Role of development banks in the promotion and development of smes

Role of development banks in the promotion and development of smes

Introduction on role of development banks

Among the Institutions whose role in the development of less developed regions and enterprises is well recognized but inadequately emphasized are development banks. By playing multiple roles these Institutions have helped promote, nurture, support and monitor a range of activities, though their most important function has been as drivers of industrial development.

All underdeveloped countries launching on National Development strategies, often in the aftermath of decolonization, were keen on accelerating the pace of growth of productivity and per capital GDP. This was the obvious requirement for alleviating poverty and reducing the Developmental gap that separated them from the developed countries. To realize this goal, they considered industrialization to be an important prerequisite. The financial sector must be designed to include institutions, source of finance and instruments that bridge the significant mismatches in the expectations with regards to maturity, liquidity, risks and interest rates between savers and investors. This is seen as attractive because unlike in the case of debt, risk is shared between financial investors and the entrepreneur. This enhance the viability of the firm in period of recession.

However, the evidence shows even in developed countries, equity market plays a relatively small role in mobilization capital for new Investments. Even were markets are active, it is the secondary market that is significance, the creation of Development Banks came as an institutional innovation in developing countries which are most often public or joint sector or institutions. Development Banks are in the nature of “Universal banks” undertaking a wide range of activities besides those undertaking by commercial banking institutions which make it less suited to lending for capital investment.

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Financial Institutions Involved in Entrepreneurship Development

The role of development banks

Commercial and Development banks contribute a lot towards the promotion of small and medium enterprises especially in the areas of their various functions. Potential to entrepreneurs therefore benefits from the functions and assistance rendered by these financial institutions. Positive roles of commercial and development Banks to entrepreneurship are hereby explored.

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Financial Institutions Involved in Entrepreneurship #development banks

Presently and in the past, the major source of funding for investment or credit to small scale-sub-sectors are as follows:

  1. Multilateral financing institutions such as the International Banks for reconstruction and Development (World Bank) and the African Development Banks (ADB)
  2. Private financing institutions like Commercial Banks, Marchant Banks, finance house etc.
  3. Bank of Industries (BOI): formed from the merger of former NBCI Nigerian Bank of Commerce and Industries and NIDB Nigerian Industrial Development Bank, the Nigerian Economic Reconstruction Fund (NERFUND) and the Nigerian Bank for Commerce Industry (NBIC)
  4. Nigerian Agricultural Co-operative Rural Development Banks (NACRDB): formed from the merger of former People’s Bank, the Nigerian Agricultural and Co-operative Bank. NACRDB extends Micro Credit financing to small and medium businesses, cooperative societies and Agricultural projects.
  5. Federal Mortgage Bank of Nigeria (FMBN) for Housing projects and finally;
  6. The Urban Development Bank (UDB) for urban development projects. BOI is ten years as of 2012 and has encouraged a whole lot of entrepreneurial endevours among Nigerians. Recenty, the Federal Government of Nigeria in recognition of the role of SMEs in economic development instructed banks to set aside certain percentages of their profits for the funding of SMEs. Since 2002 over 18 billion has been accumulated by Banks for this purpose. The Nigerian investors are therefore open to variety of fund sources which they have to investigate in other to obtain a loan to augment their personal funds, when the most viable projects have been selected, its fund needs have to be met. In other to secure required funds, the investor needs to sell his project successfully to the financier, as he presents and discusses his business report or feasibility study report, he should be able to marshall the salient points convincingly.
  7. Apex Credit Delivery System: Nigeria has two apex bodies for SMEs namely, the National Economic Reconstruction Fund (NERFUND) and the SME Apex Unit established by the Central Bank of Nigeria under the projects agreement dated 22nd December, 1988 between CBN and the International Bank of Reconstruction and Development (IBRD).
  8. Government has been the major source of funds in the area through the following major vehicles:

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i. Central Bank of Nigeria (CBN) is the Apex financial Institution of the country in charge of monetary and fiscal regulatory control. It instruct banks to direct a percentage of the total loans and advances to small and medium scale enterprises.
ii. Development Financial Institutions (DFIs), are specialized institutions charged with the responsibility of providing term financing and technical assistance of specific sectors of the economy.

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