THE IMPACT OF BANK LOANS ON SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA (A CASE STUDY OF CUSTOMERS IN UBA PLC AWKA BRANCH)
1.1 Background of the Study
In Nigeria, as in many other developing countries there is dearth of financial institutions which cater for long and medium term credit needs of business operations. In exception to this, they suffer a great deal for want of capital for development and expansion.
By definition, commercial bank is an institution where money and other valuable items are kept for security purposes and at the same time transact business such as giving of loans and advances.
Among the most important commercial banks in Nigeria are: The First Bank Plc formerly known as the bank of West Africa which has the largest assets and located its head office in Nigeria at 37 Marina, Lagos. The Union Bank formerly known as Barclays Bank which was established in the year 1917 in Lagos as the first branch and is the first bank to hit one billion naira customers’ deposit. The commercial banks trend made through British and French Banks now called the United Bank for Africa Limited which was established in 1949 making it the third expatriate bank of dominate the early Nigerian Commercial Banking.
The issue however remains that her pace, towards economic development has not kept record with the naturally endowed nations. While some sectors of the economy have recorded some significant growth, others continued to lag behind inspite of increased financial resource allocations.
While most of the villages still lack the basic necessities of life, potable drinking water, electricity and health facilities, many of the urban areas are becoming dotted with sky-scrappers. Thus parallel growth structure between the two areas. Hence giving rise to migration from the rural to the urban areas. The ultimate effect has been the abandonment of natural resources in the rural areas to urban crimes and inflation.
Government’s efforts to check the above analyzed problems have not been fruitful rather the problems seem to be complicated in certain cases.
The straw that broke the camel’s back was the down-turn of oil prices for the growth in oil production coupled with high sales in the 1970’s has turned the economy from a production oriented one to an import and distribution one. It was what the oil glut was witnessed in 1981’s that our economic planners recognized the need to reverse the trend, hence the concept of diversification. One of the militating factors of diversifying the economy is the establishment of the small scale industries.
The importance of these industries to the economic survival of the country cannot be overemphasized. They have moved from the sub-existence level of pre-indigenization period to a position of importance in the country’s industrialization process. In an attempt to modernize many small scale enterprises, their standard of operations have moved into the capital intensive stage. To do this, a reasonable amount of capital needed in many cases are beyond the financial capacity of the entrepreneurs who set up the business.
The major alternative for the provision of such capital is the financial institution. Among the financial institutions operating in the country, the commercial bank is one of the major sources of credit to various sectors of the economy. However, it is a common knowledge that getting the financial support from the commercial banks getting the financial support from the commercial banks has been grossly inadequate for building indigenous entrepreneurs and even for those who have been in the manufacturing business for a long time.
1.2 Statement of the Problem
In any economy, small scale industries are powers to reckon with in terms of provision of employment to the people. Small scale industries can perform their roles effectively if they are empowered economically. In Nigeria, small scale industries have not been encouraged enough by the government due to some constraints; such as lack of clear policy on the part of the government to strengthen their operations, lack of capitals, lack of facilities in the form of power, water supply, good road networks, and a host of others. The enabling environment is necessary to make them operate fully. The principle factor hindering their operations is lack of capital. The capital for such business could either come through personal savings, through pooling of resources from friends or through commercial banks as the case may be. Commercial banks have enormous roles to play to help small scale enterprises but they could not come due to several factors. In Nigeria, commercial banks do not actually play the intermediation roles due to lack of capital, lack of defined policy for lending to the public and heavy collaterals among others. Lack of defined interest rate, man-know-man syndrome and other constraints prevent small scale industries from performing their roles.
This research is essentially designed to investigate why commercial banks hesitate to offer assistance to small scale industries with a view to finding solutions to these problems.
1.3 Objectives of the Study
In view of the problems of small scale industries, the primary objective of the study is to evaluate the role of commercial banks in financing small scale industries in Nigeria.
Other secondary objectives include the following:
i. To identify the problems encountered by the industrialist in obtaining finance from commercial banks.
ii. To appraise the situation and make recommendation, as to how to improve on the bank services.
iii. To highlight the extent to which the commercial banks have helped finance small scale industries and problems hindering such.
iv. To create attractive opportunities for investment of Nigerian industry and provide outlets for production investment for Nigerian savings.
v. To conduct other aspect of commercial banking operations like acceptance of terms deposit and provision of loans to Nigerians.
vi. To lay emphasize on the provisions of basic ingredients of economic development necessary to finance enterprise, managerial and technical assistance which are in short supply in the rural areas. This study will help to define the contributions of banking programmes in extending banking services to every part of the country.
vii. To know the roles of commercial banks and suggested ways of minimizing their problem of the financing of the small scale industries in Nigeria. This study will help to promote the financing of small scale industries of the country both at rural and urban areas.
viii. This study will also help to make recommendations on how best some of the commercial banks activities will be handled.
