MULTIPLE BANK CHARGES: ASSESSING ITS IMPLICATIONS ON THE GROWTH OF SMES IN NIGERIA

CHAPTER ONE

INTRODUCTION

Background of the Study

The inception of the banking sector in Nigeria dates back to 1892 when the First Bank of Nigeria PLC was established. Nigeria had a total of 145 banks from 1892 to 1947. By 1980, the number of banks decreases to 20. In 1990, there was a rise in the number of banks, resulting in a total of 29 banks. In 1994, the number of banks increased to 69, and by 2011, there was a further increase, bringing the total number of banks to 89. Bognet (2012), Ikpefan (2012), and Oluduro (2015). Adamolekun, Ogedengbe, and Pratt (2012) reported that in 2007, Nigeria had a total of 24 capitalised commercial banks resulting from mergers and acquisitions facilitated by the Central Bank of Nigeria (CBN). The variation in the number of banks is due to the occurrence of banking distress. Furthermore, Nigeria has implemented numerous banking reforms to fortify and stabilise its financial sector. The need for reforms in Nigeria's banking industry has arisen due to the liquidation of banks and the globalisation of the world. While the primary reforms encompassed banking consolidation, recapitalization, and modernization. 

Anameje (2004) and Bognet (2012) agreed that the reform resulted in the introduction of new products, including ATMs, debit cards (such as verve, master card, and Visa), credit cards, and improved payment methods such as e-payment, e-banking, and mobile banking. However, these reforms have also led to the introduction of numerous bank charges, which can be burdensome for SMEs.

Small and Medium Enterprises (SMEs) are critical to the economic development of Nigeria, contributing significantly to employment generation, poverty alleviation, and the overall Gross Domestic Product (GDP). Beyond that, Small and Medium-sized Enterprises (SMEs) make up roughly 96% of the total number of firms in Nigeria and contribute around 48% to the country's Gross Domestic Product (GDP), according to the Nigerian Bureau of Statistics (2020). They have a crucial impact on the process of economic diversification, innovation, and competitiveness. Nevertheless, its expansion is frequently hindered by a multitude of financial and operational limitations. Obtaining reasonable and sufficient funding continues to be a significant obstacle, as several small and medium-sized enterprises primarily depend on bank loans and other financial services.

In most developing countries, the economy primarily relies on cash transactions, where products and services are exchanged for banknotes and coins. Nevertheless, this trend has been replaced by a contemporary and refined payment system in which physical currency and notes are transformed into digital data, which is then transferred via smartphones and satellite transponders. This phenomenon can be attributed to the swift advancement and growth of technology in the financial market (Ozuru et al., 2010; Johnson, 2005). The Internet-enabled electronic banking system distinguishes itself from traditional banking operations by facilitating faster information distribution between customers and service providers (Singhal & Padhmanabhan, 2008). The process of transferring money involves using information storage mediums such as checks, credit cards, and electronic methods rather than physical cash. 

Since the mid-1990s, the banking industry has been experiencing transformations through the adoption of advanced information technology and the growth of electronic commerce (Kalakota and Whinston, 1996). The emergence of e-banking has presented a challenge to traditional branch operations, even if electronic commerce is still evolving and undergoing rapid changes (Harris and Spence, 2002; Turbin et al., 2002). Ozuru et al. (2010) assert that the significance of electronic payment systems in any nation cannot be overstated, given the profound technological breakthroughs occurring in the global financial industry. The reforms implemented in Nigeria have resulted in the introduction of e-banking, electronic banking, and mobile banking. However, SMEs that utilise these channels are subject to costs, which might have an impact on their profitability and growth.

In response to the adverse effects of multiple bank charges, regulatory bodies such as the CBN have introduced measures to cap certain charges and enhance transparency in the banking sector. Despite these efforts, enforcement remains a challenge, and many SMEs continue to bear the brunt of high banking costs. Therefore, a survey will be conducted in order to assess the implications of multiple bank charges on the growth of SMEs in Nigeria.

