THE PROBLEM FACING SMALL AND MEDIUM SCALE ENTERPRISES IN OBTAINING BANK LOANS. A CASE STUDY OF UNION BANK OF NIGERIA PLC OGUI ENUGU.
CHAPTER ONE
INTRODUCTION
1.1       BACKGROUND OF STUDY
            The issue of financing small and medium scale enterprises has been the center piece of discussions between the government and banks.  While banks want to lend profitably government think they could sacrifice part of their huge profits without necessarily asking for collateral.
            In this research work therefore, efforts were made to unravel the problems or difficulties being encountered by small and medium scale enterprises before they could secure commercial bank loans and other incentives.  It also takes us to the contributions of small and medium scale enterprises to the development of our economy, its shortcomings and areas where their promoters are found wanting.  We will also attempt to distinguish small and medium scale industries from the big conglomerates and yard stick for distinguishing them stressed.
            The small and medium scale enterprises sub-sector is of immense benefit to any nation’s economic development but unfortunately; minimal attention is paid to them in our country.  For one thing they are major employers of labour because their operation is labour in contradistinctuctive with the larger conglomerates, which aim to automatic, and computerization.
            Modern economists have tagged small and medium scale enterprises industries as a necessary spring board for rapid industrialization of any action.
            Government policies blue-prints as formulated in their yearly budgets as it affects bank’s contribution to small and medium scale enterprises have often generated much controversy among the bankers and other financial institutions and have in most cases been thrown overboard by these groups.
            According the growth and success of such business have always been hampered by under-capitalization, poor management and more importantly bank’s refusal and unwillingness to contribute positively to them even when the federal government has fixed the percentage of their yearly contribution to the sub-sector.
            Before proceeding on this thesis, it important t o determine scale enterprises business.  The best way of defining an small and medium scale enterprises is make their performance and problems discernible from those of larger firms.
            In theory three main characteristics tend our clearly.
1.                  A small and medium scale enterprises is one that has relative small share of its market.
2.                  It is managed by it’s owners or past owners in a personalized manure and not through the medium of a formalized management structure.
3.                  According of Ewelike (1991), small and medium scale enterprises is independent as it dose not form part of a large enterprise which can provide a financial umbrella, and hence the owner – managers are free from our side control in taking their principal decisions even through that freedom may be circumscribed by their obligation to outside financial institutions.
There are however, other parameters for defining small and medium amount of capital level of turnover number of employees etc.  In developed countries like the United State of America, small and medium scale enterprise are those with less than 500 employees and makes an annual turnover with less than one million dollars.  According to George (1972) in financing small and medium scale enterprise through the stock market.  The ministry of industries has adopted a definition for it by reference to the value installed, fixed capital.  In 1972, it was at N60,000.00 while in 1975 it was raised to N250,000.00 because of inflation.
The Central Bank of Nigeria Credit Guideline to Commercial and Merchant Banks since 1979 refined small and medium scale enterprises as those establishment whose annual turnover do not exceed N500,000.00.
In the same year, the small scale small and medium scale enterprises industries division of the federal ministry of industries defined small and medium scale enterprises industries as “Enterprises having investment capital (Investment in land, Building, machinery and Equipment and Working Capital) of up to N60,000,000.00 and not more than 50 persons?  This was later revised to embrace any manufacturing and service industry with a capital not exceeding N150,000.00 in machinery and equipment.
The University of Ife research unit defined small and medium scale enterprises industry as one whose total assets in capital equipment and working capital are less than N250,000.00 and employing power than 50 full time workers.  In relation to obtaining finance from banks, an small and medium scale enterprises for commercial bank loan is define as one with an annual turnover not loan exceeding N500,000.00.  In the case of merchant banks, these are enterprise with capital investments not exceeding N2 million (excluding cost of land) or a maximum turnover of N5 million.
One remarkable thing is that all the above definitions tend to have one common factor-the upper limited of what constitutes a small and medium scale enterprises business is given in terms of turnover and capital investment.  It is pertinent here to observe that all the above definition of small and medium scale enterprises do not reflect the Nigeria small and medium scale enterprises business environment where as little as N500,000.00 could be used to start off a business, but perhaps the World Bank or Development countries definitions of small and medium scale enterprises business.
In this study therefore, efforts were made to identify the problems usually encountered by small and medium scale enterprise in raising money from banks.  The importance of such enterprises in our economy and lastly some suggestions on how to ameliorate such inherent difficulties were offered.
1.2       STATEMENT OF PROBLEM
            The problem of this study includes:
i.                    Difficulties in meeting up with interest charge by banks on loans’
ii.                  Effect of collateral requirement in loan disbursement to small business owners.
iii.                How poor management of bank loans in the past influenced loan disbursement.
iv.                The government and management decision on credit extension to small business owners.
1.3       OBJECTIVE OF THE STUDY
            The researcher has the following in the bank of her mind to achieve:
i.                    To find out the extent to which high interest rate charged by banks on loans affected the small business owners.
ii.                  To determine to what extent collateral requirement by banks affected the small business owners in obtaining bank loans.
iii.                To ascertain the extent poor management of loan affect4ed the small and medium scale enterprises owners in obtaining bank loan.
iv.                To find out the extent the small-scale business are precluded from bank loans because of their peculiar small nature and uncertainty of future existence.
v.                  To determine the extent management policies of banks affected their lending to small business owners.
1.4       THE SCOPE OF THE STUDY
            The study covers problems encountered by the small and medium scale enterprises business enterprises in obtaining bank loans.  These problems boarders on the requirements of commercial bank loans in relation to Union Bank of Nigeria Plc Ogui Road, Enugu.
1.5       RESEARCH QUESTION
            The following research questions are formulated:
i.                    To what extent does the interest rate charge by banks affect the small business enterprises?
ii.                  To what extent does poor management and poor accounting procedures/record affect the bank loans to small business owners?
iii.                To what extent does inability to procure collateral affect the small business owners in obtaining bank loan?
iv.                To what extent does the size of the small business affect the bank loan given to them?
v.                  What are the effects of management policies on the lending to small business enterprises?
1.6       STATEMENT OF HYPOTHESIS
            In consonance with the problems identified above and all research objectives the following hypothesis were propounded.
HA1:    Interest rate has no significant relationship with the Commercial Bank Loans to small scale enterprises.
HA2:    Poor management of loan has no significant relationship with bank loans to small-scale enterprises.
HA3:    Collateral requirement has no significant relationship with bank loans to small and medium scale enterprises owners.
HA4:    Business mortality rate has no significant relationship with the bank loans to small-scale business enterprises.
HA5:    The small nature of the small and medium scale enterprises has not significant relationship with the bank loans granted to them.
1.7       SIGNIFICANE OF THE STUDY
            This study is significant for the following reasons.
i.                    Show the extent commercial banks provide finance to small-scale enterprises in the state.
ii.                  Determine what relationship there is between the banks and the small scale enterprises.
iii.                Bring into focus the problems usually encountered by small and medium scale enterprises in raising money from the commercial banks.  Finally, the study would be significant to many bodies especially the following.
a.         Proprietor of small and medium scale         enterprises:    These people would be sufficiently exposed to the various requirements by commercial banks for loan lending.  The research would also recommend a good and efficient management; marketing and record keeping techniques that would be of interest to them.
b.         Banks:            small and medium scale enterprises business.  Other security arrangements other than collaterals, which would be less cumbersome to these bodies, will also be highlighted.
c.         Government: With improvement in the performance of small and medium scale enterprises industries due to availability of fund, there would be improvement in the economic activities in the economy thereby lending to increase in aggregate demand and the national income.