Why SMEs experiencing stunted growth

It is a fact that small and medium scale enterprises (SMEs) are drivers of any economy growth, but with the lack of access to the much-needed finance and poor infrastructure, economic growth can only be a mirage; BENJAMIN UMUTEME.

SMEs are critical to Nigeria’s economic development. According to the National Bureau of Statistics (NBS), SMEs in Nigeria contributed about 48 per cent – on average – to the national GDP in the last five years.

Totalling about 17.4 million, SMEs account for about 50 per cent of industrial jobs and nearly 90 per cent of activities in the manufacturing sector, in terms of number of enterprises. Despite the significant contribution of SMEs to the Nigerian economy, there are challenges that still hinder the growth and development of the sector. These challenges include lack of skilled manpower, multiplicity of taxes, and high cost of doing business.

The PwC 2020 MSMEs report

Small Businesses in Nigeria have listed obtaining finance, finding customers and infrastructure deficits as the most pressing problems impacting their operations.

These challenges are some of the findings from the recent survey conducted by Price Waterhouse Coppers (PwC) Nigeria on Micro, Small and Medium scale enterprises (MSMEs) in Nigeria.

The report titled PwC’s MSME Survey 2020- Building to last is the first in a series of surveys that provide insights into a range of issues concerning MSMEs in Nigeria, and the challenges impacting business growth, particularly financing, taxation among other issues – through the eyes of their chief executive officers.

According to the report, the lack of access to finance and Infrastructure deficits were identified as the most pressing challenges for SMEs. The survey showed that 21 per cent identified electricity as the biggest cost to SMEs daily business operations. This was followed by Rent 17 per cent and Cost of Capital and Employee stood at 15 per cent and 14 per cent, respectively.

The survey also found that the foremost economic issue affecting small businesses is the pressure to reduce prices which was 22 per cent. This is followed by rising inflation at 19 per cent and low demand for products/services 16 per cent. The report indicated that the economic recovery in Nigeria has been tepid, adding that despite positive economic growth in the last three years, Nigeria’s GDP trajectory still falls short of the projections set in the Economic Recovery and Growth Plan (ERGP) of 4.5 per cent and seven per cent for 2019 and 2020, respectively.

Partner and lead, Private Wealth Services, PwC Nigeria, Esiri Agbeyi, noted that access to finance, in particular credit “is a critical enabler for the growth and development of small and medium enterprises.”

He said, “The SME credit market, however, is notoriously characterised by market failures and imperfections. We estimate the financing gap for Nigerian MSMEs to be about N617.3 billion annually (pre-Covid-19 pandemic). More so, based on our analysis of data from the CBN annual statistical bulletin, small businesses accounted for less than 1% of total commercial banking credit in 2018.

“We also see that Electricity accounts for the biggest costs to daily operations of MSMEs. Nigeria’s power sector is overwhelmed by a myriad of challenges that have culminated in inadequate electricity supply. This has an adverse impact on the business environment in Nigeria; consequently, contributing to significant economic costs to SME and economic growth; the International Monetary Fund (IMF) stated that lack of access to reliable electricity costs the Nigerian economy an estimated $29 billion a year.”

Similarly, the country senior partner, PwC Nigeria, Uyi Akpata, noted that, “Our MSME Survey 2020 is aimed at gauging experiences of sector players, assessing the underlying issues which MSMEs face and providing insights on this strategically important sector.” 

Covid-19 lockdown

The Covid-19 pandemic in Nigeria is part of the worldwide pandemic of coronavirus disease 2019 caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2).  The first confirmed case in Nigeria was announced on 27 February 2020, when an Italian citizen in Lagos tested positive for the virus. On 9 March 2020, a second case of the virus was reported in Ewekoro, Ogun state, a Nigerian citizen who had contact with the Italian citizen.

And since then the numbers continue to rise and as at Tuesday, the National Center for Disease Control (NCDC) put the figure at over 21,371 with 7,338 recoveries and 533 fatalities. In a bid to curb the spread, the federal government placed a ban on interstate travels amongst other measures to contain the spread of the disease.

The lockdown has led the economy on its knees as the informal sector which drives the economy is unable to function effectively thus leading to massive job loss across all sectors of the economy. Meanwhile, what is the implication of this on small businesses many of whom depend of daily pay to survive?

Consequently, it becomes difficult when SMEs that are supposed to be drivers of employment through its job creation outlets are made to fend for themselves in terms of providing their own power, water, security and, more importantly, get finding facilities at exorbitant rates.

Experts’ take

Infrastructure development is a key driver for progress and a critical enabler for productivity and sustainable economic growth. Good infrastructure contribute significantly to human development, poverty reduction and the attainment of the Sustainable Development Goals SDGs). Unfortunately, the lack of proper infrastructure has continued to make it difficult for the flow of business and life generally in Nigeria.

The poor infrastructure situation of the country ranging from perennial electricity shortages, housing problems, lack of good roads both inter and intra state, water and sanitation infrastructure has made the country unlivable. This also plays out in inefficiencies in transport logistics such as roads, ports and rail transport are major hindrances to economic development of the country.

The World Bank estimates that $95 billion is needed annually to build the infrastructure in Africa. Nigeria has one of the greatest infrastructure needs on the continent, particularly due to its size and population. Her rising population is a huge strain on its failing infrastructure. It is important to note that without infrastructure, enterprise and movement cannot happen.

On the other hand, access to finance (credit) continues to pose a huge challenge to development and growth of SMEs as many budding business continue to face the difficulty of secure loans at single digits and without the bottlenecks that make it almost impossible to get their request approved by deposit money bank (DMBs).

The director, Praxis Centre and Co-convener Take Back Nigeria Movement, Jaye Gaskia, told Blueprint Weekend that the lack of a national development planning framework, combined with the absence of a regulatory framework, has been a major drawback to development of the country’s infrastructure.

“The challenges of the absence of critical infrastructure continue to impact negatively on the cost of doing business, investment, and capital inflow into the country. It is estimated that Nigeria needs $100 billion over the next six years to provide quality infrastructure in the country,” he said.

For former president of the African Finance Corporation (AFC), Mr. Andrew Alli, there is the need for the federal government to create the right environment to be able to attract private capital for infrastructure financing.

Arguing that funding alone is not the problem of infrastructure financing, Alli said other challenges that need to be addressed include bad procurement processes, structural problems that make it difficult for investors to get value for money, funding structure, maintenance, tolling. He also frowned on inadequate attention which Nigeria pays to meeting the needs of specific investors and projects already in progress, or on creating policy incentives that will spur investments.

In his contribution, the managing director, SEL Capital, Segun Opaleye, said as the engine block of the economy in job creation, stimulating growth and development of the economy, easy access to credit by SMEs must be promoted and guaranteed. According to him, about 80 per cent of SMEs are stifled because of poor financing. He said the problem of financing SMEs is not so much the sources of funds but its accessibility.

“Stringent conditions set by financial institutions, lack of adequate collateral and credit information and cost of accessing funds which stems from the uneconomic deployment of available resources are to blame,” he said.

In the past couple of years, the narrative seems to be changing with the introduction policies by past and present governments through the Central Bank of Nigeria and the Development Bank of Nigeria to make lending to small businesses more accessible.

Whether or not these are enough to address the twin challenge, only time will tell.

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