Impact Of Bank Loan On Small And Medium Scale Enterprise In Nigeria

CHAPTER ONE

INTRODUCTION

1.1     Background of the study

Small and medium-scaled businesses (SME) are businesses whose personnel numbers fall
below certain limits. The abbreviation “SME” is used in the European
Union and by international organizations such as the World Bank, the United
Nations and the World Trade Organization (WTO). Small and medium-scaled
enterprises outnumber large companies by a wide margin and also employ many
more people. SMEs are also said to be responsible for driving innovation and
competition in many economic sectors of every nation (Agwu and Emeti, 2014).

The important role played by Small and medium enterprises in the growth and
development of developing countries is well rested in the literature. SMEs have
been reported by Ayozie and Latinwo,(2010) to encourage entrepreneurship. In
addition, Ariyo, 2008 posit that there is the greater likelihood that SMEs will
utilize labour-intensive technologies thereby reducing unemployment
particularly in developing countries and thus have an immediate impact on
employment generation (Ariyo, 2008; Ayozie and Latinwo, 2010).According to the
United Nations Industrial Development Organization UNIDO (2001), for developing
countries, integration into the global economy through economic liberalization,
deregulation, and democratization is seen as the paramount way to triumph over
poverty and inequality. The importance of this process is the development of a
vibrant private sector, in which small and medium enterprises can play a
central role. The problems bedeviling the SMEs in Nigeria are multi-faceted.
Ekpenyong (1997) and Utomi (1997) identified inadequate capital, inaccessible
credit facilities. Long term development institutional credit was known not to
be available to SMEs because they are generally considered high credit risks by
financial institutions. The study by Evbuomwan, Ikpi, Okoruwa and Akinyosoye
(2012) indicated that 75.7% of their survey respondents relied mostly on own
funds to finance their businesses. A widespread concern is that the banking
system in the sub sector (which supposed to be the major financier of SMEs) is
not providing enough support to new economic initiatives and in particular to the
expansion of SMEs and agriculture sector. It is noted that commercial and the
hitherto merchant banks which retained liquidity levels in excess of regulation
have shown reluctance in financing SMEs (Sacerdoti, 2005).

The vital role of commercial bank in giving credit for the development of SMEs
within an economy has been widely acknowledged, for instance Schumpeter (1932)
established that commercial banks facilitate technological innovation through
their intermediary role. His emphasis was that efficient allocation of savings
through identification and funding of entrepreneur with best chances of
successfully implementing innovative product and production are tools to
achieve real performance. Nwanyanwu (2012) noted that the commercial banks help
to make credit available by mobilizing surplus fund from depositor who have no
immediate needs of such money and channel it in form of credit to investors who
have brilliant ideals on how to create additional wealth in the economy but
lack the necessary capital to execute the ideals. The study further reveals
that the role of commercial bank credit in an economy has been recognized as
credit are obtained by economic agents to enable them meet operating expenses.
For instance business firm obtained credit to buy machinery and equipment,
farmers obtained credit to purchase farm input such as fertilizers, seeds, farm
buildings.

The general role of commercial banks is to provide financial services to general
public and business, ensuring economic and social stability and sustainable
growth of the economy. In this respect, “credit creation” is the most
significant function of commercial banks. While sanctioning a loan to a
customer, they do not provide cash to the borrower. Instead, they open a
deposit account from which the borrower can withdraw. In other words, while
sanctioning a loan, they automatically create deposits, known as a “credit
creation from commercial banks (Omika, 2014).

However, acknowledging the role of commercial bank credit in an economy various banking
reformed has been established by the monetary authority in Nigeria in enhancing
credit accessibility. The overall intentions of these reforms have been to
ensure financial stability so as to influence the growth of the economy and
also enhance commercial bank to play critical role of financial intermediation
in provision and accessibility of credit to small and medium scale business
owners. These various reforms have led to the improvement in services in the
commercial banks in Nigeria. However, despite this increase in credit supply to
the SMEs the performance of the sector (SMEs) in Nigeria has been dwindling.
Therefore, this study examines the impact of commercial bank on small and
medium scale enterprises development in Nigeria.

