Determinants of Lending to small and medium Enterprises by Deposit Banks in Nigeria

Abstract

Small and medium enterprises (SMEs) play a prominent role in the development of the world economy. SMEs are used for redistribution of income, employment generation, check rural-urban drift, export promotion, diversification of the economy, mobilization of savings among others. Capital is one of the important factors determining the survival and growth of SMEs especially in developing economies. The study aims to examine the criteria used by deposit banks in assessing loan applications of SMEs in Lagos, Nigeria. Data were gathered from two hundred and ten (210) bank staff across thirteen (13) deposit banks; however, only two hundred and three (203) questionnaires were okay. The questionnaire was designed using five points Likert scale ranging from strongly agree (5) to strongly disagree (1) to provide information on the criteria used in assessing SME borrowers. The study found out that projected Income criterion ranked first, followed by the type of business activity then existing profitability, while government guarantee of the loan followed the curriculum vitae of clients had the least mean. The three major reasons why SME loan applications are turned down by deposit banks as stated by the bank staff include inadequate or no collateral, purpose of the loan not viable, poor/unsatisfactory/no business plan, poor record keeping and no existing relationship with the bank.