JOS JOURNAL OF ECONOMICS, VOL.4, NO.

BUILDING SMALL AND MEDIUM SCALE ENTERPRISE: A STRATEGY FOR ECONOMIC DEVELOPMENT IN NIGERIA

GUSHIBET SOLOMON
DEPARTMENT OF ECONOMICS UNIVERSITY OF JOS JOS - NIGERIA

ABSTRACT
The globalisation of business has increasingly drawn SMEs into global value chains through different types of cross-border activities. Many entrepreneurs are recognising the opportunities that this process offers, and gaining access to global markets has become a strategic instrument for their further development. Access to global markets for small businesses can offer a host of business opportunities, such as larger and new niche markets, possibilities to exploit scale and technological advantages, upgrading of technological capability, ways of spreading risk, lowering and sharing costs, including R&D costs, and in many cases, improving access to finance. This paper focuses on how small and medium enterprise activities can be integrated properly into the mainstream of the economy and thus, to determine how policies can be utilised effectively to foster the development of small and medium scale enterprises and as such, enhance economic growth and development. Socio-economic development of Nigeria can only be achieved by aggregating all the relevant and important sectors and sub-sectors of Nigeria. Nigeria as a nation exhibits some measures of sectoral disaggregation and this has affected the ability of the country to properly account for factors contributing to changes in national income and economic growth. This has led to dearth of information and data necessary for good and effective policy formulation. The paper recommends that government should direct all its agencies to patronise local manufacturers for their daily needs, and ensure adequate power supply. If SMEs had been given its rightful place, the country would have since joined the league of developed nations.

INTRODUCTION Small and Medium Enterprises (SMEs) occupy a place of pride in virtually every country or state. Because of the significant roles SMEs play in the growth and development of various economies, SMEs have aptly been referred to as the engine of growth and catalysts for socio-economic transformation of any country. SMEs represent a veritable vehicle for the achievement of national economic objectives of employment generation and

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poverty reduction at low investment cost as well as the development of entrepreneurial capabilities including indigenous technology. Other intrinsic benefits of vibrant SMEs include access to the infrastructural facilities occasioned by the existence of such SMEs in their surroundings, the stimulation of economic activities such as suppliers of various items and distributive trades for items produced and or needed by the SMEs, stemming from rural urban migration, enhancement of standard of living of the employees of SMEs and their dependants as well as those who are directly or indirectly associated with them. Supporting these facts, Ajose (2010) states that, SMEs are the pivot of economic growth and first point of contact for the business world. Small and medium-sized enterprises (SMEs) are a very heterogeneous group of businesses usually operating in the service, trade, agri-business, and manufacturing sectors. They include a wide variety of firms such as village handicraft makers, small machine shops, and computer software firms that possess a wide range of sophistication and skills. Some are dynamic, innovative, and growth-oriented while others are satisfied to remain small and perhaps family owned. SMEs usually operate in the formal sector of the economy and employ mainly wageearning workers. SMEs are often classified by the number of employees and/or by the value of their assets. The size classification varies within regions and across countries relative to the size of the economy and its endowments. It is important to note that there is a minimum as well as a maximum size for SMEs (Inegbenebor, 2006). SMEs have played and continue to play significant roles in the growth, development and industrialization of many economies the world over. In the case of Nigeria, SMEs have performed below expectation due to a combination of problems which ranges from attitude and habits of SMEs themselves through 131

