Is Funding The Problem With SMEs? 

 You wouldn’t believe it that at a very high level, talking about intellectuals this time around, disagreements come up on the issue of whether funding is the problem with SMEs or not. It was a long and tough debate at Enterprise Development Centre (EDC) at the Victoria Island campus of Pan Atlantic University (PAU), now Pan Atlantic University, penultimate week when this subject came up. Yours sincerely was running a course on Enterpreneurship Management there then. 

One of the participants, in spite of all entreaties, in spite of the robust argument put forward to convince him, would not agree that money is not the problem with SMEs. The house gave examples of instances when money was available for SMEs to access but failed to do so. To be more specific, the case of 10 Diamond Bank’s Bright Ideas came up. Ten bright entrepreneurs, were unveiled by the Executive Director of Diamond Bank then, Uzoma Dozie, in Lagos.

They were short listed by the Bank along with other aspiring entrepreneurs from thousands of entries to attend business development programmes in FATE Foundation to pre-qualify their business ideas for sponsorship by Diamond Bank. Of the 10, only three had successfully accessed the fund made available to these aspiring entrepreneurs. 

The bank set aside some fund for the takeoff of these budding SMEs and needed them to fulfil some administrative requirements. One is not talking of the traditional collateral requirement or of monetary requirement. All they needed to do was registration of business, provide guarantors, etc. When simple conditions like these stand as obstacle to accessing fund bySMEs, will you say funding is the problem with small business? If you ask me, I will say “No”. Funding is not the problem, it is the ability to access the fund that is the problem. 

Our don is not alone in this belief. Only recently, a survey which looked at strategic and emerging banking issues in key African markets held that there is “neglect on the Small and Medium Enterprise sector” by banking institutions across the African continent. It focused on “leading countries in regional markets” namely South Africa, Kenya, Egypt, Senegal and the Ivory Coast. The study also found that there were concerns by all markets about how best to service the “unbanked” market, noting that most people who lived far from urban areas did not have access to banking services. This was found to be more the case in Egypt, Nigeria and Kenya, while in South Africa it was seen to be progressing as a result of the Financial Sector Charter and new products such as Mzansi Account. 

There is merit in this argument because it is true that rural Africa is Under-banked. Some urban areas too are under-banked too. We only witnessed an improvement in Nigeria recently with bank consolidation. With consolidation, banks are growing from 50-branch network to 200-branch network. But will businesses be able to access the funds when these banks are available? 

Again, a Central Bank of Nigeria report states that the percentage of banks’ total loan portfolio advanced to SMEs declined from 49 per cent in 1992 to less than 10 per cent in 2006. It states that about N4.6 million was disbursed by banks to SMEs in the economy from 1992 to 2003. The report reveals that the percentage of banks’ total loan portfolio advanced to SMEs sharply within the period. According to the CBN report, in 1992, the banks’ total loan portfolio to SMEs decreased from 49 to 32 per cent in 1993 and 22 per cent in 1994 and that it increased to 23 per cent in 1995 and 25 per cent in 1996. The figure, according to the apex bank report went on a steady decline between 1997 and 2001 as follows: 17, 15, 13, 9, and 7 percent respectively. And in 2001 it increased to eight per cent and remained on at this level in 2003. 

 At a Bankers Committee forum then, the CBN governor, 

Chukwuma Soludo frowned at the slow pace of disbursement of the Small and Medium Enterprises Equity Investment Scheme (SMEEIS). Assessing the SMEEIs programme, he lamented that in an economy of about N18 trillion , the SMEEIS contribution which was put at N40 billion and disbursement of N16 billion over a period of 4-5 five years at an average of N3 billion was not encouraging. Soludo stated that at the end of 2004, total SME credits were less than one per cent of total credit, “whereas inSouth Africa, the corresponding figure was 22 per cent. For him, the SME contribution of N3 billion was marginal. 

The same argument subsists here: the funds are available but SMEs cannot access them. For SMEEIS, they need equity participation, until recently when some element of loan was introduced. But most of our SMEs detest equity participation – they believe the bank will take over their business. They do not believe in the principle of ‘exit’. 

This piece, from Archives Siaka-Momoh , was first published in June 2007.