ANALYSIS ON COMMERCIAL BANKS INTERVENTION IN THE SME SUB SECTOR

ANALYSIS ON COMMERCIAL BANKS INTERVENTION IN THE SME SUB SECTOR

The banking sector is the section of the economy devoted to the holding of financial assets for others, investing those financial assets as an advantage to create more wealth and the regulation of those activities by government agencies.
 
Traditionally, banks leverage the money in their vaults as loans, earning money from the interest rates charged on those loans. The great contradiction of banking is that almost all of a bank’s actual money is nowhere near its vaults, meaning that its true value is only paper,
 
The banking sector has always attempted to diversify its risks by investing as widely as possible; this prevents an unexpected loan default from sinking the entire bank. However, this can cause other problems.
 
The banking sector’s core is trust. Without it, no one would deposit money, it would be unable to use that money to give loans, invest and drive economic growth, and regulation is used to create that trust.
 
The commercial banks to lend to small- and medium-scale firms and provide naira or foreign exchange.
 
In recent times, small and medium scale enterprises (SMEs) have assumed the center stage in the industrial development agenda of Nigeria. However, largely, the existence and survival of these SMEs depend on adequate financing.
 
Globally, evidence suggests that the foundation of the prosperity of the industrialized nations of the world was laid by small and medium scale enterprises. For example, the industrial revolution in Britain in the 19th century did not start with large-scale industries, but with inventions in small-scale industries that boosted productivity in the textile industry.
 
Again, the fashion industry in Italy was founded on its cottage industries and China that is regarded today as the “workshop of the world” is anchored on low-tech manufacturing activities. With small and medium scale enterprises, these nations were able to tackle the problem of unemployment, reduce poverty, increase productivity and achieve overall economic prosperity.
 
In recognition of the role of small and medium scale enterprises in the economic development process of nations, there has been a shift of emphasis by successive governments in Nigeria away from large-scale capital-intensive industrialization in favor of small and medium scale enterprises (SMEs), especially beginning from the 1980s. The growth and development of SMEs is therefore seen as a cardinal and veritable tool in the industrialization process of Nigeria.
 
Nevertheless, the existence and survival of these small and medium scale enterprises largely depend on adequate financing.
 
SMEs in Nigeria, as defined by Small and Medium Industries Equity Investment Scheme (SMIEIS), are enterprises with a total capital employed not less than N1.5 million, but not exceeding N200 million, including working capital, but excluding cost of land and, or with a staff strength of not less than 10 and not more than 300.
 
In Nigeria, the national council on the industry in 2001 defined small-scale enterprises as an industry with a labor size of 11 to 100 workers or a total cost of not more than N50 Million, including working capital but excluding the cost of land. In like manner, medium scale enterprise is defined as an industry with a labor size of between 101 to 300 workers or total cost of over N50 million but not more than N200 million, including working capital but excluding the cost of land.
 
Commercial Banks’ credit has not contributed significantly to the growth of Small and Medium Scale Enterprises in Nigeria despite many interventions and efforts by the CBN.
 
To support the growth of SMEs by Commercial Banks, so that they can be properly positioned to play a catalytic role in rapid industrial take-off and development in Nigeria,
 
Despite extensive reforms in the financial sector in Nigeria, with a view of improving access to financial services to private agencies, finance has remained very low and not improving over the years. Commercial bank performance has been poorly characterized by low levels of private credit, high-interest rate spreads, high levels of non-performing loans, poor asset quality,
 
Credit creation is the main income-generating activity for banks and this activity involves huge risks to both the lender and the borrower. The risk of a trading partner not fulfilling his or her obligation as per the contract on the due date or anytime thereafter can greatly jeopardize the smooth functioning of the bank‟s business.
 
In addition, a bank with high credit risk has a high bankruptcy risk that puts the depositors in jeopardy. In a bid to survive and maintain adequate profit level in the highly competitive banking environment, banks have tended to take excessive risks.
 
However, the increasing tendency for greater risk-taking has resulted in insolvency and failure of a large number of banks. The major cause of serious banking problems continues to be directly related to low credit standards for borrowers, counterparties and poor portfolio management. Lack of attention to changes in economic or other circumstances can lead to deterioration in the credit standing of banks‟ counterparties.
 
Because of the above, there is a need for banks to ensure effective credit risk management to maximize a bank’s risk-adjusted rate of return and maintain credit risk exposure within an acceptable limit.
 
The issue of high Non-Performing Loans (NPLs) has gained increasing attention in the last few decades with its negative effect on the banking sector and the economy as a whole.
 
One of the major sources of funds for the survival of SMEs to perform their expected role of rapid industrialization and economic growth is the commercial banks’ credit.
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