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Banks Financing Of Small And Medium-Scale Enterprises

(A Case Study Of Imo State)

5 Chapters
|
78 Pages
|
9,641 Words

Banks play a crucial role in financing small and medium-scale enterprises (SMEs), providing them with the necessary capital to start, grow, and sustain their businesses. These financial institutions offer various funding options tailored to the specific needs of SMEs, including loans, lines of credit, and overdraft facilities. Additionally, banks often provide advisory services and support to help SMEs navigate financial challenges and make sound business decisions. By facilitating access to capital and offering financial expertise, banks contribute significantly to the development and success of SMEs, which in turn strengthens local economies, fosters innovation, and creates employment opportunities.

ABSTRACT

The main objective of this study is to show significant effect of cashflow on financing, examine the problems encountered by banks in financing small and medium scale Enterprises, ascertain the need for financing Nigerian manufacturing industries, improving funding to SMEs and to proffer solutions as to way forward. The study examined the current literature including the sources like journals, seminar, textbooks, bulletins and other sources. These were extensively used to draw incisive inferences for the conclusion of this study adopted. From the analysis and testing of the results of various primary data collected, the researcher concluded that cash flow was a major problems of banks in financing the SMEs.
Management contributed in financing the SMEs by banks from the above findings, the researcher proffered several recommendations including:
1. The private sector in Nigeria should be empowered.
2. The current and financing liberalization and international programme of government be vigorously pursued.

 

TABLE OF CONTENT

Title Page
Approval Page
Dedication
Acknowledgement
Abstract
Table of Content

CHAPTER ONE
1.0 Introduction
1.1 General Overview of the Study
1.2 Statement of Problems
1.3 Objectives of the Study
1.4 Research Hypothesis
1.5 Scope of the Study
1.6 Significance of the Study
1.7 Limitations of the Study
1.8 Definition of Terms

CHAPTER TWO
1.0 Literature Review
2.1 Historical Background Of The Study
2.2 The Roles Of Banks In Financing Smes
2.2.1 Monetary Policy
2.2.2 Credit Policy
2.3 Cbn Financing Initiatives, Support And Schemes For Smes
2.3.1 Rural Banking Scheme
2.3.2 The National Economic Reconstruction Fund (Nerfund)
2.3.3 World Bank-Assisted Sme 11 Loan Project
2.3.4 People’s Bank Of Nigeria
2.3.5 Community Banks
2.3.6 The Nigeria Industrial Development Bank (Nidb)
2.3.7 The Nigeria Bank For Commerce And Industry (Nbci)
2.3.8 Nigeria Export Import Bank
2.3.9 Current Financing Initiatives
2.3.10 The Small And Medium Industries Equity Investment Scheme (Smieis)
2.3.11 The Bank Of Industry
2.3.12 Refinancing And Rediscounting Facility
2.4 Features Of Small And Medium Scale Enterprises (Smes)
2.4.1 Sole Proprietorship Or Partnership
2.4.2 Labour-Intensive Production
2.4.3 Centralized Management
2.4.4 Limited Access To Long-Term Capital
2.4.5 Pursuance Of Individualistic Goals
2.4.6 High Mortality Rate
2.5 Benefits Of Smes
2.6 The Core Challenges Of Banks In Financing Smes
2.6.1 Problems Of Finance
2.6.2 Shortage Of Efficient Enterprises
2.6.3 Inadequate Infrastructural Base
2.6.4 Unattractiveness Of Manufacturing And Indigenous Businessmen
2.6.5 Administrative Constraints And A Restrictive Industry Policy
2.6.6 Political Instability
2.6.7 Restricted Access To Institutional Credit
2.7 Potentials Of Smes

CHAPTER THREE
3.0 Research Methodology
3.1 Research Design
3.2 Area Of Study
3.3 Population Of The Study
3.4 Sample And Sampling Techniques
3.5 Sources Of Data
3.6 Data Analysis Technique

CHAPTER FOUR
2.0 Data Presentation, Analysis And Interpretation
4.1 Data Presentation
4.2 Data Analysis
4.3 Testing Of Hypothesis

CHAPTER FIVE
5.0 Summary, Conclusion And Recommendation
5.1 Summary
5.2 Conclusion
5.3 Recommendation
5.4 Suggestion For Further Work
Bibliography
Journals
Appendix
Questionnaire

