Olatunde Akande is the Principal Partner, Carson Capital Limited, a development consultancy with focus on Small-Medium Enterprises-SMEs and agricultural development.
He had worked for almost a decade in the commercial banking sector in Nigeria until he was recruited by the International Finance Corporation-IFC. There, he was the first Investment Manager assigned to set up the SMEs technical advisory office in Nigeria.
He has over the years consulted for various state governments and deposit money banks.
In this interview with FEYI BANKOLE, the MBA holder who has just bagged a M.Phil in Development Finance from the University of Stellenbosch Business School-USB, South-Africa, where he received an award for graduating cum laude, bares his mind on issues relating to development in Nigeria, why SMEEIS failed, why most small businesses do not exceed the first generation, and the way forward for SME development in Nigeria, among other issues.
Why does SME financing seem low in Nigeria compared to what we have in other developing economies?
Let me take you back to the Small Medium Enterprises Equity Investment Scheme-SMEEIS set up by the Bankers’ Committee of the Central Bank of Nigeria. But before I go into that, we need to examine the key issues that related to access to finance.
Basically, the loans that were available were of high interest rates and were of short tenure. Also, because of issues of collateral, most SMEs could not typically come up with the kind of collateral demanded by the banks.
The CBN then came up with the equity scheme to salvage the situation, but after a few years of its implementation, the scheme died.
The scheme, by all stakeholders, was termed a failure. Banks were supposed to set aside 10% profit after tax, and about N55 billion was supposedly set aside to invest in SMEs, but only about N28 billion was actually invested.
Over half of this was invested in Lagos alone on over 186 projects out of the total 333 projects! So, you will realise that the issue with the project was not one of financing, but several other issues like record-keeping, capacity of entrepreneurs, multiple taxation, and entrepreneurs’ failure to implement business plans. My thesis on my M.Phil was actually an evaluation of SMEEIS, why it failed, and possible policies that would be needed for a new SME scheme. The reason why we cannot afford to joke with SME as a nation is because it is a major engine for growth in any economy. Another is agricultural development which today also accounts for over 40% of our GDP and at least 60% of employments in the country.
From your study, what exactly led to the failure of SMEEIS?
SMEEIS was an equity scheme which was relatively new in Nigeria. I was heavily involved in the scheme because I worked with First Funds and also Capital Alliance which were involved in the implementation of the scheme. To be honest, the SMEs entrepreneurs did not really want banks as partners in the business; there was none alignment of interests.
Rather, what they wanted was low interest rate loans of longer tenure, and they also wanted flexibility in the areas of the collateral banks were seeking. They therefore didn’t really want banks as partners! Another reason was that most of the contracts between the banks and SMEs were structured as ordinary shares and this brought a lot of issues of principal agent problems. The entrepreneur knew that no bank was going to come on account of his or her property if the business failed because the banks were there as ordinary shareholders! Because of that, the entrepreneurs themselves had some opportunistic issues and went misbehaving with the money. We therefore had issues of moral hazards. Another reason, which I will also blame on government, was that there was a lot of emphasis on disbursement of the funds which led to issues of inadequate review and monitoring of the projects. About two years ago also, the CBN came up with a policy intervention of N200 billion to assist SMEs, and this was disbursed through the Bank of Industries. However, we could see that we obviously need more than that figure to stimulate SMEs.
Any viable way forward for SME financing?
The banks will always look at SME financing as a very risky area because of issues like moral hazards, record-keeping, business plan implementation, etc., but I think the CBN has the right approach. Notwithstanding, I believe there has to be a national policy on SME funding. Such policy should be inclined with infrastructure upgrade like power which is already improving a bit. We need a sustainable SME funding scheme, and we should be watchful of some of the issues that led to the downfall of SMEEIS. The Minister of Trade and Investment is also doing a lot. I read recently when he said that Foreign Directs Investment-FDI coming into Nigeria has actually increased, and that Nigeria is one of the biggest recipients of FDI in the continent thus far this year. To be honest, where I have a problem with that is based on a principle which it seems to contradict.
An increase in FDI ought to translate in reduction in the unemployment rate, but right now, the rated increase in our FDI has not translated into a visible job creation for the youths! So, how is the FDI increasing? The Bank of Industry is also doing a lot in terms of SMEs financing, especially as it has partnered with some state governments to give out low interest rate loans of about 5 to 7 years tenure, but I think that is not enough. We need to have more institutions working towards SMEs development, and the first step has to be from the government; there necessarily has to be a national policy. Another issue to be noted is the issue of business development services because one of the problems with SMEEIS was that there weren’t too many affordable business development service consultants that could help the SMEs. So, most of the SMEs who got equity from the banks had no technical assistance. I however think SMEDAN is on the right track in this regard, especially in the encouragement of clusters. Ogun State for example has different clusters through which the entrepreneurs are targeted and given technical assistance.
Like you rightly said, many micro businesses operate without business plans and this is having an adverse effect on SME development in Nigeria. What then is your take on the role of business plans and business development services in SME development in Nigeria?
While working at the IFC, we had a facility called the Africa Project Development Facility-APDF, and I was actually recruited specifically to facilitate the opening of the office in Nigeria and I worked in that capacity as the first investment officer. IFC foresaw that it’s not just about access to finance but about technical assistance to wrap-up or backup a good business idea. The APDF then was set up all-over Africa, and its role was to provide enterprise support, capacity building, and business development services for SMEs. So many times, I have seen businesses that have failed because their promoters do not know the difference between cash, profit, sales and revenue.
There is no way business development services can be separated from the development of SMEs in Nigeria, and that was one of the main reasons SMEEIS failed; there were not so many affordable business development services. That’s one area where SMEDAN has to do a lot of work. Nobody is going to finance a business that has no documented plan! Unfortunately also, you also find that most entrepreneurs in Nigeria only use the business plan to access finance, after which they dump it! A business plan is a road-map to guide you and it needs to go far more than that! This is where the need for adequate business support comes in. The IFC still has small business advisory units all-over the world, and in continents like Africa especially, the success of it has been unparalleled. In Nigeria, the ABC has also come up to fill in that space. SMEDAN is also there, but because it is government-funded, there can be limitations to how far it can go. I cannot over-emphasise it, but honestly, without affordable business development service providers, it is doubtful if you can actually stimulate the SME sector in Nigeria.
Businesses like Coca-Cola, Ford and Mercedez-Benz started as small businesses but have been in existence for ages and have continued to grow. But why is it that most small businesses in Nigeria don’t go beyond the first generation?
That’s interesting, but unfortunately, we also have such issues in Nigeria where successful businesses die after the death of their key promoters. One key issue we’re having both in Nigeria and in many other developing countries in Africa, is the issue of succession planning; a lot of people are not in-tuned to that! Once a business is doing well, you need to begin to look at the business after you; but most people do not do so! When SMEEIS was being implemented for example, there were a lot of entrepreneurs who were averse to banks coming in as shareholders because they would rather own 100% of a small business than owning 60% of a big business! Most entrepreneurs are territorial and do not want to release any equity or lose control of a business. Ideally, when a business is growing, the entrepreneur needs to be able to look at succession planning.
That is the only way you can have businesses that would last for generations! To do that effectively, you must be able to delegate, get the right people and put structures in place that would enable the business run successfully even when you’re not there. Banks and other financiers should also start looking into what we call key-man risks insurance because that’s one way of getting entrepreneurs to work towards having succession plans.