THE IMPACT OF RECAPITALIZED BANKS AND THEIR SME CUSTOMERS IN NIGERIA
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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
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
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