Impact Of SMEs On Economic Development

Impact Of SMEs On economical phylogenyCHAPTER 4 shrimpy pedigreees raise substantiall(a)y to dickens fundamentals of leanness reduction byplay launching and economic proceeds (The World edge Group). In the previous chapter we examined a complete picture of MA in the theory of banking and at offer economic evaluation and strategic analyses of the transit, in like manner high lighting the executing of commercialized banks in post consolidation period in Nigeria. It whence viewed the benefits, consequences and bushelations of MA and concluded with recent estimates of the effects of bank consolidation on belittled Business Lending.In this chapter we shall be looking at the roles of SMEs, its benefits and impacts on the economic maturement. We shall in growth be looking at how SME get funded and the chief(prenominal) sources of cash. Finally we will comp argon this credit avail faculty to SMEs onward consolidation and after consolidation in the Nigerian banking se ctor4.0 Introduction secondary trys atomic number 18 the seeds of the private sector, and also the source of innovation and diversification. They supply big companies and develop their own activities and product lines. When they grow, they provide habit and tax revenues. lilliputian and strength-sizingd enterprises brush off be the motors of economic growth. In most Afri arse countries, but, the descent environment is non conducive to enterprise facts of life ( Bercy, 2005 ).Small and average surpass Enterprises (SMEs) argon important for triumphful economic growth and genial development. SMEs, right on supported, foster Entrepreneurship a proven pre-requisite for national economic success. human beings and private polity support of SMEs is most effective when SMEs be set ab outside(a) of the formal sector. One key objective in that locationfore is to encourage migration of SMEs from inner to formal sector (Oyekanmi, 2006)Nigerian SMEs in informal sector be beyond the reach/ attend to of public or private form _or_ system of governmentPolicies do not provide sufficient supportDifficult memory access to payTo character SMEs to stimulate economic growth and encourage businesses requires SMEs to stir up from informal sector to formal sector.4.1 Definition of SMEsSME is an acronym for teeny and medium enterprise. It is a term that is used in a different way in different country and used differently even within the uniform industries. In the United States for instant SMEs goat be used to let out firms from downhearted office home office to even double company. In Europe SMEs is used to refer to a business firm or company that has cubic decimeter to two hundred and fifty employees with an annual disturbance of seven to forty meg euro. Yet these SMEs must bring in a total addition slight than twenty-seven million euro. In Canada, the pains uses the term SMEs as a reference to any company that has less than five hundred emplo yees while categorizing company with employees above this number as large business. The definition of SMEs is country specific which is measured on size of it and level of development.In Nigeria SMEs are the moral fibres of the economy, a large serving of businesses in Nigeria employ less than one hundred employees (Oyekunmi, 2006). This segment provides fifty share of employment and fifty percent of the total industrial output. This gage be said that most of the underdeveloped nations, its private economy comprises entirely of SMEs and seen as the only soilable employment opportunity for communities ( Oyekunmi, 2006)4.2 Impact of SMEs on Economic DevelopmentNowadays, the magnificence of SMEs has been recognised worldwide and their immense pursuit to economic growth, community organisation, employment, catalysts of growth, innovation and skills and development. SMEs account for over 95% of enterprise and 60%-70% of employment, and generate a large share of new jobs in Orga nisation for economic Co-operation and development economies. (OECD Africa). Since the dawn of industrial changes and globalisation the importance and voice of teensy-weensy firms is enhance as the economies of scale slims. Nevertheless a lot of the conventional problems SMEs pillowcases brace also become more than discerning in this global environment. Such problems as lack of pecuniary backing or credit availability, problems in utilization of technology, constrained managerial capabilities, regulatory saddle down and unkept yield. Since e genuinely economy stands to gain from SMEs precise effectualness and weakness, insurance framework and the role of government must evolve for these enterprises to flourish, align to new demands and strains and to reap the benefit of globalisation. For this basis boost entrepreneurship is high on the agenda of governments in OECD member countries, developed and developing economies. The importance of entrepreneurship stands out in this time of innovative change, and fostering a climate to help the dynamism in firm humanity is considered fundamental worldwide.