Commercial Bank – Role in Financing Small Scale Industries in Nigeria

Commercial Bank – Role in Financing Small Scale Industries in Nigeria

Industry development involves the development of a technical  arrangement that moves an economy from the traditional method of production to a more complete system of more manufacturing of a variety of goods and services involving technology  and management techniques.   Industrialization tends to  proper growth and quicken the achievement of structural transformation and diversification of economist it enables a country to utilized fully.  It factor endowment and depends less on the external sector or its  growth  and substance.  Through industrialization an  economy gains the versatility and resilience that  enables it  to raise  the standard of giving of its people  and cope better with internal  stress and strains.

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Small scale industry have been defined variously by different authors.  But Ndu Okoro (1989: 10), in his write up he accepted any business whose total Assets in capital equipment, plant and working capital are less than 4m and employing fewer than so  full time  workers as small scale business/industry, such an establishment must be wholly indigenously owned.  He further pointed out that there is no rigidity in the application of this definition since manufacturing units exceeds these units of investments and  employing as stated above.

Ihenefu (1988:18) consider business as small scale  because they fail  within the category of business with paid up capital of N750,000 according to federal  ministry of industries, except those industries owned by the government or shareholders which  some  cases  are very few.  As he put it, small firms ranges from sole trader small partnership to the  private  owned industrial company.

Akuazalu (1989: 19 -20) defined small scale industry as any manufacturing processing or service industry wish capital investment not exceeding  N50,000 in machinery and equipment alone.  He adopted this definition since it was relevant to the subject matter, although one could think of definitions using business Earn and size of lasow free .

Edmud Ezeigbo (1987) affined small scale industry as “that which operates under strict amount of capital” which it’s assets and liabilities cannot enable or help it in obtaining loan or assisting from any financial institution.  This may be due to its inability to mortgage its assets or having a reasonable assets that could qualified it for a loan within the laid down rules for loan granting.

In Nigeria, small scale industry could be defined by the Lagos state ministry of trade as a manufacturing industries  concerned with a total capital investment of N150,000 and paid employees up to ten persons.  The capital investment exclude land  and building, such an establishment must be wholly Nigerian.

Central bank of Nigeria  credit guidelines (1995) on it’s own defined small scale industry as any manufacturing or service enterprise whose annual business Eurover does not exceed N500,000.

From the above there is no universal standard action for small scale enterprises as those  vary from country to country, from organization to another, are based on the economic condition of a country.

Still small scale  industry was defined by the federal  ministry of industry at the 8th annual conference (1997) as any industry with a capital investment  above  N1m and employing between 1 – 10 workers and with a capital investment below N1m is regarded as COTTAGE OR MICRO Industry.  Those employing above 35 – 65 works with a capital investment up to N15m are regarded as medium while those employing above 65 workers and above N15m are considered as LARGE SCALE INDUSTRY.

Any other existing definition is subject to charge within the current economy of a country.  The present global devaluation tend of our currency had considerably reduced the purchasing power of the waira and in this  context, the cost of acquisition of equipment used in our country are high since they are mostly imported.  Also taking into account the variable land prices in different location of the countries definition of small scale industries can be confirmed to the value of the machinery and equipment only.


(A)    Nigerian Bank for Commerce and Industries (NBCI)

The  Nigerian Bank for commerce and industry was established in October, 1983 to finance the process of indigenization of the Nation’s economy with a capital of N50 million by the federal government and the central bank of Nigeria.  In 1972 the Nigerian Enterprises Promotion Decree (NEPD) was promulgated by the military regime in Nigeria in attempt to gain economic independence.  The decree was amended in 1973, 1976 and finally in 1977.  it classified all enterprises into three schedules; specified Nigerian Equity participation Rates (EPR) ranging from 100% for schedules I enterprises through 60% for schedules II to 4% for schedule III enterprises.  It also stipulated the appropriate equities of these enterprises were to be sold or transferred to Nigerian not later than December 31 1978 (or June 30th 1977 for some classes of  business.

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The banks first function in entrepreneurship development was by giving assistance to indigenous businessmen obtain funds in the form of loans and equity to acquire the ownership interest of aliens in business activities.  Potential entrepreneurs were able to obtain funds from the bank to buy up shares or buy the entire business activities schedule  I and II

Nigerian Bank for Commerce and Industry (NBCI) assists businessmen by providing consultancy services, in  identification of viasie projects.  Entrepreneurs who want to change into another line of business can be assisted by NBCI to identify projects that can be profitable and this usually minimizes the risk of business failure.

