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AfricaApril 1 2007

Small money

The government is taking steps to address the lack of funding available to micro, small and medium-sized businesses. John McCarthy reports.
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Nigerian micro, small and medium-sized businesses (MSMEs) across all sectors have long faced several shared problems that hinder their activity, sustainability and growth.

One of the chief problems has been inadequate transport and communications infrastructure, which the government has started to address seriously. But MSMEs must also operate against a background of poor information flows, weak intra-sectoral links, weak health, safety and environmental safeguards and low levels of market access. Beyond these, they face restricted access to land and have typically been disfavoured by legislation designed with large businesses and state-backed projects in mind. However, one of the principal problems for many MSMEs has been the difficulty of accessing reliable and cheap capital to sustain ongoing operations and fuel growth.

Recognising these various difficulties needed tackling head on if MSMEs were to fulfil their vital role in economic diversification, income creation, poverty alleviation and rural development, the government created the Small and Medium Enterprise Development Agency of Nigeria (Smedan) in 2003. Under the guidance of its first director general, Modupe Adelaja, Smedan has drawn up a national policy on MSMEs, which was expected to be promulgated in final form last month. This sets out, for the first time and in detail, a co-ordinated, wide-ranging public-private programme that is designed to tap into the full potential of MSMEs. It will be complementary to the microfinance policy articulated by the Central Bank of Nigeria (CBN) two years ago.

Not everyone is convinced that the policy will work, however. Some Nigerian diaspora investors regard the policy with scepticism, pointing out the gulf that continues to exist across vast swathes of Nigerian public service between good intentions and effective implementation.

Importantly, the policy explicitly acknowledges that most MSMEs presently operate in the informal economy and thus fall outside the official framework of regulation and support, and it seeks ways of bringing them into the mainstream. It does not deal with the large number of agricultural MSMEs – mainly family farming enterprises, which fall under the national policy on agriculture – but it does identify other sectors of the economy where MSMEs are especially important.

MSMEs falling into these categories, called ‘special target enterprises’, will benefit from specific enterprise promotion programmes and are expected to have a disproportionate impact on development and productivity in line with the National Economic Empowerment and Development Strategy (NEEDS). Particular consideration will be given to sectors that include cottage food processing, cottage arts and crafts, leather products, textiles and clothing, construction, metal fabrication and engineering, electronic and information technology, and oil and gas services. Women-owned and youth-owned enterprises will also be singled out for attention.

Smedan’s role

Smedan will play a key role in implementing the policy, acting as a one-stop shop for entrepreneurs who want to start a business, and supporting innovation and facilitating access to labour, raw materials, finance, equipment, technology, management skills and markets. It has already established state-level business support centres (BSCs) in eight states and multiple local-level business information centres (BICs), with an equal number soon to be inaugurated. Among the services provided by these centres are training in elementary book-keeping, accounting, drafting of business plans, IT potential and business management; and legal and taxation advice.

Through its support for the establishment of industrial parks and workspaces, Smedan is also encouraging the emergence of sector-specific clusters of MSMEs with the intention of creating concentrations of expertise and economies of scale. Functioning clusters already exist at Aba (clothing), Abeokuta (tie and dye), Kano (leather), Nnewi (vehicle parts) and Otigba (information and communications technology).

Banking and finance

Historically, Nigerian MSMEs have had to contend with a slew of financial constraints. As a consequence of their typically weak assets bases and lack of other viable securities, bank credit has been hard to come by, and alternative options, such as equipment leasing, hire purchase and insurance, are underdeveloped.

The wholesale transformation of Nigeria’s banking system during the past three years is having a dramatic impact on business as a whole, not least among small and medium-sized enterprises (SMEs) and to some extent among micro-enterprises.

Liberalisation of the banking sector in 1986 left Nigeria with 89 banks by 2003, all comparatively small and with a combined capitalisation of less than South Africa’s single largest bank, ABSA ($46bn). Only two banks were capitalised to more than N25bn ($200m). The sector was characterised by weak corporate governance and non-compliance with regulatory and disclosure requirements.

