ROLE OF BANKING SYSTEM IN THE DEVELOPMENT OF BUSINESS ENTERPRISE (A STUDY OF SELECTED FIRMS IN EBONYI STATE)
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Abstract
The Banking sector remains a financial backbone for source of fund for most firms in Nigeria. This study examines the role of banking system in the development of business enterprise. Through a questionnaire survey, data was gathered from selected firms in Ebony State. The data revealed that banks see small and medium scale enterprises as a profitable segment. Also bank finance enhances the profitability of beneficiary SMEs. This has encouraged a trend of increased bank involvement with the SME sector. However, SME specific factors, high interest rates, collateral requirements, lack of quality information, delays in judicial proceedings and difficulties in disposing collateral restrict further bank involvement with SMEs and the latter’s freedom to access bank finance. The researcher conclude that all relevant stakeholders must contribute to fostering the trend by helping to mitigate the constraints through the implementation of deliberate policies that enhances trust between banks as lenders and business firms.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Financial institutions plays a central role in the growth and development of the economy through mobilization and deployment of financial resources. There is no doubt that financial institutions occupy strategic positions in the operation of our economic system in Nigeria, no wonder that government is always sensitive to the happenings in this important sector. The importance of these banks and other financial institutions are so encompassing that one may not imagine the working of the economic system without them. Supporting small firms financially has critically attracted the attention of researchers, policy makers, and practitioners alike. Many studies in academia have focused on this crucial topic of financing preference for firms all over the globe. However, most of the theories developed to explain financing preferences have focused on large firms. Empirical studies have concentrated on large firms Zingales (2000). Few studies on the capital structure of SMEs have concentrated on developed economies Sogorb-Mira, (2005).
In an economy like Nigerian, where things have to be bought and paid for (e.g. an entrepreneur, buying raw materials from suppliers). Such transactions in modern times are usually done in many cases, through the bank credit transfer system because apart from the large amount of money that may be involved in the payment, there is also the need to consider the security of the money. It is for this reason that modern organizations (business and non-business alike) make use of banks and other financial institutions for many of their financial transactions. So, banks just act as intermediaries in many business transactions involving money. Thus, in operating our economic system, banks and other financial institutions play many important roles which will be discussed in this study. However, before going into that, it is necessary to understand the term ‘other financial institutions’. These are those other institutions, apart from the traditional banks, who perform finance related functions such as accepting money for saving, giving out loans, managing investments, giving financial advice such as use of funds and providing safety for investment etc. Thus, investment houses, insurance companies, financial houses and unit trusts etc. constitute the other financial institutions. These institutions and the banks in modern days, perform more or less similar functions, but in varying degrees of sophistication. This is particularly true in this era of universal banking which gives a lee way to banks and other financial institutions to engage in any aspect of banking.
The banks and all these financial institutions are important to an entrepreneur, because he will have cause to deal with them for one reason or the other. For instance, he may want to expand his enterprise and for this he may need loans from the bank or he may need to invest in other areas in which case, he may need the services of a finance house or an investment house. Because of all these, the entrepreneur needs to have a knowledge of what these banks and other financial institutions can do for him to make his business grow.
1.2 STATEMENT OF THE PROBLEM
The need for entrepreneurial development as an ingredient of economic development was realized in the early 1960s (Mathur, 2008). This was considered essential as pointed by Mathur (2008) when he opined that it is necessary for motivating and assisting prospective and potential entrepreneurs to set up their own ventures to contribute in production, employment and tapping of unutilized resources. According to Nafukho (1998), “youth unemployment in Africa has reached alarming proportions”. Since most African countries gained political independence, there has been an increased population growth, rapid expansion of the education systems, high level of rural-urban migration, political conflicts and worsening economic performance (Ndegwa, 1985). These factors have led to the problem of unemployment being rampant in Africa as a whole. Studies have revealed that, although industrial backwardness is due to infrastructural bottlenecks, the real cause is non-availability of dynamic and skilled entrepreneurs who could mobilize and productively utilize the available resources. However, banks are the most important institutions among the agencies and institutions that share the responsibility of entrepreneurial development. Banks generally, according to Arora (1992) have their wide-spread branch network to reach out to all categories of customers. In a country like Nigeria, entrepreneurs require financial input alongside with non-financial inputs like scientific and technical know-how in order to cope with the changing nature and dynamics of the society.
