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SME Development - IDN - International Development Norway




Small and Medium Enterprises (SMEs) play a vital role in the development of national economy. Due to their importance and the crucial role they play in economic development and growth of the nation, much attention has been placed on financing of small and medium enterprises, since they are major contributors to the economy of Nigeria. These enterprises are drivers of the economy; therefore policy attention has to be given to them especially in developing economies because of their impact on many sectors of the economy. Their impact is felt in the following ways: Greater utilization of local raw materials, employment generation, encouragement of rural development, development of entrepreneurship, mobilization of local savings, linkages with bigger industries, provision of regional balance by spreading investments more evenly, provision of avenue for self employment and provision of opportunity for training managers and semi skilled workers.

In Nigeria, credit has been recognized as an essential tool for promoting small and Micro Enterprises (SMEs), hence the need for recapitalization of commercial banks in Nigeria. Bank recapitalization which was effective from 2006 is aimed at making Nigerian banks stronger and better in-order to finance all sectors of the economy including the major drivers of the economy-Small and Medium Scale Enterprises. About 70 percent of the population is engaged in the informal sector or in agricultural production. The Federal and State governments have recognized that for sustainable growth and development, the financial empowerment of the people is vital. If this growth strategy is adopted and the latent entrepreneurial capabilities of this large segment of the people is sufficiently stimulated and sustained, then positive multipliers will be felt throughout the economy. To give effect to these aspirations various policies have been instituted over time by the Federal Government to improve rural and urban enterprise production capabilities (Olaitan 2016)

The central Bank of Nigeria on July 6th 2004, announced therecapitalization of banking sector from N2 billion to N25 billion with effectfrom 1st January 2006. This was with a view to make the sector internationally competitive, sound and improves its ability to provide credit to all the productive sectors of the economy. In order to meet this obligation, banks embarked on strategies of merger and acquisition, floating of new shares and so on. At the end of the exercise, 25 new banks emerged.

It was hoped that the consolidation will make the banks stronger to be able to provide large amount of funds to productive sectors of the economy which is largely dominated by Small and Medium Enterprises, thereby making them grow into large firms with enough resources to contribute to the economic development. Also, in December 2005, the CBN introduced new Micro-finance Policy (MFP) which was designed to be public and private sector driven.

The purpose of the policy was to strengthen community banks in order for them to be able to grant collateral and non collateral loans to finance microeconomic activities in the economy. The policy also aims at providing many people with access to financial services who otherwise will have no access to these services. Small and Medium Enterprises as said earlier have a crucial role to play in the development of an economy, they are training grounds for local entrepreneurs, they encourage local savings and ensure equitable distribution of wealth thereby reducing rural- urban migration of human resources. To this end, government should collaborate with private sector inorder to create an enabling and conducive environment for SME’S in order to contribute positively towards the development of the economy.


Bank fraud, poor lending and credit management practices in the Nigerian banking sector forced the Central bank of Nigeria to revisit the capital structure of commercial banks in Nigeria. These among other things led the Central Bank of Nigeria (CBN) to give a directive that all banks should recapitalize from N2 billion to N25 billion with effect from 1stJanuary 2006. This development led to various financial activities in the Nigerian financial sector with most banks initially opting for additional source of fund from the capital market via floating of shares. Most banks at this stage started inviting members of the public to acquire new shares in-order to meet up with the new minimum capital directed by the central bank of Nigeria.

Notwithstanding, some banks were not capable of raising the new minimum capital by themselves, hence the need for mergers and consolidation of banks, reducing the total number of banks in Nigeria to twenty five (25). However, the consolidation of the banking sector presented new challenges to the banks which require more efforts to control cost and increase their efficiency; this in turn has effect the volume of credit facilities granted to small and medium scale enterprises in Nigeria. A study conducted by Iloh et al (2012) reveals the gap between deposit money bank deposits (DMBD) and commercial bank lending to SMEs from year 2000 upward (the year that saw the end of merchant banks).

