INTRODUCTION Given the great potential of small and medium sized enterprises to bring about social and economic development, it is of no surprise that the performance of SMEs is of all huge concern to the government of different countries in the world. Small and medium sized enterprises in both developing and developed countries plays important roles in the process of industrialization and economic growth, by significantly contributing to employment generation, income generation and catalyzing development in urban and rural areas (Hallberg, 2000; Olutunla,2001; OECD, 2004; Williams, 2006). As affirmed by one estimate , Africa and Asia has the majority of their population living in rural areas where small scale enterprises delivers about 20% - 45% of full-time employment and 30% - 50% of rural household income (Haggblade and Liedholm 1991). Latin America, which is more urbanized, has an estimated 50million micro and small-scale enterprises, employing 120million people (Berger and Guillamon 1996). In Nigeria, according to a report, an estimate of about 70% of the industrial employment is held by SMEs and more than 50% of the Gross Domestic Product (Odeyemi, 2003) is SMEs generated. Given the seminal role of SMEs to the economy of Nigeria, various regimes of government since independence in the 1960s, have focused on various progammes and spent immense amount of money with the primary goal of developing this sector, these have however not yielded any significant results (Mambula1997) as evident in the present state of the SMEs in the country. SMEs are generally very susceptible and only a certain number of them manage to survive due to several factors such as difficulty in accessing credits from banks and other financial institutions; harsh economic conditions which results from unstable government policies; gross undercapitalisation, inadequacies resulting from the highly dilapidated state of Infrastructural facilities; astronomically high operating costs; lack of transparency and corruption; and the lack of interest and lasting support for the SMEs sector by government authorities, to mention a few (Oboh 2002; Okpara 2000; Wale-Awe 2000). Despite the numerous factors that challenge the survival and growth of SMEs in both developing and developed countries, finance has been identified as one of the most important factor (UNCTAD, 1995, 2001; SBA, 2000). Having access to finance gives SMES the chance to develop their businesses and to acquire better technologies for production, therefore ensuring their competiveness, however, there is a huge challenge for SMES globally when it comes to sourcing for initial and expansion capital funds from traditional commercial banks. Abereijo and Fayomi (2005) notes that the majority of commercial bank loans offered to SMEs are often also limited to a period far too short to pay off any sizeable investment. In addition, banks in many developing Countries prefers to lend to the government rather than private sector borrowers because the risk involved is lesser and higher returns are offered (Levitsky, 1997), such apathy for the SMES have crowded out most private sector borrowers and increased the cost of capital for them. The situation is equally prevalent in the Nigerian economy where commercial banks often prefer to lend to government, trade in foreign exchange (FOREX), and financing buying and selling. A banker in Nigeria aptly put such preferences that “the banks are not a charity, hence why should they take risks with SMEs when they can make good money elsewhere”. These preferences and tendencies of the commercial banks have worsened the lack of financing for SMEs. The Financial systems in every country play a key role in the development and growth of the economy, although the ability to play this role effectively and efficiently largely depends on the degree of development of the financial system. The traditional commercial banks which are key players in the financial systems of nearly every economy, have the potential to pull financial resources together to meet the credit needs of SMEs, however, there is still a huge gap between supply capabilities of the banks and the demanding needs of SMEs. In Nigeria, the situation is even more prevalent as noted by Olutunla and Obamuyi (2008). ’’There is a huge supply of both equity and loan able funds in the commercial banking sector which the SMEs are not benefiting from. For example, as at the end of the first quarter of 2007, out of N38.2 billion set aside under the scheme by the banks, only N18.1 billion or 47.3% had been assessed by the SMEs (CBN, 2007). Similarly, the Financial Guidelines every year stipulate that banks must dedicate a minimum proportion of their loan portfolio to the SMEs. However, since the 1970s the banks have not met this requirement. On the demand side, the SMEs have been reluctant to seek bank loans despite the various loan schemes being offered by the banks and the government, because of the fear of the business being taking away in case of any problem to meet the agreed terms’’ Another important part of the financial systems apart from the traditional commercial bank are the non bank financial institutions (NBFIs), which together with commercial banks, provide a wide range of financial products and services to meet the financial need of businesses, households and the public sector. They include companies such as insurance, leasing, factoring, venture capital companies, as well as mutual funds, pension funds, and investment trusts, which all provide additional and alternative financial services. NBFIs help in improving the general system-wide access to finance, facilitate longer-term investments and financing, and also provide competition for bank deposits. According to the World Bank 2006 report, NBFIs allow for better risk management while helping to reduce the potential for systemic risk through the aggregation of resources, allocation of risk to those more willing to bear it, and application of portfolio management techniques that spread risk across diversified parts of the financial system. They serve to improve competition and increase the depth of the financial market. By reducing concentration and providing alternative sources of finance, NBFIs, as former Federal Reserve Chairman Alan Greenspan has said, “enhances the resilience of the financial system to economic shocks by providing it with an effective ‘spare tyre’ in times of need.” The question therefore arises that if traditional commercial banks are failing in fulfilling the financial needs of SMEs, are NBFIs also doing the same? Is there a possibility that SMEs are not taking full advantage of the services and products of the NBFIs to improve the prevalent problem of access finance? It is the objective of this thesis to review the challenges that SMES face in accessing finance from traditional commercial banks and also investigate other alternative sources for SMEs to access finance such as the NBFIs. Can the NBFIs be the effective ‘spare tyre’ for the SMEs in Nigeria when dealing with issues of financial services?
2009. , 60 p.