(A Case Study of Customers in United Bank for Africa)

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Small and medium scale enterprises are the catalyst for economic growth in most economy thus, the fundamental objective of this study is to investigate the impact of loans on small and medium scale enterprises (SMEs) in Nigeria. So that the ability of SMEs, to develop positively and drive economic growth in Nigeria will become real.  Simple random sampling techniques was employed in selecting the 100 SMEs that constituted the sample size of the research. Structured questionnaire was designed to facilitate the acquisition of relevant data which was used for analysis. Descriptive statistics which involve simple statistical table with, means cluster. The findings of the study reveal that significant number of the small and medium scale enterprises benefited from the loans even though only few of them were capable enough to secure the required amount needed. Interestingly, majority of the SMEs acknowledge positive contributions of loan towards increasing their returns and sales thus placing them in the competitive area. It is recommended that banks should review their interest rate Downwards and also share best practices with their small and medium scale enterprises especially on the efficient use of loans; this will boost their productivity and support SMEs in Nigeria.  








In Nigeria, available data from the Registrar General Department indicates that 90% of companies registered are micro, small and medium enterprises (Mensah 2004). This target group has been identified as the catalyst for economic growth of the country as they are a major source of income and employment to many Nigerians.

According to Mensah (2004) small enterprises employ between 6 and 29 employees with fixed assets of $100,000 while medium enterprise employing between 30 and 99 employees with fixed assets of up $1 million, Hallberg (2001) put forward that SMEs account for majority of firms in an economy and a significant  share of employment. Like other countries of the World, SMEs in Nigeria have the tendency to serve as sources of livelihood to the poor, create employment opportunities, generate income and contribute immensely to economic growth. Small firms are the engines for economic development of several developed counties as the US and Japan (Hallberg 2001).

However, in developing countries like Nigeria small scale businesses serves as the foundation upon which industries development is based. This is because small and medium scale enterprises promote stable industrial base and ensure a balanced distribution of industrial development (Nwanko G. O. 1991).

A close look at the performance of small and medium scale businesses in Nigeria portrays a situation of neglect, apathy and general underdevelopment. This situation had serious hampered the rapid growth of this important sub sector of the economy, pathetic situation could be attributed to a number of problems hindering the development of small and medium scale enterprises such as managerial problems, marketing problems, lack of high caliber of employees and lack quantitative data among others. The above-mentioned factors have hindered the development of small and medium scale businesses. The acute shortage of required-capital to meet the business operational requirements has cultivated the fluctuating performance of Nations economy. The difficulties of small and medium scale businesses in obtaining required credit facilities and varieties of credit issues has further complication the financial problem facing these industries.

The problem of obtaining the right financial facilities from the formal money markets at the right quality and good satisfying terms is also a serious factor.

There enterprises have a very important impact on the life of everybody in the society. Small independence businesses are everywhere and in every line of work. They can also be seen in every community.

This business is as old as man so virtually everything is does in life involve an element of business.

The role of small and medium scale enterprises in our economic history however has been one of distribution and contribution. Although it’s relative important had decline with the growth of the big business small and medium scale business is still making major contribution to the country economic business. Nigeria today is made up of both large and small business.

Today small scale enterprises have to enjoy more prestige than over before because of it vital contribution to the Nation economy. So vital is small business put few any part of our economy could work without its steady stream of production and services in every major industry there are successful small scale enterprises operate manufacturing plants, retail stores, wholesales, drugs computers, construction firm and hundreds of other types of business.  

Small and medium scale enterprises may have more information about their futures prospective than the banks. Since banks do not have the necessary information, even small firms with profitable investment opportunities are turned down when requesting credit facilities. Banks, therefore, introduce restrictive covenants and also collect collateral from small firms. To mitigate this problem, Bose and Colheren (1997). The question is what is the impact of this loan on these SMEs? Traditionally, debt finance has been viewed as less expensive than equity. It furthermore has used both to decrease the average cost of capital and enhance shareholders returns.

However, there is a negative side to debt, since interest payment must be made regardless of market conditions. This vulnerability is an important factor that firms must consider when making capital structure decisions.

In addition, Glen (2004) states, there is a very strong economic and statistical link between macroeconomic variable and a firms’ ability to meet debt obligations. The macro-economic environment implies the level of aggregate demand, the level of interest rate, and the level of inflation. A positive macro-economic environment results in a rise in aggregate demand and positively impacts on the ability of a firm to meet debt obligations.

The ability to service debt becomes problematic when the macro-economic environment deteriorates; resulting in the insolvency of firms (Glen, 2004).

Against this background, the study investigates whether SMEs in developing countries can use debt and still remain solvent in this era of high interest rates.  

Furthermore, SMEs often pay interest premiums and a host of non-interest fees such as application and other transaction fees when borrowing from Commercial Banks.

