There is a general consensus on the role Small and Medium enterprises (SMEs) play in economic development. It has been researched and established that this sector employs more workers per unit capital than their large counterparts. Small and medium enterprises widely known as SMEs are a powerful weapon in the fight to end poverty and have a favorable impact on regional development and serve as training workshop for developing skills of industrial workers and those of enterprises. SMEs contribute towards establishing forward and backward linkages in any economy. They play a vital complementary role to large firms. In recognition of the significant contributions that SMEs make towards economical development; many countries are now refocusing their economic policy framework to include them and Nigeria isn’t an exception. This paper is going to center on the development and challenges and prospects of SMEs in the Nigerian polity; however cases of outside economies that were similar to that of Nigeria will be mentioned.
During the 1960’s it was widely believed that SMEs were indicative of a low level of economic activity and that as economies developed they (SMEs) would become less developed. This theory was soon disproved by empirical evidence by the performance of the New Industrializing economies of Hong Kong, Taiwan, Singapore, and Malaysia, particularly Malaysia and Indonesia. Nigeria, Malaysia and Indonesia were roughly at the same level of economic development in 1965. By 1965 the gross product gaps of Malaysia and Indonesia had risen from U$3.1 billion to U$85billion (27 fold rise) and from U$3.8 billion to U$198billion (52fold rise) respectively. Nigeria’s gross domestic product the during period grew from U$5.8billion toU$26.8billion(only 3.6fold increase). The spectacular performance of the economies of the two Asian countries were attributed to its rapid development of small and medium enterprises especially export-oriented ones while Nigeria got stuck in import substitution industrialization strategies; and heavy dependency in cruel oil production and supply, while these countries are now referred to as Asian tigers, Nigeria is now among the thirty poorest countries in the world with per GDP approximately U$260 which is less today than it was at independence almost half a century ago. In addition to this gruesome situation over two thirds of the country’s people fall below the poverty line of roughly U$1 a day.
Historical Overview
Nigeria since independence has witnessed several economic policy frame work created by successive governments to move the country forward:-
1960’s the government of that time formulated its economic policy frame work based on the premise that industrialization contributed directly to economic growth and the effective use of the available resource will achieve these objective however they lacked the political will to execute these formulated policies.
By the 1970’s a clear picture of the structure of the manufacturing sector as a way forward had emerged however it was characterized with the following:-
High geographical concentration
High production cost
Low value –added
Services under utilization of capacity
Low level of foreign investment.
Between 1960 and 1980 it was recorded by the Federal Ministry of Finance that GDP increased from 5percent to 8percent: in order to correct this, government pursued the development of a more diversified and integrated industrial sector financed with rapidly rising oil income and anchored on the relatively large domestic market as the prerequisites for industrialization this led government investing heavily in the diversified portfolio of industrial projects such as salt, iron, and steel. However these efforts were soon proved to be futile with poor returns which couldn’t justify the enormous funds committed to its execution coupled with a decline in foreign exchange. It became clear that there had to be restructuring this gave rise to the structural adjustment program which was characterized with allowing the market forces to determine the foreign exchange rate, the abolition of import licensing. However despite the laudable expectation of this economic theory was to have on the economy and the lots of Nigerians the reverse was the case. It became clear that with every economic policy framework it became worse, unemployment steadily was on the rise, same with poverty. A look back showed that there all had similar patterns;
- Poor planning
- Faulty policy implementation
- Political instability
- Frequent changes of principal actors involved in policy formulation and execution.
The NEEDS report published by the National planning Commission in the year 2004 makes a summary of the economic policy framework of the country since independence “For decades Nigeria’s economy was characterized by the growing dominance of the public sector, over reliance on a single commodity (oil), and the pursuit of a highly import-dependent, import-substituting industrial strategy. While these policy thrusts were justified at their inception, experience has shown that growth based on expansionary public expenditure, import-substitution industrialization, and reliance
on the export of a few primary commodities is neither efficient nor sustainable. That the strategy did not work in Nigeria is evident from several indices of suboptimal performance: low per capita GDP, a low growth rate, a weak industrial base with declining industrial output and capacity utilization, large budget deficits and deterioration in the social and infrastructure facilities, low productivity in the real sector, and a high level of unemployment. The private sector has been dogged by weaknesses inherent in its skewed structure. It is dominated by a few large multinationals that are heavily dependent on imports and operate largely as enclaves and a large segment of small and medium-size enterprises with very little, if any, linkage to the multinationals. A rent-seeking and unproductive culture of overdependence on government patronage and contracts, with very little value-added, governs the sector. As a result of these factors, Nigeria has become a nation of traders, with a very weak and stagnant domestic private sector. Other frequently cited problems in efforts at growing the private sector include the poor state of physical infrastructure; the high cost and limited access to appropriate financing; insufficient domestic demand and the low level of patronage by public sector institutions; the high cost of imported raw materials, equipment, and spare parts; and the lack of skilled labour. Growing the private sector also hinges crucially on domestic policies, environmental factors, and investment flows”.
