Recovery 107: Solving the challenge of financing digitisation of SMEs in Nigeria

QUOTE: certain issues continue to limit the sector, especially the fact that SMEs lack sufficient collateral and may not like to expend or mortgage them to finance digital projects, which may be more of intangible nature

The Nigerian economy, like many others at its level of development, is dominated by Micro, Small and Medium Enterprises (MSMEs), especially the micros that employ about ten workers. Despite untold hardship suffered by operators in the sector, due largely to failure of public services, and lack of enablers, the sector continues to grow because it provides a safe haven for all manner of people, including those seeking financial survival and economic independence. It is the economy’s backbone and serves also as a back-stopper for white collar people structured out of their livelihood by the changing economic environment.

The lowest hanging fruit to those who lose their jobs in the formal sector is usually to try something of their own. This could be petty trading, light manufacturing or something else in that genre, which incidentally form the leading business areas in the Nigerian informal sector. In this way, the MSMEs provide as much as half of the world’s Gross Domestic Product and up to two-thirds of its employment. In Nigeria, microenterprises, with little or no capital, and short in critical leadership assets, constitute over 99 percent of the over 41.5million MSMEs operating in the country. Until we begin to build our own Microsoft, Google and Apple, the MSMEs remain our mainstay. And must be treated with the care they deserve.

The Central Bank’s Anchor Borrower Programme is one good way of helping these entities not only to access much needed capital but also to find off-takers for their output. The programme helps the atomistic operators to form into cooperatives of members grouped in 5s, tens or any such numbers that are manageable, to be linked to a bigger company called the Anchor, for the purposes mentioned earlier, and also helping them grow and become formal entities. While those kinds of programmes, and there are quite a few of them in Nigeria, were proceeding apace, the pandemic struck, changing many of the dynamics and introducing new challenges.

One of such new dynamics is the need to go virtual through digitization. For MSMEs, which lack capital and could hardly muster the needed leadership capacity to drive change, adding a process like digitization, which is undoubtedly expensive, expands the horizon of uncertainties. However, as the Peruvian economist, Hernando de Soto, said, “the present has finally prevailed and the past shall not return”. Clearly, the word has changed for good and it is not likely to return to in-person services at the rate we knew it.

Unfortunately, Nigeria is a developing country and typically not famous for efficiency of service delivery. For instance, the process of company registration, which is supposed to be one of the ways to increase the conversion of informal businesses to the formal sector, is alleged to have become a gruelling experience for lawyers trying to register companies, as the Corporate Affairs Commission enforces rules that tend to slow down company registration. The delays and several trips of lawyers to and from Abuja, add to the high cost of doing business. The MSME sector has faced productivity challenges as a result, especially in the more rural areas, despite the increasing availability of financing opportunities and funding avenues. It is likely that the transformation to digital operations will enhance productivity, if implemented.

Accordingly, these small companies have little or no choice but to transform to the digital, in order to survive. How will Nigeria’s MSMEs fund their digital transformation? Where will the money come from? It is therefore likely that digital transformation will be very slow in Nigeria, with implications for jobs, consumer spending and general economic growth. We must try to reduce the challenges in this area for MSMEs.

In regard to funding, there have been several funds created to help MSMEs, including one by the Bankers’ Committee for equity investment in SMEs in the country. That fund is known as the Small and Medium Enterprises Equity Investment Scheme (SMEEIS). It had been alleged that the typical Nigerian entrepreneur likes to go it alone, and therefore rejects equity participation by others. Perhaps, the time has come for a review of such cultural disabilities that plague our economic transformation efforts. I believe there is now a well-developed supply of public financing instruments and schemes that will ensure that overall access to finance by MSMEs is improved.

However, certain issues continue to limit the sector, especially the fact that SMEs lack sufficient collateral and may not like to expend or mortgage them to finance digital projects, which may be more of intangible nature. Add these challenges to the fact that operators are yet to understand the extent of the changes, which the new normal is going to bring, then the issue becomes more magnified.

As companies and other entities push towards the digital, several challenges in addition to finance are bound to emerge. These challenges may initially depress revenues but may eventually become revenue props. Technology costs a lot of money to adopt and even more so to adapt. We must design new strategies to collectively address the funding challenges that will follow the effort of SMEs to digitize.