Real lending rates of more than 10% remained prohibitive to MSMEs. Much-needed restructuring began in 2004 under the new CBN chairman, professor Chikwuma Soludo, erstwhile author of the NEEDS programme. He quickly launched reforms in which Nigeria’s 89 banks had been consolidated to 25 by 2006 at a cost equivalent to less than 2% of GDP.

One of the principal goals of the reforms was to encourage banks to play a more active role in economic development, including through the creation of a market for consumer finance and microcredit, driven by the obvious potential among a growing entrepreneurial middle class. Consolidation brought swift changes. Capitalisation of the sector grew dramatically from $3bn to $5bn in just one year. Simultaneously, interest rates fell to their lowest levels since financial sector reform in the 1980s, with lending to the private sector, including SMEs, rising as a consequence.

Access to funds

Aware that access to funds is among the most acute problems facing MSMEs, Smedan is collaborating with the CBN and SME-friendly banks to examine how this small financial boost can be locked in and built upon. Central to the outcome is the CBN’s microfinance policy, under which the government will boost federal resources for MSMEs and has undertaken to support the private sector, including social and non-profit organisations, in its efforts to develop innovative financial services to meet MSME needs.

Addressing the piecemeal approach to past MSME funding, the policy aims to ensure there is synergy between financing programmes and related enterprise support schemes. This will include the modernisation of the traditional lending structures and existing microfinance institutions and their integration into a co-ordinated MSME financing framework.

The banking sector’s flagship policy for SMEs is the Small and Medium Enterprises Equity Investment Scheme. Under the programme, Nigerian banks contribute 10% of their profits after tax towards equity investment in, or loans at single-digit interest rates to, SMEs. In addition, they provide financial, technical and managerial support to SMEs. Of the total funds of about N30bn annually made available through the scheme, 10% is dedicated to investment in microfinance institutions.

The various banks involved most actively in MSME finance – notably Union Bank, UBA Private Equity, the Bank of Industry, Zenith Bank and ACCION Microfinance – set different qualifying criteria for potential borrowers. The Bank of Industry, for example, deals with enterprises of all sizes but will only accept borrowers whose management capability and financial situation is unquestionably sound and who can provide collateral and guarantees for loans. Some, such as Zenith Bank, will invest only within specific parameters – it offers N20m to N500m, which must be tied to a specific project, preferably fixed assets – and take a more hands-on approach, insisting on a seat on the company board and the right to appoint a financial controller.

A significant recent move among the government-run development finance institutions has been the restructuring of the Nigerian Agricultural, Co-operative & Rural Development Bank. The bank had a history of directed and subsidised lending to businesses of various sizes through its smallholder scheme and livestock development programme among others, albeit with a poor loan repayment record that consequently limited its ongoing lending capacity. Restructuring in 2006 forced it to focus solely on MSMEs, with a subsidy from the CBN enabling it to offer loans to individuals or firms at 8%, well below the present market rate.

Other initiatives

For its part, Smedan will launch a business development service designed to attract creditors and equity investors to MSMEs, and will help to organise capacity building and institutional support programmes relevant to the promotion of the growth of MSME-specific venture capital. It will also foster the use of clusters and co-operatives as vehicles to facilitate MSME access to credit and loan facilities, and these or similar networks will be encouraged to establish mutual funds for small-scale credit and collective self-help.

At the stock exchange, plans are afoot to rejuvenate the second-tier market and launch a third-tier market with the aim of providing a more liquid capital environment and opening opportunities for trading in the equities of SMEs. And the federal government will introduce various fiscal incentives, including tax exemption for SMEs, and will underwrite expansion of the equipment leasing sector through capacity building programmes and institutional support.

The new national policy on MSMEs could be just the catalyst that is needed to kick-start the huge latent potential of the MSME sector. However, the scale of the task is immense and it will be some time yet before it is known whether the financing gulf can be bridged – a necessity if the ambitious targets envisaged by the policy are to be achieved.

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