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EFFECTS OF
BUSINESS CREDIT AVAILABILITY ON SMALL BUSINESSES
1.0
INTRODUCTION
For both
developing and developed countries, small and medium scale firms play
importantroles in the process of industrialization and economic growth. Apart
from increasing percapita income and output, Small Medium businesses create
employment opportunities, enhance regionaleconomic balance through industrial
dispersal and generally promote effective resourceutilization considered
critical to engineering economic development and growth. However,the seminal
role played by Small Medium businesses notwithstanding its development is
everywhere constrainedby inadequate funding and poor management. The
unfavourablemacro economic environmenthas also been identified as one of the
major constraints which most times encourage financialinstitutions to be
risk-averse in funding small and medium scale businesses. The reluctanceon the
part of financial institution to fund Small Medium businesses can be explained
by the insufficient capitalbase of banks and information asymmetry that often
exists between Small Medium businesses and lendinginstitutions.
This study
critically examines the availability of business credit to small business in
Nigeria, and how more funding can be made to support small businesses. However,
this chapter, forms the basic foundation for this study as it presents the
objectives of the study, and the statement of problem that motivated the
researcher to undertake the study.
BACKGROUND
OF THE STUDY AND ORGANIZATIONAL PROFILE
During the 1990s,
a number of studies documented that lending to small businesses andthe economic
activity of small businesses were affected by financial sector disruptions,
such asthe widespread merging of banks of all sizes and the capital shortfalls
occasioned by large loanlosses.
Although not
much previous research has examined discrimination in small businesscredit
markets, there has been an active debate on the question of whether banks
discriminateagainst minority applicants for mortgages. In an influential study
in that area, researchers at theFederal Reserve Bank of Boston tried to collect
any information that might be deemedeconomically relevant to whether a loan
would be approved along with the borrower’s raceandf financial status (Munnell
et al., 1996). In the raw data larger firms had 10 percent of their loans
rejected versusrejection rates of 28 percent for small scale businesses. After
controlling for the large number ofvariables collected to establish the
credit-worthiness of the borrowers (including, the amount ofthe debt,
debt/income ratio, credit history, loan characteristics, etc.) small scale
businesses were still percentage points less likely to be granted the loan.
A variety of
criticisms have been launched at this study (see, for example, Horne 1994;Day
and Liebowitz, 1998; Harrison, 1998); responses to these criticisms are found
in Browneand Tootell (1996). The most common critique indicates that we cannot
make a determination ofdiscrimination unless those small businesses whose loans
are approved have a greater likelihood ofrepayment. This argument rests
critically upon an implied assumption that the distribution ofrepayment
probabilities for large companies and small businesses is identical. Hisfigure
indicates that if this assumption is met and if firms discriminate against
small businesses by setting ahigher bar for loan approval, then the mean rate
of repayment among small businessesconditional uponloan approvalwill be higher
for large and smaller firms.
PROBLEM
STATEMENT
Small
businesses and entrepreneurial ventures which are usually considered as the
engine that run the economy are usually denied access to credit due to their
risky nature. This disturbing threat has existed for a very long time and needs
proper attention from both government agencies and non governmental agencies as
well. The importance of small businesses in the development of Nigeria cannot
be overlooked. Without proper credit availability to small businesses, the
economy as a whole will suffer. The objectives of economic planning cannot be
achieved if small businesses do not do well. Keeping this in view, the Bank of
Nigeria has streamlined Bank’s lending operations to ensure that banks’ credit
actually benefits small and medium businesses in Nigeria. This strategy is intended
to improve the economy and to develop rural areas in Nigeria.
However,
there is some anecdotal evidence that most beneficiaries of business credit
from most financial institutions are salaried workers and large scale
companies, whose ability to repay loans are believed to be better than that of
small scale businesses. Moreover, this belief is not always the case as some
small businesses who go for loans are well profitable and well managed.
1.3 RESEARCH
OBJECTIVES
This paper
is aimed at the following objectives:
To examine
the relationship that exist between small scale businesses and financial
institutions that grant business credits in Uyo.
To identify
the challenges faced by small businesses in securing business credit in Uyo.
To examine
the degree of business credit availability to small businesses in Uyo.
To identify
the effects of businesses credit availability on small businesses in Uyo.
1.4 RESEARCH
QUESTIONS
The
following questions were used by the researcher in achieving the research
objectives of this study:
What
relationship exists between you and financial institutions that grant credit in
Uyo?
What
challenges do you face when securing credit for your business?
How often
business credit is made available to you when you apply for it?
What effects
have the availability of business credit had on your business?
1.5
SIGNIFICANCE OF THE STUDY
This study
is very important because it is aimed at examining the effects of business
credit availability and its effect on small businesses in Uyo. The paper will
provide some relevant recommendations for policy makers, development agencies,
entrepreneurs, and small business managers to help seek better ways to increase
business credits to small businesses, and appropriate strategies to improve the
small business sector in Nigeria.
Secondly,
the study is also vital since it suggest to small businesses certain strategies
they can adopt before seeking business credits, to make their borrowing process
easier and more effective. This will go a long way to increase the efficiency
and profitability level of small businesses in Uyo. Any time these strategies
are put in place, access to business credit increases, and the participation of
more people in entrepreneurial activities will also increase, hence the economy
of Nigeria will be improved.
1.6 SCOPE OF
THE STUDY
The area
chosen for this study is Uyo in the South-south region of Nigeria.The study is
limited to the effects of business credit availability on small businesses in
Uyo, using various small businesses in Uyo as a focus point.
1.7
LIMITATION OF THE STUDY
In
undertaking this research, the researcher encountered the following problems;
1. The time
used to undertake the study was limited. The time was loaded with other
academic activities and as a result limited time was made available the study.
2. Also,
response from the various small business owners through the questionnaire
provided by the researcher was also a bit slow. This is because of reasons such
much work load on the part of the respondents.
1.8 CHAPTER
SCHEME
The project
will be organized around following chapters;
Chapter one
gives an introduction to the research work. It gives the basic information
about the company and the research being undertaken. This chapter therefore
consists of the background of the study and organizational profile, statement
of the problem, objectives, research questions, significance of the study,
scope of the study, and limitations encountered by the researcher.
Chapter
Twoconsists of the literature review and the theoretical framework
Chapter
three gives details of the research methodology. The research methodology
represents the various ways and methods which the researcher used in order to
gain his information.
Chapter
Fourgives the analysis and interpretation of the information gathered by the
researcher.
Chapter five
gives the findings and conclusion of the researcher. Here, conclusions will be
drawn based on the findings and their implications will also be given.
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