CHAPTER ONE

INTRODUCTION
1.1 GENERAL OVERVIEW OF THE STUDY
In recent years, the manufacturing industry has grown slower than other sectors. These manufacturing industries which comprises of small and Medium Scale Enterprises, are relied upon for the state and country’s economic survival for import substitution. There is a broad consensus today that Small and Medium Enterprises (SMEs) play a critical role in economic development. Indeed, all through history, private sector have almost always emerged from SMEs acorns.
The principal activity of SMEs is to ensure that resources are fully employed for efficient and effective production which enhances the standard of living of people in the state and country as a whole, utilizing primary products (raw materials) to produce secondary products which form the back bone of industrialists activities. These products which when effectively utilized foster economic transactions and as such enhance the balance of payment in the economy.
The manufacturing industry touches our daily lives since the products (raw materials) converted into finished goods create substitution for imported goods abroad which in turn generate employment and income for the citizenry, but with the economy of a state going through a difficult period due to non-challant attitudes of banks in financing SMEs, these objectives cannot be achieved by SMEs. Banks prefer to pay the penalties imposed on them by the monetary authorities (CBN) to financing manufacturing industries.
The plan ahead through efficient financing by some banks and effective checks by some government representatives to ensure that the money granted to them (SMEs) will not be jeopardized by inefficient management. The impromptu attitudes of banks’ financing of SMEs is a problem to the sector, Imo State and the Nigerian economy as a whole. It has been alarming proportion over the years and could be on the increase in the future if effective moral suasion control and schemes is neglected by CBN.
This study therefore focuses among other issues the problems encounted by banks, which hamper their financing of SMEs, and this is mostly the cashflow position of industrialists (SMEs). The cashflow position of SMEs also militates them from further application for credits and financial supports from various financial institutions.

1.2 STATEMENT OF PROBLEM
The fact remains that whereas SMEs hold out huge promise for economic development, the difficulties they face limits this developmental impact.
1. The inability of small and Medium Scale Enterprises to achieve their goals as a result of poor funding has slowed down the pace of development in the state.
2. The cashflow positions of industrialists (SMEs) and its significant effects on financing them by banks has become so muddy that a safe and sound banking cannot be assured nor guaranteed.
3. That the inconsistency in monetary and fiscal policies of Imo State and the economy has impeded the growth of SMEs in the state.
4. Most small and Medium Scale Enterprises in Imo State experience dearth of infrastructure base like water which are basic facilities needed by them and are essential for industrial development.
5. That Nigeria as a whole is faced with incessant internal uprisings, coup d’etat and insecurity thereby creating an atmosphere of fear and insecurity and discouraging investment in industry in the states and country at large.

1.3 OBJECTIVES OF THE STUDY
The major objective of this study is to show the significant effect of cashflow on financing of Small and Medium Scale Enterprises in Imo State, and others will include:
1. To critically examine the problems encountered by banks in financing Sm all and Medium Scale Enterprises.
2. To ascertain the need for financing the state manufacturing industries.
3. To improve funding of SMEs by banks in Imo State.
4. To profer solution as to the way forward.

1.4 RESEARCH HYPOTHESIS
For the purpose of this research effort, the following shall be tested at the end of which the result will either be confirmed or rejected.
Hi: Cash flow position has a significant effect on the banks’ financing of SMEs.
Hi: Significant relationship exists between management and financing of SMEs.

1.5 SCOPE OF THE STUDY
The study will cover the period from 2000-2007. Again, there is time and financial constraint in that only two banks and some registered industries were used. These may not provide the general basis for credit management on the whole.
There also existed data collection problem due to dearth of co-ordination between data collection agencies, insufficient coverage, too much delay in publishing of data due to non-challant attitude to work on the part of most data collectors.

1.6 SIGNIFICANCE OF THE STUDY
This study of Banks financing of Small and Medium Scale Enterprises (SMEs) was carried out because insufficient fund have hindered the activities of this small businesses thereby disrupting the economy of the state. Since SMEs are one of the pillar of the economy, the researcher wants to find out the reasons why failed in supporting SMEs, if they have; what conditions are attached, and the researcher believes by so doing it will go a long way in benefiting both the banks, up coming researchers (students) and the economy at large.

1.7 LIMITATION OF THE STUDY
The researcher encountered some constraints during the course of this research work.
The most difficult problem I encountered is that of the Owner of Small and Medium Scale Enterprises refusal to fill the questionnaires.
Some of the Small and Medium Scale Enterprises find it very difficult to disclose the precise amount given to them by the financial institution in Imo State.
Another problem is limitation of some fundamental credit policies of banks that are not disclosed. But inspite of all these, the researcher was able to complete the research work.

