CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The developed countries of the world have realized long ago that Small

and Medium Enterprises are the main drivers of the economy. While big

businesses are necessary to preserve and maintain structure within the economy,

they have considerable problems of their own. Mega corporations of the earlier

era increasingly lost their edge to smaller organizations, which have spouted all

over the western landscape, Akoja and Hasnet (2010). Nigeria, like any other

nation has witnessed dramatic changes in its industrial landscape.

These changes are largely due to the efforts of the government to convert

the economy from agricultural to an industrial one, minimizing dependence on the

developed economies, increases the country‘s national output, generates funds for

the government, and leads to the conservation of foreign exchange earnings.

The path towards industrialization in Nigeria has not been easy because of

the disparity in resources endowment of the economic units and the low level of

investment in the economy, Akoja and Hasret (2010). While some units have

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resources beyond their immediate needs, others may have need for resources

beyond what they can presently generate. Pass and Pike (1983) opined that the

level of investment in an economy is one of the major elements in determining its

future productive capacity and ultimately the growth in the real living standards of

its people. Also, other authors (Ekpenyong and Nyong, 1992, Adeyemi and

Badmus, 2000) argued that shortage of finance is a critical limiting factor in

industrial growth and the realization of an entrepreneur‘s dream.

In the light of the above and in realization of the fact that industrialization

is required for rapid economic development, successive government in Nigeria

formulated many policies and sometimes reversing earlier ones to ease

industrialization. To solve the financing problems, particularly of Small and

Medium Enterprises (SMEs), a number of specialized financial institutions like

the Nigeria Industrial Development Bank (NIDB), the Nigerian Bank for

Commerce and Industry (NBCI) and the newly introduced Microfinance Banks

have been established besides the formulation of many favorable credit policies. It

is pertinent to state that Nigeria like many Less Developed Economies (LDEs) has

an economy that is characterized by many micro firms. Micro, small and medium

enterprises in Nigeria account for 95 percent of non-oil productive activities

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outside agriculture (Jamodu, 2001). Thus, the Small and Medium Enterprises are

accorded high priority and resource commitments by government.

This is because they promote the use of local raw materials, low

technologies, light industries that employ greater number of persons per unit of

capital employed than Large Scale Enterprises (LSEs), serve as entrepreneurial

development centers and can facilitate balanced development since they can be

operated at remote and rural areas in addition to having short gestation period. As

a result of the immense potential contributions of the SMEs to the

industrialization of a country as seen in the Middle East especially, the Gulf

region led by Dubai has become a role model and reference point in industrial and

trade development to many nations of the world. Nigeria is not left out in the

scheme of activities aimed at developing the Small and Medium Scale

Enterprises.

1.2 Statement of the Problem

In the world over, small businesses face more constraints at start up

development phases than when established. In Africa, for example, the failure rate

of SMEs is 85% out of every 100 companies due to lack of skills and access to

capital (Fadahunsi, 1997). It is typical of SMEs in Africa to be lacking in business 3

skills, record of accomplishment and collateral to meet the existing lending

criteria of risk adverse banks (World Bank, 2000).

The development of SMEs in Nigeria is a step towards building a vibrant

and diversified economy (Mahmoud, 2005). However, the lack of access to credit

to start or expand small and medium scale enterprises has often plagued that

sector of the economy. Most of SMEs tend to rely on the personal resources of

their owners, and/or loans from friends and relatives to funds the enterprises

(Sule, 1986). The expectation has been that, after the initial capital of the small

scale enterprises, the business should be able to raise funds from the formal sector

especially MFIs or banking industries as well as government established financial

aid institutions to expand its operations. This has not been the case for a number

of reasons highlighted below (Sule, 1986: Inang and Ukpong, 1996; Iniodu and

Udomesiet, 2004);

The perception of small and medium enterprises as high risks: Inabilityof

the SMEs to prepare acceptable or viable banking business plans.

Poor record keeping: especially of financial operations which at times make

the entrepreneur draw money than expected from the business either for

personal or family use.

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Weak capacity on the part of the banks to downscale their lending to SMEs.

Lack of knowledge concerning the existence to facilities available in both

banks and government established financial institutions.

In view of the problems that the SMEs will have to contend with in Nigeria,

the following basic research questions are raised:

i) Does relationship exist between commercial banks’ credit to SMEs and the

GDP?

ii) What are the problems of SMEs in Nigeria?

iii)Which institution is in place to help SMEs in Nigeria?

iv) What are the contributions of SMEs to national development?

v) What are the sources of funds available to SMEs (internal and external) in

Nigeria?

vi) What are the appropriate funding mechanisms for SMEs’ sustainability in

Nigeria?

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1.3 Objectives of the Study

The main objective of this study is to examine the relationship between

commercial banks’ credits to SMEs and the real GDP in Nigeria. The specific

objectives are:

i) to examine the problem of SMEs in Nigeria.

ii) to discuss the ccontribution of SMEs to GDP.

iii) to explain the effect of government policies in the development of SMEs in

Nigeria

iv) to examine the effect commercial banks’ credit to SMEs in Nigeria.

v) to make recommendations based on the findings.

1.4 Justification for the Study

The research work is justified based on its importance to the area of Accounting

and Finance. The research will be useful to policy makers to make definite

recommendations on commercial banks’ credit to SMEs. Besides, it would assit

stakeholders most especially SMEs and commercial banks to further their

contribution to the growth of Gross Domestic Product (GDP) of Nigeria.

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The study will also improve the body of knowledge in the area of commercial

banks’credit to SMEs and its contribution to GDP.

1.5 Research Hypothesis

The general hypothesis tested in this study is:

HO1: There is no relationship between commercial banks' credit to SMEs and the

total Real GDP in Nigeria.

1.6 Scope of the Study

This research work focuses on the effect of commercial banks’credit to

SMEs in Nigeria, and its contributions to the total GDP of Nigeria. The scope of

the research covers the period from 1992 to 2012. This is because of the need to

study the effect of commercial banks’ credit to SMEs and its contribution to GDP

before and after the bank recapitalization of 2005.

1.7 Structure of the Study

The research work has been divided into five chapters. Chapter one is the

introduction which contains the background to the study, statement of the research

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problem, the objectives of the study, the research questions, and the justification

for the study, research hypothesis, scope, and structure and of the study.

Chapter two is the literature review it includes the introduction, conceptual

framework, theoretical framework, empirical framework and summary.

Chapter three is the research methodology which is made up of the

introduction, research design, types and sources of data, method of data collection

and method of data analysis.

Chapter four is data presentation and analysis contains introduction, data

presentation and analysis, test of hypothesis and discussion of findings.

Chapter five includes summary, conclusion and recommendation.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Framework: Small and Medium Enterprises and Commercial

Banks.

2.2.1 Small and Medium Enterprises: Meaning, Importance, Policies, Problems

and Strategies.

2.2.2 Meaning:

Over the years, there has not been any universally accepted definition of

Small and Medium Enterprises throughout the world (lawal 2002). This is

because the classification of Large scale or Small scale is a subjective and

qualitative judgement.Also, the bid to give a generally acceptable definition of

SMEs will definitely leave out some components and characteristics that are

peculiar to each country.

Akoja and Hasret (2010) believes that the definitions of Small and Medium

Enterprises is a heterogeneous and relative concept, Osoba (1987) opined that

numerous definitions of small scale enterprises exist and they vary from country

to country, within and between continents. On the other hand, Oshagbemi (1982)

highlights some major criteria used in the definitions of Small Medium 9

Enterprises (SMEs) to include; number of employees, financial strength, sales

value, initial capital outlay, relative size, independent ownership, the type of

industry.

Prior to 1992, different institutions in Nigeria adopted varying definitions

of Small and Medium scale enterprises. These are Nigerian Bank for commerce

and industry (NBCI), Centre for Industrial Research and Development (CIRD),

National Economic Reconstruction Fund (NERFUND) among others. The

National Council on Industry (NCI) streamlined the definition of industrial

enterprises to bring uniformity and provided for its review every four years. This

definition was revised in 2001.

The current official definitions adopted for Small and Medium Enterprises

at the meeting are;

a. Micro/Cottage Industry: An industry with a total capital employed of not more

than 1.5 million naira including working capital but excluding cost of land, and or

labour size of number more than 10 workers.

b. Small Scale Industry: An industry with a total capital employed over 1.5

million naira, but not more than 50 million naira, including working capital but

excluding cost of land and /or a labour size of 11 to 100 workers.

