DEPOSIT MONEY BANKS AND THE GROWTH OF SMALL SCALE ENTERPRISES

DEPOSIT MONEY BANKS AND THE GROWTH OF SMALL SCALE ENTERPRISES

ABSTRACT

This research work assessed deposit money banks and the growth of small scale enterprise. The objectives of this study is to examine the efficiency of SMEs in accessing adequate credit from DMBs in Nigeria, to determine the potential of DMBs’ credit in fostering SME growth; identify the challenges faced by SMEs in accessing finance from DMBs in Nigeria. Data were collected through questionnaire distributed to respondents. Simple percentages were used in presenting data while the chi-squared (X2) statistical technique was used to test the hypothesis. The result revealed that all the sampled investors in Small and Medium Scale Enterprises sourced their funds from personal savings, money lenders, thrift associations, friends and family members while a few sourced part of their working capital from banks. Equally it was observed that the factors that prevent SMEs from borrowing from Deposit Money Banks include lack of collateral, high interest rate, competition from other business, too many bureaucratic processes, poor financial plan, inability to pay previous loans and others. The work recommended that the Nigeria government should recognize the importance of SMEs and attach priority to the development of SMEs by encouraging the deposit money banks to assist them with loans because they constitute a major tool in boosting employment in the country. Also, For the deposit money banks to be more efficient under this area, the loan departments of every money deposit banks should assess each SMEs on its own merit to determine its viability and grant direct credit to each on the basis of the project’s viability without sacrificing credit standard.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The role of commercial banks in the development of SMEs is vital to economic developmensts. It is acknowledged that the availability of financial capital is a pre-requisite for rapid development. Since efficient management of scarce resources are best facilitated by financial institutions (Myers, 1984). It therefore follows that banks have vital role. Things they do to small and medium scale enterprises among others by making their vast financial resources available for financial and promotes developments. The peculiar circumstance which characterized the situation of under-development which make this role more pertinent. Nigeria is characterized with low level per capital income (Kpelai, 2009). There are also disparities in the distribution of income as well as variations in savings propensities at different level of income. Quite often the relief from the handicaps is the best provided by banks.

The quest for economic development to ensure overall improvement in individual well-being of citizens has been the preoccupation of every nation. The process involves a number of approaches. One of these is the adoption of an industrialization strategy at a point in time relevant to the prevailing needs of development (Obiatyo, 2001). Developing countries are under much pressure in this regard because of their general peculiar features. Businesses, unlike people, are not created equally. There are some companies that would be missed if they ceased to exist, but life would go on. There are others whose collapse would cause vast sections of economies and societies to implode. Into this second category falls the deposit money bank. Deposit money banks are the most important savings mobilizing and financial resource allocation institutions. Consequently, their roles make them an important phenomenon and strong pillar in economic growth and development. (Uzonwanne, 2015) Deposit money, banks which are also known as commercial banks, are financial institutions that provide services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of activities deposit. According to mainstream theory, they act as financial intermediaries to channel savers’ money to firms and individuals who seek funding for their acts (Mambula, 2002). Their importance as a catalyst to economic growth and development is widely recognized by both monetary and development economists.

The Nigeria finance system is dominated by the banking sector, especially the deposit money banks which provides the foundation for the development of financial system (Mordi, 2002). Their credit component constitutes a major link between the monetary sector and the real sector of the Nigerian economy.

In performing these roles, deposit money banks must realized that they have the potentials, scopes and prospects of mobilizing financial resources and allocating them to productive investments and, in return, promote sustainable performance and ensures that businesses are flourishing and alive. They not only store our saved cash and lend us money when we need it, but act as the system of arteries that transport money around the economy, that is why they are often known as financial intermediaries (Little, 1982). Hence their key function is to transfer money, en masse, from those who want to lend to those who want to borrow. In order for an economy whether rich or poor to function properly, it must have a well-developed and healthy deposit money banks. This is because companies like medium and small scale enterprises and individuals need to borrow money to start business and subsequently to build decent, formidable and innovative businesses which constitute the launching pad for any meaningful growth in any developing economy and this is why Oluyemi (1995) regards the deposit money banks as an engine of growth of a country’s economy that could greatly assist in the promotion of rapid economic growth. The financial institution has also been described to be a catalyst for economic growth when it is well developed and judged to be healthy (Adeoye, 2007). A World Bank study (1997) emphasizes the role played by the banking sector in the process of financial integration in developing countries.

