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Banji Oyelaran-OyeyinkaSMEs 1
Financial System Strategy2020
FSS 2020 International Conference
SME: Issues, Challenges and ProspectsBy Prof. Banji Oyelaran-Oyeyinka
Director Monitoring &Research Division (UN-HABITAT)
Visiting Professor, Innovation, Technology & Development, The Open University,
Banji Oyelaran-OyeyinkaSMEs 2
FSS 2020
Introduction
� SMEs are a very important part of the Nigerian economy.
� In countries at same levels of development with Nigeria, SMEs contribute a much higher proportion to
GDP than currently observed in Nigeria
� Compared to other emerging markets, Nigeria has historically shown lack of commitment to building a
strong SME sector;
� These economies have shown consistent commitment to the development of SMEs by implementing:
access to finance and financial incentives, basic and technological infrastructure, adequate legal and
regulatory framework, and a commitment to building domestic expertise and knowledge
� In light of recent events in the Nigerian macroeconomic environment, SMEs have compelling growth
potential and like other emerging economies are likely to constitute a significant portion of GDP in the
near future
� In this presentation, we will take a look at SMEs in Nigeria, some of the current challenges being faced
and present a case for progress for SMEs in Nigeria
Banji Oyelaran-OyeyinkaSMEs 3
FSS 2020
SMEs in Nigeria
� SMEs are broadly defined(1) as businesses with turnover of less than N100
MM per annum and/ or less than 300 employees
� Studies by the IFC show that approx. 96% of Nigerian businesses are SMEs
compared to 53% in the US and 65% in Europe
� SMEs represent about 90% of the manufacturing/ industrial sector in terms
of number of enterprises,
� They contribute approx. 1% of GDP compared to 40% in Asian countries and
50% in the US or Europe
� In Nigeria, SMEs are distributed by clusters within regions
1 Definition sums up several Nigerian institution definitions of SMEs, i.e. Central Bank, Fed. Ministry of Industry, NASME
Banji Oyelaran-OyeyinkaSMEs 4
FSS 2020
SME Contribution
� Manufactured Exports by SMEs
16 <100 employees Early
1990s
Singapore
31.5 <Rs 30 M
investment in plant
& machinery
1991/199
2
India
20 <200 employees Early
1990s
Vietnam
42.4 <300 employees 1995 Korea
40-60 <100 employees Early
1990s
China
56 <100 employees Early
1990s
Chinese
Taipei
Developing Economies
% SME manufacture
exports
Definition of an
SME (a)
Year Economy
Banji Oyelaran-OyeyinkaSMEs 5
FSS 2020
Selected Regional & Sectoral Distribution of SME Clusters
KATSINA
KATSINA
SOKOTO
SOKOTO
GUSAU
ZAMFARA
KEBBI
BIRNNKEBBI
NIGER
KADUNA
KADUNA
MINNIA
KONTANGORA
BORNU
JALINGO
YOBEJIGAWA
KANO
GOMBE
BAUCHI
ADAMAWA
TARABA
YOLA
GOMBE
BAUCHI
KANODUTSE DAMATURU
MAIDUGURI
PLATEAU
JOS
BENUE
MAKURDI
NASSARAWA
Lafia
LOKOJA
KOGI
FCT
CROSSRIVERS
CALABAR
AKWAIBOM
RIVERS
UYO
PORTHARCOURT
ABIAIMO
ENUGU
EBONYI
AN
AM
BR
A
DELTA
BAYELSA
YENAGOA
ASABA
ENUGU ABAKALIKILAGOSIKEJA
KWARA
ILORIN
OYO
OGUN
EKITI
OSUN
ONDOEDO
OFFA
IBADAN
ABEOKUTA
ADO EKITI
BENIN CITY
OSHOGBO
AKURE
Kano • Leather SME Clusters
Abeokuta • Tie & Dye SME Clusters
Nnewi • Automotive SME Clusters
Oshogbo • Tie & Dye SME Clusters
Lagos • Otigba ICT SME Clusters
Aba • Leather, Feather & Fashion SME Clusters
Banji Oyelaran-OyeyinkaSMEs 6
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Opportunities outweigh Challenges
50 – 99employees
>100employees
10 - 49employees
� SMEs have significant untapped growth potential
� Strong export and employment potentials
� SMEs in Nigeria are currently distributed along sectors within regions; creating potential operational and cost synergies
� New growing sectors, such as entertainment and leisure clusters
� Low-Tech Sectors clusters: Footwear, clothing & garment, agro-processing (cassava, oil palm and other oils.
