Full Project on Effect of Credit Availability on SMEs

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CHAPTER ONE

INTRODUCTION

Background to the Study

Small and Medium Scale Enterprises (SMEs) are different kind of firms that could be found in different business activities across the country. They include artisans producing local agricultural implements, the coffee shop owners, tailor shop owners, iron fabricators, road side mechanics, small transport firm, the internet café, small engineering or software firm and a medium-sized automotive parts manufacturer. Some of the SMEs produce for domestic market or for foreign markets. They can be found in rural, urban, regional, national or international level and the owners may be poor or rich (Ikpor, Rita & Obaji, 2017).

Small and medium scale enterprises (SMEs) play an important role in the development process of every economy, especially the developing nations. It is the life and bedrock of every economy, as it enhance regional economic balance through industrial dispersal and generally promote effective resource utilisation considered critical to engineering economic development and growth (Ogujiuba, Ohuche & Adenuga, 2004). It is a major source of employment generation (Organization for Economic Cooperation and Development (OECD), 2004). According to Savlovschi and Robu (2011), two thirds of the newly created jobs are owned to the small and medium sector. Also, it is the bed-seed for indigenous entrepreneurship and that generate all the small investments which otherwise would not have taken place (Aryeetey & Ahene, 2004).

The role of finance is very important in the development of SMEs all over the world (Iloh & Chioke, 2015). These can come from the banks, the government, family and friends, cooperative societies and so on. Essang and Olajide (1974), identified bank as a monetary institution owned by either government or private businessmen for the purpose of profit making. In pursuit of this profit, the commercial banks perform a number of functions. One of these functions is the acceptance of deposits from the public. These deposits are in turn given as credit to Small and Medium Scale Enterprises among other, which led to more production and provision of employment opportunities in the economy.

In order to survive and widen their scope, SMEs engage in sourcing of finance for expansion, as well as providing certain infrastructures for their growth when there is none in existence. Accordingly, they are generally considered as riskier than large firms because they have lower survival rate, larger variance of profitability and growth (OECD, 1998). As a result, they often suffer from credit rationing or higher loan interest rate. The development of the financial system has also been used as an important tool to determine the vulnerability of SMEs to be credit constraint (Laeven, 2003). Better protection of property rights increases external financing of small firms significantly more than it does for large firms, particularly due to the differential impact it has on bank and supplier finance (Beck & Robert, 2014).

In addition, the critical importance of adequate finance to SMEs is derived from the fact that finance optioning and availability is what is required to enable the other factor inputs to function.

Therefore, the take-off and efficient performance of any industrial enterprise will require the provision of funds for its capitalisation, working capital and rehabilitation needs as well as for the creation of new investments (Butter & Litter, 1945).

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