European Journal of Economic and Financial Research

ISSN: 2501-9430
ISSN-L: 2501-9430
Available on-line at: [Link]

doi: 10.5281/zenodo.1143751 Volume 3 │ Issue 1 │ 2018

THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL &

MEDIUM SIZE ENTERPRISES IN NIGERIA: A STUDY OF SELECTED
BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

John-Akamelu Chitom Racheal1

Muogbo Uju, S.2i
1Entrepreneurship Studies Unit,
Faculty of Management Sciences,
Nnamdi Azikiwe University,
Awka, Nigeria
2Entrepreneurship Studies Department,
Faculty of Management Sciences,
Chukwuemeka Odumegwu Ojukwu University,
Igbariam, Nigeria

Abstract:
The study examined the role of commercial banks in financing small and medium size
businesses in Nigeria. The main objective of the study is to examine the role of
commercial banks in financing SMEs in Nigeria. Structured questionnaire were
distributed to the respondents which includes the commercial banks staff and selected
SMEs staff in Anambra State Nigeria. Three research hypotheses were tested using the
chi-square. However, the 109 questionnaire administered to the bankers and SMEs were
analyzed and presented in tables with the use of percentage and chi-square method.
Therefore, the study found that small and medium size businesses encounter problem
in the procurement of loans from commercial banks; also, commercial banks have
contributed immensely to the development of SMEs through their loans and advances.
The research therefore recommended that for small & medium enterprises to survive,
there have to be collective effort between them and banks. Also the government should
engage more in the development of small & medium size enterprises by creating and
embarking on various incentives to encourage both small scale enterprises and
commercial banks.

Copyright © The Author(s). All Rights Reserved.

© 2015 – 2017 Open Access Publishing Group 1
 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

JEL: G21, G17, E24

Keywords: correlation, organizational culture, promulgation, strategy and strategic

plans

1. Introduction

1.1 Background of the Study

Overtime, small & medium size enterprises had received little attention whereas they
provide employment for approximately triple the number engaged in large scale
manufacturing as well as playing their roles of crucial importance to our developing
economy. There have been numerous opinions and write-ups on the roles banks should
play in financing and advising the small and medium size enterprises since the federal
government shift in policy with greater emphasis towards small & medium enterprises
in the achievement of self-reliance.
Small and Medium Enterprises (SMEs) have been recognized as driving force for
economic growth and development in any nation. Empirical evidences have shown that
they contribute to employment, poverty alleviation and increase productivity level in a
nation. In recognition of the role of SMEs in the economic growth process of Nigeria,
government has taken concerted efforts to foster the growth of SMEs and also develop
entrepreneurship. SMEs are of necessity to a nation’s industrialization process. One
foremost way of promoting SMEs is by having easy access to finance. Afolabi (2013)
noted that a major gap in Nigeria’s industrial development process in the past years has
been the absence of a strong and virile SMEs sector attributable to the reluctance of
banks especially commercial banks to lend to the sector. Commercial banks through
their intermediation role are meant to provide financial succor to SMEs. For SMEs to
perform their role in the economy, they need adequate funds in terms of short and long
term loans (Olachosim, Onwuchekwa & Ifeanyi, 2013). It is pertinent to know that
financing strength is the main determinant of small and medium enterprises growth in
developing countries. There is no gainsaying that finance would boost the performance
of SMEs if adequately and optimally utilized. The financial systems in every country
play a key role in the development and growth of the economy, although the ability to
play this role effectively largely depends on the degree of development of the financial
system. The traditional commercial banks which are key players in the financial
systems of nearly every economy, have the potential to pull financial resources together
to meet the credit needs of SMEs, however, there is still a huge gap between supply
capabilities of the banks and the demanding needs of SMEs.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

1.2 Statement of the Problem

Lack of education on the part of SME owners and inadequate facilities in agricultural,
purchasing and supply sector has been a big challenge to SME’s (Ukwuagu 2002).
Onwuka (2015) saw the problem facing SMEs as inadequate funding on the part of the
commercial banks and other financial institutions and poor management on the part of
small business owners. On the other hand, government has failed to provide stable
macro-economic environment and adequate physical infrastructural facilities to the
SMEs. Having known all these, the study embark on identifying the various problems
faced by SMEs in the procurement of loans from commercial banks, the contribution of
commercial banks to SMEs as well as the contribution of SMEs towards the growth and
development of Nigeria’s economy. These and many other reasons prompted the
researcher to embark on the course to study the role of the commercial banks in
financing small and medium enterprises in Anambra State, Nigeria.

1.3 Objectives of the Study

The main purpose of this study is to examine the role of commercial banks in financing
small and medium enterprises in Nigeria. The specific objectives are to:
1. Examine the problems encountered by small and medium enterprises in
procurement of loans from commercial banks.
2. Examine the degree at which commercial banks loans and advances have
contributed to SMEs development in Anambra State
3. Identify the level of contribution of small and medium size industries towards
Nigeria’s economic growth and development.

1.4 Research Questions

The following research questions were formulated to guide the research objectives;
1. To what extent can SMEs encounter problems in the procurement of loans from
commercial banks?
2. To what degree have commercial banks loans and advances contributed to small
and medium enterprises development in Anambra State?
3. To what level has SMEs contributed to the growth and development of Nigeria’s
economy?

1.5 Research Hypotheses

To answer the three research questions posed for the study the following hypotheses
were formulated in a null form.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

Ho1: To a large extent SMEs do not encounter problems in the procurement of

loans from commercial banks.
Ho2: To high degree commercial banks loans and advances have not contributed
significantly to the development of small and medium enterprises in Anambra State.
Ho3: To a high level SMEs has not contributed to the growth and development of
Nigeria’s economy.

1.6 Significance of the Study

The result of this study will be of immense benefit to the banks. It will help the
commercial banks recognize the role SMEs play in the economy and when to provide
them with enough funds so as not to hinder the growth and development of the
economy.
Through this study, the small business owners will be able to recognize the best
or appropriate means to procure loans and be educated on the various ways loans can
be obtained and the equivalent collateral to give in exchange for loan.
Also, the study will enable the government to know the necessary areas to
improve in terms of funding to small businesses and the areas of SMEs that needs
enlightenment through programmes and seminars etc.
Lastly, the study will also serve as a guide to any person(s) carrying out a similar
research work.

2. Review of Related Literature

2.1 Introduction
This section deals with Conceptual framework, Theoretical framework and Empirical
Literatures. The conceptual framework guides the study and summarizes the
dependent and independent variables. The theoretical framework enhances overall
framework of the research and deals with the theory that this study anchored on while
empirical literature reports on the previous research done by different authors on
related topic, how the research was conducted, their observations, findings and their
recommendation.

