issues, challenges and prospects_oyeyinka banji

Banji Oyelaran-OyeyinkaSMEs 1

Financial System Strategy2020

FSS 2020 International Conference

SME: Issues, Challenges and ProspectsBy Prof. Banji Oyelaran-Oyeyinka

Director Monitoring &Research Division (UN-HABITAT)

Visiting Professor, Innovation, Technology & Development, The Open University,


FSS 2020

Introduction

� SMEs are a very important part of the Nigerian economy.

� In countries at same levels of development with Nigeria, SMEs contribute a much higher proportion to

GDP than currently observed in Nigeria

� Compared to other emerging markets, Nigeria has historically shown lack of commitment to building a

strong SME sector;

� These economies have shown consistent commitment to the development of SMEs by implementing:

access to finance and financial incentives, basic and technological infrastructure, adequate legal and

regulatory framework, and a commitment to building domestic expertise and knowledge

� In light of recent events in the Nigerian macroeconomic environment, SMEs have compelling growth

potential and like other emerging economies are likely to constitute a significant portion of GDP in the

near future

� In this presentation, we will take a look at SMEs in Nigeria, some of the current challenges being faced

and present a case for progress for SMEs in Nigeria


FSS 2020

SMEs in Nigeria

� SMEs are broadly defined(1) as businesses with turnover of less than N100

MM per annum and/ or less than 300 employees

� Studies by the IFC show that approx. 96% of Nigerian businesses are SMEs

compared to 53% in the US and 65% in Europe

� SMEs represent about 90% of the manufacturing/ industrial sector in terms

of number of enterprises,

� They contribute approx. 1% of GDP compared to 40% in Asian countries and

50% in the US or Europe

� In Nigeria, SMEs are distributed by clusters within regions

1 Definition sums up several Nigerian institution definitions of SMEs, i.e. Central Bank, Fed. Ministry of Industry, NASME


FSS 2020

SME Contribution

� Manufactured Exports by SMEs

16 <100 employees Early

1990s

Singapore

31.5 <Rs 30 M

investment in plant

& machinery

1991/199

2

India


1990s

Vietnam

42.4 <300 employees 1995 Korea

40-60 <100 employees Early

1990s

China


1990s

Chinese

Taipei

Developing Economies

% SME manufacture

exports

Definition of an

SME (a)

Year Economy


FSS 2020

Selected Regional & Sectoral Distribution of SME Clusters

KATSINA

KATSINA

SOKOTO

SOKOTO

GUSAU

ZAMFARA

KEBBI

BIRNNKEBBI

NIGER

KADUNA

KADUNA

MINNIA

KONTANGORA

BORNU

JALINGO

YOBEJIGAWA

KANO

GOMBE

BAUCHI

ADAMAWA

TARABA

YOLA

GOMBE

BAUCHI

KANODUTSE DAMATURU

MAIDUGURI

PLATEAU

JOS

BENUE

MAKURDI

NASSARAWA

Lafia

LOKOJA

KOGI

FCT

CROSSRIVERS

CALABAR

AKWAIBOM

RIVERS

UYO

PORTHARCOURT

ABIAIMO

ENUGU

EBONYI

AN

AM

BR

A

DELTA

BAYELSA

YENAGOA

ASABA

ENUGU ABAKALIKILAGOSIKEJA

KWARA

ILORIN

OYO

OGUN

EKITI

OSUN

ONDOEDO

OFFA

IBADAN

ABEOKUTA

ADO EKITI

BENIN CITY

OSHOGBO

AKURE

Kano • Leather SME Clusters

Abeokuta • Tie & Dye SME Clusters

Nnewi • Automotive SME Clusters

Oshogbo • Tie & Dye SME Clusters

Lagos • Otigba ICT SME Clusters

Aba • Leather, Feather & Fashion SME Clusters


FSS 2020

Opportunities outweigh Challenges

50 – 99employees

>100employees

10 - 49employees

� SMEs have significant untapped growth potential

� Strong export and employment potentials

� SMEs in Nigeria are currently distributed along sectors within regions; creating potential operational and cost synergies

� New growing sectors, such as entertainment and leisure clusters

� Low-Tech Sectors clusters: Footwear, clothing & garment, agro-processing (cassava, oil palm and other oils.

