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TOPIC : ROLE OF COMMERCIAL BANKS IN FINANCING
SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA (1986
TO THE STUDY
Interest in the role of Small and Medium Scale Enterprises
(SMEs) in the development process continues to be in
the forefront of policy debates in developing countries.
The advantages claimed for Small and Medium Enterprises
(SMEs) are various, including: the encouragement of
entrepreneurship (Safiriyu and Njogo, 2012; Ayozie and
Latinwo, 2010; Ayesha, 2007); the greater likelihood
that SMEs will utilise labour intensive technologies
(Agwu and Emeti, 2014; Salami, 2003, Muritala et al.
2012) and thus have an immediate impact on employment
generation (Ayozie and Latinwo, 2010; Etuk et al. 2014;
Agwu and Emeti, 2014; Aigboduwa and Oisamoje, 2013;
Dimoji and Onwuneme, 2016); they can usually be established
rapidly and put into operation to produce quick returns;
SMEs development can encourage the process of both inter-
and intra-regional decentralization (Ogujiuba et. al.,
2004); and, they may well become a countervailing force
against the economic power of larger enterprises (Salami,
2003). More generally the development of SMEs is seen
as accelerating the achievement of wider economic and
socio-economic objectives, including poverty alleviation
(Agwu and Emeti, 2014; Etuk et al. 2014; Safiriyu and
Njogo, 2012; Ayozie and Latinwo, 2010; Udechukwu, 2003).
Finance has been viewed as a critical element for the
development of SMEs. It is worth mentioning that firms
depend on a variety of sources for their finance. These
includes internal and external; formal and informal.
However the relationships among these sources and their
effects on investment remain unclear in the literature.
In the case of SMEs, bank credit or loan is major alternative
of external funding (James and Ashamu, 2014). Previous
studies have decried the limited access to external
financial resources available to smaller enterprises
compared to larger organisations and the consequences
for their growth and development (Gbandi and Amissah,
2014; Omika, 2014; Yahaya, 2015; Akanbi, et al. 2016
etc). According to Valverde et al (2005) bank credit
play a crucial role in providing external financing
to Small and Medium Scale Enterprises (SMEs). But in
Nigerian context, this crucial source of finance for
Small and Medium Scale Enterprises is apparently non-functional
(Kadiri, 2012). This is evident in the ratio of loans
to Small Scale Enterprises to Commercial banks’
total credit, which shows that a meager 0.07% of commercial
banks’ total credit was granted to Small Scale
Enterprises in 2016 (CBN, 2016). More worrisome is the
fact that this ratio has been falling over the years
and continued unabated in the post-consolidation era
(Iorpev, 2012). Berg and Fuchs (2013) attribute this
trend to the high interest rates on Government securities
which serves as a disincentive to intensify lending
to Small Scale Enterprises (SMEs).
Typically, SMEs face higher transactions costs than
larger enterprises in obtaining credit. Lee (2004) further
argues that poor management and accounting practices
have hampered the ability of SMEs to raise finance.
Information asymmetries associated with lending to small-scale
borrowers have restricted the flow of finance to SMEs
(Berger and Udell, 2004). SMEs often operate at such
a low scale that is unattractive to banks (Ugoani and
Dike, 2013). Many of them are unincorporated and banks
are not forthcoming in investing in a multiplicity of
small ventures that are scattered all over the country.
Besides, SMEs are mostly family businesses and they
are therefore reluctant to open their businesses up,
especially to the banks that they regard as intruders.
Information such as financial accounts, business plans
and feasibility studies which should be provided to
external financiers is often lacking and when available,
it lacks details and rigor. The concomitant effect is
that less financial facilities are made available to
SMEs by banks. In spite of these claims however, some
studies show a large number of SMEs fail because of
non-financial reasons (Lawrence, 2003; Wattanapruttipaisan,
2003; Asaolu et al, 2005). For instance most entrepreneurs
in Nigeria lack the appropriate management and business
skill to turn their business around.
The key problem facing most Small and Medium-Scale Enterprises
(SMEs) is inadequate finance; whether for the establishment
of new industries or to carry out expansion plans. The
bulk of commercial bank lending to industries is working
capital which goes to well-entrenched blue-chip enterprises
which have enough bargaining power to negotiate better
borrowing terms. The negative bias against SMEs was
demonstrated by commercial banks’ preference to
pay penalty rather than meet the 20% target lending
to Small and Medium Scale Enterprises (SMEs) by making
risky investments when the Central Bank’s credit
guidelines were in force. It is therefore not surprising
that their lending to Small and Medium Scale Enterprises
(SMEs) drastically declined after the abolition of the
guidelines in 1996.
The inability of SMEs to attract bank credit or resources
has hindered or stifled their growth. The reasons for
this inadequate fund can be attributed to the following
• High rate of inflation that led to the vast
depreciation of Naira exchange rate, thus making it
difficult for most Small and Medium Scale Enterprises
to obtain required inputs for expansion.
