The dream of those involved in SME development is to see these entities grow big and, hopefully, graduate to major corporations. They are therefore happy to see these enterprises transit from the informal to the formal economy. There is no need here to get bogged down by definitions of what constitutes a microenterprise or small and medium enterprises. These are some of those concepts that must be discussed contextually, paying attention to geography, economics and policy realities. Precisely, what is a microenterprise in one place may be a small enterprise in another and a small enterprise in one economy may be a medium enterprise in another. Suffice it to say that for the purposes of this offering, what is critical is to bear these facts in mind, when attempting to make any categorizations.
A number of technical definitions have been presented to distinguish microenterprises from their kit and kin – small- and medium enterprises, with whom they coalesce to form what is known as the Small and Medium Enterprises (SME) sector. Those definitions, which are often based on head count and capitalization, are no doubt useful, especially in helping to appropriately direct technical and financial support to the operators. However, the focus of this piece is on the public policy effort to develop the MSME sector and some risks associated with their transition to big business. Meanwhile, some background to our industrial development efforts may be germane.
Our industrial development effort began soon after independence, with the creation in 1964 of the Nigerian Industrial Development Bank (NIDB). The company was fashioned out of an existing company, the Investment Company of Nigeria (ICON). ICON was a world-class institution that brought together some of Nigeria’s brightest investment bankers based on intellect rather than state of origin. It is no wonder that some of the most successful new generation financial institutions in Nigeria today were founded by some of ICON’s leading lights. Otunba Subomi Balogun, founder of First City Monument Bank, whom I served as image maker and Special Assistant in the early days of FCMB, was one of ICON’s top executives from where he left to start FCMB, just for example.
The core mandate of ICON was to provide financial and other forms of support to both existing and emerging enterprises in Nigeria, in an effort to give her citizens the control of the commanding heights of the nation’s industry and commerce. As the post-independence economy expanded, there was so much to do in the area of development financing, to provide the vital requisite fillip to the burgeoning energies of the enthusiastic citizens of the newly independent state. ICON, and later the NIDB, was on hand to drive the process. .
It should also be noted that Nigeria’s industrial development dynamics were not originally focused on SMEs. The now fanciful rave of SME promotion and financing is actually a latter day phenomenon. Following independence, Nigeria adopted the Import Substitution Industrialization Strategy (ISI). This strategy was intended to create industries that would produce at home what was hitherto imported. As a result, most of the early industrial establishments of government were mostly of the large industrial variety- Large-scale Industries (LSIs). They were mostly owned by governments and supported by multilateral organizations like the World Bank and its International Finance Corporation affiliate. They were engaged in light industrial production of consumables like soaps and beverages.
The LSI industrial strategy worked initially but so much foreign exchange was needed to import raw materials for the import substituting industries. However, something happened suddenly in the 1980 that changed the fortunes of the large industrial outfits – end of the oil boom. The foreign exchange needed for the importation of raw materials and spare parts dried up. Government responded with a Structural Adjustment Programme (SAP) and the devaluation of the national currency. The struggle to self-preserve led to the proliferation of micro and small enterprises, giving SMEs a greater say in the economy as they collectively became the largest employer of labour in the country. Today, we have a full-fledged national institution specifically devoted to the promotion of SMEs in the name of SMEDAN. Perhaps there is no better way to demonstrate the commitment of government to the growth of SMEs and to say that large was no longer beautiful.
Regarding the concerted effort to develop MSMEs, the objective is to grow them and help them transit from the informal to the formal sector. This happens when they migrate from micro to small enterprises or from small to medium companies. This transition usually calls for special kind of financing and management called Transformation Financing. It ensures that as the enterprises migrate from informal to formal; they do not lose their access to vital funding. This is a critical point in the life of an enterprise and the skill set we need to handle this is premium.
Let me try to explain what happens when enterprises transform from small to medium and move from informal operation to formal sector operation. There are many special financing packages dedicated to Micro, Small and Medium Enterprises. The World Bank and the international multilateral agencies have created many funds to support the sector. In Nigeria, the government through the Central Bank has also created a large pool of funds meant to promote MSMEs. As the enterprises grow and expand their operations, they may become too big for the financing support they previously were entitled to and hence no longer qualify to participate in the funds. They are expected to move up to the next level, which is mostly bank financing for which they are often not yet ready. So they hang in between. This is where the journey to financial purgatory begins.
Those of us who are Catholics and remember our catechism may know the place of purgatory in our journey to paradise. Purgatory is that intermediate state, after physical death, in which some of those ultimately destined for heaven must first stop and undergo purification, so as to achieve the holiness necessary to enter the joy of heaven. Although purgatory may be an indication that someday the inmates will transit to heaven, and as such better than outright hell, it is not a wonderful place to be. It is neither like heaven nor like the earth. It is like a crack in the wall. Inmates have a prospect of being forgotten by the mortals on earth and angels in heaven, whose prayers are the only hope of the inmates of purgatory to eventually transit to paradise.
Companies in this financial purgatory are unable to benefit from funding appropriate to their state. It is often the case that while enterprises become bigger and over qualifies for the microenterprise financing they used to enjoy, they are unable to meet the requirements of the next higher level – formal bank financing. This is a quagmire; a negative consequence of a positive attainment. It serves to discourage microenterprises from transiting from the informal to the formal sector. In other to avoid this financial purgatory experience for our MSMEs, we must embrace what the USAID called Transformational financing.
Those charged with the responsibility of developing the SME sector must be capable of identifying the station of our enterprises, which generally follows three stages, namely: enterprise formation, enterprise expansion and enterprise transformation. This way we could minimize if not completely avoid the unwarranted stay of our enterprises in financial purgatory as they transit to formal businesses.
Emeka Osuji