2.2 Conceptual Framework

2.2.1 Overview of Commercial Bank
Grimsley (2003) defined a commercial bank as a financial institution that is authorized
by law to receive money from businesses and individuals and lend money to them.
Commercial banks are open to the public and serve individuals, institutions, and

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

businesses. A commercial bank is certainly the type of bank that most people regularly
use. Banks are regulated by federal and state laws depending on how they are
organized and the services they provide. Commercial banks are also monitored through
the Federal Reserve System.
Financial Times Lexicon (2011) defined a commercial bank as a bank whose main
business is deposit-taking and making loans. World Bank dictionary in 2003, defined
commercial bank as ‚anything having to do with a business, made to be sold for a profit‛.
Investor words in 2016 defined commercial bank as an institution which accepts
deposits, makes business loans, and offers related services. Commercial banks also
allow for a variety of deposit accounts, such as checking, savings, and time deposit.
These institutions are run to make a profit and owned by a group of individuals, yet
some may be members of the Federal Reserve System. While commercial banks offer
services to individuals, they are primarily concerned with receiving deposits and
lending to businesses.

2.2.2 Functions of Commercial Banks

The principal function of commercial banks according to Ukwuagu [2002] is as follows;
1. Acceptance of deposits on fixed, current and savings account. They concentrate
on short-term deposit and operate accounts through the use of cheques.
2. Advancing loans by ways of loans, overdraft and discounting bills of exchange.
Commercial banks give short-term loans.
3. They act as agent to their customers by buying and selling of shares and stocks
on behalf of their customers, issuing travelers cheque and draft, remittance of
funds and buying foreign exchange.
4. They act as trustees, executors and also as referees to firms and individuals.
5. They provide facilities for safe keeping of wills and other documents and also
jewelries.
6. They also render services to customers and the public by selling of JAMB, GCE,
and NECO forms.
7. They also sell mobile cards and collect PHCN bills from the public on behalf of
the principal.

2.3 Challenges Facing the Banking Industry in Nigeria

According to Martin [2001] the current banking sector reform in Nigeria was designed
to promote the viability, soundness and stability of the system to enable it adequately
meet the aspirations of the economy in terms of accelerated economic growth and
development. The reform agenda was motivated by the need to proactively put the

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

Nigerian Banking Industry on the path of global competitiveness to enable it effectively

respond to the challenges of globalization. The overall objective is to guarantee that the
economy and Nigerians do not remain fringe players in the context of a globalizing
world.

2.4 The major challenges that the reform was targeted at include the following:
 Weak Capital Base: Most banks in Nigeria had a capital base that was less than
$10 million while the largest bank in the country had a capital base of about $240
million. This compared unfavourably with the situation in Malaysia where the
smallest bank had a capital base of $526 million. The small size of most local
banks, coupled with their high overheads and operating expenses, has negative
implications for the cost of intermediation. It also meant that they could not
effectively participate in big-ticket deals, especially within framework of the
single obligor limit.
 The Challenge of Ethics and Professionalism: In a bid to survive the stiff
competition in the market, a number of operators had resorted to unethical and
unprofessional practices. Strictly speaking, some even went into some businesses
that could not be classified as banking. In appreciation of the enormity of the
problems caused by the failure to adhere to professional and ethical standard,
the Bankers’ committee set up a sub-committee on ‚ethics and professionalism‛
to handle complaints and disputes arising from unwholesome and sharp
practices.
 Poor Corporate Government Practices: There were several instances where
Board Members and Management Staff failed to uphold and promote the basic
pillars of sound corporate government because they were preoccupied with the
attainment of narrowly defined interests. The symptoms of this included high
turnover in the Board and Management Staff, inaccurate reporting and non-
compliance with regulatory requirements.
 Cross Insider Abuses: One area where this was pronounced was the credit
function. As a result, there were several cases of huge non-performing insider-
related credits.
 Insolvency: The magnitude of non-performing risk assets was such that it had
eroded the shareholders’ funds of a number of banks. For instance, according to
the 2004 NDIC Annual Report, the ratio of non-performing credit to
shareholders’ funds deteriorated from 90% in 2003 to 105% in 2004. This meant
that the shareholders’ funds had been completely wiped out industry-wide by
the non-performing credit portfolio.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

 Over-Reliance on Public Sector Deposits: These deposits accounted forever 20%

of total deposits in the system. In some institutions, such public sector funds
represented more than 50% of total deposit. This was not a healthy situation
from the viewpoint of effective planning and plan implementation, given the
volatile nature of these deposits. On account of the huge reliance on public sector
funds, a number of players did not pay adequate attention to small savers who
normally constitute a major source of stable funds which should be channeled to
finance the real sectors. Instead, they concentrated on a few high network
individual, government parastatals and blue chip companies. It was in response
to this situation coupled with the need to accord the small and medium
enterprises sub-sector the priority it deserves that the Bankers’ committee came
up with the Small and Medium Enterprise Equity Investment Scheme [SMEEIS]
with a view to redirecting credit flow to the sub-sector.

2.5 Concept of Small and Medium Enterprises

The extract definition of small and medium size enterprises depend from country to
country as well as which economic scheme is involved. In Nigeria, the definition of
small and medium size enterprises are taken from the meeting of the Nigeria council of
industry held on July 2001 in Markurdi Benue state (Ositayo 2001). Adigwe (2012)
defined SME as any industry with a labour size of 11-100 workers or a total cost of not
more than N50 million, including working capital and excluding cost of land. Small and
Medium Size Enterprises (SMEs) as defined by the National Council of Industries (2009)
refer to business enterprises whose total costs excluding land is not more than two
hundred million naira (N200,000,000) only. Although, there exists no consensus among
policy makers and scholars concerning the point at which a business firm is deemed to
be small or medium.
The United Nations Industrial Development Organization (UNIDO) identified
fifty definitions of small scale business in seventy-five different countries based on
parameters such as installed capacity utilization, output, employment, capital, type of
country or other criteria, which have more relevance to the industrial policies of the
specific country. However, it has been suggested that the SMEs sub-sector may
comprise about 87% of all firms operating in Nigeria, excluding informal-enterprises.
USAID (2004) defined enterprises as informal businesses employing fewer workers
including unpaid family labour. Small scale enterprises are those operating in a formal
sector with five to twenty employees; and medium enterprises are those employing 21
to 50 employees.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

The Nigerian concepts of SMEs are somewhat divergent but the Central Bank of
Nigeria agrees with the Small and Medium Industries and Equity Investment Scheme
(SMIEIS) in their definition of SME as any enterprise with a maximum asset base less
than N200 million (equivalent of about $1.43 million) excluding land and working
capital, and with the number of staff employed not less than 10 (otherwise will be a
cottage or micro-enterprise) and not more than 300 (Sanusi 2003, Udechukwu 2003,
Akubueze 2002, SMIEIS 2002, and Sanusi 2004). Moreover, this definition for SMEs was
based on the revised definition by the National Council of Industry in 2001.

