Issues, Challenges and Prospects of Small and Medium Scale Enterprises (SMEs) in Nigeria - Part 1.

Issues, Challenges and Prospects of Small and Medium Scale Enterprises (SMEs) in Nigeria - Part 1.

Small and medium scale enterprises (SMEs) are generally regarded as  the  engine of  economic  growth  and  equitable  development in  developing  economies.  They  are labour intensive, capital saving and capable of  helping  create  most of the one  billion  new jobs the  world will need  by the end  of the century.  They are also perceived  as the  key to  Nigeria’s economic  growth,  poverty  alleviation and employment  generation.

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I have studied the Nigerian economy and have come to the conclusion that there can never be any advancement without the significant contribution from Small and Medium scale Enterprises.

I have studied SMEs for many years and have noticed  the struggle they go through in Africa. It is an established fact that 90% of startups in Africa, folds up within 5years. The infant mortality rate of our Small scale businesses is a sign that we have a longer way to go than we had envisaged.

Taking Nigeria as a case study. Let's look at the challenges facing SMEs and how it could be tackled.

After Nigeria’s independence in 1960, much emphasis has been laid on the growth of small and medium scale industries as a  means of reducing the incidence  of poverty  and unemployment in the country. Since the adoption of the  economic reform programme in 1986, there has been a decisive shift from grandiose, capital intensive and large scale industrial projects  based  on  import substitution to small scale industries with immense potentials for  developing domestic linkages  for sustainable industrial development.   Apart from  SMEs potential for  self-reliant industrialization  using local  raw materials, they  are in  a  better  position  to  boost  employment,  guarantee even distribution  of industrial development  and  facilitate the  growth  of non-oil  exports. M O. Agwu 2014, states that  SMEs employ 22% of the adult population  in developing countries while Asibor hilary 2011 observed that  small firms  are major source of  employment  opportunities for  a wide cross-section  of the workforce:  the young, old part-time workers and the cyclically unemployed.  Kombo,  etal, submitted that  “SMEs  have  contributed greatly  to  the growth  of  Kenyan  economy, accounting for 12-14% of GDP, through creating employment  opportunities,  training entrepreneurs,  generating  income  and  providing  a source of livelihood for the  majority  of  low income  households in the  country”.   Hence,  promotion  of such  enterprises in developing  economies like Nigeria will  bring about great  distribution  of income  and wealth, economic  self-dependence, entrepreneurial development and a host  of other positive economic  uplifting  factors. SMEs are veritable  engines  for  attainment of  national  objective  in  terms of  employment generation at low investment cost, development of entrepreneurial  capabilities  and indigenous technology.  They reduce  the  flow  of people from  rural to  urban  areas and can easily be  established with  minimal  skill.  They also contribute substantially  to the country’s gross domestic  product, export  earnings  and development of  employment opportunities. 

Challenges faced by SMEs

Financial Problems: About 80% of Small and medium entreprises are stifled because of poor financing and  other  associated problems  [14]. The problem  of  financing  SMEs  is not  so much the  sources of funds  but  its accessibility.  Factors identified inhibiting  funds accessibility are the stringent conditions set by  financial institutions, lack  of adequate collateral and credit information  and cost  of  accessing  funds [15]. Harper [16] believes that  the  capital shortage  problem  in  the  small firm  sector is  partly  one, which stems for the uneconomic deployment of  available resources by  the  owner-managers.  This view was shared by Ihyembe [17] who claimed  to have seen  businessmen  take loan  for expansion  projects only  to  turnaround to  marry  new  wives, acquire  chieftaincy titles or buy houses abroad. Bruch  and Hiemenz  [18] in  a  study  of  SMEs  in  Asia  observed  that financing working capital  needs was  the  most  frequently mentioned  problem.  Binks and Ennew [19] expressed  the view that  the  funding problem of SMEs is  primarily due  to  the behavior of  banks and imperfection  of  the capital  markets.   Management  Problems:  Lack  of trained manpower  and  management skills also constitute  a major  challenge  to  the  survival  of  SMEs  in  Nigeria.  According  to  West  and Wood [20], “…90% of all  these business failures result from lack  of experience  and competence.”  Rogers [13], also  added that inefficiency  in overall  business management and poor record keeping is also a major feature of most  SMEs; technical problems/competence  and lack of essential and required expertise in  production, procurement,  maintenance, marketing  and finances have  always led to  funds misapplication, wrong and costly decision  making.

