THE IMPACT OF BANK LOANS ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA (A CASE STUDY OF CUSTOMERS IN UNITED BANK OF AFRICA)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Financial adequacy and stability could play a vital role in small and medium enterprises performance and the nation’s economy at large. Small and medium scale enterprises exist in our society. These organizations are established principally for the purpose of making profit. These businesses are relatively small or medium in size and may be operating on a small or medium scale. Small and medium enterprises have been seen to be pivotal for sustainable growth of many nations (Ikpor, Nnabu and Obaji, 2017). Small and medium scale businesses could play some key role such as employment creation; transformation of the traditional industries, etc. thereby contributes to the growth of the economy. The small and medium enterprises sector occupies a unique position in the economy of any developing nation including Nigeria. The small and medium businesses could play significant role in providing the necessary support for large scale industrialization. The exploitation of the enormous natural and human resources available to Nigeria for economic growth and development would to a great extent depend on how the small and medium enterprises in the nation are coordinated. Although it is widely believed that small and medium enterprises constitute important part of economic growth and development process, small and medium enterprises in Nigeria have continue to bristle with challenges. Problems particularly associated with limited access to finance, limited managerial ability, low strength to maintain specialize personnel, low adoption of international financial reporting standard, low level or non adoption of e-commerce in business practice and limited market have among others resulted to a high incidence of mortality of these businesses (Simeon, 2012). It is imperative that measures are taken to proffer solutions to enable the full potentials of the small and medium businesses in order to be realized for accelerating the pace of economic growth and development in Nigeria. Most of the developed economies have discovered the role of small and medium enterprises in industrial growth and have advanced to formulate and adopt national financial policies for the growth of small and medium enterprises (Ikpor, Nnabu and Obaji, 2017). The Nigerian government has made effort on this but have not yielded the needed results. With the equity scheme introduction do not make significant impact on loan disbursement to finance SMEs in Nigeria (Ibrahim, 2017). Iloh and Chioke (2015) maintained that, the role of deposit money bank credits is crucial to the growth and development of small and medium enterprises. The Nigerian economy is facing challenges; the rate of unemployment is high, high inflation rate, low level of food production, low infrastructures etc. Many scholars have attributed this to the gross underperformance of the small and medium business sub-subsector which has resulted to limit its contribution to employment creation, improvement of local technology, output diversification, development of indigenous companies, etc. From the FSS 2020 small and medium sector report 2007, the key issues affecting the small and medium sized enterprises in Nigeria were grouped into four, namely; unfriendly business environment, poor funding, low managerial skills and lack of access to modern technology. Among these four, lack of finance stands as the major issue. Bank credit refers to loans, advances and discounts of specific sums, which are normally with terms and other conditions available to individuals, small and medium sized business to start, grow or sustain any economic activity (John and Onwubiko, 2013). A widespread concern is that, the deposit money banks attitude towards the subsector; which supposed to be the major source of funding to small and medium sized businesses are not providing enough aids and therefore limiting the potentials that could be taped from the subsector. The deposit money banks in their mode of operations most of the time call for more sure form of financial security, if they are to grant credit facility to small or medium sized business that need funds for business activities. However, due to the nature of small and medium sized businesses, in most cases, they tend not meeting up the requirements for the granting of the facilities. This has become a major challenge to the small and medium sized business operations in Nigeria. Robinson and Victor (2015) assert that most SMEs growth was hindered as a result of inability to access fund from financial institutions. Due to the felt importance, several studies have examined the impact of bank credits to SMEs and its effect on economic growth; but these studies end up with conflicting results and conclusions. The studies from Omonigho (2017), Hedwigis (2017), Iloh and Chioke (2015) and Akingunola (2011) found a positive and significant relationship between bank credit to SMEs and economic growth. The results from Benson (2017) and Okey (2016) found insignificant relationship between bank credit to SMEs and economic growth; while the studies from Richard, (2016), Oluwarotimi and Adamu (2017) found a negative relationship between bank credit to SMEs and economic growth. This disparity call for a study such as this at this time that Nigerian economy is facing challenges to employ more recent data to verify the previous claims.

