The impact of Banking Sector Reforms on
Small and Medium Scale Enterprises is a phenomenon that needs proper and
adequate attention in the wake of global economic depression affecting
the world generally as proper attention can put a full stop to problem
of unemployment confronting Nigeria as a whole.
The study conducted and assessed the
impact of banking reforms on Smal1 and Medium Scale Enterprises in Lagos
State, a case study of Otto - Awori, Local Government Development Area.
And to show the relationship that exist between capital and growth of
Small and Medium Scale Enterprises.
The project reviewed the nature, causes
and effect of loan delinquency by Nigeria banks towards Small and Medium
Data were predominantly gathered, using
questionnaire administered on 35 selected Smal1 and Medium Scale
Enterprises in Otto - Awori Local Government Development Area.
The data collected were analyzed using
the descriptive and inferential statistical analysis; chi-square
statistic was precisely employed in the analyzing of the data collected.
This study revealed that reforms of
banks have not helped small and medium scale enterprises in terms of
loan disbursement to them so as to facilitate their going concern as a
However, this study concluded that the
government should proffer solution to the challenges and constraints
militating against SMEs and to have a better understanding of the
lending practices of banks which ultimately prevent banks from expanding
TABLE OF CONTENTS
Table of Content
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Significance of the Study
1.5 Research Hypothesis
1.6 Scope of the Study
1.7 Limitation of the Study
1.8 Definition of Terms
CHAPTER TWO - Literature Review
2.1 Brief History of Modern Banking in Nigeria
2.2 Facilities Available in Financial System, Its Problems and Prospects
2.3 Banking Sector Reforms in Nigeria
2.4 Need for a Stronger Banking Sector
2.5 Overview of Small and Medium Scale Enterprises
2.6 Challenges of Small and Medium Scale Enterprises
2.7 Sources of SMEs Finance
2.8 Bank Lending Policies towards SMEs
2.9 Loan Deliquency and SMEs Financing
Design of the Study
Population Sample of the Study
Method of Data Collection
Data Analysis Techniques
Sources of Data Collection
Research Methodology and Procedures
4.1 Analysis of Data According to Respondents Classification
4.2 Analysis of Data According to Research Questions
4.3 Analysis of Data According to Test of Hypothesis
CHAPTER FIVE - Summary, Recommendation and Conclusion
5.1 Summary of Findings
For both developing and developed
countries, small and medium scale firms play important role in the
process of industrialization and economic growth. Apart from increasing
per capital income and output, SMEs 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 role played by
SMEs, notwithstanding its development is everywhere constrained by
adequate funding and poor management. The unfavorable macro-economic
development has also been identified as one of the major constraint
which most times encourage financial institutions to be risk - averse in
funding small and medium scale businesses. The reluctance on the part
of financial institutions to fund SMEs can be explained in terms of
insufficient capital base of banks and information asymmetry that often
exists between SMEs and lending institutions.
In Nigeria, the financial system is
dualistic and consists of formal and informal systems. The informal
financial system comprise of the institutions such as money lenders,
rotating savings and credit associations for example, that are virtually
outside the control of the established framework. The formal financial
system refers to an organized, registered and. regulated sector of the
financial system. The formal financial system comprises the banking
sector, non - banking sector, and the financial markets. Structurally,
the financial systems as at December 2008 comprises the Central bank of
Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), The
Security and Exchange Commission (SEC), the National Insurance
Commission (NAICOM), 25 deposit money banks, 6 development banks, 757
Micro - Finance Banks, 1 stock exchange, l commodity exchange, 5
discount houses, 9 primary mortgage banks, 112 finance companies and 581
stock brokers (CBN, 2008).
However, the formal sector is largely
dominated by the deposit money banks in Nigeria in terms of total
deposits, credit and total assets. In attempt to make the banking sector
sound, stable, reliable, dependable and internationally competitive,
the Central Bank of Nigeria (CBN) announced on July 6, 2004 that with
effect from January 1, 2006, the minimum paid up capital should be N25
billion. To meet the N2S billion capitalizations, banks were allowed to
merge, consolidate or even acquire another bank. At the end of the
consolidation exercise, out of the 89 existing commercial banks, 25
groups of banks emerged, while 14 banks that could not merge were set
for liquidation. To raise the funds, the banks used strategies such as
merger, acquisition, floating of new shares and so on.
