The study in brief

Several researchers have studied the catalytic influence of small and medium enterprises (SMEs) on many countries’ economies. Its underwhelming impact on the Nigerian economy has also attracted some attention. This research examined the effect of the financial system on SMEs’ access to financing. It recommended changes to the financial system that will enhance SMEs’ access to funding in Nigeria and other emerging economies. The research adopted a mixed-method approach. The quantitative analysis section used 18 years of aggregate national data sourced from the Central Bank of Nigeria (CBN) to determine the relationship between the financial system, the channel of distribution (the financial institutions), and SME access using regression analysis. In addition, 1,590 SMEs registered with the Small and Medium Enterprises Agency of Nigeria (SMEDAN) in three out of the six geographical zones of the country were surveyed based on density, spread, and randomization. Metrics such as interest rate spread, bank concentration, bank overheads, credit to the private sector, information asymmetry, and risk perception were tested to establish the influence of the financial system on SMEs’ access to funding. The key findings from the empirical evidence include the direct and significant effect of interest rate spread, number of bank branches, and credit to the private sector. The study established that policy guidance that provides credit registry, credit guarantee, insurance, movable asset registry, dedicated or re-focused SME lending institution, and SME ranking will reasonably de-risk SMEs’ risk assets portfolio and ameliorate credit rationing effect through the financial intermediation channel of distribution. This work is relevant to financial institutions, SME owners, and policymakers. This empirical work establishes the relevance of the channel of distribution theory (Levine, 2005) and the effects of credit rationing (Yu & Fu, 2021) on SMEs’ access to financing using the bank-based approach. The study incorporated the mediating role of financial institutions (Deposit Money Banks – DMBs and Non-Bank Financial Institutions – NBFIs) proxied by current and savings account balances and the moderating role of credit rationing measured by borrowing interest rate. Applying this unique theoretical model and the resultant integrated framework should potentially create a new domain of discussion for future researchers into SME funding in emerging markets.

Citation: Ademosu, A. (2022). The Impact of the Financial System and its Channels on SMES’ Access to Financing: A Nigerian Perspective.