With a financing access gap of over 99 per cent, Nigeria’s micro, small and medium-scale enterprises (MSMEs) are, perhaps, the least funded globally. But in recent times, commercial banks have been in a catch-up race not only on a social consideration but also as a means to diversify their loan portfolios, GEOFF IYATSE writes
About eight in every 10 Chinese workers are employed by micro and small-scale enterprises (MSMEs). Half of the value of Chinese Yuan (CNY) the government generates as taxes also comes from MSMEs. As at 2020, the ratio of MSMEs to all Chinese businesses was 98.5 per cent, maybe the highest in the world.
Of course, the sector is the engine room of Chinese manufacturing, accounting for 68 per cent of exports and 60 per cent of the country’s total output.
As fantastic as the sector is doing, the Chinese government is not complacent. As COVID-19 swept across the globe in 2020, the Chinese authorities rolled up their sleeves in support of the sector. In that year alone, the National Financing Guarantee Fund supported 45.6 million small and SMEs with a combined value of CNY 70.91 billion while other fiscal incentives worth several billions of CNY were expended. In terms of share of credit, MSMEs get over 40 per cent of the credits to businesses.
Interestingly, whereas the prospect of the sector is buried in complaints over risk challenges, the non-performing loan (NPL) ratio of the sector is less than three per cent in China.
With a total MSME credit of $2.48 trillion, according to data obtained from SME Finance Forum (a project that involves the International Finance Corporation), the country accounts for 64 per cent of other countries’ total credit coverage. Chinese MSME credit cover is over 35 times larger than the combined $69.7 billion credit allocated to MSMEs in Africa, a continent that is only about 200 million less in population.
A startling funding gap
The startling gap symbolises the extent of neglect of small businesses in Africa, a continent gasping for economic empowerment and inclusive growth. MSMEs in Africa, in both volume and scale, are controlled and shaped by Nigeria. The country holds 86 per cent of other African country’s 43 million formal micro enterprises and almost all the formalised SMEs.
Also, Nigeria’s estimated $158.13 billion funding gap is nearly half of the rest of the continent’s N331 access gap. Particularly, in the micro category, Nigeria’s figures of partially and fully financially constrained firms are almost taken as full representations of the situation in the entire continent.
It thus implies that Nigeria bears almost the full burden of the sector’s nonperformance. The country’s MSMEs financing gap is huge, yet the absolute figures tell an extremely obscure story about the level of the paucity of funds. The estimated $158.13 billion gap represents 99.94 per cent of the funding gap as against the worldwide 56.6 per cent funding gap and Africa’s average gap of 82.6 per cent.
This challenge undermines the huge potential of the sector. Small and Medium Enterprises Agency of Nigeria (SMEDAN) estimates the number of MSMEs in Nigeria at approximately 39.6 million while the number of jobless Nigerians was pegged at 23 million as at 2020. The number of unemployed might have gone higher since 2020. But even if the figure has doubled, empowering the current MSMEs such that they engage an additional employee each could cancel out the number of unemployed.
Is funding a sufficient condition for business survival?
Sadly, the MSMEs have been kneecapped by myriad constraints. Indeed, 80 per cent of African MSMEs die in the first five years of their existence, a 2022 Nigeria MSME report carried out by Kippa, a fintech startup said. But does every small company that fails lack requisite funding? Reliable funding is a necessary condition for achieving business goals. But is it a sufficient condition for the survival of a business enterprise?
Inquiries into the causes of general business failure are more relevant today than at any other time. This is because as business conditions tighten and people lose their livelihoods, pressure on businesses increases, triggering the risk of failure.
PwC, for instance, in its Q1 2023 Insolvency Barometer, said the direct economic impact of business failure will be significantly higher this year compared to 2022 levels. It expects the overall insolvency rate to move closer to the long-term average and back toward the 2019 pre-pandemic figure of 850 insolvencies. It warns that this could rise above 1,000 if a global recession takes hold. The panic is more relevant to small businesses which are more vulnerable. But if more companies fail, would that happen because they don’t have access to funding?
