Effectiveness of the technical support for small scale industries by commercial banks (a case study of Union bank of Nigeria plc)

Complete chapter one


This study investigates the technical support which commercial banks provide for small scale industries in Nigeria (a case study of Union Bank of Nigeria Plc). The contributions of commercial banks range from the granting of loans to the small scale industries and advisory services are examined. Various determinants employed include the use of primary sources (those collected by the researcher) and secondary sources (those collected from relevant published materials). Importantly, the study provides entrepreneurs, small scale businesses, bankers, researchers and government official a clearer view of the problems facing small scale industries, understand how best to tackle these problems and ways of stimulating development of small scale industries.

Table 1: Ratio of loans to small scale enterprise to
commercial banks total credit

Table 2: Sources of investment finance for small
Industries in Nigeria

Table 3: Resource flows to SMEs

Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vii
List of Tables viii
Table of contents ix
Introduction 1
Definition of terms that constitute small
scale industry 6
1.3 Statement of problem 11
1.4 Objective of Study 12
1.5 Scope of Study 14
1.6 Importance/Significance of Study 14
1.7 Scope and Limitation 16

Introduction 18
The role of Small Scale Businesses (SMEs) 20
Importance of Small Scale Industries 22
Strengths that make small scale industries
Positioned for assistance 24
Problems of Small Scale industries 26
Problems inherent in Small scale businesses 31
Prospects of small scale industries 33
Sources of Finance to Small industries 35
The role of commercial banks in financing small
Scale enterprises 44
Small and Medium Industries Equity Investments
Scheme (SMIEIS) 28

Union Bank of Nigeria’s Experience 30
The Way Forward 44
Objective of credit policies 45
Problems associated with the commercial bank 47
Tackling problems of provision of bank finance 49
Introduction 53
Research population 53
Sampling size and technique 54
Sources, instrument and method of data collection 56
Data Analysis 57
Limitation of Research Method 57
Introduction 60
Sources of funds 61
Commercial and merchant banks 62
Small and Medium Enterprises (SME) II 69
Summary 74
Conclusions and Recommendations 73
Bibliography 84
Prior to the 1970s or thereabout, the view that large firms were the cornerstone of modern economy dominated economic literature (Nnanna, 2001). The theory of economy of scale which is predicated on the advantages of large scale operations was almost doctrine. In this context, small scale industries (SSIs) were seen as belonging to the past, out-model and a sign of technological backwardness. Indeed, their rapid decline became an index of industrial progress (Owualah, 2001). Lately, however, this view has changed, as the importance of small scale industries in promoting industrialization and economic growth has been recognized globally.
Studies have shown that SSIs have in many countries provided the mechanism for stimulating indigenous entrepreneurship, enhancing greater employment opportunities per unit of capital invested and aiding the development of local technology (Sule, 1986; World Bank, 1995). They help to mobilize savings for investment and promote the use of local raw materials. In addition, the SSIs contribute to the strengthening of industrial linkages and the integration of industrial with other sectors of the economy through the production of intermediate products such as raw materials, spare parts and machinery. It is also recognized that small enterprises adapt with greater ease under difficult and changing conditions as their low capital intensity allows product lines and inputs to be changed at relatively low cost.
In view of these advantages, greater attention has been given to the promotion of SSI globally.
According to Economics Dictionary (1960), industry is defined as the leading sectors of the economy, the totality of all factories, works, power house, mines and workshops which produce tools and equipment, which use the materials and produce the logs, timbers and woods and further use the immediate goods produced by industries as well by agriculture. There is no universal definition of small scale industry. Each country tends to derive its own definition based on the role SSIs are expected to play in that economy and the programmes of assistance designed to achieve that goal. Varying definitions among countries may arise from differences in industrial organization at different levels of economic development and difference in economic development in parts of the same country (Sule, 1986). The criteria that have been used in the definition include capital investment (fixed assets), annual turnover, gross output and employment. Prior to 1992, different institutions in Nigeria adopted varying definitions of small enterprises. The institutions included the Central Bank of Nigeria, Nigerian Bank for Commerce and Industries, Center for Industrial Research and Development and the National Council on Industry (NCI) streamlined the definition of industrial enterprises to bring in uniformity and providing for its review every four years. The definition was revised in 1996 as follows (NCI, 1986): Small Scale Industry is an enterprise with total cost (including working capital but excluding cost of land) above N1 million, but not exceeding N40 million, with a labour size of between 11 and 35 workers.
The classification of small scale industries in a diagram:
Small scale industry

