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1.1       Background to the Study

The importance of Small and Medium Enterprises (SMEs)  in the development of national economy of any nation can not be overemphasised.  This is because of the important and the crucial role they play in economic development and growth of the nation. It is because of this that most governments around the world including the Nigerian government place  more  attention on financing of small and medium enterprises, since they are major contributors to the economy of any nation. SMEs are drivers of the economy; therefore policy attention has to be given to them especially in developing economies because of their impact on many sectors of the economy. Their impact is felt greatly in the greater utilization of local raw materials, employment generation, encouragement of rural development, development of entrepreneurship, mobilization of local savings, linkages with bigger industries, provision of regional balance by spreading investments more evenly, provision of avenue for self employment and provision of opportunity for training managers and semi skilled workers.

In Nigeria, credit financing has been recognized as an essential tool for promoting small and Micro Enterprises (SMEs). Hence the need for recapitalization of commercial banks in Nigeria to make them stronger and equipt to extend loans for commercial activities became necessary. Bank recapitalization which was effective from 2006 is aimed at making Nigerian banks stronger and better in-order to finance all sectors of the economy including the major drivers of the economy-Small and Medium Scale Enterprises. About 70 percent of the population is engaged in the informal sector or in agricultural production. The Federal and State governments have recognized that for sustainable growth and development, the financial empowerment of the people is vital. If this growth strategy is adopted and the latent entrepreneurial capabilities of this large segment of the people is sufficiently stimulated and sustained, then positive multipliers will be felt throughout the economy. To give effect to these aspirations various policies have been instituted over time by the Federal Government to improve rural and urban enterprise production capabilities (Olaitan 2006)

The central Bank of Nigeria on July 6th 2004, announced the recapitalization of banking sector from N2 billion to N25 billion with effect from 1st January 2006. This was with a view to make the sector internationally competitive, sound and improves its ability to provide credit to all the productive sectors of the economy. In order to meet this obligation, banks embarked on strategies of merger and acquisition, floating of new shares and so on. At the end of the exercise, 25 new  banks  emerged .It was hoped that the consolidation will make the banks stronger to be able to provide large amount of funds to productive sectors of the economy which is largely dominated by Small and Medium Enterprises, thereby making them grow into large firms with enough resources to contribute to the economic development.

Also, in December 2005, the CBN introduced new Micro-finance Policy (MFP) which was designed to be public and private sector driven. The purpose of the policy was to strengthen community banks in order for them to be able to grant collateral and non collateral loans to finance microeconomic activities in the economy. The policy also aims at providing many people with access to financial services that otherwise will have no access to these services. Small and Medium Enterprises as said earlier have a crucial role to play in the development of an economy, they are training grounds for local entrepreneurs, they encourage local savings and ensure equitable distribution of wealth thereby reducing rural- urban migration of human resources. To this end, government should collaborate with private sector in order to create an enabling and conducive environment for SME’S towards the development of the economy. This can be felt on issues bothering bank recapitalisation and performance of SMEs in Nigeria.

1.2   Statement of the Problem

Banks are the link between those that have investible funds and those those that needs investible funds. They do this through savings mobilisation and lending same to individual investors as well as business organisations and hence increase economic growth and development. For banks to be able to perform these two functions effectively and efficiently they must have a very strong capital base. In Nigeria, weak capital structure, bank fraud, poor lending and credit management practices in the Nigerian banking sector forced the Central bank of Nigeria to revisit the capital structure of commercial banks in Nigeria. These among other things led the Central Bank of Nigeria (CBN) to give a directive that all banks should recapitalize from ₦2 billion to ₦25 billion with effect from 1st January 2006. This development led to various financial activities in the Nigerian financial sector with most banks initially opting for additional source of fund from the capital market via floating of shares. Most banks at this stage started inviting members of the public to acquire new shares in-order to meet up with the new minimum capital directed by the central bank of Nigeria. Notwithstanding, some banks were not capable of raising the new minimum capital by themselves, hence the need for mergers and consolidation of banks, reducing the total number of banks in Nigeria to twenty five (25).

However, the recapitalization of the banking sector presented new challenges to the banks which require more efforts to control cost and increase their efficiency; this in turn has effect the volume of credit facilities granted to small and medium scale enterprises in Nigeria. A study conducted by Iloh et al (2012) reveals the gap between deposit money bank deposits (DMBD) and commercial bank lending to SMEs from year 2000 upward (the year that saw the end of merchant banks). There is a wide margin between the two variables and while deposit money bank deposits rose very high, commercial bank lending to SMEs declined from 2004 to 2010. The gap between commercial bank deposits and its lending to SMEs reveals the shift in focus from lending to SMEs to lending to major investors (customers). One is made to ask, while the banking sector is said to drive any economy, has Nigerian commercial banks neglected SMEs, which is vital for the growth and development of the Nigerian economy? Notwithstanding, it is interesting to note that community/Micro finance bank (CMFB) lending to SMEs moved in the same trend with its bank deposit. This implies that as community/microfinance bank deposits increased, it’s lending to SMEs increased. Regardless of the direct impact of community/microfinance bank on SMEs, SMEs still cry for lack of funding and lending to SMEs in Nigeria is still poor. This is so because their capital, reserve and deposit are very small and insufficient to meet the needs of small and medium entrepreneurs. It  is in the light of the above that this study examined the impact  of bank recapitalization on the performance of small  and medium enterprises in Nigeria (SMES).

1.3       Objectives of the Study

The main objective of this study is to examine the impact of bank recapitalization on performance of small and medium scale enterprises in Nigeria. Other specific objectives of the study are to:

i.                     assess the accessibility of small and medium Enterprise Equity Investment Scheme (SMEEIS) funds to SMES.

ii.                  Determine whether bank recapitalization has led to increase in funds for financing SMEs.

1.4       Research Questions

For the purpose of achieving  the  above   objectives,  the following research questions were answered

i.                      What is the relationship between banks recapitalization and performance of small and medium scale enterprises (SMES) in Nigeria?

ii.                    How accessible is Enterprise Equity Investment Scheme Funds Small and Medium to SMEs?

iii.        Does bank recapitalization increase funding for SMEs?

1.5       Research Hypotheses

The following hypotheses were formulated in line with the objectives and tested in this study:

HO1: Bank recapitalisation did not lead to increase in funds for SME financing.

Ho2:  Bank recapitalisation funds are not easily assessable to SMEs

1.6       Siginificance of the Study

Robust economic growth cannot be achieved without putting in place well focused programmes to reduce poverty through empowering the people by increasing their access to factors of production, especially credit. The latent capacity of the poor entrepreneurs would be significantly enhanced through the provision of microfinance services to enable them engage in economic activities and be more self-reliant; increase employment opportunities, enhance household income, and create wealth.

However, the lack of required financial support from the microfinance banks to SMEs has become a major concern in Nigeria. Hence, this study  be relevant to policy makers in the areas of finding out the impact of bank recapitalisation on the  performance of SMEs in Nigeria. Also, this study may enhance further research in the subject area.

Finally, This study will be beneficial to small and medium scale entrepreneurs who are finding  it  very difficult  to raise fund to finance  their projects  and  the technical knowledge required to run a small and medium enterprises profitably

1.7       Scope of the Study

This study is restricted to Small and Medium Enterprises (SMES) operating in Jos Metropolis.

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