MSME - Schemes, Plans & Budget | |
MSME - Schemes, Plans & Budget | |
9022 VIEWS | |
![]() |
Tuesday, July 09,
2019 / 12:49PM / By
SEC Nigeria / Header Image Credit: SEC and APKPure.com
EXECUTIVE SUMMARY
Micro, Small and Medium Enterprises
(MSMEs) in Nigeria face a financing gap that restricts their economic
prosperity. This report examines the prospects of capital markets solutions for
MSMEs financing in Nigeria. It maps out the main features of capital market
financing technique. It details the enabling factors, listing requirement and
reviews international experiences. The report appraise IOSCOs recommendations
on how to close the financing gap and outlines actionable solutions that could
make the capital market a more effective and viable source of finance.
1.0 Introduction
1.1. Background and rationale
There are an estimated 37,067,416
million Micro, Small and Medium Enterprises (MSMEs) in Nigeria, out of which
over 36,994,578 million are micro-enterprises, 68,168 are Small and 4,670 are
medium (SMEDAN 2013). MSMEs represent 96% of the businesses in Nigeria and
contribute 84.02% of national employment1. In nominal terms, the sector
contributes an estimated 46.54% to the nation’s Gross Domestic Product(NEPZA
2013). Thus growth in the MSME sector is directly linked with growth in the
Nigerian economy and in the level of employment.
World Bank estimate2 identifies MSMEs
lack of access to formal financing of their productive activities as a key
constraint to business. 73.24% of the top most priority of assistance needed by
MSME operators was access to finance(SMEDAN 2010).As a result, many Nigerian
MSMEs fund their activities through retained earnings as only a few large
enterprises benefit from formal financial sector intermediation for their
working capital or investment needs(IMF 2013). It is estimated that, despite
the fact that 80 percent of MSMEs seek financing only 5 percent of enterprises
have a loan (ibid).
In light of the important role MSMEs
play as engines of growth, it is critical to ensure that MSMEs in Nigeria have
access to the necessary credit they need to expand and continue to perform
their function in investment, growth, innovation and employment. In a country
where underemployment is estimated at 70.5%3, MSMEs finance is important in
supporting growth and reducing poverty through employment creation. Nigeria
needs to support the sector given its potential opportunities for growth and
poverty reduction.
The capital market presents an
opportunity of financing the MSME sector. Capital markets have always played a
role in bringing together those with savings to invest and those who need
capital thereby supporting economic growth. The International Organisation of
Securities Commissions (IOSCO) has emphasized the need for capital
markets to support small and medium-scale enterprises in addressing this
financing challenge by providing alternative funding sources.
This report examines MSMEs access to
the Nigerian capital market and explores possible measures to develop and
enhance their access. The report is structured as follows. Section 2 provides
an overview of the classification of MSMEs in Nigeria and briefly reviews the
National policy on MSMEs. Section 3 begins by exploring the state of MSMEs
finance and provides an overview of select number of interventions. Section 4,
introduces the concept of Capital market financing and introduce the Nigerian
Alternative Securities Market Board (ASEM). In section 5, we outline IOSCOs
guidelines on SME financing through the capital market while Section 6
concludes.
2.0 Overview of the MSME Market
2.1 Definition of Micro, Small and
Medium Enterprises (MSMEs)
According to the National Policy on
MSMEs, the definition for micro, small and medium enterprises adopt a
classification based on the dual criteria of employment and assets (excluding
land and buildings) as shown below. Whenever there exist a conflict on
classification between employment and assets criteria the employment- based
classification will take precedence.
Micro Enterprises employ between 1 and
9 persons. The 2013 National MSME collaborative survey put the estimated number
of micro enterprises at 36.99 million with a minimum total employment of 57.84
million. This group is dominated by those who engage in wholesale & retail
trade, repair of motor vehicles and household goods which accounts for about
54.67% followed by manufacturing (13.21%). Other numerically significant
sectors include agriculture (8.92%), other services (7.80%), accommodation and
food services (5.51%), transport & storage (4.76%) and arts, entertainment
& recreation (1.06%).