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environmental related factors, instability of governments and frequent government policy changes. The supportive business environment for SMEs is still weak in Nigeria. The SME support programmes are poorly coordinated and lack the necessary coverage to reach all sectors of the small business community. Almost all micro-finance institutions (MFIs) are supposed to cater for those enterprises with credit lending. However, project lending and risk capital for SMEs is virtually unavailable. The private equity and venture capital funds established in Nigeria are few and cater primarily to the needs of expansion of established business and privatized companies. However, as Hallberg (2000) observes, government assistance strategies in both developed and developing countries often try to achieve a combination of equity objectives (alleviating poverty and addressing social, ethnic and gender inequalities) and efficiency objectives (raising the productivity and profitability of firms). Likewise, Ojo (2003) argues that all these SME assistance programmes have failed to promote the development of SMEs. This was echoed by Tumkella (2003) who observes that all these programmes could not achieve their expected desires due largely to abuses, poor project evaluation and monitoring as well as moral hazards involved in using public funds for the purpose of promoting private sector enterprises. However, the purpose of this study is to determine how policies can be utilized effectively to foster the development of small and medium scale enterprises and as such, enhance economic growth and development. Socio-economic development of Nigeria can only be achieved by aggregating all the relevant and important sectors and sub-sectors of Nigeria. Nigeria as a nation exhibits some measures of sectoral disaggregation and this has affected the ability of the country to properly account for factors contributing to changes in national income and economic

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growth. This has led to dearth of information and data necessary for good and effective policy formulation. OBJECTIVES OF THE STUDY The overall objective of this study is to determine how small and medium scale enterprises can be used as a catalyst for economic growth and development. Specific objectives include the following: 1. To examine the constraint affecting small and medium scale development in Nigeria 2. To evaluate the financial services and incentives available to SMEs CONCEPTUAL AND THEORETICAL FRAMEWORK The performance of small and medium enterprises (SMEs) is of interest to all countries. The enterprises have a big potential to bring about social and economic development, by contributing significantly in employment generation, income generation and catalyzing development in urban and rural areas (Hallberg, 2000; OECD, 2004; Williams, 2006). In many of the newly industrialised nations, more than 98% of all industrial enterprises belong to the SMEs sector and account for the bulk of the labour force (Sanusi, 2003). It is estimated that SMEs employ 22% of the adult population in developing countries (Kayanula and Quartey, 2000), and provide more employment per unit of capital investment than large-scale enterprises (Inang and Ukpong, 1992). In Nigeria, the SMEs account for about 70% of industrial employment (Adebusuyi, 1997) and well over 50% of the Gross Domestic Product (Odeyemi, 2003). The ability to find out the factors which improve the profitability of SMEs so that they are successful and grow into conglomerates is of considerable concern to the entrepreneurs and the Nigerian government. Recognising the 133

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importance of SMEs in economic development, government in Nigeria has set up various programmes and institutions aimed at developing the SME sector (Olutunla and Obamuyi, 2008). A new approach to Small and Medium-scale Enterprise (SME) development began to emerge due to a number of factors. First, there was growing concern over low employment elasticity of modern, large-scale production. It was claimed that even with more optimal policies, this form of industrial organisation was unable to absorb a significant proportion of the rapidly expanding labour force (Chenery et al, 1974). Second, there was widespread recognition that the benefits of economic growth were not being fairly distributed, and that the use of large-scale, capital-intensive techniques was partly to blame (Chenery et al, 1974). Third, empirical diagnosis showed that the causes of poverty were not confined to unemployment, and that most of the poor were employed in a large variety of small-scale, low-productivity activities. Thus, it was thought that one way to alleviate poverty could be to increase the productivity of those engaged in smallscale production (Aftab and Rahim, 1989). Definition of Small and Medium Scale Enterprises There has not been universally accepted definition of a small business. This is because the classification of businesses into large-scale or small-scale is a subjective and qualitative judgment. And again, in the bid to give a general definition of SMEs will definitely leave out some components and characteristics that are peculiar to each country. Ekpenyong (1992) tries to identify different features in classifying SMEs in various countries. In countries such as the USA, Britain, and Canada, small-scale business is defined in terms of annual turnover and the number of paid employees. In Britain, for instance, small-scale business is defined as that

