SMEs in Nigeria: A Solution Fraught With Problems by Jennifer Uwakwe

Nigeria’s GDP is currently the highest in Africa, with projections that the country would have the highest average GDP growth in the world from 2010-2050. Growth performance has improved in recent years, driven in part by economic reforms and in part by rising oil prices. However, social and economic conditions have not improved for the majority of Nigeria’s populace. The reason being that most of the non-oil sectors remain uncompetitive—their contribution to the economic growth in terms of GDP increased only marginally.

One of such sectors is the Small and Medium Sized Enterprise sector, defined by the Central Bank of Nigeria as economic independent companies with about 11 to 300 employees and an annual debit turnover of between five million to Five Hundred Million Naira. The era of 1980s can be said to be golden years of SMEs in Nigeria. Those were the years when Federal Government Development banks were created specifically for the development of SMEs in the country. SMEs enjoyed friendly interest rates, and investors and banks were not discriminatory to the types of SME projects financed.

However, the decline came with the abundant devaluation of the Naira, which affected SMEs due to the considerable reduction in their purchasing power of foreign exchange for raw materials. The SME sector was affected, owing to the devaluation of the Naira, as well as excessive reliance on imports, exorbitant interest rates, and high rate of inflation which in turn contributed to high rates of unemployment.

Unemployment is an obvious hindrance to Nigeria’s growth. About 15 percent of the populace is unemployed, with over a million recent graduates joining the employment pool yearly. A feasible solution would be to inculcate schemes and capacities to empower these young unemployed through training, development, financing, and investment to enable them to become SMEs. In economies where SMEs are regarded as a driving force, the sector caters to over 65 percent of the national employment rate and this, in turn, increases the GDP contribution of the sector.

While the knowledge-based service capacity and entrepreneurial spirit of SMEs are laudable, the industry still faces many challenges which need to be addressed before it can be regarded as a major contributor to the economic growth of the country. In a country like Nigeria, the people rely on the Federal Government to provide everything needed to bring development to the country. A system like this is the polar opposite of the way development occurred in places like Europe, where entrepreneurs created businesses and industries based on the wishes of the market and the laws of demand and supply.

Why then does this free-market system not work in Nigeria? The SME sector in Nigeria is moribund with problems such as lack of adequate infrastructure, poor financial support, unfavorable credit environment, high interest rates, import liberalization – which does little to encourage Nigerian made products, high income taxes, adulteration of goods, low consumer patronage, difficulty to access finance, as well as unwilling investors. SMEs suffer more from financing and other constraints than large firms, although it is not size itself that justifies intervention, but rather the potential of SMEs to grow into medium and large enterprises and to contribute to the economy.

While government policies can enable SMEs to overcome constraints intrinsic in their firm size and risk, fostering partnerships and small-firm clusters may be the most expeditious path to a dynamic SME sector. Small-firm networks, capable of addressing the dynamics of entrepreneurship will facilitate an exchange of personnel, finance, technology, and information and strengthen that micro-level bond that can reinforce the country’s global competitiveness. Such networks and support systems enable SMEs to combine the advantages of smaller scale and greater flexibility with economies of scale and scope, fostering export of goods and services, and ultimately contributing to a robust relationship between the SME sector and economic growth and progress of the country.

Jennifer Uwakwe, a business development and finance expert, writes from Abuja