Where should Nigeria be ?
‘Nigeria should be a major industrialized nation that strives continually for sustained economic growth and development. In order to bring about rapid improvement in quality of life of her people’ Vision 2010 Committee
‘The 2001 Kuru Declaration also embodies this vision: to build a truly great African democratic country, politically united, integrated and stable, economically prosperous, socially organized, with equal opportunity for all, and responsibility from all, to become the catalyst of (African) Renaissance, and making adequate all-embracing contributions, sub regionally, regionally, and globally.
How can Nigeria there?
During 1999-2007 the government of Chief Olusegun Obasanjo introduced a new economic policy direction to revamp and transform the nation’s economy. To achieve these objective, this saw the formulation of the Needs document According to the report the ‘The National Economic Empowerment and Development Strategy (NEEDS) was the response to the development challenges of Nigeria. NEEDS was to lay a solid foundation for sustainable poverty reduction, employment generation, wealth creation, and value reorientation. To achieve this it was found that the following were to be achieved;
Build a private sector that can take advantage of the opportunities that abound in the domestic, regional, and global markets.
Redefine the role of government as a facilitator and promoter in the economy, recognizing that market failures in developing economies require targeted
Alter the strategy for industrial development, to make it less import dependent, more local resource–based, and more related to local research and development strategies, particularly those focused on small and medium size enterprises. This strategy will lead to the promotion and development of science and technology–based small and medium-size enterprises. It will ensure that process technologies and the design and manufacture of machinery and equipment for small and medium-size enterprises are developed through domestic capacity-building processes. Small and medium-size science and technology–based enterprises will be nurtured in science and technology parks and technology incubation centers.
This fell in line with a study carried out in the early 1990’s by the World bank and reported in the bank’s publication titled ‘Nigeria; poverty in the midst of plenty’. The report showed that the way Nigeria should go to realize her core economic objective, which is to attain sustained economic growth and development in order to bring about rapid improvement in the quality of life of her people; Nigeria must urgently implement growth oriented policies that would achieve twin goals of:-
Rapid economic growth, and even development by reducing or eliminating regional bias in economic development.
The most viable option recommended was to target the small and medium scale enterprises for rapid development. According to the study SMEs were found to be labour intensive and informal can be used effectively as tools to fight poverty and for generating wealth. SMEs used simple technology in their processes and, therefore can be used to create employment opportunities everywhere in the country to achieve rapid growth and even development.
Who are SMEs
There have been several definitions of SMEs. There is no single universally accepted definition of SMEs, According to a World bank publication ‘There is a consensus that SMEs should be defined based on assets values than any other basis, experts have attributed this in case of an economic downturn, the impact on turnover (e.g) and number employed is greater than the impact on assets values. For example, during a recession, there is a tendency for turnover to fall substantially and there number of employees to drop, but asset values (excluding real estate may remain relatively unchanged (World bank 2002b, p.1) .In a paper delivered by a representative of the small and medium enterprise development agency (SMEDAN) the body created by the Obasanjo regime to address issues affecting SMEs defined SMEs in paper delivered to the Chartered Institute of Accountants (ICAN). ‘Small; enterprises with assets not more than 50million naira and employing not more than 100people Medium: Enterprises with assets not more than 300people.
