CHAPTER
ONE
INTRODUCTION
1.1 Background
to the Study
Since
Nigeria attained independence in 1960, considerable efforts have been directed
towards industrial development. The initial efforts were government-led through
the vehicle of large industry, but lately, emphasis has shifted to Small and
Medium Scale Enterprises (SMEs) following the lessons
learnt from the success of SMEs in the economic growth of Asian countries (Ojo,
2003). Thus, the recent industrial development drive in Nigeria has focused on
sustainable development through small business development. Prior to this time, particularly
judging from the objectives of the past National Development Plans, 1962-68,
1970-75, 1976-80 and 1981-85, emphasis had been on government-led
industrialization, hinged on import-substitution strategy.
Since
1986, government had reduced its role as the major driving force of the economy
through the process of economic liberalization entrenched in the
IMF pill of Structural Adjustment Programme. Emphasis, therefore, has shifted
from large-scale industries to small and medium- scale industries, which have
the potentials for developing domestic linkages for rapid and sustainable
industrial development. Attention was focused on the organized private sector
to spearhead subsequent industrialization programmes. The incentives given to
encourage increased participation in these sectors were directed at solving
and/or alleviating the problems encountered by industrialists in the country,
thereby giving them opportunity to increase their contribution to the Gross
Domestic Product (GDP).
The contribution of Micro, Small
& Medium Enterprises (MSMEs) to economic growth and sustainable development
is globally acknowledged (CBN, 2004). There is an increasing recognition of its
pivotal role in employment generation, income redistribution and wealth creation
(NISER, 2004). The micro, small and medium enterprises (MSMEs) represent about
87 per cent of all firms operating in Nigeria (USAID, 2005). Non-farm micro,
small and medium enterprises account for over 25 per cent of total employment
and 20 percent of the GDP (SMEDAN, 2007) compared to the cases of countries
like Indonesia, Thailand and India
where Micro, Small and Medium Enterprises (MSMEs) contribute almost 40 percent
of the GDP (IFC, 2002).
Whilst MSMEs are an important part
of the business landscape in any country, they are faced with significant
challenges that inhibit their ability to function and contribute optimally to
the economic development of many African countries. The position in Nigeria is
not different from this generalized position (NIPC, 2009).
Realizing the importance of small
businesses as the engine of growth in the Nigerian economy, the government took
some steps towards addressing the conditions that hinder their growth and
survival. However, as argued by Ojo (2003), all these SME assistance programmes
have failed to promote the development of SMEs. This was echoed by Yumkella
(2003) who observes that all these programmes could not achieve their expected
goals due largely to abuses, poor project evaluation and monitoring as well as
moral hazards involved in using public funds for the purpose of promoting
private sector enterprises. Thus, when compared with other developing
countries, Variyam and Kraybill (1994) observed that many programmes for
assisting small businesses implemented in many Sub-Saharan African (SSA)
countries through cooperative services, mutual aid groups, business planning,
product and market development, and the adoption of technology, failed to
realize sustained growth and development in these small enterprises. Among the
reasons given were that the small-sized enterprises are quite vulnerable to
economic failure arising from problems related to business and managerial
skills, access to finance and macroeconomic policy.
Despite MSME’s important contributions
to economic growth, small enterprises are plagued by many problems including
stagnation and failure in most sub-Saharan African countries (Bekele, 2008). In
Nigeria, the problem is not limited to lack of long-term financing and
inadequate management skills and entrepreneurial capacity alone, but also,
includes the combined effect of low market access, poor information flow,
discriminatory legislation, poor access to land, weak linkage among different
segments of the operations in the sector, weak operating capacities in terms of
skills, knowledge and attitudes, as well as lack of infrastructure and an
unfavourable economic climate.
