Effect Of Bank Consolidation On Performance Of Small And Medium Scale Enterprises In Nigeria

Effect Of Bank Consolidation On Performance Of Small And Medium Scale Enterprises In Nigeria

Abstract

The central tenet of banking sector connection was to develop a strong, dependable and diversified banking sector that’s able of playing effective experimental places in the frugality, similar as backing of small and medium scale enterprises and getting a competent and competitive player in the African indigenous and global fiscal system. In substance, the reform was anticipated to produce big banks by adding bank capital base through the capital request and/ or combinations and accessions. The bank connection in Nigeria has generated raging debates on different borders similar as; the effect of the connection on the fiscal extremity; the advisability of universal banking; and on whether further capital could restate to banking system stability among others. One area that has entered little or no attention among scholars and policy makers is the effect of the connection on the lending and performance of small and Medium Scale Enterprises( SMEs) in Nigeria. Specifically, SMEs are generally perceived as a catalyst for profitable and development, given that the frugality draws its strength from strong internal dynamics embedded in its large population, flexible SMEs, large and vibrant informal sector. A priori, the emergence of bigger banks is anticipated to restate into further lending to SMEs. still, some scholars have argued that as small banks converted to come bigger banks, they tend to lose their being relating relationship with lower guests similar as SMEs. They supported this assumption by arguing that bigger banks will have strong preference for high profile investment with advanced returns, while displaying strong bias against credits to SMEs. While each of these groups has proffered propositions to support their positions, empirical study that reconciles these propositions with reality is non-extent. It was against this background that the main ideal of this study was to probe the effect of pre and post bank connection on the performance of SMEs in Nigeria. The specific objects of the study thus were to examine the impact of bank connection on number of registered SMEs, growth and access to fund for SMEs in Nigeria. This study espoused theex-post facto design and time series data from 1991- 2012( 22 times) for pre and post connection period were collated from Nigerian Corporate Affairs Commission database, Central Bank of Nigeria Statistical Bulletin and Small and Medium Scale Enterprises Development Agency of Nigeria database. The Ordinary Least Forecourt( OLS) retrogression was used to estimate the three suppositions formulated for the study. The result expiring from this study indicates that Bank connection had positive and non-significant impact on number of registered SMEs in pre connection period in Nigeria while it was set up to have positive and significant impact on survival of SMEs in post connection period in Nigeria. Also Bank connection had positive and significant impact on growth of SMEs in both pre and post connection banking period in Nigeria and incipiently Bank connection have negative and non-significant impact on bank lending to SMEs in pre connection banking period in Nigeria but was positive and non-significant on banking lending to SMEs in post connection banking period in Nigeria. The study, therefore, concludes that the connection exercise in 2005 was a welcome development end at enhancing the growth of SMEs. We thus, recommend among others that government should make programs that will strengthen and boost access to finances for small and medium scale enterprises.

Chapter One

Preface

Background Of The Study

Small and Medium Enterprises( SMEs) are argued to be an instrument of profitable growth and development. therefore, Fatai( 2010), states that in Nigeria where the private sector isn’t well developed, SMEs are assumed to play prominent part in employment generation and facilitation of profitable recovery and public development. He maintains that the growing recognition of the part of SMEs may have influence the decision of World Bank Group to commit roughly$2.4 billion on SME, as core element in its strategy to foster profitable growth, employment generation and poverty relief.

Significance Of The Study

It’s important to probe this issue by coordinating data with empirical reality of connection exertion. thus, this study will be significant to the following group of persons

1 operation of Banks

The decision making authority in banks lies in the hands of directors. thus, this exploration will enable operation to understand what must be done in order to act in the stylish interest of shareholders in choosing expansion measures which will help the bank achieve an optimal structure that will maximize shareholders ’ value.

2 Investors and Implicit Investors

The major heirs of an enhanced performance of banks are shareholders else called investors or implicit investors. The choice of connection between banks eventually affects their part in lending to small and medium enterprises. thus, this exploration will contribute along with other analogous literatures available in this area of finance in enhancing value maximization on the effect of connection on the performance of small and medium enterprises in Nigeria.

