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The central tenet of banking sector consolidation was to develop a strong, reliable and diversified banking sector that is capable of playing effective developmental roles in the economy, such as funding of small and medium scale enterprises and becoming a competent and competitive player in the African regional and global financial system. In essence, the reform was expected to create big banks by increasing bank capital base through the capital market and/or mergers and acquisitions. The bank consolidation in Nigeria has generated raging debates on different frontiers such  as;  the  effect  of  the  consolidation  on  the  financial  crisis;  the  desirability  of  universal banking; and on whether more capital could translate to banking system stability among others. One area that has received little or no attention among scholars and policy makers is the effect of the consolidation on the lending and performance of small and Medium Scale Enterprises (SMEs) in  Nigeria.  Specifically,  SMEs  are  generally  perceived  as  a  catalyst  for  economic  and development, given that the economy draws its strength from strong internal dynamics rooted in its large population, resilient SMEs, large and vibrant informal sector. A priori, the emergence of bigger banks is expected to translate into more lending to SMEs. However, some scholars have argued that as small banks transformed to become bigger banks, they tend to lose their existing bonding relationship with smaller customers such as SMEs. They supported this postulation by arguing that bigger banks will have strong preference for high profile investment with higher returns, while displaying strong bias against credits to SMEs. While each of these groups has propounded theories to support their positions, empirical study that reconciles these theories with reality is non-extent. It was against this background that the main objective of this study was to investigate the effect of pre and post bank consolidation on the performance of SMEs in Nigeria. The specific objectives of the study therefore were to examine the impact of bank consolidation on number of registered SMEs, growth and access to fund for SMEs in Nigeria. This study adopted the ex-post facto design and time series data from 1991-2012 (22years) for pre and post consolidation era were collated from Nigerian Corporate Affairs Commission database, Central Bank of Nigeria Statistical Bulletin and Small and Medium Scale Enterprises Development Agency of Nigeria database. The Ordinary Least Square (OLS) regression was used to estimate the three hypotheses formulated for the study. The result emanating from this study indicates that Bank consolidation had positive and non-significant impact on number of registered SMEs in pre consolidation era in Nigeria while it was found to have positive and significant impact on survival of  SMEs  in  post  consolidation  era  in  Nigeria.  Also  Bank  Consolidation  had  positive  and significant impact on growth of SMEs in both pre and post consolidation banking era in Nigeria and lastly Bank consolidation have negative and non-significant impact on bank lending to SMEs in pre consolidation banking era in Nigeria but was positive and non-significant on banking lending to SMEs in post consolidation banking era in Nigeria. The study, thus, concludes that the consolidation exercise in 2005 was a welcome development aim at enhancing the growth of SMEs. We therefore, recommend among others that government should make policies that will strengthen and boost access to funds for small and medium scale enterprises. This will ensure continual  survival  and  growth  of  SMEs  which  have  been  adjoined  as  the  engine  room  for economic growth and development of nations.




Small and Medium Enterprises (SMEs) are argued to be an instrument of economic growth and development. Thus, Fatai (2010), states that in Nigeria where the private sector is not well developed, SMEs are assumed to play prominent role in employment generation and facilitation of economic recovery and national development. He maintains that the growing recognition of the role of SMEs may have influence the decision of World Bank Group to commit roughly $2.4 billion on SME, as core element in its strategy to foster economic growth, employment generation and poverty alleviation.

While the importance of small and medium enterprises has not been in doubt, unfortunately classifying businesses and organizations into large and medium scale is subjective and depends on different value parameters. These parameters follow different criteria such as employment, total assets or total investment. The definitions of small and medium enterprises vary in different economies but the underlying concept is the same. Ayyagari et.al (2003) and Buckley (1988) contend that the “definition of small and medium scale enterprises varies according to context, author and country”.

In the case of Nigeria, hardly do we have a clear-cut definition that distinguishes small and medium scale enterprises. The first attempt to define SMEs in Nigeria was by the Central Bank of Nigeria in its monetary policies circular No. 22 of 1988, where SMEs was defined as those enterprises with annual turnover not exceeding 500,000 naira. Similarly, in 1990, the Federal Government of Nigeria defined small scale enterprises for the purpose of commercial bank loans as those enterprises whose annual turnover does not exceed 500,000 thousand naira and for merchant bank loan, those enterprises with capital investment not exceeding 2million naira (excluding the cost of land).

