DEPOSIT MONEY BANK LOANS AND THE PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) IN NIGERIA

Small and Medium Scale Enterprises (SMEs) play a crucial role in Nigeria’s economic development by driving industrial growth, job creation, and overall economic transformation. However, despite their importance, many SMEs struggle to expand and perform optimally due to several constraints, the most prominent being limited access to finance. In response to this financial challenge, most SMEs rely heavily on external funding, particularly loans from deposit money banks, which remain the major formal source of credit available to them. Against this backdrop, this study investigates the impact of deposit money bank lending on the performance of small and medium scale enterprises in Nigeria. The study adopted an ex-post facto research design and utilized time-series data, which were analyzed using the Ordinary Least Squares (OLS) regression method to examine the relationship between bank lending and SME performance. To ensure the reliability of the results and avoid spurious outcomes, unit root tests were conducted prior to estimation. The findings reveal the existence of an inverse, though statistically insignificant, relationship between deposit money bank loans to SMEs and SME output in Nigeria. This indicates that increases in bank lending to SMEs are not necessarily accompanied by corresponding increases in output. Such a result contradicts theoretical expectations, as increased access to credit is typically expected to stimulate investment and enhance productivity. The observed outcome suggests a weak commitment by deposit money banks toward effectively financing SMEs. The study further shows that the apparent expansion in SME activities has not translated into a meaningful reduction in unemployment in Nigeria. This outcome may be attributed to widespread underemployment within the SME sector, where many workers are engaged in low-productivity or part-time roles. Overall, the inability of deposit money banks to provide sustainable and adequate financing to SMEs has resulted in low SME contributions to gross domestic product (GDP). This situation has negatively affected average capacity utilization and exacerbated the already high unemployment rate in the country. Although deposit money banks are expected to support SMEs, their profit-driven orientation and reliance on short-term deposit funds often limit their willingness to provide long-term credit. In light of the study’s findings, it is recommended that the intervention initiatives of the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) be strengthened to more effectively respond to the financial and operational difficulties faced by SMEs. Furthermore, deposit money banks should reorganize and improve their SME financing frameworks to ensure the provision of more flexible, sustainable, and business-friendly credit facilities. Additionally, the Bank of Industry (BOI) should be strategically empowered and repositioned to efficiently carry out its responsibility of funding the establishment, expansion, diversification, modernization, and rehabilitation of small, medium, and large-scale enterprises.