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Content                                                                                                                 Pages

Title Page                                                                                                                    i

Certification                                                                                                                ii

Dedication                                                                                                                  iii

Acknowledgements                                                                                                    iv

Table of Contents                                                                                                       v

Abstract                                                                                                                      vii


1.1       Background to the Study                                                                               1

1.2       Statement of the Problem                                                                               3

1.3       Aims and Objectives of the Study                                                                 4

1.4       Research Questions                                                                                         4

1.5       Research Hypothesis                                                                                       5

1.6       Significance of the Study                                                                               5

1.7       Operational Definition of Terms                                                                     5


2.1.1    Conceptual Review                                                                                         7

2.1.2    The Concept of Commercial Banks’ Credit                                                    7

2.1.3    The Concept of Small/Medium Enterprises (SMES)                                      8

2.1.4    Sources of Finance Available to SMEs                                                          10

2.1.5    Characteristics of Small and Medium Scale Enterprise in Nigeria                 13

2.1.6    Role/Benefits of Small and Medium Scale Enterprises in the

Nigerian Economy                                                                                          14

2.1.8    Solutions to Financing Problems of Small and Medium Scale

Enterprises in Nigeria.                                                                         21

2.1.9    Types of Loan Facilities Granted                                                                   22

2.1.10 The Role of Banking Sector in Financing SMES:                                          24

2.1.11  Government imitated programmes to boost SMEs in Nigeria                        25

2.2       Theoretical Framework                                                                                   26

2.3       Empirical Review                                                                                            28


3.1       Introduction                                                                                                    32

3.2       Restatement of Hypothesis                                                                             32

3.3       Source of Data                                                                                                            32

3.4       Method of data analysis                                                                                 33

3.5       Model Specification                                                                                        33

3.6       A prior expectation                                                                                         34

3.7       Test of Reliability                                                                                           35


4.1       Introduction                                                                                                    37

4.2       Presentation of Ordinary Least Square Result                                               37

4.3       Interpretation of regression results                                                                 38


5.1       Summary                                                                                                         40

5.2       Conclusion                                                                                                      41

5.3       Recommendations                                                                                          43

REFERENCES                                                                                              44

APPENDIX I                                                                                                 49







This study is a survey on the role of commercial bank in the performance of small scale enterprises in Nigeria. The study is significant that it proffers in the modern times, industrial production requires the procurement of equipment, machineries and other inputs. The capital required in procuring the requirements in limited in supply and very few industrialists have access to it considering the type of collateral security required by the banks which must be fulfilled before granting loans. The study adopted secondary data, data was obtained from CBN Statistical Bulletin from the year of 1991 to 2016. The result further indicated the value of R2 as indicated in the result show that about 88.6 percent of changes in the dependent variable is accounted for by changes in the explanatory variables. It also remained strong even after adjusting for the degree of freedom and stood at 0.845. It also stated that the F-statistic which measures the overall statistical significance of the model and explanatory variable in explaining the dependent variable was found to be statistically significant at 5% level of significance. The results stated that the model has a high predictive and forecasting power. It was then concluded The development of SMEs and its effective promotion have not been approached seriously in Nigeria; hence, the lack of their impact in the economy. In Nigeria, various governments instituted various programs aimed at developing SMEs sector. Most of the programs were not given the appropriate backing and as such the impact of the programs could not be felt in the economy. The Non-Governmental organization and donor agencies are currently involved in the promotion of SMEs in Nigeria. Access to credit continues to pose a major problem to SMEs sector in Nigeria since the traditional financial institutions have not been able to meet their credit needs. It was then recommended that the financial institutions should creatively craft and adopt the availability of cheaper funds that would spur the growth of SMEs with the in view to enhancing economic growth.




  • Background to the Study

Small and Medium Scale Enterprises (SMEs) are important engines of economic growth, jobs and social cohesion. SMEs play an important role in the economies of many developing countries including Nigeria. Thus, governments throughout the world focus on the development of the SMEs sector to promote economic growth Finlayson, (2003). However, the creation, survival and growth of SMEs are often hampered by access to finance. Thus access to SMEs finance has become a key priority in developing countries like Nigeria. Therefore, Non-availability of debt finance to finance operations and expansion is one of the major causes of failure for SMEs in Nigeria.

According to Global Entrepreneurship Monitor (GEM) Survey in 2008; financial constraint is the primary exit reason for most SMEs failure in Nigeria. However, the need for SMEs growth in Nigeria is beyond question, but access to finance is a major factor stagnating the way of its growth, as a financing tool, debt financing has a distinct advantages over equity financing for the development of SMEs, but debt financing in Nigeria presently comes with significant challenges as can be seen from low responses of commercial banks to finance SMEs. There is evidence that most SMEs in Nigeria with low capital formation raise capital through loans from family and friends because at the initial stage, majority of young budding entrepreneurs lack laudable forms of collateral, business plans and feasibility studies to actually meet the requirement and convince banks  to grant them loans Ebube, (2011). This implies that a vast majority of SMEs depend on internal finance (i.e contribution from the owners, family and friends etc). Internal financing is often inadequate for SMEs in Nigeria to survive and grow, as it is increasingly difficult to keep the costs within the constraints of self-financing.

Therefore SMEs need capital from external sources (or Debt Financing). Because of this Nigerian Government over time introduced Small and Medium Enterprises Equity Investment scheme (SMEEIs) as an initiatives through Commercial banks by the CBN to solve financing problem of SMEs and the creation of (Small and Medium Enterprises Development Agency of Nigeria) SMEDAN as an agency to enhance the development of SMEs. The Banking System is very important for any nation because it is the pivot of socio-economic development of any economy Terungwa, (2011).