1.4 Significance of the Study
The significance of the study includes:
i. To help Nigerian businessmen to hold on to their own commercial fields.
ii. To make Nigerians operate in such a way as to give confidence to work effectively in the commercial and industrial fields. Industrialist will benefit because the research project will reveal any problem relating to relationship between commercial banks and the small scale industrialist. When these problems are revealed it will aid small scale borrowers to ask for loan easily without any problems.
iii. To help Nigerian establish industries and own properties with the encouragement of commercial banks.
iv. To help individuals both entrepreneurs and investors to benefit from loans advances, overdrafts and business opportunities offered by commercial banks. Individuals will also gain because when commercial banks give loans to industrialist, it will help to act that the needs of the people are provided if not fully but to an extent that a good number of people will benefit.
v. To help potential researchers who have the same or related topics to write on, and make use of this work. The research will be of importance in that, it will provide data for future studies on the subjects. Thus the study will be of benefit to students who will like to research on related topics in future; it will make their work easier because already a foundation has been laid.
vi. Through this study, the government shall become aware of the problems inherent in initiating such a project and avail themselves of such future problems in initiating other future projects in the same line.
vii. This work or study shall also help the appropriate authorities to ascertain the contributions and effectiveness of commercialization of banks.
1.5 Limitations of the Study
This topic “The Impact of Bank Loan in Financing Small Scale Enterprises” (A Case Study of UBA Plc, Awka Branch) is very verse but for purpose of manageability and financial constraints, it has therefore resisted or limited itself to some specific banks in Awka, Anambra State.
In choosing this bank, the researcher has limited her research in these areas of operation in the institutions that enhance economic emancipation of Nigeria and use inference drawn to apply to other development of financial institutions. This has been so because the researcher assumed that all financial institutions saddled with the sole responsibility of small scale industry have the same goal and objective of enhancing small scale industry.
1.6 Research Questions
The following research questions have been put forward to enable the researcher draw conclusion:
i. What are the major constraints the small scale enterprises face in obtaining loans from commercial banks?
ii. What are the roles of commercial banks to the growth of small scale industries in Nigeria?
iii. In your opinion to what extent do you think that small scale enterprises can grow without assistance from the commercial banks?
iv. What roles do you envisage government will play to encourage the small scale enterprise in Nigeria?
v. To what extent would small scale enterprises contribute to reduction in unemployment among youths in the country?
vi. To what extent could small scale enterprise survive in Nigeria in the midst of competitions in banking activities?
1.7 Research Hypotheses
The following hypotheses have been put forward to help the researcher determine result of this research work.
1. Ho: Small and medium scale enterprises in Nigeria do not
contribute to the growth of the economy in Nigeria.
Hi: Small and medium scale enterprises in Nigeria contribute significantly to the growth of the economy in Nigeria.
2. Ho: Small and medium scale enterprises have no significant
relationship with employment programmes in the country.
Hi: Small and medium scale enterprises have significant
relationship with employment programmes in the country.
3. Ho: Small and medium scale enterprises have no correlation
with poverty alleviation programme in the country.
Hi: Small and medium scale enterprises have direct correlation with poverty alleviation programme in the country.
1.8 Definition of Terms
Small Scale: Different authors have different views of what a small and medium scale industry stands for or mean. According to Kerelu F.N (1988). A small scale industry is one whose paid-up capital falls within the range of about N750.000.
The Nigerian Bank for Commerce and Industry (NBCI) which currently plays a very active role in the promotion of small industries defines a small scale industry as one employing up to N500,000. Ezeije (1990).
In most cases, the varied definitions appear to be governed by the interest of the perceived, the purpose of the definition the state of development in which the definition is employed. Generally a small business is defined as one which is owned, managed by one or two persons, influenced by the family in decision making has no undifferentiated organizational structure, market shares are small and employ less than fifty (50) persons.
Role: For the purpose of this research, role should mean and includes all parts played and exhibited by financial banks.
Loans: This is the transfer of fund from one economic entity to another which must be repaid with interest over a stipulated period of time.
Credit: This word credit comes from Latin word “Credo” meaning, I believe, ability to command capital of another in return for a promise to repay as specified in the future.
Finance: This is concerned with availability of money and capital goods for investment in industries to boost production.
Industrialization: Could be defined as a strategy through which more industries are encouraged to spring up.
Money: Money can be defined as anything, which is generally acceptable in a given society or locality as a means of exchange and for settlement of debt.
Short Term Loan: A source of fund which has a short period of maturity.