EFFECT OF BANK CREDIT ON SMALL SCALE ENTREPRENEURIAL

DEVELOPMENT IN NIGERIA

BY

AKANWA OGECHUKWU OLUFUNKE

MATRIC NO:

20152390

BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF

BANKING AND FINANCE, COLLEGE OF MANAGEMENT SCIENCE, FEDERAL
UNIVERSITY OF AGRICULTURE, ABEOKUTA

IN PARTIAL FULFILLMENT OF THE REQUIRMENT OF THE AWARD OF

BACHELOR OF SCIENCE (B.SC Hons) DEGREE IN BANKING AND FINANCE

SUPERVISOR:

DR. AJAYI

FEBUARY 2020
 DECLARATION
I, Akanwa Ogechukwu Olufunke with the Matric Number 20152390, do hereby declare that
this research study titled “Effect of Bank Credit on Small Scale Entrepreneurial Development in
Nigeria” has been written by me and it is my original work which has not been presented for an
award of a degree in any university or institution of learning.

----------------------------------------- ------------------------------------
Akanwa Ogechukwu Olufunke Date
 CERTIFICATION
This is to certify that this study was carried out under my supervision by Akanwa Ogechukwu
Olufunke and has been found to be adequate in scope and quality.

----------------------------------- -------------------------------
Dr. Ajayi Date
Project Supervisor

----------------------------------- -------------------------------
Dr. Oyetayo Date
(Head of Department)

----------------------------------- -------------------------------
External Examiner Date
 DEDICATION
This research study is dedicated to Almighty God for giving me the opportunity to start this
journey and finish strongly and also to attain this status.

I also like to dedicate this study to myself for not giving up but pushing through.
 ACKNOWLEDGEMENT
I would like to express my sincere gratitude to God, the author and the finisher of my faith and
whom by his mercies has kept me to this moment.

My deepest appreciation goes to my supervisor Dr. J.A Ajayi for providing his invaluable
guidance, comments and suggestions throughout the course of this project.

My undiluted appreciation goes to my pillars, my mum and my dad; Pastor Azu, Akanwa and
Deaconess Gbemisola, Akanwa for their love, care, guidance, support both financially and
morally before and during my course of study, may you both live long to eat the fruit of your
labour.

Furthermore, I would also like to thank my siblings Miss Ugonma, Miss Chizorom and Mr
Tochukwu for their prayers and their priceless advices which helped immensely, thanks for
always and may God grant every of their heart desires.

I would also like to appreciate all my lecturers in the College of Management Sciences,
especially in the Department of Banking and Finance: The Head of Department; Dr. J.O
Oyetayo, Dr. S Owoeye, Dr. Dapo Fapetu and Dr. O.A Oshadare for their encouragement and
being a model for protégé of emerging financial analyst like us, may God continue to bless you
and increase your strength in all ramifications.

I would also like to appreciate my amazing family here in FUNNAB, those that were with me
through hard times of this academic journey and this research work; Emmanuel Ademola,
Chisom Nwachukwu, Sarah Kehinde, Zainab Azeez, Damilola Vaughan, Juwon Okanlawan,
Heritage Adisa, Joshua Ayomide Oyadokun, Afolayemi Banjo, Adebowale Odu, Olufolajimi
Ijimakinde, Jide Agida to mention a few.

Also, special thanks goes to Bada Ibrahim, Rotimi (ROTOR), Razaq and Chinonso Okorafor for
their great support, May God continue to support you in your time of need and may you never
lack anything good in Jesus name.

I would also not forget to appreciate Pastor and Pastor (Mrs) Glenn for their love and wonderful
support through my academic journey in FUNAAB.
 TABLE OF CONTENTS

DECLARATION ............................................................................................................................................... 2
CERTIFICATION .............................................................................................................................................. 3
DEDICATION .................................................................................................................................................. 4
ACKNOWLEDGEMENT ................................................................................................................................... 5
TABLE OF CONTENTS..................................................................................................................................... 6
CHAPTER ONE ............................................................................................................................................. 10
INTRODUCTION ........................................................................................................................................... 10
1.1 BACKGROUND TO THE STUDY..................................................................................................... 10
1.2 STATEMENT OF THE PROBLEM ................................................................................................... 12
1.3 RESEARCH QUESTION ................................................................................................................. 13
1.4 OBJECTIVES OF THE STUDY ......................................................................................................... 13
1.5 RESEARCH HYPOTHESES.............................................................................................................. 14
1.6 SCOPE OF THE STUDY .................................................................................................................. 14
1.7 SIGNIFICANCE OF THE STUDY ..................................................................................................... 14
1.8 PLAN/ORGANIZATION OF THE STUDY......................................................................................... 15
CHAPTER TWO ............................................................................................................................................ 17
LITERATURE REVIEW ................................................................................................................................... 17
2.0 INTRODUCTION ........................................................................................................................... 17
2.1 CONCEPTUAL REVIEW ................................................................................................................. 17
2.1.1 Concept of Bank .................................................................................................................. 17
2.1.2 Concept of Bank Credit ....................................................................................................... 19
2.1.3 Determinant of Bank Credit ................................................................................................ 19
2.1.4 Classifications of Bank Credit .............................................................................................. 21
2.1.5 Types of Bank Credit ........................................................................................................... 22
2.1.6 Conditions of Granting Bank Credit .................................................................................... 23
2.1.7 Overview of Small Medium Enterprises in Nigeria ............................................................. 25
2.1.8 Bank credit and SMEs development in Nigeria ................................................................... 26
2.1.10 Bank Credit and SMEs performance in Nigeria ................................................................... 28
2.2 THEORETICAL REVIEW................................................................................................................. 29
 2.3 EMPIRICAL REVIEW ..................................................................................................................... 31
CHAPTER THREE .......................................................................................................................................... 39
3.0 METHODOLOGY .......................................................................................................................... 39
3.1 RESEARCH DESIGN ...................................................................................................................... 39
3.2 POPULATION/SAMPLE SIZE OF THE STUDY ................................................................................ 39
3.3 SOURCES AND INSTRUMENTS OF DATA COLLECTION ................................................................ 39
3.4 DATA DESCRIPTION AND MODEL SPECIFICATION ...................................................................... 39
3.5 METHOD OF DATA ANALYSIS ...................................................................................................... 40
3.6 APRIORI EXPECTATION ................................................................................................................ 40
CHAPTER FOUR ........................................................................................................................................... 41
4.0 DATA ANALYSIS AND FINDINGS .................................................................................................. 41
4.1 INTRODUCTION ........................................................................................................................... 41
4.2 DATA PRESENTATION .................................................................................................................. 41
4.2.1 DESCRIPTIVE STATISTICS ..................................................................................................... 41
4.2.2 CORRELATION MATRIX........................................................................................................ 42
4.2.3 GRAPHICAL ANALYSIS.......................................................................................................... 43
4.2.4 FORMAL PRE-TESTS ............................................................................................................. 44
4.2.5: OPTIMUM LAG LENGTH ............................................................................................................ 45
4.2.6 OPTIMUM LAG LENGTH FOR THE INDEPENDENT VARIABLES ............................................ 46
4.2.7 CO-INTEGRATION TEST ....................................................................................................... 47
4.3 DISCUSSION OF RESULT .............................................................................................................. 48
4.3.1 THE SHORT-RUN ARDL MODEL RESULT INTERPRETATION ................................................. 48
4.4 POST ESTIMATION TEST RESULT ................................................................................................. 49
4.5 TESTS OF HYPOTHESIS................................................................................................................. 50
4.6 FINDINGS AND IMPLICATION ...................................................................................................... 51
CHAPTER FIVE ............................................................................................................................................. 52
5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATION ............................................................... 52
5.1 SUMMARY ................................................................................................................................... 52
5.2 CONCLUSION ............................................................................................................................... 53
5.3 RECOMMENDATION ................................................................................................................... 53
REFERENCES ................................................................................................................................................ 55
LIST OF TABLES

Table 4.2: Descriptive Statistics of Data Series

Table 4.2.2: Correlation Matrix

Figure 4.2.3: Graphical Analysis

Table 4.2.4: Unit Root Test

Table 4.2.5: Lag length structure for the Dependent variable (LSME_G)

Table 4.2.6: Lag Length Structure for the Independent variables

Table 4.2.7: Bound Co-Integration Test Result

Table 4.3: ARDL Model (3, 4, 4, 4)

Table 4.4 Diagnostic Test Results

 ABSTRACT

This study examines the effect of bank credit on small scale entrepreneurial development in
Nigeria. The data used covers the period of 1992 to 2018 and it was sourced from the Central
Bank of Nigeria Statistical Bulletin (2018) and World Development Indicator (WDI).
Descriptive statistics, Correlation Matrix, Formal Pre-test, Graphical Analysis, Optimum Lag-
length, Co-integration test were adopted for data analysis.

The result of the above test shows the effect of Commercial Banks loan on Small and Medium
Scale Enterprises growth in Nigeria. Commercial Bank Credit to SMEs (BCSME), Bank Lending
Rate (BLR) and Broad Money Supply (MS) are proxies for Commercial Banks credit measures
while Wholesale and Retail contribution to GDP is used as a proxy for Small and Medium Scale
Enterprise Growth (SME_G) as in Nigeria.

The result shows that in the short run, a period time lag of small and medium scale enterprise
growth (SMEL_G (-1)) and commercial bank loan to SMEs (BCSME) appears to have a positive
and significant relationship with SMEL_G. On the other hand, broad money supply and bank
lending rate appears not to have a significant effect on SME_G.

The final result shows that at 1% level of significance the F-statistics confirm the overall level of
significance of the model while the result of the adjusted R2 shows that 96.59% of the total
variation in SME_G is explainable by the regressors used in the model.

