Small and Medium Enterprises and Economic Growth in Nigeria (1999-2017)

Abstract

The study examined the effects of Small and Medium Enterprises (SMEs) on economic growth in Nigeria within the temporal scope 1999 - 2017. On the basis of Solow-Swan growth model of the endogenous growth theory, within the framework of neo-classical economics school, the study used Gross Domestic Product (GDP) to proxy economic growth; and SMEs Financing from Commercial Banks (SMEFC), SMEs Financing from Microfinance Banks (SMEFM) and SMEs Output (SMEO) were used as proxies for SMEs with Interest Rate (INT) as control variable. With respect to these proxies, the study employed time-series data, which were sourced from Central Bank of Nigeria (CBN) statistical bulletins, and were estimated using regression analysis, Engle-Granger co-integration test, and Pair-wise Granger causality test. It was found that, SMEs financing (from micro finance banks) and SMEs output (productivity) impact positively on economic growth in Nigeria with the effect of the latter being significant. However, SMEs financing from commercial banks had significant negative effect on economic growth, and the overall model was statistically significant. Furthermore, the study found a long-run relationship between SMEs and economic growth in Nigeria, and a unidirectional causality between them, running from the former to the latter. It was, therefore, concluded that, small and medium enterprises have significant heterogeneous long-run effect on economic growth in Nigeria. Consequently, it was recommended that, policy initiatives that will encourage and ensure that commercial banks, in Nigeria, lend funds to business-oriented individuals and small and medium enterprises should be pursued so that their contributions can be felt in the economy. Not only that, interest rate on loans to SMEs should be set below 2 digits to encourage small and medium enterprises to borrow from commercial banks as well as micro finance banks; and by so doing, SMEs financing will contribute meaningfully to SMEs output, which, in turn, will contribute meaningfully to economic growth in Nigeria.