There is a wide margin between the two variables and while deposit money bank deposits rose very high, commercial bank lending to SMEs declined from 2004 to 2010. The gap between commercial bank deposits and its lending to SMEs reveals the shift in focus from lending to SMEs to lending to major investors (customers). One is made to ask, while the banking sector is said to drive any economy, has Nigerian commercial banks neglected SMEs, which is vital for the growth and development of the Nigerian economy? Notwithstanding, it is interesting to note that community/Microfinance bank (CMFB) lending to SMEs moved in the same trend with its bank deposit. This implies that as community/microfinance bank deposits increased, it’s lending to SMEs increased. Regardless of the direct impact of community/microfinance bank on SMEs, SMEs still cry for lack of funding and lending to SMEs in Nigeria is still poor. This is so because their capital, reserve and deposit are very small and insufficient to meet the needs of small and medium entrepreneurs.


The primary objective of the study is to examine the effects of bank recapitalization on small and medium scale enterprises in Nigeria. Specific objectives of the study are:

. To determine the relationship between Commercial Banks and the performance Small Business Entrepreneurs in Nigeria.

. To determine whether bank recapitalization led to increase in funds for financing SMEs.

. To examine the accessibility of Small and Medium Enterprise Equity Investment Scheme (SMEEIS) funds to SMEs.


In-order to achieve the above stated objectives, the researcher formulated the following research questions:

. What is the relationship between commercial banks and the performance small business entrepreneurs in Nigeria?

. Does bank recapitalization increase funding for SMEs?

. How accessible are Small and Medium Enterprise Equity Investment Schene Funds to SMEs?


The following hypotheses are formulated in line with the objectives and research questions of the study:

Ho: There is no significant relationship between Commercial bank and the performance of Small Business Owners in Nigeria.

Hi: There is a significant relationship between Commercial banks and the performance of Small Business Owners in Nigeria.

Ho: Bank Re-capitalization has not led to the increase of funds to SMEs

Hi: Bank recapitalization has led to the increase of Funds to SMEs

Ho: Small and Medium Enterprise Equity Investment Scheme funds are not easily assessable to SMEs

Hi: Small and Medium Enterprise Equity Investment Scheme funds are easily assessable to SMEs


Robust economic growth cannot be achieved without putting in place well focused programmes to reduce poverty through empowering the people by increasing their access to factors of production, especially credit. The latent capacity of the poor entrepreneurs would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant; increase employment opportunities, enhance household income, and create wealth. However, the lack of required financial support from the microfinance banks to Micro Business operators in Lagos state has become a major concern in Nigeria. Hence, this study shall be relevant to policy makers in the areas of finding out the impact of micro financing on the small scale investors. Also, this study shall enhance further research in the subject area.


The scope of this research work is the recapitalized commercial banks and their SME customers in Nigeria. However, due to the fact that there are many commercial banks with many SME customers, the research is limited to Mainstreet Bank, Osun branch and some of their SME customers.


Time and financial constraints were the major limitations of the study. Since the researcher could not afford the cost of reaching out to more banks, money became a challenge. The researcher was also engaged in other school activities which also limited the time used for the project.


. Economy: An economy is the total sum of product and service transactions of value between two agents in a region, be it individuals, organizations or states. An economy consists of the economic system, comprising the production, distribution or trade, and consumption of limited goods and services between two agents, the agents can be individuals, businesses, organizations, or governments.

. Mergers and Acquisitions: Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture.

. Recapitalization: Recapitalization is a sort of a corporate reorganization involving substantial change in a company’s capital structure.

. SMEs: Small and Medium Enterprises

. SMEEIS: Small and Medium Enterprise Equity Scheme


. Olaitan, L. 2016. An empirical evaluation of the corporate strategies of Nigerian companies. Journal of African Business, 2(2), 45-75.