Therefore, monetary authorities should make flexible policies that will encourage the commercial
banks to increase their credit to Small and Medium Scale Enterprises by giving a higher credit rate
so as to boost their level of productivity which will also have a positive multiplier effect on the
overall economic output level. The significant positive effect of a period lag of SMEs (SME_G(-
1)) on the its current level of growth implies that the current level of SME_G will have a direct
multiplier effect on its future growth level. Also, Government should also create an enabling
environment for SME development in terms of clear tenure rules, simple business registration and
export procedures, and accessible tax and financial incentive schemes in order to enhance their
potentials in promoting economic growth in Nigeria.
 CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Small and Medium Scale Enterprises (SMEs) have been widely recognized by various
governments of the world and among development economists as the main drive of economic
growth and a crucial factor in promoting private sector development and partnership in a country
(Dada, 2014).
According to the United Nations Industrial Development Organization (UNIDO) report of 2012,
SMEs have a significant role to play in economic development. They formed the backbone of the
private sector; they make up over 90 per cent of entrepreneurs of the world and account for 50 to
60 per cent of employment generation. They also play an important role in poverty alleviation.
In the words of Fashola (2013) Small Medium Scale Enterprise (SMEs) sector in any nation is the
main driving force behind job creation, export earnings, poverty reduction, wealth creation,
income redistribution and reduction in income inequality.” SMEs contribute to a more efficient
allocation of resources. They tend to adopt labour intensive method of production and support the
development and diffusion of entrepreneurship spirit and skills and helps in reducing economic
disparity between rural and urban centres and at the same time reducing the level of
unemployment.
Banks are a vital source of credit to firms but more especially to SMEs that do not have access to
capital markets in order to raise funds. Commercial banks close the funding gap that informal or
internal sources cannot fill. Traditional theory for a well-functioning market would suggest that a
firm’s performance and the expected future cash flows that had been adjusted for risks and
transaction cost would be factors that should affect credit decisions of commercial banks (Ghulam
and Iyofor, 2017).
However, in an attempt of the government to increase Nigeria production base, this has always
brought about different scheme which aimed towards increase productivity within the country and
as well increase employment opportunities in the country at large. Hence, the need for major
diversification and proper channelling of funds to various sectors that will spur the desired
economic growth and development in the country (Ayuba and Zubairu, 2015).
Since the adoption of Structural Adjustment Programme (SAP) in Nigeria in 1986, there has been
a paradigm shift from the ostentatious, capital intensive, large scale industrial project based on the
philosophy of import substitution and export promotion to small scale enterprises (SME’s) with
immense potentials for developing domestic linkages for rapid and sustainable economic growth.
Apart from their potentials for ensuring a self-reliant industrialization, in terms of ability to rely
largely on local raw materials, SME’s are also in a better position to boost the use of domestic raw
materials as input, this has helped in creating so many job opportunities; guarantees even
distribution of infrastructural development in both the urban and rural areas in the country and
facilitate the growth of non-oil exports (Imoughele, Lawrence & Ismaila, 2012).
Finance has been identified as one of the major factors militating against the development of small
and medium scale enterprises in Nigeria. It was in recognition of this difficulty in credit availability
for the purpose of investment that the Nigerian government singled out small and medium scale
enterprises as key area of intervention. This was premised on the government desire of giving
support to small and medium scale enterprises in the country as a measure of meeting up with its
commitment to the development plan and the indigenization policy. The intention was that it would
be a reaction against the dominance of the economy by the international capitalist entrepreneur
and also on the account that revitalizing small and medium scale enterprises would enhance the
capacity of the indigenous capitalist class as a potential player in economic growth and national
development. While some governments had formulated policies aimed at facilitating and
empowering the growth and development of the SMEs, others have focused on assisting the SMEs
to grow through soft loans and other fiscal incentives.
Terms and conditions for accessing funds of this nature are spelt out against each credit type. A
large portion of bank loans to SMEs will ordinarily be short-term instead of long-term; this is due
to mismatch between tenor of bank deposits and loans Bing sought ((Ubesie, Onuaguluchi and
Mbah, 2017).
Nwosa and Oseni (2013) investigated the determinants of commercial banks’ lending behaviour
in Nigeria their study did not pay attention to the impact of banking sector credit on small and
medium enterprises in Nigeria which this study is designed to accomplish. Therefore, this study
which focuses only on SME’s sector and formal channel of financing attempts to look more
critically into this discourse, whilst taking into cognisance more variables that could impact on
lending and add to existing body of knowledge.
(Ubesie, et al 2017) opined that entrepreneurship which is noticeable in the form of Small and
Medium Scale Enterprises (SMEs) can meaningfully contribute to the achievement of nation’s
economic development objectives which include; employment generation, output expansion,
location of industries among regions of a country, income redistribution, promotion of indigenous
entrepreneurship and technology, as well as production of intermediate goods to strengthen, inter
and intra industrial linkages. These among others, explain the increased interest, which many
countries have shown in the promotion of entrepreneurship (Small and Medium Scale Enterprises)
since the 1970s. Governments have therefore designed programmes of assistance to enhance the
achievement of these objectives. These are usually in the areas of finance, extension and advisory
services, training and the provision of infrastructural facilities. Financing programmes have
attracted more attention than others, because every enterprise requires funds for its capitalization,
working capital and rehabilitation needs, as well as the creation of new investments.
The enormous interest in SMEs and entrepreneurship probably owes more to an intensified
awareness among policy makers and international agencies about the problems of unemployment
and poverty, than any change of heart among economists or specialists in industrial development.
In many developing countries, the Small and Medium Scale Enterprises (SMEs) constitute the
bulk of the industrial base and contribute significantly to their exports as well as to their Gross
Domestic Product (GDP) and Gross National Product (GNP).
Despite Small Medium Scale Enterprises (SMEs) well recognised role in economic development
and employment generation, studies on SMEs finance availability in developing countries
generally and African countries in particular have been less frequent. It is within the authors’
defined knowledge that to date, an empirical study that examines SMEs characteristics and how it
affects credit decisions of banks has not been undertaken in Nigeria (Ghulam and Iyofor, 2017).

1.2 STATEMENT OF THE PROBLEM

Joseph Schumpeter (1934) in one of his scholarly works on economic growth and development,
opined that for any economy to experience real growth and development, such economy must have
a functioning and effective financial system that provide financial services through an adequate
financial intermediation which will channel funds from the surplus unit to the deficit unit which
will further use the fund in creating value through investment.
However, it has been noted that financing is a major challenge confronting the growth of the small
and medium scale enterprises in Nigeria holding to the fact that most of the financial institutions
(bank) are not willing to lend to the small industries due to their low experience in risk handling
and management which can result to loan default (Cressy, 2000).
In addition, most of the small industries that are willing to take the available loans from the banks
are faced with high lending rate (interest rate) which is like a bottleneck to the growth of the small
enterprises in Nigeria.
Conclusively, unfavourable economy as a result of price instability, political instability and other
macroeconomic problems are also a challenge affecting the expected growth of the small scale
industry in Nigeria thereby leading to no growth nor contribution to the overall gross domestic
product of the country. This is the gap this study intends to fill.

1.3 RESEARCH QUESTION

The following are the questions raised for the purpose of this research work:
i. What is the relationship between bank loan to SME and growth of small and medium
scale enterprises in Nigeria?
ii. What is the relationship that exists between interest rate and growth of small and
medium scale enterprises in Nigeria?
iii. What effect does money supply have on the growth of small and medium scale
enterprises in Nigeria?

1.4 OBJECTIVES OF THE STUDY

The main objective of the research study is to examine the effect of bank credit on small
entrepreneurial development in Nigeria; the study seeks to achieve the following specific
objectives:
i. To determine the effect of bank credit to SMEs to the growth of the small medium scale
enterprise in Nigeria
ii. To examine the relationship that exist between interest rate and the growth of small
medium scale enterprise in Nigeria
iii. To determine the effect of money supply on the growth of small medium scale
enterprise in Nigeria
1.5 RESEARCH HYPOTHESES
The following are the hypotheses formulated for the purpose of the research work:
H01: There is no significant relationship between bank credit to SMEs and the growth of small
medium scale enterprise in Nigeria.
H02: There is no significant relationship between interest rate and the growth of small medium
scale enterprise in Nigeria.
H03: There is no significant relationship between money supply on the growth of small medium
scale enterprise in Nigeria

1.6 SCOPE OF THE STUDY

This study covers the period of 1992 to 2018 which is twenty-seven (27) years on the topic effect
of bank credit on small entrepreneurial development in Nigeria. The study covers the total amount
of credit disbursed to small entrepreneurial businesses by the total Deposit Money Banks operating
in Nigeria as at the period of the research work. Data relating to the research work will be gathered
from the Central Bank of Nigeria Statistical Bulletin and Annual Reports as at 2018.

1.7 SIGNIFICANCE OF THE STUDY

This research work would be of invaluable benefit to both the financial institution and small and
medium sale enterprises in Nigeria, as well as the countries policy makers who have desire to place
Nigerian on a sound economic and industrial footing. Entrepreneurs who are active in the Small
and Medium Scale sector will also benefit from this study as they will be enlightened on their
rights and will know what they need to do in order to get access to funds at concessionary rates.
Also, the research study will give room for the growing SMEs in Nigeria to identify their various
means of accessing funds for expansion and its effect to their performance. In conclusion, the
research work will be a point of reference and as well add value to academicians aiming to broaden
their knowledge on the subject matter of the research work; likewise, further researchers on the
research work and students and other concerned decision makers on the research topic can always
find the research work relevance for their necessary implementation.
1.8 PLAN/ORGANIZATION OF THE STUDY
This particular section discussed how the whole research work is structured sequentially. Below
are the organisations of the chapters in the research work:
Chapter one focuses on the Introduction of the study, Statement of the problem, objectives of the
study, research questions, research hypothesis, scope of the study and operational definition of
terms while the literature reviews of the research work comprising the conceptual framework,
theoretical review, and the empirical reviews of different researchers on the subject matter coupled
with the gaps in the study will be discussed in the chapter two of the research work. However,
research methodology, model specification, techniques used will be the focus of chapter three.
Analysis of the research work is well detailed in the chapter four where the data gathered are been
presented, analysed and interpreted using suitable statistical analysis software. Conclusively, the
last chapter of the research work will give summary of the work, conclusions and
recommendations based on the findings.
Operational Definition of terms
Commercial Bank: This is a profit-seeking business firm, dealing in money and credit. It is a
financial institution dealing in money in the sense that it accepts deposits of money from the public
to keep them in its custody for safety and it creates credit by making advances out of the funds
received as deposits to needy people. It thus, functions as a mobiliser of saving in the economy.
Small Scale Enterprise: Any industry with a labor size of 11 to 100 workers or a total cost of not
more than 50 million naira including working capital excluding land.
Medium Scale Enterprise: Any industry with a labour size of 101 to 300 workers or a total cost
of not more than 50 million naira but not more than N250 million excluding cost of land
Credit: This is also known as loan or facility whereby a financial institution (commercial banks)
render to their customer which repayment will be made an agreed terms and conditions.
Money Supply: This is the total amount of money in the circulation of a given economy. It is also
the amount or volume of money in a given economy. The money supply involves the total money
in bank deposit and total money in the hands of the populace of the given country

Economic Growth: In a simple term, it is the persist increase in the general output base of a given
country. This arises as a result of continuous increase in the production capacity of a given country.
The economic growth of a given country is denoted with its Gross Domestic Product (GDP).
Sector: A sector is an area of the economy in which businesses share the same or a related product
or service. It can also be thought of as an industry or market that shares common operating
characteristics. Dividing an economy into different pieces allows for more in-depth analysis of the
economy as a whole.

Inflation Rate: This is a persistent and consistent increase in the general price level of goods and
services in a given country over a given period of time usually a year. In other words, it arises as
a result of increase in the monetary supply of a given country leading to reduction purchasing
power of the country currency. The inflation rate is determined using the consumer price index
(CPI).
Interest Rate: Interest rate is the amount charged, expressed as a percentage of principal, by a
lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis,
known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer
goods, large assets, such as a vehicle or building.
 CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
In light of the introduction done in the preceding chapter, there is need to also acknowledge and
reference the work done by past researchers in this study. There is an increasing need to study the
results and findings already in existence from the work of previous researchers. This particular
section would be done in pre stages which involves; the conceptual review, theoretical review that
introduces all the existing theories of bank credit and small scale enterprises used in previous
works by researchers. However, the empirical review follows the methodological review and this
particular review explicitly explains the result and the findings of different authors concerning the
subject study. Lastly, the section introduces the gaps identified from the previous literatures
reviewed in preceding sub section of the work.

