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COMMERCIAL BANK LENDING TO SMALL AND MEDIUM SCALE ENTERPRISES (A CASE STUDY OF UNION BANK OF NIGERIA PLC, ENUGU)

COMMERCIAL BANK LENDING TO SMALL AND MEDIUM SCALE ENTERPRISES

(A CASE STUDY OF UNION BANK OF NIGERIA PLC, ENUGU)

ABSTRACT

Various criteria had been used to define small and medium scale enterprises in different countries of the world. In Nigeria, small and medium scale enterprises are defined as those in the industrial sector, which exclude general commerce, whose total capital investment does not exceed N2.5 million (including land and working capital or whose maximum turnover is N12.5 million annually).

These enterprises are very essential and important for the economic development of any economy. They serve as sources of raw materials for large-scale enterprises, the channel of employment, and rural development. As a result, the monetary authorities through the Central Bank of Nigeria (C.B.N.) credit guideline-directed the commercial banks to give a certain percentage of their total assets to the small and medium scale enterprises as credit.

The project aims at examining the extent the commercial bank has completed with the guideline in providing credit to the small and medium scale enterprises, if they have complied, how adequate are financial assistance and what the impediments on their way are… (Scroll down for the link to get the Complete Project Material)

COMMERCIAL BANK LENDING

INTRODUCTION

Background of the Study

So much had been said and written about commercial bank lending to small and medium scale enterprises. One still wonders why the small and medium scale enterprises are ever faced with the age-old syndrome of inadequate funds. The presence of the small and medium scale industries is not found in large numbers in every city, towns, and villages as one would have thought, at least judging by the preponderance of attention it had been enjoying for a long time now.

Yet the problem is regarded as an ever-flagged issue even without any real practical solution in sight. Due to the relevance of the small and medium scale enterprises to the rapid economic development of the country, I consider any research into how to proliferate the economy with relevant small and medium scale enterprises very essential to our survival and growth; hence the promotion of this research work.

Statement of Problem

The federal and state government has recognized the importance of small and medium scale enterprises (SME) in accelerating the economic development of the nation. As a result, the monetary and fiscal policy guidelines since 1990 had directed commercial and merchant banks to increase their minimum lending limit to the small and medium scale enterprises to 20 percent of their total credit outstanding.

The loan shall be strictly for activities in the industrial sector. Prior to 2004, the prescribed minimum was 16 percent… (Scroll down for the link to get the Complete Project Material)

Research Objectives

The relevance of the small and medium scale enterprises to the rapid economic development of the country is very fundamental to our survival as a people. The commercial banks which number up to 120 in the country with branches spread all over the country do not provide adequate credit to the small and medium scale enterprises.

However, the importance of SMEs to the development of any country’s economy cannot be overemphasized.

This write-up is aimed at achieving the following objectives:

  • To highlight the different sources of finance available to small and medium scale industries in Nigeria… (Scroll down for the link to get the Complete Project Material)

COMMERCIAL BANK LENDING

LITERATURE REVIEW

Banking has to do with people and their money or their lack of it, either temporary or permanent. The people who use banks are called ‘customers’, a term which implies something slightly different from a ‘client’. Perhaps the term ‘customer’ emphasizes the need for service, as in a shop and certainly in the present age banking is thought of as a service industry rather than as a profession.

A banker is ‘anybody’ of persons whether incorporated or not, who carry on the business of banking. “Bank” means any firm, incorporated company or society, carrying on banking business as approved by the minister. J.W Gilbert defined a banker “as a dealer in the capital, or more properly, a dealer in money. He is an intermediate party between the borrower and the lender. He borrows of one party and lends to another”… (Scroll down for the link to get the Complete Project Material)

HISTORICAL BACKGROUND AND DEVELOPMENT IN COMMERCIAL BANKS

The end of the barter system due to its attendant problems led to the introduction of the medium of exchange called money to facilitate trade. The use of many different commodities or coin money did not help the early establishment of banking companies. Metal coins from France, America, Spain, and Mexico circulated freely with cowries, brass, copper bracelets, and Manilla as money especially in the southern part of Nigeria.