. Iloh V. C. 2012. The Effect of B





The dictionary of accounting defined portfolio as the collection of different securities or other assets held by an individual or an institution which can be evaluated interns of their combined risk and return. This risk of a portfolio does not depend nor any on the risking or security bills also on the relationship among the securities. For a proper understanding of the frame work upon which this study is based, it is inevitable to highlight it. The contribution made by earlier writer on portfolio management foremost among these is the work of Professor Harry mackowitz (the portfolio management in journal of Finance (1952) and portfolio selection “efficient diversification of investment 1959).

His assertion were that the possess of portfolio selection could be of two fold. Starting with their observation and experience that end with belief about the future performance that end of available securities and Starting with relevant belief about the performance that end with the choice of portfolio. In general maxrkowitz and Adesota (2015) identify here factors that determine the efficiency of portfolios selection theory. These are:

The expected future return of each candidate security. The expected risk of each candidate’s security. The extent to which each security’s risk correlated with every other security. From the evaluation of the entire potolio was the return one expects from the portfolio and associated risk of portfolio. He believed those portfolios are created to diversify holdings of wealth to achieved low risk and high returns from these it is obvious that the ultimate aim of an investor is to minimize risk without necessary reducing the returns from investment. The following those portfolios are created to diversify holding of wealth to achieved low risk and high returns from these it is obvious that the ultimate aim of an investor is to minimize risk without necessary reducing the returns from investment.

The following assumptions were made for our study:

If two portfolio of investment have same risk but different expected returns the portfolio with higher expected returns the will be selected.

If two portfolio of investment have the same expected returns. But different risk will be selected.

A portfolio with a larger expected returns and higher degree of risk.

Be commensurate with risk of such investment.

In the Nigeria socio economic setting first banks as a commercial bank whose assets have been greatly regulated by various government pronouncements, usually from the interest of judiciary. Role this banks plays to protect the interest of depositor in there of liquidity and the share holders in terms of profitability hence he opined that in a world of balance budged where each speeding units current in come and aggregate expenditure in the economy would be internally financed and surplus exit among spending units current in come and aggregate expenditure in the economy would be internally financed and would approximated gross national product. That is where deficit and surplus exit among spending such unit. Some expending would be financed externally and the extent of such fiancé would be measured by the sum of the deficit (or surpluses) undertaken (generated) by the spending units. Eyre methue (2010) identified the following reasons for assets diversification.

To save money for future requirement.

To obtain the return from long term saving

To provide a return that is more than sufficient to compensate for the fall in the purchasing power of money.

Due to the effect of inflation from the bank plc stand point

The obligating they own their share-holder in term of profitability would require them to invest in order to earn maximum returns on the facilities on their disposal.


Asset can be classified into two broad categories namely. Earning assets and non earning assets earning assets are loan and investment while non earning deposits asset are fixed asset the total reserves of banks would cash and earning deposit with the central bank earning asset liquidity more so some earning assets like short term investment provides liquidity while non earning assets like cash balance also provide liquidity. Bank asset will be discussed as follow:

Cash and short term funds: Cash is the amount of note and coins held in the strong rooms, of branches of the bank and in the head office to meet customer’s demands for withdrawals. These are idle find since they can not earn interest hence the effort of keeping the balance low short term finds refers to items in course of collection within Nigeria as well as balance with banks abroad e.g cheques.

Government securities: These include treasury bill and certificate and development stock and bonds. Treasury bill and certificate provides a safe short term involvement avenues for the surplus funds, they are issued by the CBN weekly. For 90-91 days. They are very risk but liquid and they can be discounted with the CBN before their maturity.

Statutory and other deposit with the CBN: These include balance on current account with the central bank which do attract interest, cash reserves deposit special deposits and letters of credit deposits e.t.c, the balance on current accounting is a working balance to meet they day to day cash requirement of backs such as cash withdrawal by branches foreign exchange allocation, adverse clearing balance and payment for other investments.

Investment with other bank: These include investment in call money fixed and negotiable certificate of deposit with other banks. The investment yields a high return and are reasonable saft.