2.6 Small and Medium Businesses in Nigeria

Agbaje, Osho and Abiodun [2015] observed that SME has a long history like every other
part of the world. Historically, ‚Small and Medium enterprises have its origin in the
eastern and Mediterranean‛, small and medium enterprises, all over the world is
divergent arrays of business concerns involve in economic activities sparring from
micro and rural enterprises, to contemporary industrial organizations that uses
sophisticated technologies. As a result of their relevance aid contribution i.e. small and
medium enterprises to national economics, policy planners, academic and national
government have shown interest in issues pertaining to small and medium scale
enterprises [SMES] all over the world. It was the means of survival for the people since
ages; it has managed to save many poor homes that have the innovation to start a
unique business but with different problems with establishment or survival. In Nigeria
there is no generally acceptable definition of SMEs but it varies over time from
organization to organization.
The NCI [National Council of Industry] in 2001 include the capital investment
band of SMEs at between NGN 150 to 200 million, excluding land but including
working capital and also the working force band between 11 and 300 inclusive. But on
the other hand, the [NASME] National Association of Small and Medium Scale
Enterprises also defined small scale enterprises as a business with less than fifty
employed people by the enterprise and with an annual turnover of NGN 100 million.
NASME came up with another definition, which states that small and medium scale
enterprises is a business with less than 100 employees and an annual turnover of NGN
500 million.
The Central Bank of Nigeria [CBN] defined SME as an enterprise with a
maximum asset base of NGN 200 million, without land and working capital, also the
number of employees is not less than 10 and not more than 300. Due to the flexible
nature, SMEs are quite able to withstand economically diverse situations. SMEs in
Nigeria can be categorized into urban and rural enterprises, but in a more formal way,

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THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

they can be called organized and unorganized enterprises. The organized enterprises
have paid employees with a registered office while the unorganized enterprises rely
mostly on apprentices or family members and mostly low rate or no salary paid
workers. Rural enterprises are made up artisans who work in open spaces. Operating in
temporary wooden workshop or structures, the unorganized enterprises rely mostly on
apprentices or family members and mostly low rate or no salary paid workers. Rural
enterprises are made up of family groups, women that are engaged in food production
from local farm crops and individual artisans. The major activity and leather, local
blacksmith, tinsmith, ceramic, clothing and tailoring, timber and winning, bricks and
cement, food processing, wood furniture, beverages, bakeries, electronic assembly, agro
processing, chemical based products and mechanics. [Source: [Link]
accessed online 20-05-09]
According to history, SMEs in Nigeria have existed since the country’s
independence in 1960, probably before independence but since independence, Nigeria
has had series of seminars, studies and workshops, each of which appraise the
excellence, importance and need to facilitate the establishment and sustainability of
SMEs. All the National four year development plans from 1962-63 to 1984-85 have laid
strong emphasis on strategies of government-led industrialization mount on import as
substitution. In addition the structural adjustment program [SAP] initiation in 1986, the
state did not appreciate the structural adjustment program active involvement in
industrialization by a process of commercialization and privatization. Special attention
was then shifted from large scale industries to small and medium scale enterprises,
which has a prominent potential for developing domestic linkages for effective growth,
sustainable industrial development. Bigger and greater learning were then placed on
the organized private sector [OPS] to head previous industrialization programmes.

2.7 Importance of Small and Medium size Enterprises

According to Chukwuma (2010), the objective of SMEs in Nigeria is to produce and
distribute goods and services to their customers at a reasonable price and reasonable
profit. This aspect of small business can be classified under the following;
a. Acceleration of Economic Growth: Small businesses are seen in every part of
Nigeria engaged in one business or the other providing services for the masses.
These services help in no small measure in improving living standard of the
people.
b. Creation of Employment: Small and medium size industries create employment
for about 40% or more people in Nigeria. Not only that they create jobs for
seekers but also provide employment for the owners.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

c. Skill Acquisition: Some of the big businesses in Nigeria started as small size
enterprises. For instance, Rimco Nigeria limited started as a small business until
they acquired wealth and expanded to a big company.
d. Increase Standard of Living: SMEs provide goods and services both to the rural
and urban areas of this country; by so doing increase the standard of living of the
people.
e. Increase Government Earnings: Most of these small businesses pay taxes and
fees for registration of business names. Even their employees pay personal
income tax to the government, therefore earns money through this means.
f. Accelerate Large Production: Most small businesses are found in big cities. They
help the big firms in distributing goods and services and supply them with raw
materials needed in their production.

2.8 Characteristics of Small and Medium Size Enterprises

Some small businesses eventually grow to the size of large corporation. Some
businesses are ideally suited to operate on a small scale for years, often serving a local
community and generating just more profit to take care of company owners. Small scale
businesses display a distinct set of identifying characteristics that set them apart from
their large competitors.
a. Revenue and profitability: Small business revenue is generally lower than
companies that operate on a large scale. The small business administration
classifies small businesses as companies that bring in less than a specific amount
of revenue, depending on the business type. The maximum revenue allowance
for the small business designation is set at $21.5 million per year for service
businesses. Lower revenue does not necessarily translate into lower profitability.
Established small scale businesses often own their facilities and equipment
outright, which, in addition to other factors, helps to keep costs lower than more
leveraged businesses.
b. Employees: Small businesses employ smaller teams of employees than
companies that operate on larger scales. The smallest businesses can often get
away with employing fewer than one hundred employees, depending on the
business type.
c. Market area: Small and medium businesses serve as much smaller areas than
corporations or larger private businesses. The smallest businesses serve single
communities, such as a convenient store in a rural township. The very definition
of small scale prevents these companies from serving areas much larger than a

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THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

local area, since growing beyond that would increase the scale of a small
business’ operations and push it into a new classification.
d. Ownership and taxes: The corporate form of business organization is not well-
suited to small-scale operations. Instead, SMEs prefer to organize as sole
proprietorships, partnerships or limited liability companies. These forms of
organization provide the greatest degree of managerial control for company
owners, while minimizing the hassle and expense of business registration. These
generally do not file their own taxes; instead, company owners report business
income and expenses on their tax returns.
e. Locations: A small size business, by definition, can be found only in a limited
area. These companies are not likely to have sales outlets in multiple states or
countries. For example, a large number of small scale businesses operate from a
single office, retail store or service outlet. It is even possible to run a small
business directly out of your home, without any company facilities.