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industry with an annual turnover of 2 million pounds or less with fewer than 200 paid employees. In Japan, small-scale industry is defined according to the type of industry, paid-up capital and number of paid employees. Consequently, small and mediumscale enterprises are defined as: those in manufacturing with 100 million yen paid-up capital and 300 employees, those in wholesale trade with 30 million yen paid-up capital and 100 employees, and those in the retail and service trades with 10 million yen paid-up capital and 50 employees. In Nigeria, there is no clear-cut definition that distinguishes a purely small scale enterprise from a medium-scale enterprise. The Central Bank of Nigeria, in its Monetary Policy Circular No. 22 of 1988, defined small-scale enterprises as having an annual turnover not exceeding 500,000 naira. In the 1990 budget, the federal government of Nigeria defined small-scale enterprises for purposes of commercial bank loans as those with an annual turnover of not exceeding 500,000 naira, and for Merchant Bank Loans, those enterprises with capital investments not exceeding 2 million naira (excluding cost of land) or a maximum of 5 million naira. The National Economic Reconstruction Fund (NERFUND) put the ceiling for small-scale industries at 10 million naira. Section 37b (2) of the Companies and Allied Matters Decree of 1990 defines a small company as one with: (a) An annual turnover of not more than 2 million naira; (b) Net asset value of not more than 1 million naira. Similarly, Ajose (2010) views that the Central Bank of Nigeria (CBN) had defined an SME as an enterprise that has asset base (excluding land) of between 5 million naira and 500 million naira, and labour force of between 11 and 300 in its employment. Small and Medium Enterprises (SMEs) as defined by the National Council of Industries refer to business enterprises whose total costs excluding land is not more than two hundred 135

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million naira (N200, 000,000.00) only. Nevertheless, definitions of SMEs vary significantly, usually in line with the scale of the economy concerned, its degree of development and the economic structures that are present. Characteristics of SMEs in Nigeria According to Onugu (2005), a major characteristic of Nigerias SMEs relates to ownership structure or base, which largely revolves around a key man or family. Hence, a preponderance of the SMEs is either sole proprietorships or partnerships. Even where the registration status is thus that of a limited liability company, the true ownership structure is that of a one-man, family or partnership business. Other common features of Nigerias SMEs include the following among others; labour-intensive production processes, concentration of management on the key man, limited access to long term funds, high cost of funds as a result of high interest rates and bank charges, high mortality rate especially within their first two years, over-dependence on imported raw materials and spare parts, Poor inter and intra-sectoral linkages - hence they hardly enjoy economies of scale benefits, Poor managerial skills due to their inability to pay for skilled labour, poor product or low quality output, absence of research and development, little or no training and development for their staff, Poor documentations of policy, strategy, financials, plans, information systems, low entrepreneurial skills, inadequate educational or technical background, Lack of adequate financial record keeping, poor capital structure, i.e. low capitalisation, poor management of financial resources and inability to distinguish between personal and business finance. Others are, high production costs due to inadequate infrastructure and wastages, use of rather outdated and inefficient technology especially as it relates to processing,

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preservation and storage, lack of access to international market, lack of succession plan and poor access to vital information Current Policy Intervention Various interventions have been made in different countries to cater for the peculiar needs of SMEs. These interventions include institutional support, training in the relevant skills, tax concessions, technological acquisition and liberalised access to credit and innovation schemes (Obadan and Agba, 2006). Attempts made to address the problem of SMEs in Nigeria include direct lending by various financial institutions, specification of credit guidelines by the Central Bank of Nigeria to banks lending to SMEs, the establishment of rural banking programmes and indirect lending to SMEs at concessionary rates through participating banks (Inang and Ukpong, 1992; Inegbenebor, 2006). Other schemes include the establishment of the Secondtier Securities market, the merger of the Nigerian Bank for Commerce and Industry, the Nigerian Industrial Development Banks and the National Economic Reconstruction Fund into the Bank of Industry to provide cheap financial and business support services to SMEs. All these have not been as successful as anticipated. Studies on lending experience of five major banks in Nigeria from 1990-2006 showed that non-performing loans and advances range from 40-50% among commercial banks. The poor attitude of Nigerians to loan repayment led to unwillingness of the banks to lend to the real sector in preference for the trade sector (Feese, 1994; Inegbenebor, 2006). The latest attempt by the Central Bank of Nigeria and the Banker`s Committee to tackle the financial problems of SMEs is the establishment of Small and Medium Enterprises Equity Investment Scheme (SMEEIS). The Scheme requires all banks in 137

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Nigeria to set aside 10% of their profit before tax annually for equity investment in small and medium enterprises operating in the productive sector of the economy. The scheme commenced in June 2001 and is aimed at: facilitating the flow of funds from banks for the establishment of new viable small medium industry projects, stimulating economic growth, developing local technology, promoting indigenous entrepreneurship, generating employment (UBA, 2001). Methodology This study makes use descriptive analysis in analyzing how SMEs have been funded both by private sector and the Government. Data on loan to SMEs and total bank credit were sourced from Central Bank of Nigeria Bulletin, 2008 edition, as contained in the table below.

