The impact of the fiscal policy on SMEs and the general Nigerian Entrepreneur as it relates to raising capital.
By Oluwaseun Smith
As many small business owners in Nigeria will tell you, finding capital is tough. Equity capital limits one’s savings, or what one can raise from loved ones. The demand placed on the few sources of institutional equity funding is well over the capital they have available to invest. Additionally, only a small fraction of capital from institutional investors in Nigeria goes towards helping small businesses. They’d rather fund medium-sized companies that are already cash flow positive. Regarding debt, financing from financial institutions has been historically difficult to access for MSMEs, although that seems to be changing with the introduction of interventions from newly established Development Finance Institutions such as the Development Bank of Nigeria and the Lagos State Employment Trust Fund.
The Buhari administration has raised the right issues about access to finance for startups and SMEs, but it’s unclear the extent to which this has been backed up by its policy positions. So, to what extent has this administration invested in solving the access to finance problem for MSMEs through their fiscal policy?
The administration has invested some funding indirectly increasing access to finance through its Social Investment Programmes. But there are questions about the efficacy and sustainability of programmes like MarketMoni, TraderMoni, and FarmerMoni). In 2017, the Bank of Industry facilitated the disbursement of ₦11.1 billion in loans to 205,863 beneficiaries including the underbanked groups of market women, traders, artisans, youth and farmers. That’s an average of ₦54,000 naira per beneficiary to less than 0.3% of the 77 million MSMEs in Nigeria, meaning that the programme has more of a social impact focus than trying to honestly address the broad-based funding problem faced by Nigeria’s SMEs. It’s uncertain whether the beneficiaries will pay back or even if the programmes can ever become self-funding.
In 2017, the FG invested ₦40.6 billion as equity contribution towards the take-off of the Development Bank of Nigeria with the funding coming directly from the federal budget. Added to the ₦87.9 billion received by the DBN from international development finance institutions it meant that the DBN had about ₦128 billion available to lend to MSMEs by the time it started lending operations in November 2017. Sadly, it was only able to provide ₦182.3 million in loans to MSMEs by the end of 2017. Lending in 2018 is expected to improve significantly as the bank claims to have provided loans to 35,000 beneficiaries since inception as at the end of November 2018. The intervention via DBN is more sustainable, should reach a larger group of MSMEs. Also, the DBN should become self-funding.
Some other interventions have helped address the problem of accessing debt financing, but which are not directly funded by the federal budget, and so are not a function of fiscal policy. The Bank of Industry and Central Bank of Nigeria provided funding in some form to MSMEs with financing for the programmes coming from their balance sheets. These quasi-fiscal programmes provided about ₦46 billion in funding MSMEs in 2017 with the BOI’s SME Directorate driving the bulk of the performance by providing ₦40.9 billion in loans, and CBN’s MSME Development Fund provided ₦4.2 billion in loans. At the sub-national level, the LSETF provided ₦5.1 billion in loans, bringing total fiscal and quasi-fiscal intervention in financing to MSMEs to ₦97.7 billion in 2017. Commercial bank loans to SMEs in 2017 was ₦10.7 billion, so it is quite clear that SMEs rely heavily on these fiscal interventions to get vital credit.
Despite these efforts, with a financing gap estimated at ₦9.6 trillion, there is still quite a bit of work to be done. First, this administration’s interventions to date are focused on unlocking access to debt. For SMEs, the type of financing usually required is equity, and there has been no effort to increase the amount of equity funding available. Also, this can be done either by directly setting up an MSME growth capital fund, or providing guarantees that would encourage private investors to make equity funding available which has not happened. There is also a place for facilitating the provision of debt to MSMEs by existing commercial banks through the provision of guarantees or other risk-mitigating products. The DBN is making an effort in this regard, but its programme will need significant expansion given the quantity of financing that needs to be mobilised. Finally, the current intervention programmes need to be rigorously assessed for performance so that they can be improved (or terminated) such that the ultimate aim of enhancing economic outcomes is achieved.
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Editor’s Note: This article was originally published in The Spark Magazine. Find the magazine here to read other articles.