SMEs as key driver to economic growth in an emerging market

Despite the harsh economic condition Nigeria is faced with, recent trends have shown that there are opportunities for growth of Small and Medium-sized Enterprises in Nigeria. As reported by the National Bureau of Statistics, the gross domestic product in first quarter of 2019 grew by 2.01 per cent, with majority of this growth being associated with the non-oil sector, which is a positive sign and indicative of Nigeria’s possible diversification and less reliance on the oil sector to drive her economy.

The International Monetary Fund forecasts that Gross will increase by 2.1 per cent in 2019, which would make Nigeria one of Africa’s slowest-growing economies and means that growth is negative in per capita terms. But inflation is at 11.4 per cent and has been above the Central Bank of Nigeria’s target of six per cent to nine per cent for almost four years. How then can Nigeria survive the next four years of uncertainties in revenue generation, debt recovery rate, a further devaluation of the naira, low foreign direct investment flows into the country in 2018, expected high fuel prices and insecurity? A recent report from Trading Economics shows that Nigeria’s all-time low of FDI inflow for 2018 Q4 was $314m. Nigeria’s population median age is 18 years that is made up of young, vibrant, skilled, and unskilled youths. With this youthful population and despite the tough economic conditions, I firmly believe that youth engagement through the SME approach can drive economic growth.

One of the key drivers to economic development in an emerging economy has been the successful engagement of SMEs, while the growth of economic development has been an essential goal for many developing nations. I wonder sometimes how a country with 23 per cent unemployment rate and 11.4 per cent inflation rate plans to gets her citizen out of poverty, which currently stands at 33.1 per cent, if not by empowering the populace that are living below the ‘poverty line’ (living on less than one dollar a day). The more people we have actively engaged, the better we are as a nation and with poverty alleviation.

The contribution of SMEs has been accepted as one of the primary supports for economic growth because of its ability to enhance economic output and improve human welfare. With so many challenges faced with SMEs in Nigeria today, low FDI inflows in 2018 is another critical indicator showing why tech firms like Google would establish an artificial intelligence laboratory in Ghana and not in Nigeria, despite current economic indicators that the Nigerian economy is stronger than Ghana’s? Before technological investment is made in any economy, the investing party measures the opportunity for growth, existing infrastructure and innovation. Such parameters have side-lined Nigeria for several years. FDI inflow in Nigeria for Q1 2019 was recorded at $1.1bn (Trading Economics report). Though many argue that FDI in Nigeria is usually low after a general election. The point remains that investors must see basic amenities, essentially stability and security, on the ground before going into any nation.

Jeff Dean, the leading AI software engineer at Google, stated that Ghana is the ‘Future of Africa’ and it had to do with the robust network of academic institutions and infrastructure in place, significant factors for establishing an AI lab in Accra. Aside the ‘not-too-deliberate approach’ from the government, inadequate private-public partnerships and collaborations among government agencies, SMEs in Nigeria also lack access to relatively cheap and effective sources of funding, which hinders their growth and contribution to economic growth. Agencies like Small and Medium Enterprises Development Agency of Nigeria can emulate Malaysia National SME Development Council, which demonstrated a positive impact on the country’s economy since it was established in 2004. In 2015, the contribution of SMEs to the Malaysian economy was measured in terms of their share of the total number of businesses (97.3 per cent) and share of the total number of jobs created at 59 per cent (Department of Statistics Malaysia).

IFC and World Bank’s support for SMEs
Without a doubt, government policies are one of the essential drivers for SMEs developments in any nation. Two decades ago, global financial institutions and economic organisations like World Bank and International Finance Corporation emphasised the significance of SMEs, especially in developing regions like Nigeria, these bodies had consistently sought the support of the government to implement policies for sustainable growth in human capital, financial inclusion and technological advancement.

According to the World Bank Group, “The country partnership strategy period (FY2014-FY2019) has an investment of $8.8 billion through the International Development Association and International Bank for Reconstruction and Development. Nigeria has been one of the International Finance Corporation’s fastest growing portfolios and represents IFC’s fifth largest country exposure, with a committed volume of $1.8 billion. Their support for Nigeria is structured around several priorities, which include promoting diversified growth and job creation with a focus on youth, women and the poor in marginalised areas; while improving social and financial inclusion.

It was estimated that most developing economies have a high potential in ensuring diversification, inclusiveness and expansion of industrial production as well as the fulfilment of the fundamental objectives of development. As reported by the World Bank Group, the country partnership period (FY2014 – FY2019) for Nigeria is expected to have achieved:

1. Sixteen per cent increase in power generation capacity with eight per cent increase in transmission capacity,
2. Improved access of small farmers to inputs and technology and improvement in their average income,
3. Improved road access for two million people in rural areas,
4. Additional two million micro-entrepreneurs provided with financial services, and
5. Additional 100,000 loans provided to SMEs.