The bank also assists the entrepreneur in the preparation for well  researched and articulated feasibility reports.  After deciding on a particular business idea, the next thing is to begin to gather facts and figures to enables you take a decision as to which way to go.  This state of fact finding aimed at determining the business profit potentials and return on investment is called feasibility study.  It is therefore, necessary to carry  out a feasibility study before committing any money.  The study can be simple or detailed, depending on the size of the business, in either case, the objectives of the study are as follows:

(i)                To gather as mush information as possible about the business.

(ii)             To minimize the changes of embarking on an importable venture.\to reduce losses.

Furthermore, after the implementation of the enterprises promotion Decree, NBCI assisted entrepreneurs in the financing of the importation of machinery and equipment for business enterprises it was interested in the bank has also gone as far as opening letters of credit on behalf of  enterprises it supported and is being deeply involved in new project identification and financing for entrepreneurs.

(B)     The Nigerian Agricultural and Co-operative Bank (NACB)

The bank was established in 1973 by the federal government with an initial  capital of Niz million.  The bank was set up in order to improve the level and quality  of all aspects of Agricultural production, to enhance the availability of storage facilities and to promote the marketing of agricultural product    through liberal credit to farmers and agricultural related business establishment.

However, the bank has there main functions are as follows:-

i)                   They grant loans for agricultural production

ii)                They  grant direct loans to individual farm co-operative  societies.

iii)              They satisfied  schemes for which the loans are requested.

With  government programmes emphasizing more local sourcing of raw materials, some major private abolishment’s have gone into agricultural production.  Some small and  medium scale farmers, brewery industries have gone into mechanized farming for the production of sorghum, wheat and other product to provide the necessary raw material for manufacturing.  For example, the Nigeria Breweries Limited Guinness Nigeria Limited have gone  into  mechanized farming for the production of wheat, sorghum and other substitutes to provide the necessary malt base for their manufacturing.   All such agricultural investments by these private secotr establishments which have 60%  or more indigenous ownership are qualified for loan facilities from NACB, it has offered loan facilities to some of from that have approached it (Nwabuzor 1990.) jointly by the federal government and the central Bank of Nigeria through the reconstitution of the investment corporation of Nigeria which had been in operation since 1959.  the main functions of the bank are as follows:-

i)                   The bank provides medium and long term find for both public and private sector establishment, a functions which is not satisfactorily performed by the commercial and merchant banks.

ii)                Identification of investment bottlenecks in the economy, therefore helping to determine investment priorities for both the government and private sector entrepreneurs.

iii)              Foster the development of the capital market in Nigeria by encouraging prospective borrowers to list their shares in the  Lagos stock exchange.

From the above, the bank has helped a lot in the  development entrepreneurship in the country by assisting in setting  up media size private enterprises and extending its funding and advisory service to entrepreneurs.  In present and advisory service to entrepreneurs.  In present times, NIDB has started broaden its  areas of operation, as it has braches out into opening of letters of credit, acceptance of deposit form industrial customers.  It also trade in the foreign exchange market.

However, there are a lot of problems encounter by  this bank since its inception is the inherent weakness of the Nigerian entrepreneur who are unreliable and reluctant to co-operate with financing agencies, especially in matters relating to business intelligence and financial management.  Many entrepreneurs divert funds  approved for a specific project to other uneconomic ventures like buying new cars, taking titles, marrying new wives etc.  This creates a high rate of loan losses.  The situation has  greatly improved with the constant check and timely intervention of the banks inspection departments.

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D)      The People’s bank of Nigeria (PBN)

The federal government in its effort to help the very small entrepreneurs, set up the people’s Bank of Nigeria.  The bank was established on 3rd October, 1989.  the people’s Bank is a new phenomenon in banking it is an innovative  credit programme for poor people have due to non-availability of collaterals do not have access to the facilities available at  commercial and merchant banks.

However, the objectives of the banks are as follows:-

i)                   The first objective is the extension of credit facilities to the less privileged members of the society who cannot  normally benefit from the service of the conventional banks.

ii)                Complement government efforts in improving the productive base of the economy.

iii)              Provision of opportunities for self employment for the vast utilized and under-utilized manpower of the economy.

The people’s bank of Nigeria is one of factorial institutions responsible for the disbursement of family Economic  Advancement programme (FEAP) loan.  FEAP was established in 1997 to carry out the activities aimed at reforming the Nigerian economy.  The establishment of FEAP marked an important  milestone in the efforts of the government at alleviating and  catering for the needs of the low income groups in our society.  it was conceived, prepared and  packaged as a grass root economic programme particularly to meet the needs of the under privileged  citizens within the  society, through the provision of micro credit and training needs in a sustainable manner as a tool for self empowerment.


