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CREDIT ANALYSIS ON
SMALL AND MEDIUM ENTERPRISES IN LAGOS METROPOLIS A CASE STUDY OF BANK PHB PLC.)
ABSTRACT
Small and medium enterprises are supposed to playa central
role in the drive for economic development of the country. There is however a
consensus' that these small and medium enterprises have largely failed to
·deliver on this score. Lack of access to credit from financial institutions
has been identified as constituting the greatest clog in the wheel of progress
for small and medium enterprises. This research work seeks to appraise the
process of analysing credit requests on small and medium enterprises in. the
Lagos Metropolis using Bank PHB as a case study. In carrying out this research
study, questionnaire was used as the instrument and chi-square also was used
for the testing of the hypothesis formulated with the use of non-parametric
statistical techniques. The management and staff of Bank PHB PIc was used as
the respondents which relevant question was structured to sought respondent's
opinion on the credit analysis on small and medium enterprises by banks. It was
recommended that a mechanism should be put in place whereby governments at
various levels could guarantee SMEs loans availed by banks.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
According to Nwankwo (1990), since the first formal bank was
established in 1656 in Sweden, the banking industry has always been a pervading
institutional player in any given economy, being the only sector that thrives
on other people's money. Although element of the practice of banking has always
existed both In pre and post-colonial periods, the introduction of modern
banking in Nigeria dates back to 1892 when the African Banking Corporation
(ABC) came into existence, engaging in commercial activities. This bank was
later changed to Bank of British West Africa (BBWA) in 1894, now the First Bank
of Nigeria Plc. Other banks have since sprung up in the financial landscape
offering a variety of innovative financial products to their ever-burgeoning
clientele.
According to Enyinnaya (1991), granting of credits is one of
the fundamental and basic functions of banks and other financial institutions.
By their nature, banks intermediate between savers and users of funds, i.e.,
banks source funds from economic sectors with surplus funds in form of
deposits, and disburse the same to economic units that need them for various
purposes in form of credits or loans. Aside from providing the fiduciary
responsibility on depositor's funds, granting of loans appears to be the next
most important function of banks since this activity represents one of the key
sources of income for banks generally. However, in considering requests for
loans, income or profit motivations do not and should not prevent the lending
financial institution from ensuring that the loan together with associated
interest income is repaid fully and timely. One of the surest ways of ensuring
that a credit facility together with its related interest income gets fully and
timely repaid is through a thorough credit analysis. This analysis as basis for
determining worthy customers to be availed credit facility is done for all
categories of customers including individuals, corporate organizations, and in
some instances, governments including its agencies and parastatal. In a profit
driven market economy like ours in
Nigeria, the major borrowers are organizations in the private
sector. Even amongst players in the private sector, the small and medium scale
industries are rated as having a large appetite for credit. This is not
surprising, as small and medium enterprises constitute an important segment
partly due to the fact that the sub sector has been widely known as the
backbone of many economies and their engine of growth and development.
1.2 STATEMENT OF
THE PROBLEM
We had acknowledged the central role to be played by small
and medium enterprises industries in the drive for economic development of the
country. There is however a consensus those small and medium enterprises have
largely failed to deliver on this score (Bunmi, 2002). The immediate past CBN
Governor in a key note address at the national summit on "Revamping small
and medium scale industries" organised by the Manufacturers Association of
Nigeria (MAN) at the MAN House, Ikeja on March 04, 2004, laid this failure
squarely on the absence of what he termed critical success factors including:
i. Competent entrepreneurship
ii. Technical and managerial skills; as
well as
iii. Enabling environment for investment in
small and medium scale industries.
He listed other constraints to include:
· Poor access to
money and capital markets. >High rate of enterprise mortality.
· Shortage of
skilled manpower.
· Financial
indiscipline.
· Lack of
infrastructural facilities.
· Poor policy
implementation.
· Poor
management practices and low entrepreneurial skill base.
· Restricted
market access.
· Overbearing
regulatory and operational environment.
However, he singled out lack of access to credit from
financial institutions as constituting the greatest clog in the wheel of
progress for small and medium enterprises (Olowe, 1998). This research work
seeks to appraise the process of analysing credit requests of small and medium
enterprises by banks in the Lagos Metropolis using Bank PHB as a case study.
1.3 OBJECTIVES OF
THE STUDY
The objective of this is to examine the credit analysis on
small and medium enterprises by banks with reference to Bank PHB. The specific
objectives are:
1) To determine the
level of credit demanded by banks
2) To examine the
criteria emphasized in credit analysis on small and medium scale enterprises
(SMES)
3) To identify the
credit monitoring and follow-ups for small and medium enterprises.
