Anas A. Galadima
16 June 2006
In most emerging economies of the world, small and medium enterprises (SMEs) have become major drivers of economic growth.
They serve as major employers of labour and contribute significantly to economic growth and development. Even in big economies, SMEs play a significant role in shaping the economy. In China for instance, SMEs are said to be responsible for about 60 percent of the industrial output and employ about 75percent of the workforce in urban centres.
SMEs account for most new urban jobs, and they serve as the next option for most workers that get sacked from the country's public enterprises. In Nigeria, SMEs have not gotten the desired attention and support they need to make a significant impact in the economy. Most banks in the country hardly lend to small ventures because of the perceived high risks involved in relation to profits.
Many of such banks prefer to lend to big businesses that have greater chances of making profits. Besides, most SME entrepreneurs ha rdly meet the requirements of banks in order to qualify for a loan facility. Chief among these requirements is collateral. Many entrepreneurs in this category do not have assets which they can tender in order to qualify. The recently concluded recapitalization in the banking sector has also raised a lot of fears in the country that the emergent bigger banks may not have the time and patience to fund small time ventures.
The Director-General of Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), Mrs. Modupe Adelaja, recently lamented that because there h more funds in the vaults of the banks translating to bigger lending portfolios, large businesses might be the major beneficiaries partly because the banks may place more priority on bigger enterprises.
She was quick to call on the federal government and the Central Bank of Nigeria (CBN) to put some measures in place to improve financing of SMEs in the post-consolidation era. The CBN in December last year laun ched a new microfinance policy which will see the transformation of community banks into a new kind of financial institutions called Micro Finance Banks (MFBs).
These institutions are expected to be the major financiers of SMEs in the country as most commercial banks focus on bigger challenges. For SMEs to grow, the government needs to get deeply involved by providing incentives for both banks and MFBs to lend to small and medium entrepreneurs at 9 percent interest rates or below, which is considered to be the most reasonable for small ventures.
The Chinese government has in recent years come to terms to the fact that SMEs contribute the most to employing its labour force in urban areas. It has begun a reform agenda that seeks to support such enterprises and encourage them to grow. The government sees it as an opportunity to provide sustainable employment for its youth, as a way of taming youthful unrest and civil disturbances in its cities.
The government support is coming on the heels of the evolution of a new kind of financial institutions in the country called Credit Guarantee firms which came to fill the gap left by state owned banks, providing loans to SMEs. With state owned banks lending only to state owned firms and large corporations, Credit Guarantee firms which have the collateral to get loans from banks began to do so and subsequently lending such funds on a small scale level to SMEs.
They do this by being applying flexibility on the rules of borrowing thereby being less strict on collateral and other requirements. Credit-guarantee firms in China sprang into life in the early 1990s and increased rapidly in numbers over a decade with the encouragement of the government. They simplify documenting and assessing of collateral knowing very well that SMEs need credit at short notice.
Nigeria can learn from this. In a bid to tap into the potentials that SMEs can offer, First Bank of Nigeria through its subsidiary, First Funds announced thi s week that it has set aside about N8billion for the funding of SMEs. This could go a long way in providing funds for small and medium ventures that urgently need finance. But the question remains whether the entrepreneurs with good business ideas but who do not have valuable collateral to stake would have access to this facility.
According to information posted on the website of nigeriabusiness info.com, SMEs can contribute to as much as 30 percent of the country's GDP and employ up to 58 percent of its workforce. This would thereby enhance industrialization and rural development in the country.
However, the poor state of infrastructure, unstable economic policies and corruption still remain major threats facing the growth of small and medium enterprises. Because of this, most lenders to SMEs would always prefer to lend to entrepreneurs with reliable and less risky business proposals.
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