Clearer Identification of Beneficiaries
Who are the intended beneficiaries of the SME Funding Scheme?
There is need for the beneficiaries of the scheme to be more clearly
identified. Whereas the promoters of the existing SME and SSI in the
country think that they are the sole beneficiaries of this fund, and
even the banks may think so as well, they all do so in error. Since
the fund is a growing one, its beneficiaries must include not only
existing SME/SSI but also potential ones.
The requirement for African ownership
and leadership of NEPAD adds a further dimension. Seen as a component
of NEPAD all Africans will be obliged to embrace the promotion of
SME and SSI wherever they live in their respective domains and countries
as a way of achieving rapid growth and development therein. There
lies the promise of growth. Nigerians, young men and women, old and
young, and indeed all Africans, who are desirous of establishing their
own businesses, will now have a chance to do so under this scheme.
They must be told and they must be encouraged to reach out to the
scheme and to take advantage of it to set up their own SME or SSI.
Some will fail, some will succeed, and that is how it should be.
Clearer identification of beneficiaries
will lead to an expansion of the universe of persons to which
the scheme should apply. Young graduates as well as retired persons
who think they are able to set up SME are thus challenged and invited
to strive to participate. They are all invited to learn more about
NEPAD, to learn about this scheme, to understand the need for
entrepreneurship training and to find out which SMEs are best suited
to their localities. Thereafter, they are invited to think
more of investing than of making frivolous expenditures. They
are to be encouraged to see their destiny as a matter of choice
and to find ways to accumulate capital for enterprise promotion. This
can only be good for both the banking system and for the African economy.
To help this later group participate
in the SME programme may also require that we look to the idea
of incubation centres such as they have in Israel and Malaysia,
to name a few places. Promotion of SME/SSI development in Africa would
probably require more extensive and aggressive enterprise incubation
than in other parts of the world, in view of the scale of the problem.
Provision of Entrepreneurship Training for the Beneficiaries
All beneficiaries of the SME programme have something in common; they
all need entrepreneurship training to enable them to refocus
their ideas and to bring out their best. Banks, as implementation
agents of the scheme, must find ways to assist SME promoters in this
regard. Banks can do so by themselves running entrepreneurship-training
programmes all over the country, not just in Lagos and Abuja,
and by running such training programmes at affordable prices. Alternatively,
they may encourage other training organisations including NGOs to
provide such training. The same would apply to other countries once
the programme is adopted continent wide.
Such training should also include the
identification of potential projects especially where it is backed
with research showing the gaps in the production or demand/supply
of particular items in the country.
The identification of projects that could
be done in particular areas of the country should therefore be a major
national research effort in the drive to discourage trading and to
promote industrialisation. African countries should all embrace
this approach as an aspect of NEPAD.
SMEs need lots of Financial Advice
Even the existing SME/SSI are unlikely to automatically qualify for
bank equity without some financial advice, however provided. Some
banks may provide such financial advice themselves. Many of the SME
in the country are already distressed and in need of reactivation
and refurbishment. The books of accounts of SMEs are seldom in order
and their audits may be in arrears. Not being obliged to report to
anyone, most SME operators take their time in getting their records
straight. Moreover, even when they do so, they probably grossly understate
their incomes for tax purposes. Based on such understated incomes,
they may therefore look unattractive to any potential investor. In
addition, they are likely to resent the possibility of their performance
and the worth of their businesses now being judged on the basis of
such 'defective' records. They will need time to set the records right
but time is hardly on their side. We need to persuade SME operators
who fall into this category, (and they are probably in the majority)
to come forward and we need to find ways for the system not
to penalize them for the errors of the past.
African nations may need to review their
corporate reporting frameworks to capture the essential data of SME
operators without pushing them into the revolt bracket that Hernando
de Soto explained to be a major cause of informality.
SMEs unlikely to be able to pay for Advice
Most SMEs operate on a small scale for lack of funding. They practically
live from hand to mouth and scarcely have funds with which to purchase
hardware, talk less of paying for 'software' in the form of financial
advice. They may in fact not even appreciate that they need such
advice and even when they do, they may not be able to pay for
Moreover, not many banks are competent
to render the sort of advice that SMEs need. However, banks have
the means to retool quickly and to pull in the experts who will give
such advice as part of their services. Banks are now doing this and
setting up SME Departments as part of universal banking. The existence
of the SMIEIS and the large reserves banks have accumulated is an
added impetus for them to set up such desks or departments and to
man them appropriately.
Banks will also have to discover innovative
ways of providing such financial advice to needy SME for the mutual
benefit of all. In the context of NEPAD and the regeneration of the
African continent, African nations will all have to refocus on
how to educate their people for entrepreneurship and how to offer
the sort of advice which SME operators need on terms which are affordable.
SMEs need Equity but prefer to take Loans
As was noted above, most SME tend to be undercapitalised precisely
because the promoter did not have the resources to plough into the
business. After operating as a one-man show, such promoter is however
resentful of any attempt to share control of his business, which is
what equity represents. The entrepreneur would thus rather prefer
to take a loan, which he or she hopes to be able to repay soonest,
than to receive any bank's equity investment. In addition, entrepreneurs
would prefer to receive such loans at some low concessionary rate
Unfortunately for such promoters, the
SMIEIS is an equity fund and not a loan fund, and banks are not permitted
to give out any part of the SME reserve as loans. In addition, in
the current monetary policy environment of tight money, banks
are unlikely to lend other funds to the SME at affordable interest
rates, until the issue of high interest rates in the economy is better
The challenge of NEPAD is that it would
oblige all African nations to seek macroeconomic stability and to
pursue policies that bring interest rates down to acceptable levels.
