THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA(A CASE STUDY OF ZENITH BANK PLC, PORT HARCOURT)

CHAPTER ONE

INTRODUCTION

1.0 Background to the Study

Small and Medium Scale Enterprises are sub-sectors of the industrial sector which play crucial roles in industrial development (Ahmed, 2006). Following the adoption of the Structural Adjustment Programme (SAP) in 1986, there have been several decisions to switch from capital intensive and large scale industrial projects which were based on the philosophy of import development to Small and Medium Scale Enterprises which have better prospects for developing domestic economy, thereby generating the required goods and services that will propel the economy of Nigeria towards development. It was on this premise that Ojo (2009) argued that one of the responses to the challenges of development in developing countries, particularly in Nigeria, is the encouragement of entrepreneurial development schemes.

Despite the abundant natural resources, the country still finds it very difficult to discover her developmental bearing since independence. Quality and adequate infrastructural provision has remained a night-mare, the real sector among others have witnessed downward performance while unemployment rate is on the increase. Most of the poor and unemployed Nigerians in order to better their lots have resorted to the establishment of their own businesses. Consequently, entrepreneurship is fast becoming a household name in Nigeria. This is as a result of the fact that the so called white collar jobs that people clamour for are no longer there. Even, the touted sectors (banks and companies) known to be the largest employers of labour are on the down-turn following the consolidation progremme and fraudulent practices of the high and mighty in the banking sector. The companies of course are folding up as a result of erratic power supply, insecurity and persistent increase in lending interest rate which has lead to high cost of production and undermines profit making potentials of companies operating in Nigeria. As a result of banking sector practices and continuous folding up of companies, a lot of Nigerians are thrown into unemployment which inevitably detrimental to the economic situation of the country.

Since the office jobs that people desire are no longer there for the teeming population, and some of those that succeeded in getting the jobs are being thrown out as a result of the factors identified above, the need for the government and the people to strategies on the way-out of this problem became imperative. Hence, the need for Small and Medium Scale Enterprises (SMEs) became a reality as a means of ensuring self-independence, employment creation, import substitution, effective and efficient utilization of local raw materials and contribution to the economic development of our dear nation (Nigeria).

Interest in the role of Small and Medium Scale Enterprises (SMEs) in the development process continues to be in the forefront of policy debates in developing countries. The advantages claimed for Small and Medium Enterprises (SMEs) include: the encouragement of entrepreneurship (Safiriyu and Njogo, 2012; Ayozie and Latinwo, 2010; Ayesha, 2007); the greater likelihood that SMEs will utilise labour intensive technologies (Salami, 2003, Muritala et al 2012) and thus have an immediate impact on employment generation (Ayozie and Latinwo, 2010; Aigboduwa and Oisamoje, 2013; Udechukwu, 2003; Ogujiuba, Ohuche, & Adenuga, 2004); they can usually be established rapidly and put into operation to produce quick returns.

SMEs development can encourage the process of both inter- and intra-regional decentralization (Ogujiuba et. al., 2004); and, they may well become a countervailing force against the economic power of larger enterprises (Salami, 2003). More generally the development of SMEs is seen as accelerating the achievement of wider economic and socio-economic objectives, including poverty alleviation (Safiriyu and Njogo, 2012; Ayozie and Latinwo, 2010; Udechukwu, 2003).

Finance has been viewed as a critical element for the development of SMEs. It is worth mentioning that firms depend on a variety of sources for their finance. These include internal and external; formal and informal. However the relationships among these sources and their effects on investment remain unclear in the literature. Previous studies have decried the limited access to external financial resources available to smaller enterprises compared to larger organisations and the consequences for their growth and development (Hossain, 1998; Wattanapruttipaisan, 2003; Berger and Udell, 2004; Ogujiuba et. al., 2004; etc).

According to Valverde, Fernandez & Udell (2005) bank credit play a crucial role in providing external financing to Small and Medium Scale Enterprises (SMEs). But in Nigerian context, this crucial source of finance for Small and Medium Scale Enterprises is apparently non-functional (Kadiri, 2012). This is evident in the ratio of loans to Small Scale Enterprises to Commercial banks’ total credit, which shows that a meager 0.13% of commercial banks’ total credit was granted to Small Scale Enterprises in the last quarter of 2012 (CBN, 2012). More worrisome is the fact that this ratio has been falling over the years and continued unabated in the post-consolidation era (Iorpev, 2012).

