The contribution of Micro, Small and Medium Enterprises (MSMEs) to the Nigerian economy is dampened by an unmet finance gap of $32.2 billion (N13 trillion), the International Finance Corporation has said.
In a report titled ‘Market Bite Nigeria’, the corporation said although lending to the sector has grown by 42 percent to about N590 billion post-Covid, it is still not sufficient enough for MSMEs, whose major problem is access to finance.
‘’While commercial banks lend to larger firms, smaller-scale businesses generally struggle to access formal financing; there are many reasons for this, including the government’s crowding out of the private sector, a weak debt resolution and loan recovery framework, an underutilised and underdeveloped financial infrastructure,’’ the report stated.
The report added that MSMEs often lack the business and technical capacity to make successful loan applications while small-scale entrepreneurs, often operating informally and on a micro scale, are commonly perceived as being too costly and too risky for financial institutions to serve.
Highlighting sectors with the highest demand for credit, the report said businesses in the agriculture, wholesale and retail trade sectors which are majorly informal business operators are typically underserved.
According to the survey, four primary funding sources for MSMEs are microfinance banks, which are the highest source of finance providing $658 million; private equity and venture capital firms, which issued $640 million; and commercial banks contributed $340 million as well as digital financial service providers.
The report, which surveyed 980 MSMEs between July 2021 and March 2022, revealed that the financial constraints of MSMEs intensified following the outbreak of the COVID-19 pandemic; however numerous interventions from the government to cushion the impact of the pandemic had little impact on these businesses.
For example, the Central Bank of Nigeria (CBN) deployed series of intervention funds such as N1trillion manufacturing and import substitution facility, N220 billion Micro, Small and Medium Enterprises Development Fund, the N100 billion Health Care and Pharmaceuticals Support Funds, and N300 billion Real Sector Support Facility to help boost activities and recovery in local manufacturing
Segun Ajayi-Kadir, director-general of Manufacturers Association of Nigeria, said recently in a statement that feedbacks from manufacturers and interaction with the CBN on several occasions showed that the post-Covid facilities and funds for the sector’s recovery had not been adequately accessible to manufacturers, with only N300 billion (30 percent of the loan) disbursed in one year to 76 companies.
“47 percent of MSMEs surveyed by IFC were aware of government support initiatives, including funding, only 11 percent of surveyed MSMEs had received such government support, just over 16 percent had accessed business association initiatives, and just over 1 percent stated that they had benefited from incubators; only 8 percent of respondents were aware that their bank offered training for MSMEs,” the report added.
According to the IFC, addressing informality of these businesses will enhance their access to finance as well as revenue collection for the government.
“Many informal enterprises often do not have a business bank account but operate their business using a personal bank account, In addition, they do not have proper record-keeping processes in the form of financial accounts or audited financial statements; As a result, formal financial institutions typically do not serve informal MSMEs due to the know your customer requirements,’ it stated.
IFC, however, stressed on the need for the government through the Corporate Affairs Commission (CAC) to ensure that the business registration process is more accessible to MSMEs, taking account of their constraints in internet access and power availability.
It also urged financial institutions to help MSMEs register their businesses while opening a business account or applying for a loan, adding that the CAC can automate the opening of a bank account for MSMEs that can register their business through their platform.
Read also: DBN: Five years of impactful partnership with Nigeria’s MSMEs
“Industry associations should enhance ongoing efforts to provide business development services to MSMEs that include information on the benefits of formalization. Associations are strongly encouraged to use radio as a dissemination tool to reach MSMEs,” it said.
It also stated that improving Nigeria’s business development services market would help create an enabling MSME ecosystem and improve access to finance for the business growth.
According to the Small and Medium Enterprises Development Agency of Nigeria, there are approximately 39.6 million MSMEs that create about 84 percent of jobs and contribute significantly to economic activities.
Hence, there is an urgent need for capacity development and business support services targeted at these smaller enterprises. In cities where capacity development support is available, MSMEs are often hindered by fees to access these services.
The report also noted that the adoption of digital financial services among MSMEs has potential because it opens new avenues for financial services providers to reach this market segment.
‘‘Innovation and collaborative fintech frameworks offer the possibility to build and strengthen the fundamentals of an MSME finance business and to develop more advanced offerings and tools for financial institutions to serve MSMEs in a sustainable way,’’ it stated.
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