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Small and Medium Enterprises, Financial Inclusion and Financial Markets

Presentation by

Mr. Peter Obaseki Managing Director, FCMB Group Plc.

Email: peter.obaseki@fcmb.com

21st Nigerian Economic Summit (NES#21) Tough choices: Achieving competitiveness, Inclusive Growth and Sustainability

Transcorp Hilton, Abuja 13th – 15th October 2015

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Small and Medium Enterprises (Sectors) SME

Importance of SMEs

The Definition of Small and Medium Enterprises (SMEs)

Challenges to SMEs in Nigeria

Statistical Review of SMEs in Nigeria

SME

SME

SME

SME

Financial Institutions “ Entry Barriers”

Bank loans to SMEs => Growth & % Share

Bank loans to SMEs as a percentage of GDP

SME

SME

SME

SMEs & Financial Inclusion

Conclusion

SME

SME

Structure of Presentation SME

Review of SMEs in some OECD countries, China, etc. SME

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The Definition of Small and Medium Enterprise(SME) No universally accepted definition of SME. In some countries, the definition is based solely on the size of the labour force. In

other countries, the definition incorporates financial variables, such as turnover and/or assets.

The United Nation (UN) and Organisation for Economic Co-operation and Development (OECD) provided general criteria for SME definition;

Turnover

Asset base

Number of employees

However, some competent authorities define SMEs as enterprises which:

World

Bank

•Employ up to 300 persons; have assets and annual turnover not exceeding US$15 million respectively ……………………..adopting triple criteria of employee size, turnover and asset size

Central Bank of Nigeria

•As any enterprise with a maximum turnover of N500 million and assets of N250 million (excluding land and

working capital ……………………..adopting dual criteria of turnover and asset size

Small and Medium

Enterprises Development

Agency of Nigeria

•As any enterprise with employees up to 199 persons; and assets of N250 million (excluding land and working capital ……………………..adopting dual criteria of employee and asset sizes

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SMEs are a very heterogeneous group of businesses ranging from single unincorporated entrepreneurs to medium-sized listed companies on exchange usually operating in following economic sectors among others:

Some are dynamic, innovative, and growth-oriented while others are satisfied to remain small and perhaps family owned.

SMEs usually operate in the formal sector of the economy and employ mainly wage-earning workers.

Small and Medium Enterprises (SMEs)

SMEs

Education Art

Entertainment and Recreation

Manufacturing

Wholesale & Retail Trade

Construction

Accommodation & Food Services

Agriculture, Forestry, Fishing & Hunting

Water Supply; Sewerage, Waste Management and

Remediation

Administrative and Support

Services Activities

Mining and

Quarrying

Other Services

Activities

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Importance of SMEs Engine of Growth

•The sector is the largest provider of employment in most countries, especially of new jobs

• SMEs are a major source of technological innovation and new products

•A major contributor to the Gross Domestic Product (GDP)

Poverty Reduction

SMEs tend to employ poor and low-income workers

SMEs are sometimes the only source of employment in poor regions and rural areas

Self-employment is the only source of income for many poor

SMEs play a particularly important role in developing countries where poverty is most severe

Essential for a Competitive and Efficient Market

• Ensure none of the participants have significant market control because of a large number of players

•Competitive markets achieve an efficient allocation of resources

Play a Particularly Important Role in Developing Countries

• SMEs can be used as a tool for political stability

• SMEs as a tool for financial inclusion

• SMEs as a tool to curb or reduce social vices to a manageable proportion

• SMEs as a tool to grow government tax base

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Size of SMEs

• 37million (Micro-36.99m, Small- 68,168, and Medium-4,670).

• They are mainly sole proprietorships.

• 55% of SMEs are wholesale and retail trades.

Start up Capital

• 68.35% of micro enterprises < N50,000, while small and medium enterprises predominantly < N10m

State Distributio

n

• Lagos state has the highest number of small and medium enterprises (11,663), while Kwara state has the least (226).

• Lagos state also has the highest number of micro enterprises (3,224,324),followed by Oyo state (1,864,954), then Kano state (1,794,358). While the FCT (482,365) and Nasarawa state (382,086) recorded the least.

Labour

force

•The total number of persons employed by the MSME sector as at December, 2013 stood at 59.7million, representing 84.02% of the total national labour force.

Gender

size

• Female entrepreneurs accounted for 43.32% in the ownership structure of micro enterprises as against 22.75% in small and medium enterprises.

Age

•The ownership structure by age showed that the age bracket of 24-50 dominates. Hence youth entrepreneurs are dominant.

Literacy level

•The level of education is very low. 51% of the SMEs have no education

GDP &

Export

•Contribution to GDP in nominal terms stood at 48.47%.

•Contribution to export quite low, stood at 7.27% because the products are not standards and as such, cannot access international market

Data Source: Small and Medium Enterprises Development

Agency of Nigeria (SMEDAN)

Statistical Review of SMEs in Nigeria

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South Africa

• SMEs in South Africa account for roughly 91 percent of the formal business entities, contributing between 51- and 57 percent to the GDP and 60 percent of employment (Source: Abor J. and Quartey, P. (2010), ‘Issues in SME Development in Ghana and South Africa’, International Research Journalof Finance and Economics, 39: 218–28)

United States of America

(US)

• Small and medium sized enterprises account for 98% of all enterprise, 53% of all employees, 39% of GDP (sources: www.census.gov/www.globalsmes.org)

United Kingdom

• 99.3% of the 5.2 million private sector businesses were small and 99.9% were small or medium sized (SMEs), 49.8% of GDP (Sources: www.gov.uk/www.parliament.uk/briefing-papers/sn06078.pdf)

Germany

•These constitute 99.6 percent of all companies that employ 62 percent of all employees in Germany, 75% of GDP (Sources: www.gtai.de/www.globalsmes.org).

