COMMERCIAL BANK LENDING TO SMALL AND MEDIUM SCALE ENTERPRISES

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

By

EWUZIE PRISCILLA N

Presented To

Department of Accountancy

ABSTRACT

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

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

The project aims at examining the extent the commercial bank have completed with the guideline in providing credit to the small and medium scale enterprises, if they have complied, how adequate are the financial assistance and what the impediments on their way are. At the end suggestions will be made for improving or increasing credit facilities to the sector.

The main source of material of this project is primary sources such as interviews.

Data analysis does not go into statistical theorems and methods but based on simple comprise and percentages.

Bases on the analysis, finding emerged, recommendations for improvement of credit faculties to the small and medium scale enterprises made and finally conclusion drawn.

TABLE OF CONTENTS

Title page

Approval page

Dedication

Acknowledgement

Abstract

Table of contents

CHAPTER ONE

1.1 Background of the study

1.2 Statement of problem

1.3 Objectives of the study

1.4 Significance of the study

1.5 Hypothesis

1.6 Scope and limitation of the study

1.7 Organisation of work

1.8 Definition of terms

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Introduction

2.2 The Nigerian banking system - an overview

2.3 The central banking

2.4 Commercial banks

2.5 Development banking

2.6 Merchant banking

2.7 The role of small scale industries to economics development

2.8 The definition of small industries

2.9 The financial needs of the small scale enterprises

2.10 The commercial banking industry and the small scale enterprises

CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 Sources of data

3.2 Questionnaire design

3.3 Determination of sample size

3.4 Method of investigation

3.5 Validation of measuring instruments

CHAPTER FOUR

PRESENTATION AND ANALYSIS OF DATA

4.1 Introduction

4.2 Analysis

4.3 Test of hypothesis

CHAPTER FIVE

FINDINGS, RECOMMENDATION AND CONCLUSION

5.1 Findings

5.2 Recommendations

5.3 Conclusion

Bibliography

Appendix

CHAPTER ONE

1.1 BACKGROUND OF THE STUDY

So much had been said and written about commercial bank lending to small and medium scale enterprises. One still wonders why the small and medium scale enterprises are ever faced with the age-old syndrome of inadequate funds. The presence of the small and medium scale industries are not found in large numbers in very city, towns and villages as one would have thought, at least judging by the preponderance of attention it had been enjoying for long time now. Yet the problem is regarded as an ever-flagged issue even with out any real practical solution in sight.

Due to the relevance of the small and medium scale enterprises to the rapid economic development of the country, I consider any research into how to proliferate the economy with relevant small and medium scale enterprises very essential to our survival and growth; hence the promoting of this research work.

1.2 STATEMENT OF PROBLEM

The federal and state government has recognized the importance of small and medium scale enterprises (SME) in accelerating the economic development of the nation. As a result the monetary and fiscal policy guidelines since 1990 had directed commercial and merchant banks to increase their minimum lending limit to the small and medium scale enterprises to 20 percent of their total credit outstanding. The loan shall be strictly for activities in the industrial sector. Prior to 2004 the prescribed minimum was 16 percent.

Commercial banks have been complying fully with this laudable objective of funding small and medium scale enterprises adequately as directed by the Central Bank of Nigeria. Consequently, many of these small and medium scale enterprises (SME) get "choked" "die" because of inadequate financial support from the commercial banks.

1.3 OBJECTIVES OF THE STUDY

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

The research aims at identifying the major factors responsible for the inadequate financial support of the small and medium scale enterprises (SMEs). It is the researchers desire to come up with recommendation that will help solve the problem of inadequate funds to the small and medium scale enterprises and to stimulate the interest of the commercial banks in increasing credit facilities to the sub-sector.

Consequently, the rate of unemployment in the country will reduce, as more and more people will be employed in small and medium scale enterprises that will be set up. This will lead to increased savings, increased investments and growth of the economy. The standard of living of the people eventually will rise as a result.

In addition, it is aimed at facilitating the flow of funds for the establishment of new SMI/SME projects, reactivations, expansion and modernization or restructuring of on-going projects. And also, to stimulate economic growth, develop local technology and generate employment

1.4 SIGNIFICANCE OF THE STUDY

The result of the study can help in the reduction of high unemployment rate in the country and its attendant social ills like armed robber, harlotry, cultism etc.

The welfare prosperity and happiness of the citizens of a country are very essential to achieving peace and progress in the economy. Increase in national productions and family income levels will lead to higher standard of living. Thee could be made possible through the encouragement of the establishment of more and more industries.

1.5 HYPOTHESIS

1. Commercial banks credit to the small and medium scale enterprises is grossly inadequate

2. The risk inherent in the rural sector inhibits the commercial banks lending to the small and medium scale enterprises.

1.6 SCOPE AND LIMITATIONS OF THE STUDY

The research covers the commercial banks leading to the small and medium scale enterprises in Nigeria from 2000 - 2004. But since the researcher could not collect materials (data) from every commercial bank in all the nook and corner of the country, the researcher concentrated in Enugu metropolis and the union bank. The choosing of this bank is not encountered with the fact that materials can be gathered easily there, bank services are homogenous and the similarity among the elements that make up the population.

A lot of factors inhibit the smooth carry out of this project among which are time constraint, illiteracy of the small and medium scale enterprises, financial constraints and bureaucratic nature of the banks in releasing vital information for the research.

1.7 ORGANISATION OF WORK

This work is divided into (5) five chapters. Chapter (1) one, which deals with the introductory analysis, is the core chapter from which all the other chapters follows, it deals with problem definition, method of analysis and other related matters. The second chapter deals with the review of literature.

In the third chapter, research design and methodology is discussed where the sources of data is ex-rayed. Chapter four deals with the analysis and interpretation of data where the questionnaire were looked into and the hypothesis tried.

Finally, chapter five sums up the research work with the finding, recommendations and conclusion. The bibliography comes immediately with the questionnaire as appendix I.

1.8 DEFINITION OF TERMS

SMI: Any enterprises with a maximum asset base of N200 million, excluding land and working capital, with the number of staff employed by the enterprise not being less than 10 and not more than 300.

Fiscal Policy Guidelines: This has to do with the control of cash through taxation and other tariffs as may be applied by the CBN.

Monetary Policy Guidelines: Control of the availability of money in the economy through the sale of Treasury bill, treasury certificate, cash reserve requirements, liquidity ratio etc.

Commercial Bank(s): This is the bank that engages in retail banking, they operate deposit and saving account for small time bankers i.e. individual etc.

CBN - Central Bank of Nigeria: This is the apex bank of the nation. This bank regulates all the commercial banks of the nation and serves as the banker's bank. It is also the government's bank, it also regulates the money in circulation through OMO, treasury bills etc.