� High Tech clusters: ICTs, Telecom, and Biotechnology (agric and health)

Opportunities Challenges

� Huge gaps in infrastructure

� Poor financial support and credit environment

� High levels of unskilled workforce

� Low investment commitment to bring pilot plants to commercial scale


FSS 2020

Where we Are: Financial Input

19.7

47.254.3

94.0104.1

Nigeria Kazakh Egypt South Africa Eurozone

Total Loans as % of GDP (BMI, 2006)� SMEs require improved financial

support

� Studies show that Nigeria has a low

amount of domestic investment

through loans vis-à-vis other

emerging markets

– Majority of the loans granted are

issued to large corporates and

governments

– Mostly Informal financing Lagos NnewiSources of Funding

Private Banks

Development Banks

Govt. Credit

Friends

Personal 50%

31%

29%

21%

18%

76%

38%

0%

29%

19%

Result

NA

NA

Weak

Weak

Weak

2005 Survey: Lagos ICT & Nnewi Auto Clusters


FSS 2020

0.3

1.8

2.1

2.7

Nigeria Singapore Taiwan Korea

Where we Are: Knowledge Input

R&D as % of GDP� “It is a lack of investment in human

capital, not a lack of investment in

physical capital alone, which

prevents poor countries from

catching up with rich ones.

Educational attainment and public

spending on education are

correlated positively to economic

growth” – Benhabib and Spiegel,

1994

� Import of physical capital is less

costly than the domestic

development of human capital and

technical expertise

Lagos NnewiHuman Capital Support

Secondary Education

Tertiary Education

R&D

Training

Skilled Manpower Weak

Weak

Weak

Weak

20

Weak

Weak

Weak

Weak

xx

Result

Weak

Weak

Weak

Weak

415


75

1 xx xx154

# Universities

Population (MM)(1)

1 2007 IMF estimates

Weak Weak Weak


FSS 2020

0

200

400

600

800

0 1,000 2,000 3,000 4,000 5,000

Where we Are : Infrastructural Input

GDP/Capita ($) vs. Internet Users (2000)� “Given adequate levels of

investment in human capital, strong

correlations exist between the rapid

rates of industrialisation over the

long term and the investments in

physical capital” – Sanberg, 1962(1)

� Majority of private sector led

initiatives outperform public sector

led ones

Lagos NnewiInfrastructure

Internet

Telephone

Transport

Water Poor

Fair

Good

Good

Poor

Poor

Good

Good

Result

Poor

Poor

Good

Good

Electricity PoorPoor Poor


1 Paraphrased

Mauritius

South Africa

BotswanaGabon

Nigeria


FSS 2020

Ratings of Infrastructure

Ratings by Otigba SMEs

0

20

40

60

80

100

120

Internet Telephone Roads Water Electricity

Assessment of Physical Infrastructure Provision

Bad

Fair

Good


FSS 2020

Where we Are : Government Input

Lagos NnewiSupport Systems

Govt. Incentives

Innovation

IT Support

Intellectual Property Weak

Fair

Weak

Weak

Weak

Weak

Weak

Weak

Result

Weak

Weak

Weak

Weak

Venture Capital WeakWeak Weak


Ranking(1) of Countries by Overall Govt. Support

1 Ranking index is based on overall Govt support through: Financing, Infrastructure, Knowledge, Policy

0.0 0.2 0.4 0.6 0.8 1.0

Congo

Benin

Ecuador

Nigeria

Egypt

Tunisia

S. Africa

Malaysia

Brazil

India

USA

� Vital role of Government in

providing an enabling environment

for SMEs can’t be overemphasized

� The more successful emerging

markets have high rankings as a

result of government support in

enabling the private sector , and

SMEs specifically

� SMEs surveys show weak overall

support from Government


FSS 2020

SMEs Severely Constrained

� Need for Policy Support

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

High

Tariffs

Custom

formal

Finance Info on

source

Import

Duties

Multiplicity

of Taxes

High Rent Security of

Lives

Constraints Faced By Nnewi SMEs

Cluster


FSS 2020

Need for Policy Support

� SMEs Constrained

0

0.5

1

1.5

2

2.5

3

3.5

High tariff Custom

formalities

Finance Info on

soursec

Import

duties

Multiplicity

of taxes

High rent security of

properties

Security

of lives

Constraints Faced by SMEs Firms in Aba Shoe Cluster


FSS 2020

Where we Are : Manufacturing/ Industrial Output

0

10

20

30

40

60's 70's 80's 90's 2000's

Korea Taiwan Singapore

Manufacturing as % of GDP

Nigerian levels: 3–7%

� Manufacturing as % GDP in Nigeria has

averaged 3–7% over the last few decades

� Fierce competition for the Nigerian

manufacturing sector come predominantly

from Asia

� Manufacturing amongst Asian competitors

account for 30-40% of GDP today

� SMEs today account for approx. 1% of total

GDP and approx. 14% of total

manufacturing contribution to GDP

� Studies show that <20% of SME

manufacturers export

– Majority of exporters are experiencing

decreasing levels of exporting due to

competitive pressures from Asian counterparts

0

10

20

30

40

50

60's 70's 80's 90's 2000's

Korea Taiwan Singapore

Industries as % of GDP

Nigerian levels: 3–7%


FSS 2020

Where We Are

� In the private sector, there is a two-stage lag behind these other countries in developing capabilities for competitiveness.