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Table 1. Ratio of Loans to small and Medium Enterprises to Commercial bank Total Credit
Period 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 loans to SME (N M) 20,400 15,462.90 20,552.50 32,374.50 42,302.10 40,844.30 42,600.70 46,824 44,542.30 52,428.40 82,368.40 90,176.60 54,981.20 50,672.60 25,713.70 41,100.40 13,383.90 total bank credit 41,810 48,056 92,624 141,146 169,242 240,782 272,895.50 353,081.10 508,302.20 796,164.80 954,628.80 1,210,033.10 1,519,242.70 1,899,346.40 2,524,297.90 4,813,488.80 7,725,818.90

scale

bank loan to SMES as % of total credit 48.8 32.2 22.2 22.9 25 17 15.5 13.3 8.7 6.6 8.6 7.5 3.6 2.7 1 0.9 0.2

Source: CBN, 2008

The graph below shows the availability and the movement of total bank credit in the Nigerian economy from 1992 to 2008. This shows a slow upward trend of bank credit.

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Fig. 1

Source: CBN, 2008

The graph in fig.1 shows that total bank credit to the entire real sector was extremely low between 1992 and 1997. Loan support to the real sector started growing at an insignificant pace from 1998 to 2004. An upward trend of bank credit shows a significant improvement from 2005 to 2008, and it is expected to keep growing. This implies that both government and commercial banks are gradually paying attention to the real sector of the economy. Distribution of Loan to Small and Medium Scale Enterprises in Nigeria The graph in fig. 2 below shows the distribution of credit facilities especially bank loan to SMEs in Nigeria from 1992 to 2008. In 1992, a proper framework for financing SMEs in Nigeria was established by monetary authorities in Nigeria. There was a mandatory 20% of total bank credit to be allocated to SMEs owned by Nigerians.

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Fig. 2

Source: CBN, 2008

This mandatory allocation of loan facility to SMEs was in operation up till 1996. During this period, there was up-rising of number of small scale industries in the country because the loan provided a rescue channel for development of this sub-sector. However, following the abolition of the mandatory bank credit allocations of 20% of its total credit to SMEs wholly owned by Nigerians in 1996, there was a drastic fall in total bank credit available to SMEs. As it can be seen from the graph above, there was 85% decline in bank loan to SMEs between 2003 and 2008. This shows that banks are not ready to grant credit facilities to SMEs nor were they committed to the growth of small scale enterprises. While there was increase in total bank credits available from 2005 as noticed in fig. 1, SMEs witnessed a fall in credit that was available for loan as shown in fig. 2

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Fig. 3

Source: CBN, 2008

The percentage ratio of SMEs loan to total credit shows clearly and explicitly the downward trend in bank loan to SMEs in Nigeria. Bank loan to SMEs in early 1990s shared about 50% of the total bank credit availability. However, this was not the case in the 2000s after the abolition of mandatory 20% bank credit allocation to SMEs. As a matter of fact, the percentage has fallen to inimical 0.2% of the total bank credit. This is absurd, 0.2% is nothing but non-availability of loan to SMEs. Many challenges have been identified to be confronting SMEs in Nigeria but the main problem of SMEs is finance because all smaller firms live under tight liquidity constraints (Da Silva et al 2007). Finance, whether owned or borrowed, is needed to expand investment so as to maximize profit. Many reasons have been adduced for the inability of SMEs to access funds from financial institutions in Nigeria. These include poor attitude towards external financing by Nigerian entrepreneurs, poor quality