Typically, SMEs face higher transactions costs than larger enterprises in obtaining credit as stated by Duan, Han & Yang (2009). They further explained that to issue loans for SMEs means high costs, which serves as a barrier for banks offering loans for SMEs. Banking credit is a typical scale economy. The larger the loan, the smaller the unit transaction cost. Lee (2004) further argues that poor management and accounting practices have hampered the ability of SMEs to raise finance. Information asymmetries associated with lending to small-scale borrowers have restricted the flow of finance to SMEs (Berger and Udell, 2004). SMEs often operate at such a low scale that is unattractive to banks (Ugoani and Dike, 2013). Many of them are unincorporated and banks are not forthcoming in investing in a multiplicity of small ventures that are scattered all over the country.

Besides, SMEs are mostly family businesses and they are therefore reluctant to open their businesses up, especially to the banks that they regard as intruders. Information such as financial accounts, business plans and feasibility studies which should be provided to external financiers is often lacking and when available, it lacks details and rigor. The concomitant effect is that less financial facilities are made available to SMEs by banks. In spite of these claims however, some studies show a large number of SMEs fail because of non-financial reasons (Lawrence, 2003; Wattanapruttipaisan, 2003; Asaolu, Oladoyin, & Oladele, 2005). For instance most entrepreneurs in Nigeria lack the appropriate management and business skill to turn their business around.

This study shall be divided into five chapters. In Chapter one, which is the introductory part, features the background of the study, the statement of the research problem, the objectives of the study, research questions, research hypothesis, significance of the study, scope and limitations, and definition of terms. Chapter two will deal with the literature review. The methodology analysis shall be examined in chapter three. This would also include models specification. Data presentation, analysis and interpretation will be covered in chapter four while the concluding part of the research work will be chapter five where in a nutshell the summary, the conclusion and the recommendations would be discussed.

1.2 Statement of Problem

The key problem facing most Small and Medium-Scale Enterprises (SMEs) is inadequate finance; whether for the establishment of new industries or to carry out expansion plans. The bulk of commercial bank lending to industries is working capital which goes to well-entrenched blue-chip enterprises which have enough bargaining power to negotiate better borrowing terms. The negative bias against SMEs was demonstrated by commercial banks’ preference to pay penalty rather than meet the 20% target lending to Small and Medium Scale Enterprises (SMEs) by making risky investments when the Central Bank’s credit guidelines were in force. It is therefore not surprising that their lending to Small and Medium Scale Enterprises (SMEs) drastically declined after the abolition of the guidelines in 1996.

The inability of SMEs to attract bank credit or resources has hindered or stifled their growth. The reasons for this inadequate fund can be attributed to the following reasons:

• High rate of inflation that led to the vast depreciation of Naira exchange rate, thus making it difficult for most Small and Medium Scale Enterprises to obtain required inputs for expansion.
• Low level of savings in the economy, which leads to low capital formation.
• High rate of interest charged on loans, which scared off potential small and medium scale entrepreneurs.

Inability of specialized financial institutions such as the Bank of Agriculture (BOA), Bank of Industry (BOI), Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN) etc, to provide for their funding because of the peculiar problems with these specialized institutions which make it impossible for them to provide enough fund for the Small and Medium Scale Enterprises. Therefore, this study seeks to evaluate the role of commercial banks in Small and Medium Scale Enterprises (SMEs) financing in Nigeria.

1.3 Objectives of Study

The main objective of this study is to evaluate the financing of Small and Medium Scale Enterprises in Nigeria taking into consideration various conditions such as economic, political, social, psychological etc under which small-scale enterprises operate. In view of the above, this study intends to find out the following:

(i) To identify the extent of the awareness of commercial bank financing within Small and Medium Scale Enterprises in Nigeria.

(ii) To establish the importance of capital in the expansion of Small and Medium Scale Enterprises in Nigeria.

1.4 Research Questions

This research work shall be guided by the following research questions:

1. To what extent is the awareness of commercial bank finacing within Small and Medium Scale Enterprises in Nigeria?
2. What role does capital play in the expansion of Small and Medium Scale Enterprises in Nigeria?

