SMALL AND MEDIUM-SCALE ENTERPRISES (SMES) CREDIT FINANCING, FINANCIAL DEVELOPMENT AND ECONOMIC DEVELOPMENT IN NIGERIA

SMALL AND MEDIUM-SCALE ENTERPRISES (SMES) CREDIT FINANCING, FINANCIAL DEVELOPMENT AND ECONOMIC DEVELOPMENT IN NIGERIA

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Background of the Study

The importance of small and medium enterprises (SMEs) in achieving economic growth, particularly in developing countries like Nigeria, cannot be overstated. Small and medium-sized enterprises (SMEs) continue to be the bedrock and building blocks of any economy's substantial and long-term growth. Small and medium-sized enterprises (SMEs) are the driving force behind industrial growth and development. This is primarily owing to their enormous potential for assuring industry diversification and expansion, as well as the achievement of fundamental growth objectives. Small and medium-sized enterprises (SMEs) have been emphasized as capable of assisting in a good economic turnaround and complementing the efforts of current medium and large-scale sectors for a sustainable economy (Osuagwu, 2001). Recognizing the significance of The increased emphasis and particular education on the method and approach to establish and sustain a really viable private sector dominated by small and medium scale enterprises has driven the increased attention and specific education on the role of SMEs as a catalyst and engine of growth (SMEs). Such economic contributions are evident in the mobilization of idle financial resources, the conservation of foreign exchange, the utilization of local raw materials, specialist suppliers to large companies, increasing consumer variety and choice, checking monopolistic tendency power, providing a source of innovation, breeding ground for new industries, and, above all, the creation of jobs (Bamidele, 2012).

SMES make use of local raw resources and technology, assisting in the achievement of the aim of self-sufficiency. In addition, governments at all levels (local, state, and federal) have in one way or the other facilitated the performance of Small and SMEs. While some have formulated policies aimed at facilitating and empowering SMEs' growth, development, and performance, others have focused on assisting SMEs in growing through soft loans and other fiscal incentives in order to improve the economy's socio-economic development, such as poverty alleviation, job creation, human development, and social welfare (Oreoluwa, 2011).

Small and medium enterprises (SMEs) have an essential part in the growth and development of emerging economies, according to the literature. According to Ayozie and Latinwo (2010) and Safiriyu and Njogo (2012), SMEs stimulate entrepreneurship. Furthermore, Muritala, et al. (2012) argue that SMEs are more likely to use labor-intensive technology, lowering unemployment, especially in developing countries, and so having an immediate impact on job creation (Ariyo, 2008; Ayozie and Latinwo, 2010).

According to the United Nations Industrial Development Organization UNIDO (2001), economic reform employing the tools of democracy, deregulation, and liberalization provides a key cure for poverty reduction and integration into the globalized economy, the use of democracy, deregulation, and liberalization measures to transform the economy can be a key remedy for reducing poverty and inequality. The importance of this process lies in the emergence of a vibrant private sector that provides a platform for small and medium-sized businesses to play a prominent role.

The challenges that SMEs in Nigeria encounter are numerous. Inadequate capital and unavailable credit facilities were observed by Ekpenyong (1997) and Utomi (1997). Long-term institutional lending, which had previously been inaccessible to SMEs due to a lack of credit qualifying from financial institutions, is now available. According to a 2012 study by Evbuomwan et al., roughly 76 percent of survey respondents relied heavily on their own funds to support their firms. The banking system's incapacity to give significant help to new business ideas and the growth of current agricultural and sector SMEs, which is hypothetical, is a major source of capital for SMEs. It should be highlighted that commercial and merchant banks, which previously held liquidity levels in excess of regulatory requirements, have exhibited a reluctance to finance SMEs (Sacerdoti, 2005). Despite the fact that microfinance institutions (MFIs) have risen rapidly in several countries, lending volume remains insufficient. Due to a lack of long-term money and human capability, the requisite assistance is not at the scale necessary for a number of medium-sized initiatives. Furthermore, due to the high cost of administration in relation to the volume of operations, these financial institutions demand high interest rates on micro-credits. Mahmoud (Mahmoud, 2005). Other issues include a lack of power and insufficient infrastructure (Evbuomwan et al. 2012).

This in-depth examination of the basic characteristics of current micro, small, and medium-scale enterprises is supported by the fact that many previous strategies aimed at addressing the issues of the Nigerian economy's real sector appeared to have failed. This, it has been discovered, was mostly owing to their dependence on large "white elephant" projects that were physically spectacular but had little economic ties. Furthermore, the industrialisation approach followed at the time was neither resource- nor technology-based. It was based solely on the hope that the formation of these sectors would result in the transfer of relevant technology and its adaption to the Nigerian environment. These methods, needless to say, have failed (Kayode, 2004). The failure of prior favorable policies on small, middle, and large company industrialization to revive the economy's growth and development has piqued interest in SMEs as a facilitator of industrialization efforts and their influence on economic growth in Nigeria (World Bank, 1995; Chizea) (2002). In order to achieve this goal, the Nigerian economy prioritized the growth and promotion of SMEs. Small and medium-sized businesses (SMEs) are critical to the economy's long-term growth and development.

