The role and importance Small and Medium Enterprises play in the development of nation has been well documented and beyond doubt now that any emergent economy must have a viral and sustained SME subsector which are critical to the development of an economy. The significant roles SMEs play in development is acknowledged universally. Even in countries such as the United States. Small and Medium Industries Equity Investment Scheme (SMIEIS), are enterprises with a total capital employed not less than N1.5 million, but not exceeding N200 million, including working capital, but excluding cost of land and/or with a staff strength of not less than 10 and not more than 300. This definition is adopted in this study, because it is generally used by all banks for the purpose of financing the MSMEs sector.
The small and medium enterprises all over the world play important roles in the process of industrialization and economic growth. As Ogujiuba et al (2004) observe, apart from increasing per capita income and output, SMEs creates employment opportunities, enhance regional economic balance through industrial dispersals and generally promote effective resource utilization considered critical to engineering economic development and growth. There are indications in Nigeria that the SMEs account for about 70 percent of industrial employment and well over 50 per cent of the gross domestic product, (Adebusuyi, 1997 and Odeyemi 2003). The important roles of SMEs, notwithstanding, the enterprises face serious difficulties when trying to obtain loans, especially from the formal (Bank) financial institutions. Thus, the obvious question is: why banks do not expand SMEs portfolio? Basically, small and medium enterprises in Nigeria are expected to raise funds from two main sources: Equity and debt. The sources of equity (sometimes called internal funds) include owners’ saving and ploughed back profits. Funds from external source (debt) can be obtained from informal sources (that is friends/relatives, credit association co-operative societies) and formal source (that is banks, governmental agencies). Accessibility to formal financial system, especially by SMEs is very limited. On the supply side, banks are not expanding SMEs loans due to inadequate capital, imperfect information, high transaction cost of dealing with small loans, labour, geographical dispersion of the SMEs and large number of borrowers and low returns from investment. On the demand side, SMEs are reluctant to obtain loans because of the collateral security, high interest rate, untimely delivery of credits and other things. This problem of finance has persisted for a long time, despite the existence of various reform programmes put in place by the government to develop SMEs sector. As Hallberg (2000) observes, government assistance strategies in both developed and developing countries often try to achieve a combination of equity objectives (alleviating poverty and addressing social, ethnic and gender inequalities) and efficiency objectives (raising the productivity and profitability of firms). However, as Ojo (2003) argues, all these SMEs assistance programmes have failed to promote the development of SMEs. Of times, the finance provided have been misdirected, gone to wrong persons or found to be inadequate to impact on the expected development of the assisted firms. This was echoed by Tumkella (2003) who observes that all these programmes could not achieve their expected desires due largely to abuses, poor project evaluation and monitoring as well as moral hazards involved in using public funds for the purpose of promoting private sector enterprises. At the urban and rural levels, private individual and small firms have established community Bank since 1990 as a means to stimulate the economy from the grassroots. The Bankers’ Committee introduced Small and Medium Industries Equity Investment Scheme (SMIEIS),...
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