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of project proposal presented by the SMEs to financial institutions, unreliable and outdated database and inability to access the database of the SMEs by financial institutions. Components of the Proposed Policy That Can Be Adopted In Nigeria There are a number of areas where, directly or indirectly, the Government has to adopt concrete measures to achieve its objectives in SME development, although many steps are to be taken by the private sector, NGOs and local authorities. Effective support will often require different programmes, tailor-made for specific SME target groups. Research and more detailed planning about such support packages will be the responsibility of SMEs, in close co-operation with donors and other relevant stakeholders. A number of policy proposals have been pointed out by Calcopietro and Salaam (1999) in Small and Medium Scale Enterprise Policy Proposals. These include: Creating an Enabling Legal Framework The Government should commit to pass a new enabling legislation in order to formalise the importance of SMEs in the overall economy. This legislation should include special provisions to facilitate empowerment of indigenous entrepreneurs, women businesses and the youth, and the preservation of the environment. Empowerment policies reinforce the chances for market forces to succeed by extending opportunities to compete to previously disadvantaged categories of entrepreneurs. Streamlining Regulatory Conditions It is recommended to simplify and standardise procedures, including business registration and licensing, loan applications, purchasing, sub-contracting and tender documents, export 143

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documentation and other commercial papers, registration of contracts, simplified tax return forms for SMEs, etc. There is need for regulations to strengthen SME access to raw materials and other inputs controlled by monopolistic suppliers. Facilitation of feasible avenues of legal assistance that could help leveling the playing fields for SMEs, with particular attention to women and young entrepreneurs must be also supported. Establishing Differential Taxation and other Incentives The number of taxes must be reduced and adjusted to avoid tax evasion. The central and local governments must work together to device a tax collection system that reduces the level and overall burden of taxation on the business community. Higher write-offs could be granted for expenses incurred, including training, research, technology transfer and export marketing expenses. Tax incentives should be granted to large firms and the banking sector to stimulate subcontracting and greater volumes of loans to small enterprises. Tax incentives have been included in some countries such as Tanzania, to help overcome the gender bias of larger firms and service establishments towards SMEs owned by women. This implies that a more in-depth research needs to be done to determine what would be the best course of action to support SMEs through tax incentives in Nigeria. Easing Access to Credit, Equity and Guarantees The rural and micro finance policy is addressing the need of creating a sound and sustainable financial sub-sector specialised on savings and credit facilities for very small entrepreneurs. However, two important areas deserve the attention of SME Policy, namely credit guarantees and long term equity finance. Guarantees help in building linkages between small non-bankable borrowers and formal financial institutions. In

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some countries (e.g. Argentina) innovative credit guarantee schemes have emerged as a potential financial product when it is combined with tax breaks and risk capital. Improving the Physical Infrastructure and Business Facilities The limited resources and the consequent weakness of SMEs could, to a significant extent, be overcome by grouping of SMEs within the same sectors. The spontaneous development of clustering of SMEs from specific sub-sectors creates opportunities to support efforts focused on promoting flexible specialisation. Supporting SME Exports Exporting is a market opportunity that has been explored by local SMEs in very rare cases. Nigeria requires the expansion and modernisation of the exporting sector, in order for it to take on a significant role in the national economic development. Unless effective export-promotion policies are implemented, Nigeria SMEs will not be able to compete internationally. SME Policy should encourage the establishment of export promotion mechanisms with national coverage. Promoting Rural Industrialisation Improving the physical infrastructure is fundamental to attract SME investment in earmarked rural areas. Supporting training, credit delivery, marketing and the provision of extension services to rural primary producers willing to engage in valueadding activities is also necessary. The creation of private trading companies in regional centres to help rural SMEs to commercialise their produce and basic manufactures in national urban centres and foreign markets should also be supported.