3 The Academia

Basically, this exploration intends to contribute significantly to the volume of literature available in this area of finance. In academics, the unknown is noway exhausted, as the list of what we don’t know could go on ever. thus, as a donation in this area, recommendations about connection and its effect on performances of SMEs in Nigeria will be studied. Localizing the exploration to the Nigerian terrain is particularly important in this exploration.

While the significance of small and medium enterprises has not been in mistrustfulness, unfortunately classifying businesses and associations into large and medium scale is private and depends on different value parameters. These parameters follow different criteria similar as employment, total means or total investment. The delineations of small and medium enterprises vary in different husbandry but the underpinning conception is the same. Ayyagariet.al( 2003) and Buckley( 1988) contend that the “ description of small and medium scale enterprises varies according to environment, author and country ”.

In the case of Nigeria, hardly do we’ve a clear- cut description that distinguishes small and medium scale enterprises. The first attempt to define SMEs in Nigeria was by the Central Bank of Nigeria in its financial programs in direct No. 22 of 1988, where SMEs was defined as those enterprises with periodic development not exceeding 500,000 naira. also, in 1990, the Federal Government of Nigeria defined small scale enterprises for the purpose of marketable bank loans as those enterprises whose periodic development doesn’t exceed 500,000 thousand naira and for trafficker bank loan, those enterprises with capital investment not exceeding 2million naira( banning the cost of land).

In 1993, the description of SMEs was reviewed by the Federal Government, which increased their total asset to five million as a result of the preface of the Alternate league Foreign Exchange Market( SFEM), and the helical affectation fuelled by the Structural Adjustment Programme.

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Ogechukwu( 2006) opines that the changing dynamics in the frugality has also urged scholars and interpreters to reclassify SMEs into micro and super-micro businesses, with a view to furnishing acceptable impulses and protection for the former. In that environment, any business or enterprise below the upper limit of N250, 000 and whose periodic development exceeds that of a cabin assiduity presently put at N50, 000 per annum is a small scale assiduity.

likewise, the National Directorate of Employment( NDE) conception of a small scale assiduity has been fixed to a outside of N35, 000. In other words, a business unit of not lower than N35, 000 is characterized as a small scale business in Nigeria.

The description of small- scale enterprises( SSEs) in Nigeria has changed over the times not only in consonance with the changing fortune of the country but also in agreement with the diversity of the Small and Medium Enterprises. Prior to 1992, different institutions in Nigeria espoused varying delineations of small enterprises. The institutions include the Central Bank of Nigeria( CBN), Nigerian Bank for Commerce and Industry( NBCI), Centre for Industrial Research and Development( CIRD), Nigerian Association of Small- Scale Industrialists( NASSI), Federal Ministry of Industry( FMI) and the National Economic Reconstruction Fund( NERFUND). still, in 1992, the issue of clashing description was resolved with the establishment of National Council on Industry, which is now policy making organ for the sector in Nigeria. Among the abstract issue that was resolved is whether Small- Scale Assiduity description should include all profitable conditioning similar as trading, buying and dealing or whether it should be confined to productive artificial conditioning especially manufacturing. Consequently, a clear distinction was made between small- scale enterprises conforming of trading, buying and dealing conditioning and small- scale diligence engaged in manufacturing assiduity.

This description of SMEs may not be the same in other countries, but may be useful in developing countries, because of the low capacity of these countries small scale assiduity.

One of the factors militating against the development of SMEs in Nigeria is lack of backing. This is so because, SMEs in Nigeria depends on possessors equity( particular savings), borrowings from musketeers and relations, adopting from government agencies( illustration; Small and Medium Scale Equity Investment scheme), and adopting from marketable banks. Of all these backing sources,

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expansive studies have shown that the most dependable and effective source is the marketable bank loan to SMEs. The studies further argue that those small banks are more effective in financing this sector and trait this to relationship cling. The studies further argue that the size of a bank influences the volume of backing to SMEs. SMEs in Nigeria can not pierce the capital request because of the strict table demand for the first and alternate league requests. still, it’s suspected that the recent banking reforms, through connection, might have affected the effectiveness of banks in discharging this function.

There are a number of implicit benefits derivable from the lifting of geographic walls to competition in banking and the associated surge of connection. These include, but aren’t limited to, diversification, bettered competition, and the elimination of settled hamstrung or tone serving bank directors. What’s lower clear is the effect of connection on the force of credit to businesses, particularly small businesses that depend on banks for external credit.