• Low level of savings in the economy, which leads
to low capital formation.
• High rate of interest charged on loans, which
scared off potential small and medium scale entrepreneurs.
Inability of specialized financial institutions such
as the Bank of Agriculture (BOA), Bank of Industry (BOI),
Small and Medium Scale Enterprises Development Agency
of Nigeria (SMEDAN) etc, to provide for their funding
because of the peculiar problems with these specialized
institutions which make it impossible for them to provide
enough fund for the Small and Medium Scale Enterprises.
Therefore, this study seeks to evaluate the role of
commercial banks in Small and Medium Scale Enterprises
(SMEs) financing in Nigeria.
The main objective of this study is to evaluate the
financing of Small and Medium Scale Enterprises in Nigeria
taking into consideration various conditions such as
economic, political, social, psychological etc under
which small-scale enterprises operate.
In view of the above, this study intends to find out
(i) To identify the economic potential of Small and
Medium Scale Enterprises in Nigeria.
(ii) The role of commercial banks in the financing Small
and Medium Scale Enterprises in Nigeria.
This research work shall be guided by the following
1. What role do Small and Medium Scale Enterprises play
in the economic growth and development of Nigeria?
2. What role do commercial banks play in the development
of Small and Medium Scale Enterprises in Nigeria?
H0 - That there is no relationship between Gross Domestic
Product and the operations of Small and Medium Enterprises
H1 - That there is relationship between Gross Domestic
Product and the operations of Small and Medium Enterprises
H0 - That there is no relationship between the loan
granted to Small and Medium Enterprises and the interest
rate in Nigeria.
H1 - That there is relationship between the loan granted
to Small and Medium Enterprises and the interest rate
Econometric procedure shall be adopted in the course
of this research work. The Ordinary Least Square (OLS)
technique will be employed in obtaining the numerical
estimates of the coefficients in different equations.
The data for this study would be obtained mainly from
secondary sources, particularly from Central Bank of
Nigeria (CBN) and Bureau of Statistics (BOS) publications.
The research would be based on the relationship between
the loan granted to Small and Medium Scale Enterprises
by commercial banks, interest rate of commercial banks
and the real Gross Domestic Product of the country with
data covering the fiscal year between 1986 and 2016.
gdp = a0 + a1Lsse + Ui
Where gdp - Gross Domestic Product
Lsse - Loan granted to Small scale enterprises by Commercial
a0 & a1 - Parameters
Ui - Stochastic Variable.
Lssebank = b0 + b1 i + Ui
Where Lssebank - Ratio of loan granted to Small scale
enterprises to total credit of Commercial banks
i - Average interest rate of Commercial banks
b0 & b1 - Parameters
Ui - Stochastic Variable.
OF THE STUDY
Small and Medium Scale Enterprises in Africa rely largely
on own savings, not only to grow but also to innovate,
firms often need real services support and formal finance
assistance, failing which under-investment in long term
capabilities (training and R & D) may result (Oyelaran-Oyeyinka,
2003). This study is significant because it would help
to evaluate the operations of a vital segment of the
industrial sector – Small and Medium Scale Enterprises,
which have been identified as having very high potential
in promoting economic growth and development (Oni and
Daniya, 2012). The evaluation shall be done with special
focus on their financing thereby adding to the existing
literature on the subject matter.
OF THE STUDY
This research work focuses on the financing of Small
and Medium Scale Enterprises (SMEs) in Nigeria paying
special attention to the role of commercial bank credit
in the development of Small and Medium Scale Enterprises.
Although there are other types of banks that grant credit
facilities to Small and Medium Scale Enterprises in
Nigeria, the analysis in this study focuses on commercial
banks only. The research intends to study the essential
problems encountered by Small and Medium Scale Enterprises
and suggest ways by which they can be adequately and
Most of the information and data needed for the study
would be gathered from existing literature and from
relevant government agencies such as the Central Bank
of Nigeria, National Bureau of Statistics (NBS) etc.
The estimation period is restricted to the period between
1986 and 2016 due to non-availability of needed data.
OF THE STUDY
This study shall be divided into five chapters. In Chapter
one, which is the introductory part; the background
of the study, the statement of the research problem,
the objectives of the study and the methodology to be
adopted shall be discussed. Chapter two will deal with
the literature review. The methodology analysis shall
be examined in chapter three. This would also include
models specification. Data presentation, analysis and
interpretation will be covered in chapter four while
the concluding part of the research work will be chapter
five where in a nutshell the summary, the conclusion
and the recommendations would be discussed.
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Vol. 6, no. 14, pp. 137-146.
- Fifteen Thousand Naira (Non-Negotiable)
Regression Data and Results are included
scale enterprises, financing of small and medium scale
enterprises, commercial banks
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