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Training in Entrepreneurship, Skills and Management The acquisition of relevant vocational, technical and business skills is one of the critical factors for success in small enterprises. The Government has a central responsibility for education, training and experience transfers, which is shared with a wide range of institutions, including churches, NGOs, and the private sector. SME Policy should make specific provisions to complement existing training initiatives with new strategies aimed at facilitating access to training by SMEs. Training must become more sector-specific, focusing on the particular needs and practical problems of SMEs. Fostering Linkages with Large Enterprises Linkages between large and small enterprises should be encouraged in Nigeria as part of future arrangements with foreign investors that either benefit from existing incentive packages, or establish themselves in the future in Export Processing Zones (EPZs). SME Policy should recommend that the EPZ legislation include provisions requesting that foreign investors that benefit from tax exemptions reserve a percentage of their procurement to Nigeria SME suppliers. CONCLUSION The globalisation of business has increasingly drawn SMEs into global value chains through different types of crossborder activities. Many entrepreneurs are recognising the opportunities that this process offers and gaining access to global markets has become a strategic instrument for their further development. Access to global markets for small businesses can offer a host of business opportunities, such as larger and new niche markets; possibilities to exploit scale and technological advantages; upgrading of technological capability; ways of

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spreading risk; lowering and sharing costs, including R&D costs; and in many cases, improving access to finance. Gaining access to global markets can help prospective high-growth enterprises realize their potential and; is often an essential strategic move for SMEs with large investments in intellectual property. To prosper, SMEs need a conductive business environment and regulations, adequate basic infrastructure services, access to short and long-term funding at reasonable rates, equity and venture capital, advisory assistance, and knowledge about market opportunities. However, the situation in Nigeria is worrisome. Small business operators are perennially complaining of poor business environment, leading to closure of businesses daily. Business activities are now at a standstill, those who are benefiting from overdraft before have nothing to fall back on because there is hardly overdraft facility again from the banks, and those with loans that are not yet to mature are often asked to pay up (Kuteyi, 2010). Many problems are inhibiting the growth of SMEs in Nigeria. The major problem is lack of finance whether for the establishment of new industries or to carry out expansion plans. The inability to attract financial credit or resources has stifled the growth of SMEs in the country. The problem of power supply (energy of electricity) is a critical factor. Funds are spent on running generators thereby increasing the cost of doing business (cost of production). This can easily push SMEs out of business. Also, they typically suffer from weak entrepreneurial skills as well as deficiencies in accounting, production management, and business planning. Other constraints include poor infrastructure, inability to communicate, multiple taxation, under-capitalisation with difficulty in gaining access to bank credits and other financial markets, corruption and a lack of transparency in the running of affairs of 147

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the business, high bureaucratic costs, and a seeming lack of government interest in and support for the roles SMEs play in national economic development and competitiveness. RECOMMENDATIONS As SMEs grow, they increasingly need connectivity to export markets and the world economy. So far, the lessons of international experience show that very few government and donor initiatives have succeeded in implementing sustainable strategies for SMEs development. To succeed, sustainable SME development will require concerted efforts among the various parties concerned including commercial, micro and rural banks, leasing companies and equity providers, consulting and training firms, internet providers, as well as local business associations. Governments role in the process should be limited to providing the enabling environment for private sector development, correcting potential market failures and creating a level-playing field that will allow SMEs to compete with their larger counterparts on an equal basis. Government does not have the finances or the ability to get involved directly in economic activities such as SME financing and service provision. Emerging international experience is demonstrating that government is not the appropriate vehicle to implement and coordinate such efforts, and that public-private partnerships for SMEs development are a critical element for the success of these efforts. In view of the above submissions, the paper proffers the following recommendations: i. Government should direct all its agencies to patronise local manufacturers for their daily needs. This will enhance the growth of SMEs in the country. ii. The Central Bank of Nigeria should urgently come up with credit policy of sectoral allocation on what percentage of

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loan should go to agriculture, manufacturing, and Small and Medium Scale Enterprises. This should be supported by monitoring and enforcement to ensure compliance. iii. Government should improve physical infrastructure in order to promote rural industrialisation. Government should ensure adequate power supply (constant electricity) nationwide. This will encourage the expansion of small and medium scale businesses. Small and medium scale business entrepreneurs should constantly engage in capacity building, training, research and development. This is to develop their competencies in managing and sustaining their investments.

iv.

v.

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