SMEs Financing in Nigeria

FINANCING SMEs EXPLAINED IN DETAILS

The importance of finance to business organization cannot be overemphasized. Business finance is however,not easy to come by especially in respect to SMEs. Yet they require funds from every source available to meet their asset needs,working capital needs,and for expansion.

According to Ekpen Yong and Nyong (1992), there is wide consensus in Nigeria that government  policies  are skewed in favour of the formal sector to the detriment of the informal sector. This skewness is to the great disadvantage of SMEs in Nigeria  since they are more disposed to the funds of the informal sector.

• Formal sources of financing SMEs

The commercial banks,merchant banks and development banks provide  Formal sources of finance to SMEs. The financial system in Nigeria is not short of supply of liquidity, but banks have been very reluctant to grant loans to SMEs,which they regard as a high risk sector.

SMEs are crucial catalyst for economic  development.. (Aruwa, 2006). Banks provide a nation with a function of pooling scattered resources from surplus to deficit units so as to promote investment innovation,  productivity  and consequently growth and development.

The banking industry in Nigeria dominates the financial system (Agusto, 2006). Berger et al. (2001) maintains that  a well functioning  financial system contributes to investment and economic growth..

Check Out: SMEs (A Catalyst for Economic Growth and Development in Nigeria)

Every enterprise at its onset, before standing firm on its feet, needs borrowing. The first place they need to go and borrow  at those times is the bank. According to elementary corporate finance theory, an investment project should be undertaken whenever it’s net present value is positive. This assumes that  the capital outlet is not exhaustive. Firms do any volume  of investment, and so where the firm’s do not have adequate  capital to embark on any level of investment, there is need for capital borrowing. (Mainoma,2005).

• The Small and Medium Industries Equity Investment  Scheme (SMIES) Fund.

In Nigeria, the formal financial institutions have been organized to finance SMEs through venture capital financing in the form of a SMIES. Venture capital financing supplements  or take the place of credit facilities that the conventional banks are unwilling to give.

Venture capital may be regarded as an equity investment where investors expect significant capital gains in return for accepting the risk that they may lose all their equity. (Golts,1998).

The Nigerian government’s version of venture capital financing of SMEs-SMEIS,  requires  all licensed banks in Nigeria to set aside 10% of their pre-tax profit for equity investment and to promotion  of small and medium scale enterprises. The goal is to reduce interest rate burden and other financial  service charges imposed under normal bank lending.

• Funds from specialized financial institutions

It is pertinent to recognize government efforts at improving the capital base of SMEs through creation of specialized and developed institutions and specific directives of these and other formal financial institutions, as well as the central Bank of Nigeria (CBN), targeted  towards increased lending to indigenous  (SMEs)  borrowers.

Notable among specialized  financial institutions are:

1. The reconstruction of the former NIDB in the year 2001 to Bank of Industry  (BOI) and the merger of Nigerian Bank for commerce and Industry (NBCI) and the National Economic Reconstruction Fund (NERFUND) with the newly created Bank of Industry.
2. As part of government efforts to addressing the financing needs of micro entrepreneurs, a micro-finance policy was launched by the federal government in December, 2005.

• Other source of financing SMEs

One of the major sources of funds/financing  available to SMEs is that of personal savings and informal loans from friends and lenders. According to Owualah, the major sources of funding which are available to SMEs are:

1. Personal resources
2. Family and friends
3. Partners or business associates
4. Informal financial markets
5. Banks (commercial and merchants)
6. Specialized funding facilities
7. Specialized financial institutions.

Check Out: The Nexus Between SMEs and Economic Growth

Conclusively. the importance of SMEs is such that they cannot be ignored by the government of any country especially in Nigeria. Consequently, it has been agreed that the growth of SMEs constitutes one of the cornerstones  of economic development in the country. In other words, SMEs constitute the driving force of industrial growth and development in the country.

It therefore makes it a sector that should be focused on and cared for, nurtured by the government by making funds more accessible to them at a low interest rate as they need funds to thrive and survive. More attention is to be channelled towards the development of SMEs in Nigeria so as to aid their growth and expansion.

SMES are very important to the development and growth of the country as they utilize local raw materials and technology thereby aiding the realization of the goal of self-reliance, there is a need therefore to rightly channel the concern of government towards small and medium sized enterprises because of the important roles that SMEs play in the process of industrialization and economic growth, SMEs immensely contributes to employment generation, income generation, catalyzing development in the country at large, more focus should be on the financing and performance of SMEs also because of the economic gains it brings.

Government should formulate policies aimed at facilitating and empowering the growth and development and performance of the SMEs, assisting the SMEs to grow through soft loans at low interest rate and other fiscal incentives in order to enhance the socio-economic development of the economy like alleviating poverty, employment generation, enhance human development, and improve social welfare of the people. Small and medium scale enterprise is a sector that should be given full attention and not to be ignored by the government…

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