2.1 CONCEPTUAL REVIEW

2.1.1 Concept of Bank

The word ‘Bank’ is widely and extensively used and circulated. The ‘Bank’ in English carries the
same meaning in Bengali. According to some writer the word ‘Bank’ was derived from ‘Banco’,
‘Bancus’, ‘Banque’ or ‘Banc’ all of which mean a bench upon which the mediaeval European
Money-lenders and Money –Changers used to display their coins. Anyhow this word has been in
use from the middle ages in connection of a bank (W. Frankace).
Different Authors and Economists have given some structural and functional definitions on Bank
from different angles: “Bank is a financial intermediary institution which deals in loans and
advances” (Cairn Cross). “Bank is an institution which collects idle money temporarily from the
public and lends to other people as per need. (R.P. Kent.)
“Bank provides service to its clients and in turn receives perquisites in different forms.”
(P.A.Samuelson.)
Indian Company Law 1936 defines Bank as “a banking company which receives deposits through
current account or any other forms and allows withdrawal through cheques or promissory notes.”
A bank is a financial institution that accepts deposits from the public and creates credit. Lending
activities can be performed either directly or indirectly through capital markets. Due to their
importance in the financial stability of a country, banks are highly regulated in most countries.
Most nations have institutionalized a system known as fractional reserve banking under which
banks hold liquid assets equal to only a portion of their current liabilities. In addition to other
regulations intended to ensure liquidity, banks are generally subject to minimum capital
requirements based on an international set of capital standards, known as the Basel Accords.
Banking in its modern sense evolved in the 14th century in the prosperous cities of Renaissance
Italy but in many ways was a continuation of ideas and concepts of credit and lending that had
their roots in the ancient world. In the history of banking, a number of banking dynasties – notably,
the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds – have played a central
role over many centuries. The oldest existing retail bank is Banca Monte deiPaschi di Siena, while
the oldest existing merchant bank is Berenberg Bank.
In the Mediaeval age Italian states were sound and solvent economically and commercially. At
that time a group of people used to conduct business of transaction of money sitting on a stool or
bench which was replaced by Banco, Banko, Banca, Bangk, Bancus, Bancetc. It is assumed that
the word “Bank” was originated from these words.
In the later age, an English writer Maclead challenged the above concepts.
His contention was that the money-lenders and money-changers used to display their coins which
were not termed as “Banco” “Banque” “Banke‟ “Banca”. However, Banco in Italy and Banke in
German and Australia were understood as public debt or issue of paper money. In his opinion,
these words were used for the purpose of economic activities of different countries of Europe.
Another British writer Chamber,in his Twentieth - Century Dictionary, very clearly stated that the
word “Bank” is derived from Banca andBanque. The French still uses Banque in place of the word
Bank.
In the mid of twelfth century Italian states were under political turmoil and in 1150 Venice was
afflicted with enemies. As a result, the Government introduced public debt/ collective credit/
forced subscribed loan @ 5% compulsorily on the public for meeting economic crisis.During that
time this loan was called Banke, Banco, Compara,Monte etc. So many thinkers think that the
German word‟Banke” and the Italian word “Banco” have been transformed into English
word‟Bank”.
2.1.2 Concept of Bank Credit
Bank credit is the total amount of credit available to a business or individual for a banking
institution. It consists of the total amount of combined forms that financial institutions provide to
individuals or businesses. A business or individuals bank credit depends on the borrower’s ability
to repay the loan and the total amount of credit available in the banking institutions (Alexandra,
2019). She went further to explain bank credit as an agreement between banks and borrowers
where banks make a loan to a borrower based on their assessment of the borrower’s credit
worthiness; the bank essentially trusts a borrower to repay fund plus interest for a loan, credit card
or line of credit at a later date. Bank credit also refers to the total borrowing capacity banks provide
to borrowers. The credit allows borrowers to buy goods or services. Bank Credit requires a fixed
minimum monthly payment for a certified period. For example, the most common form of bank
credit is a credit card provided by a bank. Borrowers start with a zero balance, a specified credit
limit and an agreed upon Annual Percentage Rate (APR). The borrower is allowed to use the card
to make purchases. They must pay either the balance or an agreed upon monthly minimum to use
the card and may continue borrowing until the credit limit is reached.
Bank Credit approval is determined by a borrower’s credit rating and income or other
considerations including collateral, assets or how much debts they already have. A way of ensuring
approval of bank credits includes cutting the total debt-to-income ratio (that is, a personal finance
measure that compares an individual’s monthly debt payment to his/her monthly gross income).
An acceptable debt-to-income ratio is 36%, but 28% is an ideal benchmark. Borrowers are
generally encouraged to keep card balances at 20% or less of the credit limit and pay off all late
accounts. Banks typically offer credit to borrowers with bad credit histories with terms that are
good for the banks and not so good for the borrower.
2.1.3 Determinant of Bank Credit
The following points highlight the eight main determinants of Total Bank Credit:

Excess Reserves: the credit-creating capacity of banks depends on the total amount of excess
reserve being held by the banking system as a whole per period. The amount of deposit created
varies directly with the amount of excess reserve.
Reserve Ratio: the maximum amount of credit which can be created by the banks also depends
on the reserve ratio maintained by the banking system as a whole. If the central bank raises the
minimum-reserve ratio, then the amount of deposit created by the banking system as a whole will
fall. The converse is also true.
Banking habits of the people: the credit creating capacity of the commercial banks also depends
on the banking habits of the people. In industrially advanced countries the banking habits of the
people are well- developed and most of the transactions are settled through cheques. Obviously,
the credit creating capacities of the commercial banks are higher in such countries.
In developing countries like India just the opposite is true. Banking facilities are not available in
most rural areas where 70% of the people live. Moreover, banking habits are not well-developed
in such countries. In fact, the prevalence of the barter system and lack of monetisation in most
developing countries of Asia, Latin America and Africa obstruct multiple credit expansion by the
banking system
Availability of Collateral Securities: banks normally demand securities for giving loans. If the
borrowers do not have sufficient acceptable securities to offer, then the total amount of deposits
created by the banking system will be low. Even if banks are eager to lend, they cannot expand
their volume of loan.
Existing Business Conditions: the amount of credit which can be created by the banking system
as a whole, depend on the state of the economy or, to be more specific, on existing business
conditions. If the economy is expanding, there will be more demand for goods and services. As a
result, profit prospects will be bright. So business people will be eager to produce more because
they can sell more. Hence they will take more loans and the demand for bank loan will increase.
This will make it profitable for the banks to expand the volume of credit. In contrast, if the
economy is in depression banks cannot create much credit. It is because there will not be much
demand for bank loan in such times.
Expansion of the Banking System: the total amount of credit which can be created by the banks
depends on the expansion of the country’s banking system. If the banking system is well-developed
and if there are many banks in the country, the credit-creating capacity of banks will be high. It is
because the total amount of credit that can be created by the banking system as a whole is a multiple
of the total excess reserves of the banking system. But a single (monopoly) bank in the system
cannot create credit (deposit) exceeding its own excess reserve.
Legal Reserves: If the legal reserve is 10%-but commercial banks keep 20% reserve, the deposit
(credit) multiplier will be 5 and not 10. Thus if there is an initial increase in cash deposit of a bank
of, say, Rs. 1,000, the total increase in bank deposit at the end will be only Rs 5,000 and not 10,000
naira. This is what happens in countries like India having underdeveloped money markets.
Cash Leakage: If depositors withdraw a certain amount of money for spending (transactions)
purposes, banks will be left with less cash. Thus, if people’s transaction demand for money
increases, the amount of cash with the non-bank public will also increase. This will reduce the
credit- creating capacity of commercial banks.
In short, the capacity of commercial banks to create credit depends not only on their own cash
requirements but also on the cash requirement of the public or of the non-banking system. Their
own cash requirement depends mainly on the monetary (credit) policy of the central bank.
The central bank often limits money supply growth in order to slow down the economy and control
inflation. But the cash requirement of the public depends on transactions demand for money, i.e.,
the amount of money people demand for spending purposes.
2.1.4 Classifications of Bank Credit
Ruse et al (2017) classified bank credit into different categories:
By Purpose of the Credit
Real Estate Loans: These are loans secured for landed property – land, buildings, and other
structures. It includes short-term loans for construction and land development and longer-term
loans to finance the purchase of farmland, homes, apartments, commercial structures, and foreign
properties.
Financial Institution Loans: This includes credit to banks, insurance companies, finance
companies, and other financial institutions.
Agricultural loans: This includes loans extended to farms and ranches to assist in planting and
harvesting crops and supporting the feeding and care of livestock.
Commercial and Industrial Loans: Loans granted to businesses to cover purchasing inventories,
paying taxes, and meeting payrolls.
Loans to Individuals: This includes credit to finance the purchase of automobiles, mobile homes,
appliances, and other retail goods, to repair and modernize homes, and to cover the cost of medical
care and other personal expenses, and are either extended directly to individuals or indirectly
through retail dealers.
By Duration of the Credit
Short-term credits are scheduled to be repaid within one year. Businesses take short-term loans to
meet working capital needs. Short-term loans are usually given against inventory and accounts
receivable. These loans can also be unsecured, such as a line of credit, revolving credit.
Mid-term credits are repaid over a period ranging from one year to five years. Banks customarily
grant such loans against immovable properties. Interest rates on mid-term loans are higher than on
short-term loans.
Long-term credits are the loans whose repayment period extends beyond five years. Long-term
loans are used for constructing plants and factories, construction of a house, purchase of land,
equipment, and machinery. Immovable properties are used as securities for such loans.
By Nature of the Credit
Funded Credits or Non-Documentary Credits: These are credits given out of the bank’s funds
to individuals and organizations through current accounts or loan accounts. Financed credits
include loan, cash credit, and bank overdraft.
Non-Funded Credits or Documentary Credits: These are credits given through issuing various
documents, this form of credit banks provide the loan by not extending cash but by lending their
reputation and good names, Examples of non-funded credit include a letter of credit (LC) and bank
guarantee.

