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Small and Medium Enterprises, Financial Inclusion and Financial Markets
Presentation by
Mr. Peter Obaseki Managing Director, FCMB Group Plc.
Email: [email protected]
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