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Unlocking SMEs Potentials with Better Funding

Segun Opaleye- Managing Director/CEO, Still Earth Capital Finance Limited (SEL Capital)
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Capital is crucial in driving sustainable Small and Medium Enterprises’ (SMEs’) growth but access to it remains a daunting task for many operators. Managing Director/CEO, Still Earth Capital Finance Limited (SEL Capital), Segun Opaleye speaks on the company’s research report detailing the state of the SMEs sector and what should be done to bridge funding gaps and other challenges facing it. The report highlights different funding options for SMEs and what operators, banks and government should do to unlock potentials in the sector.

The economies of great nations thrive on the strength and capabilities of their Small and Medium Enterprises (SMEs). For Nigeria, the Central Bank defines SMEs as enterprises with asset base (excluding land) of between N5 million and N500 million and labour force of 11 to 300 people. They are also seen as the engine block of the economy supporting job and wealth creation for the citizenry. For SMEs to achieve these goals of creating jobs; stimulating growth and development of the economy, operators’ easy access to credit must be promoted and guaranteed.

In Asia, Europe and North America, SMEs play significant roles in their emergence as global economic powers. The same cannot be said of Nigeria as SMEs have performed below expectations because of lack of access to finance as it is hard to raise external finance and the few shareholders makes raising internal finance difficulty. Other challenges include poor infrastructure, access to markets, inconsistency of government policies amongst other challenges.

To reverse this trend and put Nigeria’s SMEs on sound footing, Still Earth Capital Finance Limited (SEL Capital) released its research report titled: Stimulating SMEs for Growth.

SEL Capital is a multi-faceted financial services company offering tailored financial services and solutions to individuals, companies and the public sector. It provides a diversified range of financial services including corporate finance advisory, project finance, structured finance SMEs support services, wealth management and agency services.

The Managing Director, SEL Capital, Segun Opaleye, said the report was the company’s way of helping SMEs overcome the challenges facing their operations through insights to support operators’ decision-making process and government & regulatory agencies in their roles in making SMEs the bedrock of the economy.

Opaleye said SMEs vary from country to country, they are defined by the role they play in the economy as well as policies and programmes designed by agencies or institutions to guide their operations. Though, there are characteristics peculiar to them; SMEs are mostly unquoted, with restricted ownership to few individuals and they are not micro-businesses that exist to employ just owner.

He said that to fund their operations, SMEs initially turn to internal and external sources of finance. Internal sources include personal savings, borrowings from family and friends and credit from local cooperative societies but as business expands, they require greater pool of funds than is made available by these sources to meet business financing needs. The external sources of finance provide wider access to large pools of funds which are required for SMEs to exploit growth and investment opportunities.

He said SMEs can expand operations by identifying and utilizing business opportunities with better access to finance structured specifically to cater to identified needs. Such funding, he added, will come from financial institutions such as finance companies, commercial banks, development finance institutions, government grants and funds and venture capital funds.

According to the SEL Capital report, a large percentage of SMEs in high income countries operate in the formal sector and contribute over 50 per cent to Gross Domestic Product (GDP). They also account for more than 90 per cent of all firms outside the white-collar jobs sector thereby constituting a major source of employment.

Overview of the SME Sector in Nigeria

The report explained that most recent Micro Small and Medium (MSMEs) survey conducted by the Small and Medium Enterprises Development Agency (SMEDAN), showed that the number of SMEs increased by over 100 per cent between 2010 and 2013 from 17.2 million in 2010 to 37 million and contributed about 48.5 per cent to GDP in 2013.

The MSMEs’ contribution to exportation also accounted for 7.27 per cent of total exports. The SMEs also account for the employment of about 60 million people and have become the most important vehicle of employment generation, entrepreneurial training and development in the country but they face daunting challenges.

 Hurdles before SMEs

The report said about 80 per cent of SMEs are stifled because of poor financing. It said the problem of financing SMEs is not so much the sources of funds but its accessibility. “Stringent conditions set by financial institutions, lack of adequate collateral and credit information and cost of accessing funds which stems from the uneconomic deployment of available resources are to blame,” it said.

Operators, it said, also have difficulty in registering companies even as constricted regulatory framework creates a hostile environment to successfully conduct business activities in the country. “Issues around corruption, bureaucratic bottlenecks and high charges/tariffs are some of the factors contributing to the difficulty of conducting business for SMEs in Nigeria,” the report said.

It added that poor record keeping, technical problems/competence and lack of essential and required expertise in production, procurement, maintenance, marketing and finances have always led to funds misapplication, wrong and costly decision making for SME business owners.

