Posted by News Express | 22 September 2019 | 651 times
Small and Medium Enterprises (SMEs) are the engines of growth in all economies of the world, both developed and developing. However, they operate in a harsh environment in Nigeria, leading to many of them dying before they reach their potential. In this piece culled from today's edition of Sunday Independent, BAMIDELE OGUNWUSI, IKECHI NZEAKO and ANDREW UTULU, take a look at the challenges and recommend some survival strategies for SMEs in the country.
Nigeria’s economic developments remain sluggish, declining in an environment that does not encourage entrepreneurs, who are globally proven as engines of economic growth.
According to statistics, three out of four micro, small and medium enterprises die within one year of establishment and nine out of ten prospective entrepreneurs are discouraged from establishing their dream industries, because of the difficult environment.
Many state-owned enterprises have been privatised because they have become insolvent and many multinational corporations were leaving the country.
A myriad of challenges plague the business environment in Nigeria. These include the absence of or decaying infrastructure, weak government commitment and inadequate incentives, poor personal traits and destructive personal attributes of entrepreneurs, underdeveloped human resources and poor manpower management and politico-social factors.
Together, these and other challenges militate against the establishment, survival and growth of enterprises.
Entrepreneurs are the change agents in the economy. By serving new markets or creating new ways of doing things, they move the economy forward.
MSMEs have reputation for innovation, but have difficulties attracting capital because they are seen as a high-risk sector. Hence, government fostering of MSMEs is needful.
Enterprises are mainly responsible for the German economic miracle after World War II to recover to a position these days as the third most powerful economy in the world.
Also, using enterprises, the Asian Tigers have become strong economic powers.
Nigeria has a place where entrepreneurs struggle to survive and her economy has declined generally.
No light, no water, no roads, no security, no education, no health. Its human potential has been neglected and its natural resources put to waste. A phenomenon of constant insecurity and overbearing uncertainty has become characteristic of its national existence. Consequently, Nigerians are confused, burdened by hyphenation.
Entrepreneurs are no exceptions, because enterprises are hard hit in the prevailing situation in Nigeria. Although, the population is growing at 2.83%, the population of people in the manufacturing sector grew at 2.09% per annum between 2001 and 2005.
The percentage economic contribution by manufacturing industries remained abysmally low at between 1.78 and 1.9%.
The average economic productivity profile of manufacturing industries dwindled from very low 0.75 million Naira in 2002 to even much worse 0.35 million Naira in 2005.
The worsening energy problem is forcing many large enterprises or multinational corporations out of Nigeria. Michelin divested from the country as a result of harsh operating environment. Many more companies, including Unilever, PZ and Guinness have divested and relocated to Ghana
Infrastructure facilities are not improving, but keep decaying, with attendant negative impacts on entrepreneurial development and well-being of the people.
The length of roads increased marginally and remained stagnant till, despite significant increases in the number of vehicles registered per year.
The length of railway lines remained almost stagnant and most of the goods in the country are moved by roads, thus reducing the lifespan of the roads. The number of locomotives has not increased significantly over the years.
Challenges SMEs Face In Nigeria
Large manufacturing businesses are becoming increasingly reliant on automation to run their day-to-day operations.
This allows them to run more efficiently and at a lower cost. For small businesses, investing in that same type of equipment isn’t always possible or as cost effective, putting them at a disadvantage in terms of both price and quality, unless they’re able to find affordable financing options or simply focus on positioning their business differently in the marketplace.
There are also constant updates in the world of manufacturing technology. And updating those systems constantly isn’t always possible for small businesses to do as often as large ones. Most of the machinery needed for quality output are too costly for most small scale industries to acquire. This has slowed down output and increased unemployment.
Most small business owners in Nigeria do not have the time to study the ins and outs of marketing. What with the many things they have to juggle, there is little time for them to learn these skills. Nevertheless, getting the word out about what you do is essential for every business.
