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Prospects of Nigerian SMEs Under The Small and Medium Industries Investment Scheme (SMIEIS). (Posted 18th Mar, 2002) Tell your friends about this page! Email it to them.

Basic Concepts in SMEs

The Small and Medium Industries and Equity Investment Scheme (SMIEIS) defines Small and Medium Enterprise (SME) as any enterprise with a maximum asset base of N200 million excluding land and working Capital and with the number of staff employed not less than 10 or more than 300. Small and Medium Enterprises (SME) have been defined along a broad continuum of size and type. In terms of size, measures used to classify SMEs include employment, assets and revenue.

Employment-based Classification


Organisation
Micro-Enterprise Small Enterprise Medium Enterprise
International Finance 
Corporation (IFC)
< 10 10 - 50 50 - 100
Central Bank of
Nigeria (CBN)
- < 50 < 100
National Association 
Of Small Scale Industries 
(NASSI)
- < 40 -
Accenture - < 50 <500

Asset-Based (excluding Real Estate) Classification

Organisation Small Enterprise Medium Enterprise
IFC < $2.5 million -
CBN < N1 million < N150 million
NASSI < N40 million -
Federal Ministry of 
Industry
< N50 million <N 200 million
National Economic 
Reconstruction Fund 
(NERFUND)
< N10 million -

Source: International Finance Corporation (IFC) publications (2001)

Element of The Small and Medium Industries Equity Scheme (SMIEIS)

SMIEIS is a voluntary initiative of the Bankers' Committee whose membership includes all the Managing Directors and Chief Executive Officers (MD/CEOs) of banks in Nigeria, which require all licensed banks in Nigeria to set aside 10% of their Profit Before Tax (PBT) for equity investment in, and promotion of Small and Medium Enterprises (SME).

SMIEIS is intended to stimulate economic growth and development, develop local technology and generate employment. The participating banks for equity investment under this scheme have currently set aside over N5 billion for alternative approach to financing SMEs. The goal of this scheme is to reduce SMEs borrowing and consequently relieve them from interest and other bank charges that are not favourable to their capital structure. It also espouses the provision of financial, advisory, technical and managerial support to SMEs by banks.

Activities Covered By SMIEIS

As regards the practice everywhere and Central Bank stipulation coupled with the agreement reached by the Bankers' Committee. The following activities will be covered under the SMIEIS:

  1. Agro-allied
  2. Information technology and telecommunications
  3. Manufacturing
  4. Educational Establishment
  5. Services (Excluding Banking and Insurance)
  6. Tourism and Leisure
  7. Solid Mineral
  8. Construction, and
  9. Any activities that may be determined from time to time by the Bankers' Committee.

Activities Not Covered By SMIEIS

In line with international practices, banks will not invest SMIEIS funds in entities whose principal business involve or comprise the manufacture or supply of, or any activities in the following sectors:

  1. Tobacco and Tobacco products
  2. Armaments production or where 25% or more of the total production output or, 
  3. Turnover of the investee company is derived from military related purposes
  4. Beverages with alcoholic content exceeding 15%
  5. Casino or companies where the principal source of income is gambling
  6. Speculative investments in real estate or commodities
  7. Banking, insurance or financial services
  8. Immoral and illegal activities
  9. Investments that are harmful to the environment.

Eligible SMEs

Any business activities that do not fall among the specifications above and meets the following criteria will be considered an eligible SMES and thus can partake in SMIEIS:

  1. Enterprises with a maximum asset base of N200 million excluding land and working capital
  2. Enterprises with not less than 10 or more than 300 employees
  3. SMEs registered with Corporate Affairs Commission (CAC) and in compliance with Companies and Allied Matters Act (1990) such as filing of annual returns and un-audited financial statements of accounts
  4. Those who comply with all applicable tax laws and regulations as well as render regular returns to the appropriate authorities
  5. Those prepared to ensure prudent utilisation of funds granted under SMIEIS
  6. Enterprises prepared to make the company's books, records and structures available for inspection by the appropriate authorities (This including SMIEIS granting bank and the CBN) when required
  7. SMEs who are prepared to comply with the guidelines of the scheme even after funds have been disbursed
  8. Enterprises ready to provide monthly financial and operational report to the investing banks before the 15th of the next succeeding month, and 
  9. SMEs committed to keeping upto date records on the company's activities under the scheme.