World Bank has estimated the growth rate for Nigeria’s economy in 2019 at 2.1 per cent with job creation to rise by 10 per cent quarter-on-quarter, if local or raw materials and resources are well utilised. SMEs depend on raw materials and innovative technologies to achieve their goal of self- reliance. For example, provision of starch as a raw material can provide jobs at three different levels:starch for consumption, starch for clothing, starch for pharmaceuticals. In this ecosystem, the raw material provider and the user create more jobs and keep the SME ecosystem sustainable.

Role of government
Governments at various levels have in one way or another focused on the performance of SMEs for economic gains. While governments in some developed economies like the United States and China had formulated policies aimed at improving and empowering the growth and development of the SMEs. In China, State-Owned Enterprises were transformed into small and medium non-SOEs, which provided an opportunity for more SMEs to be established in China. This approach of non-SOE promotion policy led to the development of more SMEs, which contributed to China’s economic growth. They make up over 99 per cent of all enterprises in China today, while the output value of SMEs accounts for at least 60 per cent of the GDP and generates more than 82 per cent of employment opportunities in China (China Statistical Yearbook).

However, other governments focus on assisting SMEs to grow through soft loans and other fiscal incentives to promote the socio-economic development like poverty alleviation, youth unemployment, human capital development, and improved social welfare. For example, in China, the World Bank offered support through enhancing access to finance for underserved Micro, Small and Medium Enterprises with $100m in IBRD financing, including lending and technical assistance. Before the project began, about 20,000 micro and small loans were disbursed to MSME clients in 40 branches per year; but by the project’s completion at the end of 2010, more than 60,000 loans were issued in a year – tripling the supply of credit to small businesses. Over three years, $2.3bn in MSME loans were distributed through recipient Chinese financial institutions.

The bigger problem
Nigeria’s population, according to the United Nations, stands at approximately 200 million, with a median age of 18, which implies the Nigeria youth represents 42.54 per cent of the total population. According to Trading Economics, the unemployment rate in the last 10 years has continuously grown by four per cent and was 23.1 per cent as at the previous report generated in Q3 of 2018.

Also noteworthy is that approximately500,000 youths graduate yearly, with 47 per cent of these graduates’ unemployable (JobbermanReports). The government is consistently finding it challenging to match the skills of these graduates with the available jobs in the market that, in turn, puts more pressure on the nation’s dependency rate of 88.2 per cent (Trading Economics).

One may suggest that to address this employability gap and high dependency rate is to engage our technical schools actively and also revisit the curriculum of our institutions.

Many have argued on the suitability of the faculties responsible for transferring knowledge to the students in today’s VUCA (volatility, uncertainty, complexity and ambiguity) world.

Not so much about the technical understanding of it, but more on the practicality of the same knowledge outside the walls of the classrooms. Sadly, these institutions are not enough and ill-equipped. While government has only been able to establish 156 approved technical schools (NBTE Reports) across the 36 states with an average of four technical schools per state, these statistics show that the technical schools available can’t match the current population of Nigerian graduates (500,000/year). How then can we engage unskilled labourers when providing jobs for graduates is still a major challenge? Can the government establish more technical schools to accommodate the skilled and unskilled? That’s a discussion for another day.

The World Bank has estimated annual growth of 2.6 per cent of the Nigerian population, while the unemployment rate was recorded to be at 23.1 per cent in Q4, 2018. Trading Economics predicted that there will be four per cent Year-On-Year in unemployment in Nigeria. The mathematics is simple; if all variables remain constant, the four per cent YOY increase in six years would have resulted in an unemployment rate of 29.02 per cent. This scenario would lead to an increase in crime rate, political instability, exploitation of labour, increase in poverty and social problems.

However, one of the quickest solutions to this futuristic problem of unemployment is to integrate SME skills programme as a curriculum in our early years of schooling, build more technical schools to reduce dependency rate, improve on existing infrastructure (good road, rail network and electricity), encourage more public-private partnerships and introduce policies that guides SMEs to excel. The Nigerian government, through her many agencies like the Nigerian Investment Promotion Commission, Federal Inland Revenue Service and SMEDAN can enhance engagement with the MSMEs, and create central policies where SMEs are allowed to showcase their products/services and sell to the world while ensuring adherence to international standards.

It is quite important to note that the financial sector also plays a significant role in the sustainability of SMEs, as they are a major player in providing loans to SMEs. Just as reported by Techpoint, Oyapay, a fintech start-up, shut down due to a case of a family investment gone awry. This approach shows that start-ups dependence on family members for equity is not a sustainable model.

Technological innovation
Despite globalisation, an important section of developing countries’ SMEs does business the conventional way. This results in low productivity, low-quality products and exploring a small local market. It is noted that, generally, SMEs tend to have low productivity and as a result are weak in the face of competition. This is the result of using conventional technology and not having the maximum utility of machinery. Due to the limitation of funding and innovation, it may not be possible for them to improve their processes. However, policies can be implemented to guide SMEs on adopting the use of technology.

