How poor funding ruin 90% of small businesses in Nigeria

350,000 small businesses benefit from FG’s interest-free loans
small businesses in Nigeria

How poor funding ruin 90% of small businesses in Nigeria – Against the backdrop of the recent pledge by the Federal Government to continue to support the Micro, Small and Medium Enterprises (MSMEs) sector in the country; PAUL OGBUOKIRI reports that the sector is so significant that it contribute over 50 per cent to the nation’s Gross Domestic Product.

The Vice President, Prof. Yemi Osinbajo, during the recent launch of the Micro, Small and Medium Enterprises (MSMEs) Clinic in Onitsha, Anambra State, noted the invaluable contribution of the sector to the national economy.

In a statement by his Special Assistant on Media, Laolu Akande, he said: “As individual units, MSMEs may be small, but together they account for up to 50 per cent of Gross Domestic Product (GDP) and over 80 per cent of the labour force.

It therefore follows that they are of decisive importance in the national economy but the key encumbrance to the development of the sector in Nigeria is financing.”

It is in view of this that the statement on Tuesday by the Minister of Finance, Kemi Adeosun that the Federal Government is working towards settling over N45 billion debts owed to the local contractors of the defunct Nigerian Airways is a welcome development.

This came as the Minister had noted that the Small and Medium Enterprises (SMEs) is the lifeline of the Nigerian economy. She added that the Federal Government will be stimulating the economy by paying these legacy debts.

Elsewhere, the sector has been described as the key to the development of most notions’ economy. This is even as it has been discovered to be a major catalyst in wealth creation and poverty alleviation.

According to the United Nations Industrial Development Organisation (UNIDO), SMEs account for over 90 per cent of enterprises in the world and are responsible for 50 to 60 per cent of employment. Up and coming nations like Nigeria have a lot to gain by helping the SME culture to take root and thrive. This is because the country can only develop better and survive economically under a thriving SME culture.

Here in Nigeria, the National Bureau of Statistics (NBS) placed the total number of SMEs in the country at over 17 million.

Regrettably, Nigeria’s dwindling economy is not helping most of the SME operators to optimize their potentials. Whereas, SMEs grow at almost twice the rate of GDP in most markets across Asia, Africa and Middle East, Nigeria’s case is different.

Managing Director/Chief Executive Officer of Heritage Bank, Mr. Ifie Sekibo, who was a guest Speaker at the 2nd US-Africa Trade & Investment Forum/Africa Investment & Development Awards which took place recently at St. Regis Hotel, New York, USA where he spoke on “Small & Medium Enterprise Funding in Africa – a banker’s experience”, observed that in sub-saharan Africa, SMEs are more credit-constrained and this typically affects growth possibilities as significantly low number of start ups who apply for financing actually succeed. Studies, he noted, indicate that more than 70 per cent of the SMEs lack access to medium-longer-term finance, creating an SME funding gap of more than $140 billion in Africa alone.

“Using Nigeria as a case study, between 2003 and 2009, SME loans as a percentage of total credit, decreased from 7.45 per cent to 0.18 per cent. Yet by 2012, Nigeria had about 17.6 million MSMEs employing about 32.4 million people. Although it is generally accepted that SMEs enhance competition and entrepreneurship, and their development has a positive impact on innovation and productivity growth, policy and infrastructure factors to mitigate risk and costs that SME sector cannot internalise needs to be seriously worked upon by all relevant stakeholders,” he said.

According to Sekibo, in Nigeria most SMEs die within the first five years of existence while another smaller percentage goes into extinction between the sixth and tenth year, with only 5 to 10 per cent surviving, thriving and growing into established corporate status. He listed the leading causes of such sub-optimal output to include: Poor access to funds, Weak institutional support, Unstable macro economics, Complicated and Unstructured Legal framework/Regulation, Inadequate business information, Infrastructure & Business environment and Human capital factors, among others.

Having identified these mounting challenges, it is instructive to note a few ways in which banks have tried to intervene in building a formidable economy driven on the wheel of SMEs

One notable and unique approach is the Heritage Bank MSME Clinic. The Bank, as a way of cushioning the effect of capacity building and fund management, introduced the Micro Small and Medium Enterprises (MSME) Investment Protection Fund to assist the growth and rejuvenation of the sector.

Analysts say the Heritage Bank MSME Investment Protection Fund is a strong differentiating indicator of the Heritage Bank’s Approach to SME growth in the country.

According to a Lagos-based investment banker, Emeka Udoagha: “The Heritage Bank MSME Clinic should be applauded as a unique holistic bailout strategy for SMEs in the country. It consists of services such as business diagnostics, advisory services, financial literacy and entrepreneurship development, customized product development for each customer and market knowledge development backed up by the bank’s innovative MSME Investment Protection Fund (InPF), which is a non-collateralized funding option with embedded insurance for the default risk inherent in the scheme.”

He added that the package has huge potential to enhance MSME capacities and strengthen business management skills, in addition to offering other support programmes that could greatly achieve the aim of developing the SME sub-sector in the country.

Investigations show that apart from other areas of supports for various sub-sectors, the Bank also engages with customers at stages of expansion, modernization, production process & capacity improvement and restructurings through various products like term loan, lease financing facility, overdraft facility, LPO, invoice discounting, supply contract financing, distributorship financing scheme, MFIs/MFBs Whole-Leading, advisory & business support as well as market access and value chain services, among others.

The Bank says it approach needs to be copied by other bigger banks so as to speed up the country’s march towards deepening the SME culture and providing the much needed succor for the sub-sector.

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