Appraising the Changing Landscape of SME Financing in Nigeria

By Eric Eghaghe

Small and Medium Enterprises (SMEs) are key to the development of most Country's economy globally. Over the years, they have been discovered to be a major catalyst in wealth creation and poverty alleviation; this economic sub-sector enhances living standards, adds substantially to local capital and helps a country achieve high level of productivity and capability. With this in mind, the vital roles of SMEs are not in doubt, which is why economists believe that smaller scale enterprises play very key role in employment generation and providing opportunities for entrepreneurial culture, training development and promotion of agricultural initiatives as well.

The valuable status of SMEs is sacrosanct. According to the United Nations Industrial Development Organization (UNIDO), SMEs account for over 90 per cent of enterprises in the world and are responsible for 50 to 60 per cent of employment. Up and coming nations like Nigeria have a lot to gain by helping the SME culture to take root and thrive. This is because the country can only develop better and survive economically under a thriving SME culture. Here in Nigeria, the National Bureau of Statistics (NBS) placed the total number of SMEs in the country at over 17 million.

Regrettably, Nigeria's dwindling economy is not helping most of the SME operators to optimize their potentials. Whereas, SMEs grow at almost twice the rate of GDP in most markets across Asia, Africa and Middle East, Nigeria's case is very different.

What are some of the key factors militating against the growth of a strong and buoyant SME sub-sector as the backbone of Nigeria's economy?

Managing Director/Chief Executive Officer of Heritage Bank, Mr. Ifie Sekibo, who was a guest Speaker at the 2nd US-Africa Trade & Investment Forum/Africa Investment & Development Awards which took place at St. Regis Hotel, New York, USA where he spoke authoritatively on "Small & Medium Enterprise Funding in Africa - a banker's experience", observed that In Sub-Saharan Africa, SMEs are more credit-constrained and this typically affects growth possibilities as significantly low number of start ups who apply for financing actually succeed. Studies, he noted, indicate that more than 70% of the SMEs lack access to medium-longer-term finance, creating an SME funding gap of more than $140 billion in Africa alone.

“Using Nigeria as a case study, between 2003 and 2009, SME loans as a percentage of total credit, decreased from 7.45% to 0.18%. Yet by 2012, Nigeria had about 17.6 million MSMEs employing about 32.4 million people. Although it is generally accepted that SMEs enhance competition and entrepreneurship, and their development has a positive impact on innovation and productivity growth, policy and infrastructure factors to mitigate risk and costs that SME sector cannot internalise needs to be seriously worked upon by all relevant stakeholders”

He further revealed that in Nigeria, most SMEs die within the first five years of existence while another smaller percentage goes into extinction between the sixth and tenth year, with only five to ten percent surviving, thriving and growing into established corporate status. He listed the leading cause of such sub-optimal output to include: Poor access to funds, Weak institutional support, Unstable macro economics, Complicated and Unstructured Legal framework/Regulation, Inadequate business information, Infrastructure & Business environment and Human capital factors, among others.

Having identified these mounting challenges, it is instructive to note a few ways in which banks have tried to intervene in building a formidable economy driven on the wheel of SMEs

One notable and unique approach is the Heritage Bank MSME Clinic. The Bank, as a way of cushioning the effect of capacity building and fund management, introduced the Micro Small and Medium Enterprises (MSME) Investment Protection Fund to assist the growth and rejuvenation of the sector.

Analysts say the Heritage Bank MSME Investment Protection Fund is a strong differentiating indicator of the Heritage Bank's Approach to SME growth in the country.

According to a Lagos-based investment banker, “the Heritage Bank MSME Clinic should be applauded as a unique holistic bailout strategy for SMEs in the country. It consists of services such as business diagnostics, advisory services, financial literacy and entrepreneurship development, customized product development for each customer and market knowledge development backed up by the bank's innovative MSME Investment Protection Fund (InPF), which is a non-collateralized funding option with embedded insurance for the default risk inherent in the scheme”.

He added that the package has huge potential to enhance MSME capacities and strengthen business management skills, in addition to offering other support programmes that could greatly achieve the aim of developing the SME sub-sector in the country.

Investigations show that apart from other areas of supports for various sub-sectors, the Bank also engages with customers at stages of expansion, modernization, production process & capacity improvement and restructurings through the carefully various products like term loan, lease financing facility, overdraft facility, LPO, invoice discounting, supply contract financing, distributorship financing scheme, group Leading to registered associations, MFIs/MFBs Whole-Leading, advisory & business support as well as market access and value chain services, among others.

The Heritage Bank approach needs to be copied by other bigger banks so as to speed up the country's avowed march towards deepening the SME culture and providing the much needed succor for the sub-sector.

Banks have been playing and will continue to play a key role in the financial systems worldwide. The development of a robust financial system is crucial for the strengthening of an enviable SME culture as pivot of economic growth and development. The banking sector is an important and dominant part of the financial system for many countries especially developing countries. Banks have the special nature of being financial intermediaries, channels for monetary policy and also concurrently extend credit and administer payments system, all in the bid to help SMEs develop. They are key actors in causing and averting financial and economic losses. However, their power to fuel economic growth and development will depend on the strength, reliability and stability of the system vis-à-vis commitment to SME funding. One cannot over-emphasis the need for a workable, sound and reliable banking system that places emphasis on SME financing.