Poor infrastructure is a major frustration for SMEs trying to get on with their jobs; be its poor quality broadband. It is stopping a small business from operating more online or rural firms finding it harder to move around because of poor roads and public transport. Poor and deteriorating infrastructure can severely damage business growth and viability; hence the lack of such amenities has led to extremely high cost of doing businesses in Nigeria. Other factors like cost of sourcing raw materials, transportation, internet services and finished products all add up, often leading to the poor service delivery to customers just for the business to keep afloat and possibly break even. Thus, adequate and basic infrastructure can act as a catalyst for economic growth beyond the usual ease it provides. A good example is the establishment of the IPP project launched at Sura Shopping Complex, Simpson Road in Lagos Island. The project handled by Rural Electrification Authority under the Office of the Vice President of Nigeria was basic and focused on providing regular and reliable power supply to the over 1,000 shops and offices within the complex.

Upon the commencement of this project, it was observed that beyond the power supply, more jobs were created due to an uninterrupted power supply at the complex. The offices and business owners could almost immediately afford to employ more hands and do shifts (including night) for more production. Initiatives like this would further encourage SMEs and improve our ease of doing business index.

Workable models to fund SMEs
One viable model I have seen is the way some of the microfinance institutions dispense loan. The group-lending model requires individuals to form a group of five and receive five days financial training to obtain a loan from the lending institution. The emphasis from the very outset is to strengthen the SMEs organisationally and to build their capacity to plan and implement micro-level development decisions (Grameen Group Lending Model).

Government can adopt this approach and provide loan to a group of different clusters of SMEs based on their demographics, business type, location and the raw materials required to run the businesses. Other lending models can then be adopted here. Many would say such initiatives will not be successful in Nigeria going by the previous experience of bad debts, unaccountability, lack of adequate records, and poor or lack of identity management systems. My assumption is the same. However, one begs to wonder if the community lending initiative could make a difference, which allows one to be responsible for another? For instance, I can only qualify for loans if my fellow community members are faithful in the commitment to repayment. Then there is bound to be an exponential growth in the SME sector when each member depends on another to grow. Currently, for some of the micro-finance companies, these clusters can only qualify for a bigger loan after repayment.

In my days in the Fast-Moving Consumer Goods sector, working at the production line, a bonus is received when targets are met as a group and not as individuals. As the goals are met as a group, this qualifies the group to be engaged with a bigger task as they continue to grow as a unit. Is this method applicable to the SMEs? The TraderMoni initiative, for example, is focused on providing loans for petty traders that are unbanked but require access to funds to run their small businesses. Corporate finance houses might not be able to capture these sets of the population due to their locations, lack of interest to own a bank account or the knowledge gap on why being financially included is vital to them. TraderMoni can advance to the next stage on requirements where traders would only qualify for their next loan when they have successfully registered a bank account to their name through Unstructured Supplementary Service Data service. Would such an initiative improve financial inclusion? I believe so.

Government agencies like SMEDAN are responsible for initiating and articulating policy ideas for SMEs growth and development. If they further enrich their database, FDI inflows may grow based on credible and available data showing the opportunity for growth.

Government’s form of supporting SMEs doesn’t necessarily have to be financial all the time; as government can even lease equipment to a group of farmers in a community for five years. This support would promote the effective use of the equipment and drive more farmers to make the best use of the time allotted to them.

Nigeria Incentive-Based Risk Sharing System, a CBN initiative founded in 2013, currently executes the equipment-as-a-service model for farmers in rural areas. The major advantage with this initiative is that every member of such group depends on another to ensure the funds being received are judiciously used, while profit is channelled back into the business.

SMEs in Nigeria
In Nigeria, the importance of SMEs in the process of social and economic development cannot be neglected. It was summarised in Nigeria’s third National Development Plan (1975-1980) as the generation of employment opportunities, stimulation of indigenous entrepreneurship, facilitation of effective mobilisation of local resources, including capital and skill, as well as reduction in regional disparities. Despite the slow growth of SMEs, their impact had been felt as far back as 1975.

The Small Business and Entrepreneurship Council statistics revealed that 99.7 per cent of businesses in the United States are SMEs. However, there are several barriers that the U.S. SME sector still faces, especially in commodities. The significant barriers to trading include insufficient access to finance, high transportation costs, tax laws, profitability, developing new products, language and cultural differences. Gaps like these signify that no SME ecosystem is perfect, and they are required to keep evolving with time as new challenges arise. Despite the challenges in the SMEs market in the US, the sectors still contribute 47 per cent of total employment.

In developing economies like India, the contribution of the SME sector to manufacturing output, employment and exports of the country is quite significant. The SME sector of India accounts for 45 per cent of the manufacturing output and 40 per cent of total exports. India’s SME sector employs around 42 million people in over 13 million units throughout the country (Department of Commerce, Govt. of India).

It is evident from this article that contribution of SMEs is considerably high in economic development, whether in a developed or developing country. Not only financially subsidised promotion is essential, but the strategic implementation becomes vital for sustainable development of the SME sector. Strategic implementation takes care of financial aspects, human resource, marketing, research and development, technology and corporate governance in the SME sector.

SMEs in developed nations not only rely on credit availability but technological innovation and infrastructural policies. Hence, it is critical for policymakers to create an enabling and sustainable environment as bedrock for SMEs to flourish. Great to recall the words of Richard Branson, “A business starts small.”

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