Small and Medium Scale Enterprises (Smes) : The Nigerian Situation

Small and Medium Scale Enterprises
(SMEs)
The Nigerian Situation
Adeoye Aderemi
June 2003
© Copyright. Capital Partners Limited. Do not reproduce. Strictly for private use.
Outline
 Background
 SMEs
 SMEIS Scheme
 SMEIS benefits to banks
 SMEIS Definition
 Challenges Lending to SMEs
 Strategy
 Service to banks
 Service to entrepreneurs
 Implementation
 Billing
 Organization Structure
Background
SMEs are Small and Medium Scale Enterprises.
 Total workforce between 10 and 300 employees
 Usually small, owner or family managed business offering
basic goods and services
 Tend to lack organizational and management structures
 Urban SMEs tend to be more structural than their rural
counterparts
SMEs
Contributions to the Economy:
 SMEs are generally regarded as the engine driving the
growth of an economy and provide the best
opportunity for job creation and rural development
 10% of total manufacturing output and 70% of
employment are by SMEs
 SMEs promote industrial and economic development
through the utilization of local resources; production of
intermediate goods and transfer of rural technology
SMIEIS Scheme
Bankers’ Committee was set up to review the challenges
in lending to the SMEs and advise on how to support
SMEs.
 The key recommendation has resulted in the agreement
by banks to commit 10% of their profits before tax to
the funding of SMEs
 In collaboration with the CBN and other government
agencies, the Small and Medium Industries Equity
Investment Scheme was flagged off June, 2001
 As at December 31st 2002, N12.374 billion has been
set aside by banks out of which only N1.729 billion has
been invested
SMIEIS Scheme
 Each participating bank would be expected to set aside
10% of its previous year’s profit and channel it to
equity investments in SMEs
 The 10% indicated will remain in the books of the
participating banks for funding of the SMEs. Funds set
aside for use in one year can be utilized the following
year where the bank is unable to get suitable projects
to invest in that year
SMIEIS Scheme
 Each participating bank will be required to have a

SMIEIS unit which will be responsible for appraisal and
recommendation on relevant proposal for
management’s approval
 Banks are allowed 18 months to disburse the first
batch of the SMIEIS fund after which the un-disbursed
balance will be transferred to the CBN
SMIEIS Scheme
 A bank may take a position on the board of SMEs, in
which it has equity investments, depending on
exposure
 Banks will be required to render quarterly returns to
the CBN
 SMEs must be registered in the company’s registry,
maintain good financial records and be subjected to
annual audit by a firm of qualified accountants in order
to benefit from the scheme
SMIEIS Benefits to banks
 Encourages the shift of businesses from the informal to
the formal sector
 Dividends from investments
 Proceeds from divestment will revert to participating
banks and subjected to appropriate income tax but
exempted from capital gains tax
 Capital gains at time of divestment
 Initial funds set aside shall be exempted from tax
 Banks enjoy 100% investment tax credit in the
year an investment is made
SMIEIS Definition
 Any enterprise with a maximum asset base of N200m,
(excluding land and working capital)
 A labour size of between 10 and 300 employees
 SMEs registered with Corporate Affairs Commission
(CAC) and in compliance with Companies and Allied
Matters Act (1990) such as filling of annual returns and
un-audited financial statement of accounts
SMIEIS Definition
 Companies who comply with all the tax laws as well as
render regular returns to the appropriate authorities
 Those prepared to ensure prudent utilization of funds
granted under SMIEIS and are prepared to comply with
guidelines of the scheme even after funds have been
disbursed
 Enterprises prepared to provide monthly financial and
operational report to the investing banks before the
15th of the next succeeding month
Investment Sectors
 Agro-allied
 Information Technology and Telecom
 Services
 Manufacturing
 Construction
 Education
 Tourism and leisure
Challenges In Lending to SMEs
 Unfavorable bank lending strategies which do not meet

SME requirements
 Promoters’ low education, management and
entrepreneurial skills
 Poor and unreliable financial records which makes
financial review both difficult suspect. Financial and
other business records do not meet capital market
listings requirements
Challenges in Lending to SMEs
 Failure of SMEs to provide information required by
banks to properly assess their business for investments
 Lack of effective proposals
 Insincerity, SMIEIS seen as national cake
 Bank’s inexperience with respect to investment in small
and medium industries. Bank’s are uncomfortable with
the idea of investing in SMEs and waiting 3-5 years
before recouping their money
Benefits of SMIEIS to SMEs
 Provides SMEs with access to long-term capital
 Allows SMEs the opportunity to participate in the formal sector
of the economy
 Establishment of a lasting relationship between the SMEs and
the financial service industry
 Expose SME entrepreneurs to widely accepted best practices in
business and financial management
 The promotion of business linkages between SMEs and Large
Scale Industries
 Job creation and wealth generation

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Small and Medium Scale Enterprises

The Nigerian Situation

 Each participating bank will be required to have a

 Unfavorable bank lending strategies which do not meet

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