( OECD Afri digest Economic Outlook ,2009)4.3 Role of SMEs to EconomySmall and speciality Enterprises (SMEs) occupy a place of pride in virtually e really country or differentiate. Because of their significant roles in the development and growth of various economies, they be possessed of been referred to as the engine of growth and the vehicle for socio- economic change of any country. SMEs are seen as an au thence(prenominal)tic medium for the realization of national economic objectives of poverty alleviation and employment multiplication at low investment cost. whatsoever different benefit of SMEs includes access to the infrastructural facilities addle available by the very foundation on these enterprises. Also the spur of economic activities through supplies of items produced, distribution process stemming from rural to urban centre, enhance s the standard of living of the employees and their families as well as those who directly and indirectly related with them ( Onuorah, 2010). The benefits of SMEs are innumerable and cannot be exaggerated. These benefits are summarized down the stairs.Economy contribution in the provision of outputs in form of goods and services. times of employment accepts creation of jobs at relatively low outstanding cost. And the employment opportunities provided reduces village to city (rural-urban) migration and allows for even developmentUtilization of local resources This promotes the use of local raw materials requiring simple technologySMEs help to reduce income discrimination by developing a group of both skilled and semi-skilled workers as a basis for expansionIncome generation SMEs constitute major(ip) avenues for income generation and participation in economic activities in the lower income and rural brackets of developing societies oddly in agriculture, trading and services.Stigl itz and Weis (1981) observe that puny and medium scale firms with opportunities to invest in positive net present value projects whitethorn be blocked from doing so because of adverse selection and moral misadventure problems. This selection problem occurs when providers of bills cannot validate the firms access to quality projects. spell the hazard problems is related with the possibility of SMEs diverting funds to alternative projects or taking more essays than they can afford to. (Ogujiuba, Ohuche, Adenuga, 2004).Since SMEs ordinarily do not have access to public funds through the capital trade, they simply have to depend on banks for patronage. The reliance on banks makes them even more vulnerable for the simple reason that crisis in the pecuniary system can have a great impact to credit supply to SMEs, thus, SMEs are subject to funding problems in equilibrium and these problems are worsening during periods of financial instability.Berger and Udell (2001) further note that shocks to the economic environment in which both banks and SMEs outlast can significantly affect the willingness and capability of banks to lend to small and medium scale firms. regime worldwide have realised the importance of SMEs and have encouraged them by originating and creating policies that are affirmatory to encourage, support and make funding accessible. To encourage the developments in small and medium enterprise are a plus as the role SMEs plays in economic development. (Oladele, 2009).4.4 SMEs Promotion in NigerianThe Nigerian government has supported the SMEs development programs since its independence, yet very few of which have yielded impressive results. Now the challenge is to recognise the pointors that solve their performance and development as well as the implications of these factors for indemnity. Ever since the increase of independence in Nigeria, every known regime recognizes the importance of promoting SMEs as the basis of economic growth. As a result, several(prenominal) micro lending institutions were established to enhance the development of SMEs. Unfortunately, records indicate that the performance of SMEs in Nigeria has not justified the establishment of this overabundance of micro-credit institutions. Odedokun (1981) notes that in spite of the quantum of credit made available to the SME manufacturing sector the contribution of the index of manufacturing to GDP was only 7 percent between 1970 and 1979.Source CBN Annual Report, 2008The major credit programs and specialize credit delivery institutions implemented to promote SMEs in Nigeria between the social class 1971 to 1997 includes The small scale industries 1971, agricultural credit guarantee evasion (ACGSF)of 1973, the Nigerian Agricultural and Co-operative Bank of 1973, the Nigerian bank for Commerce and Industry of 1973, the small and medium scale enterprises loanwordword scheme 1 2 of 1992, field of study Economic Reconstruction entrepot of 1994 and The Family Economic Advancement Program of 1997.