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SMALL AND MEDIUM ENTERPRISES (SME) AS CRITICAL GROWTH ENGINES
...ACTUALIZING THEIR POTENTIALS IN NIGERIA

A New "Popular-Phrase"

small and Medium Enterprises (SME) have become a popular phrase in the Nigerian lexicon since this administration. Key policymakers in the public and private sector now comments on this issue every so often. Hopefully this signifies a growing realization as to the core values that SMEs can deliver to Nigeria, such as Job Creation, Poverty Alleviation and Foreign Exchange Conservation.

To better understand the role of SMEs, you need to analyze the economic history of both emerging market and industrialized countries like China, Korea, India, Turkey, Italy, Holland, UK etc.

The Italian fashion industry was virtually built on the backbone of "Mum and Pop" cottage industries. China has made a name for itself as the world's "work-house" just on the basis of low-tech manufacturing activities. Industrial revolution in Britain did not begin with large-scale manufacturing complex, it started with basic inventions like, spinning jenny and flying shuttle that dramatically accelerated productivity in the textile industry.

Simply put, the earliest manifestations of SMEs in advanced countries were cottage industries that later transformed into industrial complexes and high tech factories. SMEs today account for the bulk of output in most countries today, it is also a proven job-creator: the share of SMEs in global productivity is over 30%, higher in some countries, but generally growing. In China SMEs employ over 50% of the work force. In the US, SMEs account for over 50% of GDP.

The Nigerian Experience
So-called SMEs both in the formal and informal sectors employ over 60% of the labor-force in Nigeria. The attempt by Nigeria over the last four-decade to fully advance into the industrial age has failed woefully due to bureaucratic malfeasance, misplacement of priorities and the inability to adequately capitalize on available potentials within the country to create a sustainable domestic production base and efficient service industry. A top Bank Managing Director in Nigeria recently said that there's no chance for growing manufacturing activities in Nigeria, for which I flatly disagree. You can proffer a multitude of seemingly logical arguments why production activities by SMEs cannot thrive. You could argue for instance that, through globalization and rapid technological advancement, it is now possible to leap-frog from antiquated telecommunication infrastructure into fiber-optic technology like in Vietnam, just as you have more GSM lines than fixed wire-lines in Nigeria all within the last 2 years, therefore lets focus on areas of so-called "comparative advantage", wrong - Notwithstanding that "Ricardo Postulate" (author of the law of comparative advantage) in the face of rapid globalization, Nigeria has the capacity (infrastructure and market) to build a divers and vibrant domestic industrial and service sector.

Those arguments ring hollow if weighed against the backdrop that over 70%-80% of daily necessities, especially in Nigeria are not high-tech products. They are basic materials produced with little or no automation: Step into a Wal-Mart store (the world's largest retailer) here in the US and ask yourself how many of the merchandise on sale are sophisticated materials. China has been tenacious enough to understand these facts and aggressively capitalize on it -- every household appliance I remember as a child back in Nigeria was made in China. No surprise why Wal-Mart accounts for 10% of US trade deficit with China - what does it really take to massively squeeze lemonade out of lemon fruit and package it or to fabricate those rudimentary merchandises? Only the large manufacturers are making some effort in Nigeria thanks to economy of scale, yet the country is far from achieving self-sufficiency in basic consumer products and efficient service delivery, - SMEs are the missing link.

What Role for SME?
Without re-inventing the wheel, the smart choice for Nigeria today should be to re-focus attention on pro-actively encouraging the growth of domestic cottage industries, help inculcate efficient management culture in existing small businesses and device policy measures for assimilating the informal sector into the modern national economy. Nnewi and Aba in Eastern Nigeria are hotbeds for inventiveness and tenacity. Economic difficulties such as epileptic power supply, under-developed infrastructure, lack of long-term funds for expansion/modernization, supply chain mismatch and management deficiencies are key impediments to sustained growth.

