No BRIC dream without thriving SMEs

In order to realize its “BRIC dream,” Nigeria needs a thriving SME sector.

In the past decade, Nigeria has often been seen as a rising BRIC economy. The common denominators of these emerging economies comprise a large population, significant macroeconomic stability and strong growth rates. Nigeria has enjoyed solid growth, but it has not been inclusive, as reflected by the country’s employment and poverty indicators. According to the recent World Bank report, Nigeria’s unemployment rate is almost 10 percent. Moreover, one third of Nigeria’s population of 169 million remains in poverty.  

Since most Nigerians cannot afford not to work, but cannot find appropriate work, they become engaged in low-productivity, low-paying jobs. Over time, that will erode nation’s growth and individual dreams. What Nigeria needs is improved security, which is vital for macroeconomic stability, as well as increased agricultural productivity and better access to infrastructure and improved business environment.

In order to realize its full potential, however, Nigeria needs to boost its small-and-medium enterprises (SMEs), including micro firms. Typically, SMEs employ more people than large capital-intensive corporations. They are the true growth engines in both advanced and emerging economies.

Promoting entrepreneurship

The Global Entrepreneurship Monitor (GEM) is one of the leading international entrepreneurship barometers. Its main indicator is called the total early-stage entrepreneurial activity (TEA), which assesses the share of working age population to start an entrepreneurial activity, and that have started one from a maximum of 3.5 years.

How entrepreneurial is Nigeria?

In view of geographic region and economic development level, the GEM sees Nigeria as a Sub-Saharan African factor-driven economy, along with Angola, Botswana, Ghana, Malawi, Uganda and Zambia – and comparable to India, Philippines and Vietnam in Asia.

Among these factor-driven economies, the sub-Saharan African economies have the highest TEA rates, especially Zambia and Nigeria with 39% of the adult population (18-64 years old) involved in early-stage entrepreneurial activity.

Interestingly, Sub-Saharan African rates of female early-stage entrepreneurship are comparable to their male equivalents. Like Philippines and Indonesia in Asia, Ghana, Nigeria and Zambia exhibit more participation of women than men in Africa. 

True, popular perceptions of Nigerian entrepreneurship tend to be low both domestically and internationally. According to global indicators, there is no reason why Nigerian SMEs could not thrive, however. If anything, these SMEs may be better-positioned to succeed than their counterparts in other regions – given the right infrastructure and business environment.

From individual SME failures to national SME strategy

Reportedly, some 80% of small and medium enterprises (SMEs) fail within five years across Nigeria, due to lack of experience and poor business practices, according to Stanbic Bank. These failures have been attributed to the inability of SMEs to access finance from banks and other financial institutions, which argue that the SMEs lack proper structures.

It is the lack of adequate credit schemes that poses a major challenge to the SME sector in Nigeria. The banks cannot extend credit to the SMEs, due to poor documentation of business proposals, inadequate collateral and many other factors. As a result, government has been called to boost an enabling infrastructure for the SMEs.

At the end of July, Nigerian government set aside N220 billion for SMEs. The Central Bank of Nigeria (CBN) set aside a fund to realize the potential of the SMEs to support production, create jobs, reduce poverty and promote inclusive economic growth and development. 

Thanks to the fund, the state governments would be able to access up to N2 billion each for on-lending to eligible beneficiaries through participating financial institutions in their states. 

It is a good step forward, but only a step. According to a joint report by the International Financing Corporation (IFC) and McKinsey, the financing gap of the SME sector in Nigeria amounted to N9.6 trillion in 2010.

Using SMEs against poverty, instability, and under-employment

In order to realize its “BRIC dream,” Nigeria needs a thriving SME sector. No BRIC dream is possible when the unemployment rate hovers close to 10% and under-employment involves a great share of the labor force.

In view of its employment profile, Nigeria is still far from the East Asia’s high-performing economies. But it may be closer to the Philippines, which is currently Southeast Asia’s fastest-growing economy. 

Despite its 7.2% growth, the Philippine unemployment rate is 7% and a quarter of the population remains in poverty. The island archipelago suffers from rural poverty, random violence, and substantial under-employment. 

Such circumstances are not conducive to the realization of the BRIC dream. In contrast, they intensify the gap between the cold realities of the economy and the dreamy expectations of the people. In the long-term, it is an untenable equation.

Dan Steinbock