( Oyekunmi, 2006). otherwises includes micro credit institutions include the Nigerian Bank for Commerce and Industry (NBCI), depicted object Economic Reconstruction Fund (Nerfund), the Peoples Bank of Nigeria (PBN), the Community Banks (CB), and the Nigerian exportation and Import Bank (NEXIM), and the liberalization of the banking sector. (Ogujiuba, Ohuche, Adenuga, 2004). In addition there has been an entrepreneurship development centres in three zones since 2008, which is has trained nine thousand people and is pass judgment to create about five hundred and twenty-five thousand jobs in three to five years. Most of these programmes expireed due to poor administration in loan processing and credit procedure, poor monitoring techniques and the abuse of the scheme attributed to corruption (Oyekunmi, 2006).CBN initiated together with the Bankers Committee In 1999, an interventionist strategy called the Small and strong suit Industries E quity coronation Scheme (SMIEIS). This scheme requires banks to set divagation 10 percent of their return before tax to fund SMEs in an comeliness participation framework. (Ogujiuba, 2004). SMIEIS requires all banks in Nigeria to set aside 10% of their PBT for fair-mindedness investment in SMEs (revised to 5% from end 2006) ( Oyekunmi, 2006)According to Mambula (1997), since its independence, the small business development programs have commonly yielded poor results, despite the immense bar of money invested by the Nigerian government. But this can be associated to the fact that these funds hardly reached the SMEs business because funds got lost to bureaucratic bottleful neck and end up in accounts of public office holders. It has however been worrisome that despite the incentives, policies, programmes and support aimed at revamping the SMEs, they have performed rather below expectation in Nigeria.4.5 Funding opportunity for SMEsTo assist SME development, priority should be given to financial reforms and appropriate funding. Effective financing of SMEs should include regulatory reform the creation of a friendly business environment for doing business, the computer address of guarantees to local banks to entice them to lend in local currency (e.g. USAID Development reference point Program), tax incentives for rewarding companies that agree to have their financial statements audited, the creation of rightfulness funds suitable for SMEs, financial incentives for partnerships, etc. (Bercy, 2005).SMEs being very unique and important and because of their relative small size can be negatively touch by changes in the financial institution especially banks during crisis period. The credit availability to SMEs is very important and significant not only from a theoretical point of view but also for policy purposes.In more countries different innovation have enthused extensive restructuring in the financial sector. Commercial banks have engaged in mergers a nd acquisitions, which has lead to the vanishing of more small credit institutions and appearance of complex financial conglomerates. Merger has undefendable previously isolated market places due to the lifting of geographical barriers hence reducing market segmentation. SMEs can be funded in two major ways inhering finance, concerned with getting money from face-to-face savings and from friends and relatives and external finance when the company grows and begins to expand. External financing is sourced from most financial institutions. There are two notable variants of external finance and these include debt financing and equity financing.Dept financing engages interest bearing instruments and are secured by asset verificatory and have term structured into it. This can be long termed or short termed. Examples of dept finance include loans, overdrafts, leasing and hire purchase arrangement and letter of credit. Equity financing allows the banker or investor the right of owners hip in the business. This as such(prenominal) may not require confirmative since the equity histrion will be part of the trouble of the business. ( Ogujiuba et all, 2004).We have seen the two approaches to submerge financial gap to SMEs. This approach has been further encouraged by two approaches. The first has been to broaden the collateral establish approach by encouraging bank lenders to finance SMEs with insufficient collateral. The second approach is to broaden the viability based approach since its concerned with the business itself and the aim has been to provide an increase drop dead in the general business, create a favourable environment and reduce peril. Viability based financing is especially associated with venture capital. This much entails a fine review and assistance with the business plan. A common aim or feature of the viability based approach is the provision of appropriate finance that is clean-cut to the cash flows of the SME. (Berger and Udell, 2005). Levy in 1993 reported that smaller enterprises have limit access to financial resources compare to larger organisations and he discussed