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CHAPTER ONE

INTRODUCTION

1.1      Background to the Study

Small and medium scale enterprises (SMEs) are seen as instruments for reducing the poverty level affecting the country and improving the economy of Nigeria. Therefore the need for SMEs growth in Nigeria is beyond question. Studies by the International Finance Corporation (IFC) show that approximately 96% of Nigerian businesses are SMEs compared to 53% in the US and 65% in Europe, they contribute approximately 1% of GDP compared to 40% in Asian countries and 50% in the US or Europe (Oyelaran - Oyeyinka, 2012). The question as to why the SMEs in Nigeria, are not contributing to the growth of the economy as they should like in other countries now arises. Small and medium scale enterprises earn their funds from various sources like personal savings, family and friends, loans and professional money lender such as deposit money banks and institutions like National Directorate of Employment, National Economic Reconstruction Fund and other small and medium scale enterprise schemes. Despite all the above-mentioned sources of finance, financial constraint is still put as the major problem of SMEs. The Banking System is very important for any nation because it is the pivot of socio-economic development of any economy Terungwa, (2016). This implies that commercial banks have active developmental roles to play in the economy such as mobilizing fund from the surplus to the deficit spending units. Commercial banks are considering as the main source of finance for SMEs or rather entrepreneurs in Nigeria. Akabueze, (2007) assert that Finance has been seen as a critical element in the growth and development of SMEs. For instance the commencement and efficient performance of any industrial enterprises be it small or large will require the provision of funds for its capitalization, working capital and rehabilitation needs, as well as for the creation of new investments. Provision of funds to the industrial sector, particularly, for the SMEs has, therefore, been of prime interest to policy-makers in both the public and private sectors. It is a known fact that firms depend on a variety of sources for their finances. These include external and internal, formal and informal sources Aruwa (2009).

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