In 1993, the definition of SMEs was reviewed by the Federal Government, which increased their total asset to five million as a result of the introduction of the Second Tier Foreign Exchange Market  (SFEM),  and  the  spiral  inflation  fuelled  by  the  Structural  Adjustment  Programme.

Ogechukwu (2006) opines that the changing dynamics in the economy has also prompted scholars and practitioners to reclassify SMEs into micro and super-micro businesses, with a view to providing adequate incentives and protection for the former. In that context, any business or enterprise below the upper limit of N250, 000 and whose annual turnover exceeds that of a

cottage industry currently put at N50, 000 per annum is a small scale industry.

Furthermore, the National Directorate of Employment (NDE) concept of a small scale industry has been fixed to a maximum of N35, 000. In other words, a business unit of not less than N35, 000 is characterized as a small scale business in Nigeria.

The definition of small-scale enterprises (SSEs) in Nigeria has changed over the years not only in consonance with the changing fortune of the country but also in accordance with the diversity of the Small and Medium Enterprises. Prior to 1992, different institutions in Nigeria adopted varying definitions of small enterprises. The institutions include the Central Bank of Nigeria (CBN), Nigerian Bank for Commerce and Industry (NBCI), Centre for Industrial Research and Development (CIRD), Nigerian Association of Small-Scale Industrialists (NASSI), Federal Ministry of Industry (FMI) and the National Economic Reconstruction Fund (NERFUND). However, in 1992, the issue of conflicting definition was resolved with the establishment of National Council on Industry, which is now policy making organ for the sector in Nigeria. Among the conceptual issue that was resolved is whether Small-Scale Industry definition should include all economic activities such as trading, buying and selling or whether it should be restricted to productive industrial activities especially manufacturing. Accordingly, a clear distinction was made between small-scale enterprises consisting of trading, buying and selling activities and small-scale industries engaged in manufacturing industry.

This definition of SMEs may not be the same in other countries, but may be useful in developing countries, because of the low capacity of these countries small scale industry.

One of the factors militating against the development of SMEs in Nigeria is lack of funding. This is so because, SMEs in Nigeria depends on owners equity (personal savings), borrowings from friends and relations, borrowing from government agencies (example; Small and Medium Scale Equity Investment scheme), and borrowing from commercial banks. Of all these funding sources,

extensive studies have shown that the most reliable and effective source is the commercial bank loan to SMEs. The studies further argue that those small banks   are more effective in financing this sector and attribute this to relationship bonding. The studies further argue that the size of a bank influences the volume of funding to SMEs. SMEs in Nigeria cannot access the capital market because of the stringent listing requirement for the first and second tier markets. However, it is speculated that the recent banking reforms, through consolidation, might have affected the effectiveness of banks in discharging this function.

There are a number of potential benefits derivable from the lifting of geographic barriers to competition in banking and the associated wave of consolidation. These include, but are not limited to, diversification, improved competition, and the elimination of entrenched inefficient or self serving bank managers. What is less clear is the effect of consolidation on the supply of credit to businesses, particularly small businesses that depend on banks for external credit.

A survey of small   credit to small firms (Cole, Wolken, and Woodburn 1996), has established a fairly strong link between size of banks and the supply of small business credit, with bigger banks devoting less proportions of their assets to small business lending than smaller banks (Berger, Kashyap, and Scalise 1995, Keeton 1995, Levonian and Soller 1995, Berger and Udell 1996, Peek and Rosengren 1996, Strahan and Weston 1996).  Small banks are considered primary sources of credit for small businesses. Unlike highly capitalized and publicly traded firms, which have access to capital markets, small businesses rely strongly on banks for small business credit, partly because of the challenges of accessing fund from the capital market. These Small and Medium Scale businesses often concentrate their borrowing at financial institutions, mostly small banks with which they have long-term relationships, ie relationships that prove mutually beneficial to both parties. This relationship enables banks to collect information about the SME’s ability to repay such facility, thereby reducing the cost of providing credit facilities. Small and Medium Scale Enterprise   in turn, enjoy better access to credit facilities and lower cost of borrowing . Small banks make more of these “mutual relationship loans” than do large banks, which are more likely to make generic loans based on calculated financial ratios from the operating result of the borrower and credit indices

The banking industry which is considered as a major provider of fund to small and medium enterprises has passed through several stages of regulatory frameworks to its present state and this development could be categorized into five stages. Okafor (2011) presented five clusters of reform as (i) First (Independence) reforms cluster 1960 to 1996, The objective of this reform was to establish indigenous Banking institutions that will pilot the economy of the newly independent Nigeria (ii) Second (indigenization) reform cluster 1970 to 1976. (iii) Third (Okigbo Committee) reform cluster 1977 to 1985, (iv) Fourth (Structural Adjustment Programme) reform Cluster 1986 to 1990. (v) Fifth (Fourth Republic) reform cluster 2000-2010. Okafor (2011) further states that each of the clusters represents some major and minor reforms that are directed at improving banking service delivery in Nigeria.

