THE ROLE OF DEVELOPMENT BANKS IN THE SUSTAINABILITY OF SMALL AND MEDIUM SCALE ENTERPRISES (SMES)

THE ROLE OF DEVELOPMENT BANKS IN THE SUSTAINABILITY OF SMALL AND MEDIUM SCALE ENTERPRISES (SMES)

(A CASE STUDY OF BANK OF AGRICULTURE, NASARAWA)

ABSTRACT

This study will examine the role of development banks in the sustainability of small and medium scale enterprises in Nigeria. The specific objective of this research shall be to evaluate the extent to which small and medium scale enterprise have been able to obtain loans and advances from Nigeria development banks, to ascertain the medium scale enterprises in Nigeria, to identify problem encountered by small and medium scale enterprises in obtaining funds from deposit money banks, to determine the viability of small and medium scale enterprise financing by development bank, provision of finance to small and medium scale enterprises. Survey design shall be used to conduct the research, this will involve the use of questionnaire, observation  and interview to gather data and information from the research population. Descriptive statistic analysis method will be employed to analyze the data obtained. The analysis will provide insight whether development banks in Nigeria have contributed to the sustainability of small and medium scale enterprises in Nigeria and finally the research will make conclusion and recommendation based on the research findings.

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

 The analysis of the contribution of development banks to small scale enterprises have stem debate and growing interest among researchers, policy makers and entrepreneurs, recognizing the immense contribution of the subsector to economic growth. The relative importance of small and medium scale enterprise in advanced and developing countries has led and would continue to lead to a reconsideration of the role of small scale enterprises in the economy of nations (Aremu, 2004).

Small and medium enterprises (SMEs) play important roles in the economic growth and sustainable development of any economy (Ariyo, 2005). This is manifested in employment generation, rural development, economic growth and industrialization as well as better utilization of indigenous resources. It is generally agreed that Micro, Small and Medium Enterprises remain the backbone of the development of any economy and the driving force of national growth. (Kpelai, 2009) assertsthat SMEs are the engine room for the growth of any developing economy, because they form the bulk of business activities in developed and developing economies like Nigeria.

Development banks are state-backed financial institutions that are concerned with the provision of long term loans to not only profitable projects but also to socially beneficial ones. The rapid industrialization in many countries in the 19th century was achieved by state provision of long term loans to risky projects via development banks (Diamond, 1957; Boskey, 1961). In many countries such as Germany, Japan, France and Holland, development banks were intensely utilized to meet the needs of growing industry (Diamond, 1957).

The development banks available in the country prior to 2005 were not able to adequately address the gap in terms of credit, savings and other financial services. As reported by the CBN, the share of micro credit as a percentage of total credit was 0.9%, while its contribution to GDP was a mere 0.2% (CBN, 2005). Despite the potential importance of MSMEs in any economy, high mortality rate among established SSEs is a matter of concern in developing economies. However, the impact of development banks majorly should be seen in the multiplication of SSEs across Nigeria. The survival of these SSEs should reflect in employment generation, engagement of available local resources, local technology utilization, improved standard of living and growing gross domestic product (GDP).

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 which potentially could affect the efficiency of the market for lending. 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. It is on this basis that this research tries to examine the role of development banks in sustainability of small and medium scale enterprises.

1.3 Objective of the Study

In view of the above problem of small and medium scale enterprises, the overall objectives of this study is to examine the role of development banks in the sustainability of small and medium scale enterprises.

 The specific objectives are:

1. To evaluate the role of development banks in the sustainability of small and medium scale enterprises.
2. To evaluate the extent to which small scale enterprises have been able to obtain loans and advances from Nigerian Development Banks.
3. To identify problems encountered by small and medium scale enterprises in obtaining funds from development banks.
4. To make recommendations on how to improve on development bank provision of finance to small and medium scale enterprises.

1.4 Research Questions

1. To what extent can small scale enterprises obtain loans and advances from Development Banks?
2. What are the problems facing development banks in financing small scale enterprises in Nigeria?
3. What are the problems facing small scale enterprises in obtaining funds from development banks?
4. How viable is small scale enterprises financing by commercial banks?
5. How can development bank’s provision of finance to small and medium scale enterprises be improved upon?

1.5 Statement of Hypothesis

H0: Development banks did not play any significant role in the sustainability of small and medium scale enterprises

H0: Development banks play a significant role in the sustainability of small and medium scale enterprises

1.6 Significance of the Study

The result of this research will be very significant to the stakeholders, managers and owners of small and medium scale enterprises as it will service as an opener to the importance or relevance of development banks to the sustainability of small and medium scale enterprises in Nigeria.

The result of the research will also be very significant to policy makers and the government as it will give a firsthand information on the role of development bank in the sustainability of small and Medium scale enterprises thereby enabling them to make laws and policies that will protect the vulnerable small scale enterprises.

The research will serves as a resources material to other researchers that will have interest to research further on the role of development banks in sustainability of small and medium scale enterprises and other related subject matters.

1.7 Scope of the Study

The research is limited to the role of development banks in sustainability of small and medium scale enterprises with a particular interest in Bank of Agriculture Nasarawa branch. The researcher limits the scope of the research to Bank of Agricultural Nasarawa because it will not be possible for the researcher to examine all development banks in Nigeria due to the time and resources needed for such large scope.

1.8 Limitation of the Study

In the course of carrying out this research work, there are various limitation encounter by the researcher, some of them are listed below:

1. Uncooperative attitude of respondents: Some of the respondents are in fear of giving out their business secret. They would rather not divulge any information on their business. However the researcher convinced all the respondents that their responses was only for academic purposes and should not in any way endanger their business.
2. Time: Time serves as a constraint to this research work because the time frame is very short and the researcher has to combine normal academic work with the research.
3. Inadequate fund: Inadequate fund is another constraint to this research work because of the economic hardship and cannot make this research work to be effective.

 1.9 Operational Definition of Terms

Development Bank: A development bank maybe defined as a financial institution concerned with providing all types of financial assistance (medium as well as long term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities.

Small Scale Enterprises: As defined in the Nigerian context, following the current official definition of industrial enterprises adopted by the 13th meeting of the National Council on Industry (NCI) Markudi, Benue State in July, 2001 as “an enterprise with total capital employed of over ₦1.50m but not more than ₦50m, including working capital but excluding cost of land and or labour size of 11-100 workers.

Short term credit: This type of credit is a credit or loan that has maturity period that is less or more than one year. E.g. Personal loan.

Medium term credit: This is a type of credit or loan that has a maturity period of more than one year but not exceeding two years to be repaid back. E.g. loan required for temporary business requirement.

Long term credit: This type of credit matures in more than three years and above. It has a very long maturity period as agreed by the lender and the borrower. E.g. are business development loans and Bridging loans.

Medium Scale Enterprise: An industry with a labor size of between 10-300 workers or a total cost of over 50 million but not more than 200 million including working capital but excluding cost of land (Clifford, 1998). Business: business includes any trade, industry, professional and any occupation carried on for profit (Jerome, 2016).

Growth: According to (Anyanwu, 2011) growth refers to an increase in output as a result of bank loans invested in small and medium scale business. Ploughing back the profit into the business.

Constraints: A hindrance of business not forwarding or not prospering. Enterprises: It means any establishment engaged in production, repairs or services to satisfy human wants and make room for profits.

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