(A CASE STUDY OF SELECTED SMALL SCALE BUSINESSES IN IBADAN METROPOLIS)
The purpose of the study was to determine the relationship between commercial banks lending policies and financial performance of selected small scale businesses in Ibadan Metropolis Council. The study was guided by three objectives namely; to examine the lending policies used in Commercial Banks by Small Scale Businesses, to establish the factors influencing the financial performance of Small Scale Businesses and to examine the relationship between Commercial Banks lending policies and financial performance of selected small scale businesses. The study used data collected using a questionnaire and interviews and during the study descriptive research design was used as both quantitative and qualitative research methodologies were also used while sample of 60 respondents was used.
The study examined the lending policies used in Commercial Banks by Small Scale Businesses in Ibadan Metropolis council, interest rate, property valuation, repayment period, type of loan needed and minimum and maximum amount of loan are the profoundly used policies to determine the lending out of credit also various small scale businesses operated in Ibadan Metropolis council and they conclude; hard ware, clothe selling, general merchandise, restaurants and pubs, stone quarrying and food processing and selling. Meanwhile the relationship between lending policies and performance of small scale businesses in Ibadanwas manifested in; amount of money given, relationship with commercial banks, high value of security needed, low repayment period and high interest, On addition, small scale business in Ibadan Metropolis council have been influenced by very many factors such as; poor communication, lack of focus, high taxes, electricity supply, high interest, poor roads, high value of security, unskilled employees, rent, lack of trade credits and customer care.
The study recommends that there is need for Commercial Banks to reduce further on the interest rate they charge on credits business clients apply for, business persons ought to form business associations; these will enable entrepreneurs lobby support from government also business training is important for entrepreneurs in Ibadan Metropolis council and Commercial Banks should adjust on the collateral security demanded as a prerequisite for a loan.
This chapter of research report discusses the background of the study, statement of the problem, purpose of the study, objectives of the study, scope of the study and significances of the study as well. The study focus on the Commercial Banks lending policies as an independent variable and financial performance of Small Scale Businesses as a dependent variable.
Small Medium Enterprises (SMEs) are the main driving forces of economic growth & job creation that have a special importance, not only in developed countries but also in developing and emerging economies (Cabbar, 2000). SMEs in most countries have barriers to access to finance, difficulties in exploiting the technology, insufficient managerial capabilities, low productivity and regulatory burdens in their business environment. Some SMEs face certain constraints that are less applicable to large companies in Nigeria especially 28% of loan defaults, dependent on business development services for growing their businesses, face major constraints in their access to finance and export markets, and are disproportionately affected by regulatory barriers (AMFIU Report, 2008).
Indeed, Goldberg and White (1999) study reveals that MFIs across developing countries affects small business lending positively in urban markets and negatively in rural markets. This kind of borrowing is necessary for business performance and improving SMEs development if it is fully accessible and reasonably fair cost of money. SMEs are some of the businesses in the world that cannot function/survive without an appropriate finance because of the nature of their operations and management style (Kasekende &Opondo, 2003).
Most SMEs in Nigeria have had access to financial resources from Commercial Banks; however, they end up in the poor financial state and leading to business collapse before its first anniversary due to lack of entrepreneurial skills, lack of adequate technical and management support services (GEM report, 2008). Also, the cost of money on micro credits is very high, due to the large administrative costs in relations to their location of operations (Sacerdoti, 2007).
Lending to SMEs entails higher administration and transaction cost owing to inadequacy of records and information relating to their operations. Some SMEs had difficulties in raising short-term funds for working capital as well as long-term funds for business investment. Enterprises can take in trade credits in addition to institution loans in short-term finances which later hinder their performance in the short period (Ebong, 2007). In order to achieve this role, the SMEs need a good state of financial health and enable them to play economic role through access to financial services from the Commercial Banks. Therefore, this makes it difficult for them to achieve their performance in term of liquidity, long term solvency and profitability hence leading to lost business opportunities, and failure to grow in terms of size and financial resources (Badagawa, 2008). This has been linked to high lending terms by Commercial Banks of between 30% and 36% per annum (MFPED, 2009).