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c. Medium Scale Industry: An industry with a total capital employed of over 50

million naira, but not more than 200 million naira, including working capital but

excluding cost of land and/or a labour size of 101 – 300 workers.

d. Large Scale Industry: An industry with a total capital employed of over 200

million naira, including working capital, but excluding cost of land and/or labour

size of over 300 workers.

In 1978, the Industrial Research and Development Unit of the University of

Ife (Now Obafemi Awolowo University, Ile-Ife), defined a small scale industry as

one with total assets of less than N50, 000 and that employed less than fifty full-

time persons while a medium scale industry was defined as a factory industry that

operated with motive power and invested between N50, 000 and N500, 000,

which employed between 50 and 250 persons. The NBCI defined small-scale

enterprises in terms of total capital investment but excludes cost of land in the

computation of a ceiling of N300, 000 in total capital investment (including land)

and that of N500, 000 in annual sales turnover.

Considering other definitions given by some international financial bodies,

the World Bank in 1988 classified SMEs as enterprises with fixed assets,

excluding land and working capital which do not exceed N10million.

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The European Economic Commission in 2000 defined an SME as a small-

scale business with the exclusion of agriculture, forestry and fishing with

employment capacity of not more than 500 workers. Not minding the various

definitions and the lack of consensus in these definitions, there is the need to point

out that the definitions correspond to parameters considered adequate for policy

formulation and the promotion of the sub-sector in the country.

For the purpose of the Small and Medium Industries Equity Investment

Scheme (SMIEIS), set up in 1999 by the federal government, a small or medium

industry is defined as any enterprise with a maximum asset base of N200million,

excluding land and working capital. This study will uphold the definition of the

small and medium enterprises by the National Council of Industry. This

definition, based on the size of the workforce is highly applicable to this study.

Discussing the importance of SMEs, they are expected to provide the

driving force for the industrialization and overall development of the Nigerian

economy. This explains the increasing policy attention accorded SMEs in addition

to the fact that they play significant roles in meeting some basic economic and

industrial developmental objectives. Few among the significant roles played by

the SMEs are as follows:

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First, the SMEs provide the training ground for the development and

growth of indigenous entrepreneurs (Kilby, 1988). Casson (1982) opines that by

acting as a seedbed or nursery, usually for the indigenous population, they serve

as vehicles for the propagation and diffusion of innovative ideas for far reaching

dimensions. They are more flexible and can easily adapt to changes in the external

environment.

A second social contribution of SMEs according to Owualah (1987) is the

transformation of traditional industry. In both developed and developing

countries, the traditional sector has served and continues to serve as the

springboard for launching into a vibrant modern sector. Thus, a fledging SMEs

sector can be a means of achieving a smooth transition from the traditional to the

modern industrial sector (United Nations, 1984).

Third, SMEs due to their labour intensively and usage of low-level

technology are able to gather and use the widely available local labor supply. This

is consistent with the nation‘s income distribution objectives (Steel and Takigi,

1983). Also, it is opined that SMEs create more jobs per unit of energy consumed

than large scale ones (Vankataraman, 1984).

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A study carried out by the Small Business Research Unit in the United

Kingdom between the periods 1982-1988, showed that SMEs created between

8000,000 and 1,000,000 new jobs. Also, Gibb (1996) opined that small and micro

enterprises were by far the most common form of enterprises in Europe and

constitute over 98 percent of all registered companies. In Japan, the industrial

strength of the nation is premised on SMEs. They employ more than 82 percent of

the total labor force and account for more than 50 percent of the total

manufacturing value added.

Fourth, SMEs assist in the dispersal of economic activities through

encouraging the development and modernization of these activities outside the

major metropolitan areas. Thus, they are able to stem the tide of rural-urban drift.

Another economic role of the SMEs is their ability to mobilize financial

resources, which would otherwise be idle or untapped by the formal financial

sector (Central Bank of Nigeria, 1985).

Fifth, SMEs facilitate the conservation of foreign exchange and the

development of the scarce resources of management in developing countries. This

is mainly due to their size or scale of operations and unsophisticated management

structure. A high percentage of the profit of SMEs, most of which are locally

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owned is known to be ploughed back ensure a higher rate of future growth

(Committee of Inquiry on Small Firms, 1971) Also, Kamaluddin (1982) opined

that the SMEs provide the desired linkage effects, especially agro-industrial

linkages.

In ensuring that the above dividend of SMEs are derived in Nigeria, the

federal government of Nigeria together with the Central Bank of Nigeria has over

the years developed series of innovative ideas to promote industrialization in

nigeria through equiping small and medium scall enterprises with needed facilities

especially in the area of financing. Some of these policies includes;

Small and Medium Enterprises Equity Investment Scheme:

i. Establishments of The Scheme:

The initiative was in response to the Federal Government’s concerns and policy

measures for the promotion of Small and Medium Enterprises (SMEs) as vehicles

for rapid industrialisation, sustainable economic development, poverty alleviation

and employment generation. The Scheme requires all banks in Nigeria to set aside

ten (10) per cent of their Profit After Tax (PAT) for investment and promotion of

small and medium enterprises.

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ii. Purpose of The Scheme:

The 10% of the Profit After Tax (PAT) to be set aside annually shall be invested

in small and medium enterprises as the banking industry’s contribution to the

Federal Government’s efforts towards stimulating economic growth, developing

local technology and generating employment. The funding to be provided under

the scheme shall be in the form of loans or equity investment or a combination of

both in eligible enterprises.

iii. Activities Covered By The Scheme:

Every legal business activity is covered with the exception of:

(i) Trading/merchandising

(ii) Financial Services

Bank of Industry (BOI)

To improve access to finance by SMEs, the Central Bank of Nigeria has

approved the investment of the sum of N500 billion debenture stock to be issued

by the Bank of Industry (BOI) with effect from May, 2010.

So far, the guidelines for the N200 billion re-financing and restructuring of banks’

loans to the manufacturing sector has been issued by the Bank.The objectives of

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the N200 billion re-financing and restructuring of banks’ loans to the

manufacturing sector are to:

i. Fast-track the development of the SMEs and manufacturing sector of the

Nigerian economy.

ii. Improve the financial position of the deposit money banks.

Small and Medium Enterprises Credit Guarantee Scheme (SMECGS)

Complement to the above, the Bank has also established a N200 billion Small

and Medium Enterprises Credit Guarantee Scheme (SMECGS), for promoting

access to credit by SMEs in Nigeria. The Scheme shall be wholly financed by the

Central Bank of Nigeria (CBN) as stipulated in the guidelines. The objectives of

the SMECGS are to:

i. Provide guarantee for credit from banks to SMEs and manufacturers.

ii. Increase the access of promoters of SMEs and manufacturers to credit.

iii. Set the pace for industrialization of the Nigerian economy.

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The overall goal of these two initiatives are to increase output, generate

employment, diversify the revenue base, increase foreign exchange earnings and

provide inputs for the industrial sector on a sustainable basis.

Microfinance banks

The CBN as part of its regulatory functions ensured the transformation of

Community Banks to Micro Finance Banks which led to an inrease in their capital

base for effective and effecient fund allocation to SMEs since they are closer to

the people. The Central Bank licensed three types of micro-finance bank in

Nigeria (Ijaiya,2013). These includes:

1. The Unit Microfinance bank; this is license to operate in a local

government area with a paid up capital of N20million and it is prohibited

from having branches and cash center.

2. The State Microfinance bank; this is license to operate in different local

government area of a state with a paid up capital of N100million and it is

allowed to open branches within same state subject to prior approval from

the CBN on each new branches.

3. The National Microfinance bank; this is license to operate in more than a

state with a paid up capital of N2billion. This bank is allowed to open

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branch in all state of the federation and FCT subject to written approval by

the CBN.

The function of micro-finance includes;

Provision of timely, affordable, diversify and dependable financial

services to the economically actively poor people.

Creation of employment opportunities and increased productivity of

household income of the active poor in the country and thereby

enhancing their living standard.

To enhance service delivery to micro, small and medium scale

enterprises.

Promotion of synergy and mainstreaming of informal Micro-finance

bank sub-sector into formal financial institution.

Mobilization of savings for intermediation and rural transformation.

Moreso, other developing countries of the world has however developed

certain models for the effective funding and operations of SMEs in their countries

this include the following among others:

Indian Model: The basic principle guiding the funding of SMEs in India is

that the government regards small business as the ‘eggs’ that hatch big businesses.

