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The Role of Dfis in Promoting Smes Development in Nigeria Essay

1.0 INTRODUCTION

The significance of the Small and Medium Enterprises (SMEs) in the economic growth of many countries cannot be overemphasized. There is consensus of opinion that though the sector consists of individually small businesses, their total contributions to industrial development and national output is very significant (Roslida, 2011; Ogunsiji & Ladanu, 2010, Surienty, Hong, & Hung, 2010; Hong & Hung, 2010; OECD, 2004; NIPC, 2004). Researchers also support that SMEs help in the achievement of improvement in rural infrastructure, improved living standard of the rural dwellers, creation of employment and utilization of indigenous technology, production of intermediate technology and increase in revenue base of individuals and governments. (Wahab and Ijaya, 2006; Odubanjo, 2000; Nnanna, 2001, Onwumere, 2000).

The developed nations understand the importance of this sector and are harnessing the potentials for their growth. In China, SMEs with fewer than 300 employees accounts for 99.5% of the factories in Tokyo and employs 74% of the workforce there. Korea and Taiwan are prospering as both countries manufacture and export with the aid of well established SMEs. The German SMEs employ 73% of the labour force. Some other comparative analysis of SMEs contribution is as in the table below:

By 2020 Nigeria intends to be one of the 20 largest economies in the world, able to consolidate its leadership role in Africa and establish itself as a significant player in the global economy. The SMEs sector has been identified as one of the critical elements to achieving the Nigerian vision 20:2020. The SME sector constitutes 99% of the total business enterprises in Nigeria, employs 75% of the nation’s industrial labour force but only accounts for 10% to 15% of the total industrial output while utilizing only about 30% of its installed capacity. Significant as the SME contribution to employment figure is, there is still a serious unemployment crisis in the country today. In the recent past people without basic education accounted for over 76% of the unemployed in Nigeria. The situation today has been compounded by the regularly increasing number of unemployed graduates. According to the National Bureau of Statistics, (NBS) the total number of unemployed Nigerians rose from more than 12 million in 2010 to over 14 million in 2011, with the figure increasing by 1.8 million between December 2010 and June 2011.

The Bureau added that unemployment was highest among people aged between 15 and 24, and 25 and 44 years. The NBS data also shows that over 22million of the active population are either unwilling or unable to work or are working for less than 40 hours per week on the average. The incidence of poverty is dangerously hovering over a large proportion (70%) of the population living below the poverty line of US$1.00 (NGN150) per day. The Vision 20:2020 document notes that as at 2006, the SMEs contributed only 2 per cent of export earnings and 10 per cent to GDP.

The low contribution to export earnings has been attributed to lack of skills, management capacity, poor product quality, low production capacity, poor access to international markets and lack of working capital that have made the sector to be uncompetitive. Empirical research shows that the causes of poverty in Nigeria were not limited to unemployment, and that most of the poor were employed in a large variety of small scale, low-productivity activities. Thus, it has been suggested that one way to alleviate poverty in Nigeria could be to increase the productive capability of those engaged in small-scale production (Aftab and Rahim, 1989).

2.Characterization of SMEs in Nigeria.

There is no widely accepted definition of SMEs in Africa (Beyene, 2002). In Nigeria, the definition has changed from time to time and differs from one agency to another, using variables that range from the number of employees, capital employed and turnover. Similarly, there is no clear-out definition that distinguishes a purely small-scale from a medium scale enterprise but the following table provides some of this definitions: SME Definitions

|The working definition of SME for this paper is by the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) which defines SMEs as enterprises with a total capital employed not less than N1.5 million, but not exceeding N200 million, including working capital, but excluding cost of land and / or with a staff strength of not less than 10 and not more than 300. The SMEEIS is a scheme set up by the Bankers’ Committee, a body that consists of representatives of banks in Nigeria. The scheme requires all banks to set aside 10 percent of their profit before tax (PBT) for participation as equity in investments in Small and Medium Enterprises in the country. Characterization of SMEs in Nigeria has has taken various forms and shapes (Aluko, Oguntoye, and Afonja 1975; Ekpenyong and Nyong (1992);

Ogunsiji and Ladamu, 2012) as follows: 3.1 Few of the managers/proprietors had tertiary education while the majority had primary and secondary education. This manifests substantially in low level of business management technique, skill or market information. 3.2The same manager or proprietor finds it difficult to raise short or long term capital from the formal capital market instead relies on informal sector including personal savings or loans from friends, relatives or money lenders. 3.3In most of the enterprises there is no separation of the key functions of production, financing, marketing and personnel. These functions are concentrated in the hands of the proprietor. 3.4 The manager/proprietor’s vision is confined to and defined by the local community in which he carries on his line of business.

