Mergers and Acquisitions in SME Lending

Mergers and Acquisitions in SME LendingCHAPTER 1INTRODUCTIONIn the process of industrialization splendid calling plays an important and scotch growth. It increases per capital income and output, makes available involvements for the labour market and usu bothy promotes successful deployment of resources which atomic number 18 considered vital to steering of economic development and growth. It is presumed that the level income segments of Nigeria benefit when SMEs develop divulge access to finances because they alleviate poverty by creating more jobs and better wages. ( Emeni and Okafor 2008).In m either of the developed economies and developing economies twain have come to value, realise and appreciate midget businesses. Being that slim business are pioneering, well-organized, resourceful and allows fast decisions process to be taken because of their telling small size. They are major players in the process of industrialization and economic development. ( Ememi and Okafor, 2008)In most up-and-coming nation of the world, small and medium enterprises (SMEs) have fuck off the vanguard of economic expansion. They create employment opportunities as the most significant employer of labour force in addition they increase the nations per capital income and output invariably increasing the GDP by resolutionive resource utilization. Also in large developed nations, SMEs plays a noteworthy role in influencing the economy. Taking master(prenominal)land China for example, SMEs are said to be accountable for sixerty percent of the industrial output employing seventy-five percent of the workforce in the metropolitan centres. ( Anas A.Galadima, 2006). altogether over the world and in all country, government have come to realise the significant of this class of companies. And as such have originated all-inclusive policies to encourage, hand over confidence, support and promote the establishment of SMEs.Improvements in small and medium enterprise are a plus for employment gene proportionalityn, solid entrepreneurial base and cost increase for the use of local raw materials and technology. (Oladele, 2009).There are a lot of challenges that SMEs face in both the developed and developing countries and they are massive. One main aspect is financing, the ability to obtain and acquire loans. Most small businesses are not attractive prospects for wedges. Berger et al. ( 1998) suggest that larger banks may be less incline than smaller banks with less manifold structure, to supply impute to small businesses. Back home in Nigeria the talk is very similar with the on-going of other country. But of posthumous the Bankers Committee intervened in 2001 with a scheme called the clear and Medium Industries Equity Investment Scheme (SMIEIS). The idea brought life and empowerment to SMEs discarding all other credit rating schemes which were not properly implemented. (Aina, O. 2007).Nigerian banking reform is a product of global effort and integrati ng is one of its major achievement that everyone have welcomed happily. This consolidation cockle has greatly enhance the average magnitude and size of banking institution generally. The mean size of the total assets of banks has increased by 439% from 2003 2009, recording =N=2767.78 billion to =N=14,923.00 billion banks total assets figure (CBN report 2009).Prior to the introduction of banking reform, the banking sector was repulsively undersized, small, weak and frail, leading to numerous and several economic setback.Besides the benefits cerebrate to consolidation on the supply of credit to small and medium enterprises, merger and eruditeness have also increase the size of banks from small less complex establishment to conglomerate multinational companies in Nigeria.These includes mobilization of domestic savings, improved allocation of resources, elimination of deep-rooted inefficiency , mobilization of foreign savings and above all enhanced accessibility of small scale reen forcement. But in all these what is less comprehensible, is the effect that bank MA has on the supply of credit to small businesses in Nigeria.(Emeni and Okafor, 2008).Related LiteratureOther think studies have established some well renowned facts on the effect of consolidation on small business lending. In a recent article Berger, anyen N., R. Demsetz and P. Strahan. (1999) suggest that consolidation is only valuable and favourable to a certain extent. The consequences of consolidation could have coordinate and also indirect effects. The direct effect being an increases in bank size, increase in market share and enhance bank performance, the indirect effect can be a reduction in the availability of financial services to small businesses. (Berger, Allen N. R. Demsetz and P. Strahan. 1999).Other studies Vera and Onji (2010) illustrate that because most small businesses depend greatly on less complex small banking institution for their principal source of funding, consolidation of the banking industry may reduce ease of access of loans to small business in the US.Earlier researchers find that small businesses have not been unfavourably change by bank merger and acquisition on making credit available to small business (Peek and Rosengren 1995, 1998 Berger et al. 1995). This is because these studies relied on data up to the mid-1990, while data as at 1995-1997 being the peak of consolidation were not full employed. This has proven to be of interest to further scrutinize whether the new wave of consolidation may affect small businesses differently. In view of this importance firearm of information and the imperfection of the market mechanism to mobilise and allocate financial resources to socially desirable economic activities of any nation it is worthwhile to appareligate the kin between merger and acquisition and credit availability.Based on the above background, the enthusiasm and motivation of this research is to critically scrutinize and observe if ther e is any relationship, or connection between bank mergers and acquisitions as a resourceful solution to lending.This study, therefore, want