business, bears the risk and enjoys profit or loss.

3. Financial Institutions.

Are institutions responsible for collecting and giving out funds to individuals, firms, organization etc. for business purpose.

4. Grant.

It is a financial assistance by financial institutions or government which is not repayable.

5. Loan

Financial assistance rendered by financial institutions to borrowers. It is payable and collateral is required before financial institution can grant the loan.

6. Manager.

One who adopts a process for running the affairs of a business.

7. Overdraft.

It is a kind of loan granted by banks, but before this loan is granted, the person who wants the loan must have an account in the bank. It is a situation where an account holder in a bank withdraws above the amount he has in his account

8. Small Scale Business.

A business in which the managers are the owners, area of operation mainly local, owners supply capital and small in size within the industry.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the roles and problems of financial institutions to the growth of small scale business in Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the problem of financial institutions to the growth of SMEs business in Nigeria.


5.2 Summary

This research work was carried out to determine the constraints of small and medium enterprises in Nigeria. The study employed both primary and secondary instrument in generating data that were analyzed using simple percentage and correlation coefficient. Based on the result of the analysis the following findings are made: Our empirical result reveals that small and medium scale enterprises source their fund by obtaining loans from banks. IT also shows that past 101 saving are made use of and profit ploughed back into the business. On statistical ground, the empirical result reveals that „there is a positive relationship between small and medium scale enterprises are veritable tool for economic growth and development and has an impact on the economy. Most of small and medium scale enterprise encounters problems in getting loans from bank especially when it comes to collateral security requirement. Also an analysis of the survey report showed that lack of capital has greatly contributed to the decline and poor performance of SMEs. It was also observed that small and medium scale enterprises played a significant role in the development of nation’s economy.


5.3 Conclusion

This research has explored the role of financial institutions in financing SMEs in Nigeria. The chi-square statistic was used to test the hypothesis that the total amount generated by the lenders disbursed to SMEs is not positively related to the development of the SMEs sub-sector of the economy. This hypothesis is in line with the main objective of the study. The study revealed that bank politics, previous loan repayment records, more competition, interest rates, collateral requirement and bureaucratic procedures in obtaining loans were some of the most critical factors that enhances the entrepreneurs’ efforts to obtain loan from financial institutions.


5.4 Recommendations

Based on the results of this study, the following recommendations may be appropriate Putting in place appropriate mechanism to ensure that loans are given to well established enterprises or prospective entrepreneurs that have the capacity and capability to pay back loans borrowed for either business expansion or business establishment. This is to avoid all perceived difficulties in loan repayment. Eliminate all structural and bureaucratic bottlenecks that can impede the smooth flow of loans from the lending institutions to the borrowing firms or individuals. This is to ensure an unobstructed functioning of all economic machines geared towards growth and development. Rather than making lending decision(s) to be group-specific, lending institutions should focus more on the “ability-to-pay” criterion so that no existing or prospective enterprises are short changed inthe granting and disbursement of loans. After all, it is the collective activities of SMEs that constitute economic growth and development.


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