SMEs in Nigeria
According to a report published by Chemonics International Inc for the U.S. Agency for International Development/Nigeria titled ‘Promoting Improved Sustainable Microfinance Services’ with a GDP of about $40 billion, Nigeria is Africa’s second largest economy (Nigeria’s GDP in 2002 and 2001 was $43.4 billion and $42.5, respectively) (World Bank 2003, p.2). Its economy is a dichotomy between the oil and non-oil producing sectors, with the middle-income, oil-producing economy of perhaps five million people having a per capita income of about $2,200 and the rest of the population part of a poor, non-oil producing economy (World Bank 2003, p. 2). While oil and gas production accounts for 98% of the foreign exchange earnings and 84% of budgetary revenues, the agriculture sector is Nigeria’s biggest employer (USAID 2003a, p.40). Most Nigerians derive their income from a combination of agricultural activity and operation of an SME (USAID/Nigeria PRISMS contract section C-3.) Statistics on the number, geographical distribution, and activities of the SME sector are very partial and highly unreliable. The best estimates available suggest that SMEs comprise 87% of all firms operating in Nigeria, although the total number of registered firms in Nigeria is also unknown (World Bank 2002a, p.127).6 The only available data appears to be the number of registered business names, the last good data for which is 47,171 based on 2002 registrations with the CAC. Although not all SMEs display the same characteristics according to their size,
SMEs have such a crucial role to play in the development of an economy that cannot be ignored. In fact, SMEs serve as a resource base for skill acquisition for multinationals thereby replacing existing foreign sources.
They are also training grounds for local skills and entrepreneurs, and could become channels for mobilizing local savings, ensuring a more equitable distribution of income and reducing the migration of manpower from the rural to the urban areas.
SMEs are crucial for economic growth, poverty alleviation, wealth creation, the promotion of more pluralistic and vibrant societies’.
Source: Adapted from World Bank 2002b, p. 1.
Challenges faced by SMEs in Nigeria?
No doubt SMEs have contributed immensely to the growth of the Nigerian economy, one of which is that there are the highest employers of labour .e.t.c However this group of individuals is yet to fully make the desired impact on the Nation’s economy as that of its Asian tiger counterparts (Malaysia , Indonesia e.t.c) . This is due to the enormous challenges it faces. The challenges can be viewed from two angles; that of the SME practitioners and stakeholders in the sector. On the part of SMEs they challenges the say they face some are encapsulated in report published in the journal of business titled ‘Perception of constraints on small business in Nigeria’ thirty two firms were studied and the following were considered to be impediments to their business survival.
Nepotism and favoritism to large enterprises as regards funding by banks
Government policies and attitude of public officials adversely affected their business
Others are
Infrastructure bottlenecks
Poor protection of SME products in the market place especially as a result of dumping and smuggling of substandard goods.
While these challenges are widely accepted to be impediments to the growth of SMEs some of school of thought has also put some blame on the SMEs. This school of thought attribute SMEs to have weak enterprise ownership and low knowledge base which breeds all the managerial abnormalities witnessed within the sector.
How these challenges hamper their growth?
Infrastructure bottlenecks this challenge has led quite a number of SMEs to close shop, due to their inability to stay competitive especially as a result of the impending costs that accrue as a result of trying to augment the lapses these challenges pose. When questioned over fifty percent of finance needs required by SMEs are intended to provide alternatives to this infrastructural deficiency for example power generation, lack of basic amenities such as water.
Inappropriate, incoherent and poorly targeted policies, in effective administration of fiscal incentives. A review of past administrations fiscal and monetary has seen a trend of inconsistencies, which at the long run SMEs are the ones to bear the brunt for this abnormally. This has given rise to confusion and has made it difficult to plan and make the straits it ought to. SMEs also complain that these policies have no far reaching impact on the well being of the SMEs itself. Making its formulation inconsequential.
SMEs have mentioned the insensitivity of banks to their plights, nepotism and favoritism to large enterprises as regards funding by banks. Although there seems to be a large poll of funds available either from the SMEESIS scheme; Agricultural credit e.t.c SMEs complain that these funds are not getting to them. They complain of the highhandedness of those who disburse these funds. And those who do obtain it: is been felt in certain SME quarters that there is serious favoritism, the success of SMEs hinges on the availability of funding and lack of it impedes it.
As a result of the challenges faced by inadequate funding as well as infrastructural bottle necks, most goods and services produced are often unable to compete favourable alongside those from their larger counterparts as well as those foreign produced based on price differences. Also advocacy groups have decried government’s inability to protect SMEs as other Nations. Therefore what is obtained is a pool of finished goods unsold and those sold at the mercy of its sellers.