1.8 DEFINITION OF TERMS
BANK: A bank is defined as a corporation or one who accepts money on current account and collects cheques for customers.
BORROWING: This means taking or collecting money from a person or a bank and agree to pay back to them at a stated time.
BUSINESS: This refers to any gainful activity, which might either be commercial, financial or productive engaged for personal development or emotional gain. In this study, it is used to define the activities of Small Scale Enterprise in Imo State and their importance.
CASH FLOW: This is the movement of money into and out of business as goods and services are bought and sold.
CREDIBILITY: Being able to be trusted, the quality that somebody or something has, that makes people trust or believe them.
COLLATERAL: This is a property or something valuable that are promises to give or gives to somebody to hold as security till one pays back money borrowed.
ENTREPRENEUR: Is a person who makes money by starting or running business especially when this involves taking financial risk.
ENTERPRISE: This is simply a company or a business.
GOVERNMENT POLICY: This can be defined as those government activities that are geared towards the regulation of business organization but in this context, it is those government activities geared towards the regulation of Small Scale Enterprises financing.
FINANCING: It is the act of supporting or creating subsidiaries to a firm or an organization to boost its development and production, which can be done through equity participation on loan.
INDUSTRY: This in this context refers to various Small Scale forms that produce goods and those that render services which are being assessed in terms of their performance in relation to output.
INDUSTRIALIST: It is refers to a person who owns or runs a large factory or industrial company.
INVESTMENT: Money put in a thing or project because it will be useful or helpful.
MEDIUM SCALE ENTERPRISE: This is any enterprise with a maximum asset base of N200 million excluding land working capital and with the number of staff employed by the enterprise not less than 10 and not more than 300.
SECTOR: A part of a particular area especially of a country’s economy.
SMALL SCALE ENTERPRISE: This can be defined as an enterprise or business whether registered or unregistered that creates utility.
SCHEME: Is a plan or system for doing something or organizing something.
STRUCTURE: This is the way in which the parts of something are connected together, arranged or organized.
TRANSACTION: Is a piece of business that is done between people especially as an act of buying and selling.

 

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Banks Financing Of Small And Medium-Scale Enterprises:

Banks play a crucial role in financing small and medium-scale enterprises (SMEs), as these businesses are often the backbone of many economies worldwide. SMEs require access to capital to start, grow, and sustain their operations. Here’s an overview of how banks typically finance SMEs:

  1. Business Loans: Banks offer various types of loans tailored to the needs of SMEs. These loans can be used for working capital, purchasing equipment, expanding operations, or other business purposes. Common types of business loans for SMEs include term loans, revolving credit lines, and equipment financing.
  2. Credit Lines: Banks often provide SMEs with revolving credit lines, which allow businesses to borrow up to a predetermined limit and repay as they use the funds. This flexibility is especially helpful for managing short-term cash flow needs.
  3. Microloans: Some banks offer microloans, which are smaller loans designed for very small businesses and startups. These loans are typically easier to qualify for and can help businesses get off the ground or cover immediate expenses.
  4. Trade Finance: Banks can assist SMEs with trade finance services, such as letters of credit, export financing, and import financing. These services help SMEs engage in international trade and manage the associated financial complexities.
  5. SBA Loans (in the U.S.): In the United States, the Small Business Administration (SBA) works with banks to guarantee loans made to small businesses. This reduces the risk for banks, making it easier for SMEs to access financing.
  6. Venture Debt: For high-growth startups, banks may offer venture debt. This type of financing provides capital to startups alongside equity investments and is often used to extend the company’s runway between equity funding rounds.
  7. Invoice Financing and Factoring: Banks may provide SMEs with invoice financing or factoring services, which allow businesses to access cash tied up in unpaid invoices.
  8. Asset-Based Financing: Banks may extend loans to SMEs based on the value of their assets, such as accounts receivable, inventory, or equipment. Asset-based lending can be useful for businesses with valuable assets but limited cash flow.
  9. Government Assistance Programs: In many countries, governments offer programs and incentives to encourage banks to lend to SMEs. These programs may include loan guarantees, interest rate subsidies, or grants to reduce the risk for banks.
  10. Online and Fintech Lenders: In recent years, online and fintech lenders have emerged as alternative sources of financing for SMEs. These platforms often use technology to streamline the lending process and may be more accessible to SMEs with limited credit histories.

To secure financing from banks, SMEs typically need to demonstrate their creditworthiness, provide a solid business plan, and have a clear strategy for repaying the borrowed funds. Additionally, collateral may be required, especially for larger loans.

It’s important for SMEs to carefully assess their financing needs, explore different options, and work with financial advisors to choose the most suitable financing solution for their specific circumstances. Additionally, building a strong relationship with a bank can improve access to financing and financial advice over time.