The hope for consolidation is that,
banks would be able to mobilize a large amount of funds to provide loan -
able funds to the productive sector. The sector is dominated by the
small and medium enterprises in Nigeria. Thus, the tendency is for the
SMEs to grow into large and conglomerate firms. The consolidation will
enable banks to meet the minimum capital adequacy ratio of ten percent,
as prescribed by the Basel Capital Adequacy Accord. The ten percent
ratio which relates capital to credit implies that for every N100
credit, a bank needs N10 capital.
1.1 STATEMENT OF PROBLEM
Small and Medium Enterprises in Nigeria
have not performed creditably well and hence have not played the
expected vital and vibrant role in the economic growth and development
of Nigeria. This situation has been of great concern to the government,
citizenry, operators, practitioners and the organized private sector
groups. Year in, year out, the government at federal state and even
local levels, through budgetary allocations, policies and pronouncements
have signified interests and acknowledgement of the crucial role of the
SMEs Sub - sector of the economy and hence made policies for energizing
the same. There have also been fiscal incentives, grants, bilateral and
multilateral agencies supports and aids as well as specialized
institutions all geared towards making the SMEs sub - sector vibrant.
Just as it has been a great concern to
all and sundry to promote the welfare of SMEs, it has also been a great
cause of concern to all, the fact that the vital sub - sector has fallen
short of expectation. The situation is more disturbing and worrying
when compared with what other developing and developed countries have
been able to achieve with their SMEs. It has been shown that there is a
high correlation between the degree of poverty, hunger, unemployment,
economic wellbeing (standard of living) of the citizens of countries and
the degree of vibrancy of the respective country's SMEs. If Nigeria
were to achieve an appreciable success towards attaining Millennium
Development Goals for 2020, one of the sure ways 'would be to vigorously
pursue the development of its SMEs. Some of the key millennium
Declaration Goals like minimizing the proportion of people living in
extreme poverty, suffering from hunger, without access to safe water,
reducing maternal and infant mortality and enrolment of all children in
primary school by 2020 may indeed be a false idea unless there is a'
turnaround of our SME's fortune sooner than later. The time is now to do
something surgical to the situation of our SMEs given the aggravating
level of poverty in Nigeria and the need to meet up with the Millennium
The decreasing level of Nigeria's per
capital income as well as low level of agricultural, industrial and
infrastructural development (irrigation, roads and railway networks) all
represent disturbing indices, which also contributes to the dismal
performance and contribution of our SMEs. In spite of the fact that SMEs
have been regarded as the defensive wall for employment generation and
technological development in Nigeria, the sector nevertheless has had
its own fair share of neglect with associated unpleasant impact on the
1.2 OBJECTIVE OF THE STUDY
The research is intended to identify the
problems, challenges, and constraints militating against the success of
SMEs and also make appropriate recommendations for re - addressing and
eliminating them so that the SMEs could occupy their pride of place in
the Nigerian economy and hence play vital role they are expected to play
in the economic growth and development of Nigeria. In order to achieve
this, the research will attempt to:
(1) Identify the characteristics of SMEs in Nigeria.
(2) To determine their sources of funds (formal or informal institution
(3) Identify the constraints facing the SMEs In sourcing funds.
(4) Make appropriate recommendations for solving or at least alleviating the identified problems and challenges of SMEs.
1.3 SIGNIFICANCE OF THE STUDY
The study is expected to make
theoretical and empirical contribution to SMEs and banking services.
This study will provide basis for closer scrutiny of banking
formulations and its relevance to developing SMEs in less developed
countries. It will be of immense importance to infant industries in
recognizing steps put in place by government and stakeholders to develop
the SMEs sector in terms of finances and other issue affecting them
which has never been identified by SMEs in the time past.
Furthermore, government policy makers
and financial institutions as well as economist will find it as useful
information for efficient policy formulation and how best to tackle the
present economic problems. Also, student of higher learning institutions
will find it informative based on the latest development of financial
sector to improve SMEs and for further research study.
1.4 STATEMENT OF RESEARCH QUESTIONS
In order to achieve the objective of this research study, the following questions become relevant.
(a) Has the merger acquisition,
capitalization and recapitalization and re - capitalization of banks
helped in financing small and medium scale enterprises better.
(b) Has the establishment of
microfinance banks enhanced the accessibility of small scale buttress to
soft conditional loans as against tight affordable conditional
collateral loans demanded?