This implies that commercial banks have active developmental roles to play in the economy such as mobilizing fund from the surplus to the deficit spending units. Commercial banks are considering as the main source of finance for SMEs or rather entrepreneurs in Nigeria. Akabueze, (2002) assert that Finance has been seen as a critical element in the growth and development of SMEs. For instance the commencement and efficient performance of any industrial enterprises be it small or large will require the provision of funds for its capitalization, working capital and rehabilitation needs, as well as for the creation of new investments. Provision of funds to the industrial sector, particularly, for the SMEs has, therefore, been of prime interest to policy-makers in both the public and private sectors. It is a known fact that firms depend on a variety of sources for their finances. These include external and internal, formal and informal sources Aruwa 2004.

According to Demirguc-Kunt, Maksimovic, Beck and Laeven, (2006) External finance makes many SMEs developed, they depends on bank loans and overdrafts and suppliers credit for early stage financing. Despite the dependence of SMEs on debt finance, paradoxically access to debt finance is very limited for SMEs in Nigeria. Mambula (2002) laments that Small and medium scale enterprises dominate the private sector of the Nigerian economy, but almost all of them lack access to credit finance. This implies that Commercial banks and trade creditors hesitate to lend to SMEs. However, only few SMEs in Nigeria are able to access bank loans. Previous studies have decried the limited access to external financial resources available to smaller enterprises compared to larger organizations and the consequences for their growth and development (Hossain, 1998; Wattanpruttipaisan, 2003; Berger and Udell, 2004; Ogujiuba et al., 2004 ;).  According to Velverde et al (2005) bank credit play a crucial role in providing for external financing to SMEs, but in Nigerian context, this crucial source of finance for SMEs is apparently non-functional Kadiri, (2012).

1.2       Statement of the Problem

Small and Medium Enterprises (SMEs) have been recognised as driving force for economic growth in any nation. Empirical evidences have shown that they contribute to employment, alleviate poverty and increase productivity level in a nation.In recognition of the role of SMEs in the economic growth process of Nigeria, government has taken concerted efforts to foster the growth of SMEs and also develop entrepreneurship. SMEs are of necessity to a nation’s industrialization process. One foremost way of promoting SMEs is by having easy access to finance. Finance is of high importance to the growth of SMEs.Afolabi (2013) noted that a major gap in Nigeria’s industrial development process in the past years has been the absence of a strong and virile SMEs sector attributable to the reluctance of banks especially commercial banks to lend to the sector. Commercial banks through their intermediation role are meant to provide financial succor to SMEs. Prior researchers have identified lack of finance as a threat to the performance of SMEs.For SMEs to perform their role in the economy, they need adequate funds in terms of short and long-term loans (Ohachosim, Onwuchekwa&Ifeanyi, 2013). Adequate financing of SMEs is paramount to their survival, as it has been recorded in literature that financial constraint is one of the main reasons SMEs fail in Nigeria.Osoba (1987) argued that financing strength is the main determinant of small and medium enterprises growth in developing countries. There is no gainsaying that finance would boost the performance of SMEs if adequate and optimally utilized. The dearth of funds in these businesses is capable of crippling their operations. Lack of funding for SMEs creates obstacles in allowing them contribute to economic growth and development. Onugu (2005) ranked access to finance as the second problem faced by SMEs in Nigeria. Commercial banks are often reluctant to lend to SMEs because of the perceived risky nature of SMEs by them. Analysis of the annual trend in the share of commercial bank credit to small-scale industries indicates a decline from about 7.5 per cent in 2003 to less than 1% in 2006 and a further decline in 2012 to 0.14 per cent (Sanusi, 2013). The decline shows that commercial banks have less preference to lend to SMEs.

1.3       Aims and Objectives of the Study

The main objective of this study is to examine the role of commercial banks’ credit on the development of SMEs in Nigeria, while others objective is to:

  1. Examine the effect of commercial banks’ credit on the share of SMEs in GDP in Nigeria.
  2. Characterize the trend and pattern of commercial bank credit to SMEs in Nigeria.
  • Proffer policy recommendations based on the result of findings

1.4       Research Questions

The following question will be raised to guide the study, and there are:

  1. What are the role of commercial bank’s credit on the development on SMEs in Nigeria?
  2. What is the effect of commercial banks’ credit on the share of SMEs GDP in Nigeria?
  • What are the trend and pattern of commercial bank credit to SMEs in Nigeria?

1.5       Research Hypothesis

H0:      Commercial banks credit to SMEs have no significance impact on their development in Nigeria

1.6       Significance of the Study

In the modern times, industrial production requires the procurement of equipment, machineries and other inputs. The capital required in procuring the requirements in limited in supply and very few industrialists have access to it considering the type of collateral security required by the banks which must be fulfilled before granting loans. Since commercial banks act as intermediaries between surplus and deficit or as a bridge between scattered pockets of savers and the business community desirous of loans for investment, at the end of this research work the following will be attained; SMEs industrialist will be able to know some sources of finance and choose amongst them the best. Commercial Banks will know how effective and efficient they have been towards economic development. Commercial Banks will be able to make some adjustments in their lending processes. This study will therefore be relevant to both SMEs and Commercial banks in Nigeria after providing possible recommendations.

1.7       Operational Definition of Terms

Small Scale Enterprise: An enterprise with a labor size of workers between 10-300 or a total cost of not more than 50 million including working capital but excluding cost of land (Sule, 1986:207).

Medium Scale Enterprise: An industry with a labor size of between 11-1000  workers or a total cost of over 50 million but not more than 200 million including working capital but excluding cost of land (Clifford, 1972).

Business: Business includes any trade, industry, professional and any occupation carried on for profit Jerome (1996).

Bank credit: Bank credit is an agreement between banks and borrowers where banks trust a borrower to repay funds plus interest for either a loan, credit card or line of credit at a later date.


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