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IMPACT OF RECAPITALIZED
COMMERCIAL BANKS ON SMALL MEDIUM ENTERPRISE DEVELOPMENT IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Small and Medium Enterprises (SMEs) play a vital role in
thedevelopment of national economy. Due to their importance and the crucial
role they play in economic development and growth of the nation, much attention
has been placed on financing of small and medium enterprises, since they are
major contributors to the economy of Nigeria. These enterprises are drivers of
the economy; therefore policyattention has to be given to them especially in
developing economiesbecause of their impact on many sectors of the economy.
Their impact isfelt in the following ways: Greater utilization of local raw
materials,employment generation, encouragement of rural development,
developmentof entrepreneurship, mobilization of local savings, linkages with
biggerindustries, provision of regional balance by spreading investments
moreevenly, provision of avenue for self employment and provision ofopportunity
for training managers and semi skilled workers.
In Nigeria, credit has been recognized as an essential tool
for promoting small and Micro Enterprises (SMEs), hence the need for
recapitalization of commercial banks in Nigeria. Bank recapitalization which
was effective from 2006 is aimed at making Nigerian banks stronger and better
in-order to finance all sectors of the economy including the major drivers of
the economy-Small and Medium Scale Enterprises. About 70 percent of the
population is engaged in the informal sector or in agricultural production. The
Federal and State governments have recognized that for sustainable growth and
development, the financial empowerment of the people is vital. If this growth
strategy is adopted and the latent entrepreneurial capabilities of this large
segment of the people is sufficiently stimulated and sustained, then positive
multipliers will be felt throughout the economy. To give effect to these
aspirations various policies have been instituted over time by the Federal
Government to improve rural and urban enterprise production capabilities
(Olaitan 2006)
The central Bank of Nigeria on July 6th 2004, announced
therecapitalization of banking sector from N2 billion to N25 billion with
effectfrom 1st January 2006. This was with a view to make the
sectorinternationally competitive, sound and improves its ability to provide
creditto all the productive sectors of the economy. In order to meet
thisobligation, banks embarked on strategies of merger and acquisition,
floatingof new shares and so on. At the end of the exercise, 25 new banks
emerged.
It was hoped that the consolidation will make the banks
stronger to beable to provide large amount of funds to productive sectors of
the economywhich is largely dominated by Small and Medium Enterprises,
therebymaking them grow into large firms with enough resources to contribute
tothe economic development.
Also, in December 2005, the CBN introduced new
Micro-financePolicy (MFP) which was designed to be public and private sector
driven.
The purpose of the policy was to strengthen community banks
in order forthem to be able to grant collateral and non collateral loans to
financemicroeconomic activities in the economy. The policy also aims at
providingmany people with access to financial services who otherwise will have
noaccess to these services.
Small and Medium Enterprises as said earlier have a crucial
role toplay in the development of an economy, they are training grounds for
localentrepreneurs, they encourage local savings and ensure equitable
distributionof wealth thereby reducing rural- urban migration of human
resources.
To this end, government should collaborate with private
sector inorder to create an enabling and conducive environment for SME’S in
orderto contribute positively towards the development of the economy.
1.2 STATEMENT OF PROBLEM
Bank fraud, poor lending and credit management practices in
the Nigerian banking sector forced the Central bank of Nigeria to revisit the
capital structure of commercial banks in Nigeria. These among other thingsled
the Central Bank of Nigeria (CBN) to give a directive that all banksshould
recapitalize from N2 billion to N25 billion with effect from 1stJanuary 2006.
This development led to various financial activities in the
Nigerian financial sector with most banks initially opting for additional
source of fund from the capital market via floating of shares. Most banks at
this stage started inviting members of the public to acquire new shares
in-order to meet up with the new minimum capital directed by the central bank
of Nigeria. Notwithstanding, some banks were not capable of raising the new
minimum capital by themselves, hence the need for mergers and consolidation of
banks, reducing the total number of banks in Nigeria to twenty five (25).
