MSME financing, regulation and disabling environment

The dust raised by the decision of the MPC not to reduce the MPR, as expected by many, has settled down; somewhat much faster than expected. The usual attitude is for everyone to dump the subject and carry on with their businesses until some other news breaks. That approach ensures that we not only learn nothing from our experiences, but also repeat our errors in regularity. I believe there are dimensions of every public debate that must continue in private, not focusing on the action or inaction of someone else but on securing the gains of the debate. In this regard, it is how to ensure we progress the learning points as they affect SME financing in Nigeria – a challenge we have continually tackled at the wrong points.

One of the concerns expressed by opponents of the increase in MPR was the impact it would have on cost of borrowing, especially by MSMEs, already beleaguered by the massive depreciation of the naira. Many argued that keeping interest rates as the naira continues to fall would widen the financing gap in that sector in particular and the economy in general, with more inflation. There is merit in that argument. However, now that a decision has been made, I propose that we do not walk away from the issue but examine the funding challenges of MSMEs from another perspective. That perspective is built around the hypothesis that is not the reason why MSMEs can’t access finance. It is a challenge that has been overrated. Indeed, their lack of access to finance is a challenge that won’t go away by simply reducing interest rates without more. Corollarily, the MSMEs have bigger challenges than finance and they are unlikely to get the funding they need until those challenges are fixed. Let us look away from interest rates and address more seriously those challenges.

The MSME sector has become famous for its role in economic development across the development divide – the West and the rest of us. In the United States, the SME subsector, defined variously in accordance with jurisdictional interests and traditions, is recognised as the backbone of the economy. Its members constitute 99 percent of all enterprises in that country and provide more than half the private sector employment. SMEs account for over half of the non-farm GDP of the United States. They are involved in considerable export trade and represent 98 percent of all exporters in the USA while accounting for about 34 percent of her export revenue.

In the European Union SMEs also enjoy the status of drivers of the economy. They account for 99 percent of all enterprises. In terms of job creation, they are accounting for about 85 percent of all new jobs and two-thirds of the total private sector employment. Accordingly, SMEs are important agents of economic growth, social integration and innovation.

In Nigeria, MSMEs have received considerable attention for the same reasons. A 2013 survey by the Small and Medium Enterprises Development (SMEDAN) revealed that Nigeria had about 37 million MSMEs, with Lagos and Oyo States hosting the largest number of operators. These institutions employed about 70 million people then. Although they contribute only about 7 percent of exports, their contribution to nominal GDP is as much as 50 percent. They could do better.

In light of this, the government of Nigeria has, since independence, taken adequate steps to promote it. The government of the former Eastern Nigeria was the first government in Nigeria to recognise the importance of industrialisation through SMEs. In 1962, it set up Nigeria’s first Industrial Development Centre in Owerri, which aimed to provide extension services to industrialists in the SME sector. This centre was taken over by the federal government in 1970. This was followed in 1971 by the establishment of the Small Scale Industries Credit Scheme, which provided technical and financial support for local industries. The next effort at supporting the MSME sector was the establishment in 1973 of the Nigerian Bank for Commerce and Industry. It was followed by the launch of the Nigerian Industrial Development Bank (NIDB) – the famous institutions from the ashes of which the current Bank of Industry rose.

The government of Ibrahim Babangida went further to establish a fund, the National Economic Reconstruction Fund that also focused largely on SMEs. Since then, there have been so many funds established to support the sector. These include the Small and Medium Enterprises Equity Investment Scheme (SMEIS), which was intended to provide equity rather than mere loans; the N200 billion SME Credit Guarantee Scheme, meant to guarantee loans given to SMEs; the CBN’s MSME Development Fund, launched in August 2013 with a share capital of N220 billion, and more. The list of such funds is very long and has prompted many to say that Nigerian SMEs have all the money they need, only if they can make themselves worthy of the facilities. That should be the direction of the new discourse.

Looking at the plethora of intervention measures so far undertaken by governments for MSMEs, which has not yielded much success in relation to their access to finance, I think the time has come to take a different view of these efforts. My take is that we have paid disproportionate attention to the creation of funding channels. Clearly, this has shown that the availability of funds is not the biggest problem of SMEs. Perhaps, it’s time to seek progress in such other areas as regulation and the problems of informality and its disabling consequences.

For example, why do SMEs shy away from the capital market? How inviting are the regulations in that market to them? Do they impede SMEs access? We require a creative and innovative legislature spurred by intellect and nationalistic fervour and not marred by private issues of greed and self-preservation. The second-tier securities market was a great idea that helped convert many informal players to formality. The banks have tried to lend to SMEs but failed. Lending to the sector as presently constituted is contrary to the DNA of the money centre banks, particularly after the financial crises of 2008, which led to tougher regulations worldwide. What incentives can we offer venture capital to get it excited about SMEs? The resort to banks is excessive. We need to find out why angel capital is not coming to our SMEs.

Regulatory reforms must however not be in isolation. The problem of informality is central to the inability of SMEs in Nigeria to maximise the benefits of the many funds available. A measure of the success of the present anti-corruption government should be the extent to which we spend Nigeria’s income equitably on the poor people of Nigeria and fight the very rapid transition of our communities to the Stone Age, where infrastructure and even the presence of government has never been felt in most places, over 50 years after independence. Creating all these funds without preparing the recipient to be fundable may further official corruption opportunities than supporting SMEs. We must consciously groom SMEs out from informality to formality and this requires the provision of basic needs in our communities and regulatory reforms.