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THE EFFECT
OF BUSINESS CREDIT AVAILABILITY ON SMALL AND MEDIUM SCALE ENTERPRISES IN
NIGERIA
CHAPTER ONE
INTRODUCTION
For both developing and developed countries,
small and medium scale firms play important roles in the process of
industrialization and economic growth. Apart from increasing per capita income
and output, Small Medium businesses create employment opportunities, enhance
regional economic balance through industrial dispersal and generally promote
effective resource utilization considered critical to engineering economic
development and growth. However, the seminal role played by Small Medium
businesses notwithstanding its development is everywhere constrained by
inadequate funding and poor management. The unfavourable macroeconomic
environment has also been identified as one of the major constraints which most
times encourage financial institutions to be risk-averse in funding small and
medium scale businesses. The reluctance on the part of financial institution to
fund Small Medium businesses can be explained by the insufficient capital base
of banks and information asymmetry that often exists between Small Medium
businesses and lending institutions.
This study
critically examines the availability of business credit to small business in
Nigeria, and how more funding can be made to support small businesses. However,
this chapter, forms the basic foundation for this study as it presents the
objectives of the study, and the statement of problem that motivated the
researcher to undertake the study.
1.2
BACKGROUND OF THE STUDY AND ORGANIZATIONAL PROFILE
During the
1990s, a number of studies documented that lending to small businesses and the
economic activity of small businesses were affected by financial sector
disruptions, such as the widespread merging of banks of all sizes and the
capital shortfalls occasioned by large loan losses.
Although not much previous research has
examined discrimination in small business credit markets, there has been an
active debate on the question of whether banks discriminate against minority
applicants for mortgages. In an influential study in that area, researchers at
the Federal Reserve Bank of Boston tried to collect any information that might
be deemed economically relevant to whether a loan would be approved along with
the borrower’s race andf financial status (Munnell et al., 1996). In the raw
data larger firms had 10 percent of their loans rejected versus rejection rates
of 28 percent for small scale businesses. After controlling for the large
number of variables collected to establish the credit-worthiness of the
borrowers (including, the amount of the debt, debt/income ratio, credit
history, loan characteristics, etc.) small scale businesses were still
percentage points less likely to be granted the loan.
A variety of criticisms have been launched at
this study (see, for example, Horne 1994; Day and Liebowitz, 1998; Harrison,
1998); responses to these criticisms are found in Browne and Tootell (1996).
The most common critique indicates that we cannot make a determination of
discrimination unless those small businesses whose loans are approved have a
greater likelihood of repayment. This argument rests critically upon an implied
assumption that the distribution of repayment probabilities for large companies
and small businesses is identical. His figure indicates that if this assumption
is met and if firms discriminate against small businesses by setting a higher
bar for loan approval, then the mean rate of repayment among small businesses
conditional upon loan approvalwill be higher for large and smaller firms.
1.3 PROBLEM
STATEMENT
Small
businesses and entrepreneurial ventures which are usually considered as the
engine that run the economy are usually denied access to credit due to their
risky nature. This disturbing threat has existed for a very long time and needs
proper attention from both government agencies and non governmental agencies as
well. The importance of small businesses in the development of Nigeria cannot
be overlooked. Without proper credit availability to small businesses, the
economy as a whole will suffer. The objectives of economic planning cannot be
achieved if small businesses do not do well. Keeping this in view, the Bank of
Nigeria has streamlined Bank’s lending operations to ensure that banks’ credit
actually benefits small and medium businesses in Nigeria. This strategy is
intended to improve the economy and to develop rural areas in Nigeria.
However,
there is some anecdotal evidence that most beneficiaries of business credit
from most financial institutions are salaried workers and large scale
companies, whose ability to repay loans are believed to be better than that of
small scale businesses. Moreover, this belief is not always the case as some
small businesses who go for loans are well profitable and well managed.
1.4 RESEARCH
OBJECTIVES
This paper is aimed at the following
objectives:
1. To
examine the relationship that exist between small scale businesses and
financial institutions that grant business credits in Uyo.
2. To
identify the challenges faced by small businesses in securing business credit
in Uyo.
3. To
examine the degree of business credit availability to small businesses in Uyo.
4. To
identify the effects of businesses credit availability on small businesses in
Uyo.
1.4 RESEARCH
QUESTIONS
The following questions were used by the
researcher in achieving the research objectives of this study:
1. What
relationship exists between you and financial institutions that grant credit in
Uyo?
2. What
challenges do you face when securing credit for your business?
3. How often
business credit is made available to you when you apply for it?
4. What
effects have the availability of business credit had on your business?
1.5.
RESEARCH HYPOTHESIS
H0: Business
credit is not readily available to SMEs in Nigeria
H1: Business
credit is readily available to SMEs in Nigeria
1.5 SIGNIFICANCE
OF THE STUDY
This study is very important because it is
aimed at examining the effects of business credit availability and its effect
on small businesses in Uyo. The paper will provide some relevant
recommendations for policy makers, development agencies, entrepreneurs, and
small business managers to help seek better ways to increase business credits
to small businesses, and appropriate strategies to improve the small business
sector in Nigeria.
Secondly, the study is also vital since it
suggest to small businesses certain strategies they can adopt before seeking
business credits, to make their borrowing process easier and more effective.
This will go a long way to increase the efficiency and profitability level of
small businesses in Uyo. Any time these strategies are put in place, access to
business credit increases, and the participation of more people in
entrepreneurial activities will also increase, hence the economy of Nigeria
will be improved.
1.6 SCOPE OF
THE STUDY
The area chosen for this study is Uyo in the
Eastern region of Nigeria. The study is limited to the effects of business
credit availability on small businesses in Uyo, using various small businesses
in Uyo as a focus point.
1.7
LIMITATION OF THE STUDY
In undertaking this research, the researcher
encountered the following problems;
1. The time used to undertake the study was
limited. The time was loaded with other academic activities and as a result
limited time was made available the study.
2. Also, response from the various small
business owners through the questionnaire provided by the researcher was also a
bit slow. This is because of reasons such much work load on the part of the
respondents.
1.8 CHAPTER
SCHEME
The project will be organized around following
chapters;
Chapter one gives an introduction to the
research work. It gives the basic information about the company and the
research being undertaken. This chapter therefore consists of the background of
the study and organizational profile, statement of the problem, objectives,
research questions, significance of the study, scope of the study, and
limitations encountered by the researcher.
Chapter Two consists of the literature review
and the theoretical framework
Chapter three gives details of the research
methodology. The research methodology represents the various ways and methods
which the researcher used in order to gain his information.
Chapter Four gives the analysis and
interpretation of the information gathered by the researcher.
Chapter five gives the findings and conclusion
of the researcher. Here, conclusions will be drawn based on the findings and
their implications will also be given.
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