THE EFFECTS OF OVERDRAFT AS A SHORT TERM FINANCING ON SMALL AND MEDIUM SCALE ENTERPRISES

CHAPTER ONE

1.0     INTRODUCTION

Small and medium scale enterprises have long been revealed to be catalyst for economic growth and national development both in developed and developing countries. In Nigeria where private sector is not well developed SME is consumed by playing the role of employment generation, facilitation of economic recovery and national development.

According to extant literature the definition varies different economies but the underlying concept is the same Ayaggretal (2003) Buckley (I989) contends that the definition of small and medium scale enterprises varies according to context, author and countries”, In country such as USA, Britan and Canada, small scale business is defined in terms of annual honour and the number of paid employee (Ekpeyong and Nyang) (1992).

In the ease of Nigeria hardly do you see a clear cut definition that distinguishes between small and medium scale enterprises However, the central bank of Nigeria in its monetary policies circular No, 22 of 1988 View has annual turnover not exceedingN500, 000 (CBN21988). Similarly in 1990, the federal government of Nigeria defined small scale enterprise for the purpose of commercial banks loan as those enterprises whose annual turnover does not exceed N50, 000 and for merchant banks loan, those enterprise with capital enterprise with not exceeding 2 million naira(excluding the cost or a minimum one million naira).

One can now see that the predominate credit facilities available to small and medium scale business in Nigeria is bank overdraft and short term loan like “GROOMING LAPO“ and “SEAP" etc. while overdraft occur when money is withdrawn from a bank account and the available balance goes below zero in these Situation the amount is said to be “overdrawn”. If there is a prior agreement with the account provider for an overdrawn and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. if the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rate may apply.

There is scarcely a firm in the world that does not use overdraft facilities to manage its way through business circle. Bank prefer granting overdraft and short term , loan for the following simple reasons: i

i. They are easily rolled over

ii, They attract almost market interest rate and

iii. Collateralization

Almost all firms always rely on overdraft to finance long term investment and they have to be fully collateralized. Moreover, their average interest rate are 28.5% similar to short terms bank loan.

The difference in the average interest rate on finance is over 5% one major barrier to rapid development of the SMEs sector is a shortage of both debt and equity financing. Assessing finance has been identified as a key element for SMEs like Tejubi farm Saki to succeed in their drive to build productive capacity.

This project is to be consider the merits and demerits of the overdraft on

SMEs with a case study of Saki west local government.

1.1     BACKGROUND TO THE STUDY

The post independence Nigeria government adopted the entrepreneurship government which constrained it to consume the role of entrepreneur and the urge to offset the economics neglect on the colonial government and that result into engaging ambitions industrialization programmes. When the Nigeria Industrial Development Bank (NIDB) was established in 1964 for the purpose of speeding up the industrialization process, its mandate was promote industrial project which was large enough to make application contribution to the national economy however the collapse of the oil boom in the early 80’s exposed the inherent weaknesses of this.

Important of inputs resulted in large idle capacities, thereby creeping many gross domestic product (GDP) declined in the face of the economy and reduction of the dependency on petroleum. Small and medium scale enterprise have since become the faces of national industry policy In pursuit of self reliance in a developing Country particularly in Nigeria, the central government enacted a Decree called “Enterprise promotion decree” when there was a need for small scale medium scale in the promotion of economic development. This has since been at the fore front development strategies.

However, many developing countries have failed to adopt these strategies owing to their belief that it is a relatively slow process of industrialization. Without that development of small scale medium scale in Nigeria, the nations’ quest for industrialization will certainly remain forever at a slow pace, it is the humble opinion of the researcher that further development on our business enterprises must add to the basic issue of creating linkage within the economy to begin to yield real inputs to our economic development priority attention must therefore be given to those business enterprise for which domestic inputs could easily be produced, the objective should be to maximize the value added in their processing and manufacturing as final strong producer incentives to small and medium scale are necessary not only to meet the fully requirement but also to promote growing input supplier industrial growth in the present economy constraints may well turn out to be a blessing in disguised to our small scale industry effort particularly for the dynamic manufacturing sector for instance, the market determined exchange rate through foreign exchange market with its resultant high cost of imported inputs may serve as an impetus for industrialist to intensify their search for loan substitute, in 1971, the government of the east central statutorily enacted and edict establishing an office which was wither to a sub system of the ministry of commerce and industry to be known as Fund for Small Scale industries Credit. Scheme (FSSI) to give credits to prospective investors to enable them establish, this helping the country towards industrialization.

As at 1996 and 1999 respectively bank loans and advances to small and medium scale enterprise rose from #42,302.1 to #46,824.00 million. However, the slow rate of growth of the industrial sector, the mobility of the sector adequately provide and satisfied  the needs of the economy, the over dependence 0f the nation at large of foreign goods, pose a necessary course for the means of helping small scale enterprises to acquire the much needed finance from the background of the assess.

1.2     OBJECTIVES OF THE STUDY

The broad objective of the study is to examine the effects of overdraft as a short term financing on small and medium scale enterprises. The specific objectives are:

1.  To examine standard and accurate measure of obtaining an overdraft,

2. To ascertain the effective and judicious use of overdraft.

3. To explore the effectiveness of overdraft 0n the financing of small and medium scale enterprises.

1.3     STATEMENT OF THE PROBLEM

Emeti (2014) examined the issues, challenges and prospects of small and medium scale enterprise (SMSs). In particular, Nigeria and found that poor financing, inadequate social infrastructures, lack of managerial skills and multiple taxation were the major challenge confronting SMEs in Nigeria Also, ADB-OECO (2014) related that the 2008 global financial crises impacted SMEs and entrepreneur dispioportionately exacerbating their tradition financing constraints.

The primary focus of this study emanates from the fact that small scale enterprise owners do not have sufficient finance to carry on due to the low saving culture of the people in this part ofthe world, the reason for this is not fat fetched, low level of income, basically it is an established fact that small and medium scale enterprise face financial challenging no researcher has been conducted to investigate the effect of financial problem on their contribution to the economy development.

1.4     RESEARCH QUESTIONS

The following questions were formulated to the objective of the study

1. Does sourcing for overdraft fall in line with standard and accurate measure?

2. Can overdraft be used effectively and judiciously?

3. Does an overdraft as short term finance have effect on the financing of small and medium scale enterprises?

1.5     RESEARCH HYPOTHESIS

For the purpose of this research work the following hypothesis are formulated;

Null hypothesis is represented by Ho

Alternative hypothesis is denoted by Hi

HYPOTHESIS 1

1. Ho- sourcing for overdraft is not in line with standard and accurate measure of banking policies.

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