1.1 BACKGROUND OF THE STUDY
For both developing and developed countries, small and medium scale firms play important roles in the process of industrialization and economic growth. Apart from increasing per capital income and output , SMEs create employment opportunities, enhance regional economic balance through industrial dispersal and generally promote effective resources utilization considered critical to engineering economic and growth.
However, the seminal role played by SMEs not withstanding it development is every where constrained by inadequate funding and poor management. The unfavourable macro economic environment has also been identified as one of the major constraints which most times encourage financial institutions to be risk-averse in funding small and medium scale businesses. The manufacturing sector(including micro, small and medium enterprises) is acknowledged to have huge potential for employment generation and wealth creation in any economy, yet in Nigeria, the sector has stagnated and remains relatively small in terms of its contribution to GDP or the gainful employment.
Activity mix in the sector is also quite limited dominated by import dependent processes and factors. Although there is no reliable data, imprecise indicators show that capacity utilization in the sector has improved perceptibly in the period since 1999, but the sector is still faced with a number of constraint with lack of credit availability as the principal constraint. Credit is the largest element of risk in the books of most banks and failures in the management of credit risk, by weakening individual banks and in some cases, the banking system as a whole, have contributed to many episodes of financial instability. A greater understanding of the nature of credit risk, leading to improved measurement and international financial system vis-à-vis the small and medium enterprises in the long run.