2.9 Contribution of SMEs in Nigeria economic development

Agbaje and Abiodun et al [2015] posit that it is important to note that the development
of entrepreneurs cannot be overemphasized and the role they play in economic
development and how they are financed through both formal and informal sources. The
development experience of many countries indicates that SMEs can meaningfully
contribute to the attainment of many development objectives. These include output
expansion, employment generation, even location of industries among regions of the
countries, income redistribution, and promotion of indigenous entrepreneurship and
technology as well as production of intermediate goods to strength inter and intra
industrial leakage [Nnanna 2000].
Nevertheless, the extent to which the opportunities offered by SMEs are
exploited and their contributions maximize many economy depend on the enabling
environment created through the provision of requisite infrastructure facilities such as
roads, telecommunication, power etc and pursuit of policies such as concretionary
financing that encourage and strengthen the growth of the sector. Although the
recognition of the economic importance of SMEs to the Nigerian economy is only a
recent development, today the contributions of the sector to the economy are no longer
contestable.
The contributions of SMEs to manufacturing output and Gross Domestic Product
(GDP) is appreciable, in the area of employment generation SMEs accounted for about
70 per cent of the industrial employment in 1987 and the situation has remained largely
the same (Omwumere, 2000), the same is the case in other developing economy as it is

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THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

estimated that SMEs employ 22 per cent of the adult population in those countries,
specifically, the sector employs about 15.5 per cent and 13.9 per cent of the labour force,
which is higher employment growth than micro and large scale enterprises (5 per cent
and 11 per cent) in Ghana and Malawi respectively [Kayanula and Qaurtey, 2000].
SMEs are divided into Medium Size Enterprise (MSE), Small Scale Enterprise
(SSE) and Micro Enterprises [ME]. The federal ministry of Industries defined a Medium
Scale Enterprise as any company with operating assets less than 200 million and
employing less than 200 persons. A Small Scale Enterprise on the other hand, is one that
has total assets less than 50 million, with less than 100 employees. Annual turnover is
not considered in its definition of a SME. The National Economic Reconstruction Fund
(NERFUND) defined a SSE as one whose total assets is less than 10 million but made no
reference to either it annual turnover or the number of employee (WORLD BANK,
2010). Two fundamental financing concepts in the development of SMEs, the formal
and informal forms of financing have been identified by the previous research scholars
and practitioners (Gelinas, 1998, Anima, 2004). The findings were that among the most
popular of the formal sources of financing, the commercial banks and the development
banks remains the formal sources of finance for enterprises. The informal source
comprises of personal savings, borrowing from friends and relatives and comparatives
credits has also been identified as potential sources of financing SMEs.

2.10 Theoretical Framework

No specific theory describes how firms access external formal financing. Romano (2001)
mentioned that ‚financial theories do not adequately explain financial behavior‛. Thus,
researchers have used different theories to explain how small firms access external
financing. Various theories have been developed based on this information. These
theories investigate factors that influence the application of SMEs for external formal
financing.
Abdesamed and Wahab (2014) propounded a theory known as Information
Asymmetry. This theory identifies the relationship between variables and SMEs in the
application of bank loans. Thus, this study adopts the information asymmetry theory to
understand how firms apply for bank loan.
The main formal financing source for SMEs is the bank. According to the
European Central Bank (2011), 40% of respondent firms use their overdraft facilities or
credit lines, and more than one-third of firms have used bank loans. Longenecker (2012)
mentioned that commercial banks are the primary providers of debt capital to firms.
Commercial banks prefer firms with proven track records and sufficient collateral in the

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THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

form of hard assets. Proven track records and collaterals are difficult to obtain for small
businesses.
The lack of access to bank loans of SMEs is attributed to information asymmetry.
Finance gap hypothesis suggests that SMEs suffer from a shortage of financing, which is
caused by information asymmetry (Ed Vos 2007, Berger and Udll, 1998). Behr (2011)
mentioned that lending in developing economies, specifically lending to micro and
small enterprises, is particularly affected by information asymmetries between
borrowers and lenders. Thus, startups and expansion potentials cause difficulties in
obtaining intermediate external financing, which depend mainly on internal financing
or informal external financing such as friends and family. Constraints on external
financing are significant issues, and SMEs use internal financing as a fallback option
(Pissarides 2003).
Considerable progress has been attained in the last two decades in advancing
theoretical knowledge on the influence of information asymmetry on optional loans
(Peltoniemi and Vieru, 2013: Nofsinger and Weichang, 2011, Ed Vos et al, 2007; Bester
1985, and Stightz and Weiss, 1981). Information asymmetry refers to a situation where
owner-managers possess more knowledge about the prospects and risks facing their
business than lenders. Verrecchia (2001) defined information asymmetry as ‚the
difference in the cost of capital in the presence/absence of an adverse selection problem that arises
from information asymmetry‛.
Banks require certain information on firm performance before approving loans to
ensure that the project is commercially viable. However, this information is not readily
available from SMEs and owners of small businesses possess more and better
information about the performance of their businesses than banks. Thus, banks do not
have ample management information on SMEs. The high cost of resolving information
asymmetry can increase the difficulty of small firms to obtain loans (Ridings 2010). This
phenomenon results in small firms being offered with less capital or capital at higher
rates compared with large firms. Inadequate information affects the willingness of
banks to supply debt financing to small firms because of uncertainty. This problem
leads to the existence of a ‚debt gap‛ wherein commercially viable projects do not
obtain funding (Binks 1992).
The following are the roles of collaterals when the owner possesses more
information on the probability of success of a firm than a bank (Storey, 1994): (i)
collaterals limit downside losses by providing assets to banks in the event of project
failure (ii) collaterals provide incentives to entrepreneurs to commit him or herself to
the project; (iii) collaterals provides signals to the bank that the entrepreneur believes

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

the project is likely to succeed because the owner will not commit their personal
resources to the project if otherwise.
Collateral creates a problem for small firms because they often have no
significant fixed assets to use as collateral in their early years of establishment.
Therefore, the lack of collateral is often one of the main reasons that prevent small
businesses from applying for bank loans. The World Business Environment Survey is a
cross-sectional survey on investment climates and business environments that covers
10,000 firms in 80 countries from 1999 to 2000. The Business Environment and
Enterprise Performance Survey (BEEPS) is a joint effort of the World Bank and the
European Bank for Reconstruction and Development. BEEPS collect data on ease of
access to financing.
The ability and desire of SMEs to borrow from formal financing is often
restricted, thus forcing SMEs to borrow from informal financing sources (non-banks).
This type of financing does not require collateral and comprehensive business
information. Bhaird and Lucey (2010) confirm that the personal funds of firm owners
and funds from friends and family are extremely important in firms with low
turnovers. This situation suggests that the collaterals required by banks may act as an
indicator of owner-manager decisions to apply for bank loans.

