1.1 Introduction
Bank recapitalization refers to the process through which banks increase their capital base to strengthen their financial stability, improve liquidity, and enhance their ability to lend to various sectors of the economy (Sanusi, 2010). In Nigeria, bank recapitalization has been a significant policy tool aimed at stabilizing the banking sector, restoring public confidence, and ensuring that financial institutions are adequately equipped to support economic growth.
Small and Medium Scale Enterprises (SMEs) are defined as businesses whose personnel numbers, assets, and revenue fall below certain thresholds set by regulatory authorities, making them smaller in scale compared to large corporations (Aremu & Adeyemi, 2011). This chapter introduces the research by reviewing the background that informed the study, identifying the issues that led to its formulation, and outlining the aim and objectives. It also explains the study's significance, defines its scope, presents the research questions and hypotheses, addresses the limitations, and clarifies important terms used throughout the work.
1.2 Background of Study
Historically, bank recapitalization in Nigeria is closely linked to the evolution of the banking sector and efforts to strengthen financial stability and economic growth. Historically, Nigerian banks operated with relatively low capital bases, which limited their capacity to provide adequate credit to various sectors of the economy, particularly Small and Medium Scale Enterprises (SMEs). The financial sector experienced repeated crises in the 1980s and 1990s, including bank failures, poor corporate governance, and weak regulatory frameworks. Bank recapitalization in Nigeria has been a central policy initiative aimed at strengthening the financial sector and improving the capacity of banks to mobilize and allocate resources within the economy.
According to Akinkoye and Oyeyinka (2019), bank recapitalization involves increasing the capital base of financial institutions to enhance their stability, facilitate economic intermediation, and support broader economic activities, including lending to productive sectors such as Small and Medium Scale Enterprises (SMEs) (Akinkoye and Oyeyinka, 2019). Small and Medium Scale Enterprises (SMEs) are widely recognized as the backbone of economic development due to their contribution to employment generation, income distribution, and industrial growth. According to Aremu and Adeyemi (2011), SMEs account for a significant proportion of economic activities in Nigeria, yet their performance is often constrained by limited access to finance. Bank recapitalization has been implemented as a policy measure to strengthen the financial sector, enhance banks' lending capacity, and support economic growth.
Sanusi (2010) reported that the recapitalization of Nigerian banks in 2005 and subsequent reforms improved the stability and resilience of the banking sector. He asserted that recapitalized banks have higher lending capacity and are better positioned to provide credit to productive sectors of the economy, including SMEs. Adegbite and Ayadi (2012) stated that well-capitalized banks are more willing and able to extend loans to enterprises, enhancing their growth and operational efficiency. On the other hand, Olawale and Garwe (2010) contended that SMEs still face challenges such as high interest rates, stringent collateral requirements, and complex loan procedures, which limit their ability to fully benefit from banking sector reforms.
Ele (2025) affirmed that improved access to bank credit positively influences SMEs' financial performance, including profitability, sales growth, and business sustainability. Despite these benefits, SMEs remain vulnerable to systemic and institutional constraints, highlighting the need for targeted measures to ensure that recapitalization translates into tangible enterprise development. According to Gorton and Winton (2003), the effectiveness of bank recapitalization in promoting SME performance depends on complementary policies, regulatory support, and capacity building for both banks and enterprise operators. This study is set against the backdrop of the need to empirically examine how bank recapitalization affects the performance of Small and Medium Scale Enterprises in Nigeria.
1.3 Statement of Problems
Investigation revealed that the performance of Small and Medium Scale Enterprises (SMEs) in Nigeria is widely recognized as a critical factor in the nation's economic development. SMEs contribute significantly to employment generation, poverty reduction, and innovation (Aremu & Adeyemi, 2011). In addition, the challenges small and medium scale enterprises face in leveraging the benefits of bank recapitalization include limited financial literacy, inadequate business planning, and bureaucratic bottlenecks within the banking system (Olawale & Garwe, 2010).
Furthermore, the improved capital base of banks is expected to enhance their lending capability, potentially offering SMEs greater opportunities for financing business operations and expansion. Yet, the extent to which this expectation translates into measurable performance improvement for SMEs remains underexplored. It is against this backdrop that this study seeks to investigate the effect of bank recapitalization on the performance of Small and Medium Scale Enterprises in Nigeria.
1.4 Aim and Objectives of Study
The aim of this study is to examine the effect of bank recapitalization on the performance of Small and Medium Scale Enterprises (SMEs) in Nigeria.
The specific objectives of this study are as follows:
- To evaluate the extent to which bank recapitalization has improved the availability of credit for SMEs in Nigeria.