� Knowledge-resource accumulation is lagging 15 -30 years behind depending on which country;

� There is the more obvious 20-25-year lag in general economic development.


FSS 2020

The Asian Challenge

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

percent

Not severe

Weak severe

Fairly severe

Severe

Very severe

Effect of Asian Challenge on Otigba Cluster


FSS 2020

The Asian Chalenge

Perception of SMEs

Perceptions of Market Access Strategies (%)

19.69 87.31 Introduction of new products

29.89 70.11 Reliability in delivery/supply

10.00 90.00 Price (lower)

14.90 85.10 Quality (high)

12.93 87.07 Design (superior)

Strategy of Enterprises in OtigbaAsia's Challenge


FSS 2020

Ranking on Innovation CI


FSS 2020

Where We Are on CI

Competitiveness ratingPlot 2

Argentina

Australia

Austria

Azerbaijan

Bangladesh

Belarus

Belgium

Benin

BrazilBulgaria

Canada

Chile

China

Colombia

Congo, Rep.

Costa Rica

Croatia Czech Republic

Denmark

Ecuador

Egypt, Arab Rep.

Estonia

Finland

France

Gabon

Germany

Greece

Guatemala

Hong Kong, China

Hungary

India

Indonesia

Ireland

IsraelItaly

Jamaica

Japan

Jordan

Kazakhstan

Korea, Rep.

Kyrgyz Republic

Latvia

Lithuania

Malaysia

Mexico

Moldova

Netherlands

New Zealand

Nigeria

Norway

Pakistan

Panama

Peru

PhilippinesPoland

Portugal

Romania

Russia

Slovak Republic

SloveniaSouth Africa

Spain

SwedenSwitzerland

Syria

Thailand

Tunisia

TurkeyUkraine

United Kingdom

United States

VenezuelaVietnam

0.1

.2.4

.8T

CIP

I Ind

ex in

200

3

0 .1 .2 .4 .8Mean TCIPI over 1990-2003

Source: Oyelaran- Oyeyinka (2006)


FSS 2020

Africa Compared


FSS 2020

How To Compete: The China Example

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1997 1999 2001 2003 2005

Total R&D Investment

Increase Investment in Infrastructure (2002 -03)Create Enabling Financial Incentives and Policies

Increase Investment in Knowledge (RMB MM)

Tax Policy � Four targeted electronics products

� Exemption of production taxes, half of the income taxes and tariffs of key

equipments

� Pick up 10% of R&D expenses

� Exemption of importation taxes on

significant imported projects

DevelopmentFund

� Allocation of RMB100 million per year to support technology adaptation,

technology and commercialization of the above four products

� Used as fund for several start ups

Subsidies � Allocation RMB200 million as loan

subsidies to support the application

of computers

Licences � Importation licence management on

computer and components

93

122

8780

52

Iron/ Steel Cement Automobile Textile Coal

% Growth of total investments in infrastructure

• Strong commitment to core industries

• Increasing investments by almost 80% from the late 90s


FSS 2020

Following Figures show that wealth generation is:

� Inversely proportional to employment in agriculture;

� Positively related to technical enrolment in universities;

� Positively related to knowledge infrastructure (Internet users)

� Internet users are highly correlated with telephone use

� Internet use is positively related to computer use

Capability to Compete is based on Knowledge and InfrastructureCapacity


FSS 2020

Figure: Agricultural Labour in GDP and per Capital Income

.00

1000.00

2000.00

3000.00

4000.00

0 20 40 60 80 100

% Agriculture Labour in 1990

Per

Cap

ita

Inco

me

(200

0) in

US

D


FSS 2020

Figure: Technical Subjects Enrolment in Universities and perCapital Income

.00

1000.00

2000.00

3000.00

4000.00

.000 .050 .100 .150 .200

Technical Subjects Enrolement

Per

Cap

ita

Inco

me

(200

0)

in U

SD


FSS 2020

R2 = 0.6138

0100200300400500600700800

0 1000 2000 3000 4000 5000

GDP per capita (USD)

Inte

rnet

Use

rs

Figure: Internet use and GDP per capita in USD (2000)


FSS 2020

Figure: Internet use and telephone density (2000)

R2 = 0.9346

0

200

400

600

800

1000

0 50 100 150 200 250 300

Telephone Density

Inte

rnet

Use

rs


FSS 2020

Current Initiatives Poised to Drive Growth

Governmentderegulation of the realsector

Directive to increase National content

Creation of free trade

zones (Calabarand Lekki)

Commissioning of several transport projects

NEEDS

Development of credit bureau

CBN led AfricanFinancial

Corporation initiative

Privatisationof Government

assets

[ ]

EFCC, NAFDAC,NEITI

Regulatory bank capital allocation for SMEs

[ ]


