Effect Of Sme In Nigeria Final 1

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EFFECT OF SME IN NIGERIA final 1

CHAPTER ONE

INTRODUCTION

 

1.1       BACKGROUND OF THE STUDY

Small and Medium Enterprises (SMEs) as defined by the National Council of Industries refer to business enterprises whose total costs excluding land is not more than two hundred million naira (N200,000,000.00) only. A lot has been said and written about SMEs the world over. It has also formed the subject of discussions in so many seminars and workshops both locally and internationally. In the same token, governments at various levels (local, state and Federal levels) have in one way or the other focused on the Small and Medium Enterprises. While some governments had formulated policies aimed at facilitating and empowering the growth and development and performance of the SMEs, others had focused on assisting the SMEs to grow through soft loans and other fiscal incentives.

 

International agencies and organisations (World Bank, United Nations Industrial Development Organisation (UNIDO), International Finance Corporation (IFC), United Kingdom Department For International Development (DFID), European Investment Bank (EIB) etc are not only keenly interested in making SMEs robust and vibrant in developing countries but have also heavily invested in them. Locally, the several Non-Governmental Organisations such as Fate foundation, Support and Training Entrepreneurship Programme (STEP), the Nigerian Investment Promotion Commission (NIPC), the Association of Nigerian Development Finance Institutions (ANDFI), as well as individual Development Finance Institutions (DFIs) have been promoting the growth of SMEs in Nigeria through advocacy and capacity-building initiatives, and have continued to canvass for better support structures for operators in the SME subsector.

 

All the massive attention and support given to SMEs relate to the widely acclaimed fact that SMEs are job and wealth creators. In justifying the introduction of SMIEIS in 2003, the then Governor of the Central Bank of Nigeria, Chief Joseph Sanusi said “With a concerted effort and renewed commitment from all stakeholders, this scheme will surely succeed and realize its intended objective of revamping the SMEs as engines of growth in the economy and a veritable tool for the development of indigenous technology, rapid industrialization, generation of employment for our teeming youths and the pivot for sustainable economic development in Nigeria”.* Small and Medium Enterprises (SMEs) occupy a place of pride in virtually every country or state. Because of their (SMEs) significant roles in the development and growth of various economies, they (SMEs) have aptly been referred to as “the engine of growth” and “catalysts for socio-economic transformation of any country.” SMEs represent a veritable vehicle for the achievement of national economic objectives of employment generation and poverty reduction at low investment cost as well as the development of entrepreneurial capabilities including indigenous technology. Other intrinsic benefits of vibrant SMEs include access to the infrastructural facilities occasioned by the existence of such SMEs in their surroundings, the stimulation of economic activities such as suppliers of various items and distributive trades for items produced and or needed by the SMEs, stemming from rural urban migration, enhancement of standard of living of the employees of the SMEs and their dependents as well as those who are directly or indirectly associated with them.

 

In recognition of the enormous potential roles of SMEs, some of which have been outlined above, various special measures and programmes have been designed and policies enunciated and executed by government to encourage their (SMEs) development and hence make them more vibrant in Nigeria. The highlights of these measures include:

i.                    Fiscal incentives and protective fiscal policies

ii.                  Specialized financial institutions and funding schemes for the SMEs

iii.                Favourable tariff structure

iv.                 The SMIEIS funding scheme

v.                   Selective exemption and preferential treatment in excise duties

vi.                 Establishment of Export Processing Zones

vii.               Selective reservation of items for exclusive manufacture in the SME subsector

viii.             Government’s full weight and support for NEPAD and AGOA activities and operations.

 

The Association of Nigerian Development Finance Institutions (ANDFI) in 2004 issued this statement in relation to why SMEs perform poorly in Nigeria: “Finance is usually considered as the major constraints of SMEs. While this may be true, empirical evidences have shown that finance contributes only about 25 percent to the success of SMEs. Thus, the creation of other appropriate support system and enabling environment are indispensable for the success of SMEs in Nigeria”.

 

1.2       STATEMENT OF THE PROBLEM

Small and Medium Enterprises (SMEs) in Nigeria have not performed creditably well and hence have not played the expected vital and vibrant role in the economic growth and development of Nigeria. This situation has been of great concern to the government, citizenry, operators, practitioners and the organised private sector groups. Year in year out, the governments at federal, state and even local government levels through budgetary allocations, policies and pronouncements have signified interest and acknowledgement of the crucial role of the SME sub-sector of the economy and hence made policies for energizing the same. There have also been fiscal incentives, grants, bilateral and multilateral agencies support and aids as well as specialized institutions all geared towards making the SME sub-sector vibrant.

 

Just as it has been a great concern to all and sundry to promote the welfare of SMEs, it has also been a great cause of concern to all, the fact that the vital sub-sector has fallen short of expectation. The situation is more disturbing and worrying when compared with what other developing and developed countries have been able to achieve with their SMEs. It has been shown that there is a high correlation between the degree of poverty, hunger, unemployment, economic well being (standard of living) of the citizens of countries and the degree of vibrancy of the respective country’s SMEs. If Nigeria were to achieve an appreciable success towards attaining the Millennium Declaration Goals for 2015, one of the sure ways would be to vigorously pursue the development of its SMEs. Some of the key Millennium Declaration Goals like halving the proportion of people living in extreme poverty, suffering from hunger, without access to safe water, reducing maternal and infant mortality by three-quarts and two thirds respectively and enrolment of all children in primary school by 2015 may indeed be a mirage unless there is a turnaround of our SMEs’ fortunes sooner than later. The time is now to do something surgical to the situation of our SMEs given the aggravating level of poverty in Nigeria and the need to meet up with the Millennium Declaration Goals.