� High Tech clusters: ICTs, Telecom, and Biotechnology (agric and health)
Opportunities Challenges
� Huge gaps in infrastructure
� Poor financial support and credit environment
� High levels of unskilled workforce
� Low investment commitment to bring pilot plants to commercial scale
Banji Oyelaran-OyeyinkaSMEs 7
FSS 2020
Where we Are: Financial Input
19.7
47.254.3
94.0104.1
Nigeria Kazakh Egypt South Africa Eurozone
Total Loans as % of GDP (BMI, 2006)� SMEs require improved financial
support
� Studies show that Nigeria has a low
amount of domestic investment
through loans vis-à-vis other
emerging markets
– Majority of the loans granted are
issued to large corporates and
governments
– Mostly Informal financing Lagos NnewiSources of Funding
Private Banks
Development Banks
Govt. Credit
Friends
Personal 50%
31%
29%
21%
18%
76%
38%
0%
29%
19%
Result
NA
NA
Weak
Weak
Weak
2005 Survey: Lagos ICT & Nnewi Auto Clusters
Banji Oyelaran-OyeyinkaSMEs 8
FSS 2020
0.3
1.8
2.1
2.7
Nigeria Singapore Taiwan Korea
Where we Are: Knowledge Input
R&D as % of GDP� “It is a lack of investment in human
capital, not a lack of investment in
physical capital alone, which
prevents poor countries from
catching up with rich ones.
Educational attainment and public
spending on education are
correlated positively to economic
growth” – Benhabib and Spiegel,
1994
� Import of physical capital is less
costly than the domestic
development of human capital and
technical expertise
Lagos NnewiHuman Capital Support
Secondary Education
Tertiary Education
R&D
Training
Skilled Manpower Weak
Weak
Weak
Weak
20
Weak
Weak
Weak
Weak
xx
Result
Weak
Weak
Weak
Weak
415
2005 Survey: Lagos ICT & Nnewi Auto Clusters
75
1 xx xx154
# Universities
Population (MM)(1)
1 2007 IMF estimates
Weak Weak Weak
Banji Oyelaran-OyeyinkaSMEs 9
FSS 2020
0
200
400
600
800
0 1,000 2,000 3,000 4,000 5,000
Where we Are : Infrastructural Input
GDP/Capita ($) vs. Internet Users (2000)� “Given adequate levels of
investment in human capital, strong
correlations exist between the rapid
rates of industrialisation over the
long term and the investments in
physical capital” – Sanberg, 1962(1)
� Majority of private sector led
initiatives outperform public sector
led ones
Lagos NnewiInfrastructure
Internet
Telephone
Transport
Water Poor
Fair
Good
Good
Poor
Poor
Good
Good
Result
Poor
Poor
Good
Good
Electricity PoorPoor Poor
2005 Survey: Lagos ICT & Nnewi Auto Clusters
1 Paraphrased
Mauritius
South Africa
BotswanaGabon
Nigeria
Banji Oyelaran-OyeyinkaSMEs 10
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Ratings of Infrastructure
Ratings by Otigba SMEs
0
20
40
60
80
100
120
Internet Telephone Roads Water Electricity
Assessment of Physical Infrastructure Provision
Bad
Fair
Good
Banji Oyelaran-OyeyinkaSMEs 11
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Where we Are : Government Input
Lagos NnewiSupport Systems
Govt. Incentives
Innovation
IT Support
Intellectual Property Weak
Fair
Weak
Weak
Weak
Weak
Weak
Weak
Result
Weak
Weak
Weak
Weak
Venture Capital WeakWeak Weak
2005 Survey: Lagos ICT & Nnewi Auto Clusters
Ranking(1) of Countries by Overall Govt. Support
1 Ranking index is based on overall Govt support through: Financing, Infrastructure, Knowledge, Policy
0.0 0.2 0.4 0.6 0.8 1.0
Congo
Benin
Ecuador
Nigeria
Egypt
Tunisia
S. Africa
Malaysia
Brazil
India
USA
� Vital role of Government in
providing an enabling environment
for SMEs can’t be overemphasized