Statement of the Problem

Small and medium scale enterprises (SMEs) are considered significant catalysts for economic progress. In addition, Small and Medium Enterprises (SMEs) are recognised for their significant potential in generating employment and creating income in any economy, along with numerous other invaluable qualities. However, the growth and advancement of SMEs in Nigeria have been hindered by various obstacles and challenges, resulting in sluggish or even halted development of this crucial sector of the economy. One of the most significant being the financial burden imposed by multiple bank charges.

Additionally, access to affordable and adequate financing remains a major hurdle, with many SMEs relying heavily on bank loans and other financial services. According to Agwu & Emeti (2018), high banking charges erode profit margins, reduce working capital, and limit the ability of SMEs to reinvest in their businesses. This financial strain lead to liquidity challenges, hampering the growth and expansion of these enterprises. However, studies have shown that excessive bank charges deter SMEs from using formal banking services, pushing them towards informal financial systems that may be less secure and reliable (Ogujiuba, Ohuche, & Adenuga, 2004). Moreover, Central Bank of Nigeria (CBN) has set guidelines on bank charges, but the compliance and implementation by commercial banks often vary, leading to inconsistencies and additional costs for SMEs (Central Bank of Nigeria, 2019). Hence, it is in the light of these that the study seeks to assess the implications of multiple bank charges on the growth of SMEs in Nigeria.

 1.3  Objectives of the Study

The main purpose of this study is to assess the implications of multiple bank charges on the growth of SMEs in Nigeria.  Specifically, the study will;

To ascertain the extent multiple bank charges are impost on SMEs by Nigerian banks.

2. To identify the various types of bank charges are impost on SMEs in Nigeria.

3. To determine the extent multiple bank charges affects the operational cost of SMEs in Nigeria.

4. To evaluate the extent multiple bank charges influences the cash flow and revenue of SMEs in Nigeria.

5. To determine the extent multiple bank charges affect business expansion of SMEs in Nigeria.

1.4  Research Questions

The following questions have been prepared for the study:

What is the extent to which multiple bank charges are imposed on SMEs by Nigerian banks?

What are the various types of bank charges imposed on SMEs in Nigeria?

How does multiple bank charges affect the operational costs of SMEs in Nigeria?

To what extent do multiple bank charges influence the cash flow and revenue of SMEs in Nigeria?

How does multiple bank charges affect the business expansion of SMEs in Nigeria?

1.5 Research Hypotheses

H0: Multiple bank charges have no significant implications on the growth of SMEs in Nigeria.

Ha: Multiple bank charges have significant implications on the growth of SMEs in Nigeria.

1.6 Significance of the Study

The study findings will help SMEs manage their costs more effectively, ensuring they retain more of their earnings for reinvestment and growth. Additionally, banks will use insights from the research to design more SME-friendly banking products and services, improving customer satisfaction and retention. Also, policymakers will use the the findings to develop regulations that protect SMEs from excessive bank charges, fostering a more supportive financial environment for small businesses. Furthermore, subsequent researchers will use it as a literature review. Build on the findings to explore further aspects of the effects of multiple charges, contributing to the academic body of knowledge.

1.7 Scope of the study   

The scope of this study is boarded on the implications of multiple bank charges on the growth of SMEs in Nigeria. Empirically, this study will ascertain the extent multiple bank charges are impost on SMEs by banks, identify the various types of bank charges are impost on SMEs in Nigeria, determine the extent multiple bank charges affects the operational cost of SMEs, evaluate the extent multiple bank charges influences the cash flow and revenue of SMEs and determine the extent multiple bank charges affect business expansion of SMEs.

Geographically, the study will be delimited to some selected banks in SMEs in Edo state.

1.8 Limitation of the study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed. More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to other schools, local governments, states, and other countries in the world.

 1.9 Definition of Terms

Bank charges: refers to the charge required of a bank customer to access a service from the bank. 

Cash flow: refers to the net amount of cash and cash equivalents moving into and out of a business.

Revenue: also known as sales or turnover, is the total amount of money generated from the sale of goods or services related to the company’s primary operations.

Transaction costs: the charges incurred by a customer in a commercial bank for initiating and in need of a banking transaction.