EFFECT OF DEPOSIT MONEY BANKS’ CREDIT ON THE PERFORMANCE OF MICRO, SMALL AND MEDIUM ENTERPRISES IN NIGERIA

EFFECT OF DEPOSIT MONEY BANKS’ CREDIT ON THE PERFORMANCE OF MICRO, SMALL AND MEDIUM ENTERPRISES IN NIGERIA

Abstract

Banks are the most important example of a class of institutions called financial intermediaries, firms that extend credit to borrowers using funds raised from savers.       However, credit is not an end in itself; it is a means to an end. The ultimate goal is to affect productivity. For both developing and developed countries, micro, small and medium scale enterprises (MSMEs) play important roles in the process of industrialization and economic growth. Thus, this paper set out to empirically evaluate the effect of deposit money banks’ credit on the performance of MSMEs in Nigeria with the aid of a vector autoregression and error correction mechanism (ECM) technique. Results of the empirical investigation confirmed credit has a positive effect on GDP of MSMEs in Nigeria as the coefficient of CAM (credit to MSMEs) was positive (1.0569) and significant at one percent level.  It is therefore recommended that every effort should be made to improve access to credit by MSMEs so that they can play their potential roles of employment generation and wealth creation and move the majority of the entrepreneurs out of poverty.

 Keywords: Micro, small and medium enterprises, Financing, Credit, Economic development.

CHAPTER ONE

1.      Introduction

             Economic development is a process whereby an economy’s real national income increases over a long period of time. The term economic development also refers to achievement by poor countries of higher levels of real per capita income and of improved conditions of living for their people. Maintaining development is a problem for rich countries, but accelerating development is an even more pressing matter for poor countries (Ojo, 2010). The role of finance in economic development is widely acknowledged in literature. It is argued that financial intermediation through the banking system play a pivotal role in economic development by affecting the allocation of savings, thereby improving productivity, technical change and the rate of economic growth (Sanusi, 2011).

             For both developing and developed countries, micro, small and medium scale firms play important roles in the process of industrialization and economic growth. Apart from increasing per capita income and output, MSMEs create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resource utilization considered critical to engineering economic development and growth (Sule, 1986; Udechukwu, 2003). Micro, small and medium enterprises (MSMEs) are companies whose headcount or turnover falls below certain limits. The definitions change over time and depend, to a large extent, on a country’s level of development. Thus, what is considered small in a developed country like the USA could actually be classified as large in a developing country like Nigeria. However, the definition of MSMEs in Nigeria as contained in the National Policy on Micro, Small and Medium Enterprises (SMEDAN, 2007) is adopted in this study (Table 1), because it is in line with the definition in other developing countries like Indonesia (Timberg, 2000) as well as in the European Union (EU) (European Commission, 2007).

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