THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL-SCALE INDUSTRIES

CHAPTER ONE

INTRODUCTION

1.1         BACKGROUND OF THE STUDY

The important role played by small-scale industries in developing economics has been increasingly realized over the past years. Not only are they important for the vitality of the business sector, they also play a major role in terms of employment creation, income generation and output growth. But in order to play their role in future, there is need for researchers and policy makers to identify this role and constantly interact to bring about a sustainable policy framework for industrial development methods to have maximum effectiveness, they must include methods specifically adapted for work with small industries.

Stanley and Morse (1965) identified three types of policies towards SSI’s development, namely passive, protective and developmental. A passive policy is one of neglect, resulting from indifference, lack of information, or lack of leadership. A protective policy is designed to defend existing small enterprises against competition from large and modern industries,. The developmental approach to small-scale industries promotion has as its objective the creation of economically viable enterprises which on their own feet without perpetual subsidy can make a positive contribution to the growth of real income and therefore to better living standards. Policy instruments that can be used to achieve developmental policy objectives include the following:

–                      The provision of industrial advisory services.

–                      The training of entrepreneurial managers and supervisory personnel.

–                      Provision of developmental finance.

The policy instrument identified above are by no means exhaustive. However, these are the main problems areas identified by researchers of SSI’s. Financial constraints have been identified by researchers as the most threatening challenge (Mashly and Stanley 2008). The small-scale industries were not accorded significant importance in developing countries (Africa) until 1975 when the various government realized that its industrialization strategy of import substitution only resulted in the setting up of large-scale industries. This category of industries is capital intensive and labour saving in the operations. Due to the capital intensive and labour saving in the operations. Due to the capital-intensive nature of the industries, technical manpower was recruited from abroad as experts.

The resultant effect is that most of the value added to production in these developing countries was repatriated in the form of dividends, profit and royalties. It was against this background that the Nigerian government and the various state government now through it important if there must be industrialization based on principle of self-reliance. Small-scale industries must be given prince of place. However, it was not until the third national development plan of 1975-1980 that the programmes for the development of small-scale industries were explicitly spelt out. The creation of employment opportunities mobilization of local resources, mitigation of rural-urban migration and more distribution of industrial enterprises in different parts of the state.

Nonetheless, inadequate credit facilities has been a major impediment in the development of small-scale industries all around the world, for this reasons, many of them are either proprietary on partnership and so cannot obtain funds from commercial banks. As a result of this inability, they are either starved of fund or at best obtain fund on extremely unfavourable terms from source other than financial institutions like money lending societies, thrift societies etc. the problems of finance hinders SSI from operating profitable in a competitive market. In order to arrest the situation, the federal and state governments set up small-scale industries credit schemes and gave guidelines to commercial banks to increase their lending to these categories of industries.

1.2         STATEMENT OF RESEARCH PROBLEM

There are numerous problems that hinder the growth of small-scale industries (SSI’s) in developing countries.

Lack of access to credit hinders the growth and development of SSI. Also is the problem of cutthroat competition of the established industries and the small-scale industries also are a critical problem.

Most times commercial banks do not follow the credit guidelines and other related policy issues affecting the small-scale industries in Nigeria. In some instances where commercial banks obey policy guidelines, they charge very high interest rate.

1.3         OBJECTIVES OF THE STUDY

The objective of the study is to:

1.            Identify the role of commercial banks in financing small-scale industries in developing nations with special references to Nigeria.

2.            Analyze and examine the capital structure of small-scale industries.

3.            Examine the credit policies of small-scale industries.

4.            Identified factors, which limit small-scale industries to access credit from the formal financial market.

5.            Identify which types of credit are easily obtainable to small-scale industries.

6.            Make relevant policy recommendations to enhance the financing of small-scale industries.

1.4         HYPOTHESIS

Formulation of hypothesis using Ho and H1

Where:

Ho (null hypothesis)

H1 (alternative hypothesis)

A.        Ho: The credit policy has no significant relationship with the growth and development of small-scale industries.

H1: The credit policy has significant relationship with the growth and development of small-scale industries.

B.        Ho: There is no significant relationship between commercial banks credit scheme and the growth of small-scale industries.

H1; There is significant tie relationship between commercial banks credit scheme and the growth of small-scale industries.

C.        Ho: Small and medium scale enterprise does not enhance economic growth and development

H1: Small and medium scale enterprise does not enhance economic growth and development.

D.        Ho: Financial empowerment has no positive relationship with small-scale industries.

H1:      Financial empowerment has positive relationship with small-scale industries.

1.5         SIGNIFICANCE OF THE STUDY

The evaluation of the public sector financial assistance scheme would serve as a guide to private and non-government organizations. Moreover, evaluating the credit related policies for SSI’s would go along way to helping their development and growth. Finally a modest contribution would also be made towards the general literature of both commercial banks functions in enhancing the development of small-scale industries in Nigeria.

1.6         SCOPE OF THE STUDY

The scope of this study is essentially the role of commercial banks in financing SSI’s in Edo State.

1.7         DEFINITION OF TERMS

It would be very important for me to define clearly some of the terms used ion the study to enable the reader realize quickly what is being written to avoid any controversial interpretation of terminologies or phrases.

Commercial bank: commercial banks are profit seeking and risk-averse institutions. A bank, which make short-term loans using money from current accounts.

Industrial relations: These consist of the relationship between empowership employers and employees in industry that is established and maintained by system of agreement and laws.

Industry: This involves all the people and the processes that are involved in manufacturing or producing a particular thing.

Interest rate: Public finance (a modern approach 2007) by Augustine O. Idomkeh defines interest rate as a loan or it can be seen as the earnings of capital or payment made for using capital (money capital).

Liquidity: Paul k. Tauial (2006) in his book title basic economics for West Africa defines it as terms used to denote the ease with which an asset can be converted at its full value into money.