4) To identify the
average time fir the analysis and approval of credit
5) To determine what
can be done to reverse the trend identified in small and medicine scale
enterprises.
1.4 RESEARCH
QUESTIONS
(1) What is the
level of credit demanded by banks?
(2) What is the
criteria emphasis in credit analysis on small and medium scale enterprises
(SMES)?
(3) Does credit
monitoring and follow-ups for small and medium scale enterprises worthwhile?
(4) What is the
average time for the analysis and approval of credit?
(5) Is there a
solution to the reverse of trend identified in small and medium scale
enterprises?
1.5 RESEARCH
HYPOTHESIS
The following hypotheses were formulated for the purpose of
this study. They are as follows:
Hypothesis I
Hi: There is a
positive relationship between credit analysis and small and medium scale
enterprises.
Ho: There is a
negative relationship between credit analyses and small and medium scale
enterprises.
Hypothesis II
Hi: There is a
relationshipbetween the average time for the credit analysis and approval of
credit
Ho: There is no
relationship between the average times for the credit analysis and approval of
credit
1.6 SIGNIFICANCE OF
THE STUDY
This study will be significant in the following ways:
1. It will serve
as a source of enlightenment to those who may be uninformed about credit
analysis for small-scale industries.
2. The study will
serve as codified material for credit analysis for smallscale industries.
3. It is expected
that small-scale industries will learn useful lessons from the conclusions of
the research.
4. It is also
hoped that the result of this study would be of great assistance to other
researchers.
1.7 RESEARCH
METHODOLOGY
The methodology to be used in this research work would be
survey method through the administration of questionnaire as the instrument.
The data gathered are primary data and would be analyzed using the following
statistical technique:
(1) Simple
percentage: It will be used to analyze the bio-data section and the subject
matter itself.
(2) Chi-square:
This will be used to analyze the data and test the operational hypothesis
formulated, non-parametric test statistic with the use of statistical package
for social scientist to analyze and compare the calculated and the expected to
arrive at a reasonable conclusion.
1.8 SCOPE AND
LIMITATIONS OF THE STUDY
The study is intended to have an over view of lending generally.
It shall delve into various forms of lending and how lending decisions are
made. Special emphasis will be made on the procedure adopted by banks in
analysing credit requests from small-scale enterprises. This is with a view to
identifying the reasons for the high rejection rate presently the lot of
small-scale industries.
The work of some authors and researchers would be
incorporated in the literature review and finally, recommendations will be made
based on the conclusions.
A major limitation was time constraint, which could have
inadvertently affected the depth of the study. Restrictions to access to
information, where available, were also experienced, and certain cases of
outright unavailability of relevant information were also observed. However, a
great deal of thoroughness was employed in the use of available data and
information.
Another limitation was the inability to study all the mega
banks that resulted from the recently concluded consolidation exercise, hence
the need to select and do a special analysis of Platinum Habib Bank Plc.
Worthy of mention is the fact that that apart from above
mentioned limitations; the researcher also experienced financial handicaps,
which greatly determined the volume of research work.
1.9 ORGANIZATION OF
THE STUDY
Chapter one will provides the introductory part of the study
coupled with the sub-headings such as statement of problems aim and objectives,
research questions, research hypothesis, significance of study, scope and limitation
of study, methodology, work plan and operational definition and terms.
Chapter two provides the interactive review and the related
study of the past scholars and writers on the topic will also be considered.
Chapter three intends to give the research design, instrument
for data collection, population and sample, sampling technique and limitation
of the methodology.
Chapter four present of data and analysis. Here the data
gathered from questionnaire administration will be highlighted, presented and
interpreted alongside with the hypothesis formulated.
Chapter five is the concluding part of the research work,
which includes the summary of finding, recommendations, suggestion for further
studies and conclusion.
1.10 DEFINITION OF
TERMS
Bank: A financial institution licensed by Central Bank of
Nigeria for collection of deposits and rendering of banking related financial
services to the general public.
Credit Analysis: Aims at ensuring that the loan together with
appropriate interest will be repaid as they fall due.
Term Loans: are given to customers to buy items that are of
long term in nature. These assets include plant, machines, furniture and
fittings, motor vehicles and land/buildings.
Overdraft: is given to bank customers to finance the purchase
of stock of raw materials or finished goods, finance debtors, and pay for
wages, rent, electricity, water rates and other general expenses.
Small And Medium Enterprises: asmall-and-medium-scale firm is
defined as any enterprise with a maximum asset base of ~200 million, excluding
land and working capital, with the number of staff employed by the enterprise
not less than 10 and not exceeding thirty.
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