Each government is thus seen as the architect of its peoples' fortunes,
good or bad.
f) Banks have
equity funds to give but prefer to give loans
On the side of banks, the truth is that the SMIEIS (Small and Medium
Industries Equity Investment Scheme) is a fund to be invested in the
capital market but very few banks understand and play in the capital
market. They therefore lack the skills to handle this programme. Equity
investment is more risky than lending and banks are merely being risk
averse when they prefer to lend than to give equity. They usually
take securities for lending and can even appoint receivers or receiver-managers
to recover the loan. For their equity investment, there is absolutely
nothing they can do in the event of failure, except perhaps take over
such business and run it better than the promoter.
On the other hand, it may be that banks
are simply disinterested, because the SME Reserve funds are already
outside their balance sheets, to all intents and purposes. Banks would
perhaps prefer the traditional option of lending rather than venturing
into the new area of stock investing especially in unquoted securities.
From this point of view the SMIEIS represents
both a challenge and an opportunity. It challenges the banks to find
out the best way to deal with the problem, and it is an opportunity
for them to learn about the stock market and to discover the hidden
value in the SME sector of the economy and their operators.
In the context of SME funding, this aspect
of getting the funds into the SME is the problem of delivery. In the
context of the NEPAD, ownership is more in keeping with equity and
the capital market than with the money market. Sourcing the funds
from the banking sector for investment in SME equity is ingenious
but the true masterstroke will be achieved when the banks are able
to deliver such funds to the needy SME in the context of African capital
markets. The current state of African capital markets need not
be a deterrent. If existing markets are not suitable, it is perhaps
because they were not designed with the small African investor in
mind. The challenge under NEPAD is to design the sort of capital markets,
which have the small African investor in mind and which will trade
the sort of securities that he and perhaps not the foreign investor
would like to invest in. Such capital markets will probably be
smaller, slimmer, [thanks to IT] and be community based.
What is the Fair Price for the Shares of the SME and who determines
In all of the argument about investing in SMEs, no one appears to
have taken cognisance of the fact that investment in equity means
investment in the shares of a company and that there has to
be a framework for determining the initial fair price to pay
for such shares.
First of all, the shares must exist,
which is to say that the capital of the SME must be large enough to
accommodate the planned investment by banks. To achieve the appropriate
capital size, appropriate stamp duties must be or must have been,
paid to the relevant government office such as the Corporate Affairs
Commission. This is usually a significant investment that many SME
are reluctant to make at all.
Second, is that as said earlier, the
SME promoter probably understated his true earnings in the past. He
now has to sell his shares not on the basis of past achievement but
of future potential. He must thus pay for fresh feasibility/viability
studies, including projections as a way of justifying the value of
the shares. An independent broker or firm of valuers or firm of chartered
accountants may have to be appointed by both parties to value the
Most crucial of all is the answer to
the question; does the bank intend to be able to re-sell the shares
at any stage to any party other than the promoter? In a private company,
the bank has to offer the shares first to the promoter. If the promoter
does not wish to buy the shares or does not agree with the price,
he can of course block any sale. He can do so because in a private
company, the right to transfer is usually restricted. It is only in
a public company that shares may be freely transferred. In venture
capital parlance, we are speaking of an 'exit strategy'. No bank would
wish to make an investment for which it cannot envisage an exit. The
capital market framework, representing the ability to sell the shares
at will, represents such exit.
The public company is therefore the
ideal vehicle for the investment of shareholder's funds by any bank.
The value of shares in a public company can be determined at any
time by reference to the official list of the stock exchange.
For public but unquoted shares, the OTC (Over the Counter Market)
where it exists, usually provides a reference price. Nevertheless,
this would mean that the SME has to become a public company for the
purpose of participating in this scheme. Is this what the scheme intends?
Even if the scheme did not intend this,
I urge that we need to amend the new initiative by banks to fund SMEs
to enable it to provide for this. I argue further that the scheme
will only succeed to the extent that we expand our market infrastructure
to include markets for trading in the shares of eligible SMEs, and
so continually determining the price of their shares.
As I have argued above, even though SME
promoters are looking for money they may not necessarily want bank
staff on their boards, telling them what to do. It should be recalled
that bank SME directors may not even be the most senior bank staff,
and that it would not even be in the best interest of our economy
for senior bank staff to abandon the management of the banks to run
from one board meeting to the other in the SMEs in which their banks
have invested. Moreover, for all their wisdom and skill, banks
do not of necessity have competence in the running of SMEs. Their
contributions, on the boards on which they serve are thus likely to
be questionable and possibly unproductive and acrimonious. Both
parties would therefore need umpires to keep them on their toes and
of good behaviour at all times. Such umpires are best provided in
the form of other holders of the shares of the same SME and an impersonal
framework like the equity market.
In an earlier section, I drew attention
to the possibility of slimmer IT-enabled community-based capital markets
focused on the small African investor rather than the foreign investor.
I have in mind market frameworks such as the OTC, Over The Counter
market, or Capital Trade Points. Such frameworks would enable
any shareholder, including the investor bank or banks to sell their
shares to other investors and to withdraw gracefully when necessary
from the project and without killing the SME. It would also make it
possible for other investors who may have appetites for SME/SSI equities
to be able to participate in them without owning them exclusively.
These ideas are not new. The concept of Capital Trade Points as a
framework for the trading of SME equities in various zones of the
country was a major proposal of the Panel on the Review of the Nigerian
Capital Market in 1996 , which it was my privilege to lead.
As a final note, I have to observe that
'public-ness' may need to be redefined in the context of SME ownership.
The company laws of most nations now prescribe a minimum of fifty
persons to make up a public company. It should be possible, if the
laws are suitably amended for NEPAD, for less than that number to
make up a public company. This has recently become the practice in
some jurisdictions outside Africa.