Things appear to be looking up for Small and Medium Enterprises (SMEs), despite challenges before the sector credited with the capacity to create jobs, boost production and diversify the economy, writes Assistant Editor CHIKODI OKEREOCHA.
the Director-General/CEO,Nigerian Youth Chamber of Commerce (NYCC), Comrade Peter Ayim, is upbeat that Small and Medium Enterprises (SMEs) will soon gather momentum to catalyse industrial growth.
His optimism is hinged on the recent signing of a service agreement between Bank of Industry (BoI) and Business Development Service Providers (BDSPs) as well as other strategic initiatives aimed at unlocking the opportunities in the sector, globally acknowledged as the engine of growth. This is because of its capacity to create jobs, boost production and diversify the economy.
BoI had on November 21, last year signed a service agreement with 122 BDSPs. The synergy, seen by industry stakeholders as a revolutionary step in development banking, entailed BDSPs collaborating with the development finance institutions to identify credible SMEs that require funding. They would also develop bankable business plans and proposals for SMEs to facilitate their access to finance. The BDSPs, according to BoI’s Managing Director, Rasheed Olaoluwa, would also provide post-finance services, such as mentorship, handholding, advice and inculcation of best practices for SMEs, among others.
A few months after the agreement was consummated, Ayim confirmed to The Nation that the BDSPs have hit the ground running by preparing SME projects for possible financial support by BoI. For instance, NYCC, one of the BDSPs that scaled BoI’s rigorous and painstaking selection process, is engaged with about 10 SMEs.
“We have been engaging with 10 SMEs. While some came to us on their own, Skye Bank Plc, one of the SME-friendly banks referred some to us. We are talking to the SMEs,” he said.
Comrade Ayim added that as part of the chamber’s services to its clients, it has also commenced discussions with Raw Material Research and Development Council (RMRDC), to organise a workshop for the SMEs.
“The service agreement was the missing link,” he said, noting that the signing of the agreement effectively addressed the gap in the areas of poor packaging of loan requests and non-bankable business plans, which are some of the factors responsible for the low level of financial support to SME operators.
He added that as the umbrella body and voice of youth entrepreneurs, the chamber is proud to be associated with an initiative that is poised to stimulate SMEs. While describing the initiative as an emerging trend, he called on SMEs to take advantage of the window created by BoI to build their capacity to play their role as growth drivers. He said while NYCC and other BDSPs are preparing the enterprise operators by providing them with a range of services, the collaborating banks provide the working capital.
Chairman Managing Consultant, Resort Consult Limited, a BDSP, Mr. Femi Ekundayo, is no less excited over the prospects of SMEs riding on the platform of the agreement to scale up their operations.
“It’s a good thing that BoI did”, he said, noting that Resort Consult Limited, a financial consultancy firm specialising in financial advisory service, project and manpower development, is appraising two SME projects before forwarding them to BoI.
“We are appraising two projects. We expect that by April after the elections the projects would be completed and approved,” he disclosed. Ekundayo, however, said in rendering services to the SME sector, BDSPs are faced with the challenge of the attitude of SME operators, most of who do not want to be persuaded that there is light at the end of the tunnel for them.
“Despite that a lot of interventions made in the sector brightened prospects for SME operators, it takes a lot of persuasion to make them know that there is light at the end of the tunnel for them,” he said.
He identified other challenges facing SMEs to include lack of technical capacity to package their feasibility studies and businesses very well; lack of good management structure and accounting system to make them attractive to financial institutions for any form of assistance, as well as harsh economic environment. For instance, most SMEs are weighed down by high operating cost due to lack of basic infrastructure particularly power.
Perhaps, most importantly, with the economic crisis caused by crashing oil prices and, subsequently, the devaluation of the naira, SMEs who depend on high import with the associated foreign exchange risk are unable to compete in the global market. The current lending rate of between 20 and 30 per cent is also considered unfriendly for SMEs, as most of them find it difficult to sustain their businesses at that level.
SME-friendly banks to the rescue
The recent signing of a Memorandum of Understanding (MoU) between BoI and 10 SME-friendly banks set the tone for a major reversal in the fortunes of the sector with regards to project funding. The 10 commercial banks renowned for their SME-centric activities were carefully chosen to partner with BoI in the financing of their SME customers. The banks include Access Bank, Diamond Bank, Ecobank, Fidelity Bank, FirstBank, First City Monument Bank, Skye Bank, Stanbic IBTC Bank, Standard Chartered Bank, and United Bank for Africa.
