Monday, October 04, 2021 / 4:10 PM / By SamuelBamidele, Head,Research and Intelligence, PhillipsConsulting / HeaderImage Credit:Businessday NG
Access to finance or credit constitutes a significantgrowth driver for businesses (large and small scale). The dearth of credit is acritical barrier to industrial productive capacity and growth in the economy.In a twist of events, the Covid-19 pandemic has led to a severe differentialimpact within and across industries, further exacerbating the financingpressure businesses face.
The supply chain disruption, slowdown in retail andcross-border trade activities took a significant toll on businesses. Accordingto a recent publication from the United Nations Conference on Trade andDevelopment (UNCTAD), the disruptions caused by the coronavirus pandemic couldresult in a loss of more than $4 trillion to the global economy. Specifically,while large-scale organisations have the infrastructure and capital assets toweather the storm, the Micro, Small and Medium Enterprises (MSMEs) areconstrained by a huge financing gap.
In developing countries like Nigeria, the potentialdemand for MSMEs credit/finance is estimated at $8.9 trillion compared to acredit supply of $3.7 trillion (World Bank, 2020). It implies that the financegap from formal MSMEs is valued at $5.2 trillion in developing countries,equivalent to 19% of the gross domestic product (GDP).
The Upper-middle-income countries, including Chinaand Brazil, are the two largest contributors to MSMEs globally. In addition,the lower-middle-income countries are the second-largest category, with Nigeriaas the third-largest contributor to MSMEs in the world and the largest inSub-Saharan Africa.
MSMEs play a significant role, particularly indeveloping countries, where they account for about 90% of businesses and createover 50% of employment. Despite the growth and developmental impact ofMSMEs, In Nigeria, several challenges (access to finance, high cost of doingbusiness, lack of skilled workforce, the multiplicity of taxes, among others)persist, and these hinder the growth and development of the sector. In thisarticle, we x-rayed the credit financing gap for MSMEs and the Nigerianeconomy.
MSMEs landscape in Nigeria
According to the National Bureau of Statistics (NBS)SMEDAN MSME survey 2019, MSMEs in Nigeria contributed about 49.78% to Nigeria'sGDP and 7.64% of export receipts. Given a total of 41.5 million enterprises and59.6 million jobs created the role of MSMEs to economic prosperity in Nigeriais pivotal.
Simply put, MSMEs could play a catalytic role inemployment, production diversification, improvement of local technology,integration of large-scale enterprises, and Nigeria's overall economictransformation.
Exhibit 1:
Despite the significant contribution of MSMEs to the Nigerianeconomy, access to formal credit and alternative financing instruments remainsa major constraint. Instructive to note that, in the past thirty (30) years,the federal government of Nigeria has created a raft of support institutionsand initiatives to enable MSMEs to access funding (Exhibit 1).
For instance, one of the overarching objectives ofthe Small and Medium Agencies Development Agency of Nigeria (SMEDAN) in 2003was "Linking MSMEs to internal and external sources of finance, appropriate technologyand technical skills as well as large enterprises". However, almost threedecades since its establishment, access to credit remains a bane inhibitingMSMEs growth.
The disruptive and lasting impact of covid-19 onMSMEs in Nigeria has further revealed that with a poor credit system, MSMEs inNigeria are just one shock away from insolvency. Cumulatively, across severalinitiatives, the Central Bank has injected N3.9 trillion (2.6% of GDP) tocritical sectors targeted at MSMEs to stimulate real sector growth in theeconomy.
In Nigeria, the share of total employment in theagriculture sector (% of total) is estimated at 48% (NBS, 2017). Consequently,more than 30% of Nigeria's cumulative financing initiatives disbursement forMSMEs is concentrated in the agriculture sector (Exhibit 2).
Exhibit 2: MSMEs cumulative DisbursementInterventions Schemes from Inception to November 2020 (N=Billion)
Progress made, albeitMSMEs financing gap remains wide
While the financing interventions to MSMEs by theCentral Bank is crucial and commendable, Nigeria's MSMEs financing gap is thesecond-largest behind Brazil. According to the World Bank, Nigeria's financinggap for MSMEs is estimated at $158.1 billion. In developing countries, thereare about 162 million MSMEs. Brazil, China, and Nigeria contribute 67% to thetotal MSMEs, equivalent to 109 million enterprises. While China has the highestnumber of MSMEs, it ranks after Nigeria in the MSMEs financing gap (Exhibit 3).
In a recent wealth mapping exercise conducted by pcl. in Nigeria, we found that several factors arevital in accessing finance from traditional financial institutions or existingsources. In addition, we found that the lack of structured or organisedinformation through a single source on how to access finance further compoundsthe MSMEs challenges associated with funding.
In addition, findings from the NBS SMEDAN MSME survey2019 reveal that personal savings were the most common source of capital formost enterprises - both Micro and SMEs. Nationally, only 49.5% of SMEs (soleproprietorships) reported having access to bank credit.
Exhibit 3: Finance Gap/GDP in Top 5countries with the highest number of MSMEs
Bridging MSMEs financing gap
The MSMEscredit/financing scheme industry in Nigeria is still at its nascent stage.While policymakers are making continued efforts to increase access to financingfor MSMEs, the volume of guarantees remains low compared to peers in othereconomies. Hence, the quantum of SME financing needs across the country remainshigh. Here are some solutions (not exhaustive) to close the existing financinggap in Nigeria:
StrengtheningCredit Institutions - Toboost access to credit, the CBN recently released a guideline for regulatingand supervising credit guarantee companies in Nigeria. The guideline serves asa regulatory framework for credit guarantee firms that seek to minimise creditrisks and promote lower interest rates. Bearing that MSMEs often lack thenecessary technical knowledge to prepare sound financial statements for loanapplications, if implemented appropriately, we expect this move to address somebottlenecks facing MSMEs in securing credit.
The role ofFintechs - Technology is the crucialdifferentiator in the access to finance landscape. In Nigeria, with theunbanked population at 37%, the role of technology financial services institutionsis vital. For instance, globally, sandbox efforts have emerged to facilitateinteraction between financial institutions and technology firms. Similarly, therecently introduced Regulatory Sandbox by the Central Bank is expected toexpand electronic solutions and deepen credit penetration in the country.
Improvinginsolvency regimes - Notall MSMEs are bound to succeed. Therefore, when small businesses fail, andthere is no effective insolvency system to ensure that capital is reallocatedsuch that the business can re-enter the economy, millions/billions of naira inbusiness value, jobs, and capital can be lost or sidelined. Like Nigeria,several countries across the globe lack a well-structured insolvency frameworkto deal with MSMEs effectively, creating a significant legal gap. Implementingan insolvency regime that allows for a fresh start for failed MSMEs willenhance confidence and credit recoveries in Nigeria.
EnablingEnvironment - Strongregulatory frameworks to support a more diverse financial landscape includeimproving competition within the financial system and creating a stable policyenvironment that allows various financial institutions to operate. In addition,directed lending schemes and risk-sharing arrangements can have significantimpacts on MSMEs' access to credit.
Credit: The post Addressing theFinancing Gap facing MSMEs in Nigeria first appeared in Phillips Consulting Blog onOctober 4th, 2021
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