Nnanna (2006) states that the first stage from 1930 to 1959, was characterized by poorly capitalized and unsupervised indigenous banks, leading to failure at their infancy. He states that the second stage was from 1960 to 1985. In this period, the Central Bank of Nigeria regulatory policy framework was designed to ensure that only persons with good character and financial strength were granted Banking License subject to prescribed minimum paid up capital.

The development of this stage was based on the introduction of minimum paid up capital and other requirements before the grant of banking licenses to operators.  He states also that the third stage from 1986 to 2004 involved the post Structural Adjustment Programmes (SAPs) or the De- control Regime during which the neo-liberal philosophy of free entry was over stretched and Banking licenses were dispensed by the political authority on the basis of patronage. A major reform in the banking sector during the period was universal banking policy. This policy was responsible for the consolidation of merchant banks, commercial banks and exchange house into a universal bank. Therefore, one bank was required to perform all banking functions. He states further  that  the  fourth  stage  of  banking  sector  reform  could  be  described  as  the  era  of consolidation ie 2004 to 2008.

The major emphasis of that period was on recapitalization and proactive regulation based on risk focused supervision framework. The fifth stage; he describes as the post consolidation era, where the focus is to strengthen the banking sector through efficiency-driven policies. The fourth stage,

which was the consolidation era elicited interest both from the academic circle as well as from operators in the Nigerian Banking industry more than the other eras (Nnanna 2006).

This frequent policy changes which the CBN introduces as a regulatory institution may have affected the banking landscape in Nigeria, as a result, there have been several attempts both within and outside Nigeria to examine the impact of these consolidation programmes on bank performance.   In Nigeria and other economies, researchers have viewed banking sector consolidation differently.

Adeyemi (2006) examines the issues and challenges arising from the banking sector reform programme in Nigeria. He noted that since the consolidation programme was policy induced, the

18 months given for  total compliance appeared inadequate, following the number of activities required for consolidation to be successfully consummated, he however acknowledged that the programme could lead to the emergence of a sound and efficient financial system that would support the growth and development needs and aspirations of the Nigerian economy, to fully harness the synergies and potentials of the consolidation programme. He therefore, advocated for proper handling of post consolidation challenges such as continuous flow of fund to small and medium enterprises.

Oladepo (2010) posits that the value gains that alleged to accrue to the large and growing wave of consolidation activity have not been verified. Thus leading the research community in quandary on whether the industry has followed a path of massive restructuring or a misguided belief of value gains of consolidation. He stated that it is not clear whether the financial regulators and operators  are insincere  to  the public  and  shareholders  about  the effects  of  their  activity  on shareholders’ value and banking performance. It is important to address this issue by reconciling data with empirical reality of continued consolidation activity.

Soludo (2004) states that one of the  focus of the banking sector consolidation was to develop a diversified, strong and reliable banking sector capable of playing active developmental roles in the local economy including funding of SMEs and of being competent and competitive players in

the African regional and global financial system. It is argued that small banks are primary source of credit for small and medium enterprises. This is because these enterprises do not have access to capital market where large funds can be sourced. Their inability to access fund from the capital market could make them to concentrate their borrowing from institutions with which they have long term relationship i.e. relationship that prove mutually beneficial. It is generally argued that this relationship enables banks to collect information about the borrower’s ability to repay, and this could reduce the cost of providing credit.

The need to empirically investigate the impact of bank consolidation on the performance of SMEs in Nigeria motivates this study, since empirical studies on this issue, based on the researcher’s knowledge are inadequate.


Graig and Hardee (2006) posit that small and medium enterprises are the major sources of job growth in any country. It is generally argued that small and medium enterprises are characterized by three principal features namely (i) relatively small principal (ii) absence of asset-based collateral and (iii) simplicity of operations.