Commercial banking institutions in Nigeria can be classified into two: the purely indigenous bank owned 100% by Nigerian (government and individuals) and the mixed banks with a majority indigenous shareholding at least 60% equity and minority foreign interest as Nigerian law does not allow the establishment of foreign banks with a majority foreign interest (Femi 1986)

(1)             Extension of credit facilities:  Nigerian commercial banks in other free enterprises economies.  Their primary function is the extension of credit to worthy borrowers.  They are vehicles for implementing government National development plan.  In making credit facilities  available to  industrialists or entrepreneurs they are cending a great social service.  The commercial banks  make funds available for general development in all aspects of the economy, for instance, in  industries, commerce, mines and agriculture etc.  through their  actions, production is increased there is increased, there is extension of capital investments and a higher standard  of living is realized.

Banks make it possible for industries  to produce a large quantity of goods which may remain in stock as inventory before eventually being sold or reprocessed into another forms.

          However, a good examples is the good industry where the quantity produced may be far in excess of what can be consumed immediately.  By providing credit facilities to canners, for instance, they will be in a  position to  purchase cans and score the food that may at a later time be sold to retailers and ultimately be  consumers. During this interval of time from producer to canner, to wholesaler, to retailer and finally to consumer-bank loans are made possible the economic handling of the food crop  (Read et all  1984 in Femi “86)

Types of credit Facilities

          Commercial Banks are  more interested in providing short term loan facilities  to their customers.  These can come in the form of:

i)                   Loan account:-  The loan is mainly used by entrepreneurs or other individuals to supplement what they already have.  The amount granted is generally small and it is repayable in the shortest possible time.

ii)                Overdraft:-  Commercial banks also lend funds to their customers on overdraft, and funds  advanced on this basis are in theory is repayable on demand, while interest is payable on the outstanding balance on a daily basis.  It is generally granted to business customers – large, medium and small –scale enterprises.  An overdraft is granted until can be renewed as longs as the bank considers that the customer is still |good risk”.

2.       Business  Advisory service:-

The  main  aim of this advisory services is to assist small business customers to develop  their business in such a way that they can attract bank finance.  Entrepreneurs are  taught how to introduce simple record keeping and accounting  in their operations.  This is because most business concerns do not keep accurate recoding of their business and this can lead  to business failure.  Banks providing this services have reported significant success.

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However, commercial banks also help entrepreneurs in National and  international business transaction.  For instance giving letters of credit, bill of exchange etc to facilitate business transactions.

Because, government has substantial ownship interest in the commercial banks in Nigeria, they have served as an indirect means by which the government has sought to  fund the development of business enterprises.  In 1980, the central bank  of Nigeria (CBN) credit policy guideline required the commercial banks to  allocate a minimum of 16% o their total  loans, and a chances to small scale enterprise and since then, the commercial banks have increased their loan portfolio to the private sector enterprises because of government policy on the development of the nations economy through the private sector.


          In realization of the importance of promoting small and medium enterprises (SMES), the federal government has continued to play pioneering and active role.  The first serious policy to promote the development of SEMs came in 1970.  To this effect, the small scale industries division of the  federal ministry of industries was established to initiate and implement policy on the promotion of small scale industries in Nigeria and in the same year the industrial Development centers (IDCs) were established to provide  technical support and manpower  training facilities for industries.

Its policy objectives in the context have been  summarized as follows:-

i)                   Industrial development and National integration through industrial dispersal.

ii)                Provision of  greater employment opportunities

iii)              Increase production of manufactured exports

iv)              The development of indigenous technology

v)                Increasing local raw  material output (use of local raw material to promote grate linkages and background integration to  raise the general level of economic activity).

According, the government has employed a combination of monetary and fiscal measures as well as industrial incentive to enhance the achievement of the desired goals.  It has enunciated policies through National development plans, annual budgets, and it’s agencies to provide financial and technical assistance to SEMS.

However, government introduce monetary and fiscal policies in-respect of small and medium scale enterprises.  Monetary policy may be described as measures which deal with the discretionary control of money supply by the monetary authority with a view to influence the cost and availability of credit (Falegan in Femi 1986).

i)                   Development of the money capital market, and financial intermediaries.  In order to enhance performance of the  financial system and effectiveness of  monetary  policy, the monetary authorities  paid great attention to the development of the money and capital markets and also establishment of financial institution to provide  finance to small-scale industries.  In addition, various financial  intermediaries were encouraged on established , by Nigeria Industrial development Bank (NIDB) and Nigeria  Bank for  commerce and industry (NBCI).\

2.       Direct control of credit:  Prior to introduction of the Structural Adjustment Programme (SAP) and deregulation of the economy, the interest rates in Nigeria were direct managed by the monetary authorities.  The practice in Nigeria makes it possible for the government to set the deposit and lending rates of the financial intermediaries.  Also the practice made possible for the government to set rate for cending to specified sectors of the economy with a view to encouraging lending of these sectors.  Thus, lending rates to small and medium scale enterprises like agriculture, residential and building  construction subsectors were lower than the rates for other borrowers.


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