Lack of access to finance has been
identified as one of the major constraints to small business growth (Owualah,
1999; Carpenter, 2001; Anyawu, 2003; Lawson, 2007). The reason is that
provision of financial services is an important means for mobilizing resources
for more productive use (Watson and Everett, 1999). The extent to which small
enterprises can access fund determines the extent to which small firms can save
and accumulate their own capital for further investment (Hossain, 1988), but
small business enterprises in Nigeria find it difficult to gain access to
formal financial institutions such as commercial banks for funds. The inability
of the MSEs to meet the conditionalities of the formal financial institutions
for loan consideration provided a platform for attempt by informal institutions
to fill the gap usually based on informal social networks; this is what gave
birth to micro-financing. In many countries, people have relied on the mutually
supportive and benefit-sharing nature of the social networking of these sectors
for the fulfilment of economic, social and cultural needs and the improvement
of quality of life (Portes, 1998). Networks based on social capital exist in
developed as well as developing countries including Nigeria.
The reluctance of formal financial
institutions to introduce innovative ways of providing meaningful financial
assistance to the MSEs is attributed to lack of competition among financial
service providers, in the sense that none of financial service providers came
up with an innovative way of financing small businesses. In order to enhance
the flow of financial services to the MSME subsector, Government had, in the
past, initiated a series of programmes and policies targeted at the MSMEs.
Notable among such programmes were the establishment of Industrial Development
Centres across the country (1960-70), the Small Scale
Industries Credit Guarantee Scheme (SSICS)
1971, specialized financial schemes through development financial institutions
such as the Nigerian Industrial Development Bank (NIDB) 1964, Nigerian Bank for
Commerce and Industry (NBCI) 1973, and the National Economic Recovery Fund
(NERFUND) 1989. All of these institutions merged to form the Bank of Industry
(BOI) in 2000. In the same year, Government also merged the Nigeria
Agricultural Cooperative Bank (NACB), the People’s Bank of Nigeria (PBN) and
Family Economic Advancement Programme (FEAP) to form the Nigerian Agricultural
Cooperative and Rural Development Bank Limited (NACRDB). The Bank was set up to
enhance the provision of finance to the agricultural and rural sector.
Government also facilitated and guaranteed external
finance by the World Bank (including the SME I and SME II loan scheme) in 1989,
and established the National Directorate of Employment (NDE) in 1986.
In 2003,
the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), an
umbrella agency to coordinate the development of the SME sector was
established. In the same year, the National Credit Guarantee Scheme for SMEs to
facilitate its access to credit without stringent collateral requirements was
reorganised and the Entrepreneurship Development Programme was revived. In
terms of financing, an innovative form of financing that is peculiar to Nigeria
came in the form of intervention from the deposit-money banks. The deposit
money banks through its representatives, ‘the Banker's Committee’, at its 246th
meeting held on December 21, 1999. The deposit-money banks agreed to set aside
10% of their profit before tax (PBT) annually for equity investment in small
and medium scale industries. The scheme
aimed, among other things, to assist the establishment of new, viable SMI projects;
thereby stimulating economic growth, and development of local technology,
promoting indigenous entrepreneurship and generating employment. Timing of
investment exit was fixed at minimum of three years, that is, banks shall
remain equity partners in the business enterprises for a minimum of three years
after which they may exit anytime. By
the end of 2001, the amount set aside under the scheme was in excess of six
billion naira, which then rose to over N13 billion and N41.4 billion by
the end of 2002 and 2005 respectively.
The
modality for the implementation of the fund is such that the fund set aside is
to be invested within 18 months in the first instance and 12 months thereafter.
After the grace period, the CBN is required to debit the banks that fail to
invest the fund set aside and invest same in treasury bills for 6 months.
Thereafter, the un-invested fund would be bidded for by successful investors
under the scheme. The fund set aside by the banks under the scheme decreased
from N41.4 billion in 2005 to N38.2billion in 2006. This was as a result of
N2.5billion and N25.3 million set aside from failed banks and liquidated banks
respectively, which were netted out after the bank consolidation exercise.
Actual investment during the period grew from N12 billion in December 2005 to
N17 billion in 2006, representing only 29.1 percent of the total fund set
aside. In 2007, total amount set aside decreased further to N37.4 billion,
while total investment stood at N21.1 billion representing 56 percent of the
total sum set aside. The number of projects that benefitted from the scheme
also increased to 302 projects in 2007, from 248 in 2006 (CBN, 2007).