� The more successful emerging
markets have high rankings as a
result of government support in
enabling the private sector , and
SMEs specifically
� SMEs surveys show weak overall
support from Government
Banji Oyelaran-OyeyinkaSMEs 12
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SMEs Severely Constrained
� Need for Policy Support
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
High
Tariffs
Custom
formal
Finance Info on
source
Import
Duties
Multiplicity
of Taxes
High Rent Security of
Lives
Constraints Faced By Nnewi SMEs
Cluster
Banji Oyelaran-OyeyinkaSMEs 13
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Need for Policy Support
� SMEs Constrained
0
0.5
1
1.5
2
2.5
3
3.5
High tariff Custom
formalities
Finance Info on
soursec
Import
duties
Multiplicity
of taxes
High rent security of
properties
Security
of lives
Constraints Faced by SMEs Firms in Aba Shoe Cluster
Banji Oyelaran-OyeyinkaSMEs 14
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Where we Are : Manufacturing/ Industrial Output
0
10
20
30
40
60's 70's 80's 90's 2000's
Korea Taiwan Singapore
Manufacturing as % of GDP
Nigerian levels: 3–7%
� Manufacturing as % GDP in Nigeria has
averaged 3–7% over the last few decades
� Fierce competition for the Nigerian
manufacturing sector come predominantly
from Asia
� Manufacturing amongst Asian competitors
account for 30-40% of GDP today
� SMEs today account for approx. 1% of total
GDP and approx. 14% of total
manufacturing contribution to GDP
� Studies show that <20% of SME
manufacturers export
– Majority of exporters are experiencing
decreasing levels of exporting due to
competitive pressures from Asian counterparts
0
10
20
30
40
50
60's 70's 80's 90's 2000's
Korea Taiwan Singapore
Industries as % of GDP
Nigerian levels: 3–7%
Banji Oyelaran-OyeyinkaSMEs 15
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Where We Are
� In the private sector, there is a two-stage lag behind these other countries in developing capabilities for competitiveness.
� Knowledge-resource accumulation is lagging 15 -30 years behind depending on which country;
� There is the more obvious 20-25-year lag in general economic development.
Banji Oyelaran-OyeyinkaSMEs 16
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The Asian Challenge
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
percent
Not severe
Weak severe
Fairly severe
Severe
Very severe
Effect of Asian Challenge on Otigba Cluster
Banji Oyelaran-OyeyinkaSMEs 17
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The Asian Chalenge
Perception of SMEs
Perceptions of Market Access Strategies (%)
19.69 87.31 Introduction of new products
29.89 70.11 Reliability in delivery/supply
10.00 90.00 Price (lower)
14.90 85.10 Quality (high)
12.93 87.07 Design (superior)
Strategy of Enterprises in OtigbaAsia's Challenge
Banji Oyelaran-OyeyinkaSMEs 18
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Ranking on Innovation CI
Banji Oyelaran-OyeyinkaSMEs 19
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Where We Are on CI
Competitiveness ratingPlot 2
Argentina
Australia
Austria
Azerbaijan
Bangladesh
Belarus
Belgium
Benin
BrazilBulgaria
Canada
Chile
China
Colombia
Congo, Rep.
Costa Rica
Croatia Czech Republic
Denmark
Ecuador
Egypt, Arab Rep.
Estonia
Finland
France
Gabon
Germany
Greece
Guatemala
Hong Kong, China
Hungary
India
Indonesia
Ireland
IsraelItaly
Jamaica
Japan
Jordan
Kazakhstan
Korea, Rep.