1.2 STATEMENT OF THE PROBLEM

Inferring from the above, SMEs serve as sources of livelihood to the poor, create employment opportunities generate income and contribute to economic growth. There is also the potential of small firms to turn economies with negative growth into vibrant ones, not to mention the fact that most large companies usually start as small enterprises, so the ability of SMEs to develop and invest becomes crucial to any economy wishing to prosper. From the argument above the only easier finance options for SMEs are loans (Debt financing) assess from financial institutions, thus it’s necessary to examine the impact of these loans on the performance of SMEs. Are they having negative or positive impact on their performance .this is worth investigating because majority of the businesses fall within the SME category especially in developing countries.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine        the impact of bank loans on small and medium scale enterprises in Nigeria. Other general objectives of the study are:

1. To examine the extent at which banks loans and advances have contributed to SMEs development in Nigeria
2. To examine the problems encountered by small and medium enterprises in procurement of loans from banks
3. To examine the impact of bank loans on small and medium scale enterprises in Nigeria
4.  To examine the level of contribution of small and medium size industries towards Nigeria’s economic growth and development
5. To examine the relationship between bank loans and development of small and medium scale enterprises.
6. To make recommendations on the need for moderation of collaterals and interest rate attached to banks loan to SMEs.

1.4 RESEARCH QUESTIONS

1. What is the extent at which banks loans and advances have contributed to SMEs development in Nigeria?
2. What are the problems encountered by small and medium enterprises in procurement of loans from banks?
3. What is the impact of bank loans on small and medium scale enterprises in Nigeria?
4.  What is the level of contribution of small and medium size industries towards Nigeria’s economic growth and development?
5. What is the relationship between bank loans and development of small and medium scale enterprises?
6. What are the recommendations on the need for moderation of collaterals and interest rate attached to banks loan to SMEs?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant impact of bank loans on small and medium scale enterprises in Nigeria.

H1: There is a significant impact of bank loans on small and medium scale enterprises in Nigeria.

Hypothesis 2

H0: There is no significant relationship between bank loans and development of small and medium scale enterprises

H1: There is a significant relationship between bank loans and development of small and medium scale enterprises

1.6 SCOPE AND LIMITATION OF STUDY

The study is based on the impact of bank loans on small and medium scale enterprises in Nigeria, case study of customers in United Bank of Africa in Lagos state.

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.

1.7 JUSTIFICATION OF THE STUDY

Policy Makers: The study will be important to policy makers who will formulate policies and programs that are geared towards encouraging the interrelationship between money lenders and SMEs. The implementation of such policies will lead to the improvement of accessibility of formal financial institutions and enhance growth of the economy.

Researchers: The study will also be of great help to interested researchers who will use the findings of the study to understand the issues raised and use them as reference material and/or basis for further research.

Target Community: To the target community the micro and small enterprises will benefit from the improved business performance and sustainability of the enterprises. Such benefits will include employment and sustained supply of goods and services at an affordable cost.

Revenue and Financial Institutions: Further to the Nigerian commercial Banks and other financial Institutions, the results of this study might influence the attitude of the banks and other lending institutions towards SMEs. These institutions could also use the results of this study to improve the facilities offered to the sector and understand the socio-economic effect of the loans on the target

beneficiaries. The Federal Inland Revenue Authority-for the purpose of taxation and also reaching out to this group of income earners who may not know that they have an obligation to pay tax as per the laws of Nigeria

1.8 OPERATIONAL DEFINITION OF TERMS

Small Scale Enterprise: An enterprise with a labor size of 11-1000 workers or a total cost of not more than 50 million including working capital but excluding cost of land (Sule, 1986:207).

Medium Scale Enterprise: An industry with a labor size of between 10-300 workers or a total cost of over 50 million but not more than 200 million including working capital but excluding cost of land (Clifford, 1972:85).

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

Loans: This is the transfer of fund from one economic entity to another which must be repaid with interest over a stipulated period of time.