Weak enterprise ownership and low knowledge base which breeds all the managerial abnormalities witnessed within the sector, makes the SME unable to handle the challenges of modern business management such as the inability to attract competent hands, this were said to be one of the challenges reported by government and bank officials in the report published by the journal of small business, this characterized into the following:-
- lack of convincing feasibility and business plan
- lack of business acumen and etiquette
The me alone syndrome
How can they be made to achieve the so desired objectives accrued to them in the nations development
In line with the prescription of economic recovery of the Nigerian polity; there is no doubt the crucial role SMEs should play. The National planning Commission in its paper building partnership linkage and alliance for SME development at the 8th international conference& 10th anniversary of the Nigerian association of small and medium enterprises NASME informed participants on the New Vision Statement for Nigeria as regards SMEs:-
Create a vibrant SME class
Build Skills- high value added jobs
Foster enterprise development
Provision of intelligent venture capital
Development of a wide cross sector tax base
Destroy the breeding ground of social crisis
However for this to be made possible there has to be sincere effort to address abnormalities faced by this group of persons.
In order to achieve this there has been a general consensus on the participation of the public and private sector to achieve this feat. This was also encapsulated by the following groups of persons.
Former World bank Chief Mr James D. Wolfensohn in a publication Vo2 No1 of March 2001 on SME issues made this statements ‘Never before has there been such a broad consensus about what needs to be done to reduce poverty. This consensus includes realization of the importance of the role of the private sector given the right tools there can create many jobs and much wealth that their societies so badly require’.
Professor Slyvester Monye of The National Planning Commission in his paper on ‘Building partnership linkages and alliance for SME development’ reiterated the need for Public and Private Partnership (PPP) is compelling because neither can be done alone. Private sector growth depends on public policy which breeds mutual trust, transparency and business integrity, it engenders corporate governance, it helps in rallying national competitiveness and facilitates the development of SMEs
If that be the case each group has its own role to play
Public sector:- Largely represented by all tiers of government with the Federal government as the head. In the past administration government shifted its role to be a facilitator encouraging sustainable operating environment for economic growth.
It is expected that government should perform its role of providing enabling environment through the formation of Nigerian SME friendly policies like its sister country Ghana and fellow African country South Africa.
Government should liaise with SME advocacy group to know exactly where the shoe pinches and ensure whatever policies and programmes that are created is in line with the immediate and actual needs of this group of persons.
Infrastructural bottlenecks have been one of the banes of SMEs; government should address the major infrastructure concerns and also encourage the private sector to get involved.
Although Nigeria is a member of the World trade Organization and a signatory to its treaty; as other economies are protective of its indigenous industries especially SMEs so should Nigeria
Efforts have been made to address the funding challenge the latest with the creation of the Micro finance frame work, however SME practitioners have called on government to create an SME bank which will understand and address the issues peculiar to SMEs as it is obtained in Pakistan and other growing economies that have rapid economic growth from the development of the SME sector.
Also advocacy groups have called on government to finalize its credit guarantee scheme which will give banks the will to give out credit to SMEs
On the part of private sector
Collaborate with SMEs by subcontracting some orders to them this initiative were first started in South Africa.
Collaborate with government in the area of infrastructure development
SMEs
There has to be a reorientation on the part of SMEs on their role in economic development
A paradigm shift from the alone mentality to reaching out for help in areas where they are deficient
A culture of self development on modern business management and etiquettes
A culture of reinvesting in the business this includes its human capital; this will make it attractive for competent hands to seek employment
Join advocacy groups to press for enabling environment to operate
In conclusion
In the words of the Chairman of African roundtable Dr Bamanga Tukur ‘The promotion and sustainability of the SME sector in Nigeria is a task for all stakeholders and all hands must be on deck to assist them to become more sustainable and competitive because they are a potent force in the fight against poverty and also because they contribute significantly to exports and value addition’. PEACE
Questions that are often asked by our readers and those that either want to start a business or are running a business.
Question: Before starting a business what advice do you have for those that wish to start a business
Consultant: Whoever you are, whatever the amount you have to start a business, we encourage you do the following:
Study the environment you wish to start the business, many take that for granted and are plagued with problems when there start. This is also necessary when you intend to open a branch in a new location a careful and thorough study of the environment will give you an insight on what is allowed and what isn’t.
By environment, we mean the regulations, that exist in the environment, made by governments of all tiers, as well as trade associations that govern that area. Also a study on the behavioral patterns of those that reside in this environment, to get a scoop on these will entail you finding out from a local that leaves there.
