Bartholomew Ebong, Group Managing Director of Union Bank Nigeria Plc, explains why SMEs experience difficulty in accessing credit from commercial banks, in addition to other germane issues affecting the growth of SMEs in Nigeria. He spoke with Emeka Ezekiel.
...small and medium scale enterprises play significant role in poverty reduction, employment generation across the globe...SMEs account for about 30 per cent of global GDP and 58 per cent of the world's working population.
In the European Union countries, for instance, SMEs constitute 99 per cent of all firms and employ 65 million people. SMEs account for over 95 per cent of enterprises and 60 to 70 per cent of employment in the OECD countries. SMEs also account for about 60 per cent of the workforce and 25 per cent of the industrial output in Africa today.
In Nigeria, these enterprises constitute the majority - with all the imperfections in the system- and account for about 55 per cent of the total employment and about 50 per cent of the industrial output... SMEs employ a vast number of people...of the labour intensive nature of their production processes.
SMEs also assist in stimulating indigenous entrepreneurship and technology. They serve as vehicles for the propagation and diffusion of innovative ideas.
In addition to their impact in the labour market, the SMEs are known to rely on local raw materials. While others import their raw materials in drums and tonnes, SMEs seem to develop their raw materials locally and of course help in the industries that produce those raw materials. This therefore triggers economic activities in those sectors that produce such raw materials. I am talking particularly about agriculture.
For example, when we talk about oil processing - the palm kernel, the palm oil, the oil itself - it is only the SMEs that are processing them for intermediate use. Since they facilitate the dispersal of economic activities, SME stand to promote even development, thereby reducing rural- urban migration with its attendant consequences. When you have SMEs growing, you tend to stem the drift of people to the cosmopolitan areas.
And it is as a result of the huge potential of SMEs that successive regimes in Nigeria have taken steps to promote and strengthen their growth and development.These efforts were targeted at addressing the challenges facing entrepreneurs in the sector to enable them to fully realise their potentials. These problems are still there today, even though though they are being tackled by government and other stakeholders. It is an ongoing process...
While we acknowledge the potentials of SMEs, it’s also important to note that they face a number of challenges that undermine their realisation of these potentials. Some of these challenges include: unfavourable business environment -this encompasses waste and energy infrastructure, road, water and power supply, telecommunication, etc. As a result, many producers provide their own alternative amenities , which of course, affect their cost structure and competitiveness...
Second, we have a weak legal system which makes it difficult to enforce contracts. The regulatory and policy environment - in particular trade liberalisation and globalisation presents new challenges for SMEs. As a matter of fact, that is why we are running into serious problems in terms of conflict of business interest - we want to play as global people in the marketplace: we've opened our borders to allow imports to come in. And who is suffering the impact of this decision: the SMEs. They have to contend with substitute products from more rich and mature overseas counterparts- China and Indonesia, as it were. They flood our markets with their products and this tends to affect the growth and development of our SMEs.
Also, we have cumbersome official procedures. A typical example includes procedures for complying with regulations of such issues such as company registration and compliance with the requirements for benefiting from government incentives. When government announces incentives, to access these incentives sometimes becomes a Herculean task for SMEs.
Another issue is the macro- economic fundamentals, the degree of stability of the economic environment. But recent reforms have provided a platform for us to move forward in this direction. In this regard, it is instructive to note that Nigeria has a low rating in terms of ease of doing business.
Another major challenge facing SMEs in Nigeria is that of finance. Their main sources of capital include informal savings and loans...funds from these sources are far from being adequate.
First of all, these informal sources of finance are unpredictable. And access to informal sources of finance is rather poor. In the first place, SMEs are handicapped in accessing funds from the capital market. They cannot get easily registered because the listing requirement in the capital market is often considered restrictive by the promoters of SMEs. While it is easy for the big players to raisebillions from the capital market, SMEs find it very difficult to get there. The second-tier market that we have had during these years is growing at a snail's pace.
SMEs find it difficult to get money from banks for a variety of reasons.
First, lending to SMEs entails higher administration and transaction costs, owing to the inadequacy of records and information relating to their operations. Banks tend to devote specific amounts of time to evaluate the viability of the products and projects presented, and then the problem of poor record keeping, coupled with the common tendency of promoters to divert credit to unproductive ventures. These are very common; and that is why SMEs require closer supervision and monitoring.
Otherwise, the money meant for the purchase of machinery can be diverted to buying vehicles and all sorts of items that don't relate to the project for which the loan was given. This tends to make lending to SMEs difficult.
Generally, the promoters of SMEs are not well grounded in terms of modern management principles and practices. This raises the probability of failure of small scale enterprises, which consequently results in loan default
In growing the SMEs, I believe that every sector of the economy has their own role to play: the financial sector has their own role , the government in terms of providing the enabling environment and the infrastructure; and of course the SME practitioners themselves should be a lot more focus to adopt the proper globally accepted business practises as well be dedicated to produce good quality goods while they see growth as a strategic option.
I must say that there have been several efforts by the government to facilitate the growth and development of SMEs. A number of measures have been put in place to counter these adverse conditions affecting SMEs. A number of these initiatives centred on making funds are available to SMEs on reasonable terms. The concentration has been more on the issue of providing funds because people talk more about funds, rather than on other issues and requirements that will help the SMEs to grow.
The emphasis over the years have been laid only on funding. There have been several credit guarantee schemes. The logic behind these schemes is that they will make banks be more willing to lend to SMEs. But I believe that things would be different if the government were to guarantee repayment in the event of default. This will encourage lending. The establishment of Development Banks to promote credit directly to SMEs - all of these are targeted at finance; no other areas. Similarly, the preferential allocation of credit by banks in the past was also done to provide money for SMEs. So, what I am saying is that all these initiatives were essentially on financing. What about the other issues?
It was in realisation of this that the Bankers Committee, introduced in its own way in 2001, a scheme that combines both equity and debt finance. On account of their equity participation or interest, banks were expected to provide expertise or management support. The banks were required to provide not only money, but also to help SMEs to grow the expertise. But as experience has shown now, that has not been easy either, because of the tendency of the promoters of SMEs to hold on and say 'it is my business, I should be the one that should run my business; why do you come to tell me how to do my business. I have been doing it over the past ten years without you.'