Analysis Of The Adequacy Of Bank Financing On The Growth Of Small Businesses
(A Case Study Of Union Bank Of Nigeria Plc)
Bank financing plays a crucial role in fostering the growth and sustainability of small businesses, acting as a financial cornerstone for their development. The availability of adequate funding from banks enables small businesses to invest in various aspects such as infrastructure, technology, and human resources, thereby enhancing their productivity and competitiveness in the market. Moreover, bank loans provide small businesses with the necessary capital to expand their operations, explore new markets, and innovate products or services. This financial support also facilitates the establishment of creditworthiness, enabling small businesses to access additional funding in the future. However, the effectiveness of bank financing on small business growth depends on various factors, including interest rates, collateral requirements, and the overall economic environment. Additionally, challenges such as stringent loan application processes and limited access to credit for startups and marginalized communities can hinder the full potential of bank financing in fostering small business growth. Nonetheless, through tailored financial products and supportive policies, banks can significantly contribute to the resilience and prosperity of small businesses, driving economic development and job creation.
The study examined the adequacy of bank financing on the growth of small businesses in Nigeria using the Union Bank of Nigeria as a case study. The major objective of the study is to ascertain the extent to which Union Bank of Nigeria Plc has helped to financial small scale industries. Instrument of data collection is questionnaires and research questions which formed the source of primary data while materials from various published articles, textbooks, journals and newspaper formed the secondary data. The method of analysis is the use of table percentages and chi-square. The major finding of the research is that Union Bank of Nigeria Plc has helped to financed small scale industries period under review. The recommendation is that in order to reduce the risk in small scale industry lending, the central bank of Nigeria and the government can do more than they are doing currently. The study concluded that if the desired objective of using small scale industries as catalysts of development is to be achieved than an analysis of adequacy of bank funding should be mutually supportive.
Title Page
Approval Page
Dedication
Acknowledgments
Abstract
Table of Contents
CHAPTER ONE
1.0 Introduction 1
1.1 Background of the study 1
1.2 Statement of the problem 2
1.3 Objective/ Purpose of the study 3
1.4 Research questions 4
1.5 Research hypothesis 4
1.6 Significance of the study 5
1.7 Scope of the study 6
1.8 Limitations of the study 6
1.9 Definitions of terms 7
1.10 Historical background of Union Bank of Nigeria Plc 7
CHAPTER TWO
2.0 Literature review 9
2.1 Introduction 9
2.2 Conceptual framework 9
2.3 Theoretical framework 18
2.4 Empirical framework 22
2.5 Researcher’s position 26
CHAPTER THREE
3.0 Research methodology 31
3.1 Introduction 31
3.2 Research design 31
3.3 Sources of data 31
3.4 Area of the study 32
3.5 Population and sample size 32
3.6 Sampling techniques 33
3.7 Instruments of data collection 34
3.8 Validity and reliability of measuring instrument 34
3.9 Data analytical techniques 35
CHAPTER FOUR
4.0 Data Presentation and analysis 38
4.1 Introduction 38
4.2 Presentation of data 38
4.3 Analysis of data 50
4.4 Test of hypothesis 50
4.5 Interpretation of result(s) 55
CHAPTER FIVE
5.0 Summary of findings, Conclusion and
Recommendations 56
5.1 Introduction 56
5.2 Summary of findings 56
5.3 Conclusion 57
5.4 Recommendations 58
Bibliography 60
Appendices 62-64
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
For both developing and developed countries, small and medium scale firms play important roles in the process of industrialization and economic growth. Apart from increasing per capital income and input, SMEs create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resources utilization considered critical to engineering economic and growth.
However, the seminal role played by SMEs not withstanding its development in every where constrained by inadequate finding and poor management. The unfavourable macroeconomic environment has also been identified as one of the major constraints which most times encourage financial institutions to be risk-averse in finding small and medium scale businesses.
Okporobie (1989:10) observes that Nigeria small scale industries continued to decline despite the so called priority given to the sector.
