Entrepreneurship and MSMEs – The Engine of Economic Growth and Wealth Creation

With 148 million inhabitants and the second largest economy on the continent after South Africa, Nigeria’s economic state is a bundle of extreme contradictions. The US gets 10% of its crude oil imports from abundant oil fields in the Niger Delta, a region that also contains one of the largest known natural gas deposits in the world. Despite this natural endowment, Nigeria is plagued by rampant poverty and depressing macroeconomic and human development indicators. Unemployment is widespread and more than 54% of the population lives on less than US$1 a day. Decades of political unrest, civil unrest and large-scale government mismanagement are largely responsible for this state of Nigerian affairs.

The return of democracy in 1999 paved the way for economic reforms and the adoption of an ambitious plan to place Nigeria in the top 20 world economies by 2020. A subsequent massive reassessment of economic policy initiatives has brought tangible results: foreign exchange reserves grew fivefold in 2003 and 2006, while GDP growth averaged more than 7%. However, due to long-standing systemic imbalances, GDP per capita fell from $444 in 1997 to $430 in 2004, even though poverty was actually increasing.

The bulk of the problem has been Nigeria’s over-reliance on oil and gas exports, which have earned it an estimated US$600 billion over the past five decades, but made little difference to the non-oil sector, which is struggling in a climate of political laxity and inadequate financial and… financial resources got technical support. The focus of Nigeria’s renewed economic aspirations must be on developing entrepreneurship, taking into account its vast human resource capacity and in a way that allows for widespread but rapidly accelerating economic growth. Shifting reliance on non-renewable resources while encouraging micro, small and medium-sized enterprises (MSMEs) is critical to achieving both the 2020 target and Nigeria’s Millennium Development Goals.

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MSMEs have been responsible for the rapid growth of a variety of economies around the world, historically beginning with Britain and America, gradually moving into Europe, Latin America and more recently in considerable parts of South and East Asia. It is currently estimated that more than 90% of all companies worldwide are MSMEs, accounting for up to 80% of all employment prospects. In OECD countries, the MSME component accounts for up to 97% of total business activity and contributes between 40% and 60% of GDP1 in member countries. These statistics hide a wealth of ideas for Nigeria related to its economic development goals.

First among them is the fact that healthy MSME growth is fundamental to the expansion of rural economies as part of sustainable macroeconomic development. MSMEs comprise a diverse mix of agricultural, manufacturing, service and commercial sectors; classified based on asset and employee base on a predetermined scale of maximum and minimum scores for both counts. They often represent extreme diversity in terms of size and structure, from rural artisan guilds to small machine shops to emerging software and IT companies. Dynamic by definition, they encompass a wide range of growth-oriented skills with specific needs in terms of innovative solutions, technology and equipment, and knowledge enhancement. However, the central requirement for its promotion is the development of a viable microfinance industry with integrated easy access for small and medium-sized enterprises.

At the political level, Nigeria has taken proactive steps to encourage MSME initiatives, the most notable being a change in legislation requiring commercial banks operating in the country to set aside 10% of their pre-tax profits to invest in smaller businesses. Both the IMF and the World Bank are currently running separate outreach programs to support Nigerian microfinance through tailored procedures to streamline loan evaluation and microcredit monitoring. The effectiveness of these measures has been confirmed to some extent by recent developments.

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In June this year, the Nigerian government announced the disbursement of US$20 million2 in small business loans. This is a significant achievement considering it multiplied with the World Bank’s original $8.4 billion grant to the sector in 2006. Policymakers traded Nigeria’s traditionally poor access to credit and equity with the launch of new microfinance institutions offering broader and deeper financing solutions.

Despite this initial euphoria, the overall productivity and growth potential of Nigerian MSMEs remains severely constrained. Business development services remain generally underdeveloped relative to projected potential, and are particularly weak in rural areas outside the major urban hubs. In addition to inherent infrastructural deficiencies, MSME growth rates are further hampered by a lack of entrepreneurial knowledge, particularly the ability to identify worthwhile business opportunities.

Given Nigeria’s past and present realities, an appropriate environment for rapid growth in this key sector requires certain fundamental enforcement actions, including:

* Effective government regulation and oversight of microfinance institutions (MFIs) and operations.

* MFI empowerment through constant assessment of best practices and sustainability.

* Capacity expansion of loan disbursement systems for widespread applicability.

* Better coordination between the different agencies involved – public, private and donors.

There is certainly no shortcut or panacea for the companies’ efforts. The World Bank outlines the broader perspectives of the MSME development program in Nigeria with five priorities3: enhancing the breadth and depth of funding available to MSMEs, creating markets for business development services, providing technical and capacity-building assistance, allocating resources to the Access to best global resource practices and ultimately funding for the implementation, review and monitoring of individual projects.

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The existential value of MSMEs stems from the fact that they offer products and services that their larger counterparts do not or cannot offer. Recognizing and leveraging this potential is only half the battle. The real challenge for Nigeria does not end in achieving the best prospects for MSMEs, but in integrating their success to create a more inclusive economy, free from the shortcomings that have plagued the vast majority of its population for the better part of half a century to have .