2.1.5 Types of Bank Credit

Term Financing: This type of loan is availed by the borrower to acquire fixed assets (immovable
properties i.e. land and buildings and vehicles for commercial use). The loan carries a
predetermined length of time (tenure), with repayments done in instalments.
Lease Financing: This type of facility helps the borrowers to acquire equipment’s and machineries
for their businesses on lease. This type of finance is long Term in nature and as such, the repayment
is made in instalments.
Overdraft: This is a short-term facility which is granted to the borrower to enable him to meet his
day to day funding needs like the payment of salaries, utilities and purchases of inventories etc.
An agreed limit is sanctioned by the bank and the borrower is allowed to draw that amount through
his current account or by writing cheques against the agreed limit.
Revolving Credit: This type of loan is also short-term in nature and is used to meet short-term
funding requirements of the borrowers. This type of loan does not have a fixed number of
payments, as in the case of instalment loan.
Letter of Credit (LC) or Documentary Credit (DC): Letter of Credit is a written undertaking
by a financial institution in favour of the supplier/seller to pay him the amount of
imported/purchased goods, in case the actual importer/buyer fails to pay
Unsecured Financing: Unsecured loans are those where the banks do not demand tangible
securities such as land, building, fixed/current assets, tradable inventory etc. as security; whereas,
in secured financing, the banks demand any of the security as mentioned above. Secured financing
is also called collateralized financing.
2.1.6 Conditions of Granting Bank Credit
The following are the conditions to be considered before bank credits can be granted:

Purpose of the Loan

First, give the bank a business plan. Show them that your business is solid and you have a strong
track record of performance. Convince the bank that you don't really need their money, but if you
had it, here's what you could do with it. Banks get queasy about lending to desperate borrowers.
Be specific about how much money you need, what you will do with it and how you will pay it
back.

The business plan should include:

Summary of the business and its products and services
Experience of the management team
Competitive environment
Target market
Financial statements
After the banker understands your business, the purpose of the loan and the method of repayment,
he will evaluate the bank's risks by using the five Cs:
Character
Collateral
Capacity
Capital
Conditions
The Importance of Character

Foremost on the list is character. If bank doesn't trust you or think you're an honest person, they
will not approve your loan request. It doesn't matter how much collateral you have, it will not be
enough to offset a lack of trust.
The lender needs the confidence that the borrower has the experience, education and industry
knowledge to successfully manage the business. The borrower's reputation plays a significant part
in getting a bank loan. Your credit history will show your track record for repaying debts.
The Need for Collateral
When a bank makes a loan, it determines a plan of how the borrower will repay the loan. If the
borrower defaults on the loan, then the bank falls back on the collateral. A lender never wants to
use the collateral to repay a loan, because the sale of the collateral may not be enough to pay off
the loan.
Banks like to take property and assets as collateral as a way to recover their loan in the event the
borrower fails to pay as planned.
Capacity to Repay the Loan
The borrower must show that he can repay the loan out of the company's cash flow. The bank will
analyse a company's debt-to-income ratio and the amount of its free cash flow. Lenders like these
ratios to provide a cushion in case the business takes a downturn.
The Need for Capital
Banks feel more comfortable when the owner has his own money invested in the business. Lenders
like to know the owner will lose something if the business fails. If the owner is not investing in his
own business, why should the bank?
Banks like lending to companies with a lot of capital because it means the owners have some "skin
in the game." When owners have more personal capital in the business, they will fight harder and
sacrifice more to save a business and repay their debts.
Overall Economic Conditions
Besides analysing the borrower, bankers will look at the overall economy, industry trends and even
the direction of politics. They are thinking about factors beyond the control of the business owner
that will affect the performance of the company.
It is almost impossible to start a new business and finance its growth solely with internally
generated funds and owners' capital. At some point, small business owners will have to approach
their banks for loans. Understand the process that bankers go through to evaluate their risks before
you apply for a loan.
2.1.7 Overview of Small Medium Enterprises in Nigeria
The development of viable SMEs in Nigeria has over the years been challenged by a number of
harsh economic conditions which characterise the Nigerian business environment. Some of these
challenges have been outlined by the Institute of Development Administrator of Nigeria (IDAN,
2007). First, informal sources of finance still remain the major source of funding for SMEs in
Nigeria. These include personal saving and borrowing from friends, families and credit
associations. Formal financial institutions like commercial banks are still very unwilling to grant
credits to SMEs. On the other hand, micro finance schemes and institutions are still in developing
stages and so can only do little. Secondly, the success of economic ventures like SMEs depends
largely on the entrepreneurial skills. SME operators must possess the capacity to manage and
acquire basic skill of planning, organizing, coordinating, leadership and communication. Creative
and innovative abilities are gotten through work experience in other enterprises or through
technical and managerial training schemes.
However, for SMEs in Nigeria high failure rate is usually recorded due to poor managerial
and entrepreneurial skills necessary for the achievement of results. Thirdly, there is the challenge
of inadequate Infrastructural and Institutional Support: Weak infrastructural facilities such as
electricity, portable water, feeder roads, etc. are the still the bane of SME growth in Nigeria. Also,
State institutions like the Police, the Judiciary and others are still not strong enough in providing
internal security and fast justice. Besides, there is no adequate protection of intellectual property.
Furthermore, registration fees for some products in some government agencies are still the same
for the small and large firms, irrespective of resource availability. Above all, both small and large
firms pay the same minimum amount in opening corporate account in many banks. Fourthly,
incessant political conflicts, ethno-religious conflicts, as well as poor governance and
accountability in public service, have all functioned to make the Nigerian business environment
shaky and unreliable. Other unfavourable conditions include: flabby fiscal and monetary
measures, multiple taxation, poor implementation of high interest rate and unstable foreign
exchange as well as high inflation rates. These have weakened the economy and expose it to the
vagaries of international capitalist system. The consequences have been overdependence on
foreign technologies, final product and values, and dilapidated infrastructure.
These conditions make the small firms i.e. SMEs, major victims, so that not only are their
competitive abilities reduced, their mere existence becomes a struggle. In addition to the above,
are challenges confronting entrepreneurship in Nigeria, which also indirectly affect SMEs, due to
the relationship existing between SMEs and entrepreneurship. For instance, a number small
businesses remain small for years because of the mind-set of their owners, i.e. poor entrepreneurial
spirit. In Nigeria, many are in business not for the passion but just to meet their daily needs. They
lack the basic knowledge of managing their venture beyond the subsistence level. As such, there
is no innovation and this affects their global competitiveness. Also, the economic system in Nigeria
is majorly good at producing contractors who parasite on government jobs, and middle men who
flourish in informal business sector. Besides, the concept of entrepreneurship is generally reduced
to individuals seeking profit through supernatural and superstitious means rather than through
strategic management process. All these as noted in Ogbor and Ikhimokpa (2005), are the result
of lack of entrepreneurial education. Furthermore, in Enwegbara (2006), it is the organic process
of economic development also requires the education of young persons in job-enhancing education
such as science, engineering and technology.
These are needed to support the entrepreneurial potential and jumpstart the national
economy. Where these trained individuals are not sufficiently deployed, they migrate to other
countries with the right enabling environment. They formed the so called successful African in
Diaspora contributing enormously to the economic development of these countries and thus the
continue decrease of indigenous African entrepreneur in the continent. Even when they come back
to invest in Africa with burning desire of acquainting younger ones with the entrepreneurial spirit,
spread their talent, knowledge, experience, the prevailing enabling political, ethical, economic,
infrastructural, etc., environment is discouraging, making them to be employees of the state and
producers of raw materials purely for export and import of finished goods from the west. This
stated Enwegbara (2006) has had tremendous negative effect on African economic development
for a long time of SMEs in Nigeria
2.1.8 Bank credit and SMEs development in Nigeria
SMEs are crucial catalysts for economic development (Aruwa, 2005). Banks provide a nation with
a function of pooling scattered resources from surplus to deficit units so as to promote investment
innovation, productivity and consequently growth and development. The banking industry in
Nigeria dominates the financial system. Berger (1996) maintains that a well-functioning financial
system contributes to investment and economic growth. Every enterprise at its onset, before
standing firm on its feet, needs borrowing. The first place that they need to go and borrow at those
times is the banks. According to elementary corporate finance theory, an investment project should
be undertaken whenever its net present value is positive. This assumes that the capital expenditure
is not exhaustive. Firms do any volume of investment, and so where the firms do not have sufficient
capital to embark on any level of investment, there is need for capital borrowing. This shows that
even if an enterprise is strong and firmly rooted, it still does not stop borrowing, because it can
embark on a very large-scale investment more than it currently does, if it can get the required
capital. In an economy where the interest rate is high, small and medium scale enterprises find it
difficult to borrow and repay when in fact they constitute the real sector of the economy. When
funding becomes a major problem for such enterprises, nothing else works. This is because other
problems, which emerge later in, an enterprise’s lives that are being tackled as natural problems,
which come after its funding. This in turn hinders the growth and development of the economy.
Njoku (2007) postulates that to forestall the imminent capital flight from the real sector to the
banking sector, banks should begin to take second look at the industrial sector in terms of lending
operations. He continues that banks should plough back a large proportion of the money available
to them to the real sector of the economy as long-term loans at rates not exceeding 5%. This he
said will encourage industrialists not only to remain in their present businesses but also to achieve
their business expansion targets. Small and medium scale enterprises dominate the private sector
of the Nigerian economy, but almost all of them are starved of funds (Mambula, 2002).
The persistent lack of finance, for establishment and operation of SMEs occasioned by the
inability or unwillingness of the deposit money banks to grant long term credit to operators of the
real sector of the economy, led to the establishment of development finance institutions and the
introduction of numerous funding programmes for the development of SMEs in Nigeria. In spite
of these institutions and funding programme, there continues to be a persistent cry against
inadequate finance for the development of the SMEs in the country. The Central Bank of Nigeria
(2008) show that commercial and merchant banks loans and advances to SMEs have been
decreasing over the years. The statistics show thus; commercial bank’s loans to SMEs as a
percentage of total credit decreased from 48.8% in 1992 to 22.22% in 1994. The trend increased
marginally to 22.9 and to 25.5% in 1995 and 1996, respectively. There was a sharp reduction from
25 to 17% in 1997, and the decrease continued till it reached 0.2% in the year 2008. Similarly,
merchant banks loans to SMEs as a percentage of total credits reduced from 31.2% in 1992 to
9.0% in 2000 (Akabueze, 2002). The continuous decrease in commercial and merchant bank’s
loans to small-scale enterprises can be attributed to lack of collateral from the SMEs to secure the
loans and the high lending rates from the banks.
2.1.10 Bank Credit and SMEs performance in Nigeria
Banks are a vital source of credit to firms but more especially to SMEs that do not have access to
capital markets in order to raise funds. Commercial banks close the funding gap that informal or
internal sources cannot fill. Traditional theory for a well-functioning market would suggest that a
firm’s performance and the expected future cash flows that had been adjusted for risks and
transaction cost would be factors that should affect credit decisions of commercial banks.
However, studies have revealed a number of firm and owner characteristics that may affect banks
willingness to extend credit or not to SMEs (Kunchev et al. 2012, Beck et al., 2005). The
characteristics include the size of the firm, age of the firm, gender of the owner/manager,
educational level of owner/manager and also if the firm has financial or audited financial
statement. While some of these characteristics enhance commercial banks decision or willingness
to extend credit, others impede their willingness to extend credit. Several empirical studies have
been carried out to examine characteristics of SMEs and how they affect the credit decision of
banks. Kunchev et al. (2012) found that for developing economies the size of the firm significantly
affects bank credit decisions. Berger and Udell (1995) found that small firms that are 10 years
older pay a lower loan rate. Korting and Harhoff (1998) in their study of German firms found that
older firms pay less for a loan and are faced with less collateral arrangements. However, a study
by Yang et al. (2012) found that once the size of the firm is controlled, the age of the firm played
no significant role in the credit decision of a bank. The Wilson and Marlino (2005) study of UK
small firms found no evidence of the owners’ gender influencing bank credit decisions. Similarly,
Cole (1998) found a positive and significant relationship between firm performance and credit
availability. Despite SMEs’ well recognised role in economic development and employment
generation, studies on SMEs finance availability in developing countries generally and African
countries in particular have been less frequent. It is within the authors’ defined knowledge that to
date, an empirical study that examines SMEs characteristics and how it affects credit decisions of
banks has not been undertaken in Nigeria. Therefore, this study aims to fill this gap, as it seeks to
empirically test the role of the above mentioned firm and that of owner/manager characteristics in
the Nigerian environment. More specifically, our study seeks to empirically test if the size and age
of the firm and its performance, the gender of owner/manager, legal status, educational level, and
financial/audited financial statement affects the decision of commercial banks to extend credit to
SMEs. Our study adds to existing studies in a number of ways. It sheds and broaden the light on
the issue of firm/owner characteristics and bank credit decisions in the Nigerian case. It also differs
from the above mentioned studies in that it examines the effect of SMEs characteristics on credit
availability by testing whether these characteristics affect the likelihood or probability that SMEs
are denied or extended credit. Previous studies have mostly focused on the cost of credit and not
the availability of credit. More so, this study includes some new characteristics that have rarely
been empirically examined but theoretically is said to affect bank credit decision. We conclude
that a SME that has a financial and audited financial statement is more likely to be extended credit
by banks than SME that does not. The audited financial statement, being the significant predictor
of credit availability, supports the theory that firms with an audited financial statement poses less
risk to potential lenders. The result also indicates that medium sized firms are likely to get loan
banks than small firms.
Also, sole proprietorship is less likely to be extended credit than a partnership, corporation and
Limited Liability Company. Furthermore, better firm performance increases the likelihood or
probability of obtaining a loan. On the other hand, characteristics such as gender, educational level
and the firm’s age were not a significant predictor of bank credit to SMEs in Nigeria. Overall, the
most significant predictor of whether a firm is extended or denied credit in all the characteristics
examined in this paper is an audited financial statement. The rest of the paper is structured as
follows. Following the introduction, the next section examines the theory and empirical findings
of SMEs characteristics as it relates to bank credit availability. The subsequent section contains a
description of the data used in this study, whilst the next section describes the variables, the coding
of the variables and the method used. Regression results and their interpretation followed by a
summary and conclusion are presented in the last two sections.
2.2 THEORETICAL REVIEW
The theoretical framework adopted for the paper involved the bank capital channel model and the
capital constraint model. Also adopted in this work, is the Lifecycle approach and the Pecking-
order theory that attempts to explain small-firm financial structuring. The effect of bank credit on
small scale enterprises has been discussed a lot over the years. This study outlines major theories
relating to bank credit and SME’s, some of which includes: Bank Capital Channel Model, the
Lifecycle Approach, the Pecking Order Theory and the Anticipated income theory.