Ekeyong and Nyong (1992) observed that scale small enterprises are regarded as an organic part of a viable structure for the attainment meaningful economy development in developing economic like Nigeria.
Osayameli (1989) observes that the strength that make small scale enterprises more amendable for assistance areas e.g. low initialcapital out lay requirement and easy entry and exist.
1.2 STATEMENT OF THE PROBLEMS
The problem of credit to small scale industries may not necessarily be as a result of financing insufficiency but rather for some other reasons among which are:
1. Insufficient preparation on the part of small scale entrepreneurs in their request for credit assistance.
2. Information gaps as to range of finding institutions and scope of service available in these institutions.
3. Unfavourable bank loan policies and conditions that affect or hinders small business.
4. Inadequacy of bank financing small business.
However, the practitioners in the sector small scale industry do not display competence in preparing justification for their project. It is to see most of them coming up with cash flow projections, projected balance sheets, among others. They are based on personnel rudimentary information and speculation. At times, when they outcome that are made figures project based on assumptions which are most of their time unrealistic.
1.3 OBJECTIVES OF THE STUDY
The objectives of the study include:
a. To ascertain the extent to which the Union Bank of Nigeria Plc has helped to finance small scale industries.
b. To identify the problems encountered by small scale industrialists in obtaining finance from Union Bank of Nigeria Plc.
c. To evaluate various measures introduced to boost industrial production and its financing and how this has affected realization of the set goals.
d. To make suggestion and recommendations based on the data generated by the study.
1.4 RESEARCH QUESTIONS
The critical appraisal to give answer to the following questions:
1. To what extent has Union Bank of Nigeria Plc helped to finance small businesses?
2. What are the problems encountered by the small scale industrialists in obtaining finance from Union Bank of Nigeria Plc?
3. What are the various measures introduced to boost industrial production and its financing and how this has affected the realization of the set goals?
4. What are the causes of changes in small scale industrial financing by Union Bank of Nigeria Plc?
5. Does any linear relationship exist between leading to small business and economic recovery?
1.5 RESEARCH HYPOTHESES
Ho1: There is no significance relationship between lending to small business and economy recovery.
Ho2: There is no significance relationship between Union Bank of Nigeria Plc lending to small business.
Ho3: The loan conditions are not tailored to suit the needs of small business.
Ho4: The bank loans are not accessible to small scale business enterprise.
1.6 SIGNIFICANCE OF THE STUDY
This study will highlight problems associated with an analysis of adequacy of bank financing small scale industry in Nigeria. It will give information on the possible area for improvement.
Furthermore, the study will help commercial banks to assess and appraisal their role in financing small scale industry in Nigeria.
Moreover, suggestion and recommendation made in this paper will help policy makers formulate new economic policies maintain or modify the existing one. It will equally serve as a guideline to researchers who may wish to decide with this study in the future. It will also help small scale entrepreneurs to make sufficient preparation in the request for credit assistance.
1.7 SCOPE OF THE STUDY
The scope of the study is an analysis of adequacy of bank financing small scale industries in Nigeria. A case study of Union Bank of Nigeria Plc. It does not cover an analysis of adequacy of bank financing medium and large scale industries.
1.8 LIMITATIONS OF THE STUDY
However, there was constraints imposed on the researcher this includes the following:
a. Time a study of this nature, need a relatively long time during which information for accurate or at least near accurate inference could be drown.
b. Cost: The researcher would extent the survey to areas but limitations here include cost of transportation to source for materials and cost of setting the already completed work.
c. Dearth (scarcity) of statistical data: Lack of statistical data from our financial institutions like Central Bank of Nigeria (CBN), ministry of financial and economic development, commercial and merchant bank posed a constraint.
1.9 DEFINITIONS OF TERMS
This defines the major terms used in the research. These terms includes:
1. Small and Medium Scale Industries (Enterprises) SME: Small and medium scale enterprises are defined as those enterprise with fixed assets other than loan but including the cost of new investment not exceeding N36million.