1.2    STATEMENT OF THE PROBLEM

The key problem facing the development of most small and Medium-Scale Enterprises
(SMEs) in Nigeria is inadequate finance; whether for the establishment of new
industries or to carry out expansion plans on the existing business. This led
to the curiosity that necessitates this study because in spite of continuous
policy strategies to attract credits to the SMEs, most Nigerian SMEs have
remained unattractive for commercial bank credits supply. For instance, as
indicated in central Bank of Nigeria (CBN) reports, almost throughout the
regulatory era, commercial bank’s loans and advances to the SMEs sector
deviated persistently from prescribed minimum.

It is therefore important to carry out a study that examined the effect of
commercial banks on small and medium scaled enterprises from the perspectives
of business owners and entrepreneurs. All the existing studies on the role of
commercial banks on the development of SMEs made use of financial statements of
banks published in the CBN bulletin. However, this study is examining the
impact of commercial banks on the development of SMEs in Edo State which is the
area of this study.

1.3    OBJECTIVES OF THE STUDY

The general objective of this study is to analyze the impact of commercial banks on
small and medium scaled enterprises in Nigeria while the following are the
specific objectives:

1.   To examine the impact of commercial banks on small and medium scaled enterprises
development in Nigeria.

2.   To examine the extent to which small scale enterprises in Nigeria have been able
to obtain loans and advances from Commercial Banks for business development.

3.   To examine the  relationship between commercial bank loans and development of
SMEs in Nigeria

4.   To examine the  relationship between commercial bank deposit and development
of SMEs in Nigeria

1.4    RESEARCH QUESTIONS

1.   What is the impact of commercial banks on small and medium scaled enterprises
development in Nigeria?

2.   To what extent do small scale enterprises in Nigeria able to obtain loans and
advances from Commercial Banks for business development?

3.   What is the relationship between commercial bank loans and development of SMEs in
Nigeria?

4.   What is the relationship between commercial bank deposit and development of SMEs in
Nigeria?

1.5    HYPOTHESIS

Hypothesis one

H0: There is no significant relationship between Total asset of commercial banks and
development of SMEs in Nigeria

H1: There is significant relationship between Total asset of commercial banks and
development of SMEs in Nigeria

Hypothesis two

H02: There is no significant relationship between commercial bank loans and
development of SMEs in Nigeria.

H2: There is significant relationship between commercial bank loans and development
of SMEs in Nigeria.

Hypothesis three

H03:There is no significant relationship between commercial bank deposit and
development of SMEs in Nigeria

H3: There is significant relationship between commercial bank deposit and
development of SMEs in Nigeria

1.6    SIGNIFICANCE OF THE STUDY

This study will be of significance to monetary authority, policy maker, government,
academia and the general public. The findings of this study will help
government and the monetary authorities to see the effectiveness of monetary
policy in the management of the Nigerian economy in terms of credit demand and
supply for the development of small and medium scaled enterprises which have a
spillover effect on Nigeria economic growth. This research work further serves
as a guide and provides insight for future research on the topic and related
field for academia’s and policy makers who are willing to improve on it. This
study will also educate the management of commercial banks in Nigeria on new
ways to satisfy the entrepreneurs to promote mutual understanding and business
growth and development. The study will also contribute to knowledge by
appraising the impact of bank density and government expenditure on the growth
of SMEs output in Nigeria.

1.7    SCOPE/LIMITATIONS OF THE STUDY

Thisstudy limited to small and medium scaled enterprises in Nigeria. It will also
cover the current relationship between commercial banks and entrepreneurs
towards entrepreneurship development in Nigeria.

1.8    DEFINITION OF TERMS

SMEs:is made up of enterprises which employ fewer than 250 persons

Commercial bank: a bank that offers services to the general public and to companies

Entrepreneurs: a person who organizes and operates a business or businesses, taking on greater
than normal financial risks in order to do so.

Policy: a course or principle of action adopted or proposed by a government, party,
business, or individual.

Economy: the wealth and resources of a country or region, especially in terms of the
production and consumption of goods and services.

Loan/credit: a thing that is borrowed, especially a sum of money that is expected to be paid
back with interest

Deposit: a sum of money placed or kept in a bank account, usually to gain interest.

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.

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.

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.

1.9   ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows
Chapter one is concern with the introduction, which consist of the (overview,
of the study), statement of problem, objectives of the study, research
question, significance or the study, research methodology, definition of terms
and historical background of the study. Chapter two highlight the theoretical
framework on which the study its based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the
study. Chapter four concentrate on the data collection and analysis and
presentation of finding.  Chapter five
gives summary, conclusion, and recommendations made of the study.