Influence of the Nigerian business environment on SMEs

As small and medium-sized enterprises serve as a vehicle for the reduction of income inequalities by pooling skilled and semi-skilled employees from different sectors of the economy, it is important to ensure that external factors which affect their operations are complementary. The Nigerian business environment is however not encouraging for SMEs as many legal, financial and natural factors hamper its success.

The business environment comprises factors within and outside organisations that influence operational activities. It includes elements such as infrastructural, legal, natural, financial, cultural, economic, social, and political environments which influence the operational activities and performance of an organisation. The environment within which a business operates is very important for its smooth running. The Nigerian business environment has been deemed as largely unfavourable for the survival of fragile businesses such as SMEs and startups for a variety of reasons. This article examines three important external factors that mitigate the success of SMEs within the Nigerian business environment.

In terms of finances within the macroeconomic framework, many startups and SMEs in Nigeria have extreme difficulty in navigating the Nigerian banking system. In retrospect, the activities of the Nigerian banking sector have proven to be greatly insensitive to the plight of SMEs. From the harsh taxation system on business accounts to the high rate of interest charged on loans and the policies which have coalesced to devalue the Naira, SMEs in Nigeria are faced with a myriad of unfavorability that continues to dampen their operational success.

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Furthermore, the lack of basic infrastructure such as an affordable and effective transport system, coupled with the unavailability of constant power supply put Nigerian SMEs in a tough spot as they are made to pay high rates for services that can be otherwise provided by the government. Fixed expenses such as high rental rates due to lack of affordable housing result in high inflation rates, which negatively affect the sales of goods and services by these SMEs.

Finally, the after-effect of the outbreak of coronavirus, and the resulting lockdown continue to put SMEs in a vulnerable economic position. Many SMEs were forced to shut down during the long lockdown period and even now, the surviving businesses suffer from a fall in aggregate demand and supply. In fact, according to a survey conducted by the Nigerian Bureau of Statistics in 2020 using 1,943 SMEs, 94.3% of respondent businesses were negatively affected during and after the pandemic in areas of cash flow, sales and revenue. As a result, the operations of SMEs dwindles continuously, a phenomenon that worsens the frailty of these businesses within the Nigerian environment.

It can therefore be concluded that there exists a relationship between SMEs and the environment in which they operate. In Nigeria especially, SME administrators must understand the different types of external business environments and their implications on the organisational performance of their business activities. This is to ensure they identify challenges or threats to their businesses and update their knowledge or skills necessary to meet the predicted changes in the realm of their enterprises.

If SMEs hope to succeed within the Nigerian space, they must understand the mitigating factors that can dampen their operations and seek opportunities that will help them thrive sustainably within the Nigerian business environment.