SMEs form an important part of the Nigerian economy. According to studies conducted by International Finance Corporation (IFC), about 96% of Nigerian businesses are SMEs, also dominating the manufacturing and industrial sector in terms of total number of enterprises. Sadly, they contribute only a mere 1% of GDP which is a blow when compared to SMEs in Asian countries, the US or Europe where the economies show a consistent commitment to startup, growth and development of SMEs through access to finance, provision of cover through protective government policies, good basic and technological infrastructure and more. The opportunities for SMEs in the country far outweigh the challenges but the weight of the challenges continue to deal it a technical KO.
One big challenge SMEs continue to face is poor financial support and credit environment. With existing businesses lacking collateral, most startups are not funded by Nigerian banks. There is first the rigorous process of application for these funds, mainly with unrealistic demands in terms of collateral and existing personal transaction records which are expected to include or exceed certain high amounts to qualify the applicant for the loan. None conventional banks that have become more willing to assist with capital haven’t done so without their high interest rates. The banks can’t be overly blamed for their fair share in the provision of capital, a good look at the state of the economy and the rate at which businesses fail, gives banks a double concern before issuing out funds to startups. Statistics has it that 80% of businesses crash and burn within the first 18 months of their commencement. Federal Government on its part through grants, low interest loan from BOI and Bank of Agriculture, CBN SMEs Initiatives through the banks and other State Government initiatives as evident in Lagos state, has helped a fewer number of business, with claims of the process being assumed as political and corrupt by many startups who failed to secure their funding.
There is also a glaring huge gap in infrastructure, generally, the state of infrastructure in the country is appalling and on a steady decline. This has also hampered the establishment and growth of SMEs and in many ways contributed to as many deaths of the same. There is the stinging case of epileptic power supply. Most businesses in Nigeria cannot do business without engaging the services of electricity generators which in turn demands a lot of costs on fuel which is also on the high. Even big, established companies continue to reveal huge expenses spent on diesel fuel, figures which are discouraging enough for startups. The poor road networks and high costs of logistics among other social amenities have and continue to hamper and tamper with the state of SMEs in the country.
The bureaucratic nature of government in an upright attempt to regulate through some of her agencies, has done as much harm as or than good. While their necessities and positive contributions cannot be overlooked, regulatory bodies such as the CAC, NAFDAC, Nigerian Customs and other agencies continue to play their part in the strangle of SMEs. Getting an approval from say NAFDAC for food and or drugs could take double the time and costs due to poor management, negligence and increasing levels of corruption among staff and officials. Coupled with all these are the taxes posed by the federal and state government on SMEs; high taxes, many tax collecting agencies and strict regulatory operational laws are placing so much suffocating demand.
Benhabib and Spiegel, 1994 quipped; “It is a lack of investment in human R&D as % of GDP capital, not a lack of investment in physical capital alone, which prevents poor countries from catching up with rich ones. Educational attainment and public spending on education are correlated positively to economic growth.” It is apparent that the problems of SMEs cannot be severed from the common state of problems generally perceived in the country, hence addressing SMEs without tackling the problems of the economy is as good as treating a patient without addressing the cause of the illness, eventually it is a waste of time.
While in comparison to other emerging markets, Nigeria still shows a lack of commitment to building a strong SME sector. In light of recent events in the Nigerian macroeconomic environment, SMEs have compelling growth potential and like other emerging economies are likely to constitute a significant portion of GDP in the near future.