Loans and advances: This is by far by the largest assets on the balance sheet of many banks it stood at N500 million on the balance sheet under consideration. All loans demand except for term loans practically most rate charged on these assets are quite high and are usually fixed by the central bank.

Fixed assists: This represent the banks investment in building (premises) are quite high and are usually fixed by the central bank. Other asset: These include pre payments accrued interest received sub suspense resources and uncapitalised expenditure.


The Nigeria investment markets like other investment market can be divided into two namely:

The capital and the money market

The money market: this is the market for the raising of short terms funds. It is divided into two primary and secondary markets. The commercial are the major participants in the money markets and most of their investment assets are traded in the market.  The money funds as defined by Harming (2010) as the place of the mechanism whereby funds are obtained for short period of time (from one day to one year) and financial assets representing short-term claims are exchanges.  The primary markets as mentioned above is where term funds are obtained for the first time at different rates term while the secondary market is where these short term financial asset a re traded at rates usually dictated by the demand for supply of such short term financial assets.

The capital market: this is market in which long term finds such as equinity and bonds are raised by commercial enterprises and the government also where second hand securities such as quality and bonds are treaded for long terms finds The capital market is further divided into the primary markets is the one in which securities that are to be issued for the first time traded. The securities and exchange commission plays key role in the primary market the secondary capital markets is the stock exchange in which securities have already been traded between companies

The primary capital market is primary used by business enterprises to raise capital while, investors uses the secondary capital market (Henrning 2011) as acquire of dispose off investment at their convenient.  The following are the listing requirement for companies to be quited in the first security market the company must have a trading record of five years. Date of the last audited account figures must  not be more than the mine months .Annual quotation free is based on the share capital companies.

The companies are required to submitted quarterly half yearly and annually statement of accounts… The amount that  can be raised is limited expending upon the borrowing power of the company expending upon the borrowing power of the company Not less than 35% or N150, 000 (one hundred and fifty thousand naira) of their issued share capital must be available to the public. Despite the final requirement size companies could not be meet the requirement which led to further revision of the listing requirement without compromising standard and by 30th April 1985 the second tier securities market was launched with following listening requirements

The companies must have years trading record

Latest audited report not be more than nine months

A flat change of N2,000 (two thousand naira) per annual

The amount that can be raised may not exceed N5million.

Companies to submit half yearly and annual statement of accounts.

Number of shareholders not less than one hundred At least 10% or N50,000 (fifty thousand naira) of the equity capital to be made available to the public no single shareholders to have more than 75% of the issued share capital


As earlier noted, first bank as a commercial banks, portfolio choice is not by accident but rather a matter of capital design,.  Therefore, for this purpose, we will classify these determining factors under the following heading.

Management factors

Government factors

Economic factors

Environmental factors


Management factors are regarded as factors that are under the control of management (bank) hence management would evaluate the following factors before selecting portfolio mix.

Liquidity consideration: the ability of management to convert an asset into cash within a relatively short period of time with minimum capital relatively the transaction would determine is asset portfolio choice. Hence financial assists are generally preferred to real estates. Ease of management in view hirt and block (2013) the easier it is of manage a potolio the more readily the management select it’. Eyere Methuen (2015) stated that even where you do not have the time or inclination to manage your own portfolio, provided you can get experts such as unit trust, investment trust, stockbroker, tutee department and other independent firms to manage such investment:.

Capital appreciation: management decision would depend also on its aim in acquiring the assets is if the intention to trade on the investment or to permanently own the share in such venture in which they invest. Safety pandy (2014) believed that management would invest in the highest yielding marketable securities subject to the constraints that the securities have an acceptable level of risk which implied that to reduce the risk invention should invest in a relative safe securities. He also noted that the time period over which interest and Principal are to be repaid as an important factor in determining assets portfolio choice. This means that for any particular investment management could have to take into consideration its maturity data.


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