Bank Capital Channel Model

The lending behaviours of bankers to entrepreneurs are greatly highlighted by this model as it
concerns capital adequacy requirement. The model looks at interest rate volatility as a determining
factor to their financial treatment, particularly when their credit offer is reduced by the strength of
their capital-base. The implication is that, often, as interest rates increases, the funding cost of
banks’ external funding also increase, thereby reducing profit tendencies. When this happens the
bankers are forced to reduce their credit issue, especially when there is capital-base constraint.
The Lifecycle Approach
This approach according to Weston and Brigham (1981) was conceived around the platform of
speedy growth and poor access to capital market. SMEs are perceived to be starting out by
exploring only the owners’ resources. Whether or not the firms could make it subsequently, the
threat of insufficient capital would later surface, and then the tendency to resort to other sources
of funds would emerge.
The dynamic small firm prefers to choose between curtailing its growth to keep in line with its
minimally generated funds, get an expensive stock market quotation, or desires an almost
impossible volume venture capital according to Weston et al (1981).
The Pecking Order Theory
This theory stipulated by Myer (1984), asserts that most firms met their financial needs in an order
of hierarchy, firstly by the use of internally generated funds, secondly borrowing in form of debt
and thirdly by generating funds through equity. Here, he argued that equity is a less preferred
means to raise capital because when managers issue new equity, investors believe that managers
think that the firm is overvalued and managers are taking advantage of this over-valuation. As a
result, investors will place a lower value to the new equity issuance. The pecking order theory
postulates that the cost of financing increases with asymmetric information. Commonly, this
practice is predominant in Small Firms and implies the inverse link between profitability and
borrowings.
The Anticipated Income Theory
This theory was developed by H.V.Prochanow (1944), according to this theory, regardless of the
nature and character of a borrower’s business, the bank plans the liquidation of the loan from the
anticipated income of the borrower. This theory opines that a bank should make long-term and
non-business loans since even a “real bill” is repaid out of the future earnings of the borrower; i.e
out of anticipated income. At the time of granting a loan, the banks take into consideration not
only the security, but the anticipated earnings of the borrower. Thus a loan by the bank gets repaid
out of the future income of the borrower in instalments, instead of in lump sum at the maturity of
the loan.
2.3 EMPIRICAL REVIEW
A thorough survey on previous literatures provide a clue into possible causality between financial
institutions financing and small scale industrial activities indicating that no general form of
relationship exists between the duo concepts of interest.
The empirical findings of Malapit (2010) in Philippines suggest that women-owned small similar
results. However, studies conducted by Wilson et al (2005) in the UK found no evidence of gender
bias in credit access from banks. It is noted here that there are other factors that can be alternative
explanations for perceived gender bias, such as the performance of the firm, the type of business
and industry and where the firm is located. This view is supported by Cole et al (2011), as they
found that observed differences in credit availability between female-owned enterprises and male-
owned enterprises were insignificant when owner and firm characteristics were controlled.
Asikhia (2009) examined the attitude of the business owners to microfinance banks so as to
uncover areas of necessary modification in the policy before it becomes moribund like SMIEIS.
Primary data was employed by the study and analysed using factor analysis, correlation, regression
and simple percentage analysis. The study observed that every action of the business owners was
gauged by the expectations conceived before commencement of banking relationship, it was these
expectations and not the present relationship that determines their future decisions. The study
therefore recommended that the effectiveness of microfinance banks business management skills
as a development strategy was contingent in delivering both financial and business counselling to
the operators.
Babagana, (2010) examined impact of the role played by micro finance banks MFBs) in promoting
the growth of SMEs in Nigeria. An empirical study was carried out using Garu Micro Finance
bank in Bauchi, Bauchi State being one of the most successful Micro- Finance Banks in North
East sub region to determine impact of the role of MFBs in promoting small and medium
enterprises growth. Out of the total number of employees in the bank, 15 members of staff whom
constitute the middle and management staff were used as respondents. Questionnaire was
developed and distributed to them which they all filled and returned. The study revealed that MFBs
have contributed to the promotion of small and medium enterprises growth in Nigeria.
Ahiawodzi et al (2012) examined the effect of access to credit on the growth of Small and Medium
Scale Enterprises (SMEs) in the Ho Municipality of Volta Region of Ghana by using both survey
and econometric methods. The survey involved a sample of 78 SMEs in the manufacturing sector
from the Ho Municipality. The specified econometric model has firm growth as the dependent
variable, and the independent variables include access to credit, total current investment and age
of the firm, start-up capital, education level and annual turnover of the firm. Both survey and
econometric results show that access to credit exerts a significant positive effect on growth of
SMEs in the Ho-Municipality of Ghana.
Dada (2014) noted that the consistently repeated complaint of SMEs about their problem regarding
access to finance is highly relevant constraint that endangers the development of the sector in
Nigeria and investigating the effect of commercial banks’ credit on SMEs development employing
Ordinary Least Square (OLS) technique to estimate the multiple regression models. The findings
revealed that commercial banks credit to SMEs and the saving and time deposit of commercial
banks exert a positive and significant influence on SMEs development proxy by wholesale and
retail trade output as a component of GDP, while exchange rate and interest rate exhibit adversative
effect on SMEs development.
Qureshi (2012) examined the problems and constraints faced by small and medium-sized
enterprises (SMEs) in Pakistan with regard to access to financing. The research methodology
includes qualitative data and quantitative data. A survey was undertaken from a sample group of
500 respondents of SMEs in Karachi from whom various questions were asked through a
structured questionnaire. In addition, one-on-one formal and informal interviews were taken from
various businessmen and bankers. Samples were selected conveniently. A conceptual
model/framework was devised to test and ascertain the statistical validity. It includes dependent
variable SME financing and independent variables, financing constraints, functional/internal
barriers, government support and incentives, and SMEs growth and development. The study finds
that Formal financing is the biggest problem of SMEs because a substantial portion of SMEs does
not have the security required for collateral. The loan processing time is very lengthy and
cumbersome and the loan terms are not succinct and thoroughly understood by the borrower which
is a similar scenario to the Nigerian situation.
Riding et al (2010) evaluated the impact of deposit money banks (DMB's) financing of Small and
medium scale enterprises on the economic development of Nigeria. The study adopted regression
techniques. The finding of the study reveals that deposit money banks (DMB's) financing of
Small and medium scale enterprises has no significant impact on economic development in
Nigeria.
Beyene (2002) examined the impact of banking sector credit on the growth of small and medium
enterprises in Nigeria. As part of the methodology, annual data between 1985 and 2010 was
collected and used in the study while descriptive statistics, correlation matrix and error correction
model was used to test the formulated hypotheses which reveals that banking sector credit has
significant impact on the growth of small and medium enterprises in Nigeria.
Onyeiwu (2012), examined the effect of SMEs financing on the economic growth of Nigeria. In
doing this, the Ordinary Least Squares Method (OLS), Error Correction and Parsimonious models
were used to analyse the quarterly data between 1994 and 2008. The empirical result showed that
loans to SMEs and other variables except money supply and deficit financing exert a positive
impact on GDP growth. The study thus recommends that government should find a way to
encourage financial institution to lend to SMEs to guarantee their development.
Also, Alalade et al (2013) examined the relationship and causality between microfinance bank
operations and entrepreneurship development in Ogun state, Nigeria. The study adopted the survey
research design and questionnaires to collect the data. The study revealed that there is no
significant impact of microfinance bank operations on entrepreneurial development in the State.
They therefore recommended that government should find an avenue for creation of awareness on
how entrepreneurs can benefit from bank loans.
Afolabi (2013) investigated the growth effect of SMEs financing in Nigeria, the study employed
ordinary least square (OLS) method to estimate the multiple regression model. The result revealed
that SMEs output proxy by wholesale and retail trade output as a component of GDP, commercial
banks credit to SMEs and exchange rate of naira vis-à-vis U.S dollar exert positive influence on
economic development proxy real GDP while lending rate is found to exert negative effects on
economic growth. In terms of partial significance and using t-statistic as a test of evaluation, SMEs
output and commercial banks’ credit to SMEs were found to be significant factors enhancing
economic growth in Nigeria at 5% critical level. Therefore, the study proffered that the central
authority should create an enabling environment for SME development.
Duru (2012) accessed the impact of financial sector reforms on the growth of small scale
enterprises in Nigeria. The paper used modelling method to determine output performance of
SMEs as a function of several inputs such as firm’s characteristics, firm’s ownership and credit
facilities through the financial the financial sector. The results indicate that all these variables have
positive and significant impact on the growth of SMEs in Nigeria. Thus, the study concluded that
financial sector reforms have positive impact on the growth of SMEs in Nigeria, and recommended
that the government should create an enabling environment by providing infrastructural facilities
and security to ease the cost of doing business in the economy.
Evidence from Developed Countries
In the US, as noted, except in leasing, commercial banks are the most important small business
financing market participants, accounting for 50 to 87 percent of total debt supplied to various
small loan markets. Limited current information about bank lending to small firms has been
available from call reports (June Reports of Condition and Income) since 1994 and from CRA
reports (reports required under the Community Reinvestment Act) since 1997.21
Major developments that have contributed to changes in the performance of the small business
loan markets over the past decade include:
i. Innovations in the financial markets contributed by technology, especially in information
collection, processing and distribution, and financial modelling
ii. Banking consolidation and a decline in the number of banks in the United State
iii. Globalization in the financial markets among industrialized nations
Impacts of innovation in financial markets on the sources of funds by financial intermediaries
Innovations. In the U.S, financial markets during the past several decades have been significant.
New products and services have been developed by different financial institutions to collect
