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The role of small scale industries in Nigeria economy?

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2011-08-06 03:28:23
2011-08-06 03:28:23

Small & Medium Scale Enterprises and Funding in Nigeria (Posted 25th Aug, 2003)

NIGERIAN ECONOMY DEPENDS ON THE RECOGNITION OF SMEs

Historical facts show that prior to the late 19th century, cottage industries, mostly small and medium scale businesses controlled the economy of Europe. The industrial revolution changed the status quo and introduced mass production. The twin oil shocks during the 1970s undermined the mass production model, which triggered an unexpected reappraisal of the role and importance of small and medium sized enterprises in the global economy. Findings by economists over the years show that small firms and entrepreneurships play a much more important role in economic growth and development.

Importance of SMEs

Many economies, developed and developing have come to realise the value of small businesses. They are seen to be characterised by dynamism, witty innovations, efficiency, and their small size allows for faster decision-making process. Governments all over the world have realised the importance of this category of companies and have formulated comprehensive public policies to encourage, support and fund the establishment of SME's. Developments in small and medium enterprise are a sin quo non for employment generation, solid entrepreneurial base and encouragement for the use of local raw materials and technology.

Giving insight into the SME phenomenon, a paper delivered at a forum by Mallam Mohammed Hayatu Deen, titled "Stakeholders Roles and the Development Benefits in a Virile Small Enterprise Sector", pointed out that small business operations are propelled by the dynamic theory, which makes them efficient and prone to constant change. He gave a comparative statistic using 9 developed countries on how SMEs create employment, increase job growth, induce change, innovation and competition.

Benefits of the SME

The benefits of SME's to any economy are easily noticeable, they include: contribution to the economy in terms of output of goods and services; creation of jobs at relatively low capital cost, especially in the fast growing service sector; provide a vehicle for reducing income disparities; develop a pool of skilled and semi-skilled workers as a basis for the future industrial expansion; improve forward and backward linkages between economically, socially and geographically diverse sectors of the economy; provide opportunities for developing and adapting appropriate technological approaches; offer an excellent breeding ground for entrepreneurial and managerial talent, the critical shortage of which is often a great handicap to economic development, among others.

Challenges faced by SME s in Nigeria

The challenges facing SME's in many developing countries are monumental. The most worrying among these challenges is funding. Most new small business enterprises are not very attractive prospects for banks, as they want to minimise their risk profile. In Nigeria, the situation is not very different, until recently when the Banker's Committee intervened in 2001 with a scheme themed the Small and Medium Industries Equity Investment Scheme (SMIEIS). The scheme relegated to the background government credit schemes that are not well thought-out and implemented.

The SMIEIS Scheme

The Banker's Committee is a body constituted by representatives of banks in Nigeria. The scheme was approved at their 246th meeting on December 21, 1999. According to them, this was a response to President Obasanjo's concern and policy measures for the promotion of small and medium industries (SMI) as a vehicle for rapid industrialisation, sustainable economic development, poverty alleviation and employment generation. The scheme requires all banks in Nigeria to set aside 10% of their profit before tax (PBT) for equity investment in small and medium scale industries. The scheme commenced on June 19th 2001.

The scheme aims among other things to assist the establishment of new, viable SMI projects, thereby stimulating economic growth, development of local technology, promote indigenous entrepreneurship and generate employment. The funds will be available for projects in the real sector of the economy which include: agro-allied, information technology and telecommunication, manufacturing, educational establishments, services (directly related to production in the real sector or to enhance production), tourism and leisure, solid minerals, construction, and any other activity as may be determined from time to time by the Bankers Committee.

To qualify for the scheme, an enterprise, in addition to being engaged in any of the activities listed above, must have a maximum asset base of N200 million excluding land and working capital; with the number of staff employed by the enterprise not less than 10 and not more than 300. The enterprise must be registered as a limited liability company with the Corporate Affairs Commission and comply with all relevant regulations of the Companies and Allied Matters Act (1990) such as filing of annual returns including audited financial statement. Comply with all applicable tax laws and regulations and render regular returns to the appropriate authorities. Timing of investment exit shall be a minimum of 3 years.

There are 4 categories of stakeholders in the SMIEIS scheme, the Government, Central Bank of Nigeria (CBN), Bankers Committee and the individual banks, each playing a unique role to ensure the success of the scheme. Available data as at February 2003 indicate that 80 banks have set aside N13.07 billion with 28 banks investing around N2.87 billion based on 67 investments in 47 enterprises.

Alternative Sources of Funding

For small businesses shopping for funding can be quite a Herculean experience. But, recent development like the SMIEIS and some other funding sources are now open. One of such is the independent fund manager called the SME Manager Limited (SML), which is an investment advisory company established by African Capital Alliance (ACA) to promote SME sector-led investments in Nigeria by making equity investments in Nigerian SMEs. Also, available are: the Bank of Industry, the New Partnership for African Development (NEPAD) initiative and the African Growth and Opportunity Act, AGOA, of the United States.

Way Forward and Conclusion

Much is expected from the government to provide basic social and infrastructural facilities to assist small businesses. Nigeria s economic terrain is very constraining with the focus being concentrated on the big firms which are constantly down-sizing. Business people that fall in the SME category have frequently accused the banks of providing funding to only their cronies and favoured companies. But the banks have denied such allegations saying that many of the SMEs cannot meet up with banks requirements.

With services sector having 73.1% investments in number and 64.6% of value and Lagos-based investments accruing 86.6% of total number and 87.7% of value, the banks are advised to spread their funds wider. Also, the CBN should monitor closely some of the defaulting participating banks in the SMIEIS scheme. On the part of government, policies that promote inward induced investment should be encouraged far and above

This article may be outdated following the current development in Nigeria used as context. Though useful, am still working on the supplementaary current roles of SMS in Nigeria Economy.

Thanks.

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