SMEs Still Grappling With Funding Challenge

Small, Medium Enterprises (SMEs) play critical role in the economic development of any country, whether they are developed or developing. Their role in terms of production, employment generation, contribution to exports and facilitating equitable distribution of income is critical and cannot be over emphasised.


In this piece, Bamidele Ogunwusi, Ikechi Nzeako and Andrew Utulu, examine how funding has limited small businesses from realising their full potential, and what the Central Bank of Nigeria (CBN), and other financial institutions are doing to mitigate the challenge. Excerpts:


Small, Medium Enterprises (SMEs) hold immense potential for generating employment opportunities, development of indigenous technology, diversification of the economy and forward-integration with established sectors such as banking, telecommunication, oil and gas among others.


In Nigeria, SMEs are mostly defined in terms of the size of investment and labour force. They normally have less than 50 workers with the aid of power or less than 50 workers with the aid of power.


Government is extending various policy steps towards supporting SMEs.


In addition, the SMEs have been supported and encouraged by various government policies for infrastructure support, technology up-gradation, preferential access to credit, preferential policy support.


SMEs play a role in mitigating the problem of imbalance in the balance of payment accounts through its export promotion, while the large-scale industries are expected to increase the inequities of income and concentration of wealth, SMEs are expected to help widespread equal distribution of income and wealth.


Small sector provide opportunities to a large number of capable and potential entrepreneurs who are deprived of appropriate opportunities.


It can help to release scarce capital towards productive use. SMEs can reap the benefits of lean production and can find new cost-efficient techniques of lean production.


As small units can use resources more efficiently to the full capacity without any wastage, they may have higher allocation efficiency. As the element of risk is low in SMEs, more resources will be employed by large number of labour force.


Despite important roles that SMEs play in the development of the national economy, they should be given the necessary support they require to deliver up their optimum capacity. Their capacity is hampered by inadequate power supply, technical and managerial skills to up their ante and contribute more to the development of the economy. They also complain that the operating environment is harsh and hostile to business.


It was in the quest to reduce the funding gap for SMEs that the Central Bank of Nigeria (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 Micro, Small and Medium Enterprises (MSME) sub-sector to the economy and the existing huge financing gap.


According to the apex bank, 10 per cent of the fund has been devoted to developmental objectives such a grants, capacity building and administrative costs, while 90 percent commercial component will be released to Participating Financial Institutions (PFIs) at two per cent for on-lending to MSMEs at a maximum interest rate of nine percent annum.


The bank stated that eligible activities to be financed include agricultural value chain, services, cottage industries, artisans, trade and commerce and any income generating business as may be prescribed by the CBN from time to time.


Among these, shortage of finance occupies a very central position.


Globally, commercial banks, which remain the biggest source 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 has rendered SME practice costly and inefficient, thereby worsening their credit competitiveness.


To improve access to finance by SMEs, the Central Bank of Nigeria has approved the investment of the sum of N500 billion debenture stock to be issued by the Bank of Industry (BOI) with effect from May, 2010. In the first instance, the sum of N300 billion will be applied to power projects and N200 billion to the refinancing/restructuring of banks existing loan portfolios to Nigerian SME/manufacturing sector.


So far, the guidelines for the N200 billion re-financing and restructuring of banks loans to the manufacturing sector has been issued by the bank, while those for the power sector will be issued at a later date.


Objectives of the N200 billion re-financing and restructuring of banks loans to the manufacturing sector are to fast-track the development of the SMEs and manufacturing sector of the Nigerian economy and improve the financial position of the deposit money banks.


Complementary to the above, the bank has also established a N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS), for promoting access to credit by SMEs in Nigeria.


The scheme shall be wholly financed by the Central Bank of Nigeria (CBN) as stipulated in the guidelines.


According to the banks, the objectives of the SMECGS are to provide guarantee for credit from banks to SMEs and manufacturers, increase the access of promoters of SMEs and manufacturers to credit and set the pace for industrialisation of the Nigerian economy.


The overall goal of these two initiatives are to increase output, generate employment, diversify the revenue base, increase foreign exchange earnings and provide inputs for the industrial sector on a sustainable basis.


In addition to the efforts of the CBN to provide finance to SMEs, the Bank of Industry (BOI) has contributed in many ways to avail them of finance. The bank has intervened in many sectors in terms of funding for SMEs.


Apart from direct funding and provision of funds for small business owners, the bank also collaborates with other financial instructions to fund SMEs in the country.


A 2015 report put the number of small and medium scale enterprises (SMEs) in Nigeria at 37 million. Over the years, the number has increased significantly.


A lot of SMEs have also died within this same period and the ones that are alive struggle to keep their head above the difficult Nigerian waters. In its own report, the World Bank highlighted a lack of access to credit facilities as a reason most of these businesses struggle, hence Nigeria’s consistent poor ranking on the ease of doing business index.


These are genuinely worrying numbers for a country that hopes to achieve economic stability on the success of SMEs. In line with the mission of the Presidential Enabling Business Council (PEBEC), the vice president signed into law last year, the Collateral Registry Act and the Credit Reporting Act.


The new laws offered an exciting credit landscape to the Nigerian SME. For the first time in a long time, business owners could supposedly access loans using both conventional and non-conventional properties as collateral. Imagine using your house furniture — or generator — as collateral. This was, amongst others, the things promised by the Collateral Registry Act.


Nigerian banks are infamous when it comes to granting business loans. They seem to have excused their underwhelming performance on a lack of a database; one where they can ordinarily access the creditworthiness of SME owners. With the Credit Reporting Act that allows credit information sharing between credit bureaus and lenders, banks no longer have an excuse.


But seeing it is almost a year now since the credit facility law was enacted, it makes sense to consider how the initiative has fared. We ran a poll on social media to know impact of the new laws. Interestingly, 56 per cent of the respondents said they’ve never heard of it. Another 24 per cent believes it’s a scam, while 4 per cent think the process is too bureaucratic. Only 16 per cent described the impact as impressive.

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