The impact of bank loan on small and medium scale enterprise in nigeria

Thesis Overview

<p> </p><p><b>INTRODUCTION<br></b></p><p><b>1.1 &nbsp; &nbsp; <br></b><b>Background<br>of the study</b></p><p>Small<br>and medium-scaled businesses (SME) are businesses whose personnel numbers fall<br>below certain limits. The abbreviation “SME” is used in the European<br>Union and by international organizations such as the World Bank, the United<br>Nations and the World Trade Organization (WTO). Small and medium-scaled<br>enterprises outnumber large companies by a wide margin and also employ many<br>more people. SMEs are also said to be responsible for driving innovation and<br>competition in many economic sectors of every nation (Agwu and Emeti, 2014).</p><p>The<br>important role played by Small and medium enterprises in the growth and<br>development of developing countries is well rested in the literature. SMEs have<br>been reported by Ayozie and Latinwo,(2010) to encourage entrepreneurship. In<br>addition, Ariyo, 2008 posit that there is the greater likelihood that SMEs will<br>utilize labour-intensive technologies thereby reducing unemployment<br>particularly in developing countries and thus have an immediate impact on<br>employment generation (Ariyo, 2008; Ayozie and Latinwo, 2010).According to the<br>United Nations Industrial Development Organization UNIDO (2001), for developing<br>countries, integration into the global economy through economic liberalization,<br>deregulation, and democratization is seen as the paramount way to triumph over<br>poverty and inequality. The importance of this process is the development of a<br>vibrant private sector, in which small and medium enterprises can play a<br>central role. The problems bedeviling the SMEs in Nigeria are multi-faceted.<br>Ekpenyong (1997) and Utomi (1997) identified inadequate capital, inaccessible<br>credit facilities. Long term development institutional credit was known not to<br>be available to SMEs because they are generally considered high credit risks by<br>financial institutions. The study by Evbuomwan, Ikpi, Okoruwa and Akinyosoye<br>(2012) indicated that 75.7% of their survey respondents relied mostly on own<br>funds to finance their businesses. A widespread concern is that the banking<br>system in the sub sector (which supposed to be the major financier of SMEs) is<br>not providing enough support to new economic initiatives and in particular to the<br>expansion of SMEs and agriculture sector. It is noted that commercial and the<br>hitherto merchant banks which retained liquidity levels in excess of regulation<br>have shown reluctance in financing SMEs (Sacerdoti, 2005).</p><p>The<br>vital role of commercial bank in giving credit for the development of SMEs<br>within an economy has been widely acknowledged, for instance Schumpeter (1932)<br>established that commercial banks facilitate technological innovation through<br>their intermediary role. His emphasis was that efficient allocation of savings<br>through identification and funding of entrepreneur with best chances of<br>successfully implementing innovative product and production are tools to<br>achieve real performance. Nwanyanwu (2012) noted that the commercial banks help<br>to make credit available by mobilizing surplus fund from depositor who have no<br>immediate needs of such money and channel it in form of credit to investors who<br>have brilliant ideals on how to create additional wealth in the economy but<br>lack the necessary capital to execute the ideals. The study further reveals<br>that the role of commercial bank credit in an economy has been recognized as<br>credit are obtained by economic agents to enable them meet operating expenses.<br>For instance business firm obtained credit to buy machinery and equipment,<br>farmers obtained credit to purchase farm input such as fertilizers, seeds, farm<br>buildings.</p><p>The<br>general role of commercial banks is to provide financial services to general<br>public and business, ensuring economic and social stability and sustainable<br>growth of the economy. In this respect, “credit creation” is the most<br>significant function of commercial banks. While sanctioning a loan to a<br>customer, they do not provide cash to the borrower. Instead, they open a<br>deposit account from which the borrower can withdraw. In other words, while<br>sanctioning a loan, they automatically create deposits, known as a “credit<br>creation from commercial banks (Omika, 2014).</p><p>However,<br>acknowledging the role of commercial bank credit in an economy various banking<br>reformed has been established by the monetary authority in Nigeria in enhancing<br>credit accessibility. The overall intentions of these reforms have been to<br>ensure financial stability so as to influence the growth of the economy and<br>also enhance commercial bank to play critical role of financial intermediation<br>in provision and accessibility of credit to small and medium scale business<br>owners. These various reforms have led to the improvement in services in the<br>commercial banks in Nigeria. However, despite this increase in credit supply to<br>the SMEs the performance of the sector (SMEs) in Nigeria has been dwindling.<br>Therefore, this study examines the impact of commercial bank on small and<br>medium scale enterprises development in Nigeria.</p><p><b>1.2 &nbsp; &nbsp;<br>STATEMENT OF THE PROBLEM</b></p><p>The<br>key problem facing the development of most small and Medium-Scale Enterprises<br>(SMEs) in Nigeria is inadequate finance; whether for the establishment of new<br>industries or to carry out expansion plans on the existing business. This led<br>to the curiosity that necessitates this study because in spite of continuous<br>policy strategies to attract credits to the SMEs, most Nigerian SMEs have<br>remained unattractive for commercial bank credits supply. For instance, as<br>indicated in central Bank of Nigeria (CBN) reports, almost throughout the<br>regulatory era, commercial bank’s loans and advances to the SMEs sector<br>deviated persistently from prescribed minimum.