2.11 Relevance of the Theory

The above theory adopted for this research work shows the relevance of information in
the relationship between firms and banks. The banks require adequate information
from the firms in order to be able to render assistance in terms of loans. But there are
problems or obstacles in the way. This information is usually not readily available by
the firms and also small businesses do not possess adequate collateral to offer the banks
in exchange for loan. Voordeckers and Steijvers (2006), Degryse and Layseele (2000) and
Harhoff and Korting (1998) find that collateral requirements decrease with increasing
bank-borrower relationships. Borrowers with more concentrated and long-lasting bank
relationships have less stringent collateral requirements.
Therefore, a strong firm-bank relationship will increase the willingness of owner-
manager to apply for bank loans. Bonfirn and Daniel (2012) indicate that firms with
previous relationships with banks can regain access to such banks. Daskalakis (2013)
mentioned that ‚firms that use short-term debt also employ long term debt, and firms
that do not use short-term debt do not use long term debt. Firms that have relationships
with banks are able to apply both short and long term debt, whereas firms that do not
have such a relationship are not capable of applying and accessing any form of funds
from banks.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

On this ground, this theory happens to be or has proven to be relevant in this

study because it examines the relationship between the bank and the firm, the collateral
problem faced by the SMEs and the gap that exists in terms of information. The theory
went further to identify the relationship between variables and SMEs in the application
to banks loan.

2.12 Empirical Review

A lot of studies have been carried out on SMEs access to financing. For instance, Charles
(2002) through interview technique investigated the factors that influence the growth,
performance and development of SMEs in Nigeria and other implication on policy. He
found that accessibility to finance and good management are central to SMEs growth
and development.
Mamman and Aminu (2013) assessed the effect of 2004 banking reforms on loan
financing of SMEs in Nigeria. A sample size of 500 was randomly chosen and chi-
square test provided analysis on the survey data. The study indicated that there is no
significant effect to 2004 banking reform on loan financing of SMEs in Nigeria and
suggested that there are some constraints which restricted access to loans from the
banks for SMEs in Nigeria.
Nwosa and Oseni (2013) examined the impact of banks loan to SMEs on
manufacturing output in Nigeria for the period spanning 1992 to 2010. Employing error
correction modeling technique, the study deduced that bank loans to the SME sector
had significant impact on manufacturing output both in the long and short run.
Omah, Duruwoju, Adeoye and Elegunde (2012) examined the impact of post-
bank consolidation on the performance of SMEs in Nigeria, with special reference to
lagos state. A sample size of 50 was drawn from the supra-population of the study
within ikeja local government in lagos state. Applying mean, standard deviation and
coefficient of variation in its data analysis, the study revealed that SMEs do not have
better access to finance through banks, due to neo-reorganisation in banks as a result of
post-bank consolidation and SMEs do not have absolute rapport with the financial
institutions due to their financial background in Nigeria.
Ahiawodzi and Adade (2012) examined the effect of access to credit on the
growth of SMEs in the Ho Municipality of Volta region of Ghana by using both survey
and econometric methods. The survey involved a sample of 78 SMEs in the
manufacturing sector. Both the survey and econometric results showed that access to
credit exerts a significant positive effect on the growth of SMEs in the Ho Municipality.
Obamuyi (2011) compared the performance of loans granted to SMEs by banks with
that of micro-credit institutions in Nigerian, using Ondo state as a case study.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

Analyzing through descriptive statistics, the study revealed that the average repayment
rate for banks was 92.93% and 34.06% for micro-credit schemes; hence, suggested that
banks performed at much higher levels than micro-credit schemes.
Olutunla and Obamuyi (2008) in their study using fixed effects regression model
based on a balanced panel data on 115 SMEs randomly selected in Ondo State, Nigeria
examined the relationship between profitability, bank loans, age of business and the
size of SMEs. The results revealed that there is interdependence between bank loans
and profitability of SMEs and a significant relationship between profitability and size of
business.
Obasan and Arikewuyo (2012) investigated the effects of pre-post bank
consolidation on the accessibility of finance to SMEs in Nigeria. Using the ordinary least
square, the study found out that banks’ consolidation has failed to foster a vibrant and
competitive SMEs sector that could enhance job creation and economic growth in
Nigeria. Ishmael (2012) study based on a survey Neolithic literation and dissemination
of questionnaires on a sample size of 50 SMEs within Ikeja Local Government Area of
Lagos State using random sampling technique, revealed that SMEs do not have better
access to finance through banks, do not have absolute rapport with the financial
institutions due to their financial background and are financially handicapped which
limits their size and capacity to embark on bank loans with high interest rate arising
from the neo-reorganisation in banks occasioned by consolidation.
According to Nzotta (2002), he identified the factors that determine a lending in
Nigeria to include contact position of the bank, risk and profitability of various types of
bank credit, sterility of deposit, economic condition, monetary policies, ability and
exposure of bank personnel, credit need of the area served and the nature of the source
of bank. Nzotta said bank credit is said to mean the act of a bank giving out advances to
a debtor after considering the risk and profitability that must follow such lending
decision.

3. Research Methodology

3.1 Introduction
According to Olakunori (2000) research methodology is defined as the systematic
process or procedure designed for generating, collecting, and analyzing the data
required for solving a specified problem. This chapter discusses the ways and means
through which the study was carried out. It also presents the research design, details on
the population of the study and the sampling technique. Other areas covered are;
instrument for data collection, sources of data collection, validity of instrument,

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

reliability of instrument, method of data collection and method of data analysis adopted
for the study.

3.2 Research Design

This study used a descriptive survey design. The purpose of this design is to collect
detailed and factual information that describes an existing phenomenon (Ezeani 1998).
Data was collected based on the concepts defined in the research model (survey model)
and hypothesis tested from the responses on Likert-type questionnaire which were
distributed amongst the selected sample for the study.

3.3 Area of the Study

The area of the study covers Union Bank, UBA and First Bank and 10 small and
medium size enterprises in Onitsha, Anambra State. Onitsha is a commercial city,
educational, and religious centre and river port on the Eastern Bank of the River Niger
in Anambra State North East Nigeria (Wikipedia 2016). The researcher considered this
area because Onitsha is one of the main cities in Anambra state.