Classification of MSMEs (according to
the National Policy on MSMEs)
Source: National
Policy of MSMEs
Small enterprises employ from 10 - 49
persons and cover the same range of enterprise types concentrated in the more
modern end. The 2013 National MSMEs Survey put the number of small enterprises
in Nigeria at 68,168.
Medium enterprises are the formal face
of Nigerian enterprises employing between 50 and 199 persons. The 2013 National
MSMEs Survey put the number of medium enterprises in Nigeria at 4,670. The
medium enterprises are concentrated in manufacturing, transportation,
information and communication technology, agro & agro-allied and oil &
gas.
2.2 National Policy on micro, small
and medium enterprises (MSMEs)4
In May 2015 the Federal Government of
Nigeria approved the revised national policy on MSMEs. It is a comprehensive
and robust national policy to appropriately guide the current MSME environment.
The current policy will be in place from 2015 to 2025 and be reviewed every
four years. The original National Policy on MSMEs was developed and launched in
2007 by the Small and Medium Enterprises Development Agency of Nigeria
(SMEDAN). However initial implementation was plagued by limited stakeholder
buy-in from public and private sector institutions, lack of strong commitment
to MSME development by all tiers of Government, weak synergy amongst
institutions involved in MSME development, Ineffective funding of the MSME
development process(SMEDAN,2015; Agusto & Co, 2016).
The National Policy on MSMEs outlines key objectives, strategies and programmes for influencing development of MSMEs. The Policy delineates several programmatic areas as follows: finance, institutional, legal and regulatory framework, human resources development, technology, research and development, extension and support services, marketing and infrastructure & cost of doing businesses. The policy will give the necessary sturdy framework and guidance for the MSME stakeholders and will create an enabling environment for MSMEs to thrive.
3.0 Access to Finance
3.1 The State of SME Finance in
Nigeria
Nigeria’s businesses are starved of
capital, poor access to finance constitutes a major constraint for Nigerian
SMEs5 and is continuously touted as the main challenge affecting MSMEs in
Nigeria. The exorbitant lending rates (ranging from 21% - 30% for commercial
banks to as high as 48% - 60% per annum for microfinance banks) discourage
MSMEs from accessing bank loans6. Nigeria is also reported to have the shortest
average loan maturity (21 months) among comparison countries, such as Kenya,
Brazil, China and India(Iarossi, Mousley et al. 2009).
High interest rates on Government
securities also act as disincentive to banks to intensify lending to MSMEs7.
These reasons are why the bulk of Nigerian MSMEs rely on equity from personal
savings and contributions from family and friends as capital, which largely
proves inadequate.
According to World bank estimates, as
of 2012, only 5 percent of SMEs have a loan, despite the fact that 80 percent
of them seek financing. Furthermore, financing constraints seems to depend on
the size of the firm. An estimated 59 percent of small firms report
difficulties in accessing finance compared to 35 percent of medium firms and 11
percent of large SME firms.
The main reasons Nigerian SMEs give
for not applying for loans are:
3.2 Access to funding for Micro, Small
and Medium Enterprises (MSMEs)
Over the past few years, the Federal
Government has introduced a number of financing schemes in order to increase
access to finance for the MSME sector. Below is a list of a select few;
Small and Medium Enterprises
Equity Investment Scheme (SMEEIS)
The scheme was launched in 1999 and
required all banks in Nigeria to set aside 10% of their profit after tax (PAT)
for investment and promotion of small and medium enterprises.
CBN’s ₦200 billion
Refinancing and Rediscounting Scheme (RRF)
The scheme was launched in 2002 to
encourage medium and long-term loans to the real sector for growth and
development. Eligible projects have a concessionary rate of 2% below minimum
rediscounting rate (MRR). The scheme also aimed to encourage medium and long
term lending in order to expand and diversify the country’s production base.
CBN’s ₦235 billion
Small and Medium Enterprises Credit Guarantee Scheme (SMECGS)
Launched in April 2010, the fund is
administered at the prime lending rate of the participating bank. The scheme
target market was Manufacturing, Agricultural value chain, Educational
institutions. The Fund objectives were to accelerating the development of the
SME manufacturing segment by providing credit guarantee from banks to SMEs and
manufacturers.