According to Wanja (2009), Access to credit facilities is the main constraint for SMEs in Nigeria and limited access to capital to meet their operating working capital and long term investments. Lending rates for short and medium term loans range between 17-28% per annum (Mugisha and Kibirige, 2009). The CGAP assessment report (2008) also revealed that Nigerian MFIs clients still existed in the loan cycle and others had dropped out due to poor business performance and difficulty in loan recovery. In line with (IMF report, 2006) and Boehlje et al (1999) citing poor performance which is being contributed by low profitability, high cost of borrowings, small loan size and short period of lending to the clients. The development of SMEs would lead to poverty eradication, job creation and increased income levels in relations to achieving MDGs (MFPED, 2008).
The Small Medium Enterprise Sector in Nigeria SMEs are the backbone of the Nigerian economy, providing a prime source of new jobs, playing a crucial role in income generation, reducing poverty by helping boost employment in rural areas and recognized as an engine of economic growth and development (BIDS report, 2008). Nigeria has an extensive small and medium enterprise sector with an estimated number of 1,069,848 SMEs in urban and rural areas which account for 90% of the private sector. They contribute 75% of Nigeria’s GDP and employ some 2.5 million people (Badagawa, 2007). The SME sector in Nigeria, like other developing economies, is highly diversified by ownership, type of enterprise and stage of development (Bid report, 2008). Nigeria Small Scale Industries Association reported that SMEs are spread across all sub-sectors of the economy with the majority operating in the informal sector and mainly operated by women especially in food processing, textiles and clothing, manufacturing and handicrafts.
The SMEs sector offers a range of investment possibilities, covering all sectors from resource-based industries to manufacturing and services. SMEs occupy a highly useful niche in industrial structure, sub-contracting with large firms engaging in small batch production, made–to-order work, or finishing operations complimentary to large scale industry (BIDS Report, 2008)
Lending policy concerns the actions of a central bank or other regulatory authorities that determine the size and rate of growth of the money supply. In the United States, the Federal Reserve is in charge of lending policy, and implements it primarily by performing operations that influence short term interest rates. Lending policy in the United States is determined and implemented by the United States Federal Reserve System, commonly referred to as the Federal Reserve (Hannig, A. 2009). Currently, the South African government maintains over US$800 billion in cash in circulation throughout the world, up from a sum of less than $30 billion in 1959 as the lending policy keep changing with the level of inflation in the economy. The amount of money in circulation to businesses generally increases to accommodate money demanded by the growth of the country’s production (Hulme, D. 2010).
Lending is a risky enterprise because repayment of loans can seldom be fully guaranteed. According to Brown, Falk, & Fehr, (2009), implicit contracts between lenders and borrowers, thus, banking relationships can motivate high effort and timely repayments. Fehr & Zehnder, (20) also confirm that long-term relationships are a powerful disciplinary device. They posit that in credit markets dominated by short-term interactions, borrowers may only be motivated to repay if they know that, due to credit reporting, their current behaviour is observable by other lenders. The work of Fehr & Zehnder, (2010) indicates that the impact of credit reporting on repayment behaviour and credit market performance is highly dependent on the potential for relationship banking. Therefore, when bilateral relationships are not feasible, the credit market essentially collapses in the absence of acceptable borrower behaviour. As repayments are not third-party enforceable, many borrowers default and lenders cannot profitably offer credit contracts (Brown, Falk, & Fehr, 2009). The availability of information on past repayment behaviour allows lenders to condition their offers on the borrowers’ reputation. As borrowers with a good track record receive better credit offers, all borrowers have a strong incentive to sustain their reputation by repaying their debt (Orebiyi, 2010).
