1.1 BACKGROUND OF THE STUDY
Small and Medium Enterprises (SMEs) play a vital role in the
development of national economy. Due to their importance and the crucial
role they play in economic development and growth of the nation, much
attention has been placed on financing of small and medium enterprises,
since they are major contributors to the economy of Nigeria. These
enterprises are drivers of the economy; therefore policy attention has
to be given to them especially in developing economies because of their
impact on many sectors of the economy. Their impact is felt in the
following ways: Greater utilization of local raw materials, employment
generation, encouragement of rural development, development of
entrepreneurship, mobilization of local savings, linkages with bigger
industries, provision of regional balance by spreading investments more
evenly, provision of avenue for self employment and provision of
opportunity for training managers and semi skilled workers.
In Nigeria, credit has been recognized as an essential tool for
promoting small and Micro Enterprises (SMEs), hence the need for
recapitalization of commercial banks in Nigeria. Bank recapitalization
which was effective from 2006 is aimed at making Nigerian banks stronger
and better in-order to finance all sectors of the economy including the
major drivers of the economy-Small and Medium Scale Enterprises. About
70 percent of the population is engaged in the informal sector or in
agricultural production. The Federal and State governments have
recognized that for sustainable growth and development, the financial
empowerment of the people is vital. If this growth strategy is adopted
and the latent entrepreneurial capabilities of this large segment of the
people is sufficiently stimulated and sustained, then positive
multipliers will be felt throughout the economy. To give effect to these
aspirations various policies have been instituted over time by the
Federal Government to improve rural and urban enterprise production
capabilities (Olaitan 2006)
The central Bank of Nigeria on July 6th 2004, announced their
capitalization of banking sector from N2 billion to N25 billion with
effect from 1st January 2006. This was with a view to make the sector
internationally competitive, sound and improves its ability to provide
credit to all the productive sectors of the economy. In order to meet
this obligation, banks embarked on strategies of merger and acquisition,
floating of new shares and so on. At the end of the exercise, 25 new
It was hoped that the consolidation will make the banks stronger to
be able to provide large amount of funds to productive sectors of the
economy which is largely dominated by Small and Medium Enterprises,
thereby making them grow into large firms with enough resources to
contribute to the economic development.
Also, in December 2005, the CBN introduced new Micro-finance Policy
(MFP) which was designed to be public and private sector driven.
The purpose of the policy was to strengthen community banks in order
for them to be able to grant collateral and non collateral loans to
finance microeconomic activities in the economy. The policy also aims at
providing many people with access to financial services who otherwise
will have no access to these services.
Small and Medium Enterprises as said earlier have a crucial role to
play in the development of an economy, they are training grounds for
local entrepreneurs, they encourage local savings and ensure equitable
distribution of wealth thereby reducing rural- urban migration of human
To this end, government should collaborate with private sector in
order to create an enabling and conducive environment for SME’S in order
to contribute positively towards the development of the economy.
1.2 STATEMENT OF PROBLEM
Bank fraud, poor lending and credit management practices in the
Nigerian banking sector forced the Central bank of Nigeria to revisit
the capital structure of commercial banks in Nigeria. These among other
things led the Central Bank of Nigeria (CBN) to give a directive that
all banks should recapitalize from N2 billion to N25 billion with effect
from 1stJanuary 2006.
This development led to various financial activities in the Nigerian
financial sector with most banks initially opting for additional source
of fund from the capital market via floating of shares. Most banks at
this stage started inviting members of the public to acquire new shares
in-order to meet up with the new minimum capital directed by the central
bank of Nigeria. Notwithstanding, some banks were not capable of
raising the new minimum capital by themselves, hence the need for
mergers and consolidation of banks, reducing the total number of banks
in Nigeria to twenty five (25).
However, the consolidation of the banking sector presented new
challenges to the banks which require more efforts to control cost and
increase their efficiency; this in turn has effect the volume of credit
facilities granted to small and medium scale enterprises in Nigeria. A
study conducted by Iloh et al (2012) reveals the gap between deposit
money bank deposits (DMBD) and commercial bank lending to SMEs from year
2000 upward (the year that saw the end of merchant banks). There is a
wide margin between the two variables and while deposit money bank
deposits rose very high, commercial bank lending to SMEs declined from
2004 to 2010. The gap between commercial bank deposits and its lending
to SMEs reveals the shift in focus from lending to SMEs to lending to
major investors (customers). One is made to ask, while the banking
sector is said to drive any economy, has Nigerian commercial banks
neglected SMEs, which is vital for the growth and development of the
Nigerian economy? Notwithstanding, it is interesting to note that
community/Microfinance bank (CMFB) lending to SMEs moved in the same
trend with its bank deposit. This implies that as community/microfinance
bank deposits increased, it’s lending to SMEs increased. Regardless of
the direct impact of community/microfinance bank on SMEs, SMEs still cry
for lack of funding and lending to SMEs in Nigeria is still poor. This
is so because their capital, reserve and deposit are very small and
insufficient to meet the needs of small and medium entrepreneurs.