the impact of his findings in economic growth.SMEs funding is supplied through the business financial market in the followingRetained ProfitThe Financial MarketThe use of banks.Government monetary policy4.5.1 Retained ProfitIn the course of course a business profits are made, when these profits are unplowed for future use to expand the business it is referred to as retained profit. This profit is there for use to help buy new machinery, vehicle, computer etc to correct the business and keeps it going. On the other hand the retain earnings can be used to expand the business by diversification. And it can also be kept for a rainy day.4.5.2 Financial MarketThe financial Market is a system that allows buying and make doing of financial securities and instruments. It is a centre where bonds and stock are traded, and allows people to buy or sell comm odities such as precious metals or agricultural good and other items of value at low transaction costs. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. In finance, financial markets facilitateThe raising of capital (in the capital markets)The transfer of risk (in the derivatives markets) global trade (in the currency markets)The financial market matches those who requirement to buy with those who want to see. Money market is one component of the financial market for asset involved in short term borrowing and lending unremarkably not exceeding one year. Trades in the money market involve T-bills, Commercial Papers (CP), bankers acceptance, Certificate of Deposits (CD) and both mortgage and asset sanction securities.4.5.3 BanksThe systems of banking in Africa are not properly adapted to lending to SMEs with some exceptions. This makes financing a more hard approach, hence making financing more flexible wo uld be a welcoming help (Bercy, 2005). either over the world the importance of promoting SMEs as a channel of growth and industrialization has been recognized. One of the vital roles of the banks is to devise a way to creating loan package and providing loans to small business that are otherwise not properly informed. (Berger, Klapper and Udell 2001). Conversely credit provision to small borrowers may be affected by a number of factors. Bank consolidation is one of the major factor affecting credit to small borrowers. The creation of mega bank suggests that large institution devote less of their asset proportion to lending to small business than smaller less complex institution. ( Emeni and Okafor, 2008) .These mega banks may be oriented towards transaction lending and providing capital markets services to large corporate clients. These institutions oft have their headquarters in business metropolis far away city centre that are a great distant from small borrower. Ogujiuba, Ohuch e and Adenuga, 2004)Banks in Nigeria although reported to being highly liquid and wanting to make loans available, they are usually put off by the uncertain disposition of SMEs. And since these banks do not provide the necessary funds required to runner a business, run the business and keeps it going, SMEs tend to rely on private assets for their working capital. This reliance on personal funds makes it very difficult to operate at optimum capacity, increase output and make sales. It also limits investment to develop, expand operation or even improve technology. This risk on bank not lending is attributed to lack of information on SMEs true situation in terms of finance and their performance ability to repay loans both principal and interest. And since the judicial system is not reliable, banks cannot hold contracts, hence making business environment generally risk accustomed and uncertain.(Ogujiuba, Ohuche and Adenuga, 2004)The table below show the proportion of loans given to SMEs by commercial banks. It gives a brief summary for six years from 2000- 2005 of the ratio of loans given to SMEs to the total credit available to commercial banks in Nigeria. From this table it can be deduce that percentage of loans made available to SMEs is very low and over the years it reduces even more to a more midget proportion. disconcert 4.1 symmetry of lends to SMEs to Commercial Banks Total course creditYEARLoan to SMEs (=N=M)Commercial Bank Total credence (=N=M)Ratio of Loan to Total Credit (%)200044,542.3508,302.29.7200152,428.4796,164.86.6200282,368.4954,628.88.6200390,176.51,210,033.17.5200454,981.21,519,242.73.6200550,672.61,899,346.42.7Source Central Bank of Nigeria statistical Bulletin Volume 16, 20054.5.4 Government policy (New Monetary Policy)The Nigeria Government in a bid to encourage small and medium scale enterprises has introduced several monetary policies. This has been mentioned in the previous chapters. The success of this strategy is based on it s proper implementation, co-ordination and supervision. These monetary policies includes The Small and Medium Enterprise Equity enthronization Scheme (SMEEIS), the Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) and the