Financial System Strategy 2020

(1)

Banji Oyelaran-Oyeyinka

SMEs 1

Financial System Strategy

2020

FSS 2020 International Conference

SME: Issues, Challenges and Prospects

By Prof. Banji Oyelaran-Oyeyinka

Director Monitoring &Research Division (UN-HABITAT)

(2)

F S S 2 0 2 0

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

(3)

SMEs 3 F S S 2 0 2 0

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

(4)

F S S 2 0 2 0

SME Contribution

Manufactured Exports by SMEs

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

(5)

SMEs 5 F S S 2 0 2 0

Selected Regional & Sectoral Distribution

of SME Clusters

KATSINA KATSINA SOKOTO SOKOTO GUSAU ZAMFARA KEBBI BIRNN KEBBI NIGER KADUNA KADUNA MINNIA KONTANGORA BORNU JALINGO YOBE JIGAWA KANO GOMBE BAUCHI ADAMAWA TARABA YOLA GOMBE BAUCHI KANO DUTSE DAMATURU MAIDUGURI PLATEAU JOS BENUE MAKURDI NASSARAWA Lafia LOKOJA KOGI FCT CROSS RIVERS CALABAR AKWA IBOM RIVERS UYO PORT HARCOURT ABIA IMO ENUGU EBONYI A N A_M B_R A DELTA BAYELSA YENAGOA ASABA ENUGU ABAKALIKI LAGOS IKEJA KWARA ILORIN OYO OGUN EKITI OSUN ONDO EDO 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

(6)

F S S 2 0 2 0

Opportunities outweigh Challenges

50 – 99 employees >100 employees 10 - 49 employees

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

(7)

SMEs 7 F S S 2 0 2 0

Where we Are: Financial Input

19.7

47.2 54.3

94.0

104.1

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 _{Sources of Funding} _Lagos _Nnewi

Private Banks Development Banks Govt. Credit Friends Personal 50% 31% 29% 21% 18% 76% 38% 0% 29% 19% Result NA NA Weak Weak Weak

(8)

F S S 2 0 2 0 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 Nnewi Human 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 xx

154 # Universities

Population (MM)(1)

(9)

SMEs 9 F S S 2 0 2 0 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 Nnewi Infrastructure Internet Telephone Transport Water Poor Fair Good Good Poor Poor Good Good Result Poor Poor Good Good

Electricity Poor Poor Poor

2005 Survey: Lagos ICT & Nnewi Auto Clusters

1 _Paraphrased Mauritius South Africa Botswana Gabon Nigeria

(10)

F S S 2 0 2 0

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

(11)

SMEs 11 F S S 2 0 2 0

Where we Are : Government Input

Lagos Nnewi Support Systems

Govt. Incentives Innovation IT Support

Intellectual Property Weak Fair Weak Weak Weak Weak Weak Weak Result Weak Weak Weak Weak

Venture Capital Weak Weak 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

(12)

F S S 2 0 2 0

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

(13)

SMEs 13 F S S 2 0 2 0

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

(14)

F S S 2 0 2 0

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 Industries as % of GDP Nigerian levels: 3–7%

(15)

SMEs 15 F S S 2 0 2 0

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

(16)

F S S 2 0 2 0

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

(17)

SMEs 17 F S S 2 0 2 0

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 Otigba Asia's Challenge

(18)

F S S 2 0 2 0

Ranking on Innovation CI

(19)

SMEs 19 F S S 2 0 2 0

Where We Are on CI

Competitiveness ratingPlot 2

Argentina Australia Austria Azerbaijan Bangladesh Belarus Belgium Benin Brazil Bulgaria 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 Israel Italy Jamaica Japan Jordan Kazakhstan Korea, Rep. Kyrgyz Republic Latvia Lithuania Malaysia Mexico Moldova Netherlands New Zealand Nigeria Norway Pakistan Panama Peru Philippines Poland Portugal Romania Russia Slovak Republic Slovenia South Africa Spain Sweden Switzerland Syria Thailand Tunisia Turkey Ukraine United Kingdom United States Venezuela Vietnam 0 .1 .2 .4 .8 T C IP I In d e x i n 2 0 0 3 0 .1 .2 .4 .8

Mean TCIPI over 1990-2003

(20)

F S S 2 0 2 0

Africa Compared

(21)

SMEs 21 F S S 2 0 2 0

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

Development

Fund

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

87

80

52

Iron/ Steel C ement Automobile Textile C oal % Growth of total investments in infrastructure

• Strong commitment to core industries

(22)

F S S 2 0 2 0

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 Infrastructure Capacity

(23)

SMEs 23 F S S 2 0 2 0

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 P e r C a p it a I n c o m e (2 0 0 0 ) in U S D

(24)

F S S 2 0 2 0

Figure: Technical Subjects Enrolment in Universities and per Capital Income .00 1000.00 2000.00 3000.00 4000.00 .000 .050 .100 .150 .200

Technical Subjects Enrolement

P e r C a p it a I n c o m e ( 2 0 0 0 ) in U S D

(25)

SMEs 25 F S S 2 0 2 0 R2 = 0.6138 0 100 200 300 400 500 600 700 800 0 1000 2000 3000 4000 5000

GDP per capita (USD)

In te rn e t U s e rs

(26)

F S S 2 0 2 0

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 In te rn e t U s e rs

(27)

SMEs 27 F S S 2 0 2 0

Current Initiatives Poised to Drive Growth

Government deregulation of the real sector Directive to increase National content Creation of free trade zones (Calabar and Lekki) Commissioning of several transport projects NEEDS Development of credit bureau CBN led African Financial Corporation initiative Privatisation of Government assets [ ] EFCC, NAFDAC, NEITI Regulatory bank capital allocation for SMEs [ ]

(28)

F S S 2 0 2 0

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

(29)

SMEs 29 F S S 2 0 2 0

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;

(30)

F S S 2 0 2 0

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.

(31)

SMEs 31 F S S 2 0 2 0

National Economic System for Production and Innovation

Financial System

Education

& Training

Firms

system

Large, small, MNCs, NTBFs, …

Venture

Capital

Innovation

policy

Intermediaries

Incubators

,

Mentoring

…

Business

support

MARKETS

Human HumanHuman Human Human Human Human Human

Rules

&

Regulations

Framework Conditions

Science

policy

Firms R&D capita capita capita capita llll

(32)

F S S 2 0 2 0

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

(33)

SMEs 33 F S S 2 0 2 0

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

(34)

F S S 2 0 2 0

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.

(35)

SMEs 35 F S S 2 0 2 0

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

(36)

F S S 2 0 2 0

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..

(37)

SMEs 37 F S S 2 0 2 0 560 658 846 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)

(38)

F S S 2 0 2 0

In Conclusion

… Nigeria is on the right track,

but much still needs to be

(39)

SMEs 39 F S S 2 0 2 0

END

Thank You