By Blaise Udunze
nigeria’s estimated 17 million Small and Medium Enterprises (SMEs) constitute an important vehicle for national development as they were nurtured to integrate a large segment of the populace in productive economic activities.
Across the world, most countries have used the Micro and Small Medium Enterprises (MSMEs) platform to combat unemployment as SMEs have been known, globally as engine of economic growth, industrialisation and contributor to employment generation, wealth creation, poverty alleviation and food security.
Available statistics show that in developed countries of the world, the only way to achieve job creation and inclusive growth is by tapping into the many innovations of the private sector, particularly SMEs. An army of about 50 million SMEs creating about 500 million jobs between 1980 and 2012 led to the Chinese economic miracle. But, against international best practices Nigeria is rated poorly.
Just recently, 182-page Nigerian Bureau of Statistics (NBS)/Small and Medium Enterprise Development Agency of Nigeria (NBS/SMEDAN) 2010 National MSME Collaborative Survey reveal that there are about 17,284,671 MSMEs in Nigeria. The breakdown shows that micro businesses constitute about 17,261,753 or 99.87 per cent; the small enterprises accounted for about 21,264 or 0.12 per cent, while the medium scale enterprises are about 1,654 or 0.01 per cent. Hence, SMEs are only 22,918 representing 0.13 per cent. The were 32,414,884 jobs created by MSMEs. SMEs created 39,478 jobs representing 0.12 per cent. However, as days go by, the unemployment rate in Nigeria increased to 10.40 per cent in the fourth quarter of 2015 from 9.90 per cent in the previous period. The number of unemployed persons went up by 518 thousand to eight million and labour force population rose by one million to 76.95 million. The underemployment rate grew to 18.7 per cent (14.4 million), compared to 17.4 per cent (13.2 million). Unemployment rate in Nigeria averaged 8.85 per cent from 2006 until 2015, reaching an all time high of 19.70 per cent in the fourth quarter of 2009 and a record low of 5.10 per cent in the fourth quarter of 2010.
Also, the International Labour Organisation (ILO) 2013 statistics noted that with 53 per cent of new employment, Nigeria’s informal sector ( micro businesses), constituted by over 17 million businesses, led the growth in total job creation. ILO also noted that despite the positive developments in the job market, jonless rate was 24 per cent with youth unemployment accounting for 38 per cent of the total figure.
According to ILO, the truth about SMEs in Nigeria is that the sector does not currently account for job creation and inclusive growth.
The existence of an environment that is conducive for doing business is very important in this regard and partly responsible for this development in advanced countries.
That is why Nigeria cannot afford to be an exception if it intends to be in the top 20 economies of the world by 2020, according to Vision 20:2020, the nation’s economic blueprint.
Meanwhile, for Nigeria to sustainably create jobs and forge inclusive growth, the solution is the robust growth and scaling of SMEs, which is now attracting the attention of financial institutions.
Challenges facing SMEs
In Nigeria, because of some challenges in the economy, a lot of SME operators in the country find it very difficult to effectively play their role. Some of these constraints have been identified to include competition, infrastructure, taxes, accounting, management, marketing, economic, planning and finance. In Nigeria, poor economic conditions, which also imply poor finance and inadequate infrastructure, have been identified as the most crucial factors.
No doubt, access to finance at relatively cheap cost, is also one of the most crucial problems hindering SMEs from making significant contribution to national output in Nigeria.
In fact, a survey by KPMG Nigeria and the Enterprise Development Centre of the Pan Atlantic University (PAU), which polled over 3,000 entrepreneurs, 18 banks and government/multilateral agencies, reflected both the SMEs and banks’ perspectives on the primary issues affecting the growth of this critical sector.
Clearly, they showed that the development of MSMEs in Nigeria and their overall contributions to the economy are hampered by the fact that access to finance still constitutes a major obstacle to growth.
Specifically, shortage of finance occupies a very central position. Commercial banks which remain the biggest sources of funds to SMEs have in most cases, shied away because of the perceived risks and uncertainties. In Nigeria, the fragile economic environment and absence of requisite infrastructure have rendered SME practice costly and inefficient, thereby worsening their credit competitiveness.
Doing business in Nigeria
The World Bank Group’s Doing Business Report 2016, last week delivered a damning report, which would further distance investors from Nigeria. The report, which disclosed that Nigeria was no longer a safe haven for businesses to thrive, showed that in 2015, out of 189 countries surveyed, Nigeria ranked 170th position with a Distance To Frontier (DTF) or Ease of Doing Business Score of 47.33, while in the 2016 version of the report, the country climbed one rung of the ladder to 169th position, shedding almost three percentage points to clock at 44.69 per cent points.
Highlighted in the report as Nigeria’s Achilles heel in doing business are the unusually long number of steps it takes to register a business, the difficulty of building a warehouse, poor access to electricity and the administrative burden of complying with tax payments, among other lacunas.
Globally, Nigeria stands at 59 in the ranking of 189 economies on the ease of getting credit. The economy has a score of 6.80 on the strength of minority investor protection index, with a higher score indicating stronger protections.
Globally, Nigeria stands at 181 in the ranking of 189 economies on the ease of paying taxes. The rankings for comparator economies and the regional average ranking provide other useful information for assessing the tax compliance burden for businesses in Nigeria.
