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?

1.2 STATEMENT OF THE PROBLEM

For more than 55 years since Nigeria became an independent nation, it has been suffering from so many epileptic economic situations that have left her as a grossly underdeveloped country, instead of the economic political giant of Africa which its founding fathers intended it to be. Such persistent factors include endemic corruption, poverty, lack of good management of resources, weak financial policy, sharp dealings of greedy bankers, covetousness of bank directors, lack of proper oversight of the Apex Bank, social conflicts, instability of government and bad leadership. Hence, at 55, Nigeria has remained a “toddler” in almost every sector of her national development and this is a very worrisome situation.

There are daily reports of how Nigerian banks rip off their customers through various charges and practices. Often, customers complain and cry out for appropriate regulatory intervention. Unfortunately, their complaints seem to fall on deaf ears, because they are unaware of any positive regulatory action in response thereto. Emboldened by financial regulatory inaction, government overspending in capital projects that are not directly profit-yielding to the GDP, crude practices and indifference, many Nigerian banks now engage in more exploitative practices. The categories of such predatory bank practices are unfolded daily.

Normally, when a customer secures a loan from a bank, the latter fixes a negotiated lending rate, based on the prevailing interest rate approved by the Apex Bank. Any change in the interest rate should be brought to the notice of the borrower, except otherwise agreed. In Nigeria, however, the lending rate is rarely negotiated, and when it is reviewed upwards by the Central Bank of Nigeria (CBN), the average bank automatically applies the new rate to the outstanding loan without notifying the borrower (Okafor, 2011). Ironically, the same bank hides the fact of any downward review of the lending rate from its mostly uninformed customers, thereby illegally subjecting the customers to a higher interest regime. Unfortunately, some greedy banks play on the credulity and ignorance of their illiterate customers to make fabulous profits through illegal charges and sharp dealings against the overall interest of the customer.

Often, what the bank staff presents to a prospective borrower, during loan negotiations as the total charges, become hydra-headed once he swallows the bait. While processing loans, Nigerian banks impose on borrowers both “processing” and “administrative” fees which are duplicates. Again, they charge borrowers and corporate customers higher than what they pay the lawyer to conduct searches at land and company registries. We believe that the interest rates Nigerian banks display at their offices and report to CBN per section 23 of the Banks and other Financial Institutions Act are different from what most of them impose on customers.

Bank fraud, poor lending of SMEs and credit mismanagement practices in the Nigeria banking sector sometime in the past forced the Central Bank of Nigeria to revisit the capital structure of commercial banks in Nigeria. These, among other things, led the Central Bank of Nigeria (CBN) to give a directive that all banks should recapitalize from N2 billion to N25 billion with effect from January 1, 2006. It was hoped that the consolidation would make the banks stronger so as to be able to provide larger amounts of funds to productive sectors of the economy, which is largely dominated by small and medium enterprises, thereby making them grow into large firms, with enough resources to contribute to economic growth/development.

This development led to various financial activities in the Nigerian financial sector, with most banks initially opting for additional source of funds 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 merging and consolidating of banks resulted to reducing the total number of banks in Nigeria to twenty-three (23). However, the consolidation of the banking sector presented new challenges to the banks which required more efforts to control cost and increase their efficiency. These, in turn, affected 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 bank deposits (DMBD) and commercial bank lending to SMEs from year 2000 upward (the year that saw the end of merchant banks). There is a wide margin between the two variables, and while deposit money bank deposits rose very high, commercial bank lending to small and medium enterprises (SMEs) declined from 2004 to 2013.

Similarly, Joshua (2008) contends that about 70% of the small and medium scale enterprises in Nigeria are between operational and are on the range of folding up, while the remaining 30% operate on low level capacity and are vulnerable to folding up in the nearest future.

Therefore, in order to get out of this economic and development quagmire, policy makers and experts in Nigeria must continue to search for workable strategies of interventions that will catalyze the development process in Nigeria. Of late or recently, Nigeria policy makers and experts in and outside government, including members of the organized private sectors, seem to agree that, the catalytic process must start with the urgent setting up and empowering of as many small and medium scale enterprises (SMEs) as possible in Nigeria. This is because available facts, figures and cases and trends in global economic development have shown that SMEs indeed hold the key to the development of developing nations like Nigeria

1.3 Objectives Of The Study

The major objective of this study is to assess The Role Of Money Deposit Bank In Financing Small And Medium Enterprises In Nigeria: An Empirical   Study

The specific objectives include:

To examine the relationship between deposit money banks credit to SMEs and the growth of SMEs in Nigeria;

To assess the effect of multiple taxation on the growth of SMEs in Nigeria;

To determine the effect of policies on SMEs growth Nigeria.

1.4 Research Hypothesis

To attain the above objectives, three null hypotheses were formulated thus:

Ho:     Deposit money banks credit does not relate significantly with the growth of SMEs in Nigeria.

Ho:     Multiple taxations have no significant effect on the growth of SMEs in Nigeria.

Ho:     Government policies do not affect the growth of SMEs in Nigeria.

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