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Apart from adequate incentives, the government supports SMEs by bulk

purchasing their products and retailing them both for the domestic market and for

exports. To facilitate their access to bank credits, the government issues SMES

LPOS. Banks accept such contract papers as collateral. When small business bid

for Government contracts with small ones, big businesses must bid 15% less than

small businesses for them to supply government needs. Payments are promptly

made to the SMEs and this encourages their growth.

The Gramen model: Prof Yunus Mohammed developed the Gramen model.

In this model, banks target potential borrowers for its core operations and form

them into groups. Then soft loans are made available to these SMES, repayable

within a specific period before others in that strategic group can benefit from the

scheme. With this system, there is a subtle pressure from other SMES that are

members of this strategic core on the benefiting group to repay so that others can

benefit from the scheme. This has introduced healthy capitalization among SMES

in Bangladesh through factoring the credibility of the borrowers.

The Brazilian model: The main thrust of the Brazilian model is that apart

from heavy funding and subsidies, the Government provides infrastructure in an

area and encourages the cluster of industries in such areas. The Sinos Valley shoe

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cluster industries in Brazil have revolutionized the Brazilian shoe industry. For

the past 30 years, over 500 SMEs that produce shoes are located there. Today

Brazil is the worlds third largest shoe exporter.

The development of the SME sub-sector has been constrained by a number of

factors that had handicapped SMEs development in the industrialization process

in Nigeria despite the efforts of successive governments to promote the sub-

sector. These factors include:

i. Inconsistent policy measure

ii. Unstable macro-economic environment

iii. Inadequate infrastructural facilities: roads/railway system, water supply,

electricity, telecommunications, etc. This is in line with Giwa (2001) on the

problems of the Nigerian industrial sector.

iv. Inefficiency and effectiveness in the institutional support systems for SMEs.

v. Lack of Access to Foreign Markets.

vi. Low levels of skill and limited human capital (technical and managerial): To

buttress the above, Lewis (1977) opined that what Nigerian entrepreneurs

lack most is managerial competence.

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vii. Inability to effectively compete in the local, domestic and the international

export markets because the home market is saturated with cheap imported

products, poor quality of products or the unfamiliarity with the vagaries of

export procedures. In line with the foregoing, Giwa (2001) opined that the

influx of fake and sub-standard products, under-invoicing, dumping and

malpractices at our ports, placing imported goods at undue advantage over

local manufacturers, are some of the most damaging issues affecting the

manufacturing industry.

viii. Low levels of process technologies.

ix. Lack of productive resources: With respect to resources, Ogun and Anyanwu

(1999) consider inadequate funding (finance) to be paramount. According to

Daodu (1997), the most intractable of these problems is poor access to

capital. So wide is the credibility gap that most banks prefer to pay the

stipulated government penalty rather than carry out government directive that

a percentage of their funds be set aside to finance SMEs.

x. Lack of long-term finance or capital inadequacy

It is pertinent to reiterate that Nigerian SMEs are usually of sole ownerships

(very little are limited liability companies) with limited (though intensive) labor

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force, centralized administration and management, little access to finance (long

term and medium term) and high failure rate.

World over, the development of SMEs have been characterized by certain

constraints. To mitigate these bottlenecks, many strategies have been adopted.

Some of these strategies as identified by Central Bank of Nigeria during its

seminar on small and medium industries equity investments scheme (SMIEIS) in

2003 include the following:

• Financial discipline, prudent fiscal management, commitment to low

inflation and free markets

• SME targeted loans (direct/guaranteed) and access to Government funded

research

• Provision of tax incentives to encourage investments

• Private and Public provision of infrastructure

• Encouragement of business clusters

• Give education high priority in govt. spending (macro)

• Private technical training programs (micro)

• Provision of information on foreign markets and development of viable

capital markets

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Organization of trade fairs and missions for export promotion

Promotion of tie-ins, technical service agreements, joint ventures and

franchising with larger and/or foreign Firms.

Development of comprehensive financial infrastructure and financial

institutions

Inorder to ensure that these strategies are effectively and efficiently effected, the

following government institutions were established. These agencies are mainly

Development Finance Institutions/Banks (DFIs), which Kasimu (1997) considers

to be having a three-tier structure in Nigeria. The first-tier includes the National

Development Banks i.e. the NACB, NIDB, Urban Development Bank, NBCI and

the Nigerian Export-Import Bank. The second-tier consists of Inter-State DFIs i.e.

the Odua Investment Limited and the New Nigeria Development Company

Limited (NNDC). The third-tier consists of the state-owned Development Finance

Institutions i.e. the Kwara State Property and Investment Company and the Oyo

State Agricultural Development Programme (OYSADP). Apart from the

conventional banks (Commercial and Merchant), the main Development Finance

Institutions and Credit Schemes set up to assist the SMEs in Nigeria include the:

a. Nigeria Industrial Development Bank (NIDB)

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b. Nigeria Bank for Commerce and Industry (NBCI)

c. World Bank Assisted SME Loan Scheme

d. Nigerian Agricultural and Co-operative Bank (NACB)

e. Federal Ministry of Commerce and Industry‘s Small-Scale Industries Credit

Scheme

f. Micro Finance Bank

g. National Economic Reconstruction Fund (NERFUND).

h. Small and Medium scale Enterprises Development Association of Nigeria

(SMEDAN).

Moreso, various governments have at various times promulgated a number

of policies in support of the development and growth of the SME sub-sector. A

categorization of these policies ensues:

i. Tariff

ii. Fiscal and

iii. Infrastructure

The government has used tariffs that have been adjusted periodically at

various times to reduce production costs and thus support the SME sub-sector.

Also, the introduction of a second-tier window on the capital market, to provide

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long-term finance for enterprises that cannot satisfy the requirements in the first-

tier window has left meaningful mark in the development of the SME sub-sector.

In terms of fiscal incentives, a number of tax measures aimed at ameliorating the

problems of SMEs have been put in place. This include among others:

a. Tax relief to all small and medium enterprises during the first six years of

operation and;

b. Pioneer status involving non-recoverable tax relief for firms.

c. In the area of infrastructure, the activities of the Directorate of Foods, Roads

and Rural Infrastructure (DFRRI), National Directorate of Employment

(NDE), Petroleum (Special) Trust Fund (PTF) and the various poverty

alleviation programmes of the governments have been set up at various times

to address the socio-economic problems in the country.

2.3 Commercial Bank: Meaning, Objectives, Importance and Types of loans.

A commercial bank is a financial or a monetary institution owned by a

group of individuals known as shareholders of the bank.The core function of a

commercial bank is financial intermediation which is the acceptance of

deposits from the surplus unit and channelling it to the deficit unit who are in

need of fund (Yusuf, 2003).

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The major motive of establishing a commercial bank is profit making although a

commercial bank is always in a liquidity/profitability dilemma.This means in its

quest of making maximum profit, he is also vested with the responsibilty of

meeting credit demands of the depositors and that of the deficit unit.A commercial

bank is also obliged to fiscal and monetary policies of the government as well as

satisfying the populace which provides enabling environment for effective

running of the bank’s actiivities.

There has been different perspective to what the objectives of commercial

banks are. However, Lawal(2013) categorized commercial banks’ objetives to

include its obligations to the following category of people:

i. Shareholders: Commercial banks are vested with the responsibility of

making maximum profit inorder to meet the basic requirement for which

the shareholders had invested in the bank whch is wealth maximization.

Moreso, the profit made over the period may also attract the public who

wish to invest.

ii. Depositors: Commercial banks are obliged to be as liquid as possible

inorder to meet the demands of their depositor on their demand deposit and

savings account when needed.

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iii. Lenders: Commercial banks are also required to be able to meet credit

demands of their customers who requires short, medium or long term fund

for investment.

iv. Government: Commercial banks are required to oblige to fiscal and

monetary policies of the regulatory agencies and to implement certain

policies for economic growth and development such as the injection or

mopping up of money in circulation through open market operation.

v. Community: Commercial banks are also expected to be beneficial and to

satisfy the populace which provides enabling environment for effective

running of the bank’s actiivities.

Commercial banks are very important in the financial system and its

contribution to economic growth and development cannot be overemphasized. Its

features, roles and importance includes: acceptance of deposits from the public

into current, savings and other types of account and gives out same in form of

loans and advances to investors or businessmen in need of finance for

establishment, extension or modernization of their firm; granting of financial,

technical and legal advices to their customers, serving as banker and lender to

government; serving as intermediary between the CBN and customers in the

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financial system; assisting and promoting international trade through the

provision of foreign currencies, bills of exchange, travellers cheque etc; helping in

the formation and implementation of government policies (fiscal and monetary);

providing needed advice and resources for project evaluation and financing;

rendering services of brokers in the buying and selling of securities in the stock

exchang market; providing for the establishment of small and medium enterprises,

Hassan(2004).

