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FINANCING THE COMMERICAL BANKS ENTERPRISES IN SMALL AND MEDIUM SCALE UNIT

ABSTRACT

The study examined the role of commercial banks in financing small and medium size businesses in Nigeria. The main objective of the study is to examine the role of commercial banks in financing SMEs in Nigeria. Structured questionnaire were distributed to the respondents which includes the commercial banks staff and selected SMEs staff in Anambra State Nigeria. Three research hypotheses were tested using the chi-square. However, the 109 questionnaire administered to the bankers and SMEs were analyzed and presented in tables with the use of percentage and chi-square method. Therefore, the study found that small and medium size businesses encounter problem in the procurement of loans from commercial banks; also commercial banks have contributed immensely to the development of SMEs through their loans and advances. The research therefore recommended that for small & medium enterprises to survive, there have to be collective effort between them and banks. Also the government should engage more in the development of small & medium size enterprises by creating and embarking on various incentives to encourage both small scale enterprises and commercial banks.

INTRODUCTION

Background of the Study

Overtime, small & medium size enterprises had received little attention whereas they provide employment for approximately triple the number engaged in large scale manufacturing as well as playing their roles of crucial importance to our developing economy. There have been numerous opinions and write-ups on the roles banks should play in financing and advising the small and medium size enterprises since the federal government shift in policy with greater emphasis towards small & medium enterprises in the achievement of self-reliance. Small and Medium Enterprises (SMEs) have been recognized as driving force for economic growth and development in any nation. Empirical evidences have shown that they contribute to employment, poverty alleviation and increase productivity level in a nation. In recognition of the role of SMEs in the economic growth process of Nigeria, government has taken concerted efforts to foster the growth of SMEs and also develop entrepreneurship. SMEs are of necessity to a nation’s industrialization process. One foremost way of promoting SMEs is by having easy access to finance. Afolabi (2013) noted that a major gap in Nigeria’s industrial development process in the past years has been the absence of a strong and virile SMEs sector attributable to the reluctance of banks especially commercial banks to lend to the sector. Commercial banks through their intermediation role are meant to provide financial succor to SMEs. For SMEs to perform their role in the economy, they need adequate funds in terms of short and long term loans (Olachosim, Onwuchekwa & Ifeanyi, 2013). It is pertinent to know that financing strength is the main determinant of small and medium enterprises growth in developing countries. There is no gainsaying that finance would boost the performance of SMEs if adequately and optimally utilized. The financial systems in every country play a key role in the development and growth of the economy, although the ability to play this role effectively largely depends on the degree of development of the financial system. The traditional commercial banks which are key players in the financial systems of nearly every economy, have the potential to pull financial resources together to meet the credit needs of SMEs, however, there is still a huge gap between supply capabilities of the banks and the demanding needs of SMEs.

Statement of the Problem Lack of education on the part of SME owners and inadequate facilities in agricultural, purchasing and supply sector has been a big challenge to SME’s (Ukwuagu 2002). Onwuka (2015) saw the problem facing SMEs as inadequate funding on the part of the commercial banks and other financial institutions and poor management on the part of small business owners. On the other hand, government has failed to provide stable macro-economic environment and adequate physical infrastructural facilities to the SMEs. Having known all these, the study embark on identifying the various problems faced by SMEs in the procurement of loans from commercial banks, the contribution of commercial banks to SMEs as well as the contribution of SMEs towards the growth and development of Nigeria’s economy. These and many other reasons prompted the researcher to embark on the course to study the role of the commercial banks in financing small and medium enterprises in Anambra State, Nigeria. Objectives of the Study The main purpose of this study is to examine the role of commercial banks in financing small and medium enterprises in Nigeria. The specific objectives are to: i. Examine the problems encountered by small and medium enterprises in procurement of loans from commercial banks. ii. Examine the degree at which commercial banks loans and advances have contributed to SMEs development in Anambra State iii. Identify the level of contribution of small and medium size industries towards Nigeria’s economic growth and development.

Research Questions

The following research questions were formulated to guide the research objectives; 1. To what extent can SMEs encounter problems in the procurement of loans from commercial banks? 2. To what degree have commercial banks loans and advances contributed to small and medium enterprises development in Anambra State? 3. To what level has SMEs contributed to the growth and development of Nigeria’s economy? Research Hypotheses To answer the three research questions posed for the study the following hypotheses were formulated in a null form.

Significance of the Study The result of this study will be of immense benefit to the banks. It will help the commercial banks recognize the role SMEs play in the economy and when to provide them with enough fund so as not to hinder the growth and development of the economy. Through this study, the small business owners will be able to recognize the best or appropriate means to procure loans and be educated on the various ways loans can be obtained and the equivalent collateral to give in exchange for loan. Also, the study will enable the government to know the necessary areas to improve in terms of funding to small businesses and the areas of SMEs that needs enlightenment through programmes and seminars etc. Lastly, the study will also serve as a guide to any person(s) carrying out a similar research work.

 REVIEW OF RELATED LITERATURE

 INTRODUCTION

This section deals with Conceptual framework, Theoretical framework and Empirical Literatures. The conceptual framework guides the study and summarizes the dependent and independent variables. The theoretical framework enhances overall framework of the research and deals with the theory that this study anchored on while empirical literature reports on the previous research done by different authors on related topic, how the research was conducted, their observations, findings and their recommendation. Conceptual Framework Overview of Commercial Bank Grimsley (2003) defined a commercial bank as a financial institution that is authorized by law to receive money from businesses and individuals and lend money to them. Commercial banks are open to the public and serve individuals, institutions, and businesses. A commercial bank is certainly the type of bank that most people regularly use. Banks are regulated by federal and state laws depending on how they are organized and the services they provide. Commercial banks are also monitored through the Federal Reserve System. Financial Times Lexicon (2011) defined a commercial bank as a bank whose main business is deposit-taking and making loans. World Bank dictionary in 2003, defined commercial bank as “anything having to do with a business, made to be sold for a profit”. Investor words in 2016 defined commercial bank as an institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve System. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses.

FUNCTIONS OF COMMERCIAL BANKS

The principal function of commercial banks according to Ukwuagu [2002] is as follows;

  1. Acceptance of deposits on fixed, current and savings account. They concentrate on short-term deposit and operate accounts through the use of cheques. ii. Advancing loans by ways of loans, overdraft and discounting bills of exchange. Commercial banks give short-term loans. iii. They act as agent to their customers by buying and selling of shares and stocks on behalf of their customers, issuing travelers cheque and draft, remittance of funds and buying foreign exchange. iv. They act as trustees, executors and also as referees to firms and individuals. v. They provide facilities for safe keeping of wills and other documents and also jewelries.
  2.  vi. They also render services to customers and the public by selling of JAMB, GCE, and NECO forms. vii. They also sell mobile cards and collect PHCN bills from the public on behalf of the principal.

Challenges Facing the Banking Industry in Nigeria

 According to Martin [2001] the current banking sector reform in Nigeria was designed to promote the viability, soundness and stability of the system to enable it adequately meet the aspirations of the economy in terms of accelerated economic growth and development. The reform agenda was motivated by the need to proactively put the Nigerian Banking Industry on the path of global competitiveness to enable it effectively respond to the challenges of globalization. The overall objective is to guarantee that the economy and Nigerians do not remain fringe players in the context of a globalizing world.

The major challenges that the reform was targeted at include the following:  Weak Capital Base: Most banks in Nigeria had a capital base that was less than $10 million.

· while the largest bank in the country had a capital base of about $240 million.

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