Modalities For Implementation

To safeguard the abuse of the scheme, the following modalities subsist:

  • Funds invested by participating banks shall be in the form of equity investment in eligible industries
  • Equity investment may be in the form of fresh cash injection and/or conversion of existing debts owed to participating banks into equity investment
  • A participating company may obtain more funds by way of loans from banks in addition to equity investment under the scheme
  • Eligible industries may approach any bank, including those they presently have relationship with or the ones they do not have any relationship
  • Banks may operate the scheme directly, through their wholly-owned subsidiary venture capital companies floated by a consortia of banks
  • Prospective beneficiaries should seek the opinion of third party consultants like lawyers, accountants and valuers in the determining the value to be placed on the asset and capital of their businesses to enjoy a fair price before and during negotiations with banks
  • The recommendations of industrial associations (e.g. MAN, NACCIMA, NASME, NASSI etc.) will be mandatory for members of these associations (where applicable), and 
  • Membership of recognised NGOs engaged in entrepreneurial development and promotion of small scale industries will also be an advantage.

Potentials of SMEs

SMEs is believed to be the engine room for the development of any economy, because they form the bulk of business activities in a growing economy like that of Nigeria. This is manifested in the following ways:

1. Employment Generation 

  • 30% contribution to global GDP
  • Employment generation capacity of about 58% of global working population
  • SMEs also play the critical role of principal safety net for the bulk of the population in developing economies, and 
  • Their labour intensity structure accounts for their recognition as a job creation avenue.

2. Rural Development 

  • SMEs constitute major avenues for income generation and participation in economic activities in the lower income and rural brackets of developing societies especially in agriculture, trading and services, and 
  • The employment opportunities offered apparently reduces rural-urban migration and allows for even development.

3. Economic Growth and Industrialisation

  • National economic development prospects hinge on entrepreneurial energy of vibrant SMEs as most big business concern grew from small scale to become big icons, and
  • As they grow, they protect nations from the geographical cost-benefit permutations of a few multinationals who are ever prepared to close up their businesses and relocate at the slightest provocation or appearance of economic downturn.

4. Better Utilisation of Indigenous Resources

  • The considerable low capital outlay required for setting up SMEs enables them to convert minimal resources into productive ventures, 
  • They also offer veritable outlets for technological advancement especially in businesses with rudimentary technology requirements.

Challenges/Constraints of Funding SME Operations in Nigeria

  • Insufficient personal savings/funds resulting in low initial promoters' equity
  • Uncoordinated business ideas and plans
  • Non bankable projects by entrepreneurs
  • Inability of the customers (SMEs) to satisfy high credit risk standards, including security/collateral
  • Inability of banks to provide long-term funds due to mismatch between tenor of bank deposits and loans being sought
  • Fluctuating and prohibitive interest rate regime, and 
  • Volatile exchange rate regime.

Summary, Conclusion and Recommendations

From the above information, banks would always insist on clean, defensible and comprehensive business proposals before investing under SMIEIS, support businesses that are properly focused, professionally managed and with bright prospect. SMEs with a clear-cut and practicable succession plan will enjoy the blessing of SMIEIS. No doubt, banks would be represented on the Management Board of any enterprise they have equity investment.

SMIEIS, if properly managed could provide the necessary impetus for growth in Initial Public Offers (IPOs) in the future as the banks would exit from the investments made under the scheme and trade off the equity invested to interested the public as banks do not generally tend to stay too long with SMEs. SMEs would be better assisted with the provision of basic functional infrastructures, the inadequacy of which has constituted a drain channel for the investible funds of SMEs, they have to make provision for all these from the loan/funds hither to acquired from banks. If these basic amenities were readily available, SMEs would divest such funds to more productive operations.

The government could also assist by establishing a well funded National Credit Guarantee Fund that will act as buffer for credit facilities from banks and other financial institutions over and above the equity provided under SMIEIS.

* Part of this piece was extracted from Ben Akabueze's paper on Financing Small and Medium Enterprises (SMEs): The Small and Medium Industries Equity Investment Scheme (SMIEIS) Option, delivered at the e-week 2002 Seminar held at the Muson Centre, Lagos between 11-14 February, 2002. The remaining was prepared by our team.

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