Commercial banks grant loans and advances to their customers to meet their

demands inorder to ensure that investors have enough fund to start up or expand

their business. This is classified according to wikipedia under the following

headings:

i. Secured Loans: This is a loan which the borrower pledges some assets( e.g

a car, plant, land and building etc) as collateral for the loans which then

becomes a secured debt owed to the creditor who give the loan. The debt is

thus secured against the collateral in the event that the borrower defaults,

the creditor takes possesion of the asset used as collateral and may sell it to

regain some or all of the amount originally lent to the borrower.

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ii. Unsecured Loans: These are monetary loans that are not secured against the

borrowers asset( no collateral is involved). There are small business

unsecured loans made available to small and medium enterprises to the the

fund required for the growth of their business. These may include; bank

overdraft, corporate bonds,credit card, credit facilities or line of credit,

personal loans among others.

2.4 Contribution of SMEs to GDP growth

In line with the above, Maizels (1963) agrees that industrialization is the

key to economic progress in most countries because it tends to increase physical

output per head. The ripple effect of this is the increase in the share of

manufacturing in the national output. Similarly, a country is said to be

industrialized if her industrial output is at least 25 percent of her Gross Domestic

Product (GDP), 60 percent of this output is contributed by the manufacturing sub-

sector and of the population, at least 10 percent are engaged in manufacturing.

The Nigerian industrial scene is characterized by a wide diversity of

industrial structures, technologies, factor intensities, input requirements and

product qualities.

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It is pertinent to highlight the contributions of SMEs to the economy of

some countries including that of Nigeria. In Nigeria, Kasimu (1998) opined that

the SMEs have through NIDB assisted projects created more than 300,000 jobs

and through the Nigeria Agricultural and Co-operative Bank (NACB), created

more than 700,000 jobs

In addition, the SMEs are widely accepted as having greater capacities to

utilize locally available raw materials, technologies, work force and promote even

and balanced industrial development. The major activity in the SMEs

development occurred between 1987 and 1989 with the establishment of several

institutions to provide financial assistance to small and medium enterprises.

In spite of the invaluable contributions of SMEs to economic development,

they are faced with a great number of problems in Nigeria. Thus, their

contributions to the industrialization process are still generally low when

compared with other countries of South East Asia. The access to institutional

finance by SMEs has remained a problem to the development of the sub-sector in

Nigeria. More importantly in the area of working capital (short-term finance), the

larger industries edge out the small enterprises. The SMEs are classified as high-

risk ventures by financial market operators and therefore remain unassisted. By

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and large, this problem led the government to establish specialized institutions

and credit schemes to support SMEs development.

2.5 Theoretical Framework

Various theories have explained SMEs growth from different perspectives.

However, in order for an SME to develop its core competency, adequate resource

(both internal and external) is an important prerequisite. SMEs growth depends on

many factors that vary from country to country.

McIntyre (2002) argues that a synergistic relationship between the SMEs

and the larger enterprise sector is a critical factor. However, the resource based

theory, clustering, networking, and institutional theories provides an analytical

framework to explain how a well-defined support regime can provide policy

support, resource, and institutional infrastructure for the growth of SMEs.

Rindova and Fombrun (1999) propounded the resource based theory which

argued that resources, capabilities and core competencies are essential for a firm’s

competitive advantage. Therefore, adequate resource support and policies to

create capability are critical for SMEs’ growth as they are small in size and need

assistance. Resource based theory provides a framework to explain how business

32

can identify suitable measures to overcome growth obstacles, have better access

to technology resources, manpower resources, financial resources, natural and

infrastructure, and access to the market.

According to Barney (1991) and Grant (1991), the four types of tangible

resources are financial, organizational, physical, and technological. The three

types of intangible resources are human, innovation and reputational resources.

An example is the Township and Village Enterprises (TVEs) model in China,

where TVEs rely on the state sector as a source of capital, materials, equipment,

specialised personnel, technology, subcontracting arrangement and sales revenues

(Harvie, 2002).

Porter (1998) proposes the clustering theory which states that industrial

cluster policies can be a growth strategy for a firm and cluster is a geographic

concentration of interconnected companies and institutions in a particular field.

This argument is strongly supported by Enright and Robert (2001), Dijk and

Sverrisson (2003), and Nadvi’s (1995) since SMEs can receive external economic

advantages (economies of scale and scope) if clustering and networking offer a

potential growth path for SMEs.

33

Many Central and East European countries have used clustering approach

for assisting the development of SMEs such as Poland, Hungary, Slovenia, the

Czech Republic, Slovakia, Ukraine, Lithuania, Estonia and Latvia, (Ionescu,

2003). Examples of cluster theory in practice in East Asia and Latin America

include surgical instrument clusters in Sialkot, Pakistan; electronic clusters in

Penang, Malaysia; knitwear in Tiruppur, India; software in Bangalore, India;

leather shoes in the Sinos Valley, Brazil (Abonyi, 2003).. Tambunan (2005) also

suggests that experiences in many European countries show that clustering

approach can be a powerful means for overcoming resource constraints that SMEs

in transitional economies lack.

‘Firms should not be seen in isolation but as being connected in business

systems’ (Ritter, Wilkinson, and Johnston, 2003, p.175) leading to networking

theory. Lechner and Dowling (2000) define networks as the relationship of

individual with other individuals, or relations between organizations that can have

various functions.. Therefore, network relationships can be considered as an

important intangible resource to support SMEs who do not have sufficient

resources since it help SMEs to develop the links with suppliers, distributors and

34

customers, or utilization of social contacts, including acquaintances, friends,

family and kin.

Networking approach is applied in Moldavia, the Ukraine and Belarus

(Smallbone and Welter, 2001); Thailand (Brimble, Oldfield and Monsakul 2002);

Zhejiang, China (Krug and Hendrischke, 2003); Taiwan (Ngui, 2002) and Korea

(Gregory, 2002). In addition, Nadvi (1995) suggests that both local associations

and government support bodies facilitated the development of clusters and

networks of SMEs in Brazil, Mexico, India and South Korea.

North (1990) came up with the institutional theory which emphasizes that

market economies convert resources - land, labour, energy, and capital - into

manufacture services and goods. To make this conversion a success, institutions

must also help and guide those transformations in predictable ways. Kartz (1995)

observes from the economic histories of both newer and mature markets based in

Asia, North America and Western Europe that private enterprises cannot emerge

and prosper in an imperfect market without a conducive policy environment and

institutional support system. Murrell (2003) also states that at the beginning of

economic transition, institutional support is vital. Institutions must be designed so

35

that they are able to work in the environment in which they are to be

implemented.

The success of China indicates that transitional institutions, formed by

incremental change, can be helpful. In China, there was much enthusiasm for

accepting new measures to improve the economic situation, but under the

condition of not moving too far from the existing system.

Therefore, SMEs need to identify key success factors such as finance,

technology transfer, taxation, market promotion, export opportunities, and

research and development strategies that determine the conditions for them to

overcome difficulties in both their internal and external environments (Petri,

1995; Assaf, 1998).Wattanapruttipaisan (2002) proposes that competitiveness can

be leveraged by factors other than location and natural resources such as: on-

going access to global information and knowledge (market standards, marketing

opportunities and technology); participation in clusters of firms, networks with

suppliers, producers or complementary product distributors and consumers; and

on-going learning and improvements in efficiency and flexibility.

36

This network relationship created a new information flow and knowledge

base for SMEs that could be the model for the efficiency of resource distribution

to SMEs by numerous policy packages from the state and the market.

The above suggest that resource based theory; clustering, networking

approach and application of institutional theory are not separated. The main

argument is that, in gaining better access and utilizing resources, firms need to

cluster in suitable locations, build strategic alliances or network in a cluster of

firms. This is in order to attain the critical mass needed to create support

infrastructure. These theories also emphasize the role of supporting institutions as

agents for facilitating the development of firms’ cluster and network, improving

technology flow and knowledge which is also vital.

A study on the effectiveness of supporting policies is crucial to identify the

difficulties that SMEs have been facing. The resource base, clustering,

networking, and institutional theories referred to by Petri (1995), Assaf (1998),

Brimble, Oldfield and Monsakul (2002), Harvie (2002), Tambunan (2005), Ha

and Swierczek (2003), and Gibb (1996) provide an understanding of the factors

supporting SME development in developing countries. These authors infer that a

well-defined support regime from the state can coordinate with existing market

37

factors to provide policy support, external resources, and institutional

infrastructure for the growth of SMEs.

