Small and medium-sized enterprises (SMEs) are recognised as pivotal engines of economic growth and job creation globally. In Nigeria, concerted efforts to support new venture creation and scale up promising SMEs into larger firms can help address the urgent challenges of unemployment and underemployment.
This in-depth article analyses the startup and SME landscape in Nigeria. It assesses government initiatives and gaps and provides actionable recommendations for strengthening the ecosystem. The goal is to highlight proven strategies and models to enable Nigerian SMEs to thrive, create quality jobs, and realise their full potential.
The Vital Role of SMEs in Spurring Economic Growth
SMEs are defined differently across nations but typically refer to firms with less than 300 employees and maximum asset sizes ranging from $15 million in the US to $50 million in Nigeria.
Despite their small individual size, SMEs collectively account for the vast majority of registered businesses globally. Importantly, they are responsible for significant job creation.
In the US, SMEs generate around 60–80% of net new jobs annually, creating employment for about 60 million people. In the EU, SMEs employ 95 million people, representing two-thirds of the total workforce.
Beyond job creation, SMEs spur competition, innovation, and the commercialization of new ideas and technologies. They help diversify economies beyond reliance on large multinational corporations.
Thriving SME sectors boost incomes and living standards and distribute economic gains more equitably across society. They are thus crucial for both developed and emerging economies.
But for SMEs to maximise their potential, targeted support is required from both the government and the private sector across areas like finance, infrastructure, entrepreneurship promotion, and competitive regulatory environments.
The SME landscape in Nigeria
In Nigeria, small businesses represent 96% of registered companies and contribute over 80% of employment. However, the sector remains underdeveloped compared to advanced and many other developing economies.
Total early-stage entrepreneurial activity is relatively low, with Nigeria ranking 77 out of 137 countries surveyed in the 2021 Global Entrepreneurship Monitor report. Access to capital was identified as the most critical limitation by 57% of Nigerian entrepreneurs.
Additional challenges cited include inefficient government bureaucracy, infrastructure deficits, and difficulties in talent acquisition. Corruption and transparency issues also undermine Nigeria’s business environment rankings.
Yet there are bright spots. Nigeria has a young, tech-savvy population eager to capitalise on the opportunities of the digital economy. Venture capital funding for startups has increased sharply over the past decade, rising from $44 million in 2011 to over $600 million by 2020.
Leading sectors include fintech, e-commerce, entertainment, and logistics. Notable startups that have attracted investment include Flutterwave, Interswitch, Opay, and Jumia.
Several government MSME development programmes also aim to address growth obstacles like limited financing and weak infrastructure. However, there is significant scope to enhance, expand, and optimise such initiatives.
Overall, strategic support for new venture creation and developing high-potential SMEs into larger firms represents a promising pathway for large-scale job creation for Nigeria’s surging youth population.
Assessing Government SME Development Schemes
The federal government runs a variety of MSME programmes, primarily through the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the Bank of Industry (BOI). Let’s examine some major initiatives:
SMEDAN’s Entrepreneurship Development Programme
SMEDAN’s flagship entrepreneurship scheme aims to promote a culture of entrepreneurship, particularly among youth and women. It focuses on mindset change, technical skills training, business plan development, and the facilitation of finance through microcredit and conditional grant schemes.
Impact: 130 centres were established nationwide. Over 150,000 potential entrepreneurs trained from 2013–18 across vocations like food processing, cosmetology, and welding. However, the entrepreneur conversion rate remains low; many still struggle to access capital.
BOI’s Government Enterprise and Empowerment Programme (GEEP)
The GEEP scheme provides microloans from N10,000 to N100,000 for petty traders, artisans, agriculturists, and medium-sized enterprises at favourable rates. Loans are repayable over 6 to 12 months.
Impact: From 2016–2020, over 2 million microcredits were disbursed worth N38 billion. But cumbersome loan processing and conditions like group collateral constrain access to the most disadvantaged informal workers. High default rates also plague the programme.
YOUWIN! Business Plan Competition
YOUWIN awarded grants of N1 million to N10 million naira to youth-owned businesses from 2011 to 2015 based on competitive business plan submissions.
