Full Project – Financing small and medium scale business by commercial banks in Nigeria

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ABSTRACT

The critical causes on why financing small and medium scale industries by commercial banks in Nigeria have not been very effective were evaluated. Not only are the SMEs starved with financial back-up, they are also faced with other external problems such as high interest rates, inconsistency in government industrial policies, lack of infrastructural facilities and internally; poor management practices, high rate of business failure, poor accounting standards, shortage of skilled manpower and financial indiscipline. In view of these numerous problems, this research work was conducted so as to come out with solutions as this will pave way for banks to have more confidence in financing these SMEs efficiently and effectively as against hitherto, their stringent lending policies and the risk averse behavior of funding. This has become necessary as it is a well known fact that the survival, growth and development of SMEs of any country depend largely on funding with other factors put in place. In the light of the findings in this research work, some recommendations and suggestions were made to the government, commercial banks and the small and medium scale entrepreneurs themselves which if implemented will not only sustain the survival, growth and development of this sector, it will also provide employment opportunities and improve the economic situation of Nigeria.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

For both developing and developed countries, small and medium scale firms play important roles in the process of industrialization and economic growth. Apart from increasing per capita income and output, SMEs create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resources utilization considered critical to engineering economic and growth(Adebisi & Ofuami 2015).

However, the seminal role played by SMEs not withstanding its development is everywhere constrained by inadequate funding and poor management. The unfavorable macroeconomic environment has also been identified as one of the major constraints which most times encourage financial institutions which most times encourage financial institutions to be risk-averse in funding small and medium scale businesses.

The manufacturing sector as described by Babatunde et al (2016) including Micro, Small and Medium Enterprises) is acknowledged to have huge potential for employment generation and wealth creation in any economy, yet in Nigeria, the sector has stagnated and remains relatively small in terms of its contribution to GDP or to gainful employment. Activity mix in the sector is also quite limited dominated by import dependent processes and factors. Although there is no reliable data, imprecise indicators show that capacity utilization in the sector has improved perceptibly in the period since 1999, but the sector is still faced with a number of constraints with lack of credit availability as the principal constraint. Credit is the largest element of risk in the books of most banks and failures in the management of credit risk, by weakening individual banks and in some cases, the banking system as a whole, have contributed to many episodes of financial instability. A greater understanding of the nature of credit risk, leading to improved measurement and international financial system vis-a-vis the small and medium enterprises in the long run.

Generally, the stage of development and, thus the efficiency of the system varies among countries and changes over time in the same country. The more developed and sophisticated financial systems tend to be associated with the nature economies, while underdeveloped financial systems feature in developing economies. As a process, the financial system adjusts to changes in the real economy just as the economy responds to developments in the financial sector.

All over the world, size had become an important ingredient for success, the banking sector included (Haruna 2018).

In Nigeria every known regime recognizes the importance of promoting SMEs as the basis of economic growth. As a result, several micro-lending institutions were established to enhance the development of SMEs. Such micro credit institutions include the Nigerian Bank for Commerce and Industry (NBCI), National Economic Reconstruction Fund (Nerfund), the people’s Bank of Nigeria (PBN), the community Banks (CB) and the Nigerian Export and Import Bank (NEXIM), and the Liberalization of the banking Sector (Obiageri et al 2019).

This study attempts to find out how Commercial Banks finance small and medium scale Enterprises taking Union Bank of Nigeria Plc as a case study.

1.2 STATEMENT OF PROBLEM

One of the main obligations of commercial Banks in Nigeria and elsewhere in the maximum contribution to the economic development of the nation. Others are maximum profitability owned to the shareholders and maximum liquidity owned to the depositors. This research work will concentrate on the maximum contribution to the economic development of the nation, i.e. through financing SMEs by commercial Banks. The analysis of the research problem will thus pose some questions like.

Do commercial Banks finance small and medium scale enterprises adequately, if not what are the limitations.

1.3 STATEMENT OF OBJECTIVE

Since the importance of SMEs forwards the development of any country’s economy, as already discussed in chapter one cannot be overemphasized, this write-up is aimed at achieving the following objectives:

1. To highlight the different sources of finance available to small and medium scale industries in Nigeria.
2. To examine the role of Commercial Banks in satisfying the financial needs of SMEs in Nigeria taking Union Bank of Nigeria Plc as a case study.

1.4    RESEARCH QUESTIONS

The following are research questions

(1)     How does the attitude of SMEs, business owners relate to the method union bank plc lend money to them?

(2)     Does money lend to small and medium scale business owner by union bank plc enhances profitability in their business?

(3)     Does Union comply with CBN policy in lending to SMEs business owners?

1.5     NEEDS AND SIGNIFICANCE OF THE STUDY

During the 1960’s and early 1970’s most Nigeria engaged in industrial project did soon subsistence level but now emphasis has shifted to the sophisticated and capital intensive enterprises. Annual policies of the federal ministry of Nigeria in recent years have been to ensure that commercial bank provide needed capital to small and medium scale enterprises to help improve their present state. The study therefore sets out to ascertain the extent to which commercial banks have performed the role and the findings will help make recommendations for future improvement of the present situation.

1.6     DELIMITATION AND LIMITATION OF THE STUDY

One of the major limitations in carrying out this work is time. There is time constraint in carrying out this research work due to the fact that there are other academic engagements like attending lectures, writing assignments, tests, e.t.c. Another limitation of this study is that only UBN, Plc is used. The operation in this bank will certainly not represent the genuine situation obtainable in other banks. This can be as a result of different polices or the financial capabilities in lending.

However, UBN, Plc is chosen because of its financial backing and thus represent Commercial Banks that can fulfill their obligations as seen in the earlier part of this chapter.

1.7 DEFINITION OF TERMS

Commercial Banks: Commercial Banks are generally referred to as those banking institutions that create money in the form of demand deposits. Simply put, a Commercial Bank in an institution engaged in all aspect of the commerce of its own country and its business relations with other countries with a view f making profit.

Small And Medium Scale Industries (Enterprises) SME: Small and medium scale enterprises are defined as those enterprises with fixed assets other than loan but including the cost of new investments not exceeding N36Million.

Entrepreneur: This can be defined as a person who set and start his own new and small business enterprise.

Economic Growth: This is defined as a sustained increase in a nation’s gross national income per capital over a long time period.

Economic Development: This is defined as the st5ructural transformation of all the economic indexes from a low to the high strata.

Financing: This is the process of sourcing for fund or acquisition of funds for financial purpose.

Capital: This can be defined as wealth or property in form of money or property, sometimes the basic sum in an investment enterprise.

Collateral Security: Property or something valuable which is used as guarantee that someone will repay such a landed property, insurance policy e.t.c., which the bank is authorized to take in the event of a customer defaulting in the loan agreement.

Loan: The sum of money borrowed at an agreed rate of interest. It can be of long term or short term.

Overdraft: This is a financial assistance granted by way of allowing customers withdraw in excess of the balance in their accounts.

Assets: Resources or things of value owned by an economic nit, such as a firm, individual or household as cash property and rights to property.

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Full Project – Financing small and medium scale business by commercial banks in Nigeria