IMPACT OF EFFECTIVE FINANCING OF SMALL SCALE INDUSTRIES ON NATIONAL ECONOMIC DEVELOPMENT
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IMPACT OF EFFECTIVE FINANCING OF SMALL SCALE INDUSTRIES ON NATIONAL ECONOMIC DEVELOPMENT
Chapter one
1.1 Background of the Study
In most developing countries, the corporate world is characterised by low investment rates caused by a lack of reliable cash and a weak economic situation. Many of these nations feel the need to revitalise their economies by starting on economic reform programmes projected to improve the amount of activity in the economy. Olaleye (2002).
A substantial majority of industrialization countries base their economic policies on the encouragement of small and medium-sized firms. Public support for small and medium-sized businesses appears to be founded on the commonly held notion that the small business sector is an incubator of economic growth, where innovation occurs and fresh ideas become economically viable corporate ventures. Craig, Jackson, & Thompson (2005).
In keeping with this, the importance of small and medium-sized firms in promoting economic development has been clearly articulated in many forms of government policy.
The focus on them is based on their predicted impact and prospective contribution, as well as an accelerative attempt to achieve macro-objectives such as full employment of local technology. They also serve as a motivator for increased national productivity and a viable entry point into the global export market.
Giving insight into the small and medium-sized firm phenomenon, it appears that the Nigerian economy has not been able to realise the benefits of SMEs in the past.
Similarly, many industries complain about government indifference or disinterest in their pursuit of rapid expansion and development. The current lukewarm relationship is not beneficial to the economy.
For these reasons, the Nigerian government began to take an interest in SMEs in the 1970s and continues to do so today. Some of the positive actions taken by the government include providing funds for some research into these industries, establishing small scale industries divisions or departments
as well as small scale credit schemes in various states and at the federal level, and prioritising the subject in national development plans from the 1970s and 1980s, particularly the 1981-1985 plan.
As a result of the increased public interest in SMEs and the government’s recognition of their numerous benefits, the government has implemented several rules and issued specific pronouncements regarding the sector’s operation and promotion.
Monetary initiatives include the formation of financial institutions to supply financing for the sector. Banks were also compelled to lend a specific proportion of their available credit to indigenous borrowers, with a focus on SMEs.
Furthermore, monetary authorities established a number of financial intermediaries to provide incentives to these emerging industries and businesses in order to assist them with financing and problem management.
In line with the preceding assertions, it is clear that research of this sort cannot be overstated given the new approach of Nigerian banks and other financial institutions to giving essential financing to small and medium-sized firms.
1.2 Statement of the Problem
It is widely acknowledged that small and medium-sized businesses have the potential to bring the economy out of the doldrums in which it is currently mired Ajonbadi, (2002). The opportunities are simply immense. However, the clamour has been about a paucity of investible funds.
This is especially true when claims have been levelled against the Nigerian government, and specifically Nigerian banks, that business regulations have been predominantly designed to benefit major corporations at the expense of the SMEs sub-sector. As a result, SMEs have limited access to funding.
Because of their size and origin, SMEs are more prone to face serious information asymmetry issues, as well as a lack of established credit rating methods. Several economists, including Slightz and Weiss (1981).
Contend that private lending institutions may fail to allocate loans efficiently due to basic information gaps in the market for SMEs’ business loans.
According to Slightz and Weiss (1981), while considering whether to make a loan, banks assess both the interest rate and the risk. As a result, the inability to combine these two elements makes it difficult for SMEs to get the capital they require.
Furthermore, it has been observed that one of the reasons for SMEs‘ poor growth in Nigeria is a lack of access to long and medium-term loan facilities for the acquisition of fixed assets and expansion. The lack of cash for this purpose is mostly owing to the short-term nature of bank deposits, which are the economy’s principal source of financing.
Clearly, in an effort to mitigate the risk inherent in the mismatch of the terms of their deposits and loans, banks have been overly cautious in picking projects for medium-long-term financing while charging relatively high interest rates. As a result, the study focuses on funding issues for small and medium-sized businesses.
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