IMPACT OF CREDIT FACILITIES ON PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES IN KADUNA METROPOLIS

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IMPACT OF CREDIT FACILITIES ON PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES IN KADUNA METROPOLIS

Abstract

The study examines the impact of credit facilities on the performance of small and medium-scale enterprises (SMEs) in Kaduna Metropolis. SMEs play a pivotal role in economic development, serving as a major driver of employment, innovation, and poverty alleviation. However, access to adequate and affordable credit remains a critical challenge for their growth and sustainability. This research investigates the extent to which credit facilities, including loans, grants, and microfinance, influence the operational efficiency, profitability, and overall performance of SMEs. A mixed-methods approach was employed, combining quantitative data collected through surveys of SME operators with qualitative insights from interviews with financial institutions and policymakers. The findings reveal a positive correlation between access to credit and improved business performance, highlighting the importance of favorable lending terms, financial literacy, and adequate policy support. The study also identifies key barriers to accessing credit, such as high interest rates, collateral requirements, and bureaucratic bottlenecks. Recommendations include enhanced collaboration between financial institutions and SMEs, the establishment of credit guarantee schemes, and the need for tailored financial products to support SME growth. This research contributes to understanding the critical role of credit facilities in fostering the development of SMEs and offers actionable insights for policymakers and financial service providers.

Keywords: credit facilities, SMEs, performance, financial access, Kaduna Metropolis, economic development.

Chapter One

Introduction

1.1 Background to the Study

Small and Medium Scale Enterprises (SMEs) are widely recognized as a critical sector for economic development, poverty alleviation, and employment generation. They serve as the backbone of many economies, contributing significantly to Gross Domestic Product (GDP) and fostering innovation and competition. In Nigeria, SMEs account for a significant share of business activities and are essential for economic diversification. Despite their importance, one of the major constraints faced by SMEs is access to adequate and affordable credit facilities, which hinders their ability to grow, expand operations, and contribute meaningfully to economic development.

Credit facilities, including loans, overdrafts, and microfinance programs, are essential financial tools that enable SMEs to access working capital, invest in new technology, and improve production efficiency. However, SMEs in Nigeria, particularly in Kaduna Metropolis, face challenges in accessing credit due to high-interest rates, collateral requirements, and bureaucratic bottlenecks. These challenges have led to limited financial inclusion, hampering the ability of SMEs to achieve their full potential.

The link between credit access and SME performance is critical in understanding how financial institutions and policymakers can support the growth of this sector. This study seeks to explore the impact of credit facilities on the performance of SMEs in Kaduna Metropolis, examining the opportunities, challenges, and implications for sustainable economic development.

The role of small and medium scale enterprises in driving economic growth in nations, the world over, is well documented. Empirical evidences suggest that the foundation of the prosperity of the industrialized nations of the world was laid by small and medium scale enterprises. For example, the industrial revolution in Britain in the 19th century did not start with large scale industries, but with inventions in small scale industries that boosted productivity in the textile industry. Again, the fashion industry in Italy was founded on its cottage industries and China which is regarded today as the “workshop of the world” is anchored on low-tech manufacturing activities. With small and medium scale enterprises, these nations were able to tackle the problem of unemployment, reduce poverty, increase productivity and achieve overall economic prosperity.In recognition of the role of small and medium scale enterprises in the economic development process of nations, there has been a shift of emphasis by successive governments in Nigeria away from large scale capital intensive industrialization in favour of small and medium scale enterprises (SMEs), especially beginning from the 1980s.The growth and development of SMEs is therefore seen as a cardinal and veritable tool in the industrialization process of Nigeria. But the existence and survival of these small and medium scale enterprises to a large extent depend on adequate financing. As has been observed by Ovat (2013) and Afolabi (2013), the bane of SMEs in Nigeria is financial constraint.

