Commercial Bank Loans and the Performance of Small and Medium Scale Enterprises (SMEs) In Nigeria

Abstract

The contributions of Small and Medium Scale Enterprises (SMEs) to the growth of Nigerian economy cannot be understated as they seem to drive the economic and industrial transformation of the country. Notwithstanding the acknowledged role of SMEs, a number of factors tend to limit their growth potentials. They’re still faced with the issue of funding and to overcome this problem, external borrowing has become inevitable. Commercial banks appear to be the most likely source of funds. Thus, the main objective of this study is to ascertain the impact of commercial bank loans on the performance of small and medium scale enterprises in Nigeria. While an ex-post facto research design was adopted in the investigation; a least square regression analysis was carried out on a time-series data to ascertain relationships, and to avert the emergence of spurious results, unit root tests were conducted. Outcome of the study indicates that, there exists an inverse relationship (though not statistically significant) between the amount of commercial bank loans (CBLSME) made available to SMEs and the output of SMEs (OPSME) in Nigeria This implies that as CBLSME increases, OPSME decreases. The negative sign exhibited by OPSME is not in line with our apriori expectation because an increase in CBLSME is supposed to cause an increase in investment which is expected to boost the output of SMEs. This trend has shown the poor attitude of commercial banks towards the granting of loans to SMEs in Nigeria. The study also revealed that a seeming upsurge in the activities of SMEs may not have reduced the rate of unemployment in Nigeria as a good number of people employed by the SMEs are probably under-employed. Conclusively, the inability of our commercial banks to grant effective loans to SMEs have translated to low level of output of SMEs to GDP. This in turn has impacted negatively on average capacity utilization and a consequent hike in the already strained unemployment situation in Nigeria. While commercial banks are expected to come to the rescue of SMEs, the truth must be said, that these institutions are profit oriented and may not be in a vantage position to give long term loans with depositors funds that are predominantly short tenured. Based on the findings of study, it is recommended that, the intervention programs put in place by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) to ameliorate the challenges of the SMEs should be strengthened. It is not out of place too, for commercial banks to re-jig their SME desks in order to offer sustainable financial assistance to the SMEs. Lastly, the Bank of Industry (BOI) should be properly positioned in its mandate of providing financial assistance for the establishment of large, medium and small projects as well as the expansion, diversification and modernization of existing enterprises and to rehabilitate the ailing ones.