littlefinance Banks and Micro Credit Fund.4.5.4.1 Small and Medium Enterprises Equity Investment Scheme (SMEEIS)The Small and Medium Enterprises Equity Investment Scheme is a voluntary green light of the Bankers Committee in agreement with CBN, approved IN 1999. It was aimed at mitigating the risk-averse behavior of banks. The scheme was a responds by the federal government to the promotion of small and medium enterprises as a tool of industrialization, poverty alleviation and job creation or employments. This scheme required all commercial banks in Nigeria to set aside annually ten percent of their profit before tax (PBT) for promotion of small and medium enterprises and equity investments. This was the banks own contribution in responds to the fed eral governments efforts in economic growth. This takes care of the burden of all financial charges such interest under normal bank lending. In addition the scheme provides financial, advisory, technical and managerial support from the banking industry. ( Soludo, 2005). Activities approved for funding under the scheme includes manufacturing, construction, Information technology, education, tourism and services.The funds set aside by banks under the scheme change magnitude from N13.1 trillion in 2002 to N41.4 one million million in 2005. However, actual investments grew much slower from N2.2 billion in 2002 to N12.1 billion in 2005, representing only 29.1 per cent of the funds set aside. This further increased to N21billion in 2007 representing a further 21.5 per cent of funds set aside. (CBN statistical Bulletin, 2008)Figure 4.2 Banks Investment in SMEs through SMEEISSource CBN Statistical Bulletin, 2008Table 4.1 SME Reserve for Small and Medium Scale Industry of Top 5 Commercial Banks in Nigeria. (NM)ZenithFirst BankUBAUnion Bank world-wide20093,729,20411,193,00020083,729,2049,439,0002,635,0003,868,49820073,729,2047,916,0002,635,0005,537,0003,868,49820063,729,2046,998,0002,635,0004,931,0002,387,12220052,580,3241,379,0002,050,0004,429,0001,527,53220041,224,2421,379,0001,426,0003,491,000856,93520031,224,2421,379,000865,0002,280,000856,935Source Annual Reports of the Various BanksVarious studies have pointed out that brusk data on SMEs business activities and the vague scope of economic activities are some of the major issues constraining disbursement of funds under the scheme. ii very important policy actions were than taken by the Bankers Committee in 2005, to restructure the scheme so it could take proper effect. The first policy action was to implement the funding of all business activities with the exception of general commerce and financial services under this scheme. It was restructured to contain and provide for non-industrial enterprises so that ot her sectors of the economy such as agriculture, housing, transport and utilities can be funded under this scheme. The name of the scheme was, therefore, changed to Small and Medium Enterprises Equity Investment Scheme (SMEEIS), to reflect the expanded focus. The Bankers Committee also embarked setting the guidelines for the management of withdrawn un-invested funds during the year. The second policy action was to set the limit of banks equity investment in a single enterprise. This was increased from N200 million to N500 million, thus accommodating the real medium sized industries that constitute the deficient middle in Nigerias industrial structure.These two policies had an instantaneous impact on the scheme as investment rose by 29.4 per cent in 2005 to N12.1 billion. The cumulative amount set aside by the banks at end- declination 2005 stood at N41.4 billion, compared with N28.8 billion at the end of the preceding year 2004. The terminal benefit of this policy is expected to m anifest fully from 2006, following the success on bank consolidation exercise in 2005. (CBN Annual Report, 2005).4.5.4.2 Small and Medium Enterprises Credit Guarantee Scheme (SMECGS)CBN established the Small and Medium Enterprises Credit Guarantee Scheme (SMECGS).This scheme was set up in a bid to ease the rigid nature of the credit market in Nigeria, to also augment credit to the real sector and complement its 500 billion Naira Power/Manufacturing facility the Management of the Central Bank of Nigeria (CBN) approved the establishment of a N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS), to promoting access to credit to manufacturers and SMEs in Nigeria. It is funded one percent and managed by CBN. The aim ideas behind this scheme is to fast track the development of SMEs and the manufacturing sectors in Nigeria as a whole by providing guarantees, creating an atmosphere favourable for industrialization, increasing the accessibility of credit and generate e mployment. ( Soludo, 2006)4.5.4.3 Microfinance Banks and Micro Credit FundThe Microfinance Policy Regulatory and Supervisory framework was a major policy initiative of the Bank in 2005 after consolidation of banks. Microfinance Banks and Micro Credit Fund was a