Kyrgyz Republic
Latvia
Lithuania
Malaysia
Mexico
Moldova
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Panama
Peru
PhilippinesPoland
Portugal
Romania
Russia
Slovak Republic
SloveniaSouth Africa
Spain
SwedenSwitzerland
Syria
Thailand
Tunisia
TurkeyUkraine
United Kingdom
United States
VenezuelaVietnam
0.1
.2.4
.8T
CIP
I Ind
ex in
200
3
0 .1 .2 .4 .8Mean TCIPI over 1990-2003
Source: Oyelaran- Oyeyinka (2006)
Banji Oyelaran-OyeyinkaSMEs 20
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Africa Compared
Banji Oyelaran-OyeyinkaSMEs 21
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How To Compete: The China Example
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1997 1999 2001 2003 2005
Total R&D Investment
Increase Investment in Infrastructure (2002 -03)Create Enabling Financial Incentives and Policies
Increase Investment in Knowledge (RMB MM)
Tax Policy � Four targeted electronics products
� Exemption of production taxes, half of the income taxes and tariffs of key
equipments
� Pick up 10% of R&D expenses
� Exemption of importation taxes on
significant imported projects
DevelopmentFund
� Allocation of RMB100 million per year to support technology adaptation,
technology and commercialization of the above four products
� Used as fund for several start ups
Subsidies � Allocation RMB200 million as loan
subsidies to support the application
of computers
Licences � Importation licence management on
computer and components
93
122
8780
52
Iron/ Steel Cement Automobile Textile Coal
% Growth of total investments in infrastructure
• Strong commitment to core industries
• Increasing investments by almost 80% from the late 90s
Banji Oyelaran-OyeyinkaSMEs 22
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Following Figures show that wealth generation is:
� Inversely proportional to employment in agriculture;
� Positively related to technical enrolment in universities;
� Positively related to knowledge infrastructure (Internet users)
� Internet users are highly correlated with telephone use
� Internet use is positively related to computer use
Capability to Compete is based on Knowledge and InfrastructureCapacity
Banji Oyelaran-OyeyinkaSMEs 23
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Figure: Agricultural Labour in GDP and per Capital Income
.00
1000.00
2000.00
3000.00
4000.00
0 20 40 60 80 100
% Agriculture Labour in 1990
Per
Cap
ita
Inco
me
(200
0) in
US
D
Banji Oyelaran-OyeyinkaSMEs 24
FSS 2020
Figure: Technical Subjects Enrolment in Universities and perCapital Income
.00
1000.00
2000.00
3000.00
4000.00
.000 .050 .100 .150 .200
Technical Subjects Enrolement
Per
Cap
ita
Inco
me
(200
0)
in U
SD
Banji Oyelaran-OyeyinkaSMEs 25
FSS 2020
R2 = 0.6138
0100200300400500600700800
0 1000 2000 3000 4000 5000
GDP per capita (USD)
Inte
rnet
Use
rs
Figure: Internet use and GDP per capita in USD (2000)
Banji Oyelaran-OyeyinkaSMEs 26
FSS 2020
Figure: Internet use and telephone density (2000)
R2 = 0.9346
0
200
400
600
800
1000
0 50 100 150 200 250 300
Telephone Density
Inte
rnet
Use
rs
Banji Oyelaran-OyeyinkaSMEs 27
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Current Initiatives Poised to Drive Growth
Governmentderegulation of the realsector
Directive to increase National content
Creation of free trade
zones (Calabarand Lekki)
Commissioning of several transport projects
NEEDS
Development of credit bureau
CBN led AfricanFinancial
Corporation initiative
Privatisationof Government
assets
[ ]
EFCC, NAFDAC,NEITI
Regulatory bank capital allocation for SMEs
[ ]
Banji Oyelaran-OyeyinkaSMEs 28
FSS 2020
But Require Systemic SME Business Framework
SME Firm
IPR/ Patents
Technological institutions
Labour market
Skilled workforce
Financing
Market orientation
Infrastructure
Regulatory institutions
� Key building blocks for an enabling
SME business environment include:
– Basic science and technology
Knowledge Base
– Legal and regulatory structure
– Basic Physical and technological
infrastructure
– Financial and incentive structures
� In Nigeria today, significant
leadership is particularly required
in these areas
SME Business Framework
Banji Oyelaran-OyeyinkaSMEs 29
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Systemic Functions for Supporting SMEs
1) Knowledge Support including targeted R&D and Design;
2) Competence building: formal and non-formal training in educational institutions and training of technical manpower in firms and organizations;
3) Supply of inputs, particularly finance for production and innovation and for the development of scientific, technical and managerial manpower; flow of Foreign Direct Investment FDIs, venture capital and loans;
4) Provision of regulatory frameworks and measures, standards and quality functions (such as product quality tests) and provision of incentives to develop new products and services;
Banji Oyelaran-OyeyinkaSMEs 30
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Systemic Functions for Supporting SMEs
5) Facilitation of the exchange and dissemination of knowledge and information;
6) Stimulation of demand and creation of markets through govt procurement policies;
7) Reduction of uncertainties and resolution of conflicts through appropriate institutions, such as industrial arbitration.