The report said that SMEs are burdened with enormous multiple taxes and tax related issues which affect profitability. “SMEs are also taxed with multiple levies from various government agencies and parastatals which affect business activities negatively,” it said.

The SMEs also face inadequate infrastructure which ranges from shortage of water supply, inadequate transport systems and poor electricity supply to improper solid waste management. “This infrastructure inadequacies lead to high operating costs for SMEs which often contend with high costs of imported materials and poor access to raw materials in local markets,” it added.

Also, policies directed towards SMEs are often un-comprehensive and lack coordination/linkages with other established programmes and policies. As a result, these programmes/policies do not have the desired effect on SMEs. Lack of adequate data on SMEs also makes planning difficult and impedes confidence in the sector.

“Besides, volatility in the exchange rate, output and inflation often impact negatively on the business activities and operating capacities of SMEs. SMEs dependent on importation of raw materials often struggle with exchange rate fluctuations and inflation. Also, lack of access to modern technology and infrastructure to support this technology hinders the growth of SMEs in sectors which require technology to enhance productivity,” the report said.

Global trends Vs Nigeria SMEs

The SEL Capital report explained that in the Organisation for Economic Co-operation and Development (OECD) region (United States of America, United Kingdom, Japan, Germany, France among others), SMEs account for 99 per cent of all firms; 70 per cent of jobs and generate between 50 to 60 per cent value added on average.

It said that the OECD countries use special policies to spur SME growth and innovation by providing business environments conducive to growth, adopting policies which encourage innovation and technology transfer, improving access to finance and supporting development of strategic resources particularly technology.

For instance, the United Kingdom set up the British Business Bank (BBB) in 2014 to improve access to finance for smaller UK businesses. The BBB works with partner companies including banks, leasing companies, and venture capital funds to lend and invest indirectly in SMEs.  It has supported over 48,000 SMEs in the UK with about £3.1 billion.

In the BRICS comprising of Brazil, Russia, India, China and South Africa, SMEs represent about 90 per cent of total firms in the economies and create a buffer for high unemployment rates particularly in China and India where population is high.

The report said early policy making in BRICS economies has notably improved the performance of SMEs over the years particularly with establishment of specialized institutions like SEBRAE (Brazilian Micro and Small Business Support service). SMEs in India are estimated to be about 42.5 million employing about 109 million people, an estimated 40 per cent of the workforce.

The report showed that in transition economies, like the MINT economies (Mexico, Indonesia, Nigeria, and Turkey) SMEs have been recognised as playing a vital role in employment creation and poverty alleviation. SME businesses are the major source of income to low income households. They account for about 85 to 90 per cent of employment and contribute about 50 per cent to GDP.

The SMEs account for employment of about 60 million people in Nigeria, about 84 per cent of the total work force but have remained largely informal without legal and financial protection. Survey carried out by SMEDAN in 2013 indicated that about 96 per cent of SMEs are not officially registered and 70 per cent do not have viable business plans while 65.2 per cent of SMEs do not have insurance cover.

 Way forward for SMEs

The SEL Capital report said that although, Nigeria is currently one of the best improvers on the Doing Business Index, more reforms are needed to improve the rating and create a more enabling environment for the growth and development of SMEs.

It said the improvements in the macroeconomic indicators – GDP, inflation and exchange rates – and stability of macroeconomic and regulatory policies will also significantly address some of the challenges facing SMEs.

Opaleye insists that deliberate intervention by government is required to improve economy perception at the global view and unlock the potentials in the SME sector.

On poor access to finance, he explained that to support the growth of SMEs, government and financial institutions needed to create measures supporting sales, cash flows and working capital as well as measures enhancing SMEs’ access to bank lending.

On innovation, Opaleye said the SME sector requires effective innovative schemes that can bring together small enterprises in various industries to exploit the immense national business opportunities.

“The government is also expected to actively encourage investments in the SME sector and growth of new business to generate employment and alleviate poverty. The sufficient information on new technology and innovations will ensure global competitiveness in terms of product quality and pricing and improve export earnings from SMEs,” he said.

On infrastructure development, he said: “It is important to create an enabling business environment where businesses can operate without limitations imposed by stifling conditions. Investment in the development of infrastructure, particularly implementation of the power sector reform policies is also critical in improving the ease of doing business and improving productivity of SMEs”.

Opaleye urged government to carry out institutional reforms by championing the creation of support systems targeted directly to offer support to SMEs. Existing institutions should be realigned to effectively utilize their service offerings to SMEs.

On capacity development, he said SMEs require capacity building in areas of technical and management skill development to effectively run the businesses. Initiatives to deepen entrepreneurship capabilities amongst business owners will improve the lifespan of the average Nigerian SME.

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