A check of small credit to small enterprises( Cole, Wolken, and Woodburn 1996), has established a fairly strong link between size of banks and the force of small business credit, with bigger banks devoting lower proportions of their means to small business lending than lower banks( Berger, Kashyap, and Scalise 1995, Keeton 1995, Levonian and Soller 1995, Berger and Udell 1996, Peek and Rosengren 1996, Strahan and Weston 1996). Small banks are considered primary sources of credit for small businesses. Unlike largely capitalized and intimately traded enterprises, which have access to capital requests, small businesses calculate explosively on banks for small business credit, incompletely because of the challenges of penetrating fund from the capital request. These Small and Medium Scale businesses frequently concentrate their borrowing at fiscal institutions, substantially small banks with which they’ve long- term connections, ie connections that prove mutually salutary to both parties. This relationship enables banks to collect information about the SME’s capability to repay similar installation, thereby reducing the cost of furnishing credit installations. Small and Medium Scale Enterprise in turn, enjoy better access to credit installations and lower cost of borrowing. Small banks make further of these “ collective relationship loans ” than do large banks, which are more likely to make general loans grounded on advised fiscal rates from the operating result of the borrower and credit indicators

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The banking assiduity which is considered as a major provider of fund to small and medium enterprises has passed through several stages of nonsupervisory fabrics to its present state and this development could be distributed into five stages. Okafor( 2011) presented five clusters of reform as( i) First( Independence) reforms cluster 1960 to 1996, The ideal of this reform was to establish indigenous Banking institutions that will pilot the frugality of the recently independent Nigeria( ii) Alternate( indigenization) reform cluster 1970 to 1976.( iii) Third( Okigbo Committee) reform cluster 1977 to 1985,( iv) Fourth( Structural Adjustment Programme) reform Cluster 1986 to 1990.( v) Fifth( Fourth Republic) reform cluster 2000- 2010. Okafor( 2011) farther countries that each of the clusters represents some major and minor reforms that are directed at perfecting banking service delivery in Nigeria.

Nnanna( 2006) states that the first stage from 1930 to 1959, was characterized by inadequately subsidized and unsupervised indigenous banks, leading to failure at their immaturity. He states that the alternate stage was from 1960 to 1985. In this period, the Central Bank of Nigeria nonsupervisory policy frame was designed to insure that only persons with good character and fiscal strength were granted Banking License subject to specified minimal paid up capital.

The development of this stage was grounded on the preface of minimal paid up capital and other conditions before the entitlement of banking licenses to drivers. He states also that the third stage from 1986 to 2004 involved the post Structural Adjustment Programmes( SAPs) or the De-control Regime during which the neo-liberal gospel of free entry was over stretched and Banking licenses were allocated by the political authority on the base of patronage. A major reform in the banking sector during the period was universal banking policy. This policy was responsible for the connection of trafficker banks, marketable banks and exchange house into a universal bank. thus, one bank was needed to perform all banking functions. He states further that the fourth stage of banking sector reform could be described as the period of connection ie 2004 to 2008.

The major emphasis of that period was on recapitalization and visionary regulation grounded on threat concentrated supervision frame. The fifth stage; he describes as the post connection period, where the focus is to strengthen the banking sector through effectiveness- driven programs. The fourth stage,

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which was the connection period inspired interest both from the academic circle as well as from drivers in the Nigerian Banking assiduity further than the other ages( Nnanna 2006).

This frequent policy changes which the CBN introduces as a nonsupervisory institution may have affected the banking geography in Nigeria, as a result, there have been several attempts both within and outside Nigeria to examine the impact of these connection programmes on bank performance. In Nigeria and other husbandry, experimenters have viewed banking sector connection else.

Adeyemi( 2006) examines the issues and challenges arising from the banking sector reform programme in Nigeria. He noted that since the connection programme was policy convinced, the 18 months given for total compliance appeared shy, following the number of conditioning needed for connection to be successfully perfected, he still conceded that the programme could lead to the emergence of a sound and effective fiscal system that would support the growth and development requirements and Bourne’s of the Nigerian frugality, to completely harness the solidarity and capabilities of the connection programme. He thus, supported for proper running of post connection challenges similar as nonstop inflow of fund to small and medium enterprises.