savings from individual households and businesses to lend to and/or invest in governments,
businesses, and households.22 Since most small businesses and all households rely on financial
intermediaries for financing—residential mortgages, automobiles, personal finances and credit
cards for households; and credit lines, vehicle loans, and commercial mortgages for small
businesses—the impact of developments in the financial markets on the availability of sources of
funds to financial intermediaries becomes critical to the growth of small business loan markets.
Most non-deposit financial institutions such as finance companies rely on the public markets for
funding of their business lending; most depository institutions—banks, savings banks, and credit
unions—have experienced drastic declines in deposits as the source of funding for lending.23
Credit scoring, which allows lenders to access their borrowers’ credit profiles, especially their
credit history, is one major innovation that should contribute to the growth of small business loan
markets.
In contrast, the UK has a generally centralised banking system. In the case of UK SME finance
the big-4 banks are the main banks for 78% of SMEs and in Scotland they have 95% of the market,
(Fraser, 2005). Even though there is less empirical evidence on small firm relationship banking in
UK, it has been reported that relationship banking is equally important for UK SMEs in terms of
alleviating financial problems, for instance (Han, 2008). In a research project on small business
credit market discrimination, Fraser (2009) reports that there is no ethnic discrimination in UK
markets and the ethnic differences in the availability and price of small business finance can be
interpreted by variations in non-ethnic risk factors. It has been widely accepted that small firms
make great contributions to regional economic development and the creation of jobs. It has also
been noticed that small firms are more likely to raise external capital locally because of the high
transaction costs incurred.
Therefore, geography plays an important role in small business finance in terms of costs of private
information collection, monitoring and etc. For example, local financial development enhances the
probability of business start-up and promotes growth (Guiso et al., 2004), and the highly
centralised UK banking system may well introduce spatial bias in the flows of capital to SMEs
(Klagge and Martin, 2005). In Italy, because of the concentration of bank decisional centres, the
functional distance between banks and local firms has been widened and as a result, it makes local
borrowers’ financial constraints more binding (Alessandrini et al. 2009).
Moreover, the geography in SME finance also has strong implications on economic rent creation
and the problem of asymmetric information (e.g. Degryse and Ogena, 2005) which is essential to
gaining and understanding the financial behaviour of small businesses, generally supposed to be
‘informationally opaque’. Theoretically, with the problem of asymmetric information, small
business borrowers would be either credit rationed (Stiglitz and Weiss, 1981) or offered a ‘menu
of contracts’ (Bester, 1985). The empirical implications of asymmetric information theory for
small business finance are, Firstly, creditworthy small businesses may under invest, if they cannot
raise the capital they need and/or at a price they can afford. Secondly, because of information
asymmetries, no creditworthy small businesses may over invest if their loan applications are
mistakenly approved by lenders.
By analysing the 2004 U.K Survey of SME Finances with 2500 sample firms, this paper examines
the use of bank support services and their impacts, via relationship banking, on the lessening, or
otherwise, of the severity of financial problems encountered by UK based SMEs prior to the
ongoing and unresolved EU funding crisis. This paper contributes to the literature in a number of
ways. Firstly, by complementing the existing literature on the use and the effectiveness of the
available public support programmes, such as Business Link, we investigate the use and impacts
of assistance from the private sector – banks. Secondly, our empirical results reinforce the
importance of the level and quality of an entrepreneur’s human capital on the financial health of
small business. We thus highlight the important role played by bank support to compensate for the
lack of sufficient human capital. Thirdly, contributing to the literature in relationship banking, this
paper offers evidence that the favourable relationship effects in alleviating SME financial
problems are much stronger for bank support users, rather than non-users.
Carl (2001) in his study of the survival of small firm in developing countries posited that financial
assistance to SMEs led to its survival in Africa and Latin America. While Godfried & Song (2000)
in their investigation of financial mode available to SMEs in Ghana employed profit models. The
study reported that small firms make use of credit from informal sector than credit from banks.
Also, it established that many small firms relied on informal credit to finance their business.
Furthermore, it revealed that credits from banks are more available to high profit making SMEs
than low profit making SMEs. Their findings are in tandem with Ojo (1995) who analysed the
importance of informal source of loan to the growth of small firms in Lagos State found out that
informal source of credit contributed 60 percent of the overall source of financing.
Avinash and Mitchell-Ryan (2009) assessed the impact of the sectoral distribution of commercial
bank credit on Economic growth and development in Trinidad and Tobago. They noted that in
Trinidad and Tobago, commercial bank credit plays an important role in the way in which
businesses and individuals finance economic transactions. They asserted that the credit channel of
the monetary transmission mechanisms, which states that credit influences economic growth
through its impact on capital investment. They employ a vector error correction model to firstly
assess the relationship between credit and investment, and secondly to determine the casual
directionality of the relationship (if any). The model found that overall, credit and growth tends to
demonstrate a ‘demand following’ relationship. However, further analysis revealed a ‘supply
leading’ relationship between credit and growth within key sectors of the non-oil economy.
Bari, Ali & Haque (2005) in their examination of the key constraints faced by the SMEs sector in
Pakistan highlighted that excessive government regulation, weak technological base, poor access
to credit, arbitrary and exploitative tax system, and the lack of business support services are the
main factors hindering the growth of SMEs in Pakistan. Dionco et al. (2006) examined the
promotion strategy of SMEs in Lagos state using descriptive analysis. The result reveals that
promotion strategy enhances small scale industries in the area of information service, training,
technical, extension, technology adaptation and commercialization. The study concluded that low
level awareness to these programs deny SMEs chances to make use of these services. This
drastically affects growth and development of SMEs in Nigeria. Adams (2007) opined that no
country will achieve sound industrialization without a well-developed SMEs in a country. They
concluded that SMEs constitute 75 percent of the industrial set-up as well as contributed 60 percent
employment opportunities in the economy. Moktan (2007) in the study of challenges facing small
businesses in Bhutan surveyed a total of 168 SMEs. The study found that restrictive business
regulations, finance and infrastructure are the major constraint facing the growth of SMEs.
Chiou, Wu and Huang (2011) examined how diversified operations of banks impact their loans to
SMEs by using panel data on 28 banks. The result indicated that as aggressive derivatives traders,
the impact of its total assets on SMEs loans is positive at 1% significance level and credit
guarantees positively impact SME loans at 1% significance level, implying that large banks are
encouraged to make loans to SMEs through the assistance of the credit guarantees scheme.
Amonoo, Acquah and Asmah (2003) established whether there is a relationship between interest
rates and the demand for credit as well as interest rates and loan repayment by the poor and the
SMEs in Ghana. The results showed a negative relationship between interest rates and demand for
credits as well as interest rates and loan repayment. The study suggested that lowering interest
rates would increase the poor and SMEs demand for credit and loan repayment at banks and non-
bank institutions which can be achieved through the amendment of the fiscal policy by the
government. Finally, the study concludes that severity level of constraints in urban and rural
districts has significant influence on size of SMEs. Asikhia (2009) used factor analysis, correlation,
regression and simple percentage on primary data to examine the views of firm owners towards
micro-financing. The study opined that the action of entrepreneurs depends on the prospect they
have before establishing relations with the bank.

Gaps in Literature
In some of the previous empirical studies reviewed, it was discovered that some of the studies were
obsolete and may not effectively reflect the future since there have been some recent policies
enacted to enhance the growth of small businesses in Nigeria. These policies may have undermined
the usefulness of these studies. While some other studies employed panel data approach on the
survival of SMEs in Africa as a whole and study cannot effectively access the Nigerian economy
since these studies are not country specific, most of which are limited in scope. This study
however, differs from the previous studies in that its scope has been extended to 2018, making
sure it takes into consideration the changes in policies and growth that has occurred in recent years.
It also differs from the above discussed studies in that it examines the effect of small scale
entrepreneurial development on credit availability by testing whether these characteristics affect
the likelihood or probability that SMEs are denied or extended credit. Previous studies have mostly
focused on the cost of credit and not the availability of credit. More so, this study includes some
new characteristics that have rarely been empirically examined but theoretically is said to affect
bank credit decision.
 CHAPTER THREE
3.0 METHODOLOGY
The main objective of this research work is to ascertain the impact of bank lending on the growth
of small and medium scale enterprises in Nigeria. Therefore, in order to achieve this highlighted
objective, a methodological research work is needed. Methodology is the core of any scientific or
empirical study upon which findings deduced from a research can be used by others who may want
to conduct similar investigation on the subject matter in the future.

3.1 RESEARCH DESIGN

In carrying out an inquiry into the unknown, an important aspect of the process is having a design.
Consequently, in a research work, a research design is important. A research design is a plan or a
blueprint that spells out the details or procedures to carry out an investigation successfully. It
assists the researcher to develop a mental image of the structure for gathering data and the analysis
that will follow. In this academic project work, an ex post facto research design was employed in
order to gather relevant time series data on the topic of discussion. The ex post facto is found be
effective because it does not give room for manipulation on the part of the researcher.

3.2 POPULATION/SAMPLE SIZE OF THE STUDY

Population is defined as all elements, individuals, or units that meet the selection criteria for a
group to be studied, and from which a representative sample may be taken for detailed
examination. Therefore, the population of this study is the total number of commercial banks
operating in Nigeria. The sample size is the credit extended to the SME subsector of the economy.

3.3 SOURCES AND INSTRUMENTS OF DATA COLLECTION

Data utilized for this study is secondary data, which may be published data or unpublished data.
The secondary data for the study was obtained from a published source, which is the Central Bank
of Nigeria Statistical Bulletin. The relevant data was culled from the bulletin of 2018.