Essentially, the banks are collaborating with BoI in the provision of long-term loans to qualified SMEs based on BoI’s Risk Acceptance Criteria (RAC) and the provision of working capital to the SMEs also based on individual bank’s RAC. Olaoluwa explained that the terms of the loans will be in accordance with BoI term loan with a tenor of three to five years. While the moratorium will be 6-12 moths, interest rate is between 9 and 10 per cent per annum. On the other hand, working capital facilities by SME-friendly banks will be on a tenor of 6-12 months.
The BoI MD listed sectors to be financed to include agro-processing, solid minerals and metals, light manufacturing, logistics, etc. identified under the Nigeria Industrial Revolution Plan (NIRP) launched by the Federal Government recently. While describing the synergy between BoI and the SME-friendly banks as unprecedented, he said it will undoubtedly foster greater access to finance for SMEs, financial inclusion for Nigerians and also engender wealth creation and accelerated job creation for Nigerians.
Banks have since keyed into this aspiration, having seen the synergy as opening up a new vista for them in that sector of the economy.
CBN shows the way
The launch of the N220 billion MSMEs’ Development Fund in August 2013 by the CBN was a shot in the arm of MSMEs.
The intervention, which CBN Governor Godwin Emefiele, described as an innovative way of improving MSMEs access to finance, was aimed at shoring up the sector’s potential for job creation and poverty reduction in the country. One way it hopes to achieve this is by addressing the challenge of high cost of funds that has continued to affect operators’ profitability.
This is so because most commercial banks charge as high as between 22 and 25 per cent interest rates. Micro-finance Banks (MFBs) even charge higher, insisting on between 30 and 40 per cent interest rates. The exorbitant interest rate charged by the commercial banks is also believed to be partly responsible for why local industries are uncompetitive.
This was why the CBN in its guidelines said the fund attracts nine per cent interest rate. The fund would also be administered through private or state owned Micro-Finance Institutions (MFIs), Finance Houses, and Cooperative Finance Agencies. Such MFIs or micro-finance banks must pass CBN’s competency and proficiency tests in order to certify them capable of distributing these funds to MSMEs. State governments will be able to access up to N2 billion each for lending to eligible beneficiaries through Participating Financial Institutions (PFIs) in their states.
In other words, the CBN will not be lending directly to farmers or businesses. What the fund does is a wholesale fund. It provides funding to the PFIs. MFIs or micro-finance banks can also come to the fund. The CBN will assess them; give them the money at low interest rate. The PFIs would undertake that they will lend at low rate of interest to micro-entrepreneurs, the low-income earners, farmers, artisans and the active poor who operate in the informal sector. Also, PFIs can only finance agricultural value chain activities, trade and commerce; cottage industries, artisans, among others.
The apex bank in a bid to ensure that productive sectors of the economy attract more finance necessary for employment creation and diversification of the country’s economic base, also said a maximum of 10 per cent of the commercial component of the fund should be channeled to trading and commerce.
The icing on the cake of the intervention for MSMEs perhaps, was the provision that 60 per cent of the fund, representing N132 billion, be earmarked for providing financial services to women-owned businesses. Emefiele said PFIs would be required to submit periodic returns on disbursements as well as an analysis of the social impacts of the fund. He added that the finance sector regulator will also undertake regular on and off site checks to ascertain the veracity of the reports received.
SON, OPS also involved
Rejection of made in Nigeria goods because of poor quality and packaging remains a pain in the neck of most SME operators. To halt the trend, which inflicts losses to operators and by extension, the local economy, the Standards Organisation of Nigeria (SON) is certifying SMEs in the country to prepare them for export. This is in the hope of stopping the high scrutiny given made-in-Nigeria goods at the global market.
During a visit by the National President, Nigerian Association of Chamber of Commerce, Industry Mines and Agriculture, Alhaji Mohammed Abubakar to SON in Lagos, its Director-General, Dr. Joseph Odumodu, said the agency found that apart from challenges of funding and poor management facing SMEs, what makes SMEs fit for export is not just for their products to meet Nigerian standards but also meet international standards. “We intend to work with SMEs going forward to build them to international standards,” he said.
Odumodu stated that as part of the agency’s emphasis on making made in Nigeria products acceptable all over the world, its accredited laboratory is for a specific competence, which boasts of carrying chemical and biological testing for agricultural products in the country. He said Nigeria has entered a phase, which he called the map for world quality due to its latest accredited laboratory.
While urging SMEs to take advantage of this golden opportunity to push their products to the world, he said SON intends to certify 50 SMEs to International Standard Organisation (ISO) 9001 quality management systems.
SME operators are not folding their arms. Recently, the Lagos Chamber of Commerce and Industry (LCCI), part of the Organised Private Sector (OPS) commenced a programme of equipping SMEs with requisite skills needed to make their products competitive.
LCCI President Alhaji Remi Bello, stressed that the Chamber was embarking on the initiative because the sector has been proven by developed economies of the world as a tool to accelerate economic growth and development.