Oladepo( 2010) posits that the value gains that contended to accrue to the large and growing surge of connection exertion haven’t been vindicated. therefore leading the exploration community in double bind on whether the assiduity has followed a path of massive restructuring or a deceived belief of value earnings of connection. He stated that it isn’t clear whether the fiscal controllers and drivers are insincere to the public and shareholders about the goods of their exertion on shareholders ’ value and banking performance. It’s important to address this issue by coordinating data with empirical reality of continued connection exertion.

Soludo( 2004) states that one of the focus of the banking sector connection was to develop a diversified, strong and dependable banking sector able of playing active experimental places in the original frugality including backing of SMEs and of being competent and competitive players in

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the African indigenous and global fiscal system. It’s argued that small banks are primary source of credit for small and medium enterprises. This is because these enterprises don’t have access to capital request where large finances can be sourced. Their incapability to pierce fund from the capital request could make them to concentrate their borrowing from institutions with which they’ve long term relationship i.e. relationship that prove mutually salutary. It’s generally argued that this relationship enables banks to collect information about the borrower’s capability to repay, and this could reduce the cost of furnishing credit.

The need to empirically probe the impact of bank connection on the performance of SMEs in Nigeria motivates this study, since empirical studies on this issue, grounded on the experimenter’s knowledge are shy.

Statement Of Problem

Graig and Hardee( 2006) posit that small and medium enterprises are the major sources of job growth in any country. It’s generally argued that small and medium enterprises are characterized by three top features videlicet( i) fairly small star( ii) absence of asset- grounded collateral and( iii) simplicity of operations.

The bulk of small and medium enterprise credit is said to come primarily from banks thus institutional changes through connection could have an adverse effect on small business credits and the performance of SMEs( Gray abd Harde, 2006). This really has to be caught on in the Nigerian situation, hence the challenge or problem of this study. For case, government in history have tried through several intervention schemes to promote backing to SMEs. The schemes which were designed to insure nonstop inflow of fund to SMEs include; the Nigerian Agrarian and united Bank Ltd( NACB), the National Directorate of Employment( NDE), the Nigerian Agricultural Insurance Corporation( NAIC), the Peoples Bank of Nigeria( PBN), the Community Banks( CBs), the Family Economic Advancement programme( FEAP).

Despite these schemes, SMEs largely calculate on marketable bank for fund. still, the2004/2005 bank connection is argued to have constrained the smooth inflow of fund from marketable banks

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to SMEs in Nigeria. Some studies have argued that connection of the banking assiduity will have negative impact on the quantum of credit available to small businesses. Strahan and Weston( 1996) state that small banks are said to be major source of credits for small business outfit, unlike large enterprises which have access to the capital request, small and medium enterprises calculate heavily on bankcredit.However, it may be explosively contended that it’ll have a negative effect on the vacuity of credit to small and medium enterprises, If small banks are decreasingly acquired by large banks in the form of connection.

Graig and Hardee( 2004) examine the recrimination of connection on the quantum of credit available to small business. They set up that access to credit connection significantly reduced banking credit to SMEs. They argue that this can reduce the productivity of small businesses and their overall donation to the frugality in terms of adding employment creation and social weal. The recrimination of lack of credit to small business is that these small businesses may be decreasingly turning to non-bank sources of finance to pierce credit. still this source comes with a cost to this class of business hence adding the cost of product.

still, these studies failed to probe the impact of bank connection on the performance of SMEs in Nigeria. This is especially necessary, given that bank connection was aimed at icing bank stability, promoting good commercial governance, establish mega banks and promote bank lending to the private sector.

Objects Of The Study

The main ideal of this study is to assess impact the2004/2005 bank connection on the performance of SMEs in Nigeria. Specific objects of the study include

i) To determine the effect of pre and post bank connection on the number of registered small and medium enterprises in Nigeria.

ii) To examine the impact of pre and post bank connection on the growth of small and medium enterprises.

iii) To assess the donation of pre and post bank connection Nigeria on advancing to small and medium enterprises in Nigeria.

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Exploration Questions

As a follow- up to the ideal, this exploration seeks to give answers to the following questions.

i) To what extent do pre and post bank connection affect the number of registered small and medium enterprises in Nigeria.

ii) In which ways do pre and post bank connections affect the asset size of small and medium enterprises in Nigeria?