A new initiative to rejuvenate small and medium scale enterprises in the country is in the offing. The Bank of Industry has raised $750 million (about N250 billion) which it aims to lend to the SMEs and start-ups to lift the industrial sector. This is a welcome move, no doubt, but solving the problem also requires effective macro-economic interventions beyond funding.
News of the N250 billion lifeline must have been music to the ears of the SMEs operators who have for long bemoaned the paucity of low interest credit to lift the sector. Olukayode Pitan, the Managing Director of BoI, who unfolded the tidings in Abuja, explained that the syndicated loan, the biggest ever raised by a development bank in Nigeria, was provided by 16 local and foreign banks and brokered through the African Export Import Bank. Another novelty in the loan is that four United Kingdom-based subsidiaries of Nigerian banks were part of the lending consortium in addition to the ECOWAS Bank for Investment and Development. Most cheering, however, is the single-digit interest rate at which it would be lent to producers.
Pitan’s disclosure that priority would be given to micro, small and medium scale operators strikes the right chord. Targeting the creative industry, manufacturing and gender-based businesses would help create jobs and boost exports and savings. These sectors, according to the World Bank, typically employ many and expand exports.
All efforts to stimulate the productive sectors of the economy, create jobs and diversify the national export base deserve support. Nigeria’s economy is depressed because of her over-dependence on oil and gas export revenues, while the neglect of the potential in agriculture, mining and manufacturing guarantees unemployment, poverty and insecurity.
Stimulating these sectors should be government’s priority through interventions that go beyond rhetoric. Manufacturing sector’s contribution to Gross Domestic Product in Q3 2017 stood at 8.55 per cent, according to the National Bureau of Statistics. Though this is an improvement over the 3.9 per cent the sector sank to a few years ago, it falls short of the 13.37 per cent the World Bank said this sector recorded in South Africa, our main continental rival.
Studies by the United Nations Development Programme show that small businesses out-number big ones by a wide margin and are the main drivers of innovation, competition and exports. A report presented to the OECD conference of ministers says, “SMEs play a key role in transition and developing economies,” adding that they typically account for 90 per cent of all firms, generating significant domestic and export earnings and employment. A report by the Office of the United States Trade Representative said that country’s 30 million SMEs accounted for two-thirds of all new private sector jobs, grew faster and paid higher salaries than similar businesses. Australia’s SMEs constitute 97 per cent of all Australian businesses, contribute 33 per cent of GDP and employ 4.7 million people, says the Small Business Association of Australia.
Problems affecting small businesses revolve mainly around finance and management skills. In Nigeria, these problems are magnified by very adverse macro-economic conditions. Power supply nationwide is poor, averaging just 4,000 megawatts, forcing firms − big and small − to source alternatives, mostly from standby generators. This adds between 40 and 60 per cent to costs, rendering products uncompetitive. Add to this poor infrastructure, especially outside the big cities, multiple taxes, charges and fees and even unregulated fees imposed by state and local authorities, as well as chaotic ports, airports and highways, SMEs face daunting challenges here.
Funding at low interest and with long-term tenor is crucial. Decades of government initiatives have failed to solve this. Corruption, poor risk management by the development finance institutions and deposit money banks, nepotism and the culture of poor repayment of credit have prevented dramatic success. Funds provided or backed by government guarantees are treated as “national cake” and corrupt, incompetent officials collude with loan beneficiaries to default.
This fund should be better managed. The Central Bank of Nigeria, which is in partnership with BoI on this project, needs to be more effective in regulation to ensure that single interest loans are not diverted in an economy where average lending rates are between 24 and 40 per cent.
Past experience demonstrates that funding, as crucial as it is, needs the interplay of other factors to enable the SME sector to fly.
Countries that have transited most successfully from developing to industrialised export economies like Japan, South Korea, Singapore and Malaysia, apply a mix of fiscal and monetary policies to shape an environment of rock bottom interest rates, stable foreign exchange rates, first rate infrastructure and investment-friendly policies. Taming corruption is key too. Japan once offered zero to 0.5 per cent interest on such loans backed by the institutional capacity to ensure compliance. China continues, despite protests from the West, to provide low interest credit to exporters.
President Muhammadu Buhari needs to embark on reforms to liberalise the operating environment and privatise all state-owned commercial assets to attract foreign direct investment, diversify exports and create jobs. Urgently, government should withdraw from its loss-making commercial ventures to free money for infrastructure and social services.
It should view the high exchange rates, 40 per cent youth unemployment, poor infrastructure, fuel importation and liberalising the railways sector as national emergency challenges.
In the meantime, BoI and the CBN should ensure that the N250 billion goes to the right operators and that this loan does not go the wasteful way of its predecessors.
