SME funding as panacea to Nigerian Prosperity

By Bayo Ogunmupe

According to the Nigerian Bureau of Statistics (NBS), Small and Medium Enterprises have contributed 48 percent of Nigeria’s Gross Domestic Product (GDP) in the past five years. They account for 50 percent of Nigeria’s industries and 90 percent of our manufacturing, in terms of number of enterprises. A 2020 World Bank report notes that most Nigerian SMEs do not grow, they remain stagnant or exit. However, a few exhibit rapid growth in productivity and scale. Indeed, some startups shape the Nigerian economy through new and more productive business models. The World Bank report also noted further that compared to large firms, SMEs are more likely to fold up permanently. But a strong SME dominated economy bolsters the economy’s resilience in diversifying the domestic economy, thereby reducing fluctuations in the global and private capital inflows. Sadly, poor SME funding, and overregulation threaten the sustainability of SMEs. In a 2020 survey, 57 percent of SME chief executives cited multiple taxes and levies and the absence of technological aid as challenges of SME growth. Lack of access to credit and overregulation remain the bane of SME development in Nigeria. Without finance to facilitate transactions, the entire SME supply chain comes to a halt. Trade finance becomes highly relevant here, by introducing liquidity via a Central bank of Nigeria (CBN) special allocation. One of the segments that has been impacted the most by the exit of large global banks from frontier and emerging market economies as economic fallout of the COVID19 pandemic was its subsequent impact on SME funding. Thus, financial inclusion in Nigeria is yet to peak as most SMEs operate in the informal sector and are largely unbanked. Hence their viability cannot be ascertained Indeed, the hurdles that impede growth in the informal market have not been effectively tackled. For example, customs clearance in the ports requires tons of paper documents which slow down trade activities by forcing unnecessary supply chain bottlenecks. These bottlenecks form a hurdle for most SMEs who require ease of doing business and valuable financial products offered by the banks to drive their growth plans. It is for this reason that I advocate a separate one trillion naira special funding allocation for SMEs. That was how China, India and South Korea escaped from poverty strangulation to transition into industrial societies. Digitisation is another enabling policy option for a rapid SME propelled industrialization. Moreover, the pandemic has accelerated the adoption of digital trade finance solutions by SMEs. While technology driven solutions are becoming more and more relevant, much of the trade finance sector, is still paper driven, with manual processes slowing down access to finance. To digitize trade finance, the entire ecosystem needs support to participate in how to unlock value. This includes how to integrate activities between role players and regulators, the banks and other non-bank financial institutions. This drives a concept known as digital trade ecosystem. It is an online platform that facilitates the exchange of data between partners in trade finance networks. It is a catalyst for this sector. While innovation and advancement in technology are important. To leverage the positive impact of digitization, there are issues that have to receive urgent attention. These issues will leverage the positive impact of digitization on SMEs. First issue is a focus on a system to facilitate coherent industry-wide solutions that can operate on the world’s scale. This is particularly relevant to Nigeria with the opening of the African Free Trade Area which we expect to be a big driver of cross border trade in Nigeria. The second issue is standardization. This is an important issue to the sector because only parts of the African Continental Free Trade Area finance process are subject to digital innovation. Which is why the end-to end digitization across the trade value chain remains fragmented. We need common language technology and credit scoring systems to facilitate faster access to solutions. Finally, we need to focus on more agility in the regulatory space. An example in this age paperless communication, is the limited acceptance of electronic documents and digital signatures on contracts by banks and other stakeholders. Millions of dollars of transactions could be freed up through the adoption of these digital tools. Digitization must be supported by easy foreign currency availability and the regulatory reform in the appropriate treatment of trade finance. However, Nigerian government failure to formalize the operations of over 34 million informal micro- small and medium enterprises (MSMEs) in Nigeria has continued to minimize the potential of the Nigerian economy. Latest figures from the NBS show that of the 39,654,385 SMEs in Nigeria, 34,413,420 operate informally. This makes it impossible for the government to regulate and harness full benefits from them; particularly in terms of taxes. As contained in the 2020 SME survey jointly conducted by the NBS and the Small and Medium Enterprises Development Agency (SMEDAN). The assets of the SMEs were valued at N8.41 trillion in 2020, despite the pandemic. If nothing is done to formalize this sector, we cannot fully optimize the potential of the Nigerian economy and the growth expected cannot be actualized because the informal space is very