1.3 OBJECTIVES OF STUDY
The primary objective of the study is to examine the effects of bank
recapitalization on small and medium scale enterprises in Nigeria.
Specific objectives of the study are:
- To determine the relationship between Commercial Banks and the performance Small Business Entrepreneurs in Nigeria.
- To determine whether bank recapitalization led to increase in funds for financing SMEs.
- To examine the accessibility of Small and Medium Enterprise Equity Investment Scheme (SMEEIS) funds to SMEs.
1.4 RESEARCH QUESTIONS
In-order to achieve the above stated objectives, the researcher formulated the following research questions:
- What is the relationship between commercial banks and the performance small business entrepreneurs in Nigeria?
- Does bank recapitalization increase funding for SMEs?
- How accessible are Small and Medium Enterprise Equity Investment Schene Funds to SMEs?
1.5 HYPOTHESIS OF THE STUDY
The following hypotheses are formulated in line with the objectives and research questions of the study:
Ho: There is no significant relationship between Commercial bank and the performance of Small Business Owners in Nigeria.
Hi: There is a significant relationship between Commercial banks and the performance of Small Business Owners in Nigeria.
Ho: Bank Re-capitalization has not led to the increase of funds to SMEs
Hi: Bank recapitalization has led to the increase of Funds to SMEs
Ho: Small and Medium Enterprise Equity Investment Scheme funds are not easily assessable to SMEs
Hi: Small and Medium Enterprise Equity Investment Scheme funds are easily assessable to SMEs
1.6 SIGINIFICANCE OF THE STUDY
Robust economic growth cannot be achieved without putting in place
well focused programmes to reduce poverty through empowering the people
by increasing their access to factors of production, especially credit.
The latent capacity of the poor entrepreneurs would be significantly
enhanced through the provision of microfinance services to enable them
engage in economic activities and be more self-reliant; increase
employment opportunities, enhance household income, and create wealth.
However, the lack of required financial support from the microfinance
banks to Micro Business operators in Lagos state has become a major
concern in Nigeria. Hence, this study shall be relevant to policy makers
in the areas of finding out the impact of micro financing on the small
scale investors. Also, this study shall enhance further research in the
1.7 SCOPE OF THE STUDY
The scope of this research work is the recapitalized commercial banks
and their SME customers in Nigeria. However, due to the fact that there
are many commercial banks with many SME customers, the research is
limited to Mainstreet Bank, Osun branch and some of their SME customers.
1.8 LIMITATIONS OF THE STUDY
Time and financial constraints were the major limitations of the
study. Since the researcher could not afford the cost of reaching out to
more banks, money became a challenge. The researcher was also engaged
in other school activities which also limited the time used for the
1.9 DEFINITION OF TERMS
- Economy: An economy is the total sum of product
and service transactions of value between two agents in a region, be it
individuals, organizations or states. An economy consists of the
economic system, comprising the production, distribution or trade, and
consumption of limited goods and services between two agents, the agents
can be individuals, businesses, organizations, or governments.
- Mergers and Acquisitions: Mergers and acquisitions
(abbreviated M&A) is an aspect of corporate strategy, corporate
finance and management dealing with the buying, selling, dividing and
combining of different companies and similar entities that can help an
enterprise grow rapidly in its sector or location of origin, or a new
field or new location, without creating a subsidiary, other child entity
or using a joint venture.
- Recapitalization: Recapitalization is a sort of a corporate reorganization involving substantial change in a company's capital structure.
- SMEs: Small and Medium Enterprises
- SMEEIS: Small and Medium Enterprise Equity Scheme
- Olaitan, L. 2006. An empirical evaluation of the corporate
strategies of Nigerian companies. Journal of African Business, 2(2),
- Iloh V. C. 2012. The Effect of Bank Consolidation on Small and Medium Scale Enterprises in Nigeria. Lagos: Longman Nigeria Plc.