2.6 SME Feasibility Appraisal Model

The feasibility appraisal model is a risk-based, predetermined criterion that

the business idea must be subjected to warrant commitment of external funding by

investors. Risk in this context is defined as the classification of the probability of

an error resulting in a loss of the investment,Raji(2009). The feasibility appraisal

model provides both quantitative and qualitative methods of assessment. A

quantitative technique deals with projections and other financial information

while qualitative techniques consider other factors relevant to the success of the

business that are not reflected in financial numbers. The business environment

and other socio-political considerations are critical to the success of the business.

An important role of banks is to design ways of providing loans to informational

opaque small business (Berger, Klapper and Udell 2001).

However, a number of factors may affect the banking system’s ability to

provide credit to small borrowers in the future. There is evidence of bank

consolidation across many countries of the world through mergers and

38

acquisitions. These mega banks may be oriented towards transaction lending and

providing capital markets services to large corporate clients. These institutions are

also often head quartered at great distances from small business customers and

may have difficulty processing locally based, and often less quantitative

relationship information on small business.

However, there are very few small firms that will satisfy the rigorous

condition set by the traditional feasibility appraisal model, which is often

designed for both small and big firms.

While some small firms meet some aspects of the criteria of the feasibility

model, others do not, therefore for banks to lend to information opaque small

firms; they need to develop lending rules that accommodate the peculiar

characteristics for both the SMEs and their owners. Small scale lending rules of

financial intermediaries can be categorized into four main distinct lending

technologies. These are the Financial Statement Rule, the Asset-Based Rule,

Credit Scoring, and Relationship Lending banks cannot readily verify whether

SMEs have access to qualitative projects, while moral hazards occur when SMEs

divert funds for alternative projects (Stiglitz and Weiss 1981). These problems

can lead to either credit rationing or over lending (see de Meza and Webb 1987).

39

2.6.1 Financial Statement Rule: This lending rule places emphasis on evaluating

information from the firm’s financial statements. The decision to lend and terms

of the contract are principally based on the strengths of the firm’s balances sheet.

Financial statement lending is best suited for relatively transparent firms with

certified audited financial statements. Thus, it is likely to be the rule of choice for

lending to large firms.

However, when adapting this rule for small firms, the firms must be ones with

long histories, relatively transparent transactions and strong audited financial

statements (Berger and Udell, 2001). Unfortunately, many small firms in Nigeria

lack these qualities.

2.6.2 Asset-Based Lending Rule: The most apparently guaranteed form of

lending to SMEs is asset-based lending. This lending technology bases its

decision to lend on the quality of the available collateral. This type of lending

requires constant monitoring of the business and this can prove to be expensive.

The collateral in this case may be accounts receivable and inventory; this is why

the bank has to intensively monitor the turnover of these assets. This is the most

common lending rule for SMEs in Nigeria.

40

2.6.3 Credit-Scoring Rule: This lending technology uses a summary statistic

about the borrowers expected future loan performance (Feldman 1997, and

Mester, 1997). In fact, credit scoring assumes that credit analysis ultimately

determines that the personal credit history of small business owners is highly

predictive of the loan repayment prospects of the business (Berger, Frame and

Miller, 2002).

The method for the use of credit scoring involves attaching heavy statistical

weights to the financial conditions and history of the principal owner given that

the credit worthiness of the owner and that of the firm are closely related for most

small businesses (Feldman 1997, Mester 1997).

2.6.4 Relationship Lending Rule: In relationship lending, the lender bases its

decision to lend in substantial part on propriety information about the firm and its

owner through a variety of contacts over time. This information is obtained

through the provision of loans (e.g. Peterson and Rajah 1994, Berger and Udell,

1995) and deposits and other financial products (e.g. Nakamura 1993, Cole 1998,

Mester, Nakamura and Renault, 1998). Additional information may also be

gathered through other members of the local community, such as suppliers and

customers, who may give specific information about the firm owner or general

41

information about the business environment in which they operate. Importantly,

the information gathered over time has significant value beyond the firms’

financial statements, collateral and credit scores.

This information helps the relationship lender deal with information opacity

better than potential transaction based lenders. Empirical studies have proved that

relationship lending affects the pricing and availability of credit (Cole 1998, Elsas

and Krahnog, 1998; di Salvo and Ferri, 1998). A stronger relationship measured

in various ways is empirically associated with lower interest rates for the firms

(Berger and Udell 1995, Harkoff and Koiting 1998). Berlin and Mester (1998)

also report that relationship lending provides greater protection against the interest

rate cycle.

However, relationship lending involves the role of agents in gathering

information and this could add extra costs to the banks. There is still a gap in the

empirical literature as to how to determine how relationship lending works and

how the organizational structure of the banks aids their ability to deliver. It is also

necessary to determine how recent changes in the economic environment are

likely to affect the availability of credit to small businesses.

42

2.7 Empirical Framework

Lawal and Ijaiya (2006) looked at SMEs access to commercial banks’

credits and their contribution to GDP in Nigeria. They concluded that there is a

positive relatioship between commercial banks’ credits to SMEs and their

contribution to GDP and thus encourage CBN to come up with guidelines that

will increase credits from commercial banks to SMEs and promptly..

Onakoya, et. al (2013) examines the impact of financing small scale

enterprises on economic growth in Nigeria, using a quarterly time series data from

1992 to 2009. The study combined several econometric estimation techniques.

The findings shows that loan to small scale entrepreneurs have a positive impact

on the economic performance while interest rate has a negative impact on

economic growth. The study thereby concludes that the greatest or worst problem

confronting SMEs in Nigeria is managerial capacity. Access to capital or finance

is necessary but not a sufficient condition for successful entrepreneurial

development.

Another problem confronting SMEs in Nigeria according to Onasanya, et al

(2013) is managerial capacity. Access to capital or finance is necessary but not a

sufficient condition for successful entrepreneurial development. If one has the 43

entire funds in the world and does not have the capacity to manage that fund and

does not have the necessary information as to what he/she should do, the money

would go down the drain.

Utomi (1997) identified inadequate capital, inaccessible credit facilities.

Long term development institutional credit was known not to be available to

SMEs because they are generally considered high credit risks by financial

institutions. The study by Evbuomwan, et al. (2012) indicated that 75.7% of their

survey respondents relied mostly on own funds to finance their businesses.

A widespread concern is that the banking system in the sub sector (which

supposed to be the major financier of SMEs) is not providing enough support to

new economic initiatives and in particular to the expansion of SMEs and

agriculture sector. It is noted that commercial and the hitherto merchant banks

which retained liquidity levels in excess of regulation have shown reluctance in

financing SMEs (Sacerdoti, 2005). Also, the interest rate on micro-credits is very

high, due to large administrative costs in relation to their scale of operations.

(Mahmoud, 2005). Adoyi and Agbo (2009) adopt the descriptive research method

and employ both primary and secondary data to determine the extent to which

small business firms have developed Benue State of Nigeria and found that 86.3%

44

of the small business firms pay their taxes regularly. These taxes increase the

revenue base of the State which is used for development purposes.

Akingunola (2011) assesses specific financing options available to SMEs in

Nigeria and contribution with economic growth via investment level. The

Spearman’s Rho correlation test is employed to determine the relationship

between SMEs financing and investment level. The analysis reported a significant

Rho value of 0.643 at 10% which indicated that there is significant positive

relationship between SMEs financing and economic growth in Nigeria via

investment level.

The relevance of small and medium scale enterprises as a means of

generating employment and reduction of poverty in the country in Nigeria was

examined by Aremu and Adeyemi (2011). After a deep review of the literature,

the authors concluded that the SME sector is the main driving force behind job

creation, poverty reduction, wealth creation, income distribution and reduction in

income disparities.

Finance availability has been touted as one of the constraints of SMEs

(Evbuomwan et al., 2012). However, Azende (2011) in the empirical evaluation

of the performance of the Small and Medium Scale Enterprises Equity Investment 45

Scheme in Nigeria (SMEEIS) in Benue and Nassarawa States of Nigeria utilised

secondary data of total credit to SMEs as percentage of banks total credit for a

period from 1993 to 2008 and paired sample t-test to test the significance of bank

loans before and after the introduction of SMEEIS. He reported that there is no

significance difference between the loans disbursed by banks to SMEs before and

after the introduction of SMEEIS which is due largely to the fact that the

conditions for accessing SMEEIS funds was beyond the reach of the targeted

SMEs.

