ROLE OF BANKS IN SMALL AND MEDIUM SCALE ENTERPRISES (A CASE STUDY OF COMMERCIAL BANKS IN BENUE STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

There has been so many works on the contribution of banks in financing small and medium scale businesses in Nigeria, but the available few have given an in depth up-to-date, study of its operation. Most of the writers made immense additions on topics related to this course of the study in wider horizon. In Nigeria economy, attention has been drawn to the fact that small scale enterprises had gained little attention where as they provide employment or jobs for approximately triple the number engaged large scale manufacturing as well as playing their roles of crucial importance to our developing economy. This is why it is important to reconsider the dis advantages hindering the growth and general development of this sector. There have been numerous opinions and commentaries on the role of commercial banks should play in financing and advising the medium and small scale enterprises since the federal government shift in policy with greater emphasis towards small and medium scale business in the achievement of set-reliance. Unfortunately, some of these opinions have tended to obscure the long standing relationship which the commercial  banks have enjoyed with the small business community and some misconceptions have arises and there is need to clarify some of these misconceptions. In Nigeria, small scale businesses constitute over ten percent of all registered companies or firms. They are considered to have specific importance to the economic development and growth of the country for a number of reasons. These businesses provide opportunity for employment at large and therefore, make possibility of equal distribution of national income more realistic. The enterprises also provide the means of creating more opportunity at relatively cheap cost. Thus, in a labor abundance economy, like Nigeria, and in the present economic down-turn, they are even more important in the mobilization of capital and human resources that otherwise be left idle. Small and medium scale enterprises (SMEs) are generally regarded as the engine of economic growth and equitable development in developing economies. They are labor intensive, capital savings and helping most of the one billion new jobs the world will need by the end of the century. They are also perceived as the key to Nigeria’s growth, development, poverty alleviation and employment generation in current years has generated a lot of research interest on their challenges and prospect. After Nigeria’s independence in 1969, much emphasis has been laid on the development of small and medium scale industry in reducing the rate of poverty and unemployment in the country. Since the adoption of economic reform programming in 1996, there has been a decisive shift from grandiose capital intensive and large scale industry project based on import substitution to small scale industry with immense potential for developing domestic linkage for industrial development. Apart from SMEs potential for self-reliant industrialization using local raw materials, they are in a better position to boost employment guarantees even distribution of industrial development and facilitate the growth of non-oil exports. Fabayo (1989) general section of the work force to young old part –time workers and the cyclically employed. Small and Medium scale Enterprises have contributed greatly to Nigeria economy accounting for 12-14% of GDP through creating job employment opportunities, training entrepreneurs, creating income and providing a source of lively hood for the majority of low income household or earners in the country. Hence, promotion of such enterprises in developing economies like Nigeria will bring about great distribution of income and wealth, economic self-dependence, entrepreneurial development and a host of other economic uplifting factors. Small and Medium businesses are veritable engines for the attainment of national objectives in terms of employment generation at low investment cost, development of entrepreneurial capabilities and indigenous technology. They reduce the movement of people from rural to urban areas and can easily be established with minimum skill. Commercial banks also play an important role in any economy, whether in developed or developing countries. They play a major role in achieving economic and social development programs and contribute to the success of national strategies in reducing the problems of poverty and unemployment by providing diversified and sustainable financial services that meet the needs of different sectors. Commercial banks provide financial services to small and medium enterprises in order to meet their financial needs to increase the productivity of these projects and improve the standard of living of the owners of these projects and employees as well; Thus, achieving the goals of governments in achieving their Economic and Social Programs.

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. The front liners in the sector of small scale business do not portray attitude of seriousness in preparing reasonable justification for their project. They most times come up with unreliable account statement or a balance sheet that appears attractive but are designed using personally customized system of account preparation so as to unduly win credits. For obvious reasons of this nature, incriminating proposals are out rightly rejected by bank managers. They however can be accommodated in conditions where borrowings terms are no longer in compliance with the monetary policies and credit guidelines set by the government. Lack of formal education on the part of Small and medium enterprise owners and inadequate facilities, in purchasing and supply sector has been a big challenge to SME’s (Ukwuagu 2012). On the other hand, government has failed to provide stable macro-economic environment and adequate physical infrastructural facilities to the SMEs. Having known all these, the study embark on identifying the various problems faced by SMEs in the procurement of loans from commercial banks, the contribution of banks to SMEs as well as the contribution of SMEs towards the growth and development of Nigeria’s economy. 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 role of banks in Small and Medium scale Enterprises in Nigeria.

1.3 OBJECTIVE OF THE STUDY

The main purpose of this study is to examine the role of commercial banks in financing small and medium enterprises in Nigeria. The specific objectives are to:

1. Identify the level of contribution of small and medium size industries towards Nigeria’s economic growth and development
2. Examine the problems encountered by small and medium enterprises in procurement of loans from commercial banks
3. Examine the impact of commercial banks on financing of small and medium scale enterprises
4. What extent have commercial banks loans and advances contributed to small and medium enterprises development in Nigeria
5. Examine the relationship between commercial banks and small and medium scale enterprises
6. Recommend solutions to the problems encounter by small and medium scale enterprises in the procurement of loans in commercial banks

1.4 RESEARCH QUESTIONS

1. What is the level of contribution of small and medium size industries towards Nigeria’s economic growth and development?
2. What are the problems encountered by small and medium enterprises in procurement of loans from commercial banks?
3. What is the impact of commercial banks on financing of small and medium scale enterprises?
4. To what extent have commercial banks loans and advances contributed to small and medium enterprises development in Nigeria?
5. What is the relationship between commercial banks and small and medium scale enterprises?
6. What are the solutions to the problems encounter by small and medium scale enterprises in the procurement of loans in commercial banks?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

HO: There is no significant impact of commercial banks on financing of small and medium scale enterprises

H1: There is a significant impact of commercial banks on financing of small and medium scale enterprises

Hypothesis 2

HO: There is no relationship between commercial banks and small and medium scale enterprises

H1: There is a relationship between commercial banks and small and medium scale enterprises

1.6 SIGNIFICANCE OF THE STUDY

The result of this study will be of immense benefit to the banks. It will help the commercial banks recognize the role SMEs play in the economy and when to provide them with enough fund so as not to hinder the growth and development of the economy. Through this study, the small business owners will be able to recognize the best or appropriate means to procure loans and be educated on the various ways loans can be obtained and the equivalent collateral to give in exchange for loan. Also, the study will enable the government to know the necessary areas to improve in terms of funding to small businesses and the areas of SMEs that needs enlightenment through programs and seminars etc. Lastly, the study will also serve as a guide to any person(s) carrying out a similar research work.

1.7 SCOPE OF THE STUDY

This study is restricted to the roles of banks in small and medium scale enterprises

1.8 LIMITATION OF THE STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 DEFINITION OF TERMS

Small And Medium Scale Business: Small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms which employ less than a given number of employees. Small firms are generally those with fewer than 50 employees, while micro-enterprises have at most 10, or in some cases 5, workers.

Commercial Bank: is a financial institution which performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit. They generally finance trade and commerce with short-term loans.

Financing:  Is the process of providing funds for business activities, making purchases or investing. Financial institutions such as banks are in the business of providing capital to businesses, consumers, and investors to help them achieve their goals.