1.3 0BJECTIVES OF THE STUDY
The overarching objective of this study is to identify the the role of banking system in the development of business enterprise, but the researcher intend to address the following sub-objectives;
- To examine the extent to which banks and other financial institutions significantly help in providing loans to promote entrepreneurship development in Nigeria.
- To find out the extent to which banks and other financial institutions significantly help in providing advisory services to entrepreneurs in Nigeria.
- How banks identify potential SMEs and their entrepreneurs for lending purposes
- The extent of banks involvement with SMEs and the impact it loans have on SMEs.
1.4 RESEARCH QUESTIONS
- What is the effects of financial services of the banking sector on the growth of small and medium scale business enterprise?
- Are there challenges facing small scale business enterprise in accessing bank loan in Ebonyi State?
- What is the impact of non-financial services of the banking sector on the performance of small and medium scale business?
- What are the factors limiting the development of the banking sector in Ebonyi State?
- Does the banking sector contribute to small and medium scale enterprises in Ebonyi State?
1.5 RESEARCH HYPOTHESES
H0: There is no significant difference in the level of awareness of financial institutions by small and medium scale enterprises in Ebonyi State.
H1: There is a significant difference in the level of awareness of micro financial institutions by small and medium scale enterprises in Ebonyi State.
H0: There is no significant difference in the difficulties small and medium scale enterprises face when accessing finance from various banks.
H2: There is a significant difference in the difficulties small and medium scale enterprises face when accessing finance from various banks.
1.6 SCOPE AND LIMITATION OF THE STUDY
This study covers the role of banking system in the development of business enterprises in Nigeria, but particularly focused on some selected banks in Ebonyi State with a view of identifying their contributions towards the development of small and medium scale enterprises in Nigeria. In the cause of the study, the researcher encounters some limitations which limited the scope of the study;
Staff Reluctance: In most cases the staffs of the selected banks in Ebonyi State often feels reluctance over providing required information required by the researcher. This result in finding information where the structured questionnaires could not point out.
Researcher’s Commitment: The researcher, being of full time student spent most of her time on other academic activities such as test, class work, assignment, examination etc which takes average focus from this study.
Inadequate Materials: Scarcity of material is also another hindrance. The researcher finds it difficult to long hands in several required material which could contribute immensely to the success of this research work.
Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.7 SIGNIFICANCE OF THE STUDY
A study of this nature is very imperative as it provides an average Nigerian a means to access to financial services in their localities to boost their standard of living in a sustainable manner in line with the millennium development goal of alleviating poverty in developing countries. The study will assist financeial institutions to adopt the necessary measures needed to ensure the desired growth in the small and medium scale business enterprises (SMEs) industry. It is also beneficial for formulation of policies and programmes by the federal and state government as they might be looking forward to taking necessary steps to prevent the collapse or failure of small scale businesses in Nigeria and Ebonyi State in particular. Again, it will enable the entrepreneurs to have more understanding of how businesses should be financed, thus having knowledge on funding further research in this area. Finally, the study would serve as a source of reference for other researchers or members of the general public who need information in the subject. More importantly, entrepreneurs of small and medium scale enterprises may find it useful in the successful operation of their enterprises as the study will unveil some of the reasons why some small and medium scale business enterprises (SMEs) finds it hard to repay their loans.
1.8 DEFINITION OF TERMS
SMEs: the European definition of SME follows: “The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.”
Banking system: A banking system is a group or network of institutions that provide financial services for us. These institutions are responsible for operating a payment system, providing loans, taking deposits, and helping with investments.
Development: development is defined as the process of developing or being developed or an event constituting a new stage in a changing situation.
Business enterprise: business enterprise – the activity of providing goods and services involving financial and commercial and industrial aspects; “computers are now widely used in business” business, commercial enterprise.
Financial institutions: Financial institution or Depository institutions deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies; Contractual institutions insurance companies and pension funds.
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