3.4 Population of the Study

A population is made up of all conceivable elements or observations relating to a
particular phenomenon of interests to the researcher (Asika, 1991). The population for
this research study was the staff of small and medium size enterprises and the banks
staff in Onitsha. The SMEs include; Five Star Food And Restaurant, Dorin Stores
Limited, Chicken Republic Restaurant, Kas Chicken Fastfood, Raymond Sawmill, C-
Mark Pharmaceutical Stores, Ginpat Aluminium, Uchelink Communications, Rico and
Haco Limited, Omile Ventures, while the banks are: First Bank, Uba And Union Bank.
The population size of staff of the SME’s is 118 while the staff of the banks is 32. The
total population size for this research study is one hundred and fifty (150). The table
below shows the following figures of the aforementioned SMEs and Banks in Onitsha,
Anambra state.

Table 1: Population Size of the selected SMEs in Onitsha

Name of Industry Staff Total
Five star food and restaurant 16 16
Dorin stores limited 13 13
Chicken Republic restaurant 10 10
Kas chicken fast food 20 20
Raymond sawmill 10 10
C-Mark pharmaceutical 10 10

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

Ginpat Aluminum 11 11
Uchelink communication 10 10
Omile Ventures 8 8
Rico and Haco 10 10
118 118
Source: Field survey, 2017.

Table 2: Population size of the selected Banks in Onitsha

Banks Staff Total
First Bank 11 11
UBA 12 12
Union Bank 9 9
32 32
Source: Field survey, 2017.

Therefore, the total population figure is 150 consisting of 118 staffs of the SMEs and 32
staff of the Banks, all under Onitsha Anambra state.

3.5 Sample Size and Sampling Technique

This study settled for a sample size since it was unable to study the whole population.
The sample size for this study was determined using Taro Yamani formula (1967).
However, the sample size for the research work is 109 comprising of 88 SME staff and
21 bank staff under study in Onitsha, Anambra state.
Hence, the sample size determination is stated below:

n=

Where; N = Population of the study [150]

n = sample size
e = level of significance [0.05]
1 = constant
Therefore;

n=

n=

n=

n=
n= 109
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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

3.6 Method of Data collection

The information gathered for the research work was collected from primary and
secondary sources. The primary source was mainly through the questionnaire
distributed to some selected bank staff and SME’s staff in Onitsha and also backed up
with personal observations, and interviews, while the secondary data was from the
available related literature, textbooks, journals, magazines, newspapers, and periodicals
which were very informative. A Likert-type questionnaire was used. A likert scale
measures the extent to which a person agrees or disagrees with the question
(information technology services, 2010). The scale ranges from (4) Strongly Agree (SA),
(3) Agree (A), (2) Disagree (D), (1) Strongly Disagree (SD). The questionnaire was to the
respective banks staff and SME owners. Also, interviews and personal observations
were conducted in order to help gather information.

3.7 Method of Data Analysis

The response gotten from the questionnaires were presented in tabular forms. The
responses were converted to frequencies and percentages. Interpretation was based on
the findings and the research question of the study. The hypothesis formulated in this
work was tested with the use of chi-square method, which shows the magnitude of the
discrepancy between the variables, expectation and observation. The test was carried
out at 5% level of significance. Chi-square is represented as follows:

X2 = 2

Here = Summation
0 = Observed frequency
X2 = Calculated = chi-square calculated
= Expected frequency

3.8 Validity and Reliability of Instruments

To ensure that the structured questionnaire instrument developed for this study
measures what it is expected to measure, that is to certify the requirement of validity,
content validity was adapted to adequately measure coverage of the research topic. The
instrument was submitted to the supervisor for criticisms and suggestions. The
corrected copy was validated by the supervisor from which final copies were
reproduced.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

4. Data Presentation and Analysis

4.1 Introduction
In this chapter, data were collated, presented and analyzed so as to proffer answers to
research question. The response from the staff of banks and SME’s in Onitsha, Anambra
State was effectively addressing the problem of concern.

4.2 Presentation of Data

After the administration and collection of instrument, the 109 questionnaire sampled
were staff of the three banks and ten SME’s in Onitsha, Anambra State (First Bank,
UBA, Union Bank, Five Star Food and Restaurant, Dorin stores limited, Chicken
Republic Restaurant, Kas Chicken Fast Food, Raymond Sawmill, C-Mark
Pharmaceutical, Ginpat Aluminium, Uchelink Communication, Omile Ventures, Rico
and Haco Ltd). The one hundred and nine (109) copies of questionnaire administered
were properly filled and returned. Below is the presentation of data in frequency table.

4.3 Characteristics of the Respondents (Bio-data)

Table 4.1: Characteristics of the Respondents

S/N Variables Frequency Percentage
1 Sex
Male 69 63
Female 40 37

Total 109 100

2 Age
Below 25 years 59 54
26-36 years 42 39
37-47 years 7 6
48-58 years 1 1
Above 59 years ___ ___

Total 109 100

3 Mantal Status
Single 86 79
Married 23 21
Divorced ___ ___

Total 109 100

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

4 Educational qualification
First school leaving certification ___ ___
WAEC 55 50
OND/NCE 14 13
HND/[Link] 38 35
Masters 2 2

Total 109 100

5 Income Level
Below 30,000 55 50
31000-40000 15 14
41000-50000 10 9
51000-60000 13 12
61000-70000 3 3
71000-80000 13 12

Total 109 100

Source: Field Survey, 2017.

The table above shows that 63% of the respondents are male while 37% of them are
female. The respondent’s age brackets are below 25 years, 26-36 years, 37-47years, and
48-58 years. This represents the percentage value of 54%, 39%, 6% and 1% respectively.
Again, the table reviewed that 79% of the respondents are single, while 21% are
married. More of the respondents obtained Waec which represents 50%, OND/NCE
13%, HND/[Link] 35%, and Masters 2%. The table also revealed the income levels of the
respondents which are 50%, 14%, 9%, 12%, 3%, and 12% respectively.

Table 4.2 Respondent’s opinion on whether SMEs encounter problems in

accessing loan from the banks
Responses Frequency Percentages
Strongly Agree 21 19
Agree 64 59
Undecided 16 15
Disagree 8 7
Strongly Disagree ____ ____
Total 109 100
Source: Field Survey, 2017.

The above table indicates that 19% of the respondents strongly agreed that small scale
businesses encounter problems in accessing loan from the banks, 57% Agreed, 15%
Undecided while 7% disagreed.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

Table 4.3: Respondent’s opinion on whether banks are indispensable sources of capital to SME’s
Responses Frequency Percentages
Strongly Agree 12 11
Agree 46 42
Undecided 45 41
Disagree 6 6
Strongly Disagree ____ ____

Total 109 100

Source: Field Survey, 2017.