According to Kippa’s survey, the most significant impediment to MSMEs’ growth is not a lack of capital but a lack of the skills necessary to manage a successful firm. Other setbacks it highlights are a lack of process, corporate structure and business acumen.
What is more important than money?
The level of priority accorded to money is perhaps the most obvious time line that separates experienced and prospective entrepreneurs. Beginners often think money is the most important thing they need to grow their business and survive but older ones have learnt from experience that money does not prevent failure entirely. That presupposes that money is necessary but not a sufficient condition for business success.
Lack of money will certainly reduce the survival chance of a company, but some experts point to absence of a market as the first reason business ideas fail. Money is often attracted by ideas. And great ideas are almost synonymous with the market. Think of it. Which bank turns down ideas that have a ready market?
In the context of market development, the talk about smart money is gaining prominence. What does smart money imply? It suggests investors that will bring money, networks, experience and business acumen to help grow an enterprise – money still, but a different kind of money.
In simple terms, smart money refers to investors or financiers who have trained their intuitions enough to identify trends and market leads. They are aware of market intelligence and pitfalls, placing them in advisory positions. Interestingly, most Nigerian banks have dozens of such individuals who are trained to see beyond the façade of business visions when accessing credit applications – a reason one should speak with banks rather than traditional lenders.
Many times, entrepreneurs take an exciting ride or attempt to invent non-existing needs. Cultures are diverse, and these essentially determine consumption. Of what use is ice to Eskimos? To contextualise this, there is a limit to the extent you can duplicate a business that thrives in northern Nigeria in the south. The climate conditions are different – and this determines what the people wear, eat or drink.
So, it is important to understand the local market and the needs. Then, the team matters. Partners must necessarily agree to travel together otherwise they could be cycling when they should be flying.
Money still matters
Capital is the life of every business, irrespective of its size. A small business needs capital to grow just as a medium-sized business needs the same for expansion. A multinational, as well, needs capital for varied reasons – vertical and horizontal diversification, liquidity buffer and many others.
There is a wrong perception that businesses need capital only when times are hard and liquidity dries. That is certainly not true. Imagine that a firm with a working capital of N1 million makes a monthly profit of N100,000. What happens if the business leverages the working capital is leveraged 10 times? It translates to N10,000. If the profit margin is sustained at the level N100,000 for every N1 million working capital, the monthly return increases to N1 million.
By simple analysis, the return on fresh capital is 10 per cent. Of course, every kobo invested in business has a cost. Let’s assume the monthly cost of the capital is five per cent (no Nigerian bank charges that high except if you visit a loan shark anyway), the entrepreneur still has a net profit of N450,000 as a result of the fresh capital injection. This is a strategy millions of big businesses use globally to scale.
Unfortunately, many Nigerian businesses see banks as vaults where they could deposit and withdraw money. That perception has constrained their ability to take advantage of market opportunities, limited their growth, and kneecapped their transition.
Yes, there is an access gap. But some entrepreneurs, for reasons such as cultural and religious beliefs, prefer funding their ideas with equity. Thousands of essays have been published on this challenge. Shouldn’t we rather dwell on the opportunity in debt funding, which is already highlighted and where budding entrepreneurs could source business-friendly credits?
A lot of Nigerian banks have improved tremendously in MSMEs funding approaches. The majority of them see MSME funding as a social investment and could lend as much as N1 million to micro businesses as working capital without collaterals. In some cases, all they require is steady transactions for six months on the customers’ corporate account.
If you have a viable business, there are several products targeted at MSMEs such as invoice discounting facilities, contract finance and cash-backed programmes. Some of these products come with complementary services such as marketing, financial management, training and bookkeeping packages. But many entrepreneurs rarely engage their banks but rather go on shadow chasing when they need capital support.
Are you also aware that many development finance institutions have created lots of MSMEs-targeted funds that are on-lent by many Nigerian commercial banks at discounted interest rates?
You can only know when you engage your bank.