China

• Small and medium-size enterprises (SMEs) accounted for 99 percent of China's registered enterprises and contributed to 58.5 percent of GDP, 50 percent of tax revenues, 68 percent of exports and 75 percent of new jobs every year, according to the China Association of Small and Medium Enterprises (Source: http://english.mofcom.gov.cn)

India

•The Sector provides employment to over 80 million persons. It through more than 6,000 products contributes about 8% to GDP besides 45% to the total manufacturing output and 40% to the exports from the country (Source: www.smechamberofindia.com)

Japan

•Accounting for 99.7% of all companies, 70% of all employees, and more than 50% of all added value (manufacturing industry) in Japan, SMEs form the very basis of the Japanese economy.(Source: www.chusho.meti.go.jp).

Data Source: Small and Medium Enterprises Development

Agency of Nigeria (SMEDAN)

Review of SMEs in some OECD countries, China, etc.

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Challenges to SMEs in Nigeria Lack of necessary knowledge & poor skills resulting in low quality products and

services that cannot compete on the export markets.

Absence of financial management and lack of book keeping practices

Hesitant to share financial information due to fear of the Tax Man

One man show; weak management structures; impeding the pooling of skills and

funds from a team of committed entrepreneurs

Lack of access to finance, infrastructure and regular supply of power and water

Disconnect between highly formalized, centralized banking system and a largely

informal, fragmented/dispersed SME sector

Often operates with sub-optimal capital structures in the extremes

Inadequate risk-sharing and risk guarantee schemes that can enable access to credits

Most of the SMEs are not covered by any insurance policy, that is, most of them are

not insured and also, not integrated into the contributory pension system

Absence of heavy upstream industries that can train and feed downstream activities

in metals and minerals, etc

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Un-structured SME market segments with high mortalities

SME’s perceived to be high risk and lack sound track records

Lack tangible assets or guarantees to secure exposures

Often operate on high gearing or over-trading

Small ticket sizes, fragmented and widely dispersed

Poor financial disclosures and transparency

A regionally empowered operating structure, working closely on a

relationship basis with customers is required; rather than the

existing centralized and detached operating structure that deal

with customers on a piece-meal, transaction basis.

Financial Institutions “Entry Barriers”

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Bank loans to SMEs => Growth & % share

Bank loans to SMEs

consistently swing

northward from 2010

to 2014, showing

financial deepening

The spike between

2010 and 2011

reflects the lending

stimulating effects of

CBN’s bailout

funds

AMCON asset

purchases

Injection of

private funds

into the banks

CBN takeover/

guaranteeing of

some banks

However, SME loans

as a % of banks’

loans started

declining from 2011.

It was less than 10%

as at 2014

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Bank loans to

SMEs as a

percentage of

GDP less than

1.5% as at 2014.

Growth in

nominal GDP not

correlated with

growth in SME

loans.

Bank loans to SMEs as a percentage of GDP

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…the importance of the SME sector in the ongoing drive to include a larger chunk of the nation’s populace in the formal financial system cannot be over-emphasized

CBN/FIs leading the drive through various institutional frameworks, agencies, programmes, funds and schemes such as

Small & Medium enterprises Development Agency of Nigeria (SMEDAN) Family Economic Advancement Program (FEAP) Industrial Development and Coordinating Centre. National Directorate of Employment National Economic Reconstruction Fund (NERFUND) The African Development Bank / Export Stimulation Loan (ADB/ESL) Nigerian Export Import Bank Bank of Industry (BOI), etc.

The tools for driving the inclusion strategy include the following: Agent Banking Tierred Know-Your-Customer Requirements classifying customers into low, medium & high levels Financial Literacy Consumer Protection Linkage Banking Implementation of the MSME Development Fund Small & Medium Industries Equity Investment Scheme (SMIEIS) Credit Enhancement Programmes such as

Agricultural Credit Guarantee Scheme (ACGS) Commercial Agricultural Credit Scheme (CACS) Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) Refinancing and Rediscounting Facilities for SMEs Small and Medium Enterprise Credit Guarantee Scheme Entrepreneurship Development Centres

FIs on their own, for sustained profitability and market share in loan and deposit bases , have started coming up with friendly products targeted at the SME segment of the economy, improving on loan documentation requirements, increasing ATM location and other alternate e-channels.

SMEs & Financial Inclusion

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Conclusion: The SME sector carries great hopes and great weights in the evolution of the Nigerian economy.

Nigeria has problems of income distribution and job creation and as such, SME remains an important pillar in Nigerian

economic development.

For SME sector to thrive, it requires the provision of the enabling environment: Availability of finance without much constraint but under structures that support low defaults. Manpower and skill acquisition and development centres. Business friendly institutional, legal & regulatory frameworks. Availability of market. Availability of research & development. Extension of technological support services. Provision of infrastructure, etc.

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Thank you