</p><p>It<br>is therefore important to carry out a study that examined the effect of<br>commercial banks on small and medium scaled enterprises from the perspectives<br>of business owners and entrepreneurs. All the existing studies on the role of<br>commercial banks on the development of SMEs made use of financial statements of<br>banks published in the CBN bulletin. However, this study is examining the<br>impact of commercial banks on the development of SMEs in Edo State which is the<br>area of this study.</p><p><b>1.3 &nbsp; &nbsp;<br>OBJECTIVES OF THE STUDY</b></p><p>The<br>general objective of this study is to analyze the impact of commercial banks on<br>small and medium scaled enterprises in Nigeria while the following are the<br>specific objectives:</p><p>1. &nbsp; To<br>examine the impact of commercial banks on small and medium scaled enterprises<br>development in Nigeria.</p><p>2. &nbsp; To<br>examine the extent to which small scale enterprises in Nigeria have been able<br>to obtain loans and advances from Commercial Banks for business development.</p><p>3. &nbsp; To<br>examine the relationship between commercial bank loans and development of<br>SMEs in Nigeria</p><p>4. &nbsp; To<br>examine the relationship between commercial bank deposit and development<br>of SMEs in Nigeria</p><p><b>1.4 &nbsp; &nbsp;<br>RESEARCH QUESTIONS</b></p><p>1. &nbsp; What<br>is the impact of commercial banks on small and medium scaled enterprises<br>development in Nigeria?</p><p>2. &nbsp; To<br>what extent do small scale enterprises in Nigeria able to obtain loans and<br>advances from Commercial Banks for business development?</p><p>3. &nbsp; What<br>is the relationship between commercial bank loans and development of SMEs in<br>Nigeria?</p><p>4. &nbsp; What<br>is the relationship between commercial bank deposit and development of SMEs in<br>Nigeria?</p><p><b>1.5 &nbsp; &nbsp;<br>HYPOTHESIS</b></p><p><b>Hypothesis<br>one</b></p><p><b>H0:</b>&nbsp;There<br>is no significant relationship between Total asset of commercial banks and<br>development of SMEs in Nigeria</p><p><b>H1:</b><br>There is significant relationship between Total asset of commercial banks and<br>development of SMEs in Nigeria</p><p><b>Hypothesis<br>two</b></p><p><b>H02:</b><br>There is no significant relationship between commercial bank loans and<br>development of SMEs in Nigeria.</p><p><b>H2:</b><br>There is significant relationship between commercial bank loans and development<br>of SMEs in Nigeria.</p><p><b>Hypothesis<br>three</b></p><p><b>H03:</b><br>There is no significant relationship between commercial bank deposit and<br>development of SMEs in Nigeria</p><p><b>H3:</b><br>There is significant relationship between commercial bank deposit and<br>development of SMEs in Nigeria</p><p><b>1.6 &nbsp; &nbsp;<br>SIGNIFICANCE OF THE STUDY</b></p><p>This<br>study will be of significance to monetary authority, policy maker, government,<br>academia and the general public. The findings of this study will help<br>government and the monetary authorities to see the effectiveness of monetary<br>policy in the management of the Nigerian economy in terms of credit demand and<br>supply for the development of small and medium scaled enterprises which have a<br>spillover effect on Nigeria economic growth. This research work further serves<br>as a guide and provides insight for future research on the topic and related<br>field for academia’s and policy makers who are willing to improve on it. This<br>study will also educate the management of commercial banks in Nigeria on new<br>ways to satisfy the entrepreneurs to promote mutual understanding and business<br>growth and development. The study will also contribute to knowledge by<br>appraising the impact of bank density and government expenditure on the growth<br>of SMEs output in Nigeria.</p><p><b>1.7 &nbsp; &nbsp;<br>SCOPE/LIMITATIONS OF THE STUDY</b></p><p>This<br>study limited to small and medium scaled enterprises in Nigeria. It will also<br>cover the current relationship between commercial banks and entrepreneurs<br>towards entrepreneurship development in Nigeria.</p><p><b>1.8 &nbsp; &nbsp;<br>DEFINITION OF TERMS</b></p><p>SMEs:<br>is made up of enterprises which employ fewer than 250 persons</p><p><b>Commercial bank:</b>&nbsp;a<br>bank that offers services to the general public and to companies</p><p><b>Entrepreneurs:</b>&nbsp;a<br>person who organizes and operates a business or businesses, taking on greater<br>than normal financial risks in order to do so.</p><p><b>Policy:</b>&nbsp;a<br>course or principle of action adopted or proposed by a government, party,<br>business, or individual.</p><p><b>Economy:</b><br>the wealth and resources of a country or region, especially in terms of the<br>production and consumption of goods and services.</p><p><b>Loan/credit:</b>&nbsp;a<br>thing that is borrowed, especially a sum of money that is expected to be paid<br>back with interest</p><p><b>Deposit:</b>&nbsp;a<br>sum of money placed or kept in a bank account, usually to gain interest.</p><p><b>Short term credit:</b><br>This type of credit is a credit or loan that has maturity period that is less<br>or more than one year e.g. Personal loan.</p><p><b>Medium term credit:</b><br>This is a type of credit or loan that has a maturity period of more than one<br>year but not exceeding two years to be repaid back e.g. loan required for<br>temporary business requirement.</p><p><b>Long term credit:</b><br>This type of credit matures in more than three years and above. It has a very<br>long maturity period as agreed by the lender and the borrower. E.g. are<br>business development loans and Bridging loans.</p><p><b>1.9 &nbsp; <br></b><b>ORGANIZATION<br>OF THE STUDY</b></p><p>This<br>research work is organized in five chapters, for easy understanding, as follows<br>Chapter one is concern with the introduction, which consist of the (overview,<br>of the study), statement of problem, objectives of the study, research<br>question, significance or the study, research methodology, definition of terms<br>and historical background of the study. Chapter two highlight the theoretical<br>framework on which the study its based, thus the review of related literature.<br>Chapter three deals on the research design and methodology adopted in the<br>study. Chapter four concentrate on the data collection and analysis and<br>presentation of finding. Chapter five<br>gives summary, conclusion, and recommendations made of the study.</p> <br><p></p>