Osuka (2007) examined the impact of banks’ credits on the growth and

performance of small and medium scale enterprises in Nigeria. Using regression

tools, he observed that there is a positive relationship between SMEs performance

in terms of outputs and contribution to GDP and capacity utilization, and credits

from conventional banks and specialized finance institution.

In principle, Nigerian small-scale enterprises can be said to make a valuable

contribution to the economy, although this study has not addressed the specifics of

that contribution. However, this study has shown that, by their nature, these

enterprises have insufficient access to formal financial institutions, and as a result,

rely more on their own or friends and relatives' savings, and on informal financial

46

institutions for investment capital. Thus, government policies aimed at the

creation of a favorable environment for informal institutions are necessary to

ensure their survival.

It has also been shown that some existing government policies may be

detrimental to the SMEs' development, whereas some have been designed to

encourage them. Of those examined in this study, many of the enterprises that

failed were operated by sole proprietors with minimal educational background or

business experience. These enterprises often relied heavily on imported

components, and were in many cases unaware of existing government incentives

from which they could benefit. While on one hand the respondents identified

government policies as being responsible for their difficulties, on the other hand

the respondents were unaware of the various incentives and credit facilities

provided by the government. For example, about 75 per cent of the respondents

were unaware of the "Work-For-Yourself" programme; 70 per cent were unaware

of the National Economic Reconstruction Fund Programme; 81 per cent were

unaware of the Small-to- Medium-Scale Enterprises Loan Scheme; and 79 per

cent were unaware of the Small-Scale Industries Credit Scheme. To improve their

47

chances of success, the government could do more to publicize the existence, of

these programmes which target SMEs.

Grace and Tomol (2008) empirically analyzed those factors associated with

the profitability of Small and medium - enterprises in Nigeria and their result

added to our knowledge on the series of factors associated with the profitability of

small and medium-sized firms in Nigeria. The results demonstrate that there is

interdependence between the SMEs profitability and bank loans, a significant

relationship between profitability and the size of business and a positive

relationship between profitability and interest rate. For high profitability, more

loans and growth in size of business remain important.

Akoja and Hasret (2010) worked on the financing of industrial development

in Nigeria using Kwara state as the case study. They arrived at the following: It is

no exaggeration to say that despite the lofty objectives of the government in

respect of the Small and Medium Enterprises sub-sector, the results are often

disappointing and the potentials of small-scale industries are not often realized in

the industrialization process. Their study highlighted the type of ownership of the

SME, the entrepreneur‘s educational development level; the sub-sector type and

the size of the annual revenue of the SME are significant indices and thus affect

48

the financing of the enterprises in Kwara State. Further, the entrepreneur‘s source

of seed capital, source(s) of business/financial information and the membership of

trade/business organization also significantly affect the financing of SMEs, cum

industrialization of Kwara State.

2.8 Summary

SMEs have been identified as a viable industrial development strategy. The

sources of fund to SMEs ranges from governments, private institutions such as

banks and individuals which include the owners of the business and borrowed

fund from friends and relatives. Past research work has shown the contribution of

SMEs to economic development and has identified it as a viable tool for industrial

development considering it contribution to the developed countries of the world.It

has also identified the problems of SMEs to include lack of fund, lack of

entreprenuerial skills, inconsistent policy measure, unstable macro-economic

environment, inadequate infrastructural facilities.

This work will complement earlier research works by evaluating the

relationship between commercial banks’ credit to SMEs and the effect on the total

real GDP using product moment correlation coefficient to elicit the relationship.

49

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter focuses on the basis, process, procedure and methods used in

carrying out this study. It discuss the method and strategies that was adopted in

carrying out this research. It comprises of the research design, types and sources

of data and method of data analysis.

3.2 Research Design

This research is designed to present the hypothesis tested that is, the

relationship between SMEs and real GDP. The statistical instrument adopted for

the analysis is product moment correlation coefficient. This research work focuses

on financing options available to SMEs via commercial banks in Nigeria, their

accessibility to such fund and SMEs contribution to the total real GDPs of Nigeria

in recent years. Relationship between commercial banks' credit to SMEs and the

total Real GDP in Nigeria from 1992-2012 is analyzed.

The scope of the research is from 1992 because Small Scale Enterprises

started in 1992 (CBN statistical bulletin,2012) and it runs through to 2012 which

50

is the most recent year. It also considers the effect of bank recapitalization of 2005

on commercial banks loans to SME which is from 2006 to 2012. This is a period

of seven (7) years so, seven years data before the bank recapitalization was also

reviewed which is between 1999 to 2005.

3.3 Types and Sources of Data

This study relies on historical quantitative data, which are available in

secondary form. This used Central Bank of Nigeria (CBN) Statistical Bulletin

published information on commercial banks' credit to SMEs and the total real

GDP which were studied to obtain information between the variables that were

treated. The choice of secondary source is based on its authenticity and reliability.

Hence, the reliance on published information on commercial banks' credit to

SMEs and the total Real GDP became imperative.

Other datas used for this research was sourced through journals, textbooks,

newspapers and the internet.

3.4 Method of Data Analysis

The quantitative nature of this study makes it imperative to carry out an

empirical investigation to examine if there is any functional relationship between

51

the variables that were treated. The two most important of this analysis are

commercial banks' credit to SMEs and the real gross domestic product (GDP). In

line with this, product moment correlation coefficient was used to test whether the

commercial banks' credit to SMEs have impacted on the socioeconomic

development of Nigeria, proxy by the total Real Gross Domestic Product (GDP).

The product moment correlation coefficient statistical test formula is given as the

relationship between the variables involved in the research.

The relationship can be expressed as shown below:

r = N Ʃ Xcbl Ygdp – (Ʃ Xcbl) (Ʃ Ygdp)

(N Ʃ Xcbl 2 – (Ʃ Xcbl)2) (N Ygdp

2 – (Ʃ Ygdp) 2)

Where :Ʃ= summation.

N = numbers of years

Xcbl = commercial bank loan to SMEs.

Ygdp = gross domestic product (GDP)

Ygdp is the endogenous or dependent variable and Xcbl is the exogenous or

independent variable.

52

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1 Introduction

This chapter deals with the data presentation, analysis of data and discussion of

findings. Hence in this chapter, the secondary data collected was presented and

analyzed using descriptive and inferential statistical tools. Specifically product

moment correletion coefficient was employed to test the research hypothesis.

This chapter is divided into three parts. The first part involves the

description of data extracted, the second part deals with the testing of hypothesis

that was earlier stated and the discussion of the findings.

4.2 Descriptive Analysis

In this part of the research, we present analysis of the results of the research

hypothesis. As stated earlier, product moment correletion coefficient was used in

carrying out correlation analysis on the specific items in the data directly to the

research questions.

53

4.2.1: Tabular representation of commercial bank credit to SMEs as a

percentage of Real GDP (N’Millions) from 1992 to 2012.

Table 4.1: Commercial Banks’ credits to SMEs as a percentage of GDP

(=N=’Million) from 1992 to 2012.

Years Commercial

Banks’ credit to

SMEs in Nigeria

(=N=’million)

Real Gross

Domestic Product

at 1990

Basic Prices

(=N=’Million)

Commercial

Banks’ credit to

SMEs as a

percentage of GDP

1992 20,400.0 271,365.52 7.52

1993 15,462.9 274,833.29 5.63

1994 20,552.5 275,450.56 7.45

1995 32,374.5 281,407.40 11.5

1996 42,302.1 293,745.38 14.40

1997 40,884.3 302,022.48 13.54

1998 42,260.7 310,890.05 13.59

1999 46,824.0 312,183.48 15.0

2000 44,542.3 329,178.74 13.53

2001 52,428.4 356,994.26 14.6954

2002 82,368.4 433,203.51 19.01

2003 90,176.5 477,532.98 18.88

2004 54,981.2 527,576.04 10.42

2005 50,672.6 561,931.39 9.02

2006 25,713.7 595,821.61 4.32

2007 41,100.4 634,251.14 6.48

2008 13,383.9 672,202.55 1.99

2009 16,366.5 718,977.33 2.28

2010 12,550.3 776,332.21 1.62

2011 15,611.7 834,000.83 1.87

2012 13,863.46* 888,893.06* 1.56

Source: CBN Statistical Bulletin, 2012

* Provisional figure

The above table shows an increased percentage in the relationship

between commercial bank’s credit to SMEs from 7.92% in 1992 to 19.01%

in 2002. This was as a result of the increment in commercial banks’ credit

to SMEs and proper implementation of Government policies within this

period. However, the percentage has been fallen from 2003 and stands at

55

1.56% in 2012 which was as a result of unstable macro economic

environment, inconsistent policy measure among others.

