The SME Economy

The developed economies in Europe, America, Asia and the Pacific have all leveraged on the strength of their Small and Medium-Scaled Enterprise (SME) sector vitality. Today’s mega brands and conglomerates in the developed economies started as SMEs. The performance of SMEs in countries like Brazil and India helped identified them among the BRICS countries (Brazil, Russia, India, China and South Africa); while Indonesia and Bangladesh are known among the Next Eleven (N-11) countries. In the emerging economies, Bangladesh and Indonesia have a repute of having the most vibrant microfinance banking systems. Nigeria, though named as one of the N-11, is yet to fix its microfinance knot.

The Next Eleven (N-11) Nations
1.   Bangladesh
2.   Egypt
3.   Indonesia
4.   Iran
5.   Mexico
6.   Nigeria
7.   Pakistan
8.   Philippines
9.   Turkey
10. South Korea
11. Vietnam

The entrepreneurial spirit of the Chinese has seen them not only as the second largest economy in the world, but also the country with thriving international presence in foreign economies competing favourably. South Korea was one of the worst hit economies by the Asian financial crises of 1997. Through focus on the promotion of SMEs, the country recovered from the crisis. In 1999, SMEs accounted for 81.9% of industrial employments and 74.3% of total manufacturing in South Korea. SMEs and the larger private enterprises are reputed to be the right engine to drive economic growth and development.

SMEs in Nigeria
The Small & Medium-Scaled Enterprise sector in Nigeria has gone through tumultuous period of crippling infrastructural deficiencies that presently threaten the very existence of this critical sector. The continuous paralysis of this sector is a major truncating factor working against the diversification and transformation of the economy for the achievement of desired economic goals. It is however interesting to know that this same sector holds the ace to the very crucial issues of economic growth, job creation and poverty eradication. The pointer to investors and government is that SMEs are indispensable in the discourse of sustainable development in any economy.

Enormous investment opportunities exist in Nigeria for entrepreneurs venturing into manufacturing, trade, food processing, agribusiness, professional and outsourcing services, telecommunications and information technology. There are also emerging business opportunities in Nigeria’s power sector, solid minerals, electronic & mobile technology, and educational sector that are seen as potential goldmines with the various on-going reform programmes. Concerted efforts must be made to grow the number and capacities of SMEs if Nigeria must achieve its vision of being among the 20 most industrialised nations by 2020. Although Nigeria is already counted as one of the Next Eleven (N-11) economies after BRICS, its real sector and especially the SMEs cannot be left in the shape it is today.

Appreciable efforts are being made to boost the real sector to attain optimal capacity utilisation. For instance, Nigeria has attained a 24-hour company registration capability.  Development institutions like the Central Bank of Nigeria (CBN) and the Bank of Industry (BoI) are launching special intervention funds specifically for SMEs; and there are various investment opportunities in the emerging mobile technology sector. However, the Nigerian government must do more in the problematic areas of electricity supply, road infrastructure, access to finance, tax administration, corruption, security, acquisition of vocational education and business skills training.

Enterprise Baseline Survey
Even in the face of the many suffocating challenges, investment potentials exist in the large, young and growing Nigerian population following the impressive economic growth profile, stable financial industry, mobile technology growth, attraction to foreign investors, among others. The recently released 2012 Enterprise Baseline Survey conducted jointly by the Pro-Poor Growth and Promotion of Employment Programme and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) with support from the German Development Agency showed that there are 17,284,671 Small and Medium Scale Enterprises in Nigeria, employing 32,414,884 persons and contributing 46.54% to the nation’s Gross Domestic Product (GDP) in nominal terms. Several other SMEs operate in Nigeria’s large informal sector.

As a result of the absence of reliable and detailed SMEs database, it has been very difficult to translate general policy framework into effective and sustainable intervention programmes for the benefit of the SMEs in Nigeria. It is obvious that Nigerian SMEs are resilient and dogged to wade through the challenging business environment to remain relevant in this economy.

Economic freedom discourse is about how the business environment encourages entrepreneurial activities looking at the rule of law, regulatory efficiency and open markets. In measuring economic activity by sector, it is obvious that countries where most of the businesses depend on government spending (i.e. where government is the highest spender), the economic freedom of such a country is low and is inversely correlated to a high rate of unemployment and high poverty level (low per capita income which measures poverty level).

Index of Economic Freedom
Looking at the table below, Nigeria ranks 120th out of 177 countries with high unemployment level (21%) and relatively poorer per capital income of $2,578, when compared with countries like Hong Kong (1st), Singapore (2nd), Australia (3rd) and even Mauritius (8th) and Botswana (30th) in Africa.  Countries that ranked higher in economic freedom also paraded lower rates of unemployment and higher per capita income.

Ranking of The Next Eleven
Bangladesh (132nd), Egypt (125th), Indonesia (108th), Iran (168th), Mexico (50th), Nigeria (120th), Pakistan (121st), Philippines (97th), Turkey (69th) , South Korea (34th), and Vietnam (140th). These countries are formidable competitors with Nigeria to clinch membership of the world’s top 20 economies come 2020. Most of these countries show better performance in terms of unemployment and poverty levels when compared with Nigeria’s records at the Index of Economic Freedom and the Human Development Index.

While we cannot totally kick against government’s debts, it is advisable that these debts are channelled into productive ventures and provision of basic infrastructure that would support the performance of SMEs in Nigeria. Apart from investments in power, roads and rail systems, government must invest greatly in technology infrastructure to support the deployment of modern mobile and electronic technology for businesses. Any business without a technology component may not be sustainable in this modern age. Nigeria’s technology use is still low relative to the position the country is expected to attain in the next decade.

Internet World Statistics revealed that 45.04 million population of Nigeria are internet savvy. Nigeria is therefore among the top 20 countries that use the internet worldwide. However, when considered as a ratio of its population, the penetration rate is about 27%. This means that 27 out of every 100 Nigerians use the internet. Acquisition of technology must be made affordably low for start-up entrepreneurs to power their businesses. There is a correlation between the deployment of technology and the thriving of businesses. This can be seen in SME-focused countries like China, USA and India; the first three countries respectively in terms of internet usage worldwide.

Government Action Required
Going practical, there is need for the establishment of industrial clusters where credible entrepreneurs are given subsidised spaces to do business. This would address, to some extent, the problem of large informal sector as businesses in these clusters are easily captured in a dedicated database and they can easily be reached at their offices. These clusters can be grouped into cooperative societies to access credit on behalf of their members. The clusters should be well equipped with all needed amenities at subsidised and affordable rates for small businesses.

On why the SMEs remain unattractive to lending institutions, it is obvious that the banks are aware of the myriads of operational overheads that could easily erode the borrowers’ ability to break-even and repay loans. Presently, the banks have found solace in investing their funds in government treasury bills and bonds. The only private sector operators that access credit from banks today are the conglomerates and multinationals; and even at cheaper rate than an SME would get same loan. The banks have become risk-averse towards small businesses in Nigeria. The government must show some seriousness in creating an enabling environment for the SMEs to thrive before the banks can return to their financial intermediary function.

While Nigeria parades an impressive GDP growth rate and huge inflow of foreign direct investments, we should stop celebrating the unemployment growth rate and the dangerously rising foreign investments in Nigeria recorded by managers of the economy. More people need to be engaged in productive ventures to reduce huge spending on security and fight against crimes. On the inflow of FDIs, we need to take caution as the withdrawal of these foreign funds could cause serious macroeconomic distortions in the economy.