Impact: Over 4,000 new businesses were financed across sectors like agriculture, ICT, and creative industries. However, the grant size was still insufficient for capital-intensive manufacturing. Selection opacity and political patronage also dogged the programme.
Development Bank of Nigeria (DBN) SME Lending Scheme
The DBN provides low-cost, medium- to long-term financing to SMEs through partner banks and microfinance institutions instead of direct lending. The aim is to expand access to capital for underserved segments.
Impact: Over N70 billion will be disbursed to 10,000 MSMEs by late 2020. But interest rates still range from 7–10%, which remains high given many SMEs’ risk profiles and cost of capital challenges.
Assessment of Government MSME Schemes
In general, federal and state government SME development initiatives like the examples above suffer from:
- Overemphasis on basic business training vs. incubation, acceleration, and growth support
- Financing schemes like grants and microcredit are insufficient to spur manufacturing and tech innovation.
- Weak monitoring frameworks result in low entrepreneur conversion rates.
- Limited policy coordination across different agencies and levels of government
- Opacity and inefficiency in programme selection and loan disbursal
- Political patronage undermines impartial programme administration.
While government efforts to strengthen MSMEs are commendable, there remains tremendous scope for amplification and optimization. Effective policies must be grounded in the on-the-ground realities facing Nigerian SMEs across all life cycle stages, rather than top-down schemes conceived in bureaucratic silos.
Optimising the MSME Support Ecosystem
A vibrant SME sector requires coordinated efforts from both the public and private sectors. Based on global best practices, here are 5 strategies to strengthen Nigeria’s MSME ecosystem:
- Support early-stage ventures
Many government programmes focus on rudimentary business training for potential entrepreneurs. But creating prosperity requires a pipeline of innovative, scalable startups with the potential to achieve high growth.
Nigeria should boost pre-seed funding via grants and equity-free capital to enable prototype development, customer validation, and market entry. Incubators like CCHub and Wennovation Hub provide mentoring and physical workspace but need more funding support.
Accelerator programmes that intensively groom high-potential ventures on product-market fit, scaling, fundraising, and leadership development must also expand, such as the Lagos-based Sprout Hub.
Startups still struggle to attract early seed capital from angels and institutional investors due to limited track records and underdeveloped angel investing networks. Incentives like tax breaks on seed-stage investments can help. The government can also fund-of-funds programmes that invest in multiple early-stage funds to amplify capital deployment.
- Facilitate access to growth capital
After startups gain initial product-market traction, they require series A+ financing to scale up, hire talent, build out operations, and build out infrastructure. However, growth funding remains constrained with limited investment-ready startups and few specialised funds.
Policies must nurture both demand and supply. Startups need support to plug skills gaps in financial management, governance, and compliance to improve funding eligibility. Standardised investor readiness programmes can help ventures structure for growth.
Concurrently, facilitating specialised venture capital (VC) funds with local expertise in key sectors like fintech, logistics, and creative industries is crucial. Government initiatives like the Fund-of-Funds programme, tax breaks, and subsidised regulatory compliance costs can provide incentives.
Development finance institutions like the African Development Bank can anchor emerging sector-focused funds. Successful growth capital injection propels the best startups into the small-medium enterprise segment.
- Boost Access to Affordable Credit
A major hindrance for SMEs is high-interest rates from banks, averaging over 15% in Nigeria. Government development banks must lower lending rates through below-market costs of capital.
New scoring models based on cash flow, business performance, and outside collateral like trade receivables should also be implemented to lend more to informal and start-up SMEs.
Additional financing mechanisms like peer-to-peer lending, supply chain finance, mobile money-backed loans, and financing for equipment leasing all have significant potential to expand formal credit access. A modernised secured lending framework will enable more of these instruments.
- Strengthen infrastructure
Erratic power supply, transportation bottlenecks, limited broadband connectivity, and poor water access all impose heavy costs on SMEs. The government must mobilise private investment in infrastructure via public-private partnerships.
Priority areas are expanding renewable energy, upgrading transport corridors, enhancing broadband and mobile coverage, and establishing industrial parks and business zones with reliable utility access.