However, the consolidation of the banking sector presented
new challenges tothe banks which require more efforts to control cost and
increase theirefficiency; this in turn has effect the volume of credit
facilities granted to small and medium scale enterprises in Nigeria. A study
conducted by Iloh et al (2012) reveals the gap between deposit money
bankdeposits (DMBD) and commercial bank lending to SMEs from year 2000 upward
(the year that saw theend of merchant banks). There is a wide margin between
the two variables and while deposit moneybank deposits rose very high,
commercial bank lending to SMEs declined from 2004 to 2010. The gapbetween
commercial bank deposits and its lending to SMEs reveals the shift in focus
from lending toSMEs to lending to major investors (customers). One is made to
ask, while the banking sector is said todrive any economy, has Nigerian
commercial banks neglected SMEs, which is vital for the growth anddevelopment
of the Nigerian economy? Notwithstanding, it is interesting to note that
community/Microfinance bank (CMFB) lending to SMEs moved in the same trend with
its bank deposit. This implies that ascommunity/microfinance bank deposits
increased, it’s lending to SMEs increased. Regardless of thedirect impact of
community/microfinance bank on SMEs, SMEs still cry for lack of funding and
lending toSMEs in Nigeria is still poor. This is so because their capital,
reserve and deposit are very small andinsufficient to meet the needs of small
and medium entrepreneurs.
1.3 OBJECTIVES OF STUDY
The primary objective of the study is to examine the effects
of bank recapitalization on small and medium scale enterprises in Nigeria.
Specific objectives of the study are:
1. To determine the
relationship between Commercial Banks and the performance Small Business
Entrepreneurs in Nigeria.
2. To determine
whether bank recapitalization led to increase in funds for financing SMEs.
3. To examine the
accessibility of Small and Medium Enterprise Equity Investment Scheme (SMEEIS)
funds to SMEs.
1.4 RESEARCH QUESTIONS
In-order to achieve the above stated objectives, the
researcher formulated the following research questions:
1. What is the
relationship between commercial banks and the performance small business
entrepreneurs in Nigeria?
2. Does bank
recapitalization increase funding for SMEs?
3. How accessible
are Small and Medium Enterprise Equity Investment Schene Funds to SMEs?
1.5 HYPOTHESIS OF THE STUDY
The following hypotheses are formulated in line with the
objectives and research questions of the study:
1. Ho: There is no
significant relationship between Commercial bank and the performance of Small
Business Owners in Nigeria.
Hi: There is a significant relationship between Commercial
banks and the performance of Small Business Owners in Nigeria.
2. Ho: Bank Re-capitalization has not led to the
increase of funds to SMEs
Hi: Bank recapitalization has led to the increase of Funds to
SMEs
3. Ho: Small and
Medium Enterprise Equity Investment Scheme funds are not easily assessable to
SMEs
Hi: Small and Medium Enterprise Equity Investment Scheme
funds are easily assessable to SMEs
1.6 SIGINIFICANCE OF THE STUDY
Robust economic growth cannot be achieved without putting in
place well focused programmes to reduce poverty through empowering the people
by increasing their access to factors of production, especially credit. The
latent capacity of the poor entrepreneurs would be significantly enhanced
through the provision of microfinance services to enable them engage in
economic activities and be more self-reliant; increase employment
opportunities, enhance household income, and create wealth.
However, the lack of required financial support from the
microfinance banks to Micro Business operators in Lagos state has become a
major concern in Nigeria. Hence, this study shall be relevant to policy makers
in the areas of finding out the impact of micro financing on the small scale
investors. Also, this study shall enhance further research in the subject area.
1.7 SCOPE OF THE STUDY
The scope of this research work is the recapitalized
commercial banks and theirSME customers in Nigeria. However, due to the fact
that there are manycommercial banks with many SME customers, the research is
limited toMainstreet Bank, Osun branch and some of their SME customers.
1.8 LIMITATIONS OF THE STUDY
Time and financial constraints were the major limitations of
the study. Since the researcher could not afford the cost of reaching out to
more banks, money became a challenge. The researcher was also engaged in other
school activities which also limited the time used for the project.
1.9 DEFINITION OF TERMS
· Economy: An
economy is the total sum of product and service transactions of value between
two agents in a region, be it individuals, organizations or states. An economy
consists of the economic system, comprising the production, distribution or
trade, and consumption of limited goods and services between two agents, the
agents can be individuals, businesses, organizations, or governments.
· Mergers and
Acquisitions: Mergers and acquisitions (abbreviated M&A) is an aspect of
corporate strategy, corporate finance and management dealing with the buying,
selling, dividing and combining of different companies and similar entities
that can help an enterprise grow rapidly in its sector or location of origin,
or a new field or new location, without creating a subsidiary, other child
entity or using a joint venture.
·
Recapitalization: Recapitalization is a sort of a corporate
reorganization involving substantial change in a company's capital structure.
· SMEs: Small
and Medium Enterprises
· SMEEIS: Small
and Medium Enterprise Equity Scheme
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