This multiplicity of coins and commodity money that circulated freely prior to 1885 did not help in the valuation of goods and services. To eradicate the problem of multiplicity of coins and commodity money, the British government in exerting its influence in the interior of Nigeria, demonetize the foreign coins and community money in 1880 and replace them with the British silver coins. It must be made clear at this point that the demonetizing was not an easy task since they operated in Nigeria till 1948… (Scroll down for the link to get the Complete Project Material)

SOURCES OF FINANCE TO SMALL AND MEDIUM SCALE INDUSTRIES

Finance sourcing refers to the various ways through which capital is raised for business enterprises. The sourcing could be done either internally or externally. Internal sourcing requires sourcing involves a third party. Funds could be provided by entrepreneurs by introducing capital or providing assets for the business. As for the third party, government, financial institutions like banks and individuals provide loans, grants, and subsidies for the enterprise.

Internal Sources

  • Personal Savings:

Personal savings is defined by Bullion as “fund accumulated from personal saving.” It forms the primary part of the fund to most enterprises or entrepreneurs setting up small and medium scale businesses… (Scroll down for the link to get the Complete Project Material)

External Sources

As stated above, the external sources of finance are sources of fund which the firm resorts to through the third parties. This is as a result of the inadequacy of internal sources, that is where internal sources fail to provide the needed finance for business organizations and also fail to meet the seasonal demand of the business. These sources are further divided into short and long term sources.

The Short Term Sources of Finance

  • Deposit from Customers:

This is a system in which payment is made awaiting the provision of goods or services at another time. According to Nua (2007) deposit represents funds received by a firm to supply goods and services at the agreed future date… (Scroll down for the link to get the Complete Project Material)

COMMERCIAL BANK LENDING

RESEARCH METHODOLOGY

Introduction:

Academic research is often undertaken to maintain, further, and promote knowledge. In doing so, the research seeks to delve into the unknown, seeking answers to questions and solutions to problems. In-so-far as this involves circumstances, ideas and at times guesses, gut feelings and definitions all of which must be submitted to scrutiny and subsequently, agreement.

Research consequently opens the door for debate, especially about claims on contribution to knowledge as well as about methods and meanings.

Data Collection Techniques

With the hindsight of a thorough literature review that has been influenced by the research philosophy of the researcher, it would have been clear that different researchers have adopted varying techniques in studying apparently similar projects what any research tries to do is to remove bias in his data collection and analytical approach such that inferences and conclusions drawn from the research work will be a true reflection of the population.

The main techniques used in this research work are discussed below:

(Scroll down for the link to get the Complete Project Material)

RESEARCH FINDINGS AND DISCUSSION

QUESTION 3: Educational qualification

Table 4.1a: Educational background

RESPONSES

FREQUENCY

PERCENTAGE (%)

SSCE/WAEC/GCE O’LEVEL

NCE/OND/GCE A’LEVEL

2

4

B.Sc/HND

30

60

Masters

17

34

Professional qualification

1

2

Total

50

100

Source: fieldwork

QUESTION 4: How long have you worked with the bank?

Table 4.1b Working Experience

RESPONSES

FREQUENCY

PERCENTAGE (%)

0 – 5 years

18

36

above 5 years

29

58

above 20 years

3

6

Total

50

100

Source: fieldwork

QUESTION 5: Have you been or are you directly involved in granting of loans in your bank?

Table 4.1c: Involvement with lending

RESPONSES

FREQUENCY

PERCENTAGE (%)

YES

35

70

NO

15

30

Total

50

100

Source: fieldwork

Tables 4.1a, 4.1b, and 4.1c show the educational qualification, the number of years spent, and the involvement in granting loans of the respondents respectively. This information was used to verify the authenticity of the answers or responses given by the respondents in the questionnaire.

Table 4.1a shows a very high level of the educational background of the respondents as it is seen that only 4% have qualifications below B.Sc/HND, while 60%, 34%, and 2% have B.Sc/HND, Masters Degree, and professional qualifications respectively.

58% of the respondents have worked for more than 5 years, 6% for more than 20 years and 36% worked for less than 5 years…. (Scroll down for the link to get the Complete Project Material)

Analysis and Interpretation of Data from Small and Medium Scale Industries

QUESTION 2: FORM OF OWNERSHIP

Table 4.15

RESPONSES FREQUENCY PERCENTAGE (%)
Sole proprietor

30

75

Partnership

3

7.5

Company

7

17.4

Total

40

100

A large number of respondents expressed an overwhelming preference for the sole proprietorship form of business. From the above table, it is shown that 75% favor sole ownership while 17.5 are owned by private companies only 7.5% of the businesses are joint partnerships which makes it the most unpopular form of ownership.