The bulk of small and medium enterprise credit is said to come primarily from banks therefore institutional changes through consolidation could have an adverse effect on small business credits and the performance of SMEs (Gray abd Harde, 2006). This really has to be ascertained in the Nigerian situation, hence the challenge or problem of this study. For instance, government in past have tried through several intervention schemes to promote funding to SMEs. The schemes which were designed to ensure continuous flow of fund to SMEs include;  the Nigerian Agricultural and Co-operative Bank Ltd (NACB), the National Directorate of Employment (NDE), the Nigerian Agricultural Insurance Corporation (NAIC), the Peoples Bank of Nigeria (PBN), the Community Banks (CBs),  the Family Economic Advancement programme (FEAP).

Despite these schemes, SMEs largely rely on commercial bank for fund. However, the 2004/2005 bank consolidation is argued to have constrained the smooth flow of fund from commercial banks

to SMEs in Nigeria. Some studies have argued that consolidation of the banking industry will have negative impact on the amount of credit available to small businesses. Strahan and Weston (1996) state that small banks are said to be major source of credits for small business outfit, unlike large firms which have access to the capital market, small and medium enterprises rely heavily on bank credit. If small banks are increasingly acquired by large banks in the form of consolidation, it may be strongly contended that it will have a negative effect on the availability of credit to small and medium enterprises.

Graig and  Hardee (2004) examine the implication of consolidation on the amount of credit available to small business. They found that access to credit consolidation significantly reduced banking credit to SMEs. They argue that this can reduce the productivity of small businesses and their overall contribution to the economy in terms of increasing employment creation and social welfare. The implication of lack of credit to small business is that these small businesses may be increasingly turning to non-bank sources of finance to access credit. However this source comes with a cost to this class of business hence increasing the cost of production.

However, these studies failed to investigate the impact of bank consolidation on the performance of SMEs in Nigeria. This is especially necessary, given that bank consolidation was aimed at ensuring bank stability, promoting good corporate governance, establish mega banks and promote bank lending to the private sector.


The main objective of this study is to assess impact the 2004/2005 bank consolidation on the performance of SMEs in Nigeria. Specific objectives of the study include:

(i)      To determine the effect of pre and post bank consolidation on the number of registered small and medium enterprises in Nigeria.

(ii)     To examine the impact of pre and post bank consolidation on the growth of small and medium enterprises.

(iii)   To assess the contribution of pre and post bank consolidation Nigeria on lending to small and medium enterprises in Nigeria.


As a follow-up to the objective, this research seeks to provide answers to the following questions. (i)     To what extent do pre and post bank consolidation affect the number of registered small and

medium enterprises in Nigeria.

(ii)     In which ways do pre and post bank consolidations affect the asset size of small and medium enterprises in Nigeria?

(iii)   How far do pre and post  bank consolidation  in Nigeria enhance lending to  small and medium enterprises?


Based on the foregoing research questions, the following hypotheses are formulated.

(i)      Pre and post bank consolidations in Nigeria do not  have significant and positive impact on the number of registered small and medium enterprises

(ii)     Pre and post bank consolidations of banks in Nigeria do not have significant effect on asset size of small and medium enterprises in Nigeria.

(iii)   Pre and post bank consolidations do not have any significant contribution on lending to small and medium enterprises in Nigeria.


The scope of this study covers the period 1991 to 2012. To achieve the objectives of the study, the period of the study was divided into two. The first was from 1991-2005, fifteen years before and during consolidation; and second, 2006-2012, seven years after consolidation. The appeal of using pre and post analysis is to aid the researcher compare the performance of SMEs before consolidation with the trend at present, on the performance of small and medium enterprises in Nigeria.


It is important to investigate this issue by reconciling data with empirical reality of consolidation activity. Therefore, this study will be significant to the following group of persons:

1   Management of Banks

The decision making authority in banks lies in the hands of managers. Therefore, this research will enable management to understand what must be done in order to act in the best interest of shareholders in choosing expansion measures which will help the bank achieve an optimal structure that will maximize shareholders’ value.

2 Investors and Potential Investors

The major beneficiaries of an enhanced performance of banks are shareholders otherwise called investors or potential investors. The choice of consolidation between banks ultimately affects their role in lending to small and medium enterprises. Therefore, this research will contribute along with other similar literatures available in this area of finance in enhancing value maximization on the effect of consolidation on the performance of small and medium enterprises in Nigeria.

3     The Academia

Essentially, this research intends to contribute significantly to the volume of literature available in this area of finance.  In academics, the unknown is never exhausted, as the list of what we do not know could go on forever.   Therefore, as a contribution in this area, recommendations about consolidation and its effect on performances of SMEs in Nigeria will be studied. Localizing the research to the Nigerian environment is particularly important in this research.

This material content is developed to serve as a GUIDE for students to conduct academic research



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