IMPLEMENTING THE NEW PARTNERSHIP FOR AFRICAN DEVELOPMENT (NEPAD) BY PROMOTING THE DEVELOPMENT OF THE SME SECTOR IN THE CONTEXT OF CAPITAL MARKETS IN AFRICA

by Chief Dennis O. ODIFE
(Article Reference: Document No.18, November 2002)

A NIGERIAN CASE STUDY
Recent Nigerian experience is a good case for study. Not only is Nigeria the largest black African country, she also has a very large informal sector, often estimated at over 70% of the economy. Nigerian Governments have historically made various attempts to stimulate the SME sector, which is also seen as the indigenous sector. In the seventies, Nigerian governments pursued policies designed to stimulate and promote equity share ownership amongst the indigenous population as well. All through the period, Nigerian banks were obliged by prevailing monetary policies to lend prescribed proportions of their credit portfolios to small-scale enterprises defined variously as 'the indigenous sector' and more recently as the SME sector. In the nineties, following Nigeria's adoption of a Structural Adjustment Programme, the Nigerian Reserve or Central Bank working jointly with the African Development Bank (ADB) established and ran a programme for export stimulation for the benefit of Nigerian raw material processing and exporting SME. The Export Stimulation Loan (ESL) Scheme provided the fixed capital component but did not address the issue of local equity and of working capital. In the event, these SMEs, as well as others, were easily crowded out of the banking sector in the allocation of scarce credit by both the government sector and by the organised private sector. Funding, or lack of it, was thus obviously a critical factor in the underperformance of that sector. Actual delivery of available funding may have been another factor but we shall look at this in more detail later.

The rising rate of urban and rural poverty in Nigeria as in many other African countries has naturally raised questions about the adequacy of past policies and programmes. The need to bridge the 'development chasm' in the shortest possible time as NEPAD envisages, also compels a search for other alternatives. Are there any other options? Specifically, we pose the question: Is it not possible to promote the SME sector through the capital markets of Africa?[4]

In answering these questions, the bold example of the Nigerian Monetary authorities and Nigerian banks and the decision of Nigerian banks to set aside 10% of their annual profits before tax for investment in the equity of SME and SSI (Small Scale Industries) in Nigeria deserve study. Actual implementation will also be monitored for lessons.

According to press reports, within the first two years of the operation of the scheme alone, Nigerian banks accumulated over N11 billion in their respective SME Reserves. The bulk of these funds, it is alleged, still reside with the banks and less than 10% are invested. It is further suggested either that the banks are not willing to part with their SME Reserves or that the SMEs themselves are not forthcoming to apply for and take the funds. Remedies being considered include sanctions against erring banks and possibly, the mandatory transfer of un-invested reserves to the CBN or some designated agency.

What is the problem? What should be done? In the first place the Nigerian authorities deserve commendation for this bold initiative. The new programme deals a fatal blow on the SME funding problem by designating a special pool of funds exclusively for SME. Secondly, the programme achieves a vital breakthrough by making it an "equity scheme" rather than a traditional "loan-type scheme". These are the strengths of the programme as it is. These mean that properly implemented Nigerian banks would become major partners in the industrial reconstruction of the country through the SME Sector. Moreover, this could rapidly become a model for emulation by other African countries. Unfortunately these strengths do not guarantee the success of the scheme. This leads again to the question: What is the problem?

The problem is that the scheme is an equity type scheme in a framework with very weak capital markets. The state of African capital markets has been documented in the bibliography to this presentation. What is now required is to attempt to promote and to support the SME sector in Africa in the context of African capital markets. This requires a radical and urgent rethink of capital markets in Africa and their restructuring to focus on the local investors as a prelude to attracting the foreign investors.

In the rest of this paper we shall examine the other difficulties being encountered by banks and SME operators in the implementation of the Nigerian Banks SME funding programme. We shall suggest how the programme may be refocused towards the capital market to ensure its success.

Initial reports on the performance of banks under the scheme suggests that banks appear to be attempting to use the funds to set up their own SMEs instead of giving the funds to outside SMEs. One can empathize with banks starting their own SMEs with their reserves, rather than giving the funds to their 'enemies' as BOFID appears to require Banks to do under the current Prudential Guidelines. One would therefore have allowed banks to set up their own SMEs as a way of jumpstarting the process. Not much harm can come from banks starting their own SMEs and gaining experience in the process! How many SMEs would the banks set up anyway? Now that banks have been stopped from starting their own SMEs, how many non-bank related SMEs have they funded in total.

As things currently stand, and if the foregoing is a true description of the state of affairs, the laudable objectives for which the scheme was set up are unlikely to be achieved. Under these circumstances, and like most Nigerian schemes, this very laudable scheme could fail, and thus not be available as an option for the implementation of the NEPAD. In the rest of this paper, I shall be addressing the shortcomings of the Nigerian Scheme in order to make it more implement able in Nigeria and thus enhance its prospects for adoption as a possible model for NEPAD and for other African countries.

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[4] D. O. Odife: "Financing the African Economy: The role of the Capital Market" being the text of a paper presented at the Goldland International Conference on 'Conceptualising the African Approach to Management' at the University of Lagos, Akoka, July 2000.

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