In a competitive world, Nigeria would be courting Foreign Direct Investment that creates large corporations or it would be looking for the next generation of billionaires that build industries.
But these cannot be the only paths to Nigeria’s prosperity; agile economies recognise that small businesses are the engines of growth and their “sachetisation” replicated in multiple forms expands wealth and creates job opportunities.
The Mittlestand, Germany’s group of mainly small family-owned businesses, is famous for being the powerhouse of the German economy, accounting for as much as 37% of annual corporate turnover and 59% of employees in 2014.
China’s economic miracle is well-documented, but notice how it reports its SME growth with pride. Zhu Shumin, Vice-Chairman of the China Banking Regulatory Commission recently noted, “outstanding loans to such businesses amounted to 33.49 trisllion yuan ($5 trillion) by the end of 2018, accounting for 23.81 per cent of the total outstanding loans".
Does anyone show that same zeal for promoting SME growth in Nigeria —the Ministry of Finance or the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)? Even the breakdown of commercial bank credit to the private sector is only available by industry, not by size.
President Buhari has the opportunity to change that in his second term, and so let us examine what he can do to address the challenges faced by SMEs.
- Insight: Are Nigerian banks fit for purpose?
Scale the Efforts of Development Bank of Nigeria
The government has provided loans to small vehicles through the Bank of Industry (BoI), SMEDAN, the Central Bank of Nigeria (CBN) and others. A recent report published by Carnegie Endowment for International Peace showed that these vehicles have been grossly ridden with corruption.
In 2017, the federal government created the Development Bank of Nigeria, another development agency for small businesses, but it has been comparatively tame in using the DBN to scale up small businesses.
In its recent report, the Development Bank of Nigeria stated that it has provided “loans of over ₦31.59bn to 35,000 entrepreneurs and that 73% of the loans went to women”. This is the type of programme that needs more public awareness, creating the opportunity to structure funding for MSMEs at lower rates since the banks prefer the big-ticket transactions and government treasuries.
It would not be out of place to have funds that target high-growth sectors such as technology, creative industry, mechanised agriculture, light manufacturing as seen in the planned $500m FG fund, provided by the African Development Bank.
Enable one-stop service-driven SME clinics across the country
Few things are as frustrating as interacting with government services when dealing with the likes of tax filings, business registrations, and so on. The opportunity to find the Corporate Affairs Commission, Nigeria Investment Promotion Council, Development Bank of Nigeria, Federal Inland Revenue Service, and others, in a single space with dedicated and nimble staff can go a long way in transforming service delivery with the government.
The federal government has earmarked over ₦500 million for Ease of Doing Business initiatives in the 2019 Budget, and it is about time we take this beyond the World Bank scoring template focused on Lagos and Kano alone. Nigeria needs a harmonised government service centre with active social media pages and toll-free lines in every state, targeted at small businesses.
Nigeria is also due for its Small Business Act, similar to what was passed by the United States in 1953, which combines a loan guarantee system with access to federal procurement. The sheer number of documents needed to participate in public contracting rules out many small businesses.
This has created a situation where only a few companies tick the boxes to access public contracting under an opaque arrangement. This does not help small businesses to offer their services to the government. The Presidential Enabling Business Environment Council (PEBEC) got the Bureau of Public Procurement to restate the guidelines for levels of contract as part of the 2017 ease of doing business reforms, but the documentation process remains too strenuous for small businesses.
Enhancing Credit Data Systems to boost funding
On the issue of getting credit to small business owners, the challenge is data. Nigeria cannot go forward without addressing the problem where an individual can take out a loan and vanish because the state does not have an identity system.
The deficit in Nigeria’s finance system is tied to the inability of the country to profile and score the citizens based on credit history. The law that guarantees registration of moveable assets is a positive step, but building single-user identification linked with credit histories is essential to strengthen the credit systems to small businesses.
Supporting states for SMEs targets
The responsibility of scaling SMEs for economic development should also not only sit with the Federal Government (FG). One way of moving states away from the practice of sharing the national cake is by coaxing them into supporting SME growth. For example, states could discount certain taxes for small businesses and craft plans to deepen the technical pool within their perimeter. Local and state governments often see small businesses as vehicles to be milked, rather than encouraged, and changing this culture would be a crucial step towards supporting SME growth.
PEBEC has also purportedly introduced specialised small claims commercial courts in Lagos and Kano. While this sounds like a good initiative in Nigeria’s chaotic judiciary system, the initiative needs to scale beyond those two states. The goal would be to ensure access to justice and contract enforcement for small businesses.
Bringing it all together
Let’s add everything together: the DBN for funding, directing investment to high-growth clusters, setting up one-stop government service centres, creating an inclusive procurement system, consolidating civic data to build credit histories, ensuring justice is delivered for small businesses.
Would all this not make a difference?
Instead, the government plans to extend its bureaucracy through the “People Money Bank” and “Entrepreneur Bank”. The details of the new banks are still sketchy, but I would consider it prudent to classify development funding into three buckets:
- Bank of Industry for large scale funding with development impact;
- Development Bank of Nigeria to provide discounted financing and guarantees for small business; and
- A Central Bank Fund to provide cheap access funding to microfinance banks for onward lending to micro-enterprises.
The TraderMoni program took a lot of flak recently as the Vice-President toured the country to promote it. Providing micro-loans to petty traders is not a bad idea, but why should that be the task of the BoI? If we want to fix the puzzle down the line, in the absence of another election to win, President Buhari needs a scalable SME strategy that finds jobs for over 39 million under/unemployed Nigerians, a bulk of whom are young people.
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