Formal Financing of Small and Medium Scale Enterprises in Nigeria: A Path to Economic Development?

This investigation assessed the influence of formal financing for small and medium-sized enterprises (SMEs) on the economic advancement of Nigeria, utilising annual time series data ranging from 1992 to 2022. Employing the Cobb-Douglas framework, control variables, including capital formation and labour, which could influence economic development, were incorporated into the empirical model to mitigate bias. Following initial tests for stationarity, it was determined that all variables achieved stationarity upon the first difference, a finding that validated the Vector Error Correction Mechanism (VECM) application. The analysis revealed that the credit extended to SMEs by commercial banks and the loans provided by microfinance banks exhibited a negative and significant influence on economic development, as measured by GDP per capita, in both the long and short term. The negative coefficients associated with the credit from commercial banks to SMEs and the loans from microfinance banks indicate that these financial institutions have not yet catalysed the requisite leap in Nigeria's economic development, probably due to the negative effects of unstable interest rates on lending. Both gross capital formation and labour demonstrated a significant impact on GDP per capita; however, the effect of labour was found to be negative. Consequently, it was concluded that financing for SMEs through commercial banks’ credit and microfinance bank loans had a negative and significant effect on Nigeria's economic development. The study recommended that policymakers and regulatory bodies should empower and facilitate formal financial institutions, such as commercial banks and microfinance banks, to extend financial services to SMEs, thereby enhancing their productivity.