3.4 DATA DESCRIPTION AND MODEL SPECIFICATION

In this study, the researcher seeks to examine the impact of bank lending on the growth of small
and medium scale enterprises in Nigeria. The dependent/predictor variable for the study was
growth rate of SMEs which was represented by wholesale and retail contribution to GDP while
the independent/explanatory variables are bank loan to SMEs, Bank lending rate and money supply
which measures the availability of funds in the circulation over the period under review. The period
under consideration is from 1992 to 2018, that is Twenty-Seven (27) years.
In light of this, a simple linear regression model is specified; the functional form of the model is
expressed as follows:
SMEG = f (BCSME, BLR and MS)
The model was adopted from the work of (Aremu and Adeyemi,2011).
Therefore, linear regression model with an error term (µ) is specified in econometric form as
shown below:
Y = f (β0 + β1X1 +β2X2 + β3X3 ….βnXn + µ) …………………………… (1)
The econometric model of this research work is:

SMEG = f (β0 + β1BCSME+ β2BLR+ β3MS+ µ) …………………. (2)

Where, SMEG = Small and Medium Scale Enterprises Growth (Wholesale and Retail
contribution to GDP)
BCSME= Bank Credit to Small and Medium Scale Enterprises
BLR = Bank Lending Rate
MS= Money Supply
3.5 METHOD OF DATA ANALYSIS
The study sourced data from Central Bank Statistical Bulletin of 2018. The research design is ex
post facto while the method of data analysis involves the use of Ordinary Least Square using the
suitable statistical package to run the data gathered for the purpose of the research work.

3.6 APRIORI EXPECTATION

Bank Loan to SMEs and money supply is expected to have positive relationship with Small and
Medium Scale Enterprises Growth while bank lending rate is expected to have a negative
relationship to the growth of Small Medium Scale Enterprises in Nigeria. Hence, this is express
mathematically as follows:
β1> 0 β2<0; β3>0
 CHAPTER FOUR
4.0 DATA ANALYSIS AND FINDINGS

4.1 INTRODUCTION
This chapter focused on the analysis of the data, estimation and interpretation of the results
obtained from the regression of the model specified in the previous chapter. This is necessary in
order to ascertain whether the outcome of the regression analysis falls in line or otherwise with the
stated hypothesis as well as to answer the research questions asked and to achieve the objectives
of the research.

4.2 DATA PRESENTATION

4.2.1 DESCRIPTIVE STATISTICS

For proper analysis there is need to describe the data which were employed for the study. This
involves describing the average (mean), the standard deviation, skewness, kurtosis and Jarque-
Bera. The estimated result is presented in Table 4.2 below.

From table 4.2 below, SME_G represents Small and Medium Scale Enterprise Growth; BCME
represents Small and Medium Enterprises Bank Loan to SME; BLR for bank lending rate and
Broad Money Supply (MS) within the years of 1992 to 2018. The standard deviation value of
1.088293 for SMEG has little dispersion from its mean value of 1.317528. The deviation value of
0.365424 for BCSME disperse much from its mean value 4.503252 while a deviation value of
4.344879 was also recorded for BLR which appears to disperse little from its mean value of
5.624074. As for LMS, a deviation value of 0.740885 which disperse much from its mean value
of 12.44156 was also observed. Also, considering the skewness statistics whose threshold value
for symmetry (or normal distribution) is zero, all variables (SMER, BCSME, BLR) appear to be
positively skewed except LMS which appears to be negatively skewed. On the other hand, the
kurtosis whose threshold is three for it to be Mesokurtic (normally peaked) shows that all the
variables are platykurtic (lowly peaked). Although skewness statistics indicate that most of the
variables are positively skewed (greater than zero) and kurtosis value indicate that all the variables
have a lowly peakedness, the fact still remains that neither skewness nor kurtosis can singularly
confirm the normality of a series. Hence, since the Jarque-Bera statistics combines skewness and
kurtosis properties, it provides more comprehensive information. We then move to the Jarque –
Bera probability with the hypotheses that if probability is less than 5%, then the series is not
normally distributed. Using this Jarque – Bera statistic, it was observed that only BCSME and
LMS among all the series used in this model have a Jarque-Bera probability value more that 10%
suggesting that SMER and BLR have a probability greater than ten percent. Therefore, the
alternative hypothesis of a normally distributed series cannot be rejected.

Table 4.2: Descriptive Statistics of Data Series

SMEG LBCSME BLR LMS
Mean 1.317528 4.503252 5.624074 12.44156
Median 1.039745 4.510203 4.110000 12.41712
Maximum 4.627025 5.500935 16.66000 13.36790
Minimum 0.158217 4.031323 1.410000 11.11088
Std. Dev. 1.088293 0.365424 4.344879 0.740885
Skewness 1.043735 0.854432 1.533552 -0.236232
Kurtosis 4.143178 3.360503 3.986941 1.635349

Jarque-Bera 6.372440 3.431453 11.67883 2.346182

Probability 0.041328 0.179833 0.002911 0.309409

Sum 35.57324 121.5878 151.8500 335.9222

Sum Sq. Dev. 30.79390 3.471898 490.8273 14.27168

Observations 27 27 27 27
Source: Author’s Computation (2020)

4.2.2 CORRELATION MATRIX: From table 4.2.2 below, the correlation coefficient matrix
indicates no existence of multi-collinearity among the variables used in the model. Among all
independent variables used in the model, only LMS appears to negatively correlate with SMEG
while BCSME, BLR appears to have a positive correlation with SMEG. A strong positive
correlation coefficient of 0.94 is observed via a correlation between SMEG and BCSME. On the
other hand, a weak positive correlation coefficient of 0.11 was observed via a correlation between
BLR and SME_R followed by a weak negative correlation of -0.26 via LMS.
Table 4.2.2: Correlation Matrix

SMEG LBCSME BLR LMS

SMEG 1.000000
LBCSME 0.943761 1.000000
BLR 0.109814 -0.037983 1.000000
LMS -0.257271 -0.098431 -0.803193 1.000000
Source: Authors Computation (2020)

4.2.3 GRAPHICAL ANALYSIS

Graphical illustration shows the movements, trends, fluctuations, structural breaks and
discontinuities in the series. It also provides a qualitative assessment of possible relationship
among the series. The figures below show the graphical expression of relevant variables.
Figure 1 as provided below depicts the movements and trends in Small and Medium Scale
Enterprise Growth (SME_G), Small and Medium Scale Enterprise Bank Loan (SMEL), Domestic
Credit to Private Sector (DCP) and Bank Lending Rate (BLR) respectively.

Figure 4.2.3: Graphical Analysis

GRAPH OF DATA SERIES

SMEG BCSME
5 400,000

4
300,000

3
200,000
2

100,000
1

0 0
92 94 96 98 00 02 04 06 08 10 12 14 16 18 92 94 96 98 00 02 04 06 08 10 12 14 16 18

MS BLR
2.4E+13 20

2.0E+13
16

1.6E+13
12
1.2E+13
8
8.0E+12

4
4.0E+12

0.0E+00 0
92 94 96 98 00 02 04 06 08 10 12 14 16 18 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Source: Author’s Computation (2020)

4.2.4 FORMAL PRE-TESTS
Unit Root Test: Unit root test shows the result for the test of stationarity of the series to
be used for model estimation. Following the assumptions of the Ordinary Least Square (OLS)
technique, it is required that series must exhibit a constant mean, variance and covariance over
time i.e. whether the series are time invariant in their unconditional moments. In other words, when
series are not stationary, it is said to exhibit a unit root process. If non stationary series are adopted
in a regression analysis, the resulting model is termed as spurious, unstable, and misleading and
thereby, cannot be used for forecast. This is because non-stationary variables feature changes as
time progresses. Thus, such variables are said to exhibit unit root and cannot be used for
conventional modelling. This test is primarily important as the use of non-stationary series result
in spurious regression which will generate misleading results
Table 4.2.4 presents the ADF unit root test results. From the ADF results, all variables are
stationary after first differencing considering all test options (Constant – Model I, Constant and
trend – Model II, without constant and trend – Model III). (BCSME) and Bank Lending Rate
(BLP), LPS are all stationary after first differencing. The last column titled “I (d)” in the above
tables concludes on the order of integration of the variables. Conclusively, all variables are
integrated of order one i.e. I (1). These results imply that running a regression analysis on these
variables in their levels using Ordinary Least Square technique can generate spurious results as
some of the Traditional Least Square assumptions have been violated. Therefore, this research
work will adopt Autoregressive Distributed Lag (ARDL) Model as it accommodates variables with
first order of integration and any abnormality in the data series provided that they are normally
distributed.
 Table 4.2.4: Unit Root Test

Variables Table 4.2 – Augmented Dickey – Fuller (ADF) Test I (d)

Level First difference

Model I Model II Model III Model I Model II Model III

LSMEL -------- -------- -------- -2.7657**,b -3.2673*,b -2.6647***,b I (1)

LSMEL -------- -------- -------- -3.6881**,b -3.8611*,b -3.9358***,b I (1)

LDCP -------- -------- -------- -4.3340***,b -47.2961***,b -4.5758**,b I(1)

BLR -------- -------- -------- -4.6773***,b -2.69361***,b -3.7537***,b 1(1)

*, **, *** represent significance levels at 10%, 5%, and 1% respectively. a and b represent the
order of integration i.e. I (0) and I (1), respectively. Model I, II, and III are unit root with intercept,
intercept and trend, and without intercept and trend respectively.

Source: Author’s Computation (2020)

4.2.5: OPTIMUM LAG LENGTH

According to AIC, SC and HQ, based on the result given in table 4.2.4 below, the optimum lag
length for SMEG is 1 lag period. This implies that in the proposed Panel ARDL equation, a lag
length of three will be used for SME_R in the model equation.
Table 4.2.5: Lag length structure for the Dependent variable (LSME_G)

VAR Lag Order Selection Criteria

Endogenous variables: SMER
Exogenous variables: C
Date: 12/24/19 Time: 22:17
Sample: 1992 2018
Included observations: 23

Lag LogL LR FPE AIC SC HQ

0 -35.78006 NA 1.433966 3.198266 3.247636 3.210683

1 -32.24100 6.462632* 1.150322* 2.977478* 3.076217* 3.002311*
2 -32.07097 0.295708 1.237715 3.049650 3.197758 3.086898
3 -31.83331 0.392664 1.325294 3.115940 3.313417 3.165605
4 -31.76658 0.104438 1.442340 3.197094 3.443941 3.259175

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion
Source: Author’s computation (2020)

4.2.6 OPTIMUM LAG LENGTH FOR THE INDEPENDENT VARIABLES

According to FPE, AIC and HQ base on the result given in table 4.2.4 below, the optimum lag
length for the explanatory variables (BCSME, BLR, LMS) is 3. This implies that in the proposed
Panel ARDL equation, an optimal lag length of four will be used for SMEL, DCP and BLR in the
equation.