Depending on what stage you are in your business , you could just be thinking about making your own product or you might have started producing and want to expand your operations.
Whatever the case is, you will need some money to kick start and continue your operations.
Unfortunately, money is not readily available for manufacturers in this region. When finances do become available through bank loans, the interest rates are very high (25% t0 40%). At such rates, a good amount of the profit made by manufacturers is used to pay debts to the banks.
When running a business, you want to do two things – maximise your profit by increasing your revenue and minimising your costs. It’s that simple. The same goes for running a factory, a plant or a small-scale operation in your home.
To achieve this, a factory has to operate efficiently – maximise its production output and minimise the energy used for production.
This is an issue with a lot of manufacturers in Africa – they do not utilise practices that make them operate efficiently. Processes such as production forecasting, inventory management, and continuous process improvements are some of the practices that are not employed in Nigeria and other African countries.
I can’t talk about the issues facing all businesses in this region without talking about infrastructure challenges. The main issue that hinders manufacturers is the access to uninterrupted power supply.
The use of alternative power such as diesel generators in Nigeria and Ghana increases the cost of production by a magnitude, which discourages manufacturers. Other infrastructural issues include bad roads, poor storage facilities. These all extend the time it takes for a manufactured product to get into the hands of the consumer
Manufacturers that do not have well-established distribution channels usually have difficulty selling their products.
The retailers in Nigeria will sometimes demand that manufacturers or wholesalers pay them ahead of time to stock their goods at its retail outlet. This can be very discouraging to the SMEs that are just starting their business and do not have the proper distribution channel to get the product to market.
Lastly, and this ranks high as one of the main issues for local manufacturers , the fact that people perceive locally-made products as inferior to imported ones. If the people that are supposed to be buying the goods do not see the product as valuable, then it will be hard convincing them to buy it. I see this as a marketing and branding issue – a lot of awareness has to be created so that products of the same quality are seen to be as valuable as their imported counterparts. Some strides have been made to improve the perception of locally made goods with the recent buy made in Nigeria campaign. However, there is still some way to go to make Nigerian-made goods competitive in the global market.
The Managing Director and Chief Executive Officer at Crystal Paints, Nkechi Ifedigbonma, while enumerating how some SMEs survived in the country laid it on the doorstep of determination when she said that the determination to succeed has been the ground root to the success of SMEs in the country.
She said that Crystal Paint offers the highest quality interior paint, exterior paint, and real estate coatings. As a leading paint and coatings brand, Crystal Paints also offers cutting edge color tools and systems services.
“Crystal paints is treated professionally at our production room to enable it stand the test of Mother Nature when it hits them.
The product is known for its wide spreading rate, excellent durability, low odour, Superior hiding power, and quick drying. When it comes to paint, we never say can’t, instead we ask ourselves what more our paint can do”, Ifedigbonma added.
While striving to be the best in the industry, she said that their mission is to provide unequalled services and ensure customer satisfaction by providing goods and services that meet the needs of their customers.
Capital is crucial in driving sustainable Small and Medium Enterprises’ (SMEs’) growth but access to it remains a daunting task for many operators.
Segun Opaleye, Managing Director/CEO, Still Earth Capital Finance Limited (SEL Capital), speaks on the company’s research report detailing the state of the SMEs sector and what should be done to bridge funding gaps and other challenges facing it.
The report highlights different funding options for SMEs and what operators, banks and government should do to unlock potentials in the sector.
The economies of great nations thrive on the strength and capabilities of their Small and Medium Enterprises (SMEs). They are also seen as the engine block of the economy-supporting job and wealth creation for the citizenry. For SMEs to achieve these goals of creating jobs; stimulating growth and development of the economy, operators’ easy access to credit must be promoted and guaranteed.
In Asia, Europe and North America, SMEs play significant roles in their emergence as global economic powers.