Increasing output, generating
employment, diversifying the revenue base increasing forex earnings and
providing sustainable inputs for the industrial segment.
Real Sector Support Facility
(RSSF)
The ₦300 billion fund launched in 2014 targeted Manufacturing,
Producing and processing of tangible goods, Fabricating, deploying plants,
machinery or equipment to deliver goods or providing infrastructure to
facilitate economic activity in the real sector Agriculture, Services. The fund
objectives were to fast track the development of SMEs in the manufacturing,
agricultural value chain and services sub-sectors.
The National Enterprise
Development Programme
The National Enterprise development
programme is a strategic way of addressing the critical factors that have
restricted the growth of the MSME sector. NEDEP interventions cuts across all
tiers of enterprise and provides the tools to assist enterprises grow from
micro to small, small to medium and medium to large.
4.0 SMEs funding through the capital
market
4.1 Capital Market financing
In order to address financing
challenges that are facing small and medium sized businesses capital market
solutions are increasing being adopted. Capital markets are clear alternative
to bank lending and MSME funding could be sourced from the capital markets10.
However, raising capital by issuing equity or debt securities attracts high
average transaction costs, arduous listing requirements and complex legal and
regulatory frameworks11. For these reasons, it has been mainly large firms that
usually access the capital market (Peterhoff et al, 2014).
SME focused equity platform is a
capital market solution available to well established SMEs offering an
alternative to the main listing boards on national stock exchanges. The SME
platform acts as a second-tier listing alternative and such platforms are
characterized by lower listing requirements and costs to list than the main
board. SME equity platforms are best suited to the largest SMEs such as the
medium segment due to the initial cost and ongoing listing requirements most platforms
demand (Peterhoff et al, 2014).
According to IOSCO(2015)12, certain jurisdictions have implemented
the SME platforms differentiating SME issuers from others in capital markets.
Successful platforms across the world that have grown briskly and maintained a
substantial number of listings include the Alternate Investment Market
(London), TSX Venture (Canada), HK GEM (Hong Kong), Mothers (Japan), Alternext
(Europe) and AltX (South Africa) (Peterhoff et al, 2014).
4.2 Nigerian Alternatives Security
Market (“ASeM’’)
The Alternative Securities Market
(ASeM) is a specialized board of the Nigerian Stock Exchange (NSE) for emerging
enterprises with high growth potential. ASeM provides smaller companies the
avenue to access the capital market and raise longterm finance through less
stringent listing rules and requirements in line with regulatory requirements,
of the Corporate Affairs Commission(CAC) and the Securities and Exchange
Commission (SEC)(Onyema 2013; NSE ND).
Businesses could list in one of the
twelve sectors on the NSE: Agriculture, Construction/Real Estate, Consumer
Goods, Financial Services, Industrial Goods, Information &Communications
Technology (ICT), Natural Resources, Oil & Gas, Services Utilities, and
Conglomerates. ASeM is designed to address issues and challenges associated
with emerging businesses in Nigeria, which include but are not limited to:
Difficulty in accessing long term capital due to high cost of funds as a result
of perceived high risk Increased cost of operations due to inadequate basic
public infrastructure, including access roads, power, security, etc. Inability
to build capacity required to deliver results due to high staff turnover
Informal nature of operations, which undermines strategies, policies, processes
and corporate governance Lack of proper accounting standards, controls and
management of financial resources (NSE ND).
Small and medium sized companies with
high growth potential are given the opportunity to raise long-term capital from
the capital market at a relatively low cost, thereby enabling them to grow and
institutionalize.(Ajumogobia&Okeke 2015).
GMA (2013) listed the benefits of
listing as follows:
Before a company can be listed on the
ASeM, it must satisfy the following pre-listing requirements:
Listing on the ASeM can be done either
through:
Owners may retain up to 85% of total
shareholdings of the company; requirement is for 15% minimum public ownership .
Concern about associated cost of being listed:The benefits of being listed far
outweigh cost as applicable fees on ASeM are relatively low. Disclosures will
improve the adherence of the company to transparency, which improves confidence
and brand integrity(Onyema 2013).
