How weak transmission mechanism hinders government funds to SMEs

The small and medium scale enterprises (SMEs) constitute the engine of growth in any economy. They account for 48 percent of Nigeria’s gross domestic product and create jobs for about 60 million people.

But, in spite of the compelling growth potential of SMEs, running this category of business in Nigeria is a difficult thing because of numerous challenges facing them. Apart from other challenges, funding has always been the major albatross to the growth of these businesses.

Finance is the fuel that propels SMEs. In its absence, SMEs risk failure or stagnation. Despite this, SMEs’ access to loans remains limited.

According to analysts, the solution to funding SMEs is quite complex due to the long chain of getting the funds to these businesses. Analysts believe that government needs to strengthen the transmission system of getting the funds to the SMEs.

“Finance is a major challenge for SMEs and the solution to that challenge is quite complex because it cuts across a long chain of participants,” Obinna Igwebuike, partner, Sawubona Advisory Services, Lagos, said in a statement made availabe to Businessday.

“The problem we have had with these funds is the transmission mechanism to get them from the government to the SMEs, which has been quite weak,” Igwebuike said.

Only a meagre 3.5 percent of bank finance flows to agriculture and 0.2 percent to SMEs, and virtually nothing to exports, according to the Central Bank of Nigeria (CBN).

Similarly, only two percent of Nigeria’s adult population received loans from one financial institution in the past year, according to Findex, a global database on financial inclusion. The World Bank latest data say that only 14 percent of SMEs in the country have access to a loan or overdraft account.

“Banks are still finding it difficult to get the funds from CBN. The funds are there but access to the fund is the problem,” Wale Fasanya, director, ED &P, SEMDAN said, during the franchising and SME event held recently in Lagos.

Entrepreneurs and small business owners cannot easily access finance to expand business and they are usually faced with problems of collaterals, high interest rates, extra bank charges, inability to evaluate financial proposals and limited financial knowledge, among others.

These have remained major impediments to growth for SMEs in Nigeria, Africa biggest economy, since most of them cannot access external finance due to their sizes.

The cost of doing business for SMEs and business in general has continued to rise with the increased bureaucracy caused by new currency restrictions. In addition, increase in the prices of many commodity goods has spiked inflation in recent times.

The CBN last week cut the monetary policy rate and cash reserve requirement to stimulate the economy by allowing banks to lend more to critical sectors of the economy so as to stimulate investment and boost employment.

But analysts said the MPC decision to reduce key rates and allow more funds in the banking system does not mean that banks will lend more to the critical sectors of the economy so as to stimulate investment and boost employment.

Josephine Okojie