FSS 2020

But Require Systemic SME Business Framework

SME Firm

IPR/ Patents

Technological institutions

Labour market

Skilled workforce

Financing

Market orientation

Infrastructure

Regulatory institutions

� Key building blocks for an enabling

SME business environment include:

– Basic science and technology

Knowledge Base

– Legal and regulatory structure

– Basic Physical and technological

infrastructure

– Financial and incentive structures

� In Nigeria today, significant

leadership is particularly required

in these areas

SME Business Framework


FSS 2020

Systemic Functions for Supporting SMEs

1) Knowledge Support including targeted R&D and Design;

2) Competence building: formal and non-formal training in educational institutions and training of technical manpower in firms and organizations;

3) Supply of inputs, particularly finance for production and innovation and for the development of scientific, technical and managerial manpower; flow of Foreign Direct Investment FDIs, venture capital and loans;

4) Provision of regulatory frameworks and measures, standards and quality functions (such as product quality tests) and provision of incentives to develop new products and services;


FSS 2020

Systemic Functions for Supporting SMEs

5) Facilitation of the exchange and dissemination of knowledge and information;

6) Stimulation of demand and creation of markets through govt procurement policies;

7) Reduction of uncertainties and resolution of conflicts through appropriate institutions, such as industrial arbitration.


FSS 2020

National Economic System for Production and Innovation

Financial SystemFinancial System

EducationEducation

& Training& Training

FirmsFirms

systemsystemLarge, small,

MNCs, NTBFs, …

VentureVenture

CapitalCapital

InnovationInnovation

policypolicy

IntermediariesIntermediaries

IncubatorsIncubators,,

MentoringMentoring……

BusinessBusiness

supportsupport

MARKETS

HumanHumanHumanHumanHumanHumanHumanHuman

RulesRules &&

RegulationsRegulations

Framework Conditions

ScienceScience

policypolicy

FirmsR&D

capitacapitacapitacapita

llll


FSS 2020

Proposal: Broad Vision

� 1. Nurture 200 manufactured export SMEs distributed across sectors by 2020 ;

� 2. SMEs to contribute to increased employment, national income generation and export revenues: raise manufactured exports of SMEs to 10% by 2010; 20% by 2015; and 25% by 2020;

� 3. Expand domestic oriented SME, through:

� − The creation of new and innovative firms; and

� − The graduation of as many informal enterprises as possible into the formal sector.


FSS 2020

Recommendations and Proposals

(1)Short Time Must Do Now!

Basic Infrastructure that is targeted;

� Designate SME Clusters as Priority Economic Zones (PEZs)for Infrastructure support including power, water and broadband.

These include traditional technology clusters: leather works, agro-processing (cassava, oil palm, automotive components etc..

High-tech clusters include ICTs, biotechnology for specific products to solve health and food problems


FSS 2020

Promote High-Tech Industrial Clusters

� Establish a framework and A Fund Mechanism to raise the capability of local computer component assemblers;

� With private actors build high tech parks for hardware and computer software;

� Build Model technology Incubators within parks;

� Build on existing institutions such as NIPRID, SHEDCO etc to spin-off SMEs that draw on research from these organizations.

� Framework to move research into market using SMEs


FSS 2020

Better Systems Coordination

� Establish a National Foundation for Innovation, and Competitiveness (NAFIC). It will comprise the CBN, Ministries of S&T, Industry, Finance, SMEDAN and NPC and located in the presidency;

� The NFIC will include representatives of the private sector as well as international and national individuals appointed on their merit;

� Malaysia, the UK, India and Hong Kong among others have such bodies.


FSS 2020

Knowledge of Sector

In collaboration with other agencies:

� Deepen the knowledge of the sector through surveys and studies of SMEs;

� Organize periodic fora to bring together sectoral SME groups with suppliers, buyers etc..

� Organize the Nigeria “SMEs on the Web” Project


FSS 2020

560658

846

1,171

1,396

2002 2003 2004 2005 2006

SMEs can Replicate Other Success Stories

0

5

10

15

20

25

30

35

Jan01 Aug02 Mar04 Oct05 Apr07

Unprecedented growth in Telecoms

Strong growth in Banking (Agusto report, 2007)� Tremendous growth in the SME

sector can be achieved, with the

right amount of economic enabling

� Successful case studies from the

banking and telecom sectors show

the growth potential inherent in

unreformed business sectors

� Further impetus within the broader

Nigerian socioeconomic

environment provide a compelling

case for the SME sector growth

potential, such as aforementioned

initiatives driving growth

Mobile phone subscriber base (MM)

Total Banking Industry Loans and Advances (N Bn)


FSS 2020

In Conclusion

… Nigeria is on the right track,

but much still needs to be

done to promote SMEs …


FSS 2020

END

� Thank You

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