One of the major sources of funds for the survival of the SMEs to perform their expected role of rapid

industrialization and economic growth is commercial banks’ credit. Commercial banks through their financial intermediation role, are expected to provide financial leverage for small and medium scale enterprises. But in most developing countries in Sub-Sahara Africa including Nigeria, small and medium scale enterprises are plagued with paucity of capital, thus affecting their ability to grow (World Bank 2013).Given the fact that SMEs have been generally acknowledged as the bedrock of industrial development of nations across the globe and financial institutions especially Commercial Banks are theoretically expected to provide financial succor for their growth, the objective of this paper therefore is to examine how well the Commercial Banks in Nigeria have extended credit to the small and medium scale enterprises to facilitate their growth. For purposes of clarity and analytical sequencing, the paper is organized as follows: Section 2 explores related literature and theoretical frame work, Section 3 presents the research methodology and in Section 4, empirical results are presented and analyzed while Section 5 concludes the paper with recommendations.

1.2 Statement of the Problem

Access to credit remains one of the biggest obstacles to the growth and performance of SMEs in Nigeria. Despite the establishment of various financial institutions, government interventions, and credit schemes aimed at improving financial access, SMEs in Kaduna Metropolis still struggle to secure the necessary funds for their operations. Issues such as high-interest rates, stringent collateral requirements, limited financial literacy, and complex loan application processes hinder their ability to obtain credit.

These challenges have led to low business expansion, poor operational efficiency, and reduced profitability for many SMEs in Kaduna. As a result, their contributions to job creation, poverty reduction, and economic growth remain suboptimal. Moreover, there is limited empirical evidence on how available credit facilities have impacted SME performance in Kaduna Metropolis, creating a gap in knowledge that this study seeks to fill.

1.3 Objectives of the Study

The general objective of this study is to examine the impact of credit facilities on the performance of SMEs in Kaduna Metropolis. The specific objectives are:

To assess the extent of access to credit facilities by SMEs in Kaduna Metropolis.

To analyze the relationship between access to credit facilities and SME performance in Kaduna Metropolis.

To identify the challenges SMEs face in accessing credit facilities in Kaduna Metropolis.

To provide recommendations for improving access to credit facilities for SMEs in Kaduna Metropolis.

1.4 Research Questions

This study seeks to answer the following research questions:

To what extent do SMEs in Kaduna Metropolis have access to credit facilities?

What is the relationship between access to credit facilities and SME performance in Kaduna Metropolis?

What are the challenges faced by SMEs in accessing credit facilities in Kaduna Metropolis?

What strategies can be implemented to improve SME access to credit facilities in Kaduna Metropolis?

1.5 Research Hypotheses

The following hypotheses will guide this study:

H0: Access to credit facilities has no significant impact on the performance of SMEs in Kaduna Metropolis.H1: Access to credit facilities has a significant impact on the performance of SMEs in Kaduna Metropolis.

1.6 Significance of the Study

This study is significant for several stakeholders. For policymakers, it provides insights into the effectiveness of existing credit schemes and offers recommendations for improving access to credit for SMEs. Financial institutions can benefit from understanding the challenges SMEs face, enabling them to design tailored financial products that meet the needs of this sector. For SME operators, the study highlights opportunities to enhance their financial literacy and creditworthiness. Finally, the study contributes to the academic literature by providing empirical evidence on the relationship between credit facilities and SME performance in Kaduna Metropolis.

1.7 Scope of the Study

This study focuses on SMEs operating within Kaduna Metropolis. It examines the accessibility of credit facilities, the relationship between credit and business performance, and the challenges faced by SMEs in securing financial resources. The study covers the period from 2018 to 2023, providing a recent perspective on the dynamics of credit access and SME performance.

1.8 Limitations of the Study

The study is not without limitations. Data collection may be constrained by the willingness of SME operators to disclose financial information. Additionally, the study is limited to SMEs in Kaduna Metropolis and may not fully capture the experiences of SMEs in other regions. Time and resource constraints may also limit the scope of the research. However, efforts will be made to mitigate these limitations and ensure the reliability and validity of the findings.

1.9 Definition of Key Terms

Credit Facilities: Financial products such as loans, overdrafts, and microfinance schemes provided by financial institutions to support business operations.

Small and Medium Scale Enterprises (SMEs): Businesses with a limited number of employees, turnover, and capital investment, as defined by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).

Performance: The ability of SMEs to achieve desired outcomes, including profitability, operational efficiency, and business growth.

Kaduna Metropolis: The urban and peri-urban areas within Kaduna State, Nigeria, where the study is focused.

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