Problems and prospects of small and medium-scale enterprises in Nigeria

ABSTRACT

Entrepreneurial development is every nation’s inexorable route to economic development. Policymakers and researchers around the world have therefore invested time and resources in studies aimed at developing better strategies for poverty reduction, job creation, wealth distribution and equitable development, which rely mostly on the competitiveness, productivity level and growth of Small and Medium-scale Enterprises (SMEs). This article examines why SMEs in Nigeria are underperforming despite the federal government’s huge budgetary allocations and implementation of several development schemes in favour of the sector. The research method adopts a descriptive survey. Further, collated data is evaluated using a mix of percentages, pie charts, tables and mean scores whereas a validity test of hypotheses is conducted with Chi-square. Research findings show that SMEs in Nigeria face managerial incompetency, inadequate social infrastructure and poor financing as the major challenges. The study, however, concludes that revitalizing the SME sector will boost Nigeria’s economic recovery and diversification strategy, away from the oil-dependent and constantly waning economy.

  

CHAPTER ONE

  • INTRODUCTION

Small and Medium-scale Enterprises (SMEs) are a reliable economic development tool because they propel economic diversification strategies, generate employment, strengthen industrial linkages through production of primary goods, and encourage entrepreneurship among the citizenry. SMEs offer nearly 70% of Nigeria’s industrial employment, including about 80% of the entire workforce, and account for over 15% of total output from the manufacturing sector (Enelamah., 2018). The impact of SMEs, particularly on agriculture and the development of indigenous technology, is evident in the increasing rate of local production and use of raw materials, which are essentials for industrialization. Considering its capital-saving and labour-intensive nature, the Federal Government of Nigeria (FG) considers SMEs as a key to economic growth despite the sector’s unimpressive performance in recent years (Acha., 2009).

By dint of Central Bank’s introduction of a new, open and attractive forex window considered most-appealing by exporters and investors, inflation reduced significantly since April 2017 and the Naira attained stability against the U.S. dollars. The Nigerian stock market also increased returns by 40% thus gaining global recognition as one of the best performers. SMEs in Nigeria contributed 48% of the Gross Domestic Product (GDP) in 2017, the same year FG confirmed a 90% decline in importation, having applaudably escaped its most-awful, decades-long recession. Yet, the documented substantial growth failed to make significant impact in poverty reduction, mortality rates and standard of living among 37 million Nigerians (Aziken & Yakubu., 2017). This study therefore delves into the performance and potentials of SMEs in Nigeria, with focus on proffering effective solutions to the identified problems.

1.1 BACKGROUND OF THE STUDY

Established in 2003, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) aimed at restructuring Micro, Small and Medium Enterprises (MSMEs) sector for sustainable growth and the attainment of national economic development objectives (Ayyagari et al., 2003). In line with previous economic transformation policies, particularly the Structural Adjustment Programme (SAP) of 1986, Nigeria has jiggled between capital-intensive projects that support large-scale industrialization and others such as SMEs, which are labour-intensive but more responsive in identifying and harnessing domestic linkages for quick, sustainable growth, self-reliant development, and progression of non-oil exports (Lalkaka., 1997).

In its monetary policy statement released in 1998, the Central Bank of Nigeria (CBN) described SMEs in general commerce as businesses with less than 300 employees, including total assets below ₦500,000 and/or annual revenue not above ₦100 million (Oyelaran-Oyeyinka., 2006). Business activities in the sector include: poultry farming, trading, food production and supplies, laundry services, food beverage production, fashion designing, restaurant services, creche/kindergarten education, including professional services such as law, accountancy etc (Fabayo., 1989). Developmental efforts from the World Bank and three tiers of government (Federal, State and Local governments), National Economic Reconstruction Fund (NERFUND), Nigeria Export & Import Bank (NEXIM), Peoples Bank of Nigeria (PBN), Bank of Industry (BOI) and community/microfinance banks, through budgetary allocations to SME Loan Schemes, have provided financial assistance to business owners who previously depended on private funds or cash received from informal sources (Arriyo., 1999).

The failure of these formal credit schemes in addressing problems of SMEs in Nigeria has been attributed to managerial incompetence, weak capital base and entrepreneurs’ low credit rating, which makes the argument on poor performance a vicious circle (Ayyagari et al., 2003). This study therefore aims at identifying the underlying factors impeding growth of SMEs and how change and innovation strategies can transform the sector into a catalyst for economic growth.

1.2 STATEMENT OF THE PROBLEM

Dearth of accurate and verifiable information on the number of SMEs operating within Nigeria, including the total working population in the sector, is responsible for an alleged distortion of facts on job creation, production of raw materials, export earnings, development indicators, and inherent potentials of SMEs. According to a 2010 survey conducted by the National Bureau of Statistics (NBS) and SMEDAN, there are about 32.5 million employees in nearly 17.3 million SMEs, and significant improvements have been documented in the federal government’s efforts to stabilize the economy through effective macroeconomic policies, reduction of importation barriers, streamlining the taxation system and institutionalizing transparency in the nation’s customs system (Enelamah., 2018).

