IMPACT OF BANKING REFORMS ON SMALL AND MEDIUM SCALE ENTERPRISES (SMES).
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IMPACT OF BANKING REFORMS ON SMALL AND MEDIUM SCALE ENTERPRISES (SMES).
Chapter one
1.0 Introduction
Small and medium-sized businesses are critical to the industrialization and economic progress of both emerging and industrialised countries. Aside from improving per capita income and output, SMEs generate job opportunities, improve regional economic balance through industry dispersal, and encourage effective resource utilisation, all of which are regarded vital to engineering economic development and growth.
However, despite their growth, the function of SMEs is always limited by proper funding and poor management. Unfavourable macroeconomic development has also been cited as a major restraint, which often encourages financial institutions to be risk-averse when supporting small and medium-sized firms.
Financial institutions’ reluctance to fund SMEs can be attributed to banks’ weak capital base and the knowledge asymmetry that exists between SMEs and lending institutions.
Nigeria’s financial system is dualistic, with both formal and informal systems. Money lenders, rotating savings and credit societies, and other entities that operate outside of the recognised framework make up the informal financial system.
The formal financial system is an organised, recognised, and controlled part of the financial system. The formal financial system consists of the banking sector, the non-banking sector, and the financial markets.
As of December 2008, the Nigerian financial system consisted of the Central Bank of Nigeria (CBN), the Nigeria Deposit Insurance Corporation (NDIC), the Security and Exchange Commission (SEC)
the National Insurance Commission (NAICOM), 25 deposit money banks, 6 development banks, 757 micro-finance banks, one stock exchange, one commodity exchange, five discount houses, nine primary mortgage banks, 112 finance companies, and 581 stock brokers.
However, deposit money banks dominate Nigeria’s formal sector in terms of total deposits, credit, and assets. The Central Bank of Nigeria (CBN) declared on July 6, 2004, that the minimum paid-up capital will be N25 billion beginning January 1, 2006.
To fulfil the N2S billion capitalization requirements, banks were permitted to combine, consolidate, or even acquire another bank. After the consolidation exercise, 25 groups of banks emerged from the 89 existing commercial banks
while 14 institutions that were unable to consolidate were liquidated. To raise cash, banks employed techniques such as mergers and acquisitions, the flotation of new shares, and so on.
The goal for consolidation is that banks would be able to mobilise a big quantity of cash to lend to the productive sector. Nigeria’s small and medium-sized firms dominate the sector. As a result, SMEs are more likely to grow into giant conglomerates.
Banks will be able to fulfil the Basel Capital Adequacy Accord’s minimum capital adequacy ratio of 10% through consolidation. The ten percent ratio, which ties capital to credit, suggests that for every N100 loan, a bank requires N10 capital.
1.1 Statement of Problem
Small and Medium Enterprises in Nigeria have not performed creditably, and as a result, they have not played the expected crucial and lively part in Nigeria’s economic growth and development. This situation has caused tremendous worry among the government, citizens, operators, practitioners, and organised private sector groups. Year after year, the federal, state, and even municipal governments have demonstrated their interest in and recognition of the critical role of the SMEs sub-sector of the economy by budgetary allocations, policies, and pronouncements, and have thus implemented policies to energise it. There have also been fiscal incentives, grants, bilateral and international agency support and aid, as well as specialised organisations, all aimed at boosting the SMEs sub-sector.
Just as it has been a major concern for everyone to promote the welfare of SMEs, it has also been a major source of concern for everyone that the key sub-sector has fallen short of expectations.
The situation is more troubling and concerning when compared to what other emerging and established countries have accomplished with their SMEs. It has been demonstrated that there is a strong relationship between the degree of poverty, hunger, unemployment, and economic well-being (quality of living) of a country’s inhabitants and the vibrancy of that country’s SMEs.
If Nigeria is to achieve significant success in meeting the Millennium Development Goals by 2020, one of the sure approaches would be to strongly pursue the development of its SMEs.
Some of the key Millennium Declaration Goals, such as reducing the proportion of people living in extreme poverty, hunger, and lack of access to safe water, reducing maternal and infant mortality, and enrolling all children in primary school by 2020, may be a pipe dream unless our SMEs’ fortunes improve sooner rather than later.
Given Nigeria’s escalating poverty and the necessity to reach the Millennium Development Goals, now is the time to do something surgical about our SMEs’ position.
The declining per capita income in Nigeria, as well as the low level of agricultural, industrial, and infrastructural development (irrigation, roads, and railway networks), are all troubling indicators that contribute to our SMEs’ poor performance and contributions.
Despite the fact that SMEs have been seen as Nigeria’s defensive wall for job creation and technical growth, the sector has also suffered from neglect, with negative consequences for the economy.
1.2 Objective of the Study
The research aims to identify the problems, challenges, and constraints impeding SMEs’ success, as well as make appropriate recommendations for addressing and eliminating them so that SMEs can take their rightful place in the Nigerian economy and thus play the critical role they are expected to play in Nigeria’s economic growth and development. To accomplish this, the research will try to:
(1) Determine the characteristics of SMEs in Nigeria.
(2) Determine their sources of money (official or informal institutions).
(3) Identify the obstacles that SMEs face when sourcing finance.
(4) Make relevant recommendations for resolving or relieving the highlighted problems and obstacles for SMEs.
1.3 Significance of the Study
The study is aimed to provide theoretical and empirical insights on SMEs and banking services. This study will serve as the foundation for a more in-depth examination of banking formulations and their relevance to developing SMEs in less developed nations.
It would be critical for infant industries to recognise actions taken by the government and stakeholders to develop the SMEs sector in terms of finances and other issues affecting them that have previously gone unnoticed by SMEs.
Furthermore, government policymakers, financial institutions, and economists will find it beneficial for developing effective policies and addressing current economic issues.
Furthermore, students from higher education institutions will find it interesting based on the most recent developments in the financial sector to strengthen SMEs and for future research studies.
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