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Obtaining finance, finding customers and infrastructure deficit top challenges of Nigerian MSMEs – PwC Survey

Small Businesses in Nigeria have listed the most pressing problems impacting their operations to include obtaining finance, finding customers and infrastructure deficits. These are some of the findings from a survey of Micro, Small and Medium scale enterprises (MSMEs) in Nigeria conducted by PwC Nigeria.

The survey findings were revealed during a recent webinar hosted by the firm for MSMEs on Managing the Impact of COVID-19 and Repositioning Your Business for Growth. The report titled PwC’s MSME Survey 2020- Building to last is the first in a series of surveys that aim to provide insights into a range of issues concerning MSMEs in Nigeria, and the challenges impacting business growth, particularly financing, taxation issues; and other factors – through the eyes of their CEOs.

 The survey which was conducted prior to the COVID-19 Pandemic (between August and December 2019) sought the opinion of 1629 key decision makers in the MSME sector surveyed with annual sales turnover ranging from N5 million and above. The businesses surveyed had a geographical spread covering 29 states and across the 6 geopolitical zones in the country.

Presenting results of the findings Esiri Agbeyi, partner and lead, Private Wealth Services, PwC Nigeria noted that Obtaining finance (22%), Finding customers (16%) and Infrastructure deficits (15%) were identified by respondents as their most pressing problems. When asked what the biggest cost to their business operation is, 21% identified Electricity as being responsible for the highest cost to their daily operations. This was followed by Rent (17%) and Cost of Capital and Employee cost at 15% and 14% respectively.

“Access to finance, in particular credit, is a critical enabler for the growth and development of small and medium enterprises. The SME credit market, however, is notoriously characterised by market failures and imperfections. We estimate the financing gap for Nigerian MSMEs to be about N617.3 billion annually (pre-COVID-19 pandemic). More so, based on our analysis of data from the CBN annual statistical bulletin, small businesses accounted for less than 1% of total commercial banking credit in 2018,” she said.

“We also see that Electricity accounts for the biggest costs to daily operations of MSMEs. Nigeria’s power sector is overwhelmed by a myriad of challenges that have culminated in inadequate electricity supply. This has an adverse impact on the business environment in Nigeria; consequently, contributing to significant economic costs to SME and economic growth. The International Monetary Fund (IMF) states that lack of access to reliable electricity costs the Nigerian economy an estimated USD29 billion a year.” She added.

The survey also found that the foremost economic issue affecting small businesses is the pressure to reduce prices (22%). This is followed by rising inflation (19%) and low demand for products/services. (16%). The economic recovery in Nigeria has been tepid. Despite positive economic growth in the last 3 years, Nigeria’s GDP trajectory still falls short of the projections set in the Economic Recovery and Growth Plan (ERGP) of 4.5% and 7% for 2019 and 2020 respectively.

On tax matters, MSMEs find local government levies (28%) the most difficult tax to comply with. This is closely followed by Company Income Tax (CIT) at 26% and Value Added Tax (VAT) at 25%.

Reasons for the difficulty in compliance comprised: the multiplicity of taxes and levies; lack of coordination between federal & state tax agencies, absence of technology platform(s) for ease of payment of all taxes and levies, as well as lack of fully functional tax refunds schemes at the state & federal level.  Others included the absence of comprehensive tax payment schedule notification or calendar, and physical harassment/intimidation by local tax collectors.

Highlights of some of the other findings made in the survey include that 22% of MSMEs rely on the internet, media and research publications for business insights (vs 16%who rely on professional service providers), 48% said family & friends are the most popular financing sources (vs 15% who obtained credit facilities), A higher percentage (46%) would prefer private equity over debt financing (33%), and only 10% of MSMEs believe Artificial Intelligence (AI) and the Internet of Things (IoT) will have the most impact on the growth of their businesses in the next 3 years.

One remarkable finding was how payment policies imposed by big corporates severely affected 33% of MSMEs whose payments were delayed for more than a month. The impact on cash flows is worse when you consider the double-digit interest rates or inflation. It does not come as a surprise then when about 50% of the SMEs surveyed did not record growths above 20% over the last 3 years.

The objective of the study according to PwC is to capture the challenges the MSME sector faces, identify opportunities to unlock growth and investment, provide solutions, mitigate risks and assess the outlook for MSMEs across industries. Findings covered the Nigerian business environment and market conditions, tax issues, access to finance, growth obstacles, payment policies, the role of technology and the impact of women on the MSME sector in Nigeria. The report also includes case studies with leading SME players across various sectors, as well as interviews with key stakeholders and experts on the sector.

Commenting on the report, Uyi Akpata, Country Senior Partner, PwC Nigeria in his foreword noted:

“Our MSME Survey 2020 is aimed at gauging experiences of sector players, assessing the underlying issues which MSMEs face and providing insights on this strategically important sector. You will find the survey headlines confirm some persistent problems and sheds light on those you never really considered to be issues such as payment policies,” he said.

MSMEs are critical to Nigerian’s economic development. According to the National Bureau of Statistics, SMEs in Nigeria have contributed about 48% – on average – to the national GDP in the last five years. Totaling about 17.4 million enterprises, they account for about 50% of industrial jobs and nearly 90% of activities in the manufacturing sector, in terms of number of enterprises. Despite the significant contribution of SMEs to the Nigerian economy, challenges still persist that hinder the growth and development of the sector. Challenges encountered by the sector include lack of skilled manpower, multiplicity of taxes, high cost of doing business, among others.

PwC’s 2020 SME survey report is the first of its kind in this sector.  The firm hopes the findings will be useful to both policy makers and stakeholders in the sector and help to kickstart new solutions for this critical sector.

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