The above table shows that 11% of the respondents strongly agreed that banks are
indispensable sources of capital to SME’s, while 42% agreed, 41% neither agreed nor
disagreed and 6% disagreed to the assertion.

Table 4.4: Respondents opinion on whether SME’s contribute to the

growth of the country through employment creation
Responses Frequency Percentages
Strongly Agree 16 15
Agree 80 73
Undecided ______ ______
Disagree 13 12
Strongly Disagree ______ ______

Total 109 100

Source: Field Survey, 2017.

From the above table, 15% of the respondents strongly agreed that SME’s contribute to
the growth of the country through employment creation, while 73% agreed and 12%
disagreed.

Table 4.5: Respondents opinion on whether SME’s are engine driver for economic development
Responses Frequency Percentages
Strongly Agree 27 25
Agree 75 69
Undecided 7 6
Disagree ______ ______
Strongly Disagree ______ ______

Total 109 100

Source: Field Survey, 2017.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

The above table indicates that 25% of the respondents strongly agreed that SME’s are
engine driver for economic development, 69% agreed while 6% were indecisive.

4.4 Test of Hypotheses

In this study, three hypotheses were empirically tested. This was aimed at verifying the
validity of the proposition and to find out the relationship existing between the
variables under study. Hence chi-square often denoted as X2, was used to test the
research hypothesis.

Thus: X2 = ∑
Where,
X2 = Calculated Chi-square
Fo= Observed Frequency
Fe = Expected Frequency
∑ = Summation

A. Hypothesis One
Ho1: To a large extent SMEs do not encounter problems in the procurement of loans
from commercial banks.
In testing this hypothesis, responses from table 4.2 will be used.
Computation of Expected Frequency

Fe =
Where,
Fe = Expected Frequency
RT= Row Total
CT= Column Total
GT= Grand Total
The figures in brackets are the expected frequency for each of the options.

Table 4.6: Contingency Table for Hypothesis One

Question SA A U D SD Total
1 21(12.5) 64(60.75) 16(23.75) 8(11.25) ________ 109
2 8(12.5) 55(60.75) 28(23.75) 15(11.25) 3(0.75) 109
3 12(12.5) 59(60.75) 30(23.75) 8(11.25) ________ 109
4 9(12.5) 65(60.75) 21(23.75) 14(11.25) ________ 109
Total 50 243 95 45 3 436
Sources: Field Survey, 2017.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

Table 4.7: Computation of Chi-Square Distribution Table

Cells Fo Fe Fo-Fe (Fo-Fe)2 (Fo-Fe)2/Fe
A1 21 12.5 8.5 72.25 5.78
A2 64 60.75 3.25 10.56 0.17
A3 16 23.75 -7.75 60.06 2.52
A4 8 11.25 -3.25 10.56 0.93
B5 8 12.5 -4.5 20.25 1.62
B6 55 60.75 -5.75 33.06 0.54
B7 28 23.75 4.25 18.06 0.76
B8 15 11.25 3.75 14.06 1.24
B9 3 0.75 2.25 5.06 6.74
C10 12 12.5 -0.5 0.25 0.02
C11 59 60.75 -1.75 3.06 0.05
C12 30 23.75 6.25 39.06 1.64
C13 8 11.25 -3.25 10.56 0.93
D14 9 12.5 -3.5 12.25 0.98
D15 65 60.75 4.25 18.06 0.29
D16 21 23.75 -2.75 7.56 0.31
D17 14 11.25 2.75 7.56 0.67
Total 25.19
Source: Authors Computation 2017.

Therefore, chi-square calculated = 25.19

Determination of the critical value
Df = (R-1) (C-1)
Df = (4-1) (5-1)
Df = (3) (4)
Df = 12
Level of significance =5% = 0.05
Therefore, the critical value X2 = 21.026
Decision
The decision rule state that null hypothesis should be rejected if the chi-square
calculated (25.19) is greater than the critical value of chi-square (21.026), otherwise
accept. Since the computed chi-square is greater than the critical value of chi-square, we
reject the null hypothesis and accept the alternate hypothesis which states that the SMEs
do encounter problems in the procurement of loans from commercial banks.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

B. Hypothesis Two
Ho2: To high degree commercial banks loans and advances have not contributed to the
development of small and medium enterprises in Anambra State.
In testing this hypothesis, responses from table 4.3 will be use Computation of Expected
Frequency:

Fe =
Where,
Fe = Expected Frequency
RT= Row Total
CT= Column Total
GT= Grand Total
The figures in brackets are the expected frequency for each of the options.

Table 4.8: Contingency Table for Hypothesis Two

Question SA A U D SD Total
5 12 (11) 46 (48.5) 45 (30.3) 6 (17.16) ________ 109
6 9 (11) 46(48.5) 30(30.3) 20(17.16) 4(2) 109
7 5 (11) 43(48.5) 22 (30.3) 33(17.16) 6(2) 109
8 8 (11) 64(48.5) 24(30.3) 13(17.16) ________ 109
9 12 (11) 38 (48.5) 38 (30.3) 21(17.16) ________ 109
10 20 (11) 54 (48.5) 23 (30.3) 10(17.16) 2(2) 109
Total 66 291 182 103 12 654
Sources: Field Survey, 2017

Table 4.9: Computation of Chi-Square Distribution Table

Cells Fo Fe Fo-Fe (Fo-Fe)2 (Fo-Fe)2/Fe
A1 12 11 1 1 0.09
A2 46 48.5 -2.5 6.25 0.12
A3 45 30.3 14.7 216.09 7.13
A4 6 17.6 -11.6 134.56 7.64
B5 9 11 -2 4 0.36
B6 46 48.5 -2.5 6.25 0.12
B7 30 30.3 -0.30 0.09 0.00
B8 20 17.16 2.84 8.0656 0.47
B9 4 2 2 4 2
C10 5 11 -6 36 3.27
C11 43 48.5 -5.5 30.25 0.62
C12 22 30.3 -8.3 68.89 2.27
C13 33 17.16 15.84 250.9 14.62
C14 6 2 4 16 8

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

D15 8 11 -3 9 0.81
D16 64 48.5 15.5 240.25 4.95
D17 24 30.3 -6.3 39.69 1.30
D18 13 17.16 -4.16 17.30 1,00
E19 12 11 1 1 0.09
E20 38 48.5 -10.5 110.25 2.27
E21 38 30.3 7.7 59.29 1.95
E22 21 17.16 3.84 14.74 0.85
F23 20 11 9 81 7.36
F24 54 48.5 5.5 30.25 0.62
F25 23 30.3 -7.3 53.29 1.75
F26 10 17.16 -7.16 51.26 2.98
F27 2 2 0 0 0
Total 72.64
Source: Authors Computation, 2017

Therefore, chi-square calculated = 72.64

Determination of the critical value
Df = (R-1) (C-1)
Df = (6-1) (5-1)
Df = (5) (4)
Df = 20
Level of significance =5% = 0.05
Therefore, the critical value X2 = 31.410
Decision
The decision rule states that null hypothesis should be rejected if the chi-square
calculated (72.64) is greater than the critical value of chi-square (31.410), otherwise
accept. Since the computed chi-square is greater than the critical value of chi-square, we
reject the null hypothesis and accept the alternate hypothesis which states that
commercial banks have contributed to the development of small and medium size
enterprises through their loans and advances.

