Bank fraud, poor lending and credit management practices in the Nigerian banking sector forced the Central bank of Nigeria to revisit the capital structure of commercial banks in Nigeria. These among other things led the Central Bank of Nigeria (CBN) to give a directive that all banks should recapitalize from ₦2 billion to ₦25 billion with effect from 1st January 2006.This development led to various financial activities in the Nigerian financial sector with most banks initially opting for additional source of fund from the capital market via floating of shares. Most banks at this stage started inviting members of the public to acquire new shares in-order to meet up with the new minimum capital directed by the central bank of Nigeria. Notwithstanding, some banks were not capable of raising the new minimum capital by themselves, hence the need for mergers and recapitalization of banks, reducing the total number of banks in Nigeria to twenty five (25).
However, the recapitalization of the banking sector presented new challenges to the banks which require more efforts to control cost and increase their efficiency; this in turn has effect the volume of credit facilities granted to small and medium scale enterprises in Nigeria. A study conducted by Iloh et al (2012) reveals the gap between deposit money bank deposits (D.M.B.D) and commercial bank lending to SMEs from year 2000 upward (the year that saw the end of merchant banks). There is a wide margin between the two variables and while deposit money bank deposits rose very high, commercial bank lending to SMEs declined from 2004 to 2010. The gap between commercial bank deposits and its lending to SMEs reveals the shift in focus from lending to SMEs to lending to major investors (customers). One is made to ask, while the banking sector is said to drive any economy, has Nigerian commercial banks neglected SMEs, which is vital for the growth and development of the Nigerian economy? Notwithstanding, it is interesting to note that community/Micro finance bank (C.M.F.B) lending to SMEs moved in the same trend with its bank deposit. This implies that as community/micro-finance bank deposits increased, it’s lending to SMEs increased. Regardless of the direct impact of community/micro-finance bank on SMEs, SMEs still cry for lack of funding and lending to SMEs in Nigeria is still poor. This is so because their capital, reserve and deposit are very small and insufficient to meet the needs of small and medium entrepreneurs. It is the in the light of the above that this study examined the impact of banks recapitalization on the performance of small and medium enterprises in Nigeria (SMES).