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AfricaOctober 3 2004

Informal sector is high priority

Like many other developing countries, the small and medium enterprise (SME) sector in Nigeria is considered crucial to job creation and broad-based economic development. Indeed, SME development has been a high priority ever since the transfer to civilian rule in 1999.
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Without quality data, the best estimates available indicate that Nigeria’s informal sector – almost exclusively SMEs but excluding those that are registered and tax-paying – accounts for one-third of GDP and as much as 90% of new job creation. With as much as half the working population unemployed, the informal sector is often the only option for individuals seeking an income. And with anything from half to two-thirds of the population living on or below the poverty line, the informal sector is a crucial lifeline.

An International Finance Corporation (IFC) study of the barriers to SME development was narrowed down to three chief concerns: inadequate physical infrastructure, particularly erratic power supply; an uncertain business environment, which included corruption and red tape; and insufficient access to finance. The government’s reform programme is specifically focused on addressing the first two barriers; the lack of finance is a more complex problem.

Nigeria’s approach to SME financing in the past has been varied and the results mixed.

In the past two decades the government has established a number of development finance institutions (DFIs) and funds to provide capital to small business. These include the Nigerian Bank for Commerce and Industry, the National Economic Reconstruction Fund and the Nigerian Industrial Development Bank. Other initiatives included the Family Support Programme and Family Economic Advancement Programme, both providing micro-credit to women; the National Directorate of Employment; the Peoples Bank of Nigeria (PBN) and community banks.

Unprofitable for banks

The use of DFIs was required because of commercial banks’ inability and reluctance to provide long-term credit to SMEs. This was because the deposit base of the commercial banks was short term in nature. In fact, in the late 1970s, the government compelled commercial banks to extend service into rural parts of Nigeria. This would prove unsustainable as low incomes resulted in limited financial intermediation, both in terms of deposit-taking and lending. The banks’ commitment soon wavered and the business proved unprofitable.

The DFI’s were capitalised using government funds, following a global practice at the time whereby government, as a matter of deliberate policy, established schemes for providing concessionary finance to SMEs. This recognised SMEs’ highly disadvantaged position in open market competition for finance and other resources.

A tale of failure

According to Lawrence Osi-Afiana, managing director of the Bank of Industry, despite the good intentions of the programmes, the institutions managing them later became weakened and incapable of effectively discharging their responsibilities due to weak capitalisation, inefficient operations, poor loan portfolio quality, poor liquidity and inability to access further external lines of credit. He lays the blame on an absence of accountability and crippling bureaucratic practices.

“The failure of the DFIs is traceable back to the fact that they operated with little commercial orientation. They operated on the philosophy that they were agents for the disbursement of government funds. Consequently, the beneficiaries of their facilities were not keen to service their loans even if they were able, assuming the funds to be their share of the ‘national cake’. For government-owned DFIs to be successful in the long term, they must operate under a different philosophy that is underpinned by commercial orientation,” says Mr Osi-Afiana.

He says the embrace of new approaches to financing SMEs in Nigeria is urgent. Past approaches have failed and if SMEs are to play the crucial role of ensuring meaningful and sustainable growth of the economy, it is imperative that new approaches be adopted.

Modupe Adelaja, director general of the Small and Medium Enterprises Development Agency of Nigeria (SMEDA) agrees that access to finance has been difficult for SMEs but she says the availability of funds is only part of the equation. “In the past, the DFIs have focused only on providing capital and have not given attention to assessing and developing SME managers, monitoring operational performance of the SME and mentoring inexperienced SME managers. Financial institutions in Nigeria do not have the know-how and experience of dealing with SMEs,” she says.

Access to finance

Because of the heightened interest in SME development in Nigeria, there is no shortage of funding ideas: venture capital (the Wealthy Nigerian Initiative, for instance, is aimed at attracting Nigerian savings abroad back to the country); a second-tier securities market; and a national credit guarantee fund. Many are novel but few offer a mechanism for correctly pricing capital in such way that there is a sustainable supply of funding at the same time as being affordable to SMEs.

Others propose restructuring and refocusing the DFIs, an improbable solution for the moment, given the pressing need to restructure so much of the state and quasi-state sector, and critical resource constraints.

Perhaps the most interesting solution on the table is the Small and Medium Industries Equity Investments Scheme (SMIEIS), a private sector initiative of the Bankers Committee, consisting of the Central Bank of Nigeria and commercial banks. The scheme was launched in 2001.

Initially, the scheme required all commercial and merchant banks to commit 10% of their annual pre-tax profit to the funding of equity investments in SMEs. However, last year stakeholders acknowledged that SMEs are often not suitable for equity investment, lacking the necessary structure. It was agreed that 10% of the 10% already set aside (in other words 1% of annual pre-tax profit) would be allocated to micro-credit.

As at the end of April 2004, N22.3bn (about $167.7m) has been set aside by 83 banks out of which N9.8bn had been disbursed to 185 projects.

Mrs Adelaja points out that the commercial focus of privately-owned banks will ensure credit quality and sustainability of the programme. And she believes SMEDA can help out, providing “certificates of quality” to SMEs to help banks to assess credit worthiness. Proposals being considered include certificates to SME owners if they complete a management course, for instance. “Management skills, more than finance, are the most important ingredient for SME success,” say Mrs Adelaja.

“SMEDA should not be in the business of disbursing funds but it must have teeth. Who is responsible for finding and nurturing attractive SMEs? The banks do not know how to. This is an area where we can add value,” she says.

Mrs Adelaja would welcome international SME-focused credit institutions. And she sees a role in linking promising SMEs to donor funding.

Missed goals

In April this year, at the launch of a census of SMEs in Delta State, governor James Onaneffe Ibori, made this telling observation: “The crisis of development in Nigeria is compounded not by lack of vision but by consistent failure to actualise the goals for which different policies are made and agencies established. It is worrisome that, in spite of the enormous resources and manpower available in the country, most economic policies fail to meet their goals.”

It is an observation that resonates with Mrs Adelaja. SMEDA, which was established in July 2003, is under-funded and struggling to meet its targets. But she points out that its creation is indicative of government’s intention to mobilise and co-ordinate all the different stakeholders to develop the SME sector. This unified approach has been lacking in the past.

Others share her optimism. “Since 1999, the promotion of SMEs has been accorded a priority status in government policy,” National Bank chairman Philip Oni told an SME workshop in Lagos in August. “This policy will sustain industrialisation and promote non-oil exports. Furthermore, it will achieve other economic goals of poverty eradication and employment creation.”

Mr Oni said that few other economic policies matched SME development for broad-based growth and employment creation – exactly what is needed in Nigeria. It presents an urgent challenge but a massive opportunity, too.

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