This might be a result of the entrepreneurs’ mistrust for each other so they avoid partnerships. This will definitely result in the trend of the low capital base as indicated by the answer given to question 5 of the industrialist’s questionnaires. The answer showed that most… (Scroll down for the link to get the Complete Project Material)

SUMMARY, CONCLUSION, AND RECOMMENDATIONS

Summary

This study sheds light on the problems, roles, and importance of small and medium scale industries in the economic development of any country and Nigeria in particular. An attempt was made to evaluate the role of commercial banks of Nigeria through financing these industries.

The other sources of finance available to small and medium scale industries were also enumerated. Issues raised by both the bank and the SMEs were analyzed and a summary of the findings was discussed in chapter four… (Scroll down for the link to get the Complete Project Material)

Conclusion

From the analysis of the results in chapter four, one can deduce that the accessibility to the credit market for small and medium scale businesses in Nigeria is extremely difficult due to the fact that the macroeconomic instability and uncertainty in the business environment have forced banks to lend short to SMEs.

Also, such facilities i.e. overdrafts and short term loans are made available at a very high-interest rate of over 26 percent and they are heavily collateralized. In a situation in which SMEs are mainly dependent on bank loans, this situation could be very disastrous… (Scroll down for the link to get the Complete Project Material)

Recommendations

There is no way Nigeria can achieve sustainable funding of small and medium scale enterprises by commercial banks and other agencies such as NERFUND, NIDB, etc established for the funding purposes until both the external and internal problems of SMEs are solved.

Banks react to the stimulus of the macroeconomic environment and as long as the environment remains unconducive, banks will continue to exhibit risk-averse behavior irrespective of the programs put in place to address this problem including the SMIEIS program was already highlighted.

The following recommendations, in my opinion, will help improve the growth and development of the SMEs:

  • The government should cut down the interest rate since interest rates are not favorable to investors in the sense that the cost of funds could undermine profits and cause a loss of the investment. Interest rates in Nigeria officially are as high as 6% and this has a negative impact on the ability of small and medium scale industries to obtain credit from the banks… (Scroll down for the link to get the Complete Project Material)

COMMERCIAL BANK LENDING

BIBLIOGRAPHY

  1. Adekanye F: The Element of Banking in Nigeria. F and A Publishers Ltd. (1986). (Commercial Banks)
  2. Annual Report and Accounts: Union Bank of Nigeria Plc 2003. (Commercial Banks)
  3. Ashonibare M.D: The Role of Small and Medium Scale Industries in Development Planning IDC Zaria (1990).
  4. Doyle, E.P. & Kelly, J.E: Practice of Banking: Macdonald and Evans, Third Edition 1981. (Commercial Banks)
  5. Exejelue A.C. and Ogwu: Basic Principle of Managing Research Projects. African Feb. Publishers, Onisha (1990). (Commercial Banks)
  6. Femi A: The Element of Banking in Nigeria: Third Edition. (Commercial Banks)
  7. Femi A: The Nigeria Banking Handbook: Graham Burn Publishers, 1984. (Commercial Banks)
  8. H.A. Saliu & J.O. Oyebanji: A guide on Research Proposal and Report Writing. University of Ilorin Press, October, 2004. (Commercial Banks)
  9. K.K. Ogujiuba, F.K. Ohuche & A.O. Adenuga: Credit Availability to Small and Medium Scale Enterprises in Nigeria: Importance of new capital base fo banks. Bullion Vol. 28 No. 4 October- December, 2004. (Commercial Banks)
  10. Lot, J.Y: Credit Liberalization: The rate of commercial banks; Nigerian Institute of Bankers Annual Seminar Lagos (pp. 104-115). (1980). (Commercial Banks)
  11. Majule E.O.O.: The Role of Financing Institutions in the Promotion and Development of Small and Medium Scale Enterprises in Nigeria. A paper presented at a workshop of Nigerian Universities Engineering Students Association – Uni- Ilorin. (Commercial Banks)
  12. Obidigbo Chike: Financing Small and Medium Enterprises in Nigeria Business Times Magazine March 28 (1990). (Commercial Banks)
  13. Obidigbo Chike: Small-Scale Industrial Outlook Magazine March 11–17-1990 (1990). (Commercial Banks)
  14. Onipe, Michael: An Appraisal of Methods of Financing Small Scale Business in Nigeria (1988). (Commercial Banks)
  15. Osuala, E.C: Introduction to Research Methodology African. Feb. Pubishers Ltd. Onisha, Nigeria (1987). (Commercial Banks)
  16. S.A Aluko Etal: Small-scale Industries Mid Western State, of Nigeria Ile-Ife. The Industrial Unit, University of Ife (1973). (Commercial Banks)

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