- To assess the impact of increased bank capital on the operational efficiency and growth of SMEs.
- To identify the challenges and systemic issues that hinder SMEs from fully benefiting from bank recapitalization.
- To examine the relationship between bank recapitalization and the financial performance of SMEs.
- To provide recommendations for policymakers, financial institutions, and SME operators on optimizing the benefits of bank recapitalization for business development.
1.5 Research Questions
Based on the objectives of this study, the following research questions are formulated:
- To what extent has bank recapitalization improved the availability of credit for Small and Medium Scale Enterprises (SMEs) in Nigeria?
- How does the increased capital base of banks affect the operational efficiency and growth of SMEs?
- What are the challenges and systemic issues that hinder SMEs from fully benefiting from bank recapitalization?
- What is the relationship between bank recapitalization and the financial performance of SMEs in Nigeria?
- What strategies can be implemented by policymakers, financial institutions, and SME operators to optimize the benefits of bank recapitalization for SME development?
1.6 Research Hypotheses
Based on the objectives of this study, the following hypotheses are formulated:
- H01: Bank recapitalization has no significant effect on the performance of Small and Medium Scale Enterprises (SMEs) in Nigeria.
- H02: Bank recapitalization significantly improves the availability of credit for SMEs in Nigeria.
- H03: The increased capital base of banks has a significant positive effect on the operational efficiency and growth of SMEs.
- H04: Systemic challenges and inefficiencies in the banking sector significantly hinder SMEs from fully benefiting from bank recapitalization.
- H05: There is a significant relationship between bank recapitalization and the financial performance of SMEs in Nigeria.
1.7 Significance of Study
The outcome of this research will serve as a guide for policymakers in the financial sector, particularly the Central Bank of Nigeria, in designing strategies that ensure recapitalization efforts translate into increased access to credit and improved operational efficiency for SMEs. This research will also benefit Small and Medium Scale Enterprise operators by identifying the key factors that influence their ability to access bank financing post-recapitalization.
Furthermore, the outcome of this research will contribute to the academic body of knowledge by providing empirical evidence on the effectiveness of bank recapitalization in fostering SME performance.
Lastly, this research will serve as a reference point for future studies on financial sector reforms, SME development, and economic growth, thereby enriching policy debates and research on the subject.
1.8 Scope of Study
The scope of this study is focused on examining the effect of bank recapitalization on the performance of Small and Medium Scale Enterprises (SMEs) in Lagos State, Nigeria.
1.9 Limitations of the Study
During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this research work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
- Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.
1.10 Definition of Terms
Bank Recapitalization:
Bank recapitalization refers to the process through which banks increase their capital base to strengthen their financial stability, enhance liquidity, and improve their lending capacity (Sanusi, 2010). In practical terms, this means injecting additional funds into banks from shareholders, the government, or other financial sources to meet regulatory capital requirements. For this study, bank recapitalization is considered in relation to its impact on the ability of banks to provide credit facilities to Small and Medium Scale Enterprises (SMEs) in Nigeria.
Small and Medium Scale Enterprises (SMEs):
SMEs are businesses whose scale of operation, number of employees, and annual turnover fall below thresholds defined by regulatory authorities (Aremu & Adeyemi, 2011). In the context of this study, SMEs are considered as registered businesses in Lagos State that engage with commercial banks for credit facilities and operational funding.
Performance:
Performance in this study refers to the effectiveness and efficiency with which SMEs achieve their business goals. This includes indicators such as profitability, growth in sales, operational efficiency, market share, and ability to repay loans. Performance is measured both in financial and non-financial terms to provide a comprehensive view of the effect of bank recapitalization on SMEs (Ele, 2025).
Credit Accessibility:
Credit accessibility is the ease with which SMEs are able to obtain loans or financial support from banks. It encompasses factors such as availability of funds, interest rates, loan processing time, and collateral requirements (Olawale & Garwe, 2010). This term is important in understanding whether bank recapitalization has facilitated or hindered SME access to finance.
Operational Efficiency:
Operational efficiency is the ability of SMEs to optimize their resources to achieve maximum output with minimal waste. This involves effective management of human, financial, and physical resources to improve productivity and business outcomes (Adegbite & Ayadi, 2012). For this study, operational efficiency is used to evaluate the effect of improved banking services on SME operations post-recapitalization.
Financial Stability:
Financial stability refers to the soundness and resilience of both banks and SMEs in managing financial obligations and maintaining liquidity. In this study, it examines how recapitalized banks provide a stable lending environment that influences SME sustainability and growth (Akinkoye & Oyeyinka, 2019).
…
