THE ROLE OF MONEY DEPOSIT BANK IN FINANCING SMALL AND MEDIUM ENTERPRISES IN NIGERIA

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THE ROLE OF MONEY DEPOSIT BANK IN FINANCING SMALL AND MEDIUM ENTERPRISES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background To The Study

The growth of the industrial sector of any economy is achieved through the interdependence and interrelationship among various business units. Growth has been defined as the numeric increase in the productive activities of a country. It is an increase in the amount of goods produced by all sectors of an economy in naira value. SMEs are sub-sectors of the industrial sector and they play crucial role in industrial development (Ahmed, 2006). SMEs have been identified as veritable engines that accelerate economic growth. According to Ettah (2004), they are very vital for the indigenization of the industrial sector, creation of employment opportunities, utilization of local raw materials and development of local technology and man power needed to feed large scale enterprises. They also correct imbalances in development among regions through the distribution of investment projects since they can more readily be located in the rural areas (Ettah, 2004). In addition, they have potentials for generating multiplier effects through the process of forward and backward linkages with large scale enterprises.

Irrespective of these vital roles play by SMEs scholars believed that the sector’s full potential has not been completely exploited (see Ihyembe (2000), Ojaide (1999), Levy (1993) and Cookey (2001),). The reasons for this situation are many. Afolabi (2013) noted that financial constraint, explained by high lending rates, high loan requirements, lack of entrepreneurial skills, lack of adequate credit for SMEs, traceable to the reluctance of banks to extend credit to them owing, among others to poor documentation at project proposals as well as inadequate collateral by SMEs operators constitute some of the major problems of SMEs in Nigeria.

It could therefore be inferred from the foregoing that most of the problems faced by SMEs in Nigeria evolved as a result of inadequate credit and funding of the sector. Credit has been defined Aryeety (1996) as the amount extended out with a promise to repay both the principal and interest at a stipulated future date. NDIC (1990) as cited by Ugwu (2010), defined credit to include the aggregate of all loans, advances, overdraft, commercial papers, bankers’ acceptance, bills discounted lease and guarantee.

The responsibility of providing credit to SMEs is placed on deposit money banks. Other than the provision of credit, Anyanwu, Oaikhenan, Oyefusi & Dimowo (1997) identified other roles played by deposit money banks to include encouragement of savings, provision of capital needed for development, encouragement of trading activities through the use of cheques, encouragement of investment, provision of managerial advice to SMEs industrialists who do not engage the services of specialists and rendering financial advice. Ironically, deposit money banks that ought to perform these functions to enhance the sector’s role in the economy have been accused of charging arbitrary rates on the services provided to the sector (see Victor & Eze, 2013 and Okafor 2011). This study is therefore meant examine the role played by deposit money banks on the growth of the SMEs in Yakurr Local Government Area, Cross River State, Nigeria.

SMEs are faced with many problems ranging from financial constraint, explained by high lending rates, high loan requirements, lack of adequate credit for SMEs, traceable to the reluctance of banks to extend credit to them, to lack of entrepreneurial skills, illiteracy, bad roads network, infrastructural decay, multiple taxation, to mention but a few.

The results of the forgoing are eminent, high cost of production, high prices, use of obsolete technology and crude methods of production, poor product quality, lack of funds for research and development and above all a drastic drain in the sector’s capacity to perform as a wheel that drives industrialization. To reduce the negative impact of lack of funding on SMEs performance, the CBN in its prudential guidelines often consider the interest of the SMEs by requiring deposit money banks to channel a certain percentage of their loan portfolio to SMEs. The question that readily comes to mind is has CBN efforts really increased deposit money banks credit to SMEs?

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