BUSINESS CREDIT AVAILABILITY AND ITS EFFECT ON SMALL AND MEDIUM SCALE ENTERPRISES IN GHANA
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, Small Medium businesses create employment opportunities,
enhance regional economic balance through industrial dispersal and
generally promote effective resource utilization considered critical
to engineering economic development and growth. However, the seminal
role played by Small Medium businesses notwithstanding its development
is everywhere constrained by inadequate funding and poor management.
The unfavourable macro economic environment has also been identified
as one of the major constraints which most times encourage financial
institutions to be risk-averse in funding small and medium scale
businesses. The reluctance on the part of financial institution to fund
Small Medium businesses can be explained by the insufficient capital
base of banks and information asymmetry that often exists between
Small Medium businesses and lending institutions.
This study critically examines the availability
of business credit to small business in Nigeria, and how more funding
can be made to support small businesses. However, this chapter,
forms the basic foundation for this study as it presents the
objectives of the study, and the statement of problem that motivated
the researcher to undertake the study.
1.2 BACKGROUND OF THE STUDY AND ORGANIZATIONAL PROFILE
During the 1990s, a number of studies documented
that lending to small businesses and the economic activity of small
businesses were affected by financial sector disruptions, such as the
widespread merging of banks of all sizes and the capital shortfalls
occasioned by large loan losses.
Although not much previous research has examined discrimination
in small business credit markets, there has been an active debate on
the question of whether banks discriminate against minority applicants
for mortgages. In an influential study in that area, researchers at
the Federal Reserve Bank of Boston tried to collect any information
that might be deemed economically relevant to whether a loan would be
approved along with the borrower’s race andf financial status
(Munnell et al., 1996). In the raw data larger firms had 10 percent
of their loans rejected versus rejection rates of 28 percent for
small scale businesses. After controlling for the large number of
variables collected to establish the credit-worthiness of the
borrowers (including, the amount of the debt, debt/income ratio,
credit history, loan characteristics, etc.) small scale businesses
were still percentage points less likely to be granted the loan.
A variety of criticisms have been launched at this study (see,
for example, Horne 1994; Day and Liebowitz, 1998; Harrison, 1998);
responses to these criticisms are found in Browne and Tootell (1996).
The most common critique indicates that we cannot make a determination
of discrimination unless those small businesses whose loans are
approved have a greater likelihood of repayment. This argument rests
critically upon an implied assumption that the distribution of repayment
probabilities for large companies and small businesses is identical.
His figure indicates that if this assumption is met and if firms
discriminate against small businesses by setting a higher bar for loan
approval, then the mean rate of repayment among small businesses
conditional upon loan approvalwill be higher for large and smaller
1.3 PROBLEM STATEMENT
Small businesses and entrepreneurial ventures
which are usually considered as the engine that run the economy are
usually denied access to credit due to their risky nature. This
disturbing threat has existed for a very long time and needs proper
attention from both government agencies and non governmental agencies
as well. The importance of small businesses in the development of
Nigeria cannot be overlooked. Without proper credit availability to
small businesses, the economy as a whole will suffer. The objectives
of economic planning cannot be achieved if small businesses do not do
well. Keeping this in view, the Bank of Nigeria has streamlined
Bank’s lending operations to ensure that banks’ credit actually
benefits small and medium businesses in Nigeria. This strategy is
intended to improve the economy and to develop rural areas in
However, there is some anecdotal evidence that
most beneficiaries of business credit from most financial
institutions are salaried workers and large scale companies, whose
ability to repay loans are believed to be better than that of small
scale businesses. Moreover, this belief is not always the case as some
small businesses who go for loans are well profitable and well
1.4 RESEARCH OBJECTIVES
This paper is aimed at the following objectives:
- To examine the relationship that exist between small scale
businesses and financial institutions that grant business credits in
- To identify the challenges faced by small businesses in securing business credit in Uyo.
- To examine the degree of business credit availability to small businesses in Uyo.
- To identify the effects of businesses credit availability on small businesses in Uyo.
1.4 RESEARCH QUESTIONS
The following questions were used by the researcher in achieving the research objectives of this study:
- What relationship exists between you and financial institutions that grant credit in Uyo?
- What challenges do you face when securing credit for your business?
- How often business credit is made available to you when you apply for it?
- What effects have the availability of business credit had on your business?
1.5 SIGNIFICANCE OF THE STUDY
This study is very important because it is aimed at examining the
effects of business credit availability and its effect on small
businesses in Uyo. The paper will provide some relevant recommendations
for policy makers, development agencies, entrepreneurs, and small
business managers to help seek better ways to increase business credits
to small businesses, and appropriate strategies to improve the small
business sector in Nigeria.
Secondly, the study is also vital since it suggest to small
businesses certain strategies they can adopt before seeking business
credits, to make their borrowing process easier and more effective.
This will go a long way to increase the efficiency and profitability
level of small businesses in Uyo. Any time these strategies are put in
place, access to business credit increases, and the participation of
more people in entrepreneurial activities will also increase, hence
the economy of Nigeria will be improved.
1.6 SCOPE OF THE STUDY
The area chosen for this study is Uyo in the Eastern region of
Nigeria. The study is limited to the effects of business credit
availability on small businesses in Uyo, using various small businesses
in Uyo as a focus point.
1.7 LIMITATION OF THE STUDY
In undertaking this research, the researcher encountered the following problems;
1. The time used to undertake the study was limited. The time was
loaded with other academic activities and as a result limited time
was made available the study.
2. Also, response from the various small business owners through
the questionnaire provided by the researcher was also a bit slow. This
is because of reasons such much work load on the part of the
1.8 CHAPTER SCHEME
The project will be organized around following chapters;
Chapter one gives an introduction to the research work. It gives
the basic information about the company and the research being
undertaken. This chapter therefore consists of the background of the
study and organizational profile, statement of the problem, objectives,
research questions, significance of the study, scope of the study,
and limitations encountered by the researcher.
Chapter Twoconsists of the literature review and the theoretical framework
Chapter three gives details of the research methodology. The
research methodology represents the various ways and methods which the
researcher used in order to gain his information.
Chapter Fourgives the analysis and interpretation of the information gathered by the researcher.
Chapter five gives the findings and conclusion of the researcher.
Here, conclusions will be drawn based on the findings and their
implications will also be given.