A study of the environment, gives you a honest opinion on what to expect and enables you plan for the seen and unforeseen
Apart from studying the environment we encourage that you create a strategy on how you intend to enter the market place. Because being in business is like being in a battlefield which if you don’t have an action plan or game plan on how you can use the limited resources at hand to fully explore the marketplace will see you losing all you have and invariably failing.
What is a strategy? A plan that is intended to achieve a particular purpose.
It is the process of planning or carrying out a plan in a skillful way.
The peculiar nature of an Small and Medium Enterprise business; which is characterized with the following:- limited resources e.g. funding, human capital, high cost of starting and running a business and this is further increased when there isn’t a strategy in place, stiff competition from within and outside, constraints in entry to the marketplace, challenges in acquiring funding
The state of the business terrain particularly in a country such as Nigeria; These and many more makes operating a business especially in a country such as ours challenging and has led to a lot of promising entrepreneurs closing shop. To maneuver in a business environment such as ours it is necessary to be armed with what it takes to succeed. Your goal as an entrepreneur is to succeed despite the odds. This can only be achieved by developing a business strategy and planning along that line
Question: What is the mistake made by would be entrepreneurs and entrepreneurs which could have been averted
Consultant: Given the population of those who wish to start a business, a large percentage have not registered their businesses and run their business unprotected. And when there eventual wish to do so, find out that someone has that name registered. Which means; that there have to start all over again, to create a new name, which is an expense which could have been averted. The second mistake is the failure to plan their business before starting, and by planning it isn’t the belief that you have every thing in your head that will invariably translate to success. Planning is a skillful way to bring into perspective all that is intended to ensure you arrive at your goal. Finally another mistake is not having a well thought out cash flow mechanism, which will see you managing your cash to safeguard the future. This can only be achieved through discipline. Where by instead of going on a spending spree you reinvest part of your cash got from sales into the business while setting aside the rest for a rainy day which will eventually come.
Question: When I start a business what is a normal experience to expect
Consultant: Be aware that sales will not immediately flood to your business; therefore you shouldn’t feel you have failed in business. There is always a season of inertia, where customers are taking their time to study your business. In that case the following should be done:-
If you have not started a business plan bearing in mind that sales in the beginning will be slow, however to have an idea, ask those in similar businesses, that are not your direct competitors and will not feel threatened to share this information with you
Do not bring too much to the marketplace, start small, or with small innovation, it is better to start small or the most elementary of your business and build up, rather the other way round.
While waiting for the flood of customers, do ensure your standard of operation and what you are offering is of value to be appreciated by those you are targeting.
Have close contact with customers and re modify your product or service to suit their wants
Keep marketing, communication, the key is constant communication; let this not leave your mouth. Customers want to be sure that when they start patronizing, there are sure to get the same value consistently
Sales are very important, but cash is king. From the very inception start managing your cash flow, failure to do can be very risky for the business as a whole
Question: What is the number one cause of failure of businesses?
Consultant: entrepreneurs are risk takers and this can be taken overboard especially when it comes to managing their finances. From personal experience and that of those who are in business, apart from the business terrain which has been characterized to be harsh, a major cause of failure which lays on the doorstep of entrepreneurs is the inability to manage their funds. The inability to differentiate between personal and business funds have resulted to sudden collapse of some fledging business. When bills can no longer be paid, these interrupt the business adversely. An upswing in sales and capture of more market doesn’t give room for spending sprees. Rather caution and restraint must be applied, because to further serve this market more money is required.
How can you get a grip on your finances?
Make a resolution to succeed in your business
See these as a long-term goal
With the help of a professional, know what is the break even point of what you produce, the point where you making exactly what you have invested.
Also draw up a cash flow
With the above, you can now appropriate what should be set aside for the operation of the business and for future use, also what should be for your personal use
To achieve success, you must make yourself accountable, that Is why you either if your business can afford it employ the services of an accountant or the have a contractual agreement with a book keeper, or accountant to come in and set up a financial system and periodically comes in to check the books
Try and not have a lot of unwanted. Unbudgeted cash with you, bank them or invest
Reduce some of the unwanted luxuries, until you know that after all the needs of the business have been taken care of you can still afford these luxuries. However caution, sourcing for money puts you in a situation which can portray your failure in business. Especially when the sum you need, you easily could have it, if you didn’t indulge in that luxury