2. Bank Financing: This is the process of sourcing for fund or acquisition of funds for financial purpose from a bank.
3. Adequacy: Thiscan be defined as the quality of being sufficient, adequate or able to meet the needs.
1.10 HISTORICAL BACKGROUND OF UNION BANK OF NIGERIA PLC
The Union Bank of Nigeria Plc was found in 1917 as colonial bank. In 1925 Barclays bank acquired colonial bank, changing the bank name to Barclays bank (Dominion, Colonial and overseas) or Barclays bank (DCO).
In 1969 Barclays bank (DCO) was incorporated in Nigeria, as Barclays bank of Nigeria Limited to comply with banking laws enacted in 1968. The bank later changed its name to Union Bank of Nigeria Plc, to reflect it new ownership structure.
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Analysis Of The Adequacy Of Bank Financing On The Growth Of Small Businesses:
Analyzing the adequacy of bank financing on the growth of small businesses is a complex task that involves examining various factors and their interplay. Here’s a comprehensive analysis of this topic:
1. Access to Financing:
- Loan Approval Rates: High loan approval rates indicate that small businesses have adequate access to financing. Low approval rates can stifle growth.
- Interest Rates: High interest rates can increase the cost of financing and negatively impact profitability.
- Collateral Requirements: Stringent collateral requirements may limit access to financing for businesses without significant assets.
2. Funding Amount and Terms:
- Loan Size: Small businesses often require smaller loan amounts. The adequacy of financing depends on whether banks offer loans that align with these needs.
- Loan Terms: Longer repayment periods can ease the burden on small businesses, making financing more adequate.
3. Industry and Business Stage:
- Industry-Specific Financing: Certain industries may require specialized financing options. Adequacy depends on whether banks offer tailored solutions.
- Startups vs. Established Businesses: Startups may require riskier, early-stage financing, while established businesses need growth capital. Adequacy hinges on whether banks provide options for both.
4. Creditworthiness and Risk Assessment:
- Credit Score Requirements: High credit score requirements can hinder financing adequacy for businesses with limited credit history.
- Risk Assessment: Adequate risk assessment practices by banks ensure that funds are disbursed to viable businesses, reducing defaults.
5. Alternative Financing Options:
- Venture Capital and Angel Investors: The presence of alternative financing sources can alleviate the dependence on banks, making financing more adequate.
6. Government Support and Policies:
- Government Programs: Adequacy can be influenced by the existence of government-backed loan programs designed to support small businesses.
7. Economic Conditions:
- Interest Rate Environment: Favorable interest rate environments can make bank financing more attractive and adequate.
- Overall Economic Stability: Economic downturns can impact banks’ willingness to lend, affecting financing adequacy.
8. Bank-Business Relationship:
- Customer Relationship: A strong relationship with a bank can lead to better financing terms and conditions.
- Financial Advisory Services: Banks offering advisory services can help businesses better manage their finances, enhancing the adequacy of financing.
9. Regulatory Environment:
- Regulations on Banks: Stringent banking regulations can affect the availability and terms of financing.
10. Technological Advancements:
- Online Banking and Fintech: Technological advancements have expanded financing options through online banking and fintech companies, potentially improving financing adequacy.
11. Impact on Growth:
- Revenue Growth: Adequate financing should result in sustainable revenue growth for small businesses.
- Job Creation: It should also support job creation, which is a vital aspect of economic growth.
12. Long-Term vs. Short-Term Growth:
- Adequacy should consider both short-term working capital needs and long-term investment for expansion.
In conclusion, the adequacy of bank financing for small businesses depends on a multitude of factors, including access, terms, creditworthiness, alternative options, and the broader economic and regulatory environment. Analyzing this adequacy requires a comprehensive assessment of these factors in the context of the specific business and industry. Moreover, it’s important to recognize that while bank financing is essential, a diversified approach to funding may be necessary to ensure sustainable growth for small businesses.