THE ROLE OF BANKS IN FINANCING OF SMALL SCALE BUSINESSES IN NIGERIA

ABSTRACT

The major objective of the study is to ascertain the extent to which banks in Nigeria have helped to finance small scale businesses. The instrument of data collection is questionnaires and research questions which formed the source of primary data, while materials from various published articles, textbooks, journals, and newspaper formed the secondary data. The method of analysis is the use of tables, percentages, and chi-square. The major finding of the research is that the union bank of Nigeria plc has helped to finance small scale businesses period under review. The recommendation based on the finding is that in order to reduce the risk in small scale industry lending, the central bank of Nigeria and the government can do more than they are doing currently scheme. The study concluded that if the desired objective of using small scale businesses as catalysts of development is to be achieved than the role of union bank should be mutually supportive.

 

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND TO PROBLEM

The successive development plans of Nigeria have laid emphasis on the attainment of self-reliance.  The need for this national objective is because much is expected from individuals from the viewpoint of providing employment opportunities self-reliance in basic food and material production high per capita income, foreign exchange earnings and the production of industrial raw materials. Okporobie (1989:10) observes that Nigeria’s small scale business continued to decline despite the so-called priority given to the sector. However, the discovery by the central bank that this policy was not enough by it self led to the central bank request with effect from 1970/80 that all commercial banks must reserve a proportion of the minimum credit allocation to indigenous borrowers for small scale Nigeria enterprises.  The target prescribed in 1979 was ten percent (10%) which subsequently raised to sixteen percent (16%). Even though available data showed that the performance of Union bank against this directive has been disappointing. The central bank intends to spare no effort in ensuring that banks fully couple without compromising the smooth functioning of the nation’s banking system. He observed also, that without the development of small scale business in Nigeria, the nation’s quest for industrialization will certainly remain forever at stake. It is the opinion of the researcher that future development in our industrialization must address the basic issues of creating linkages without the economy to begin to produce real inputs to our manufacturing activities. Priority attention must, therefore, be given to these industries for which domestic inputs could easily be produced.  This will bring about agro-allied industries like food processing and other by-products. The objective should be to maximize the value-added in their processing and manufacturing as final goods immediately inputs. Nzewi and Oze (1985:56) observed that empirical evidence indicates that strong producer incentives to small scale industrialists are necessary not also only to meet the food requirement but also to provide growing input supplies and demand as a foundation for sustained industrial growth. The present economic constraint may well turn out to be a blessing in disguise to our industrialization effect particularly for the dynamic manufacturing sector.  For instance, the market determinate exchange rate through seeing with its result and high cost of imported inputs may serve as an impetus for an industrialist to intensify their search for local substitutes. Ekenyong and Nyong (1992) observed that small scale enterprises are regarded as an organic part of a viable structure for the attainment of meaningful economic development in developing economies like Nigeria. They are significantly more cost-effective in bringing about development than large enterprises because of the perceived linkage and multiplier effects that small scale enterprises have on the performance of the economy and economic growth in general.

 

Osayameh (1989) observes that the strength that makes small scale enterprises more amendable for assistance areas as follows.

1.    The personal commitment of the proprietor whose life savings usually form the start-up capital.

2.   Low initial capital outlay requirement

3.    Ease of entry and exit and prevalence of just minimal legal constraints

4.   Amenability to business advisory services because of their small size which makes then more responsive to improvement suggestions.

Olashore (1987) Observes that the four main sources of enterprise financing open to small scale industries in Nigeria are.

i.   Formal financial institutions such as commercial banks merchant banks, insurance companies, and the development bank.

ii.    Informal financial landlords, credit and savings associations “Jesus” friends and relations personal savings and.

iii.   Another financial scheme, NERFUND NEXIM

in 2001, there was an introduction of small and medium industries equity investment scheme (SEIS) in which N359 million was set aside to date by banks under small-medium industries equity investment scheme.

Through union bank small and medium scale enterprises (SMEs) department, the bank has remained in forefront of SMEs financing nations was extended to the SMEs as of 31st March 2004.

Small scale industry is any industry not exceeding N750,000 including working capital but excluding the cost of land.

It is also defined by the center for industrial research and development of Obafemi  Awolowo University Ile Ife as those industries whose total assets in plant, equipment, and working capital do not exceed N250,000 with not more than 50 employees.

 

1.2  STATEMENT OF THE PROBLEM

The problem of credit to small scale business may not necessarily be as a result of financing insufficiency but rather for some other reasons among which are.

i.  Insufficient preparation on the part of small scale entrepreneurs in their request for credit assistance.

ii.  Information gaps as to the range of funding institutions and scope of services available in these institutions

iii. Moreover, servicing small business accounts is relatively experience, risky and difficult to monitor with low turn over of account.

However, the parishioners in the sector small scale industry do not display competence in preparing a justification for their project.  It is are to see most of them coming up with cash flow projections, projected balance sheets, among others. They are based on personal rudimentary information and speculation.  At times when they seek the advice of consultants, the outcome that is made figures project based on assumptions that are most of their time unrealistic.

As a result, such proposals are outrightly rejected by banks.

There are suitable when credit demands in this sector are not in compliance with this government monetary policy and credit guidelines which must be adhered to by banks.

The researcher identifies this problem and considers it necessary to carry our study on them.

 

1.3  OBJECTIVES OF THE STUDY

The objectives of the study include:

a.  To ascertain the extent to which the union bank of Nigeria plc has helped to finance small scale business.

b. To identify the problems encountered by small scale industrialists in obtaining finance from the union bank of Nigeria plc.

c.  To evaluate various measures introduced to boost industrial production and its financing and how this has affected the realization of the set goals.

d. To determine the causing changes in small scale industrial financing by union bank of Nigeria plc.

e.  To make suggestions and recommendations based on the data generated by the study.

 

1.4  RESEARCH QUESTIONS

The critical appraisal to give answers to the following questions.

a.   To what extent has the union bank of Nigeria plc helped to finance small scale businesses?

b.  What are the problems encountered by the small scale industrialists in obtaining finance from the union bank of Nigeria plc?

c.  what are the various measures introduced to boost industrial production and its financing and how this has affected the realization of the set goals?

d.  What are the causes of changes in small scale industrial financing by union bank of Nigeria plc?

e.  Does any linear relationship exist between lending to small scale businesses and economic recovery and self-reliance on the economy?

 

1.5  RESEARCH HYPOTHESIS

a.    There is no linear relationship between lending to small scale businesses and economic recovery and self-reliance of the economy.

b.    there is no relationship between union bank of Nigeria plc lending to small scale businesses and the attitude of these customers

 

1.6  SCOPE OF STUDY

The scope of the study is the Union Bank of Nigeria.  It does not cover the role of Union bank in financing medium and large scale businesses.

 

1.7  SIGNIFICANCE OF THE STUDY

This study will highlight problems associated with the role of Union bank in financing small scale industry in Nigeria.

It will give information on the possible areas for improvement.

Furthermore, the study will help commercial banks to assess and appraisal their role in financing small scale industry in Nigeria.

Moreover, suggestions and recommendations made in this paper will help policymakers formulate new economic policies to maintain or modify the existing one.

It will equally serve as a guideline to researchers who may wish to decide with this study in the future.

It will also help small scale entrepreneurs to make sufficient preparation in their request for credit assistance.

It will guide the entrepreneurs in making credits demands that are compliance with government monetary policy.

The last but not least it will help the entrepreneurs to displayed competence in preparing a justification for their project. It is rear to see most of them coming up with cash projections, projected balance sheets.

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