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
REFERENCES
·
Olaitan, L. 2006. An empirical evaluation of
the corporate strategies of Nigerian companies. Journal of African Business,
2(2), 45-75.
·
Iloh V. C. 2012. The Effect of Bank
Consolidation on Small and Medium Scale Enterprises in Nigeria. Lagos:
Longman Nigeria Plc.