Fiscal incentives like tax holidays, subsidised land, and portfolio guarantees can attract private infrastructure investors. Small project sizes remain a challenge, so aggregating demand across industrial clusters is important.
- Promote exports
Domestic market size poses growth limitations for Nigerian SMEs. However, regional markets within Africa and selected non-traditional exports like cultural goods, fintech, and entertainment services offer major opportunities.
Export promotion agencies must assist with compliance, certification, trade fair participation, and overcoming information barriers. SME financing schemes should support export capital expenditures.
Trade accords like the African Continental Free Trade Agreement (AfCFTA) will progressively open and integrate markets. Nigerian SMEs able to achieve export competitiveness will benefit tremendously from this massive, addressable opportunity.
Case Studies of Successful SME Programmes
While Nigeria can tailor SME promotion frameworks suited for its context, there are proven models globally that provide inspiration and best practices:
Chile’s Startup Chile
Chile’s accelerator programme provides equity-free seed capital, visa support, free office space, and mentorship for foreign tech entrepreneurs to build their startups locally. Over 200 startups are inducted annually, with a strong focus on founder diversity.
The programme has helped position Chile as the innovation hub of Latin America. As startups scale, they boost enterprise ecosystem development.
Germany’s SME Investment Fund
Germany’s state-owned KfW bank operates an EUR 2.5 billion SME investment fund that takes minority stakes in fast-growing mid-sized Mittelstand companies. The fund only invests in profitable companies for expansion financing, not distressed firms.
The fund’s patient capital and company-building support helped anchor manufacturing, preventing relocation to cheaper locations. The programme could be a model for Nigerian industrial SMEs.
Singapore’s Productivity Solutions Grant
Singapore provides sizable grants for SMEs to adopt advanced technology solutions that demonstrably improve productivity. Consultants pre-approve technology investments tailored to the SME’s operations.
The scheme catalyses manufacturing SME modernization. Nigeria could adapt it to subsidise e-commerce, digital, and automation technology adoption.
South Korea’s Venture Guarantee Programme
South Korea’s National Credit Guarantee Fund provides up to 90% guarantees on loans to startups. This helped spur lending when a lack of credit history and collateral kept banks risk-averse.
A similar guarantee programme in Nigeria backed by a government fund could incentivize commercial bank lending to seed-stage ventures and informal SMEs.
The Future of Nigerian SMEs
SMEs globally face a challenging landscape amidst economic uncertainty and the growing adoption of disruptive technologies like artificial intelligence, robots, and blockchain.
But with the right strategic support, Nigerian SMEs can also harness these technologies to leapfrog infrastructure deficits in areas like payments, energy, and agriculture.
Policy must balance the near-term alleviation of growth barriers with building long-term resilience and competitiveness. Developing a skilled workforce and a globally ambitious entrepreneurial culture will be pivotal.
There are positive signs. Nigeria is home to nine companies valued at over $1 billion, including Andela, Flutterwave, and Interswitch. Venture funding hit record levels in 2019. SMEs are making inroads into new sectors like online entertainment.
With urgent mass job creation imperative, the government and private sector must now join hands to turbocharge the most promising ventures through robust incubation, easier access to growth capital, and export readiness programmes.
The vision should be to facilitate the continuous emergence of high-growth firms—not just petty traders but innovative manufacturers, leading digital platforms, and world-class champions—that can generate large-scale employment and sustainable prosperity.
Conclusion
SMEs represent the growth engine for any thriving economy. In Nigeria, strengthening both the quantity and quality of SMEs through strategic enablement across funding, infrastructure, exports, and governance represents a viable pathway for job creation amidst challenging demographics.
There are multiple proven models globally, including innovation accelerators, growth-stage venture capital, export assistance, and productivity enhancement grants, that Nigeria can adapt to its local needs. Government, private capital, and larger firms must align efforts to strengthen the SME ecosystem.
With a concerted long-term focus on nurturing entrepreneurship and expanding the cadre of investment-ready SMEs in target sectors, small businesses can transition from distress-driven necessity-based activities to becoming catalysts for economic transformation, job creation, and rising living standards.