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THE ROLE OF
COMMERCIAL BANKS IN FINANCING SMALL-SCALE INDUSTRIES
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The
important role played by small-scale industries in developing economics has
been increasingly realized over the past years. Not only are they important for
the vitality of the business sector, they also play a major role in terms of
employment creation, income generation and output growth. But in order to play
their role in future, there is need for researchers and policy makers to
identify this role and constantly interact to bring about a sustainable policy
framework for industrial development methods to have maximum effectiveness,
they must include methods specifically adapted for work with small industries.
Stanley and
Morse (1965) identified three types of policies towards SSI’s development,
namely passive, protective and developmental. A passive policy is one of
neglect, resulting from indifference, lack of information, or lack of
leadership. A protective policy is designed to defend existing small
enterprises against competition from large and modern industries,. The
developmental approach to small-scale industries promotion has as its objective
the creation of economically viable enterprises which on their own feet without
perpetual subsidy can make a positive contribution to the growth of real income
and therefore to better living standards. Policy instruments that can be used
to achieve developmental policy objectives include the following:
- The provision of
industrial advisory services.
- The training of
entrepreneurial managers and supervisory personnel.
- Provision of
developmental finance.
The policy
instrument identified above are by no means exhaustive. However, these are the
main problems areas identified by researchers of SSI’s. Financial constraints
have been identified by researchers as the most threatening challenge (Mashly
and Stanley 2008). The small-scale industries were not accorded significant
importance in developing countries (Africa) until 1975 when the various
government realized that its industrialization strategy of import substitution
only resulted in the setting up of large-scale industries. This category of
industries is capital intensive and labour saving in the operations. Due to the
capital intensive and labour saving in the operations. Due to the
capital-intensive nature of the industries, technical manpower was recruited
from abroad as experts.
The resultant effect is that most
of the value added to production in these developing countries was repatriated
in the form of dividends, profit and royalties. It was against this background
that the Nigerian government and the various state government now through it
important if there must be industrialization based on principle of
self-reliance. Small-scale industries must be given prince of place. However,
it was not until the third national development plan of 1975-1980 that the
programmes for the development of small-scale industries were explicitly spelt
out. The creation of employment opportunities mobilization of local resources,
mitigation of rural-urban migration and more distribution of industrial
enterprises in different parts of the state.
Nonetheless, inadequate credit
facilities has been a major impediment in the development of small-scale
industries all around the world, for this reasons, many of them are either
proprietary on partnership and so cannot obtain funds from commercial banks. As
a result of this inability, they are either starved of fund or at best obtain
fund on extremely unfavourable terms from source other than financial
institutions like money lending societies, thrift societies etc. the problems
of finance hinders SSI from operating profitable in a competitive market. In
order to arrest the situation, the federal and state governments set up
small-scale industries credit schemes and gave guidelines to commercial banks
to increase their lending to these categories of industries.
1.2 STATEMENT OF RESEARCH PROBLEM
There are
numerous problems that hinder the growth of small-scale industries (SSI’s) in
developing countries.
Lack of
access to credit hinders the growth and development of SSI. Also is the problem
of cutthroat competition of the established industries and the small-scale
industries also are a critical problem.
Most times
commercial banks do not follow the credit guidelines and other related policy
issues affecting the small-scale industries in Nigeria. In some instances where
commercial banks obey policy guidelines, they charge very high interest rate.
1.3 OBJECTIVES OF THE STUDY
The
objective of the study is to:
1. Identify the role of commercial
banks in financing small-scale industries in developing nations with special
references to Nigeria.
2. Analyze and examine the capital
structure of small-scale industries.
3. Examine the credit policies of
small-scale industries.
4. Identified factors, which limit
small-scale industries to access credit from the formal financial market.
5. Identify which types of credit are
easily obtainable to small-scale industries.
6. Make relevant policy recommendations to
enhance the financing of small-scale industries.
1.4 HYPOTHESIS
Formulation
of hypothesis using Ho and H1
Where:
Ho (null
hypothesis)
H1
(alternative hypothesis)
A. Ho: The credit policy has no
significant relationship with the growth and development of small-scale
industries.
H1: The
credit policy has significant relationship with the growth and development of
small-scale industries.
B. Ho: There is no significant
relationship between commercial banks credit scheme and the growth of
small-scale industries.
H1; There is significant tie
relationship between commercial banks credit scheme and the growth of
small-scale industries.
C. Ho: Small and medium scale enterprise does
not enhance economic growth and development
H1: Small and medium scale
enterprise does not enhance economic growth and development.
D. Ho: Financial empowerment has no
positive relationship with small-scale industries.
H1: Financial empowerment has positive
relationship with small-scale industries.
1.5 SIGNIFICANCE OF THE STUDY
The
evaluation of the public sector financial assistance scheme would serve as a
guide to private and non-government organizations. Moreover, evaluating the
credit related policies for SSI’s would go along way to helping their
development and growth. Finally a modest contribution would also be made
towards the general literature of both commercial banks functions in enhancing
the development of small-scale industries in Nigeria.
1.6 SCOPE OF THE STUDY
The scope of
this study is essentially the role of commercial banks in financing SSI’s in
Edo State.
1.7 DEFINITION OF TERMS
It would be
very important for me to define clearly some of the terms used ion the study to
enable the reader realize quickly what is being written to avoid any controversial
interpretation of terminologies or phrases.
Commercial
bank: commercial banks are profit seeking and risk-averse institutions. A bank,
which make short-term loans using money from current accounts.
Industrial
relations: These consist of the relationship between empowership employers and
employees in industry that is established and maintained by system of agreement
and laws.
Industry:
This involves all the people and the processes that are involved in
manufacturing or producing a particular thing.
Interest
rate: Public finance (a modern approach 2007) by Augustine O. Idomkeh defines
interest rate as a loan or it can be seen as the earnings of capital or payment
made for using capital (money capital).
Liquidity:
Paul k. Tauial (2006) in his book title basic economics for West Africa defines
it as terms used to denote the ease with which an asset can be converted at its
full value into money.
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