Factories Non-factories

Cottage Industries Crafts Industry

The increasing development of small scale industries in Nigeria can be appreciated by looking at the pride of place it occupied in many National Development plans. For example, in the second National Development Plan, the government stated that it is its policy to give active support to the promotion and development of small scale industries in the country. To this end, a lot of policies and programme have been initiated by government to enable them attain their objectives culminating in the establishment of the Nigerian Industrial Development Bank (NIDB). In fact, the forth National Development Plan 1980 – 1985 stated that the objective of establishment special assistance programme for the development of small scale industries is for them to serve as a necessary tool for the development of the Nigerian enterprises.
The term small, medium and large are relative. They differ from industry to industry and country to country. In short, there is no unique of universally accepted definition to these terms. What Nigerians considered very large scale in the 1940s may be qualified now as small scale. Also, the optimum size of a ceramic industry is quite dissimilar to that of a fertilizer plant. Some industries are typically small (crafts, gold milling for example). While some are typically large scale (iron and steel manufacturing for example) in terms of capital and/or employment. Many industries also graduate from medium or large probably due to differences in policy focus.
Different government agencies in Nigeria apply various definitions which are considered below:
The introduction of the Structural Adjustment Programme (SAP) July 1986 and with it, the realignment of the Naira exchange rate raised production costs particularly for high import dependent industries. The higher operational costs as a result of the depreciation of the Naira motivated the World Bank to consider a definition closely related to present day cost price configuration. In this programme of $270 million loan assistance to Nigeria’s small, medium scale businesses, the World Bank identified a group referred to as Micro-enterprises. These are enterprises with fixed assets (excluding land plus cost of investment project below N450,000 in constant 1988 prices. It’s also with fixed assets excluding land plus cost of the investment project not exceeding N10 million in constant 1988 prices.
With regard to the National Economic Reconstruction Fund (NERFUND) small scale enterprises are defined as those with fixed assets other than land but inclusive of the cost of new investment not exceeding N100 million.
The centre for Industrial Research and Development (GRO) at the Obafemi Awolowo University, Ile-Ife defines small scale industries as those enterprises with total assets in capital equipment, plant and working capital not exceeding N250,000 and employing not more than 50 full time workers.
The Nigerian Industrial Development Bank defines a small scale enterprises as the one with project cost (investment and working capital) not exceeding N750,000 while it defines medium scale as, those businesses in the range of N750,000 to N3 million.
Industrial policy defines small scale industries as those with total investment of between N100,000 and N2 million excluding cost of capital but including working capital.
The fluidity in the concept of small and medium scale industries as highlighted above, reflects that the range in the definition is exclusively wide from N250,000 in total asset (GRD) to N10 million in fixed assets excluding cost of land (World Bank and NERFUND). Given the prevailing high cost situation and taking into consideration the larger group for government’s policy measures and income taxes, some of the institutions would need to revise their definitions. Bankers on the other hand may need to vary their definitions in time with whatever project they are investing in or funding.
There are so many problems confronting the small and medium industries. Among these is financial constraint. This is caused by sources of fund used in financing the project. Industrial projects need long gestation period. So, to finance such project, long term finance is needed and not a short term finance. In order to solve the problem of short term finance, commercial banks came out with a strategic approach in extending medium to long financing which attracted high interest rates. This measure still constituted more constraint to promoters and investors.
Other problems which have hindered the development of the sub-sector are as follows:
Lack of common service facilities
Imperfect knowledge of the existing market
Inadequate technical and economic counseling on the side of the promoters and investors.
It is against these, that this study will be looking into the following:
Activities of major financial institutions, to find out their level of commitment and determine why there is gap in their credit delivery system.
Whether the guidelines on interest and exchange rate and credit facilities do not contradict with the objectives of the scheme.
This study intends to bring into limelight the following:
The sustainable sources for adequate long term financing.
The clear knowledge of existing markets.
The provision of common service facilities.
Other objectives of this study are:
Evaluation of the contribution of commercial banks in Nigeria to the development of small scale industries.
Highlighting the progress and difficulties encountered by these banks in carrying out these duties to the small scale industries.
The successes and failures to the small scale industries will be considered also.
Highlights of the contribution of small scale industries in return to the development of the nation with possible changes.
Hypotheses are ideas or suggestions put forward as a starting point for reasoning or explanation (Hornby, 1974). It is “a tentative, conjectural statement of the relationship between two or more variables (Agbonifoh & Yomere, 1999).
In this research work three hypotheses will be tested:
1. Ho: (Null Hypothesis)
Level of awareness of credit facilities from commercial banks to small scale enterprises will not significantly improve the activities of SMEs.
Hi: (Alternative Hypothesis)
Level of awareness of credit facilities from commercial banks to small scale enterprises will significantly imrpve the activities of SMEs.
2. Ho: (Null Hypothesis)
Lack of infrastructure will not significantly be a major constraint to SME operators.
Hi: (Alternative Hypothesis)

The study will limit itself to the contribution of commercial banks through the granting of loans to the small scale industries from 1980 – 1999. To be looked at also are government policies and incentives for small scale industries within the period.

Clearly, the study will highlight the role commercial banks have played (especially Union Bank of Nigeria’s experience) towards the development of small scale industries. It will equally pinpoint the limitations these banks have encountered in fully realizing their potentials and then make suggestions for the full realization of these potentials.
Another significance is to provide entrepreneurs small scale businesses, bankers, researchers and government officials with a clear view of the problems facing small scale industries, understand how best to tackle these problems and ways of stimulating development of small scale industries.
Lastly, to acquaint owners of intending owners of small scale industries with the investment opportunities but exist in small scale industry, and how to set up simple accounting records for small scale industries. This study will be of great benefit to banking authorities especially the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance in their policy formulation.
Samples will be used to represent the whole population and the fact that some companies do not let out some information which they consider as confidential, there is bound to be some elements of sampling bias which will reflect in the analysis of data. However, this is not expected to be significant as the characteristics and nature of commercial banks and small scale industries are homogenous.

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