In Nigeria, it is important to recognize that SMEs have not gotten the attention or funding they require to operate effectively and profitably. The obstacles that SMEs in Nigeria encounter appear to be numerous. Inadequate capital and unavailable credit facilities are two key problems that SMEs face, according to Ekpenyong (1997) and Utomi (1997). Long-term loans, which are required for appropriate funding of SMEs, have been scarce. This terrible situation has persisted over time, owing to the fact that many financial institutions do not trust in the potential and profitability of SMEs, making financing to them hazardous. Other obstacles mentioned by Evbuomwan, Ikpi, Okoruwa, and Akinyosoye (2012) include poor power supply and insufficient appropriate infrastructure. This is true since no firm, even SMEs, can function effectively without the necessary infrastructure. They also stated in their study that 75.7 percent of their survey respondents financed their firms mostly with their own money. Small businesses have been severely handicapped by their incapacity to evaluate external sources of capital. A frequent complaint is that the banking system in the sub-sector (which is intended to be the primary financier of SMEs) is not sufficiently supporting new economic initiatives, particularly the development of SMEs and the agriculture sector.

According to McKinnon (1973) and Shaw (1973), the theoretical framework linking finance and growth emphasizes the necessity for financial liberalization directed toward boosting changes in realized savings that lower interest rates and promote investment and capital creation. Most SMEs in developing nations earn enough to meet their demands if they are able to attract a bigger share of savings to expand their capital base at low levels of income when the problem of low inclination to save and asymmetric information exists (Onyeiwu, 2012). In order to boost production growth, Schumpeter (1973) highlights the significance of lending to small businesses in funding innovations. This demonstrates the importance of continuing to provide credit support to SMEs in order for them to reach their full potential. However, owing to unequal financial opportunities faced by small company operators in most developing nations, such as Nigeria, this may not be the case. In this regard, a number of investigations have been carried out (see Klapper, Laeven & Rajan, 2004; Demirguc-Kunt, 2006; Oluba, 2009; Onakoya, Fasanya & Abdulrahman, 2013 etc.).

1.2 Statement of the Problem

The challenges that SMEs in Nigeria encounter appear to be numerous. Inadequate capital and unavailable credit facilities are two key problems that SMEs face, according to Ekpenyong (1997) and Utomi (1997). Long-term loans, which are required for appropriate funding of SMEs, have been scarce. This terrible situation has persisted over time, owing to the fact that many financial institutions do not trust in the potential and profitability of SMEs, making financing to them hazardous. Other obstacles mentioned by Evbuomwan, Ikpi, Okoruwa, and Akinyosoye (2012) include poor power supply and insufficient appropriate infrastructure.

According to Kuteyi (2012), small and medium enterprises (SMEs) fuel their country's growth through creating jobs and contributing to GDP (GDP). According to Ariyo (2008), Ayozie and Latinwo (2010), Muntala, Awolaja, and Bako (2012), Nkwe (2012), and Akingunola (2011), SMEs are more likely to use labor-intensive technologies, resulting in lower unemployment, especially in developing countries, and thus have an immediate impact on job creation. Azende (2011); Afolabi (2013); Onokoya, Fasanya, and Abdulrahman (2013), on the other hand, concluded that SMEs had no substantial impact on the country's economic progress. This study was inspired by the fact that earlier results were ambiguous, and as a result, some studies indicate both negative and positive outcomes on the contributions of SMEs to Nigeria's economic well-being.

Despite the fact that various research have been undertaken on the link between SMEs funding, financial development, and economic growth, there are few studies that focus on the interplay of the three fundamental topics. They also fail to look at how output responds to shocks in SMEs credit financing and financial market development indicators. In this context, this paper investigates the influence of SMEs credit financing from commercial banks, financial market performance, and shocks on Nigerian production growth across the study period.

1.3 Research Questions

In the context of this, the following research questions are formulated;

i. What is the impact of commercial bank credit financing on the financial development of SMEs in Nigeria ?

ii. What is the impact of Small and Medium-scale Enterprises credit financing on the economic development of Nigeria ?

iii. What is the relationship between Small and Medium-scale Enterprises  credit financing, financial development and economic developmemt in Nigeria ?

1.4 Objectives of the Study

The main objective of this study is to examine the Small and Medium-scale Enterprises (SMEs) Credit Financing, Financial Development and Economic Development in Nigeria. The specific objectives of this study include:

i. To determine the impact of commercial bank credit financing on the financial development of SMEs in Nigeria

ii. To evaluate the impact of Small and Medium-scale Enterprises credit financing on the economic development of Nigeria

iii. To investigate the relationship between Small and Medium-scale Enterprises  credit financing, financial development and economic development in Nigeria

1.5 Research Hypothesis

H01: there is no significant impact of commercial bank credit financing on the financial development of SMEs in Nigeria

H02: there is no significant impact of Small and Medium-scale Enterprises credit financing on the economic development of Nigeria

H03: there is no significant relationship between Small and Medium-scale Enterprises  credit financing, financial development and economic development in Nigeria

1.6 Significance of the Study

The following stakeholders will find this study extremely useful:

Government: This effort would offer adequate reasons for the country to support small and medium-sized businesses and the diversification of Nigeria's economy from an oil-dependent economy to a diversified economy. This effort will provide helpful information to the government on how to increase credit funding for SMEs.

Researchers: Because all research aims to improve existing knowledge, it is expected that this study will significantly contribute to studies on Small and Medium-scale Enterprises (SMEs), Credit Financing, Financial Development, and Economic Development in Nigeria, as well as serve as a reference for future research.

1.7 Scope of the Study

The research aims to evaluate Small and Medium-scale Enterprises (SMEs) Credit Financing, Financial Development and Economic Development in Nigeria. A detailed empirical research will be done using data spanning 30 years, from 1991 to 2021, to properly capture its economic impact. This time period is crucial because it records the fast growth of small and medium-sized businesses (SMEs) in the country.

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