Table 4.2.6: Lag Length Structure for the Independent variables

VAR Lag Order Selection Criteria

Endogenous variables: LBCSME BLR LMS
Exogenous variables: C
Date: 12/24/19 Time: 22:23
Sample: 1992 2018
Included observations: 23

Lag LogL LR FPE AIC SC HQ

0 -70.52278 NA 0.120010 6.393285 6.541393 6.430534

1 -0.696490 115.3652* 0.000612* 1.104043 1.696474* 1.253038*
2 5.564368 8.710759 0.000816 1.342229 2.378984 1.602970
3 13.81853 9.330793 0.000987 1.407084 2.888164 1.779572
4 27.29554 11.71914 0.000872 1.017779* 2.943183 1.502013

* indicates lag order selected by the criterion

LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion

4.2.7 CO-INTEGRATION TEST

Since it has been established that some variables were not stationary at level, there is need to check
whether there is existence of similar trend properties between or among the series as a regression
model on co-integrated series. Thus, given the unit root test result above, the most appropriate co-
integration test is the Pesaran Bounds test since the test allows combination of fractionally
integrated variables i.e. combines variables of different orders of integration. The purpose of co-
integration is to detect if there is a long run equilibrium among the variables, since we have
established that all variables are not stationary at level form until they were differenced, it means
that the mean of most of the variables varies overtime.

ARDL Bound Co-integrationTests Result: Looking at the ARDL Bound test result in table 4.2.4
below, it was observed that the value of F-statistic test (0.843153) is lesser than the lower and
upper bound level at all significant level. Therefore, only the short run ARDL model will be
estimated.
Table 4.2.7: Bound Co-Integration Test Result
Test statistic

F-Statistic 0.843153

Significance 10% 5% 2.5% 1%

I(0) 2.72 3.23 3.69 4.29

I(1) 3.77 4.35 4.89 5.61

4.3 DISCUSSION OF RESULT

4.3.1 THE SHORT-RUN ARDL MODEL RESULT INTERPRETATION
The Table 4.3.1 below reveals the short run ARDL result of the model. It shows the effect
of Commercial Banks loan on Small and Medium Scale Enterprises growth in Nigeria.
Commercial Bank Credit to SMEs (BCSME), Bank Lending Rate (BLR) and Broad Money Supply
(MS) are proxies for Commercial Banks credit measures while Wholesale and Retail contribution
to GDP is used as a proxy for Small and Medium Scale Enterprise Growth (SME_G) as in Nigeria.

The result shows that in the short run, a period time lag of small and medium scale
enterprise growth (SMEL_G (-1)) and commercial bank loan to SMEs (BCSME) appears to have
a positive and significant relationship with SMEL_G. On the other hand, broad money supply and
bank lending rate appears not to have a significant effect on SME_G.

It therefore follows that at one percent significant level, a percent increase (decrease) in
SMEL_G (-1) and BCSME will make small and medium scale enterprise growth (SME_G) to
increase (decrease) by 0.8724% and 0.000015% respectively while holding the effect of all other
regresssors in the model constant.

On the contrary, changes in MS and BLR would probably have no significant effect on the
behaviour of SME_G in Nigeria given their respective probability value as 76.07% and 27.29%
which are respectively greater than five percent.
 On the final note, at 1% level of significance, the F-statistic confirms the overall level of
significance of the model while the result of the adjusted R2 shows that 96.59% of the total
variation in SME_G is explainable by the regressors used in the model.

4.4 POST ESTIMATION TEST RESULT

After having estimated the short-run ARDL model, it is required to verify whether the
estimated model follows the ARDL diagnosis test which is the test for normality.
To confirm the efficiency and consistency of the model various diagnostic tests was
conducted as reported in table 4.2.3 below. The result shows that the model is free from
autocorrelation and heteroscedasticity problems because in the entire two (2) tests null hypothesis
cannot be rejected which implies that the model is efficient and consistent.

Table 4.3: ARDL Model (3, 4, 4, 4)

Table 4.3.1 Short run result

Dependent variable: LSME_G

Variable Coefficient Std. Error t-Statistic Prob.*

SMER(-1) 0.872383 0.180902 4.822409 0.0001

BCSME 1.51E-05 8.69E-07 17.44104 0.0000

BCSME(-1) -1.34E-05 3.04E-06 -4.402828 0.0003

MS -4.66E-15 1.51E-14 -0.308712 0.7607

BLR 0.016823 0.014920 1.127550 0.2729

C 6.47E-05 0.251165 0.000258 0.9998

Source: Author’s Computation (2020)
Table 4.4 Diagnostic Test Results

TEST F-Stat (Prob)

Breusch-Godfrey Test (Serial 0.3609 (0.4371)

correlation)

Heteroskedasticity 0.5581 (0.4626)

4.5 TESTS OF HYPOTHESIS

The test of hypothesis as stated in chapter one is carried out using regression analysis whereby the
ARDL Model was adopted.

H01: There is no significant relationship between bank credit to SMEs and the growth of small
medium scale enterprise in Nigeria.
The test results in Table 4.3.1 showed that there was a positive and significant relationship between
bank credit to SMEs and growth of small medium scale enterprise in Nigeria. Therefore, we failed
to accept the null hypothesis.
H02: There is no significant relationship between bank lending rate and the growth of small
medium scale enterprise in Nigeria.
Result from the test of hypothesis indicated a positive and insignificant relationship between bank
lending rate and the growth of small medium scale enterprise in Nigeria. Therefore, the null
hypothesis, Ho2, cannot be rejected, and it was concluded that there is no significant relationship
between bank lending rate and the growth of small medium scale enterprise in Nigeria.
H03: There is no significant relationship between money supply and the growth of small medium
scale enterprise in Nigeria.
Result from the test of hypothesis indicated a negative and insignificant relationship between
money supply and the growth of small medium scale enterprise in Nigeria. Therefore, the null
hypothesis, Ho3, cannot be rejected, and it was concluded that there is no significant relationship
between money supply and the growth of small medium scale enterprise in Nigeria.
4.6 FINDINGS AND IMPLICATION
The main objective of this work is to check the impact of Commercial Banks credit on
Small and Medium Scale Enterprises growth in Nigeria. Bank credit to SMEs (BCSME), Bank
Lending Rate (BLR) and money supply (MS) are proxies for Commercial Banks credit measures
while Output from wholesale and retail trade is used as a proxy for Small and Medium Scale
Enterprise growth (SME_G). Results shows that a period lag length of bank credit to SMEs and
bank credit to SMEs positively and significantly affect the growth of small and medium scale
enterprises in Nigeria.

The significant positive relationship of Bank credit to SMEs output implies that increase in bank
credit to SMEs will have a positive impact on SMEs output in Nigeria. Therefore, monetary
authorities should make flexible policies that will encourage the commercial banks to increase
their credit to Small and Medium Scale Enterprises by giving a higher credit rate so as to boost
their level of productivity which will also have a positive multiplier effect on the overall economic
output level. The significant positive effect of a period lag of SMEs (SME_G(-1)) on the its current
level of growth implies that the current level of SME_G will have a direct multiplier effect on its
future growth level.
 CHAPTER FIVE
5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATION

5.1 SUMMARY

This study examined the effect of Commercial Banks credit on Small and Medium Scale
Enterprises growth in Nigeria. Bank credit to SMEs (BCSME), Bank Lending Rate (BLR) and
money supply (MS) are proxies for Commercial Banks credit measures while Output from
wholesale and retail trade is used as a proxy for Small and Medium Scale Enterprise growth
(SME_G). Relevant economic data were sourced from the Central Bank Statiscal Bulletin (2018)
and World Development Indicator (WDI) spanning through of 1992 to 2018. The methodology
employed included Augmented Dickey Fuller unit root test as well as bound test for co-integration,
SC, AIC and HIC were used in determining the optimum lag combination in the model estimated
for the Unit Root Test and Autoregressive Distributed Lagged Model (ARDL).

However, before the models were estimated, the statistical properties and trend of each of
these variables were highlighted using descriptive statistics and graphical analysis. The stability
of the series of variables examined was tested using Augmented Dickey Fuller test. The results
indicated that all variables are stationary after first differencing. Shortly after that the presence of
long-run relation among the variables were examined using Autoregressive Distributed Lag Model
Bound test owing due to the facts that all variables are I (1).
However, before the models were estimated, the statistical properties and trend of each of
these variables were highlighted using descriptive statistics and graphical analysis. The stability
of the series of variables examined were tested using Augmented Dickey Fuller test, the results
indicated that all variables are stationary after first differencing. Afterwards, the presences of long-
run relation among the variables were examined using Autoregressive Distributed Lag Model
Bound test owing to the facts that all variables are not stationary at level. The bound test result
confirms the presence of no long run relationship among the variables used in the model and as a
result, the ARDL short run model was adopted in order to confirm the efficiency and consistency
of the model, various diagnostic tests were conducted. The result shows that the model is free from
serial correlation and heteroscedasticity problems because in all the two (2) tests null hypothesis
cannot be rejected which means the model is efficient and consistent and therefore reliable.
5.2 CONCLUSION

Small and Medium Enterprises (SMEs) have been recognized as driving force for
economic growth in any nation. Empirical evidences have shown that they contribute to
employment, alleviate poverty and increase productivity level in a nation. In recognition of the
role of SMEs in the economic growth process of Nigeria, government has taken concerted efforts
to foster the growth of SMEs and also develop entrepreneurship. SMEs are of necessity to a
nation’s industrialization process. One foremost way of promoting SMEs is by having easy access
to finance. Finance is of high importance to the growth of SMEs as it has been noted by number
of researchers that a major gap in Nigeria’s industrial development process in the past years has
been the absence of a strong and virile SMEs sector attributable to the reluctance of banks
especially commercial banks to lend to the sector.

Using the proxies of Commercial Bank credit measures, it can be deduced from the analysis
carried out that SMEs growth significantly depends on commercial bank loan to SMEs as it has
been revealed from the analysis of result that a significant and positive relationship exist between
commercial bank loan to SMEs and SMEs growth in Nigeria. Therefore, flexible policies by the
monetary authorities that will encourage the commercial banks to increase the issue loans to Small
and Medium Scale Enterprises will unambiguously boost their level of output and the overall level
of economic growth of the country. The findings of this research work is consistent with that of
Sunday and Ehijiele (2017); Joseph and Nnanyelugo (2015) and Ehikioya and Mohammed (2012)
among others.

5.3 RECOMMENDATION

From the above discussion, the policy recommendations are clear:

1. The Monetary Authority should mandate the commercial banks to reduce credit allocation
requirements in terms of collateral and interest in order to increase credit allocation to
SMEs to enhance economic growth in Nigeria.
2. Commercial Banks should keep to a lower level of lending rate so as to encourage the
Small and Medium Scale Enterprises to opt for more loans to increase their level of
productivity.
3. Government should also create an enabling environment for SME development in terms
of clear tenure rules, simple business registration and export procedures, and accessible tax
and financial incentive schemes in order to enhance their potentials in promoting economic
growth in Nigeria
4. Commercial banks should establish more branches especially in the rural areas so that
SMEs can have easy access to credit facilities to facilitate their growth.
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