4.2.2: The statistical model used in this study is given as:

r = N Ʃ Xcbl Ygdp – (Ʃ Xcbl) (Ʃ Ygdp)

(N Ʃ Xcbl 2 – (Ʃ Xcbl)2) (N Ygdp

2 – (Ʃ Ygdp) 2)

Where: Ʃ= summation.

N = numbers of years

Xcbl = commercial bank loan to SMEs.

Ygdp = gross domestic product (GDP)

However, correlation (r) ranges from -1 to +1 which serves as the basis of

determinant whether the dependent variable Ygdp is dependent or related to the

indepent variable Xcbl.

Moreso, if the calculated r value ranges from +0.1 to +1, their is either a

weak positive correlation between both variables (+0.1 to +0.4),strong positive

correlation (+0.5 to +0.9) or that they are perfectly positively correlated if r=+1.

However, if the r value ranges from -0.1 to -1,then their is a weak negative

correlation between both variables (-0.1 to -0.4),strong negative correlation (0.5-

56

0.9) or that they are perfectly negatively correlated if r = -1. If the r value is zero,

then there is no correlation.

Decision rule: reject Ho if r falls between +0.1 to +1 that there is

relationship between the variables and reject if otherwise.

57

4.2.3 Graphical representation of commercial banks’ credit to SMEs as a

percentage of the Real GDP in Nigeria (N’ Millions) from 1992 to 2012.

Fig 4.1: The graphical trend of commercial bank credit to SMEs from 1992

to 2012

Source: Researcher’s Computation, 2013

The above graph shows a relative increase in commercial bank loan to sme

in the 1990s which reached its peak in 2003 and started falling drastically.

58

Although it rose back in 2006 immediately after the bank capitalization but fell

rapidly since then.

Fig 4.2: The graphical trend of commercial bank credit to SMEs as a

percentage of their total credit to the private sector from 1992 to 2012.

Source: Researcher’s Computation, 2013

The above graph shows that commercial credit to small scale enterprises as

a ratio of their total credit has over the years reduced drastically. The percentage

fell below 15% in 1994 but rose back in 1995. It is also shown that the percentage

59

of commercial bank loan given out to SMEs has been consistent at a very low rate

after the bank recapitalization of 2005.

Fig 4.3: The graphical trend of the Real GDP from 1992 to 2012

Source: researcher’s computation, 2013 (using CBN Statistical Buletin, 2012)

From the above graph, it can be deduced that the rate of growth in the

1990s was very much insignificant but there was a geometric increase in the trend

from 2001 till date.

60

Fig 4.4: The graphical trend of the Real GDP growthrate in percentage from

1992 to 2012

Source: Researcher’s Computation, 2013

From the above graph, it can be deduced that the rate of growth in the

1990s was below 5%. It then increase above 5% in the millenium with a very

significant increase and reached the highest growth rate ever in 2003 which is

21.3% but fall back to range between 5% and 10% from 2005 till date.

61

4.3 Test of Hypothesis

Hypothesis: There is no relationship between commercial banks' credit to SMEs

and the total Real GDP in Nigeria.

Table 4.2: This shows the relationship between Xcbl and Ygdp for the period 1992 to

2012

Correlations

Xcbl Ygdp

Xcbl Pearson

Correlation 1 -.329

Sig. (1-tailed) .072

N 21 21

Ygdp Pearson

Correlation -.329 1

Sig. (1-tailed) .072

N 21 21

Source: researcher’s computation using statistical

package for social science(SPSS), 2013

62

From the table above the r value is -0.329 which falls within the range -0.1 to -

0.4. This indicates that both variables are weak negatively correlated i.e. there is

no relationship between commercial bank loan to SMEs and the Real GDP for the

period 1992 to 2012. Hence, we accept the Ho .

Table 4.3: This shows the relationship between Xcbl and Ygdp for the period 1992 to

1998.

63

Correlations

Xcbl9298 Ygdp9298

Xcbl9298 Pearson

Correlation 1 .900**

Sig. (1-tailed) .003

N 7 7

Ygdp9298 Pearson

Correlation .900** 1

Sig. (1-tailed) .003

N 7 7

Source: researcher’s computation SPSS,2013

** Correlation is significant at the 0.05 level

From the table above, the r value is +0.9.00 which falls within the range

+0.5 to +0.9 and this indicates that there is a strong positive relationship between

commercial bank loan to SMEs and the Real GDP for the period 1992 to 1998.

Hence, we reject the Ho and accept H1 that there is a strong relatioship between

commercial bank credit to SMEs and GDP growth between 1992 and 1998.

Table 4.4: This shows the relationship between Xcbl and Ygdp for the period 1999 to

2005 which is a period ofseven years before the bank capitalization.

64

Correlations

Xcbl9905 Ygdp9905

Xcbl9905 Pearson

Correlation 1 .320

Sig. (1-tailed) .242

N 7 7

Ygdp9905 Pearson

Correlation .320 1

Sig. (1-tailed) .242

N 7 7

Source: researcher’s computation using SPSS, 2013.

From the table above, the r value is +0.320 which falls within the range +0.1 to

+0.4 and this indicates that there is a weak positive relationship between

commercial bank loan to SMEs and the Real GDP for the period 1998 to 2005.

Hence, we reject the Ho and accept H1 that there is a relatioship between

commercial bank credit to SMEs and GDP growth between 1999 and 2005.

65

Table 6: This shows the relationship between Xcbl and Ygdp for the period 2006 to

2012 after the bank recapitalization of 2005.

Correlations

Xcbl0612 Ygdp0612

Xcbl0612 Pearson

Correlation 1 -.620

Sig. (1-tailed) .069

N 7 7

Ygdp0612 Pearson

Correlation -.620 1

Sig. (1-tailed) .069

N 7 7

Source: researcher’s computation using SPSS, 2013

From the table above, the r value is -0.620 which falls within the range -0.5 to -

0.9 and this indicates that there is a strong negative relationship between

commercial bank loan to SMEs and the Real GDP for the period 2006 to 2012

after the bank recapitalization of 2005. Hence, we accept the Ho that there is no

66

relatioship between commercial bank credit to SMEs and GDP growth between

2006 and 2012.

4.4 Discussion of Findings

This research work concentrated on the funding of SMEs via commercial

banks’ credit and how this has contributed to productivity in the country which is

measured by Real GDP in Nigeria. The following was revealed after analyzing

the data collected:

For the period 1992 to 2012, there is negative relationship between

financing of SMEs and the Real GDP. This means that commercial bank

loans to SMEs does not have direct effect on the growth of the Real GDP

for the period.

For the period 1992 to 1998, there is a strong positive relatioship between

commercial bank credit to SMEs and GDP growth. This suggest that

commercial bank loans to SMEs have direct effect on the growth of the

Real GDP for the period and if the country wishes to reap the full benefit of

small scale as it is in developed countries of the world, the government

have to establish institutions that will help in financing SMEs and to try to

regulate the functioning of those that are established.67

For the period 1999 to 2005, there is a weak positive relatioship between

commercial bank credit to SMEs and GDP growth. This also indicates that

commercial bank loans to SMEs have direct effect on the growth of the

Real GDP for the period. Therefore, the regulatory authority has to ensure

that commercial banks are committed to financing SMEs with lesser

formalities in terms of security and documentation requirements. Priority

should also be given to them by commercial banks and the authority has to

see to this because the level of positive relationship has fallen below the

values of the the previous years.

For the period 2006 to 2012, there is a strong negative relationship between

commercial bank loan to SMEs and the Real GDP. This indicates that after

the bank recapitalization of 2005 commercial bank credit to SMEs has

decreased drastically and has been insignificant on Real GDP growth for

this period.

CHAPTER 5

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 INTRODUCTION

68

This chapter contains the findings, summary, conclusion and

recommendations with regard to the research work; “An Evaluation of the

relationship between Commercial Banks’ credit to SMEs and its effect on the

Real GDP in Nigeria”

5.2 SUMMARY

This study, as stated earlier, concentrated its efforts on the funding of SMEs in

Nigeria and its effect on productivity in the country. This is in realization of the

fact that the SMEs, as in many emerging economies, play a significant role in the

industrialization process. The specific objectives of this research include: to

examine the problem of SMEs in Nigeria, to evaluate institutions in place to help

SMEs in Nigeria, to determine the importance of SMEs to national development

GDP, to determine how government policies has affected the development of

SMEs as regards their sources of funds, to examine the sources of funds available

for the start-up and expansion of SMEs and to identify ways of improving credit

availability and delivery to SMEs sub-sector.