The same cannot be said of Nigeria as SMEs have performed below expectations because of lack of access to finance as it is hard to raise external finance and the few shareholders makes raising internal finance difficulty. Other challenges include poor infrastructure, access to markets and inconsistency of government policies amongst other challenges.
To reverse this trend and put Nigeria’s SMEs on sound footing, Still Earth Capital Finance Limited (SEL Capital) released its research report entitled: Stimulating SMEs for Growth.
SEL Capital is a multi-faceted financial services company offering tailored financial services and solutions to individuals, companies and the public sector.
It provides a diversified range of financial services including corporate finance advisory, project finance, structured finance SMEs support services, wealth management and agency services.
Segun Opaleye, the Managing Director, SEL Capital, said the report was the company’s way of helping SMEs overcome the challenges facing their operations through insights to support operators’ decision-making process and government & regulatory agencies in their roles in making SMEs the bedrock of the economy.
Opaleye said SMEs vary from country to country, they are defined by the role they play in the economy as well as policies and programmes designed by agencies or institutions to guide their operations. Though, there are characteristics peculiar to them; SMEs are mostly unquoted, with restricted ownership to few individuals and they are not micro-businesses that exist to employ just owner.
He said that to fund their operations, SMEs initially turn to internal and external sources of finance. Internal sources include personal savings, borrowings from family and friends and credit from local cooperative societies but as business expands, they require greater pool of funds than is made available by these sources to meet business financing needs.
The external sources of finance provide wider access to large pools of funds, which are required for SMEs to exploit growth and investment opportunities.
He said SMEs can expand operations by identifying and utilising business opportunities with better access to finance structured specifically to cater to identified needs. Such funding, he added, will come from financial institutions such as finance companies, commercial banks, development finance institutions, government grants and funds and venture capital funds.
According to the SEL Capital report, a large percentage of SMEs in high income countries operate in the formal sector and contribute over 50 per cent to Gross Domestic Product (GDP). They also account for more than 90 per cent of all firms outside the white-collar jobs sector thereby constituting a major source of employment.
Overview of the SME Sector In Nigeria
The report explained that most recent Micro Small and Medium (MSMEs) survey conducted by the Small and Medium Enterprises Development Agency (SMEDAN), showed that the number of SMEs increased by over 100 per cent between 2010 and 2013 from 17.2 million in 2010 to 37 million and contributed about 48.5 per cent to GDP in 2013.
The MSMEs’ contribution to exportation also accounted for 7.27 per cent of total exports.
The SMEs also account for the employment of about 60 million people and have become the most important vehicle of employment generation, entrepreneurial training and development in the country but they face daunting challenges.
Hurdles before SMEs
The report said about 80 per cent of SMEs is stifled because of poor financing. It 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,” it said.
Operators, it said, also have difficulty in registering companies even as constricted regulatory framework creates a hostile environment to successfully conduct business activities in the country. “Issues around corruption, bureaucratic bottlenecks and high charges/tariffs are some of the factors contributing to the difficulty of conducting business for SMEs in Nigeria,” the report said.
It added that poor record keeping, technical problems/competence and lack of essential and required expertise in production, procurement, maintenance, marketing and finances have always led to funds misapplication, wrong and costly decision making for SME business owners.
The report said that SMEs are burdened with enormous multiple taxes and tax related issues which affect profitability. “SMEs are also taxed with multiple levies from various government agencies and parastatals which affect business activities negatively,” it said.
The SMEs also face inadequate infrastructure, which ranges from shortage of water supply, inadequate transport systems and poor electricity supply to improper solid waste management.
“This infrastructure inadequacies lead to high operating costs for SMEs which often contend with high costs of imported materials and poor access to raw materials in local markets,” it added.
Also, policies directed towards SMEs are often un-comprehensive and lack coordination/linkages with other established programmes and policies. As a result, these programmes/policies do not have the desired effect on SMEs. Lack of adequate data on SMEs also makes planning difficult and impedes confidence in the sector.