Inadequate  Basic Infrastructure:   Government  has  not done  enough  to  create  the best  conducive environment for the  striving of  SMEs,  the problem  of infrastructures ranges from  shortage of water supply, inadequate transport systems,  lack of  electricity to improper solid waste management. Nigeria’s underdeveloped physical and  social infrastructures create  a binding constraint  to SMEs growth, since;  they  heavily  rely on the  inefficiently provided state  infrastructures  and cannot afford  the cost of  developing alternatives [21]. Socio-Cultural Problems:  Most Nigerian  Entrepreneurs  do  not  have the investment culture of  ploughing  back  profits.  Bala  [22] stressed that  the attitude of a  typical  Nigerian entrepreneur is to invest  today and reap  tomorrow. Also, the socio-political  ambitions  of some entrepreneurs may lead to the diversion  of valuable  funds and energy  from business  to  social  waste.  The  problem  of  bias against  made  in  Nigeria goods is significant.  Most Nigerians  have developed a high propensity for the consumption of foreign goods as against their locally made  substitutes. Strategic Planning  Problems:  SMEs often do not carry out proper  strategic planning in their  operations. Ojiako  [23] stated that  one  problem  of SMEs is  lack of  strategic planning. Sound planning is a necessary input to  a sound decision-making. Location/Economic Problems:  Market stores are  dominated  by  absentee landlords who  charge  exorbitant  rates. The  ownership  of  market  stores by  politicians is crowding real  small-scale  operators out  of  the market. The high  rents  charged by  store owners  on good locations  have  forced  real small-scale  operators into  the streets or at  best into accessible places [24]. Also, domestic economic  problems of deregulation  and removal of protection  as  well as the global financial  crisis have been  detrimental  to SMEs.
Poor Accounting  System:  The accounting system of  most  SMEs lack standards hence, no proper  assessment of  their performances. This creates  opportunity  for mismanagement and eventually leads to  the downfall of  the  establishment. Multiple taxation:  This  has become a  major problem  especially  given  the role  of  tax consultants and agents  hired by local  governments.  They  are  often crude in  their operation, excessive in  their assessment  and  destructive in  their  relationship  with  the production  process.  They  tax everything in their  bid to generate revenue  without considering the net effect to  household incomes and employment.
Unstable policy environment:  Instability in government  policies  have caused  some SMEs to  collapse. One of such  policies is  that of the 1980s  when government specified that  cocoa should not  be exported in raw or unprocessed form after a specified deadline. Many  SMEs  had  to  import  machineries  only  for government  to  reverse  this  policy.  This negatively affected so many  SMEs in the  cocoa industry. The present  high  mortality rate  of  SMEs in Nigeria is awful  to contemplate and constitute danger to  the entire economic  system. It represents serious financial  pressure on  the  nation’s economy  as  well  as a  waste  of valuable  resources.  The business  owner should always  consider challenging situations  and be  prepared to meet  them with preplanned strategies [25]. The survival  of  SMEs is only possible through a systematic analysis of the problems  they  are facing  and  mapping out appropriate strategies of overcoming them,  through  a proper understanding of  the business environment [26]. For  a business to survive in unfriendly environmental  conditions  it should adopt  a strategy that utilizes  its strengths to exploit opportunities while avoiding its weaknesses

Nwoye [28], argued that strategic changes  might take place in  a firm without  initial formulations,  such decision could be informed  by expansion strategy,  preference to  cash sales policy, innovation  strategy, change  in production  techniques,  local  sourcing  or use of  alternative materials, backward  integration and merger. Thus, any entrepreneur  who wants to succeed must identify  business  opportunities,  be creative, visionary, daring, risk taking, courageous and sensitive to changes in the business environment.

We shall elucidate on the way out of these challenges in part 2.

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