1.5 STATEMENT OF RESEARCH OBJECTIVE
The primary objective of this research
is to identify the problems, challenges and constraints militating
against SMEs and to have a better understanding of the level of loan
delinquency among SMEs and the lending practices of banks, which
ultimately prevent banks from expanding SMEs portfolio.
However, the statement of research objective are
(i) The effectiveness of bank funding on SME
(ii) The impact of baking reforms on economic growth and development through the productive sector which include small and medium scale enterprises
(iii) The impact or relevance of SMEs growth on the reduction of unemployment in Nigeria.
1.6 RESEARCH HYPOTHESIS
According to Nzeribe (1995) hypotheses
are statements of facts. In order to effectively accomplish this study,
the following hypotheses are formulated for the study.
(1) Ho: The reforms of banks do not help in financing small and medium scale enterprises in Lagos state.
Hi: The, reforms of banks help in financing small and medium scale enterprises in Lagos State.
(2) Ho: Bank reform have not succeeded in achieving economic growth and development through small and medium scale enterprises
Hi: Bank reforms have succeeded in achieving economic growth and development through small and medium scale enterprises.
1.7 SCOPE OF THE STUDY
The scope of the study is to appraise
the impact of bank reforms on Small and Medium Scale Enterprises in
Lagos state. The study will include formal and informal financial
institutions as the professional finance lease to small and Medium Scale
Enterprises, the research covers 35 selected Small and Medium Scale
Enterprises in Otto Awori Local Government Council Area of Lagos State.
1.8 LIMITATION OF THE STUDY
Certain limitations are encountered in the course of this study, key among them are:
(1) Unavailability of data: One of
the greatest challenges the researcher encountered in this study relates
to access to and collection of hard data due to extreme data gaps and
(2) Time and funds: Another
limitation of this study relates to time, funds and logistics
constraints which limited the intensity of the spread or area coverage
of the study. Even though Small and Medium Scale Enterprises are spread
throughout the length and breadth of Nigeria though with negligible
concentrations in some states and less in urban areas, this study
focused largely on Small and Medium Scale
Enterprises in Lagos and its environs
where there is a relatively high concentration of about eighty percent
(80%) of Small and Medium Scale Enterprises.
(3) Resistance of respondents: the
researcher was also limited by the resistance of some respondents to
complete the questionnaire promptly and those who even failed to
complete them. The researcher however faced some difficulties in
sourcing for relevant data due to some uncooperative attitude of the
custodian of data.
1.9 DEFINITION OF TERMS
(1) Micro Enterprises: A firm whose
total cost including working capital but excluding cost of land is not
more than ten million naira (N10, 000, 000) and or with a labour size of
not more than thirty (30) full time workers and/or turn over less than
N2, 000, 000 (two million) naira only.
(2) Small Enterprises: An enterprise
whose total cost including working capital but excluding cost of land is
between ten million naira (N10, 000, 000) and the one hundred million
(100, 000, 000) and/or a work force between eleven (11) and seventy (70)
full time staff and/or with a turn over of not more than ten million
naira (N 10, 000, 000) in a year.
(3) Medium Enterprises: A company
with total cost including working capital but excluding cost of land of
more than one hundred million naira (N100, 000,000) and/or a staff
strength of between seventy one (71) and two hundred (200) full time
workers and/ or with annual turnover of not more than twenty million
naira (N20, 000, 000) only.
(4) Large Enterprise: Any enterprise
whose total cost including working capital but excluding cost of land is
above three hundred million naira (300, 000, 000) and/or a labour force
of over two hundred (200) workers and/or annual turnover or more than
twenty million only.
(5) SMEs: Small and Medium Scale Enterprises are those firms which satisfy the definition given above
(6) Bank: A bank is a financial
institution where money and valuables are kept for safety purpose. Lawal
1982, saw a bank as a dealer in money and credit holding itself one to
receive from the public deposit payable on demand by cheques.
(7) Bank Deposit: this refers to total money owned by it bank to all and sundry customers.
(8) Loan: This refers to sum of money given to a person who is a customer to the bank after all requirements have been met.
(9) Economic Development: This can be
described as a process whereby the level of national income or per
capital income increase over a period of time.
(10) Economic Growth: this can be
described as the process where production capacity of an economy
increase over a given period leading to a rise in the level of National