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THE IMPACT
OF RECAPITALIZED BANKS AND THEIR SME CUSTOMERS IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Small and
Medium Enterprises (SMEs) play a vital role in the development 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
policy attention has to be given to them especially in developing economies
because of their impact on many sectors of the economy. Their impact is felt in
the following ways: Greater utilization of local raw materials, employment
generation, encouragement of rural development, development of entrepreneurship,
mobilization of local savings, linkages with bigger industries, provision of
regional balance by spreading investments more evenly, provision of avenue for
self employment and provision of opportunity 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 their capitalization of banking
sector from N2 billion to N25 billion with effect from 1st January 2006. This
was with a view to make the sector internationally competitive, sound and
improves its ability to provide credit to all the productive sectors of the
economy. In order to meet this obligation, banks embarked on strategies of
merger and acquisition, floating of 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 be able to provide large
amount 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 the economic development.
Also, in
December 2005, the CBN introduced new Micro-finance Policy (MFP) which was
designed to be public and private sector driven.
The purpose
of the policy was to strengthen community banks in order for them to be able to
grant collateral and non collateral loans to finance microeconomic activities
in the economy. The policy also aims at providing many people with access to
financial services who otherwise will have no access to these services.
Small and
Medium Enterprises as said earlier have a crucial role to play in the
development of an economy, they are training grounds for local entrepreneurs,
they encourage local savings and ensure equitable distribution of wealth
thereby reducing rural- urban migration of human resources.
To this end,
government should collaborate with private sector in order to create an
enabling and conducive environment for SME’S in order to 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 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 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 to the banks which
require more efforts to control cost and increase their efficiency; 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 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 SMEs declined from 2004 to
2010. The gap between commercial bank deposits and its lending to SMEs reveals
the shift in focus from lending to SMEs to lending to major investors
(customers). One is made to ask, while the banking sector is said to drive any
economy, has Nigerian commercial banks neglected SMEs, which is vital for the
growth and development 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 as
community/microfinance bank deposits increased, it’s lending to SMEs increased.
Regardless of the direct impact of community/microfinance bank on SMEs, SMEs
still cry for lack of funding and lending to SMEs in Nigeria is still poor.
This is so because their capital, reserve and deposit are very small and
insufficient 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:
To determine
the relationship between Commercial Banks and the performance Small Business
Entrepreneurs in Nigeria.
To determine
whether bank recapitalization led to increase in funds for financing SMEs.
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:
What is the
relationship between commercial banks and the performance small business
entrepreneurs in Nigeria?
Does bank
recapitalization increase funding for SMEs?
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:
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.
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
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 their SME
customers in Nigeria. However, due to the fact that there are many commercial
banks with many SME customers, the research is limited to Mainstreet 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.
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