This is to say that deposit money banks are inseparably linked to economic growth of any nation. Figuratively, they are like the body and soul in the overall functions of the human person. Proper functioning of this banks leads to economic growth of a nation. They play an important role in economic growth of a nation. They are patterns of resources that aim to meet the needs of medium and small scale enterprises (Thirwal, 1978).

The purpose of this study therefore is to assess the efficiency of the deposit money banking system in financing the medium and small scale enterprises in Nigeria and its potential in achieving the desired economic growth for the sustainability of Nigerian economy. It is with the foregoing background that this study seeks to examine role of Deposit money bank in the development of Small Scale Enterprises.

1.2 Statement of problem

A well-functioning financial system is a key enabler of economic growth. SMEs are an important part of Nigeria’s economic growth and development and bank lending is the primary source of external finance for SMEs. Therefore, it is important that the banking sector responds efficiently and effectively to the needs of SMEs. According to Ohanga (2005), there are a number of features of lending generally Loan size, Loan term, Repayment frequency, Moratorium or grace period, Prepayment option, Purpose of loan, Collateral or back-up, Choice between an MIS-led or market-led product. Which potentially could affect the efficiency of the market for lending.

Information asymmetry is a situation where business owners or managers know more about the prospects for, and risks facing, their business than do lenders (Ohanga, 2005). Where information asymmetries exist, bank lending theory predicts that lenders may respond by increasing lending margins to levels in excess of that which the inherent risks would require. Bank lending theory also suggests that banks may also curtail the extent of lending credit rationing even when SMEs would have been willing to pay a fair risk-adjusted cost of capital. The implication of raising interest rates and/or curtailing lending is that firms will not be able to finance as many projects as otherwise would have been the case (Adeoye, 2007). Information asymmetry is more acute in case of SMEs because their relative size makes them economically unattractive to banks since they are unable to accurately gauge the level of risk involved in lending to SMEs (Ohanga, 2005). SME borrowing requirements are small and frequently do not appeal to financial institutions. More collateral may be required than SMEs can pledge. Financial institutions may lack expertise in understanding small and medium knowledge-based business.

The flexibility in terms and conditions of financing that SMEs require may not be available. There are four problems in financing SMEs which have become recurrent: the cost of capital; risk; the inappropriate terms on bank loans; and the short age of equity capital. There is a noticeable steady decrease in the percentage of banks loans to SMEs from1992through out the period of the operation of SMEEIS. What then is responsible for this unchallenged decrease of bank loans to SMEs. Stieglitz and Weis (1981) observed that small and medium scale firms with opportunities to invest in positive net present value projects may be blocked from doing so because of adverse selection and moral hazard problems. Adverse selection problems arise when potential providers of external finance cannot readily verify whether the firms have access to quality projects. Nonetheless, the liquidity ratio of these financiers plays a major role (Stieglitz

and Weis, 1981). Moral hazard problems are associated with the possibility of SMEs diverting funds made available to them to fund alternative projects or develop the propensity to take excessive risks due to some pervasive incentive structure in the system.

On the other hand, because SMEs do not have access to public capital markets they naturally depend on banks for funding. Dependence on banks makes them even more vulnerable for the simple reasons that shocks in the banking system can have significant impact on the supply of credit to SMEs (Stieglitz and Weis, 1981). Thus, SMEs are subject to funding problems in equilibrium and these problems are exacerbated during periods of financial instability (Adeoye, 2007).

Berger and Udell (2001) further note that shocks to the economic environment in which both banks and SMEs exist can significantly affect the willingness and capability of banks to lend to small and medium scale firms. These shocks come in a variety of forms such as technological innovation, regulator regime shifts, and shifts in competitive conditions and changes in the macroeconomic environment (Berger and Udell, 2001).

1.3 Objectives of the Study

The general objective of this study is to investigate the role of Deposit Money Banks (DMBs) in SME growth in Nigeria. Specifically, the study intends to;

i. Examine the efficiency of SMEs in accessing adequate credit from DMBs in Nigeria;

ii. Determine the potential of DMBs’ credit in fostering SME growth;

iii. Identify the challenges faced by SMEs in accessing finance from DMBs

TOPIC: DEPOSIT MONEY BANKS AND THE GROWTH OF SMALL SCALE ENTERPRISES

Format: MS Word

Chapters: 1 - 5
Delivery: Email

Number of Pages: 81

Price: 3000 NGN

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