The cause of this is that SMEs are considered a high credit risk compared to large firm. This high cost of funds because of increased risk increase the costs of debt for small firms.


Inferring from the above, SMEs serve as sources of livelihood to the poor, create employment opportunities, generate income and contribute to economic growth. There is also the potential of small firms to turn economics with negative growth into vibrant ones, not to mention the fact that most large companies usually start as small enterprises, so the ability of SMEs to develop and invest becomes crucial to any economy wishing to prosper. From the argument above the only easier finance option for SMEs are loans (Debt Financing) assess from financial institutions, thus its necessary to examine the impact of these loans on the performance of SMEs. Are they having negative impact on their performance? this is growth investigating because majority of the business fall within the SMEs category especially in developing countries.


The general objective of this work therefore is to investigate the contributions of loans to SMEs performance. The specific objectives of the study are:-

  1. To find out what SMEs, classify as disadvantages and advantages of accessing loans.
  2. To find out how loans provided by financial institutions are utilized by the small and medium scale businesses.

iii. To investigate whether loans to SMEs actually lead to increase in stated performance or otherwise.


  1. What are the disadvantages and advantages of taking a bank facility?
  2. How do small and medium scale enterprises utilize loans?

iii. Do small and medium scale enterprises loans affect performance?


A research of this sort is necessary with respect to the fact that:-

  1. Worldwide, the SMEs have been accepted as the engine room of economic growth, and for promoting equitable development. Thus it leverage should be of great concern.
  2. Accessing finance has been identified as a key element for SMEs to succeed in their drive to build productive capacity, to compete, to create jobs and to contribute to poverty alleviation in developing countries.

iii. Small business especially in Africa can rarely meet the conditions set by financial institutions, which see small and medium scale enterprises as a risk because of poor guarantee and lack of information about their ability to repay loans. Without finance, SMEs cannot acquire or absorb new technologies nor can they expand to compete in global markets or even stick business linkages with large firm. (UNCTAD, 2002).


The research covered the whole SMEs industry in Nigeria since one SMEs was picked randomly from each sector namely Primary, Secondary and Tertiary. Thus, making it more representative of the overall Nigerian industrial sector.

Although the data collected concentrate on one SMEs each from each industry, it might not have reflected a true representation of realistic issues, but at least it showed a bit of what happens in each segment. Another limitation may be the fact that a single researcher collected and analyzed the data. Because of this, some explanations may be skewed toward personal interpretation to distort the meaning of the results. The research is also constraint with time since the time frame for the research is limited.


The chapter is divided into five main chapters and each chapter is divided into various sections.

Chapter one is the general introduction. It elaborates on the setup of small and medium enterprises (SMEs) and its financing options among others reviews also focuses on the impact of loans on small and medium scale enterprises and presents problems identified. It also presents the research objectives, rational, methodology and scope of the study.

Chapter two review literatures related to the problem under study. It mainly reviews literature on small and medium enterprises and access to finance, alternative sources of financing SMEs.

Chapter three chronicles the methodology and approach for the study.

Chapter four focuses on the presentation of data and analysis of the data collected. It starts with test accessibility to loans and moves on to establish loans contributions toward SMEs sales and marketing activities and overall performance.

Chapter five which is the final chapter is the presentation of the major findings conclusions and recommendation. 


In view of the fact that different meanings can be assigned will apply to the following words as used in this research work:-

  1. Small and Medium Enterprises: A small business concern shall be deemed to be one which is independently owned and operated and which is not dominant in its field of operation”. In general a small business has few employees, limited capital investment, and low sales.
  2. Manufacturing: The process of converting raw materials components, or parts into finished goods that meet a customer’s expectations or specifications. It is also the value added production of merchandise for use or sale using labour and machines tools, chemical and biological processing, or formulation.

iii. Medium Scale Enterprises: Medium scale enterprises are those companies whose personal numbers falls below the set criteria. Generally, this term is used by European Countries and some International Organization such as WTO, World Bank and by United Nation.

  1. Wholesale: This is person or firm that buys large quantity of goods from various producers or vendors. A real certified wholesale distributor is a company who handle the wholesale shipments for the manufacturing of goods.
  2. Small Scale Retailer: The small scale retailers operate in various forms. They consist of hawkers, selling their wares from house to house to sell their commodities.
  3. Retailer Stores: Are retailing stores in which products are physically moves them about to reach the consumers in different parts of the Country.

vii. Bank: A bank is a business house where money is received or repaid and where loans or general financial business may be negotiated and transacted.

viii. Loan: loan is an arrangement in which a lender gives money or property to a borrower, and the borrower agree to return the property or repay the money, usually along with, interest, there is a predetermined time. Usually, there is a generally the lender has to bear the risk that the borrower may not repay a loan (though modern capital markets have developed many ways of managing this risk).


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