Why credit and financing still remain the bane of SMEs in Nigeria

March 15, 2018
3 min read

A 2015 report put the number of small and medium scale enterprises (SMEs) in Nigeria at 37 million. Over the years, the number has increased significantly.

A lot of SMEs have also died within this same period and the ones that are alive struggle to keep their head above the difficult Nigerian waters.

In its own report, the World Bank highlighted a lack of access to credit facilities as a reason most of these businesses struggle, hence Nigeria’s consistent poor ranking on the ease of doing business index.

These are genuinely worrying numbers for a country that hopes to achieve economic stability on the success of SMEs.


The case study of PEBEC

In line with the mission of the Presidential Enabling Business Council (PEBEC), the vice president signed into law last year, the Collateral Registry Act and the Credit Reporting Act.

The new laws offered an exciting credit landscape to the Nigerian SME. For the first time in a long time, business owners could supposedly access loans using both conventional and non-conventional properties as collateral. Imagine using your house furniture -- or generator -- as collateral. This was, amongst others, the things promised by the Collateral Registry Act.

Nigerian banks are infamous when it comes to granting business loans. They seem to have excused their underwhelming performance on a lack of a database; one where they can ordinarily access the creditworthiness of SME owners. With the Credit Reporting Act that allows credit information sharing between credit bureaus and lenders, banks no longer have an excuse.

But seeing it is almost a year now since the credit facility law was enacted, it makes sense to consider how the initiative has fared. We ran a poll on social media to know impact of the new laws.

Interestingly, 56% of the respondents said they’ve never heard of it. Another 24% believes it's a scam, while 4% think the process is too bureaucratic. Only 16% described the impact as impressive.

We cannot say the initiative has failed outrightly based on our findings (or any other one for that matter). Because we risk not factoring the relevance of timing into the equation.

Regardless, there are equally other important things that cannot be overlooked. For one, this is not the first -- nor will it be the last -- initiative geared towards SME financing in Nigeria. And like others before it, there seems to be a pattern of improper implementation.

Of such numerous initiatives, the one that vividly comes to mind is the Small and Medium Enterprise Equity Investment Scheme (SMEEIS). The initiative required all banks in Nigeria to set aside 10% of their profit After Tax (PAT) for equity investment as well as loans to SMEs. The loans were put at a single digit interest rate to reduce the burden of interest and other financial charges under normal bank lending.

As good as the initiative was, not much came out of it. If care is not taken, the new initiative might as well be edging towards the same direction and the reasons are not farfetched.

Getting it right

In some advanced countries in the world, SMEs account for a significant share of employment. This was achieved by deliberately following through on SME laws.

Nigeria’s disheartening unemployment figures show how valuable SMEs can be in combating the unemployment problem.

At 32.7% in the previous quarter, unemployment and underemployment rose to 40% in Q3 2017, according to information from the National Bureau of Statistics (NBS).

With access to credit facilities, SMEs can scale up in no time and even contribute significantly to Nigeria’s GDP. However, nothing will work if things are done in an impassive manner.

Among other things, it is the responsibility of the government to provide an enabling environment for businesses to thrive. Providing an avenue to access credit will go a long way to give SMEs a boost in Nigeria’s quest for economic stability.

Ifeanyi is a desk reporter-turned administrator. Outside of work, I love to read and travel.
Ifeanyi is a desk reporter-turned administrator. Outside of work, I love to read and travel.
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Ifeanyi is a desk reporter-turned administrator. Outside of work, I love to read and travel.

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