replacement to community banks with a deadline to microfinance bank latest December 2007. The policy, among others, addresses the problem of lack of access to credit by entrepreneurs who do not have access to regular banks strengthens the weak capacity of such entrepreneurs, and raises the capital base of microfinance institutions. The key elements of this framework was to set aside not less than one percent of the annual budget by state governments and local government for on lending through the microfinance banks, in addition to endorse and authorise the management of microfinance banks, establishment of the micro credit funds and introduce deposit insurance for micro finance banks to protect depositors funds.Problems asso ciated with Credit availability for SMEsAccording to Cork and Nisxon, (2000) poor management and accounting practices have hampered the ability of smaller enterprises to raise finance. Owning to the nature of small business and the personal lifestyle of individual owners, goes a long way to affect operations and sustainability of the business. As a consequence of the ownership structure, some of these businesses are risky and may not guarantee returns in the long run. However, there is reason to hope because according to Liedholm et al. (1994), a large number of small enterprises fail because of non-financial reasons. Remmers et al. (1974) reported the debt/total assets ratio to be independent of firm size while Peterson and Schulman (1987) reported that debt/total assets ratio to first rise and then fall with size of firm. Whatever sides you choose to take, the granting of loans to SMEs depends solely on the conclusiveness of the loan granting institution. And this choice is also depended on size of the balance weather sheet of the SMEs. The general problems associated with credit availability for SMEs everywhere is summarized below.Bad Credit accountingAn adverse borrowing history of SMEs particularly if it is involving a sister face will discourage the lender. The logical presumption is that if you do not have a good credit history then that is indicative of a personality pattern which means that in the future you will face the same problems as you are trying to clear you refinancing initiative. The bank is then well advised to stay away from you or at the very most offer you some very stringent terms for borrowing. brusk business plansMost SMEs applying for loans do not present convincing feasibility studies or attractive business plans. They are therefore regarded as hazardous ventures.Lack of CollateralThirdly, even those SMEs with business plans not backed by adequate collateral. The lack of adequate collateral would be unacceptable risk for the lender. As banks cannot afford to take any chances of non-repayment of loans, they insist on these collateral requirements being met. In as much as they have nix to fall back on should you default on your loan repayment obligations? Good financial management requires that they do not accept a refinancing initiative until they are sure that you are more than capable of cover the full loan if circumstances demand it. Collateral is the final fill-in to meet this criteria and if it is missing, then the decision is likely to be negative.The impact of regulatory and monetary factors on bank loanThe result is that monetary policy effects on bank lending depend on the capital adequacy of the banking sector lending by banks with low capital has a delayed and then amplified reaction to interest rate shocks, relative to well-capitalized banks. Other implications are that bank capital affects lending even when the regulatory coyness is not momentarily binding, and that shocks to bank profi ts, such as loan defaults, can have a persistent impact on lending.Financial crisis once again bank financial distresses may also be an important antigenic determinant of credit availability during periods of credit crunch and accompanying financial crises. However, there are very few small firms that will satisfy the hard-and-fast condition set by the traditional feasibility appraisal model, which is often designed for both small and big firms. While some aspects of the criteria of the feasibility model are met by some small firms, others are not met at all, therefore for banks to lend , they need to develop lending rules that nurse the peculiar characteristics both for the SMEs and their owners.Other reasonsIn addition, many SMEs do not hold deposit accounts in the formal banking sector, which the banks require from loan applicants. some other reason SMEs were not given any concessions in terms of loan conditions was that in Nigeria no law exists to protect bankers against def ault. Yet another reason banks resist loans to SMEs is the unwillingness of owner/managers to acquire formal training. Such training is useful in providing added expertise and competence in a chosen field of business and in improving chances of obtaining loans.( Mambula, 2002)THE END .