 

The decreasing level of Nigeria’s per capita income, which declined from $870 in 1981 to $260 in 1998, and $205 in 2004 as well as a low level of agricultural, industrial and infrastructural development (irrigation, road and railway networks) all represent disturbing indices, which also contribute to the dismal performance and contribution of our SMEs. The problems and challenges that SMEs contend with are enormous no doubt but it is curious to know that some SMEs are able to overcome them. This gives hope and should provide a basis for optimism that there is a way out. There must be some survival strategies, which are not known to many SME promoters. This research is also intended to explore and unravel some of the key business survival strategies, which have worked for a few thriving SMEs. The benefits of this could be tremendous in that other SMEs facing threats of extermination as well as new and proposed new ones could also borrow a leaf from them. Many other countries have been able to energize and transform their SME sub-sector to such a vibrant one that they have been able to reduce to the barest minimum their unemployment and poverty level because of the immense contribution of the sub-sector to their economic growth and development.

 

Expectations from this research work: It is expected that the outcome of this research will go a long way in ensuring a turnaround of Nigeria’s SME sub-sector. The research would come up with a set of recommendations for various stakeholders for implementations.

 

With the concerted efforts of all and sundry including governments at all levels, SME promoters, Agencies and Departments of Governments involved in the SME sub-sector, Non Governmental Organisations (NGOs), Multilateral Agencies, Banks, Financiers, Investors, etc, it is hoped that the fortunes of SMEs in Nigeria would dramatically improve.

 

From the above, the key areas of shortcomings of the Nigerian SME sub-sector could be summarised as:

i.          Rate of survival: it is said that less than 5% of SMEs survive beyond their first year of existen65dxsce.

ii.         Contribution to Industrial employment: whereas in great and developed economies of Germany, United States of America and even South Korea, SMEs account for as high as 64% of industrial employment, a comparative figure in Nigeria is around 31%, less than half of those in developed countries. The 31% of SME contribution to industrial growth is rather disturbing given the high degree of unemployment rate in Nigeria as well as the poverty level in the country low and GDP Growth Rate as compared with other countries. It is expected that the standard of living of the masses will rise with improvement in Nigeria’s SME sub-sector’s performance, as has been the case with economies whose SMEs have developed and grown steadily over the years.

iii.        Contribution to Industrial Production in particular and GDP in general: in spite of the fact that there is hardly any well-documented, reliable and current data, it is rather obvious that the contributions of SMEs to the Nigerian Industrial output in particular and the Gross Domestic Product in general are less than satisfactory. Evidence for this poor performance is buttressed by the fact that most manufacturing enterprises in Nigeria had operated well below capacity in the last two decades. At times the capacity utilization has been as low as thirty percent (30%). Only the multinational businesses had thrived with many SMEs folding up and thus aggravating the unemployment situation in the country and its attendant high crime rate (even multinational companies that use to strive are packing up and relocating to other West African countries like Ghana and Cote d’Ivoire due largely to harsh business environment).

 

The government in “The Nigerian Vision 2010” initiatives had envisioned an environment in which small and medium scale enterprises would contribute about 34% (gross value of  manufacturing to GDP ratio) to the national product and generate 60-70% employment with sustainable yearly growth, and a low mortality rate for businesses. The envisioned future for SMEs in Nigeria is that of “a strong and virile small and medium scale enterprise that enjoys strong institutional support, contributing significantly to the Gross National Product (GNP)”.

 

In his address to the 2004 Annual General Meeting of the Lagos Chamber of Commerce and Industry (LCCI), the President, Chief Olusola Faleye, lamented that the real sector of the economy, comprising manufacturing, solid minerals and agriculture sectors, where most SMEs fall into, continued to experience difficult times during the year. Continuing, he said that the situation arose from the persistent problems of high energy cost, weak consumer demand, policy inconsistency, multiplicity of taxes and levies, institutional bottlenecks, high cost of funds and poor state of infrastructure among others. He cautioned that if something concrete is not done to address these constraints, the real sector of the economy especially the small and medium segment, would continue to experience a sluggish growth if not outright stagnation. The LCCI President also pointed out that the various poverty alleviation measures such as the Poverty Alleviation Programme (PAP), which later became Poverty Reduction Strategy Programme (PRSP) and currently National Poverty Eradication Programme (NAPEP) put in place by the Federal Government have yet to be felt by the masses. He stressed that these programmes do not touch the root of poverty problems in Nigeria as recent estimates put the percentage of Nigerians living in abject poverty at 70%. The LCCI was visibly concerned about the situation because of its wider implications for consumer purchasing power, the state of internal security, crime rate and the social and political stability of the country. The government, as is evidenced by the following objectives and strategies many of which have been on going for a while, has indeed appreciated the above problems. The objectives hinge on creating a favourable and enabling environment for stimulating growth in the real sector of Nigeria especially the SMEs.   

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