There is little or no knowledge of the wider or distant market. 3.5The rate of business mortality is high; most of the operators of the enterprises that failed had primary and / or secondary education only. 3.6Most of the operators of the enterprises had no previous experience in business before embarking on their SME business activity. Majority (60%) of the enterprises that failed had 0-5 years prior experience and only 10% had 5-15 years of experience (Ekpenyong and Nyong, 1992).

3.7The SME is generally poorly equipped due to weak capitalization and lack of access to external funding. 3.8Little or no accounting records are kept in many SMEs; banking services are not considered important by this group and their major savings and/or loan source is either the cooperative society or Esusu system. 3.9Ownership structure largely revolves around a key man or family such that most of the SMEs are either sole proprietorships or partnerships. Where the registration status is that of a limited liability company, the true ownership structure is that of a one-man, family or partnership business. Other characterization of SMEs in Nigeria includes:

* Labour – Intensive production processes; * High cost of funds as a result of high interest rates paid on loan sourced from informal financial sector; * High mortality rate especially within the first two years of existence. * Poor inter and intra-sectoral linkages; hence they hardly enjoy the benefits economies of scale. * Poor product quality, poor packaging and equally poor marketing strategy. * Absence of Research and Development to drive innovative ideas and match global benchmark. * High production costs due to inadequate infrastructure. * Lack of access to international market. * Lack of succession plan.  * Poor access to vital information.

The federal Bureau of Statistics (FBS) released the results of its first National Survey on SMEs conducted across the 36 states of the federation and the Federal capital territory July 2012. The result announced by the Minister of Trade and Investment, Mr. Olusegun Aganga, showed that 17.28 million SMEs are in the country out of which 17.26 million (about 99.9%) are micro enterprises employing less than 10 persons and valued at less than N5 million each. The minister stressed that the National MSME policy recognizes that the sub-sector is the biggest employer of labour throughout the world and the visions of National MSME policy therefore include:

* Delivery of maximum benefits of employment generation;
* Wealth creation;
* Poverty reduction;
* Growth to the Nigerian economy.

The survey further revealed that SMEs in the country currently employs 32.4 million people. Lagos State has the highest number of SMEs with 17% of the national figure while Osun state has the fewest number with only 0.4% of the national figure. The potentials and opportunities for SMEs to live up to the expectation of government and play the crucial role of engine of growth, development and industrialization, wealth creation, poverty reduction and employment creation are enormous; as hereunder discussed.

3.Challenges of the SMEs in Nigeria

Several of the formed SMEs die within the first few years of their existence. Problems associated with their high mortality have been widely identified (Aftab and Rahim, 1989; Ekpenyong and Nyong, 1992; Onugu, 2005); these include:

* Insufficient Capital;
* Lack of Succession plan;
* Inadequate Market Research;
* Over Concentration on one or two markets for finished products;
* Lack of focus;
* Inexperience
* Lack of proper records or lack of any records at all;
* Inability to separate business and family or personal finances;
* Lack of business strategy;
* Inability to distinguish between revenue and profit;
* Inability to procure the right plant and machinery;
* Inability to engage or employ the right caliber staff;
* Lack of planning;
* Cut-throat competition;
* Lack of official patronage of locally produced goods and services;
* Inimical government rules and regulations (e.g. dumping of foreign goods, unfavourable fiscal policy, multiple taxes, levies and rates)
* Over concentration of decision making on one key person;
* Infrastructural inadequacy;
* Restricted market access;
* Raw materials sourcing problems;
* Problems of inter-sectoral linkages given that most large scale firms source some of their raw materials outside instead of subcontracting to SMEs;
* Insecurity of people and property;
* Unfavourable monetary policies;
* Lack of preservation, processing and storage technology and facilities.

4.Finance as a major challenge of SMEs

Access to finance has been identified as a most critical constraint on SMEs in Nigeria. There are three main source of financing open to them as follows: * Formal Financial institutions such as the conventional banks, insurance companies and development banks. * Informal Financial institutions consisting of money lenders, credit and savings associations (cooperative societies); esusu, friends and relations. * Personal savings.

A study by the Nigerian Institute for Social and Economic Research (NISER) in 1984 reveals that about 73% of the respondent obtained their funds from personal savings, while only about 2% obtained theirs from the formal financial institutions. Another study by Ojo (1984) on the sources of investment finance for small industries shows a similar trend that over 96% came from personal savings with about 3% from the informal sector and less than 1% from the formal financial institutions.