Bello, who spoke through LCCI Director General, Mr. Muda Yusuf, during the graduation of 25 mentees of the chamber’s mentoring programme scheme 2, said the mentoring programme is aimed at match-making young business leaders with experienced business owners to share their experiences with the mentees in order to make their products competitive anywhere in the world.
More hurdles to cross
Ordinarily, a combination of these interventions ought to take the SME sector out of the woods. But this has not happened. Although, operators and experts say that there is silver lining on the horizon for SMEs as a result of the increased focus on the sector, they however, contend that there are still a number of hurdles that must be crossed if SMEs must get to the ‘Promised Land’.
One of such hurdles, according to Mr. Ekundayo, is the lack of technical/financial management capacity by most SMEs. He also said SMEs lack technical capacity and are constrained by harsh economic environment induced by high operating cost due to lack of basic infrastructure, particularly power.
The poor state of roads also increases the cost of transporting both raw materials and finished goods to and from markets. They are also under constant threats from different organs and tiers of government who collect regressive and multiple taxes and levies.
Most importantly perhaps, the current economic crisis caused by crashing oil prices and subsequently, devaluation of the naira, is taking a huge toll on SMEs who depend on high import. With the associated foreign exchange risk, most SMEs are unable to compete in the global market place. The current lending rate of between 20 and 30 per cent is considered unfriendly for SMEs, as most of them find it different to sustain their businesses at that level.
That is not all. The attitude of some SMEs, according to Ekundayo, is not helping matters. He said despite the fact that a lot of interventions made in the sector have brightened prospects for SME operators, “It takes a lot of persuasions to make them know that there is light at the end of the tunnel.”
Recommendations
Ayim noted that although, Nigeria has the required number of active enterprises, with a predominantly youthful population of over 70 million youths, what is required is for government to give them the needed impetus by deliberately creating the enabling environment that will remove all the barriers that impede youth-led micro enterprises.
According to him, this could be done by building a robust and dynamic public/private enterprise development eco system. “This will facilitate diverse direct investment options in youth focused start-ups and micro-enterprises,” he told The Nation. While describing government’s diverse intervention programmes as ‘demonstration of commitment to encourage and support the promotion and development of entrepreneurship and the MSME, he said it is also important for government to explore other credible vistas so that more people can enter and actively participate in the MSME sector.
“In the circumstance, a dynamic mix of micro-leasing, micro-insurance and demand-driven business development services offered within a cluster is a credible option that should be encouraged,” he said, adding that using this approach will enable more aspiring entrepreneurs who cannot meet the conditions of accessing available funding options to access appropriate equipment under a micro-leasing arrangement for their businesses while existing entrepreneurs can access equipment to grow and expand their businesses.
Why SMEs hold the ace
President Goodluck Jonathan underscored the critical importance of SMEs to Nigeria’s economic growth and development when at the recent inauguration of the MSMEs Council he said: “MSMEs are the innovators, the wealth creators, as well as employment generators. Every MSME today has the potential of growing to the large corporation of tomorrow, and that is why we are now backing the initiative with the creation of this Council.”
Latest survey by the National Bureau of Statistics (NBS) put the number of MSMEs in Nigeria at 17.2 million. The enterprises, according to NBS, employ over 32 million people. Citing the survey, Jonathan said, “Over 95 per cent of registered businesses in Nigeria are small businesses. If each of these businesses employs one more person, we would create over 17 million extra jobs, which would indeed be a revolution in Nigeria’s job markets. This is the unexplored power of small businesses.”
The President also explained how MSMEs’ impact on employment, saying that apart from employing people directly, MSMEs promote employment indirectly through creating market opportunities and improving market conditions. They also disperse and diversify economic activities, wealth creation and distribution as well as localize resources, mobilise savings, and stimulate indigenous entrepreneurship and technology especially in developing economies.
The job creation capacity of the sector appears to be the most interesting. For instance, 70 per cent of all new net jobs in the US are created by SMEs, according to National President of Nigerian Association of Small Scale Industrialists (NASSI), the umbrella association for all small scale enterprises and industries in Nigeria, Chief Chuku Wachuku. He however, said that in Nigeria SMEs contribute about 95 per cent to Gross Domestic Product (GDP), but their only problem is that whereas they contribute this percentage to GDP, the wealth addition stands at only 46 per cent.
He noted that the economy of the emerging nations or even developed nations appreciate that economies must necessarily depend on MSMEs and the informal sector because it’s the engine of growth, propelling the economies of those countries by creating the bulk of job opportunities. He said government only creates the enabling environment for the private sector to thrive through unfettered access to credit facility to MSMEs in those countries as well as provide the necessary infrastructure.