However, lack of reliable data management systems are not the only challenges to SME growth in Nigeria. Oyelaran-Oyeyinka (2006) notes that SMEs in countries like Korea, Vietnam, India and Singapore, which are comparatively at the same level of development with Nigeria, have made better progress. The researcher has therefore identified these as the major problems:

  • Lack of commitment from FG in institutionalizing a solid SME sector.
  • Poor infrastructure base.
  • Poor credit environment.
  • Inadequate technical/financial support.
  • Low-level investments from individuals, corporate bodies and foreign creditors.

1.3 PURPOSE OF THE STUDY

This paper is an analysis of the performance, problems and prospects of SMEs in Nigeria. The objectives are:

  1. To identify the problems militating against SMEs’ performance as a catalyst to Nigeria’s economic growth and sustainable development objectives.
  2. To thoroughly examine sources of the identified problems.
  3. To analyse the current situation of SMEs in Nigeria.
  4. To ascertain the prospects of SME development in Nigeria.
  5. To proffer solutions through change and innovative models.

1.4 SIGNIFICANCE OF THE STUDY

Results of this analysis will be useful for the long-elusive transformation of the SME sector by:

  • Providing managers and policymakers with the most effective leadership and business management strategies needed to identify the strengths, weaknesses, opportunities and threats in the SME sector, for optimal development and functioning of human capital and material resources.
  • Providing entrepreneurs with easy access to working capital and investment funds.
  • Adding competitiveness to the sector and thereby attracting investors from all over the world.
  • Increasing local production of goods and services for exports, with less reliance on imported products.
  • Presenting an intellectual basis for further research on SMEs in Nigeria.

1.5 RESEARCH QUESTIONS

SMEs have formidable potentials for exports, employment and economic growth, especially in Nigeria, where there are significant, unexploited opportunities spread across entertainment and leisure, agro-processing, fashion, biotechnology, telecom etc. Although the development of SMEs requires improved financial assistance, Benhabib and Spiegel (1994) noted that the problem is not in providing physical cash but in human capital investments. This is true, although domestic development of entrepreneurs with adequate technical know-how is costlier than what any country can spend to attract Foreign Direct Investment (FDI).

Based on these facts, the research question is: “How can innovative policies be recommended to the Nigerian government to solve SME challenges and maximize opportunities in local and global markets?”

Additionally, the sub-questions are as follows:

  1. How has Nigerian SMEs performed in the last five years and what are the potentials?
  2. What are the socio-economic and political impacts on the development of SMEs in Nigeria?
  3. How has incompetent managerial skills affected the potentials of entrepreneurs and SMEs in Nigeria?

1.6 SCOPE OF THE STUDY

The research investigates SME challenges and prospects using valid, verifiable and unbiased contributions from bank managers and accountants from selected Microfinance institutions (MFIs) in Enugu metropolis.

1.7 RESEARCH METHODOLOGY

This study will focus on the overall performance of SMEs in Nigeria, including a comparative analysis with India, but narrowed down to Enugu State, where, through a mix of qualitative and quantitative methods, the researcher collates useful primary data from bank managers/accountants in MFIs. Other information collected from secondary sources include materials from public libraries, journals, academic books, print media and the Internet, will are expected to add relevance to the cache of knowledge required by the researcher to successfully complete this task.

1.8 HYPOTHESES

H01: There is a relationship between availability of capital and the success of SMEs in Nigeria.

H02: Factors from socio-economic and political environment have direct influence on the development of SMEs in Nigeria.

H03: Incompetent managerial skills hampers competitiveness, growth and sustainability of SMEs in Nigeria.

1.9 LIMITATIONS

Research processes are often challenged by human limitations such as ethics, moral, culture, tradition, language and socio-political barriers. Also, lack of reliable, comprehensive and easily assessible data records in Nigeria presents one of the major challenges to this study.

1.10 CONCLUSION

According to the 2017 survey conducted by the Economist Intelligence Unit (EUI), over 90% of businesses in Nigeria are categorized as SMEs which, with increased and sustainable productivity, have the potentials for champion economic diversification strategies for industrialization, development and sectoral development. Unfortunately, a unstructured taxation system drains the nation of productive time, with approximately 956 hours spent on filling tax returns in Lagos, compared to Africa’s overall average of 310. Findings from EIU also show that only 2% of adults had access to loans from MFIs. Further, 50% of Nigerians live without access to electricity supplied by Enugu Electricity Distribution Company (EEDC). Although about 82% of residents access the internet through mobile phones on daily basis, mobile business transactions are slow and mostly impossible due to poor network coverages, especially in rural communities (Green., 2017).

On this backdrop, SMEs in Nigeria experience low survival rate. Adeniji (2015) points out that most business outfits collapse within five years of existence whereas many others struggle to last between six and ten years. Only less than 10% of SMEs survive the highly-competitive market due to infrastructural inadequacies such as inaccessible roads, dysfunctional or inexistent water supply systems, poor knowledge market trends, lack of differentiated products, ineffective business strategies, inexperience and inadequate capital (Dӑnӑcicӑ., 2011).

For Nigerian SMEs to attain productivity and global competitiveness, there is need for collaborations, commitment and increased investments from the government, entrepreneurs, investors (local and foreign) and other stakeholders.