A Sweeping Look At Nigeria’s MSME Space

Nigeria’s entrepreneurial spirit is alive, and hard to miss.

It’s on the raucous streets of Lagos, where caterers sell their food from makeshifts sheds, in the midst of moving commercial buses, sweaty hawkers, and high-rise buildings.

It’s in the tanneries of Kano, where world-class leather starts its journey to thousand dollar valuation. It’s on show at the auto spare parts shops of Nnewi, where intense negotiations happen between vendors and clients over the price of car engines and spark plugs.

Small businesses are an integral part of Nigeria’s economy, as they are elsewhere in the world. Their energy and verve results in more than just interesting sights and constant noise; they contribute as much as 48% of Nigeria’s Gross Domestic Product. Without them, the country would have only half the wealth it makes annually.

The MSMEs are a huge constituency, numbering over 37 million. That’s according to a 2013 survey conducted by the Small and Medium Enterprises Development Agency (SMEDAN) and the National Bureau of Statistics (NBS). They also account for 50% of our industrial jobs and almost 90% of businesses in the manufacturing sector.

If there’s anything to learn from these figures, it’s the fact that the “small guys” aren’t an insignificant portion of the economy. Taken together, they matter just as much as the billion-dollar conglomerates and have a bigger impact on the lives of people than the large companies (at least in direct terms). Theirs is the domain where the ‘trickle-down effects’ of economic policy touches ‘the masses’.

For all the strength and potential that exists in the SME space, it’s also the most difficult part of the commercial landscape to thrive in.

The Travails of a Million Bosses 

A widely quoted statistic suggests that about 80% of small businesses fail within five years of starting up. This isn’t merely a Nigerian problem. But it’s the reasons for the high business mortality rate that make this figure especially concerning.

First, there’s the enormous infrastructure gap that plagues the country. Constant power outages mean that businesses have to spend billions on alternative power sources. Poor road networks result in higher product transport costs and prices, and the loss of tons of perishable produce. Storage facilities are few and far between, so a lot of farm output can’t be preserved.

Funding problems have also bitten many SMEs hard. Joseph Nnanna, Chief Economist at the Development Bank of Nigeria, recently said that only about 31% of small businesses obtain loans from commercial and microfinance banks. Others have been more specific in making this point, and have mentioned prohibitively high interest rates and other difficult demands made by formal lenders as obstacles that stifle the growth of SMEs.   

Financial institutions typically counter these claims by noting the high risks involved with starting and running businesses in Nigeria. They say that the high interest rates they charge simply reflect the degree of risk involved with the segment as a whole. In other words, too many loans go bad, and they have to make up for the losses with gains on other high-interest loans. Even this is a signal of how difficult it can be to sustain a business and make it profitable enough to repay the loans it takes out. 

Companies also face a longer-term challenge: plotting leadership transitions. Most enterprises in Nigeria don’t outlive their founders. The ones that do eventually get run into the ground in the heat of succession tussles. A KPMG report from 2017 says that while most of the Nigerian businesses it surveyed agreed that they should have a succession plan, only 20% of them actually had one.

These mixes of short and long term issues, as well as the dearth of important information and skills, have combined to restrict the growth and progress of SMEs.

Help SMEs Can Use

Some help is available for entrepreneurs and the establishments they run. Government bodies and private initiatives are working to plug funding and information gaps, and are providing small businesses with the skills and equipment they need to scale and thrive.

Examples of these include the Bank of Industry (BOI), which grants loans to SMEs in the manufacturing, ICT, and creative industries; the Nigerian Export and Import Bank (NEXIM), which helps fund the export activities of local merchants; and the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), which trains entrepreneurs and assists them with financial, operations and other vital information.

Another institution, the Development Bank of Nigeria, recently announced a ₦500 billion loan facility for small businesses. And the Corporate Affairs Commission (CAC) has slashed its business name registration fee by 50%, a discount which will be accessible until August 13.

Some private institutions and NGOs are helping out as well. Organizations like GroFin, AYEEN (Africa’s Young Entrepreneurs), and the Tony Elumelu Foundation are providing funding to entrepreneurs; others, like She Leads Africa (SLA), the Cherie Blair Foundation, FATE foundation, and the many startup incubators springing up in the country, are building the capacity of small businesses to operate in their industries.

There’s more left to be done. Power supply needs to be fixed, insecurity has to be tackled, and more small-time enterprises ought to know about the opportunities and assistance that’s available to them. Transportation networks will have to be expanded and modernized, and the educational system (which churns out Nigeria’s skilled workforce) should be reformed to cater to today’s tech-driven, fast-changing world.

In the end, it’ll rest on the shoulders of Nigeria’s resilient entrepreneurs to leverage these positive changes (if or when they happen) and fashion a commercial space that’ll carry the country into a more prosperous future.

Source: KPMG Africa

Featured image source: Footprint to Africa

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ikenna-nwachukwu

Ikenna Nwachukwu holds a bachelor's degree in Economics from the University of Nigeria, Nsukka. He loves to look at the world through multiple lenses- economic, political, religious and philosophical- and to write about what he observes in a witty, yet reflective style.

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