1.5 Research Hypotheses

Hypothesis I

H01 – Small and Medium Enterprises in Nigeriaare not aware of commercial bank loans.

Hypothesis II

H02 – Lack of capital does not hinder expansion in small and medium enterprises.

1.6 Significance of the Study

This research work is to be used for the purpose of learning. It will broaden the mind of other researchers on the issues involved in small scale business and its impact on the growth and development in Nigeria. It will also form a basis for future work by some students who may be so much interested in small scale business. It will also be useful to both the commercial bank and SMEs alike. This study is a dynamic one for this reason, it cannot be said to have been completely treated in one work like this.

1.7 Scope and Limitation of the Study

This research work focuses on the financing of Small and Medium Scale Enterprises (SMEs) in Nigeria paying special attention to the role of commercial bank credit in the development of Small and Medium Scale Enterprises, a case study of Zenith bank Plc. Although there are other types of banks that grant credit facilities to Small and Medium Scale Enterprises in Nigeria, the analysis in this study focuses on commercial banks only, thus the choice of Zenith bank Plc. The research intends to study the essential problems encountered by Small and Medium Scale Enterprises and suggest ways by which they can be adequately and efficiently financed. Most of the information and data needed for the study would be gathered from existing literature and through the use of survey and questionnaire.

The problems that I envisage in the course of the study include the problem of data collection, prohibitive costs and short time interval available for the study. This might invariably affect the amount of data available to the researcher. Despite the limitations envisioned, I will ensure that this study will be carried out with all amount of thoroughness given the prevailing circumstances. It is therefore possible to make valid assertions from the volume of data collected using apt evaluation techniques.

1.8 Definition of Terms

1. Commercial Bank: commercial banks are financial institutions that issue financial obligations (such as demand deposits) in order to acquire funds from the public. They pool these funds and provide them in larger amounts to business, government and individuals for investment. It can also be viewed as institutions which serve the purpose of channeling funds from lenders to borrowers in the form of short-term funds, medium term funds and long term funds from lenders. In other words, it is an institution involved in financial inter-mediation where money is mobilized from the surplus units (those who have surplus funds) and channeled to deficit units (those who want to invest in productive activities).
2. Loan: It is a financial facility granted by a bank which intended to be applied for financing a specific purpose. Virtually every business has a credit relationship with a financial institution especially banks. Some rely on periodic short term loans to finance temporary working capital needs. Others primarily use long term loans to finance capital expenditure, new acquisitions or permanent increase in capital. Regardless of the type of loan all credit request mandate as systematic analysis of the borrower’s ability to repay. The basic objective of credit analysis is to assess the risk involved in extending loans to bank customers.

III. Fund: it can be classified as increase in the liability or equity account of a decrease in the asset account. The layman’s view as it related to individuals, business organizations or even pubic authorities represents the sum of money or possession by individual organizations and government for the purpose of making payment and receipts for goods and services provided to the society.

1. Finance: it is the possession of funds when it is needed for investment. This comprises the whole range of financial services to the rural and urban population at large. Financial services include savings facilities, credit, payment and transfer services, insurance and leasing.
2. Financing: The act or process of providing funds for a business venture.
3. Credit: it is a special form of account payable and it is the most popular source of short term credit in small and medium scale business in developed and developed economics. It involves the purchase of goods and services and suspending payment to an agreed future date.

VII. Small and Medium Scale Enterprise: Small and Medium-sized Enterprises (SMEs) in Nigeria, as defined by Small and Medium Industries Equity Investment Scheme (SMIEIS), are enterprises with a total capital employed not less than N1.5 million, but not exceeding N200 million, including working capital, but excluding cost of land and/or with a staff strength of not less than 10 and not more than 300.In this work, this definition was adopted, however an observation of some of the surveyed SMEs are with a total capital less than N1.5 million and a lower staff strength. They are estimated to generate about 50% of the Gross Domestic Product (Odeyemi, 2003) and employ about 70% of the industrial work force in the country (Adebusuyi, 1997). The SMEs are made up of a mixed blend of businesses ranging from distributive trade which constitute about 50% of the SMEs, 10% in manufacturing, 30% in agriculture and 10% in services all operating in different parts of the country.