Financial Structure, Small and Medium Enterprises Financing and Economic Growth in Nigeria
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Date
2014-09
Authors
Onyeiwu, C. I.
Owualah, S.
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Abstract
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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Keywords
Economic growth , Small and medium enterprise , Finance , Nigeria
Citation
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