The
CBN found the reasons for the slow pace in utilization of the SMIEIS fund to
include: the desire of the Banks to acquire controlling shares in the funded
enterprises and the entrepreneurs’ resistance to submit control; inability of
the banks to adapt equity investment which is quite different from what the
banks are familiar with in credit appraisal and management, and lack of proper
structure for effective administration of the scheme when it took off among
other factors. Responding to the findings, the Bankers’ Committee took a policy
decision to extend funding under the scheme to all business activities
including even non-industrial enterprises, except for general commerce and
financial services. The name of the scheme was changed from SMIEIS to Small and
Medium Enterprises Equity Investment Scheme (SMEEIS) to reflect the expanded
focus. Also, the limit of banks’ equity investment in a single enterprise was
increased from N200 million to N500 million, making room for medium size
industries.
Despite
all these efforts, the contribution of SMEs in the industrial sector to the
Nation’s GDP was estimated to be 37% compared to other countries like India,
Japan and Sri Lanka and Thailand where SMEs contributed 40%, 52% 55% and 47.5%
respectively to the GDP in 2003, (UNCTAD, 2003), hence the need for alternative
funding window. In 2005, the Federal Government of Nigeria adopted microfinance
as the main financing window for micro, small and medium enterprises in
Nigeria. The Microfinance Policy Regulatory and Supervisory Framework (MPRSF)
was launched in 2005. The policy, among other things, addresses the problem of
lack of access to credit by small business operators who do not have access to
regular bank credits. It is also meant to strengthen the weak capacity of such
entrepreneurs, and raise the capital base of microfinance institutions. The objective of the microfinance policy is
to make financial services accessible to a large segment of the potentially
productive Nigerian population, which have had little or no access to financial
services and empower them to contribute to economic development of the country.
The microfinance arrangement makes it
possible for MSEs to secure credit from Microfinance Banks (MFBs) and other
Microfinance Institutions (MFIs) on more liberal terms. It is on this platform
that we intend to examine the impact of microfinance on small business growth,
survival, as well as business performance of MSEs operators.
1.2 Statement of Research Problems
Majority
of the micro and small enterprises (MSEs) in Nigeria are still at a low level
of development, especially in terms of number of jobs, wealth and value
creation. This is because 65% of the active population, who are majorly
entrepreneurs, remain unserved by the formal financial institutions. The
microfinance institutions available in the country prior to 2005 were not able
to adequately address the gap in terms of credit, savings and other financial
services. As reported by the CBN, the share of micro credit as a percentage of
total credit was 0.9%, while its contribution to GDP was a mere 0.2% (CBN,
2005). The CBN in 2005 identified the unwillingness of conventional banks to
support micro-enterprises, paucity of loanable funds, absence of support
institutions in the sector, as well as weak institutional and managerial capacity
of existing microfinance institutions among other reasons as the major reasons
for the failure of past microfinance initiatives in the country. To address the
situation, the Microfinance Policy, Regulatory and Supervisory Framework
(MPRSF) for Nigeria was launched by CBN in 2005 to provide sustainable
financial services to micro entrepreneurs. This initiated an important turning
point in the microfinance industry with the establishment of the Microfinance
Bank (MFB) as an institutional vehicle for privately owned, deposit taking
Microfinance Institutions (MFIs). The framework is designed to unite the best
of the NGO credit organizations, and new MFI initiatives under a common legal,
regulatory and supervisory regime. Five years down the line, though
microfinance has proven to be one of the ways of bridging the resource gap
created in the Nigerian economy, there are still some undesirable problems
experienced against its proper execution. The lack of documentation of the
practice of microfinancing in Nigeria has made it difficult to formulate
supportive programmes for the growth of the sector.
For
complete materials (Chapter One to Chapter Five), visit www.researchshelf.com
No comments:
Post a Comment