“Besides, volatility in the exchange rate, output and inflation often impact negatively on the business activities and operating capacities of SMEs. SMEs dependent on importation of raw materials often struggle with exchange rate fluctuations and inflation. Also, lack of access to modern technology and infrastructure to support this technology hinders the growth of SMEs in sectors which require technology to enhance productivity,” the report said.
The SEL Capital report explained that in the Organisation for Economic Co-operation and Development (OECD) region , United States of America, United Kingdom, Japan, Germany, France among others, SMEs account for 99 per cent of all firms; 70 per cent of jobs and generate between 50 to 60 per cent value added on average.
It said that the OECD countries use special policies to spur SME growth and innovation by providing business environments conducive to growth, adopting policies which encourage innovation and technology transfer, improving access to finance and supporting development of strategic resources particularly technology.
For instance, the United Kingdom set up the British Business Bank (BBB) in 2014 to improve access to finance for smaller UK businesses. The BBB works with partner companies including banks, leasing companies, and venture capital funds to lend and invest indirectly in SMEs. It has supported over 48,000 SMEs in the UK with about £3.1 billion.
In the BRICS comprising of Brazil, Russia, India, China and South Africa, SMEs represent about 90 per cent of total firms in the economies and create a buffer for high unemployment rates particularly in China and India where population is high.
The report said early policy making in BRICS economies has notably improved the performance of SMEs over the years particularly with establishment of specialised institutions like SEBRAE (Brazilian Micro and Small Business Support service). SMEs in India are estimated to be about 42.5 million employing about 109 million people, an estimated 40 per cent of the workforce.
The report showed that in transition economies, like the MINT economies (Mexico, Indonesia, Nigeria, and Turkey) SMEs have been recognised as playing a vital role in employment creation and poverty alleviation. SME businesses are the major source of income to low-income households. They account for about 85 to 90 per cent of employment and contribute about 50 per cent to GDP.
The SMEs account for employment of about 60 million people in Nigeria, about 84 per cent of the total work force but have remained largely informal without legal and financial protection. Survey carried out by SMEDAN in 2013 indicated that about 96 per cent of SMEs are not officially registered and 70 per cent do not have viable business plans while 65.2 per cent of SMEs do not have insurance cover.
Way Forward For SMEs
The SEL Capital report said that although, Nigeria is currently one of the best improvers on the Doing Business Index, more reforms are needed to improve the rating and create a more enabling environment for the growth and development of SMEs.
It said the improvements in the macroeconomic indicators – GDP, inflation and exchange rates – and stability of macroeconomic and regulatory policies will also significantly address some of the challenges facing SMEs.
Opaleye insists that deliberate intervention by government is required to improve economy perception at the global view and unlock the potentials in the SME sector.
On poor access to finance, he explained that to support the growth of SMEs, government and financial institutions needed to create measures supporting sales, cash flows and working capital as well as measures enhancing SMEs’ access to bank lending.
On innovation, Opaleye said the SME sector requires effective innovative schemes that can bring together small enterprises in various industries to exploit the immense national business opportunities.
“The government is also expected to actively encourage investments in the SME sector and growth of new business to generate employment and alleviate poverty. The sufficient information on new technology and innovations will ensure global competitiveness in terms of product quality and pricing and improve export earnings from SMEs,” he said.
On infrastructure development, he said: “It is important to create an enabling business environment where businesses can operate without limitations imposed by stifling conditions. Investment in the development of infrastructure, particularly implementation of the power sector reform policies is also critical in improving the ease of doing business and improving productivity of SMEs”.
Opaleye urged government to carry out institutional reforms by championing the creation of support systems targeted directly to offer support to SMEs. Existing institutions should be realigned to effectively utilize their service offerings to SMEs.
On capacity development, he said SMEs require capacity building in areas of technical and management skill development to effectively run the businesses. Initiatives to deepen entrepreneurship capabilities amongst business owners will improve the lifespan of the average Nigerian SME.
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