The result of the data analyzed shows that there is negative relationship

between commercial banks’ credit to SMEs and the GDP in Nigeria for the period 69

1992 to 2012. However, it also shows that there is positive relationship between

both variables between 1992 to 1998 and 1999 to 2005.This suggests that the

negativity in the relationship arose from within 2006 and 2012 (after the bank

recataliation) which has been shown in the analysis. So, if Nigerians are to reap

the benefit of small scale enterprises as it is in developed countries of the world,

the government must consider the factors that has led to the negativity after the

bank capitalization and take relevant corrective measures. The institutions that

that will help in financing SMEs that has been establish should be adequately

regulated to ensure effectiveness in the performance of SMEs.

The problem of SMEs as observed from this study include: poor

infrastructural facilities; low level of skill on the part of the business owner

particularly in terms of management and accounting; inability to effectively

compete in local, domestic and the international export markets because the home

market is saturated with cheap imported products; low level of technology; lack of

productivity resources among others. To ease the unavailability of finance to

SMEs, government of the country has established lots of institutions to help out

on this. These include Nigeria Industrial Development Bank, Nigeria Bank for

Commerce and Industry, World Bank Assisted SME Loan Scheme, Nigerian

70

Agricultural and Co-operative Bank, Federal Ministry of Commerce and

Industry‘s Small-Scale Industries Credit Scheme, Micro Finance Bank, National

Economic Reconstruction Fund. Despite the existence of these and many others,

SMEs still face the problem of finance and technical aid. Government has to see

to their efficient functioning to ensure that they achieve the objective(s) for which

they were established.

SMEs contribute to national development by providing the training ground

for the development and growth of indigenous entrepreneurs; utilizing the locally

available raw materials; transforming the traditional industry to modern and

larger ones; provision of employment opportunity; facilitating the conservation of

foreign exchange and the development of the scarce resources of management in

developing countries among others.

Moreso, most policies of the government for the developmentof SMEs

appear to be very good but has not really had a positively effect on the growth of

SMEs because of inefficiency in the implementation of such policy. An example

is the Micro Finace Banks which is meant to be the bank of the poor and are

supposed to give loans to potential entrepreneurs with little or no collateral now

demand stringent conditions in granting of loans and advances.

71

It has also been revealed from the study that most fund for SMEs growth

and expansion in Nigeria has been sourced from personal saving, contribution

from friends and saving, informal sectors in the economy among others.

Inorder to improve credit availability and delivery to the SME sub sector,

the regulatory authority have to ensure that commercial banks are committed to

financing SMEs with less formalities in terms of security and documentation

requirements. Priority should be given to them by commercial banks and the

authority has to see to this.

5.3 CONCLUSION

It is no exaggeration to say that SMEs in Nigeria are under financed despite

government efforts to see to the development of SMEs in the country. SMEs have

been identified as a good developmental instrument as shown in the both the

developed and the developing countries of the world, So,the Nigerian government

must ensure that institutions established for the purpose of financing SMEs

perform the work satisfactorily and in particular, commercial bank as a major

source of finance has to be regulated and their credit directed towards SMEs with

less stringent requirement.

5.4 RECOMMENDATIONS72

There is no gain-saying that the Small and Medium Enterprises are a vital

force in the industrialization process of developing and emerging economies.

Certainly, governments all over the world will continue to accord the sector the

high priority it deserves. In order to bring about sustainable development in an

environment that is characterized by stiff competition, especially against the

backdrop of trade globalization, concerted, coordinated and sustained efforts are

required from all operators in the economy, i.e. the government and its

agencies/parastatals, Non-Governmental Organizations, relevant financial

institutions and international bodies.

With regard to the findings of this study, the following recommendations has been

made:

1. In order to focus the country in her economic emancipation and commitment to

the building of a virile, competitive and resilient industrial sector, there is need for

the government to be better coordinated in the financing of the SME sub-sector

more importantly by way of equity. The creation of an SME window in the

Nigerian Stock Exchange is very important. In this way, the orderly growth,

development and continuity of the nation‘s SMEs can be put on a solid

foundation. The commencement of the Small and Medium Industries Equity

Investment Scheme (SMIEIS) by the federal government is highly commendable. 73

However, the scheme needs to be well coordinated in order to address the under

capitalization problems of SMEs in addition to the fact that the beneficiaries need

to be clearly identified. Entrepreneurial training and financial advice needs to be

giben to the beneficiaries at little or no cost. It is pertinent to note however, that

SMEs need equity but prefer to take loans and banks have equity funds to give but

prefer loans. Thus there is the need to strike a balance.

2. The need arises for government to formulate and implement policies that will

address the problem of low/dwindling revenues accruing to the small and medium

scale enterprises. Such measures include the provision of infrastructural facilities,

establishment of purchase/trade agreements by government agencies with the

SMEs and the provision of training to address production needs, marketing

activities and technology acquisition/management issues.

3. There is also the need for the government to take deliberate and positive steps

to address all structural defects in the industrial sector by adopting industry

concrete measures in the financing of the Small and Medium Enterprises. This

ensures that the goals of industrialization are consistent with the motivations

internal to each sub-sector.

4. Certainly, there is the need to investigate further and carry out detailed sub-

sector analysis of the financing of the Small and Medium Enterprises with a view 74

of finding out the problems/bottlenecks that do not enable these enterprises to

contribute meaningfully towards the industrialization process.

5. Above all, government needs to come up with regulation mandating

commercial banks in the country to give a stipulated minimum percentage of their

loan to SMEs with less stringent requirement in terms of documentation and

collateral security which must be duly cordinated.

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APPENDIX I

Table 4.1: Commercial Banks’ credits to SMEs as a percentage of GDP

(=N=’Million) from 1992 to 2012.84

Years Commercial

Banks’ credit to

SMEs in Nigeria

(=N=’million)

Real Gross

Domestic Product

at 1990 Basic

Prices

(=N=’Million)

Commercial

Banks’ credit to

SMEs as a

percentage of GDP

1992 20,400.0 271,365.52 7.52

1993 15,462.9 274,833.29 5.63

1994 20,552.5 275,450.56 7.45

1995 32,374.5 281,407.40 11.5

1996 42,302.1 293,745.38 14.40

1997 40,884.3 302,022.48 13.54

1998 42,260.7 310,890.05 13.59

1999 46,824.0 312,183.48 15.0

2000 44,542.3 329,178.74 13.53

2001 52,428.4 356,994.26 14.69

2002 82,368.4 433,203.51 19.01

2003 90,176.5 477,532.98 18.88

2004 54,981.2 527,576.04 10.42

2005 50,672.6 561,931.39 9.0285

2006 25,713.7 595,821.61 4.32

2007 41,100.4 634,251.14 6.48

2008 13,383.9 672,202.55 1.99

2009 16,366.5 718,977.33 2.28

2010 12,550.3 776,332.21 1.62

2011 15,611.7 834,000.83 1.87

2012 13,863.46* 888,893.06* 1.56

APPENDIX II

Table 4.2: Descriptive Statistics of commercial banks’ credit to SMEs

and its effect on GDP for the period 1992 t0 2012

86

Mean

Std.

Deviation N

Xcbl 36896.2076 21917.9164

3

21

Ygdp 482323.514

8

2.06222E5 21

APPENDIX III

Table 4.3: Descriptive Statistics of commercial banks’ credit to SMEs

and its effect on GDP for the period 1992 t0 1998.

87

Mean

Std.

Deviation N

Xcbl9298 30605.2857 11661.5508

0

7

Ygdp9298 287102.097

1

15269.6273

4

7

APPENDIX IV

Table 4.4: Descriptive Statistics of commercial banks’ credit to SMEs

and its effect on GDP for the period 1999 to 2005

88

Mean

Std.

Deviation N

Xcbl9905 60284.7714 18222.9898

0

7

Ygdp9905 428371.485

7

98787.2751

8

7

APPENDIX V

Table 4.5: Descriptive Statistics of commercial banks’ credit to SMEs

and its effect on GDP for the period 2006 t0 2012.

89

Mean

Std.

Deviation N

Xcbl0612 19798.5657 10384.0956

0

7

Ygdp0612 731496.961

4

1.07104E5 7

90