4.3 Challenges of Alternatives
Securities Market (“ASeM’’)
Omoluabi Savings and Loans PLC
recapitalized to meet the CBN capital base requirement for the primary mortgage
institutions through ASeM in the twilight of 2013 (Morgancapitalgroup 2014).
This was the first straight equity IPO in the capital market since the
recession of 2008. This gave impetus to the IPO market and the ASeM as more
investors and institutions signified interest in raising capital through ASeM
platform.
However, as of June 30, 2016, ASeM
currently had 9 Equities listed with a market capitalization of
N8,443,180,449:00. The 52-week change of the NSE ASeM index from July 2015 to
June 2016 is only 0.01%(NSE). The NSE ASEM Index is currently 1,213.68 points
as investors shy away from these companies’ stocks. In spite of regulatory
efforts at reviving the alternative securities market (ASeM) of the Nigerian
Stock Exchange (NSE), companies listed on this segment of the market are yet to
attract the needed liquidity from local and foreign investors.
ASeM was meant to provide the opportunity for small companies to
raise long-term capital at relatively low cost from the capital market. The
Alternative Securities Market (ASeM) appears to be heading the same path as the
Second Tier Securities Market (SSM). Consequently, the NSE’s goal of achieving
a $1 trillion market capitalisation by 2016, has not been realized.
5.0 IOSCO guidelines to ease SMEs’
access to capital markets
In its detailed report on 'SME
Financing through Capital Markets', IOSCO issued the following seven
recommendations to make it easier for SMEs to access capital market.
(i) Review current securities regulatory
requirements on SME issuers1314
(ii) Offer alternatives to a public
offering.
(iii) Ensure investor protection.
(iv) Support the market for SME
shares.
(v) Increase financial literacy/
public awareness for the need of SME financing.
(vi) Set up a system to ensure that
SMEs comply with regulatory requirements.
(vii) Foster investor demand for SME
shares.
6.0 Conclusion / Key Takeaways
6.1 Conclusion
The capital market is critical to a
country's economic development. Long-term financing is an essential element for
supporting investment and growth. Access to long-term financing enables MSMEs
solves their financing needs over the long term and this has a positive effect
on economic growth and on employment generation.
6.2 Key takeaways
Footnotes
References
Appendix 1: NSE Listing Requirements:
Source: NSE
Appendix II: Members of ASeM
As at 29/04/2013 ASeM had a total of
eleven(11) members with market capitalization of N4.1 billion.
These members are:
Presently, ASeM has a total of nine(9)
members. These are:
Appendix III: International
Experiences
The London Stock Exchange’s
Alternative Investment Market (AIM), which was set up in 1995, has succeeded in
attracting a large number of small-sized companies globally, including a few
Indian ones. AIM facilitates easy entry and less tedious disclosure
requirements, but it has in place an appropriate level of regulation for
smaller companies. It also provides a faster admission process and no
pre-vetting by the regulator. Currently, firms have raised almost 30 billion
pounds via IPOs on AIM with companies coming from 37 sectors, 90 sub-sectors
and 26 countries (AIM 2014).
The National Stock Exchange (NSX) in
Australia is the fully regulated main board stock exchange focused on listing
SMEs. There is an alternative exchange for SMEs in South Africa (Altx). The
Shenzhen Stock Exchange in South China’s Guandong Province has a board for
SMEs. Similarly, Egypt launched has an SME Exchange (NILEX).
Other SME exchanges are GEM (Growth
Enterprise Market) in Hong Kong and the Market of the High-Growth and Emerging
Stocks (MOTHERS) in Japan. GEM is a separate dedicated stock exchange different
fom AIM and MOTHERS, which are trading platforms of their respective main stock
exchanges.
Other initiatives include TSX Ventures
Exchange (TSX-V) in Canada, Catalist in Singapore, KOSDAQ in the Republic of
Korea and MESDAQ in Malaysia. NASDAQ also started as an SME Exchange and
provides special facilities for listing of small and medium enterprises.
The Rwanda Stock Exchange (RSE) has also started an initiative for
small and medium enterprises’ (SMEs) listing on the alternative market segment
of the bourse. The Istanbul Stock Exchange (ISE) in Turkey has a particular
segment catering to the funding requirements of SMEs.
Related Links – Proshare Economy
Related News