Financial Structure, Small and Medium Enterprises Financing and Economic Growth in Nigeria

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Onyeiwu, C. I.
Owualah, S.
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Small and medium enterprises (SMEs) are critical agents of economic transformation as they account for more than 50 percent of Gross Domestic Product (GDP) of developing economies and are the main source of innovation, technological development, entrepreneurship, and enterprise. SMEs provide human capital and raw materials to large businesses but they are financially constrained. Numerous studies have linked financial constraint of SMEs to the financial structure of an economy (Berger and Udell, 2005) but none of these studies examined how the Nigerian financial structure regimes have affected SME financing. It is true that SMEs are riskier than large organizations but the respective contributions of SMEs and large organizations to economic growth are yet to be examined in Nigeria. This study, therefore, examined the effect the Nigerian financial structure regimes have on SME financing and the extent to which Nigerian SMEs contribute to economic growth. This study examined the Nigerian financial structure as a bankbased financial structure with different financial structure regimes; strict regulation(1959-1985), the deregulation with small banks (1986- 2004) and enhanced reform with megabanks (2005 -2010). In doing this, Multiple Regression and Vector Error Correction Models were used to analyze annual data on GDP growth rate, SME financing, money supply, credit to private sector, fiscal deficit and gross capital formation between 1978 and 20 I0 derived from publications of Central Bank of Nigeria (CBN) and National Bureau of Statistics of Nigeria (NBS). The result of the study showed that loans to SMEs had a significant effect on economic growth and in fact of all the independent variables in the growth model, loans to SMEs had the highest contribution to economic growth. It was also observed that the enhanced reform with mega banks period made the highest impact on the SMEs. SME financing significantly impacted economic growth of Nigeria even more than large organizations as it was seen that while one percent increase in SME financing led to 8.21 percent growth in GDP, one percent increase in credit to the private sector as a whole contributed only 3.35 percent increase in GDP. Against this backdrop, it is recommended that government should continue to support the present financial structure and find a way to further encourage financial institutions to lend to SMEs by providing guarantees, interest rate subsidies and specify minimum percentage of bank loan portfolio that should go to SMEs because there is the tendency for funds to be denied the SMEs which have been proven to be more efficient than large organizations.
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Economic growth , Small and medium enterprise , Finance , Nigeria
Onyeiwu, C. I. and Owualah, S. (2014), Financial Structure, Small and Medium Enterprises Financing and Economic Growth in Nigeria. Being a Paper presented at the 2014 Global Development Finance Conference held 2-3 September, 2014 at Crowne Plaza Hotel, Dubai United Arab Emirates