Onwuka InterBiz was the first indigenous company listed at the Nigerian Stock Exchange (NSE). The company became a major manufacturer of steel products in the country. It has since fallen on hard times. Therefore the government must consistently strive to dismantle unnecessary hindrances. As critical growth engines, SMEs need to be on the priority list in the government policy in other to thrive, fortunately some prerequisites already exist - abundant raw materials, cheap labor, ready market, fast growing telecommunication infrastructure, availability of long-term financing and improving political and economic climate. Corruption, dishonesty, unnecessary ethnic rivalry and dirty politics still present formidable challenges.

Crucial Steps.
Rightly so, there had been numerous attempts to encourage growth with limited success. Beginning with the Small Scale Industries Credit Scheme of 1971, up till the creation of Small and Medium Scale Enterprise Loan Scheme ten years later. The latest overture to fund SME through the Small and Medium Industries Equity Investment Scheme (SMIEIS) is quite salutary. According to the Central Bank Governor, Mr. Sanusi, speaking in mid November at the Wharton Global Conference in Philadelphia, already 20 billion Naira has been amassed in this scheme through the mandatory contribution of 10% of pre-tax profit by banks. This amount would hit the 30 billion Naira mark in the soon, yet less than 20% of these funds have been utilized due to lack of bankable ideas. What an irony of life for a country with a comatose textile industry that is loosing foreign exchange revenue through incessant importation of everything from flashy automobiles to packaged fried plantain and "Hollandis" women wrappers. Policies to revamped SMEs must not only be limited to mobilizing funding but should now extend to:

1. Creating business clusters/cooperatives around the country that could nurture ideas, pull existing facilities together to achieve economies of scale, establish new collective production facilities and service outlets where the owners would be responsible for their success or failure.

2. Making the university faculties more productive and the NGOs and research institutes more closely involved, by creating business incubators and development centers around them. So that they could help write sound business plans, provide initial training, office space and ancillary support services to small and medium scale enterprises.

3. Encourage the emergence of Community Development Venture Capital (CDVC) Funds and Small Business Investment Corporations (SBIC), just like the community bank model. They can function either as NGOs or on commercial basis to specialize and concentrate on the unique comparative advantages of specific regions/territories of the country.

4. Stimulate the growth of modern Fund Management and Venture Capital Firms around the banks and in the financial system, manned by professionals with proven expertise in deal origination, business analysis and start-up equity financing. I must warn that neither the traditional banks nor the stock brokerage companies today in Nigeria are well equipped to play this role. These unconventional Fund Companies or Venture Capital firms should be entrusted with some or all of the SMIEIS funds and provided strict operational guidelines by the Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC) and then allowed a free-hand to deliver much needed hands-on management expertise/global best practices through defining exit strategies for portfolio companies to ensure that they attain growth targets and become successful in the long run.

5. The State governments, international organizations and foreign NGOs also have an indispensable role to play in either providing operational support, reaching out to grass-root entrepreneurs or funding new ventures. A pilot program targeted on developing new entrepreneurial initiatives through regional, statewide as well as national business plan contests would help to identify lucrative ideas and seek ways of commercializing those ideas - you just can't say where the best new idea would come from.

A typical division of labor scenario for growing SMEs in Nigeria would therefore entail the banks, multilateral organizations and federal/state governments providing seed capital, the universities/research institutions and NGOs acting as boot camps to nurture ideas, CBN and SEC maintaining regulatory oversight while specialized fund management and Venture Capital firms get down into the trenches to search and commercialize new ideas.

Time for a Paradigm Shift.
For SMEs to thrive in Nigeria, our mindset must now shift from conventional worker or contractor mentality to entrepreneur/value-creator mentality. You don't need rocket scientists to make things happen in Nigeria. Everyone speaks about the abundance of human and material resources in the country - true, but how far has that taken us? A cohesion of these resources with available funds and a strong dose of realism in an improving business climate could enable Nigeria achieve the long-sought dream of industrialization.

Chamberlain is the Founder/CEO of New Era Capital Corporation, -- a New York-based Financial Services Company. He was previously a Financial Advisor with Merrill Lynch Global Private Client Group. [email protected]