The trend has not improved over the years. Attempts made to address the financing problem of SMEs in Nigeria include specification of credit guidelines by the CBN to banks, lending to SMEs, the establishment of rural banking programmes and indirect lending to SMEs at concessionary rates through participating banks, the merger of the Nigerian Bank for Commerce and Industry, the Nigeria Industrial Development Bank and the National Economic Reconstruction Fund into the Bank of Industry (BOI) to provide cheap financial and business support services to SMES. In addition, the CBN and the Bankers’ Committee in an attempt to tackle the financial problems of SMEs established the (SMEEIS) which started in June 2001 and requires all Banks in the country to set aside 10% of their profit before tax annually for equity investment in SMEs operating in the productive sector of the economy. The objectives of the scheme are to stimulate economic growth, facilitate the flow of funds from banks for the establishment of new viable small medium industry projects, develop local technology and promote indigenous entrepreneurship (UBA, 2001)

The table above shows the distribution of bank loans to SMEs in Nigeria from 1992 to 2008. Between 1992 and 1996, there was a mandatory minimum of 20% of total bank credit to allocate to SMEs owned by Nigerians. From 1997 when the mandatory allocation was abolished, there has been a downward trend in the total credit allocation to SMEs which has dangerously reached a frightening proportion as at 2008 when only 0.2% of total commercial banks credit was channelled to SMEs. This trend has established a gap in financing options available to this important sub-sector, and this is what the development finance Institutions (DFIs) were established to resolve. 5.DFIs on Rescue Mission

Development Finance Institution (DFI) is defined by scharf and shetty, 1972 as ‘an institution promoted or assisted by government mainly to provide development finance to one or more sectors or sub-sectors of the economy. The institution distinguishes itself by a judicious balance between commercial norms of operation as adopted by any private financial institution and developmental obligations. It emphasizes the ‘project approach’ – meaning the viability of the project to be financed- against the ‘collateral approach’; apart from provision of long-term loans, equity capital, guarantees and underwriting functions, a development bank normally is also expected to upgrade the managerial and other operational pre-requisites of the assisted projects.

Its insurance against default is the integrity, competence and resourcefulness of the management, the commercial and technical viability of the project and above all, the speed of implementation and efficiency of operations of the assisted projects. Its relationship with its clients is of a continuing nature and of being a ‘partner’ in the project than that of a mere ‘financier’. It has been confirmed that DFIs play crucial roles in providing credit in the form of higher risk loans, equity positions and risk guarantee instruments in support of private sector investments in developing countries for infrastructural and real sectors development. A major DFI in Nigeria is, for instance, the Bank of Industry (BoI).

It has the mandate to ‘transform Nigeria’s industrial sector and integrate it into the global economy through providing cheap financing and business support services to existing and new industries in order to achieve the attainment of modern capabilities to produce goods that are attractive to both domestic and external markets. The Bank (BoI) is specifically expected to assist in resuscitating ailing industries and promoting new ones in all the geopolitical zones in the country. To achieve this, it has been mandated to identify and assists projects that have large transformational impacts by way of * creating forward and backward linkages with the rest of the economy;

* utilize domestic inputs by adding value to raw materials; * generate employment opportunities;
* produce quality products for the market.

The main role/purpose therefore for BoI and other DFIs is to provide finance to the private sector for investments that create jobs, produce quality products and promote economic growth and development.

6. DFIs Roles to SMEs

The role of DFIs to SMEs can be summed up in the concept and mandate of developmental banking or financing as enunciated in the above paragraph. This is different from that of the conventional banks to the extent that DFIs are to fill the gap that conventional formal banking services have failed to invest sufficiently as a result of the special risks of certain economic agents. The task of development finance is to identify the gaps in institutions and markets in a country’s financial sector and act as a ‘gap-filler’. The principal motivation for developmental finance is to make up for the failure of financial markets and institutions to provide certain kinds of finance to certain kinds of economic agents (e.g. SMEs).

The failure may arise because the expected return to the provider of finance is lower than the market-related return or the risk involved cannot be covered by high risk premium as economic activity to be financed becomes unviable at such risk-based price. Therefore, developmental financing is targeted at economic agents that are rationed out of the market. The Aim of the DFIs is to be catalysts in galvanizing economic growth and development. This can be done with maximum impact by assisting and encouraging small and medium scale enterprises, not only providing finance but similarly in the following special areas of need:

6.1Access to Credit, Equity and Guarantees.

The first National survey on SMEs shows that an estimate of 99 percent of SMEs is valued at less than 5 million. The main source of capital is personal savings with over 54 percent followed by loan with 22 percent and family source with 16 percent. DFIs need to explore, exploit and fill this financing gap by providing long term equity finance in the form of project finance. Similarly, credit guarantee schemes help in building linkages between small non-bankable borrowers and formal financial institutions. Innovative guarantee schemes could be extended by DFIs to SMEs that will give SMEs more and better access to credit in conventional commercial banking system.