Banji Oyelaran-OyeyinkaSMEs 31
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National Economic System for Production and Innovation
Financial SystemFinancial System
EducationEducation
& Training& Training
FirmsFirms
systemsystemLarge, small,
MNCs, NTBFs, …
VentureVenture
CapitalCapital
InnovationInnovation
policypolicy
IntermediariesIntermediaries
IncubatorsIncubators,,
MentoringMentoring……
BusinessBusiness
supportsupport
MARKETS
HumanHumanHumanHumanHumanHumanHumanHuman
RulesRules &&
RegulationsRegulations
Framework Conditions
ScienceScience
policypolicy
FirmsR&D
capitacapitacapitacapita
llll
Banji Oyelaran-OyeyinkaSMEs 32
FSS 2020
Proposal: Broad Vision
� 1. Nurture 200 manufactured export SMEs distributed across sectors by 2020 ;
� 2. SMEs to contribute to increased employment, national income generation and export revenues: raise manufactured exports of SMEs to 10% by 2010; 20% by 2015; and 25% by 2020;
� 3. Expand domestic oriented SME, through:
� − The creation of new and innovative firms; and
� − The graduation of as many informal enterprises as possible into the formal sector.
Banji Oyelaran-OyeyinkaSMEs 33
FSS 2020
Recommendations and Proposals
(1)Short Time Must Do Now!
Basic Infrastructure that is targeted;
� Designate SME Clusters as Priority Economic Zones (PEZs)for Infrastructure support including power, water and broadband.
These include traditional technology clusters: leather works, agro-processing (cassava, oil palm, automotive components etc..
High-tech clusters include ICTs, biotechnology for specific products to solve health and food problems
Banji Oyelaran-OyeyinkaSMEs 34
FSS 2020
Promote High-Tech Industrial Clusters
� Establish a framework and A Fund Mechanism to raise the capability of local computer component assemblers;
� With private actors build high tech parks for hardware and computer software;
� Build Model technology Incubators within parks;
� Build on existing institutions such as NIPRID, SHEDCO etc to spin-off SMEs that draw on research from these organizations.
� Framework to move research into market using SMEs
Banji Oyelaran-OyeyinkaSMEs 35
FSS 2020
Better Systems Coordination
� Establish a National Foundation for Innovation, and Competitiveness (NAFIC). It will comprise the CBN, Ministries of S&T, Industry, Finance, SMEDAN and NPC and located in the presidency;
� The NFIC will include representatives of the private sector as well as international and national individuals appointed on their merit;
� Malaysia, the UK, India and Hong Kong among others have such bodies.
Banji Oyelaran-OyeyinkaSMEs 36
FSS 2020
Knowledge of Sector
In collaboration with other agencies:
� Deepen the knowledge of the sector through surveys and studies of SMEs;
� Organize periodic fora to bring together sectoral SME groups with suppliers, buyers etc..
� Organize the Nigeria “SMEs on the Web” Project
Banji Oyelaran-OyeyinkaSMEs 37
FSS 2020
560658
846
1,171
1,396
2002 2003 2004 2005 2006
SMEs can Replicate Other Success Stories
0
5
10
15
20
25
30
35
Jan01 Aug02 Mar04 Oct05 Apr07
Unprecedented growth in Telecoms
Strong growth in Banking (Agusto report, 2007)� Tremendous growth in the SME
sector can be achieved, with the
right amount of economic enabling
� Successful case studies from the
banking and telecom sectors show
the growth potential inherent in
unreformed business sectors
� Further impetus within the broader
Nigerian socioeconomic
environment provide a compelling
case for the SME sector growth
potential, such as aforementioned
initiatives driving growth
Mobile phone subscriber base (MM)
Total Banking Industry Loans and Advances (N Bn)
Banji Oyelaran-OyeyinkaSMEs 38
FSS 2020
In Conclusion
… Nigeria is on the right track,
but much still needs to be
done to promote SMEs …
Banji Oyelaran-OyeyinkaSMEs 39
FSS 2020
END
� Thank You
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