The bank of Nigeria in 1999 issued a policy statement where all financial institutions are categorized in four tiers namely Commercial banks, Credit institutions, Micro -finance deposit taking institutions and institutions involved in micro-finance business that do not qualify for tier 1,2,or 3 (Micro Finance Forum, 2001). By identifying the different tiers, Bank of Nigeria recognized Micro-finance Institutions as one of the key players in Nigeria Finance Sector. It is therefore important to investigate and learn more about Commercial banks and Micro-finance institutions success and failure in the area of credit delivery. Commercial banks are broadly defined as Banks that are engaged in keeping, lending money and providing other monetary services to the commercial sector. The commercial sector includes delivery of services, trade, and small and light industry (Dennizer, 2009). Commercial banks focus on profits in providing services to the commercial sector.
Nigeria cooperative Alliance report (2004) says that Commercial Banks reduce on poverty through provision of loans to small and medium businesses. In developing countries like Nigeria, the government is trying to strengthen micro finance industry in order to pool together scarce resources which will create a significant funding for credit facilities to business owners towards poverty reduction. In doing this, the government has committed and dished out five million shillings to each sampled Commercial Banks to support and help the poor peoples start small projects though some of these financial institutions tend to set stringent policies such high interest rates, high value of the security needed restricting the number of beneficiaries and added that as towns expand, Commercial Banks also increase to provide their services to the people in the area
In Ibadan Metropolis Council, many traders operate their businesses with the help of Commercial Banks who provide them with financial services especially bank credits. But it is also embarrassing that most of the businesses do seem not to be expanding. According to the study done by Kazooba (2006) in the towns of Mbarara and Bushenyi found out that once businesses are established they confront competition from other businesses in their similar or related businesses. Basing on the above background, the study was therefore try to establish the impact of Commercial Banks lending policies on financial performance of Small Scale Businesses in Ibadan Metropolis.
With improved credit risk assessment afforded by the credit bureau, new products including medium and long-term financing like business credits and mortgages have been introduced by most Commercial Banks in Ibadan Metropolis. The interest rates in Commercial Banks which were in the 10% to 20% range before 2010 have been increased to 28%. Despite of numerous commercial banks in Ibadan Metropolis, more than 50 percent of selected Small Scale Enterprise owners fight uphill battle from the start and fail in the first five years (Kazooba, 2006). It is therefore not clear whether bank credits accessed by small scale enterprise owners are useful to their businesses given the ever increasing rate of business failure. Therefore, the study was to establish relationship between Commercial Banks lending policies and financial performance of Small Scale Businesses in Ibadan using a case of selected small scale businesses in Ibadan Metropolis.
The Main objectives of the study was to determine the relationship between commercial banks lending policies and financial performance of small scale businesses in Ibadan Metropolis
- To examine the lending policies used in Commercial Banks by Small Scale Businesses.
- To establish the factors influencing the financial performance of Small Scale Businesses.
- To examine the relationship between Commercial Banks lending policies and financial performance of small scale businesses.
1.4. THE RESEARCH QUESTIONS
- What are lending policies used in commercial banks by Small Scale Businesses?
- What are the factors influencing the financial performance of Small Scale Businesses?
- What is the relationship between Commercial Banks lending policies and financial performance of Small Scale Businesses?
This research was carried out at small scale businesses in Ibadan Metropolis Council. Ibadan Metropolis Council is found in Ibadan District, South Western Nigeria. The Town Council is composed of differing selected small scale businesses and such businesses were not performing financially very well despite the commercial banks in the area with different lending policies
The study considered information relating to the period of four years that is 2011-2015. The time of three years was considered as there was decline in financial performance of the small scale businesses as the researcher is attaching it to the lending policies in commercial bank around the study area.
The study was interested in information related to examine the lending policies used in Commercial Banks by Small Scale Businesses, to establish the factors influencing the financial performance of Small Scale Businesses and to examine the relationship between Commercial Banks lending policies and financial performance of selected small scale businesses.
The research may benefit the Commercial Banks since it has highlighted areas that may badly need adjustments in lending policies and the ability for improved Small Scale Business’s financial performance.
The study may further act as a material for scholars and other academicians interested in studying the same study variables of lending policy in commercial banks and financial performance of Small Scale Businesses in Ibadan Metropolis since the study has provided information in relation to such.
In addition, the study may help the researcher to acquire her bachelor’s in Business Administration of Lead City University since it is one of the requirements for the University program.
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