to investigate and find evidence that consolidation between banks of underwater diver structure and asset base that occurred as a result of the Nigerian banking reform of 2004, could negatively affect small business lending. This is the reason why we subscribe to examine the effect of MA to SMEs in Nigeria.Aim and ObjectiveAimThe main purpose of this dissertation is to examine whether bank mergers and acquisitions are a resourceful solution to lending to SMEs. As a result the main research question isDo banks mergers and acquisitions increase or decrease credit availability to SMEs?This leads to a number of sub-questionsDoes financial performance in the banking sector adversely affected small business lending after MA occurs?What other factors affects or is obligated for credit availability to SMEs from the Nigerian banks?To present key findi ngs and recommendation based on data analysis and information collected.Research MethodologyThere are several research methods that could have been used in this work, such as a Questionnaire based survey through the distribution of questionnaire. Carrying out direct interviews with Small business owner and Bank managers or loan officers is also an effective means to collection of data information.Since the main purpose of this study is to examine if bank mergers and acquisitions increase or decrease credit availability to SME, we testament be using accounting based financial ratio analysis. The use of financial ratio in measuring a banks performance and its effectiveness to distinguish high-performance banks from others is quite common in the literature (Abdulla, 1994a Samad, 2004a).Data SampleTen Nigerian commercial banks which have effectively been consolidated with other smaller banks will be considered in this study over the period of 2000-2009 based on the pursual reasons Fir st, these banks are long established locally incorporated banks in Nigeria. Secondly they have been involved in the consolidation process from small bank to mega banks, passing through the premerger phase up to the post merger phase. Thirdly the period 2000-2009 effectively covers the span before consolidation and after consolidation. The data that will be used in this study is taken from Bank Scope. The annual financial statement of the top ten commercial banks based on their asset base. All the figures are expressed in Naira (=N=) the Nigeria indigenous currency.Since one of our aims is to examine whether the add of small business lending is affected by the new consolidation legislation passed by Nigeria government on bank reform, we will also be comparing the figures from the statutory reserve. This is mandatory for all commercial banks in Nigeria to invest 10% of their profit before tax to Small and Medium Enterprise Equity Investment Scheme. It is more likely that we will cap ture the total amount of small business lending that is actually supplied to small businesses within Nigeria.Dissertation StructureThe dissertation is split into five chaptersChapter one is the introduction of the dissertation topic, related studies and the motivation for the choice of the dissertationChapter two focuses on the Nigeria banking sector, how the banking sector has developed in Nigeria over the years. Covering the history of the Nigerian banking sector divided into 4 periods the budding period, the expansion period, the consolidated period and the post-consolidated period. High lighting major financial developments from liberalisation that saw the existence of 87 banks to the consolidation of banks by the substitution Bank of Nigeria deadline of 2005.Chapter three is a literature review on academic literature and analytical view on merger and acquisition and its theory in banking. This chapter aims at providing a complete picture of bank mergers and acquisitions (MAs) in the theory of banking and at offering economic evaluation and strategic analyses of the process. The main characteristics of this process is how it has affected lending to small businessChapter four introduces the Small and Medium Enterprises, what they are, why they exist. This Section will review some recent literature that is particularly applicable to the effect of bank consolidation on small business lending.Chapter five discusses the empirical results, in which the main findings of the performance of the banks during the period 2002 2009 are analysed.This last chapter, Chapter six concludes and highlights the limitations of the study and recommendations for the future researchSummaryWe have been able to introduce the topic of the dissertation and the motivation behind why it was considered important to investigate funding of the small and medium enterprises. Small business play vital role in the process of industrialization and economic growth. It is presumed that the lo wer income segments of Nigeria benefit when SMEs have better access to finances because they alleviate poverty by creating more jobs and better wages. Developments in small and medium enterprise are a plus for employment generation, solid entrepreneurial base and encouragement for the use of local raw materials and technology. Governments all over the world have realised the importance of this category of companies and have formulated comprehensive public policies to encourage, support and fund the establishment of SMEs. The most worrying challenges facing SMEs in legion(predicate) developing countries is funding.In the next chapter we will be reviewing the Nigerian banking system. We will be looking at a brief history of the Nigerian banking system dividing its growth into four phases, and see how it has evolved from many smaller banks into fewer mega banks. We shall also be looking at the major regulators of this industry and see how they have effectively influence the actions th at has lead to merger and acquisition in the banking industry. Also see how the merger and acquisition phase has influenced lending to the small business through the new monetary policies on SMEEIS and Microfinance banks to aid economic growth, which is the main aim of this dissertation.