6.2SME Export

The survey on SMEs (2012) affirms that only 3 percent of the SMEs in Nigeria were accessing export market, a situation which the Minister for trade and Investment described as “adversely inimical to the development of the nation’s economy”. This revelation is a testimony to the unexploited opportunity by local SMEs that require a coherent approach by all stakeholders, including the government. On the part of the DFIs, the development and extension of export promotion facilities that will incorporate export opportunity awareness and encouragement of the SMEs to compete internationally will certainly be helpful.

6.3 Physical Infrastructure and Business Facilities

A major challenge to the success of SMEs in Nigeria is irregular power supply and antiquated facilities. This has manifested in several areas as low capacity utilisation, low output and low quality and internationally uncompetitive products of many of the SMEs. DFIs can facilitate the upgrade of facilities through special packages deliberately targeted at infrastructural upgrade of the SMEs.

6.4 Training in Entrepreneurship Skills and Management

Empirical researches are conclusive that lack of business experience, skill and exposure is a major factor in the success rate of SMEs. Part of the extension programme of DFIs to SMEs could be in areas such as organised seminars, workshops and facility tours that will enhance the general education and exposure of the SME proprietors and their employees. If done at moderate cost and inherent values carefully articulated, the package may be an instant success.

6.5 Linkages

In general, linkages between large and small enterprises should be encouraged by SME policy in Nigeria and facilitated by the DFI strong network with government. The role of DFIs to SMEs can also be viewed with reference to a framework developed by Dunning (1992), who identified five main types of linkage and spillover effects. The framework was initially developed in respect of Foreign Direct Investment (FDI), which has a concurrent application and similarity of development financing objectives with DFIs. These linkages are: * Backward Linkages with Suppliers: This refers to the extent to which components, materials and services are sourced within the business environment of the SMEs. Interconnectivity with suppliers can be facilitated by financing institutions which have a better advantage of deep knowledge of the environment of the SMES. This knowledge can be made available to these small entrepreneurs at little or no cost through seminars, ‘meet-the buyer’ events etc.

* Forward Linkages with Customers: These can include marketing outlets from within and outside the country which is normally at the data base of DFIs and which can be made accessible to SMEs. Similarly, seminars, trade fairs, and such other programs to connect SMEs with their customers can be organized by DFIs. * Linkages with Competitors: DFIs may act as the bridge to facilitate the connectivity of similar companies in the same industry for shared experience and facilities for mutual benefits. Because of the vantage position and activities of the DFIs to the economy, they have access these enterprises with their strengths and weaknesses. The weaknesses of some of these SMEs are the strengths of others and some of these may be mutually exchanged in a manner that will not compromise healthy competition and leave each of the participating SMEs better off.

* Linkages with Technology Partners: One of the challenges of SMEs has been found to be antiquated technology (Ekpenyong and Nyong, 1992; UNCTAD, 2008). The reason for this is partly finance and partly lack of knowledge on the part of the SMEs to sources of technology that will enhance their optimal performance. DFIs with their wide contacts both locally and externally can act as facilitators with technology partners from within and outside the country. * Other Spillover Effects: These include demonstration effects, as DFIs demonstrate new and better ways of doing things to SMEs. This could be by way of human capital spillover whereby trained personnel leave the DFIs to work for SMEs in areas of human deficiency by the SMEs.

7. Conclusion and Recommendations

This paper has given an overview of the contributions of SMEs in the growth of economies all over the world with particular reference to Nigeria. Specifically, it identified the SMEs significant contributions in areas of employment creation, improvement in rural infrastructure, improved living standard of the rural dwellers, utilization of indigenous technology and production of intermediate technology. The achievement of the lofty ideals of Vision 2020 in Nigeria may be a mirage except there is a concerted effort to make the SMEs the true engine of growth and innovation they are positioned to be.

The paper also identified the various challenges facing the growth and development of SMEs in Nigeria, principally identifying lack of education, skill and experience; lack of succession plan; deficient infrastructure and capital inadequacy.

Taking a cursory look at the challenges of SMEs and the inadequacy and unwillingness of conventional commercial banking system to address and resolve these challenges, a natural gap is thus created for a special-purpose financing and empowerment framework to provide for the needs of SMEs as an engine of growth. The Development Financing Institutions are not only providers of finance to SMEs; they act as the educators, promoters and pathfinders for the SMEs. DFIs are supposed to be the lubricating oil inside the engine of growth.

For Nigeria to achieve the developmental objective of becoming one of the 20 most industrialised nations by the year 2020; for Nigeria to surmount the excruciating unemployment of youths and other able body persons willing to work; for Nigeria to truly alleviate poverty in the land and for Nigeria to become a secured country where all can sleep with the two eyes closed; then DFIs must be empowered in order to provide necessary support and lubrication for SMEs.

References:

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