CBN’s SMEEIS/MSMEDF/SMECGS to the rescue
The Central Bank of Nigeria (CBN) introduced the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) as a voluntary initiative of the Bankers’ Committee at its 246th meeting on December 21, 1999, which was in response to the government’s concerns and policy measures for the promotion of SMEs as vehicles for rapid industrialisation, sustainable economic development, poverty alleviation and employment generation.
The scheme requires all banks in Nigeria to set aside 10 per cent of their Profit After Tax (PAT) for equity investment and promotion of SMEs. Under the terms of the guidelines (as amended in July 2016 by CBN), the contribution will be 10 per cent of profit after taxation. However, this is no longer mandatory. The SMEEIS Reserve are non-distributable, as such, many deposit money banks may choose not to make any appropriation thereof. That notwithstanding, only last year the CBN earmarked N220 billion for Micro, Small and Medium Enterprises (MSMEs) Development Fund.
The CBN launched the MSME Development Fund on August 15, 2013 with a share capital of N220 billion. The fund was established in recognition of the significant contributions of the MSMEs sub-sector to the economy and the existing huge financing gap. 10 per cent of the fund has been devoted to developmental objectives such a grants, capacity building and administrative costs while 90 per cent commercial component will be released to Participating Financial Institutions (PFIs) at 2 per cent for on-lending to MSMEs at a maximum interest rate of 9 per cent per annum.
Complimentary to the above, the apex bank also established a N200 billion SMEs Credit Guarantee Scheme (SMECGS), for promoting access to credit by SMEs in Nigeria.
Financing MSMEs opportunities via commercial banks’ support
Despite the enormous challenges, financial institutions are expanding their SME operations and better tailoring their products and services, including commercial banks and other interested institutions in the SME financial services space.
First Bank, in the recent past said it has been a consistent promoter and supporter of the SMEs and some of its interventions for SMEs include overdraft for working capital, operational vehicles loans, e.g. school bus, delivery vans, equipment finance, commercial building loan, education management portal, contract and LPO finance, invoice discounting finance, import finance, bonds and guarantees, bill and tax payments, bulk payment and collections solutions, e-commerce platforms, non-oil export financing, domestic money transfers, zero COT accounts, non-oil export financing, import finance facility, key distributorship finance (cement, telco, FMCGs), among several other products.
Another bank, which has shown commitment to SMEs, is Zenith Bank; the bank has obtained several international facilities to commit to SMEs. For instance, not long ago, it obtained an AfDB N21.3 billion and an IFC $100 million facility to throw at small businesses across the country. Skye Bank has been at the vanguard of not only providing funding for SMEs, it has consistently taught business owners how to manage their businesses in seminars and workshops across the nation. The bank recently announced that it has disbursed the sum of N500 million loan to SMEs under CBN’s MSME intervention fund.
How governments can help finance SMEs
Governments are often keen to assist as to the extent that SMEs are unable to raise finance for their profitable projects, investment opportunities are potentially lost, hence, national wealth is lower than it could be. Additionally, governments are to support innovation, which is one area where SMEs often excel and are keen to support the growth of SMEs as this boosts employment. According to a Finance/Management Consultant and Certified Professional Forensic Accountant, Dada Adefolami Suaraju, governments can assist through providing grants and tax breaks. For instance, tax incentives may be available to those willing to take the risk of investing in SMEs (agricultural process).
He further advised government to set up government fund which provides assistance to those setting up and running a business, including advice on raising finance.
“Guaranteeing loans: For instance, for a small fee from the SME, a large proportion of any loan advanced by a bank is guaranteed by the government. As this significantly reduces the risk to the bank, they are potentially more willing to lend. This can be called ‘Enterprise Finance Guarantee’ scheme. Instead of commercial loss of money to the defaulters.
“Providing equity investment: This is government-backed venture capital organisations that are willing to invest in the equity of SMEs. This is often done on a matching basis where the organisation will match any equity investment raised from other sources. This is practiced in UK and USA.”
In addition, the Chief Executive Officer, Greenfield Limited, Mr. Makanjuola Ojewunmi, pointed out that if properly organised, Nigeria remains a huge market with great potential for SMEs.
“In the past few years, the dominant sector had been the oil and gas sector. So, when oil and gas is depressed, it shows up easily as if we are nowhere. But the reality of it is that the aggregation of the businesses that small businesses produce in this country ought to constitute a bigger chunk of our GDP and that is where we should be driving the economy towards.
“This is because the earlier we begin to realise that SMEs are the ones that drive any nation, the better for us. Go to China, Turkey, Italy, it is the small businesses that make their economies strong,” he said.
According to Ojewunmi, to succeed as a small business operator in Nigeria, one must have passion for his or her area of business.
Nonetheless, the Vice Chancellor, Kwara State University, Prof. AbdulRasheed Naallah, who acknowledged that MSMEs are capable of moving the economy from a mono-economy to a diversified economy, expressed disappointment that the current educational curriculum had not helped in that regard.
“The crisis we face is because our foundation as a nation, which includes governmental foundation, was never prepared to move this nation into a virile SME nation. A person with a secondary school education should be able to run a business.
“But if you look at the type of curriculum we have, it does not prepare anybody for anything. So, what we need to do, as far as I am concerned, is to make sure that the curriculum of our universities change today because it is that level of education that has direct impact on our people. What we have done at Kwara State University is to prepare SMEs from the university,” he argued.