5. Summary of Findings, Conclusion, Recommendation and Suggestions for

further studies

5.1 Introduction
This chapter discusses the result analyzed in previous chapter and from the result drew
up conclusions. It also recommended solutions to the problems and made possible
suggestions for further studies.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

5.2 Summary of Findings

From the analysis of the study, the following findings were made;
1. The SMEs encounter problems in the procurement of loans from commercial
banks because most of them doesn’t have collateral and requirements from the
banks in assessing loan and advances
2. Commercial banks have contributed to the development of small scale
businesses through their loans and advances.
3. Small and medium size enterprises have contributed to the development of
Nigerian economy.

5.3 Conclusion
This work examined the roles of commercial banks in financing small scale businesses
using Onitsha as the case study. The data generated were analysed using simple
percentage analysis and the hypothesis formulated were tested using chi-square
statistical technique at five per cent level of significance. The study revealed among
others that SMEs encounter problems in the procurement of loans from commercial
banks. The study also revealed that commercial banks have contributed significantly to
the development of small and medium size enterprises through their loans and
advances. Also, the study revealed that SMEs have significantly contributed to the
development of Nigerian economy. It is seen from the study that the role SMEs play in
the process of economic growth and development are;
1. SMEs act as a catalyst for growth and development.
2. They are the major source of employment.
3. Provide training avenues for local entrepreneurs in several areas of economic
activities.
4. Aid the process of income redistribution
5. Sound development of SMEs has positive implication for improving the
standard of living of the citizen.
Although this list of the roles of SMEs in the process of economic growth and
development is limited, the sub-sector in Nigeria is still faced with a lot of bottle-necks,
which retard the pace of their growth and development. Apart from finance, other
factors hindering the growth and development of SMEs are;
1. Inadequate infrastructure
2. Unstable power and water supply
3. Poor road and rail network
4. Inefficient water and air transport system
5. Modern communication facilities

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

6. Poor governance
7. Unfriendly tax system
For the country’s SMEs to survive the competitive drive, the Nigerian government and
the banking industry will have to improve upon the factor highlighted above.

5.4 Recommendations
Having highlighted the problems and shortcomings of the small and medium
enterprises (SMEs) in Nigeria, the following recommendations aimed at correcting and
eliminating those constraints are put forward for consideration. In order to reduce the
risk in small and medium enterprises (SMEs) lending, the central bank of Nigeria and
the government must ensure that they keep on regulating properly their current
initiative of requiring all commercial banks to set aside 10 percent of their profit before
tax for equity investment in small and medium size enterprises.
Rediscounting by the central bank of Nigeria (CBN) can sample possibility for
encouraging commercial banks to gain experience in medium and long term building
operation. A number of procedures can be adopted such as preferential discount rates,
multiple discount rates or quotas favouring certain purposes. The banks themselves can
ensure maximum risk of the loan losses by providing technical and managerial
resources to various kinds of small enterprises customers. This would assist them in
project preparation, implementation, financing and management. At the same time,
small scale enterprises can avail themselves to such services provided by the
government at the entrepreneurial development centre. In order to make credit
available to SMEs sector, the banks and the government should make use of the rural
banking program. The branches of each bank in the rural community should be given
free hand to take certain decisions concerning advancement of these loans and advances
to rural small scale enterprises. They should be able to act as ‘management consultants’
identifying problems and suggesting solutions.
Banks would also need to be encouraged to find the working capital
requirements of SMEs. In the face of limitations and inadequacies already enumerated
in this project, small size enterprises are high risk for banks to lend. Consequently, part
of the government programs for small enterprises would be to devise a means of
providing incentives and management to banks to be able to freely lend to small
enterprises.
Central bank of Nigeria (CBN) should license more micro finance banks to be
able to extend more loans to small and medium enterprises. We also recommend that
SMEs should not base only in urban areas. This is because the numbers of small
enterprises in urban areas are alarming and commercial banks cannot give loans to all.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

This is why they should be encouraged to reside more in rural areas i.e rural small
enterprises should be encouraged. If this is achieved, the government should ensure
that it provides more infrastructural facilities in rural areas so as not to discourage these
small businesses in achieving their objectives.
Finally, a major impediment to growth generally in Nigeria has been the state of
economic and social infrastructure. This has been an over-flogged issue in the
discussion of Nigeria’s economic development. Provision of necessary infrastructural
facilities and the enabling environment for business operations generally is an
imperative. Uninterrupted power supply, good roads and transportation networks,
rural development, efficient, effective and cheap communications etc. are the basis to
competitive performance of enterprises. Their provision will definitely reduce the
funding needs of small enterprises as they would no longer require funds to provide
electricity, water, telephone and other infrastructures on their own.

5.5 Suggestions for Further Research

In a research work like this, which is quite broad ‘the role of commercial banks in
financing small scale businesses in Onitsha’, cannot be easily exhausted and that is why
the researcher has identified other areas of further research in greater details. The areas
are as follows;
1. How the government can improve the provision of basic infrastructure and
provide entrepreneurial extension services to train these small scale
entrepreneurs and their staff in order to improve the poor technical know-how of
these enterprises.
2. How the central bank of Nigeria in conjunction with the government can
establish decrees that will enable development banks to be reviewed in allowing
them maintain current accounts and attract deposit from the general public. This
will afford them the opportunities to provide loans.
3. The study also wishes that banks can act as financial consultant to small scale
enterprises (SSEs) in the form of regular guidance on the preparation of financial
records and proposals for banks facilities.
4. Finally, how commercial banks can assist small and medium size entrepreneurs
in having access to foreign exchange and also ensuring that they do not misuse
such opportunities. If this is achieved, it will help in the reduction of cost and
will lead to an increase in their working capital.

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

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A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

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 John-Akamelu Chitom Racheal, Muogbo Uju, S.
THE ROLE OF COMMERCIAL BANKS IN FINANCING SMALL & MEDIUM SIZE ENTERPRISES IN NIGERIA:
A STUDY OF SELECTED BANKS AND FIRMS IN ANAMBRA STATE, NIGERIA

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