ACCESSIBILITY OF CREDIT FACILITY FROM FINANCIAL INSTITUTIONS BY SMALL AND MEDIUM SCALE ENTERPRISES: EVIDENCE FROM NIGERIA

Well Research and Ready to use Dissertation, page number: 206, Department: M.Sc. Accountancy

CHAPTER ONE
INTRODUCTION

1.1      Background of the Study

A business whether small or big, simple or complex, private or public  is created to either 

provide competitive prices make profit, provide social services or add value (Ayozie, 1999). Business in Nigeria has been classified as small, medium and large. However, (SMEs) Small and Medium Enterprises does not have a one way definition rather, its definition is best understood from its characteristic features; level of project costs,  turnover,    number    of    employees,    ownership    composition    and    capital    outlay (Akinsurile, 2006).

The Federal and State Ministries of Industry and Commerce have adopted the criteria of value of fixed capital to determine what Small and medium scale enterprises (SMEs)  definition would be. The National Council of Industries defined SMEs as those businesses whose capital base excluding land is not more than N2m only and employee ranges from 10 to 300 persons (Akimade,1991).  However, this value rose from N60, 000 in 1972, N159, 000 in 1975, N250, 000 in 1986 before rising to N2m in 1991.  On the other hand, small and Medium Scale Industries development Act 2003 specified that SME employee rages from 10-199, Assets excluding land and building fall between (5 and 499) million Naira only.

Small and Medium Scale Enterprises in Nigeria constitutes a greater percentage (75%) of all the registered companies in Nigeria.  They have been in existence for quite a long time as majority of SMEs’ grew from Cottage Industries.  The operations of SMEs’ are found in all the areas of human endeavours: Manufacturing, Production, information, Services, Agriculture, Hotel and Restaurants, Financial Intermediation, Real Estate, Education, Building and Constructions, Mining and Quarrying.

For SMEs’ to operate in these sub-sectors of the economy, they are not left without controls. Federal government through the apex bank (CBN) monitors the activities of SMEs to ensure that they work in line with the set standards in other countries.  The government set several agencies like small and medium scale industries equity investment schemes (SMIEIS),small and medium enterprise development agency(SMEDAN),Nigerian  agricultural cooperative and rural development bank,(NACRDB),Bank of industry(BOI), Nigerian  bank  for  commerce  and  industry(NBCI),Nigerian  industrial  development bank(NIDB). They are set to moderate, monitor, finance and control SMEs’ to ensure that they are resurrected to be the major driver of our economic development and growth (Onugu, 2005).

On the other hand, the Federal  government  liaises with  international  agencies  and organizations World Bank, International Finance Corporation (IFC), United Kingdom Department   for   International   Development   (DFID),   United   Nations   Industrial Development Organizations (UNIDO), and Europeans Investment bank (EIB) .The essence is not only to invest heavily on SMEs but to make them work vibrantly.

Wide attention and support given SMEs is not far-fetched from the obvious reasons that 

they are job and wealth creators.

1.2      Statement of Problem

SMEs in Nigeria can never be severed from the challenges and key variables that characterize the nation as a developing one.  We know that the nation has been faced with several challenges like economic and political instability, corruption, insecurity, high rate of poverty, poor infrastructures.  SME by extension as a sub-sector of the economy must definitely get a fair share of these problems.  In addition, to the general challenges (Cole, 2008; Udell,2003;Blum&Laurie,1995; Burch & Claudia,2004; Birly,1996; Bates,2007) who studied the problems and challenges facing SMEs, found out that one of the greatest problem facing SMEs was access to credits. Also, (Watson& Kunt, 2002; Vos,Yeh,Carter & Tagg, 2007; Beck & Kunt,2008; Chittenden & Hall, 1996) in their studies examined the extent to which limited access to finance has affected the performance and growth of SMEs. They observed that funding pose serious impediment to growth of SMEs. In the same vein, (Abereyo & Fayomi,2005; Dagogo & Ollor,2012; Gbandi & Amissah,2012; Anyawu,2010) have studied the appraisal of some sources of finances available for SMEs, and observed that most sources of finance attracts huge costs of capital with the exception 

of retained earnings that are cost free though may be too meager for the effective growth of 

SMEs.

Furthermore, financial institutions are demanding unattainable conditions and terms (high interest rate) for the granting of loan. They are claiming that SMEs are not presenting bankable   project   (good   project   proposal),   inadequate   collaterals,   lack   of   trained personnel’s, lack good accounting system that would give rise to audited annual accounts, coupled with high enterprise mortality. Thus, it would appear that greatest problem facing SMEs could be lack of accessibility of credit facilities.

Still worrisome is the position of Federal Government in the implementation of SMEs policies.  How far the apex bank has gone in the enforcement and control of the laws that guide SMEs even after the emphasis on budgetary allocation?  How have she ensured that the 10% profit before tax set aside by the commercial banks is made available to SMEs? It would appear that the commercial banks even prefer to pay a penalty of 20% to CBN instead of choosing the option of granting loans to SMEs.

But, despite the general vigorous marketing of these facilities by the financial institutions, SMEs have little or no access to them. The big question then is “why is it that SMEs are not able to access these credit facilities from the financial institutions’’?

1.3      Objectives of the Study

The main objective of this study is to determine the degree of accessibility of credit 

facilities from financial institution by Small and Medium Scale Enterprises: Evidence from 

Nigeria.

While the specific objectives of the study are as follows- To:

i.         examine the extent to which government policies favour SMEs in Nigeria.

ii.        ascertain whether access to credit facilities represents the greatest problem facing SMEs.

iii.       determine whether tax incentives affect the accessibility of credit facilities by SMEs.

iv.      determine whether having collaterals have effect on the accessibility of credit facilities by                 SMEs.

v.        ascertain the extent to which SMEs are funded by international agencies: - World Bank, IFC.

1.4      Research Questions

In the course of this research study the following research questions were raised:-

(i)                 How far has government policies favoured SMEs in Nigeria?

(ii)      To what extent is access to credit facilities the greatest problem facing SMEs?

(iii)     Has tax incentives affect the accessibility of credit facilities by SMEs?

(iv)     To what extent does having collaterals affected credit facilities accessible by SMEs?

(v)      What is the extent to which SMEs are funded by international agencies?

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